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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-13546
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APACHE OFFSHORE INVESTMENT PARTNERSHIP
--------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-1464066
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
77056-4400
Suite 100, One Post Oak Central ----------
2000 Post Oak Boulevard, Houston, TX (Zip Code)
- ---------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2004 2003
---------- ----------
REVENUES:
Oil and gas sales $3,250,730 $3,191,408
Interest income 6,084 3,438
---------- ----------
3,256,814 3,194,846
---------- ----------
EXPENSES:
Depreciation, depletion and amortization 689,206 741,464
Asset retirement obligation accretion 11,922 9,197
Lease operating costs 198,610 257,611
Gathering and transportation expense 34,992 38,099
Administrative 102,000 105,000
---------- ----------
1,036,730 1,151,371
---------- ----------
OPERATING INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 2,220,084 2,043,475
---------- ----------
Cumulative effect of change in accounting principle - 302,407
---------- ----------
NET INCOME $2,220,084 $2,345,882
========== ==========
NET INCOME ALLOCATED TO:
Managing Partner $ 564,279 $ 536,308
Investing Partners 1,655,805 1,809,574
---------- ----------
$2,220,084 $2,345,882
========== ==========
NET INCOME PER INVESTING PARTNER UNIT $ 1,561 $ 1,668
========== ==========
WEIGHTED AVERAGE INVESTING PARTNER
UNITS OUTSTANDING 1,060.7 1,084.9
========== ==========
The accompanying notes to financial statements
are an integral part of this statement.
1
APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,220,084 $ 2,345,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 689,206 741,464
Asset retirement obligation accretion 11,922 9,197
Cumulative effect of change in accounting principle - (302,407)
Dismantlement and abandonment cost (146,222) -
Changes in operating assets and liabilities:
(Increase) decrease in accrued revenues receivable 18,345 (519,078)
(Increase) decrease in receivable from/payable to
Apache Corporation (97,855) (418,814)
Increase (decrease) in accrued operating expenses payable 6,049 57,768
------------ ------------
Net cash provided by operating activities 2,701,529 1,914,012
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (198,621) (82,532)
------------ ------------
Net cash used in investing activities (198,621) (82,532)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Investing Partners (2,121,466) (542,445)
Distributions to Managing Partner (581,420) (463,526)
------------ ------------
Net cash used in financing activities (2,702,886) (1,005,971)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (199,978) 825,509
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,271,495 915,891
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,071,517 $ 1,741,400
============ ============
The accompanying notes to financial statements
are an integral part of this statement.
2
APACHE OFFSHORE INVESTMENT PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,071,517 $ 2,271,495
Accrued revenues receivable 622,865 641,210
Receivable from Apache Corporation 184,072 86,217
------------ ------------
2,878,454 2,998,922
------------ ------------
OIL AND GAS PROPERTIES, on the basis of full cost accounting:
Proved properties 182,537,535 182,173,899
Less - Accumulated depreciation, depletion and amortization (174,187,895) (173,498,689)
------------ ------------
8,349,640 8,675,210
------------ ------------
$ 11,228,094 $ 11,674,132
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accrued development costs $ 353,533 $ 334,740
Accrued operating expenses 58,125 52,076
------------ ------------
411,658 386,816
------------ ------------
ASSET RETIREMENT OBLIGATION 824,442 812,520
------------ ------------
PARTNERS' CAPITAL:
Managing Partner 150,069 167,210
Investing Partners (1,060.7 units outstanding) 9,841,925 10,307,586
------------ ------------
9,991,994 10,474,796
------------ ------------
$ 11,228,094 $ 11,674,132
============ ============
The accompanying notes to financial statements
are an integral part of this statement.
3
APACHE OFFSHORE INVESTMENT PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by the Apache
Offshore Investment Partnership (the Partnership), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission, and reflect
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited financial statements. All such adjustments are of a normal,
recurring nature. Certain information, accounting policies, and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations, although the Partnership believes that the disclosures
are adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and the
summary of significant accounting policies and notes thereto included in the
Partnership's latest annual report on Form 10-K.
1. RECEIVABLE FROM APACHE CORPORATION
The receivable from Apache Corporation, the Partnership's managing partner
(Apache or the Managing Partner), represents the net result of the Investing
Partners' revenue and expenditure transactions in the current month. Generally,
cash in this amount will be transferred to Apache in the month after the
Partnership's transactions are processed and the net results of operations are
determined.
2. RIGHT OF PRESENTMENT
As provided in the Partnership Agreement, as amended (the Amended
Partnership Agreement), a first right of presentment offer for 2004 of $11,518
per Unit, plus interest to the date of payment, was made to Investing Partners
in April 2004, based on a valuation date of December 31, 2003. The Partnership
is not in a position to predict how many Units will be presented for repurchase
under the April 2004 offer and cannot, at this time, determine if the
Partnership will have sufficient funds available to repurchase all Units
presented. The Investing Partners have until May 21, 2004 to offer their Units
under the current right of presentment. The Partnership has no obligation to
purchase any Units presented to the extent it determines that it has
insufficient funds for such purchases. The Amended Partnership Agreement
contains limitations on the number of Units that the Partnership can repurchase,
including a limit of 10 percent of the outstanding Units on an annual basis.
3. ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which requires that an asset retirement obligation (ARO)
associated with the retirement of a tangible long-lived asset be recognized as a
liability in the period in which it is incurred and becomes determinable, with
an offsetting increase in the carrying amount of the associated asset. The cost
of the tangible asset, including the initially recognized ARO, is depleted such
that the cost of the ARO is recognized over the useful life of the asset. The
ARO is recorded at fair value, and accretion expense will be recognized over
time as the discounted liability is accreted to its expected settlement value.
The fair value of the ARO is measured using expected future cash outflows
discounted at the company's credit-adjusted risk-free interest rate. The
Partnership's asset retirement obligations primarily relate to the plugging and
abandonment of oil and gas properties.
Upon adoption, the Partnership recorded an increase to net oil and gas
properties of $1.1 million and additional liabilities related to asset
retirement obligations of $.8 million. These amounts reflect the ARO of the
Partnership had the provisions of SFAS No. 143 been applied since inception and
resulted in a non-cash cumulative effect increase to 2003 earnings of $.3
million.
The Partnership's increase in ARO liability from December 31, 2003 was
attributable to accretion expense of $11,922.
4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET INCOME AND REVENUE
The Partnership reported net income for the first quarter of 2004 of $2.2
million, or $1,561 per Investing Partner Unit. A year ago, the Partnership
reported earnings of $2.3 million for the first quarter of 2003 which included
$.3 million of income from the cumulative effect of change in accounting
principle from the adoption of SFAS No. 143. Driven by higher oil prices,
increased production and lower expenses in 2004, net income in the current
quarter was nine percent higher than the first quarter of 2003 operating income
before the cumulative effect of change in accounting principle. Total revenue
increased two percent, rising from $3.2 million in the first quarter of 2003 to
$3.3 million in the first quarter of 2004.
The Partnership's oil and gas production volume and price information is
summarized in the following table (gas volumes presented in thousand cubic feet
(Mcf) per day):
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------- INCREASE
2004 2003 (DECREASE)
------------ ------------ ----------
Gas volume - Mcf per day 3,750 3,647 3%
Average gas price - per Mcf $ 5.99 $ 6.91 (13%)
Oil volume - barrels per day 338 309 9%
Average oil price - per barrel $ 35.24 $ 33.22 6%
Natural gas liquids (NGL) volume - barrels per day 48 - -
Average NGL price - per barrel $ 27.54 - -
OIL AND GAS SALES
Natural gas sales for the first quarter of 2004 totaled $2.0 million, down
10 percent from the first quarter of 2003. The Partnership's average realized
natural gas price for the first quarter of 2004 decreased $.92 per Mcf from the
year-earlier period, reducing current sales by approximately $.3 million.
Natural gas volumes on a daily basis increased three percent from a year ago as
a result of recompletion operations in 2004 and 2003. The Partnership
recompleted the South Timbalier 295 A-13 ST1 and Ship Shoal 258 JB #5 wells in
February 2004.
The Partnership's crude oil sales for the first quarter of 2004 totaled
$1.1 million, a 17 percent increase from the first quarter of 2003. A $2.02 per
barrel, or six percent, increase in the Partnership's average realized oil price
contributed to the increase in oil revenues. Oil production was nine percent
higher than a year ago as recompletions at South Timbalier 295 during the second
half of 2003 more than offset natural depletion.
During the fourth quarter of 2003, the Partnership began processing a
portion of its natural gas production through on-shore plants operated by third
parties. The Partnership sold an average of 48 barrels per day of natural gas
liquids from processing gas during the first quarter of 2004.
Declines in oil and gas production can be expected in future periods due
to natural depletion. Given the small number of producing wells owned by the
Partnership, and the fact that offshore wells tend to decline at a faster rate
than onshore wells, the Partnership's future production will be subject to more
volatility than those companies with greater reserves and longer-lived
properties.
OPERATING EXPENSES
The Partnership's depreciation, depletion and amortization (DD&A) rate,
expressed as a percentage of oil and gas sales, was approximately 21 percent
during the first quarter of 2004 compared to 23 percent during the same period
in 2003. The decline in rate in 2004 reflected higher prices in the current year
and reserve additions from recompletions in 2003. During the first quarter, the
Partnership recognized $11,922 of accretion expense on the asset retirement
obligation.
5
Lease operating expense (LOE) in the first quarter of 2004 decreased 23
percent from the first quarter of 2003 as a result of lower workover and repair
costs in 2004. Administrative expense declined slightly from a year ago to
$102,000 for the quarter.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's primary capital resource is net cash provided by
operating activities, which totaled $2.7 million for the first three months of
2004. Net cash provided by operating activities in the quarter was up 41 percent
from a year ago as a result of increases in oil prices, higher oil and natural
gas production, and reduced operating costs. Future cash flows will be
influenced by fluctuations in product prices, production levels and operating
costs.
The Partnership's future financial condition, results of operations and
cash from operating activities will largely depend upon prices received for its
oil and natural gas production. A substantial portion of the Partnership's
production is sold under market-sensitive contracts. Prices for oil and natural
gas are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of factors beyond the Partnership's control. These
factors include worldwide political instability (especially in the Middle East),
the foreign supply of oil and natural gas, the price of foreign imports, the
level of consumer demand, and the price and availability of alternative fuels.
With natural gas accounting for 62 percent of the Partnership's first quarter
2004 production and 62 percent of total proved reserves at December 31, 2003, on
an energy equivalent basis, the Partnership is affected more by fluctuations in
natural gas prices than in oil prices.
The Partnership's oil and gas reserves and production will also
significantly impact future results of operations and cash from operating
activities. The Partnership's production is subject to fluctuations in response
to remaining quantities of oil and gas reserves, weather, pipeline capacity,
consumer demand, mechanical performance and workover, recompletion and drilling
activities. Declines in oil and gas production can be expected in future years
as a result of normal depletion and the Partnership not participating in
acquisition or exploration activities. Based on production estimates from
independent engineers and current market conditions, the Partnership expects it
will be able to meet its liquidity needs for routine operations in the
foreseeable future. The Partnership will reduce capital expenditures and
distributions to partners as cash from operating activities decline.
In the event that future short-term operating cash requirements are
greater than the Partnership's financial resources, the Partnership may seek
short-term, interest-bearing advances from the Managing Partner as needed. The
Managing Partner, however, is not obligated to make loans to the Partnership.
On an ongoing basis, the Partnership reviews the possible sale of lower
value properties prior to incurring associated dismantlement and abandonment
costs.
CAPITAL COMMITMENTS
The Partnership's primary needs for cash are for operating expenses,
drilling and recompletion expenditures, future dismantlement and abandonment
costs, distributions to Investing Partners, and the purchase of Units offered by
Investing Partners under the right of presentment. The Partnership had no
outstanding debt or lease commitments at March 31, 2004.
During the first three months of 2004, the Partnership invested $.4
million in oil and gas properties as the Partnership participated in
recompletions at South Timbalier Block 295 and Ship Shoal 258. The Partnership
is participating in drilling the Ship Shoal 258 JB-6 well which was in-progress
at March 31, 2004. Based on information supplied by the operators of the
properties, the Partnership anticipates capital expenditures of approximately
$1.8 million for the remainder of 2004, primarily for drilling at Ship Shoal
258/259. The Partnership currently plans to participate in drilling six wells in
the field in 2004. Such estimates may change based on realized prices, drilling
results or changes by the operator to the development plan.
On March 17, 2004, the Partnership paid distributions to Investing
Partners totaling $2.1 million, or $2,000 per Investing Partner unit. The
Partnership made a cash distribution to Investing Partners during the first
quarter of 2003 of $500 per Investing Partner Unit. The amount of future
distributions will be dependent on actual and expected production levels,
realized and expected oil and gas prices, expected drilling and recompletion
6
expenditures, and prudent cash reserves for future dismantlement and abandonment
costs that will be incurred after the Partnership's reserves are depleted.
As provided in the Amended Partnership Agreement, a first right of
presentment offer for 2004 of $11,518 per Unit was offered to Investing Partners
in April 2004, based on a valuation date of December 31, 2003. The Partnership
is not in a position to predict how many Units will be presented for repurchase
under the April 2004 offer and cannot, at this time, determine if the
Partnership will have sufficient funds available to repurchase any Units. The
Investing Partners have until May 21, 2004 to offer their Units under the
current right of presentment. The Partnership has no obligation to purchase any
Units presented to the extent it determines that it has insufficient funds for
such purchases. The Amended Partnership Agreement contains limitations on the
number of Units that the Partnership can repurchase, including a limit of 10
percent of the outstanding Units on an annual basis.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's major market risk exposure is in the pricing applicable
to its oil and gas production. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to its
natural gas production. Prices received for oil and gas production have been and
remain volatile and unpredictable. The Partnership has not used derivative
financial instruments or otherwise engaged in hedging activities during 2003 or
the first three months of 2004.
The information set forth under "Commodity Risk" in Item 7A of the
Partnership's Form 10-K for the year ended December 31, 2003, is incorporated by
reference. Information about market risks for the current quarter is not
materially different.
ITEM 4 - CONTROLS AND PROCEDURES
G. Steven Farris, the Managing Partner's President, Chief Executive
Officer and Chief Operating Officer, and Roger B. Plank, the Managing Partner's
Executive Vice President and Chief Financial Officer, evaluated the
effectiveness of the Partnership's disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation and as of the
date of that evaluation, these officers concluded that the Partnership's
disclosure controls to be effective, providing effective means to insure that
information it is required to disclose under applicable laws and regulations is
recorded, processed, summarized and reported in a timely manner. Also, no
significant changes were made in the Partnership's internal controls over
financial reporting during the fiscal quarter ending March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Partnership's internal control over financial reporting.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Partnership, are
forward-looking statements that are dependent on certain events, risks and
uncertainties that may be outside the Partnership's control, and which could
cause actual results to differ materially from those anticipated. Some of these
include, but are not limited to, the market prices of oil and gas, economic and
competitive conditions, inflation rates, legislative and regulatory changes,
financial market conditions, political and economic uncertainties of foreign
governments, future business decisions, and other uncertainties, all of which
are difficult to predict.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks, including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Fluctuations in oil
and gas prices, or a prolonged period of low prices, may substantially adversely
affect the Partnership's financial position, results of operations and cash
flows.
7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 - Certification of Chief Executive Officer
31.2 - Certification of Chief Financial Officer
32.1 - Certification of Chief Executive Officer and Chief
Financial Officer
b. Reports filed on Form 8-K - None.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
APACHE OFFSHORE INVESTMENT PARTNERSHIP
By: Apache Corporation, General Partner
Dated: May 7, 2004 /s/ Roger B. Plank
------------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: May 7, 2004 /s/ Thomas L. Mitchell
------------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
31.1 - Certification of Chief Executive Officer
31.2 - Certification of Chief Financial Officer
32.1 - Certification of Chief Executive Officer and Chief Financial
Officer
8