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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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________________ to _____________________
Commission File Number 1-4300
APACHE CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central 77056-4400
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of June 30,
2004.............326,002,236
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues .................... $1,247,412 $1,044,330 $2,400,166 $2,019,492
Other .............................................. (6,679) 10,026 (9,494) 1,473
---------- ---------- ---------- ----------
1,240,733 1,054,356 2,390,672 2,020,965
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization ........... 295,737 272,356 581,965 486,705
Asset retirement obligation accretion .............. 10,891 10,445 21,652 15,758
Lease operating costs .............................. 197,097 186,286 403,126 320,421
Share appreciation plan - lease operating costs .... 10,992 - 10,992 -
Gathering and transportation costs ................. 20,162 15,131 39,796 26,992
Severance and other taxes .......................... 21,595 32,742 30,543 57,296
General and administrative ......................... 36,479 30,574 80,329 58,405
Share appreciation plan - general and administrative 11,012 - 11,012 -
China litigation ................................... 71,216 - 71,216 -
Financing costs:
Interest expense ............................ 40,193 41,428 80,742 79,124
Amortization of deferred loan costs ......... 595 536 1,162 1,067
Capitalized interest ........................ (12,708) (12,618) (26,358) (23,850)
Interest income ............................. (513) (428) (833) (1,502)
---------- ---------- ---------- ----------
702,748 576,452 1,305,344 1,020,416
PREFERRED INTERESTS OF SUBSIDIARIES ....................... - 3,330 - 6,692
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ................................ 537,985 474,574 1,085,328 993,857
Provision for income taxes ......................... 164,847 230,193 363,106 437,179
---------- ---------- ---------- ----------
INCOME BEFORE CHANGE IN ACCOUNTING
PRINCIPLE ............................................... 373,138 244,381 722,222 556,678
Cumulative effect of change in accounting principle,
net of income tax ........................... - - - 26,632
---------- ---------- ---------- ----------
NET INCOME ................................................ 373,138 244,381 722,222 583,310
Preferred stock dividends .......................... 1,420 1,420 2,840 2,840
---------- ---------- ---------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ....................... $ 371,718 $ 242,961 $ 719,382 $ 580,470
========== ========== ========== ==========
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle .............. $ 1.14 $ .75 $ 2.21 $ 1.73
Cumulative effect of change in accounting principle - - - .08
---------- ---------- ---------- ----------
$ 1.14 $ .75 $ 2.21 $ 1.81
========== ========== ========== ==========
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle .............. $ 1.13 $ .74 $ 2.19 $ 1.71
Cumulative effect of change in accounting principle - - - .08
---------- ---------- ---------- ----------
$ 1.13 $ .74 $ 2.19 $ 1.79
========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral partof this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 722,222 $ 583,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ......................... 581,965 486,705
Asset retirement obligation accretion ............................ 21,652 15,758
Provision for deferred income taxes .............................. 99,098 221,370
Cumulative effect of change in accounting principle .............. - (26,632)
Other ............................................................ 32,759 3,311
Changes in operating assets and liabilities:
(Increase) decrease in receivables ............................... (174,184) (147,208)
(Increase) decrease in drilling advances and other ............... (20,548) (14,951)
(Increase) decrease in inventories ............................... 4,426 4,410
(Increase) decrease in deferred charges and other ................ (19,637) (12,636)
Increase (decrease) in accounts payable .......................... 105,697 56,575
Increase (decrease) in accrued expenses .......................... (21,467) 81,009
Increase (decrease) in advances from gas purchasers .............. (9,072) (8,088)
Increase (decrease) in deferred credits and noncurrent liabilities (23,859) (18,768)
----------- -----------
Net cash provided by operating activities ................. 1,299,052 1,224,165
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ........................................... (1,058,149) (771,046)
Acquisition of BP properties .................................................. - (1,157,134)
Other, net .................................................................... (19,188) (32,342)
----------- -----------
Net cash used in investing activities ..................... (1,077,337) (1,960,522)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings .......................................................... 404 1,042,418
Payments on long-term debt .................................................... (135,300) (852,305)
Dividends paid ................................................................ (41,838) (34,366)
Common stock activity ......................................................... 13,383 570,363
Treasury stock activity, net .................................................. 7,663 3,399
Cost of debt and equity transactions .......................................... (2,050) (4,039)
----------- -----------
Net cash provided by (used in) financing activities ....... (157,738) 725,470
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 63,977 (10,887)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................................... 33,503 51,886
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................................... $ 97,480 $ 40,999
=========== ===========
The accompanying notes to consolidated financial statements
are an integral partof this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 97,480 $ 33,503
Receivables, net of allowance ............................. 811,633 639,055
Inventories ............................................... 127,837 125,867
Drilling advances ......................................... 62,451 58,062
Prepaid assets and other .................................. 58,463 42,585
------------ ------------
1,157,864 899,072
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties .................................. 17,391,779 16,277,930
Unproved properties and properties under
development, not being amortized ............. 767,807 795,161
Gas gathering, transmission and processing facilities ..... 868,315 828,169
Other ..................................................... 249,494 239,548
------------ ------------
19,277,395 18,140,808
Less: Accumulated depreciation, depletion and
amortization ................................. (7,461,957) (6,880,723)
------------ ------------
11,815,438 11,260,085
------------ ------------
OTHER ASSETS:
Goodwill, net ............................................. 189,252 189,252
Deferred charges and other ................................ 87,397 67,717
------------ ------------
$ 13,249,951 $ 12,416,126
============ ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 414,979 $ 300,598
Accrued operating expense ............................................ 55,661 72,250
Accrued exploration and development .................................. 252,462 212,028
Accrued compensation and benefits .................................... 41,748 56,237
Accrued interest ..................................................... 32,527 32,621
Accrued income taxes ................................................. 35,801 18,936
Oil and gas derivative instruments ................................... 69,771 63,542
Other ................................................................ 72,650 64,166
------------ ------------
975,599 820,378
------------ ------------
LONG-TERM DEBT ............................................................ 2,192,070 2,326,966
------------ ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes ......................................................... 1,786,314 1,697,238
Advances from gas purchasers ......................................... 100,135 109,207
Asset retirement obligation .......................................... 759,617 739,775
Oil and gas derivative instruments ................................... 1,233 5,931
Other ................................................................ 160,794 183,833
------------ ------------
2,808,093 2,735,984
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized - Series B,
5.68% Cumulative Preferred Stock, 100,000 shares issued and
outstanding ................................................... 98,387 98,387
Common stock, $0.625 par, 430,000,000 shares authorized,
333,669,932 and 332,509,478 shares issued, respectively ....... 208,544 207,818
Paid-in capital ...................................................... 4,094,351 4,038,007
Retained earnings .................................................... 3,126,013 2,445,698
Treasury stock, at cost, 7,667,696 and 8,012,302 shares,
respectively .................................................. (100,102) (105,169)
Accumulated other comprehensive loss ................................. (153,004) (151,943)
------------ ------------
7,274,189 6,532,798
------------ ------------
$ 13,249,951 $ 12,416,126
============ ============
The accompanying notes to consolidated financial statements
are an integral partof this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B
COMPREHENSIVE PREFERRED COMMON PAID-IN
(In thousands) INCOME STOCK STOCK CAPITAL
--------------- ---------- -------- ----------
BALANCE AT DECEMBER 31, 2002.............. $ 98,387 $194,331 $3,427,450
Comprehensive income (loss):
Net income........................... $ 583,310 - - -
Commodity hedges, net of income tax
benefit of $30,902................. (51,870) - - -
---------------
Comprehensive income................... $ 531,440
===============
Dividends:
Preferred............................ - - -
Common ($.10 per share).............. - - -
Five percent common stock dividend..... - 581 25,333
Common shares issued................... - 12,444 563,050
Treasury shares issued, net............ - - 2,113
Other.................................. - - (509)
---------- -------- -----------
BALANCE AT JUNE 30, 2003.................. $ 98,387 $207,356 $4,017,437
========== ======== ===========
BALANCE AT DECEMBER 31, 2003.............. $ 98,387 $207,818 $4,038,007
Comprehensive income (loss):
Net income........................... $ 722,222 - - -
Commodity hedges, net of income tax
benefit of $648.................... (1,061) - - -
---------------
Comprehensive income................... $ 721,161
===============
Dividends:
Preferred............................ - - -
Common ($.12 per share).............. - - -
Common shares issued................... - 726 49,201
Treasury shares issued, net............ - - 4,738
Other.................................. - - 2,405
---------- -------- -----------
BALANCE AT JUNE 30, 2004.................. $ 98,387 $208,544 $4,094,351
========== ======== ===========
ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) EARNINGS STOCK INCOME (LOSS) EQUITY
----------- ---------- ------------- --------------
BALANCE AT DECEMBER 31, 2002.............. $1,427,607 $(110,559) $ (112,936) $ 4,924,280
Comprehensive income (loss):
Net income........................... 583,310 - - 583,310
Commodity hedges, net of income tax
benefit of $30,902................. - - (51,870) (51,870)
Comprehensive income...................
Dividends:
Preferred............................ (2,840) - - (2,840)
Common ($.10 per share).............. (33,705) - - (33,705)
Five percent common stock dividend..... (25,914) - - -
Common shares issued................... - - - 575,494
Treasury shares issued, net............ - 3,257 - 5,370
Other.................................. (6) - - (515)
----------- ---------- ------------ --------------
BALANCE AT JUNE 30, 2003.................. $1,948,452 $(107,302) $ (164,806) $ 5,999,524
=========== ========== ============ ==============
BALANCE AT DECEMBER 31, 2003.............. $2,445,698 $(105,169) $ (151,943) $ 6,532,798
Comprehensive income (loss):
Net income........................... 722,222 - - 722,222
Commodity hedges, net of income tax
benefit of $648.................... - - (1,061) (1,061)
Comprehensive income...................
Dividends:
Preferred............................ (2,840) - - (2,840)
Common ($.12 per share).............. (39,067) - - (39,067)
Common shares issued................... - - - 49,927
Treasury shares issued, net............ - 5,067 - 9,805
Other.................................. - - 2,405
----------- ---------- ------------ --------------
BALANCE AT JUNE 30, 2004.................. $3,126,013 $(100,102) $ (153,004) $ 7,274,189
=========== ========== ============ ==============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation
(Apache or the Company) 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 accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company 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 Company's most
recent annual report on Form 10-K.
On September 11, 2003, the Company declared a two-for-one stock split,
distributed January 14, 2004, to shareholders of record on December 31, 2003.
Quarterly share and per share information for 2003 have been restated to reflect
the two-for-one stock split.
Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentations.
1. ACQUISITIONS
On May 24, 2004, Apache signed a letter of intent with ExxonMobil to
explore and develop properties in West Texas, Western Canada, Louisiana and the
Gulf of Mexico. The program will capitalize on the respective strengths and
assets of both companies in these areas. The agreement provides for transfers
and joint venture activity across a broad range of prospective and mature
properties. Apache's participation will include an estimated cash payment of
$385 million as of the effective date. The parties are negotiating definitive
agreements, based on the letter of intent which included the following:
- ExxonMobil will transfer its interest in 28 mature producing oil and
gas fields in West Texas and New Mexico, retaining a revenue
interest indexed to oil price through 2009 and a 50 percent working
interest in all properties beneath the currently producing
intervals.
- ExxonMobil Canada will farm out its interest in approximately
300,000 acres of undeveloped property interests in the Western
Canada Province of Alberta to Apache Canada Ltd. ExxonMobil Canada
will retain a 37.5 percent lessor royalty interest in fee lands and
a 35 percent working interest on ExxonMobil leaseholds as to any
production resulting from the drilling program to be undertaken by
Apache, currently targeted to include at least 250 wells.
- The companies will explore jointly for deep gas on approximately
800,000 acres of Apache onshore Louisiana and Gulf of Mexico
properties for an initial five-year period, with provisions for
extension.
On January 13, 2003, Apache announced that it had entered into agreements
to purchase producing properties in the North Sea and Gulf of Mexico from
subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion,
with $670 million allocated to the Gulf of Mexico properties and $630 million
allocated to properties in the North Sea. The properties included estimated
proved reserves of 233.2 million barrels of oil equivalent (MMboe), 147.6 MMboe
located in the North Sea with the balance in the Gulf of Mexico. Both purchase
agreements were effective as of January 1, 2003. As is customary, Apache assumed
BP's abandonment obligation for the properties, which was considered in
determining the purchase price. Both the Gulf of Mexico and North Sea assets
acquired from BP were funded with available cash on hand, the issuance of 19.8
million shares of Apache common stock (adjusted for the five percent common
stock dividend and the two-for-one common stock split) and borrowings under the
Company's lines of credit and commercial paper program. The offering of Apache's
common stock provided net proceeds of approximately $554 million.
6
Apache and BP closed the above referenced acquisition of the Gulf of
Mexico properties on March 13, 2003, which included BP's interest in 56
producing fields, and 104 blocks. At closing, the $670 million purchase price
was adjusted for normal closing items and preferential rights exercised by third
parties. The exercise of preferential rights by third parties reduced the
purchase price by $73 million and estimated reserves by 9.6 MMboe. The purchase
price was further adjusted for various normal closing items, including revenues
and expenditures related to the properties for the period between the effective
and closing dates. As a result, cash consideration of $509 million was paid by
Apache upon closing. In a separate transaction closed February 21, 2003, Apache
purchased BP's interest in several other Gulf of Mexico properties with
estimated proved reserves of 2.1 MMboe for an adjusted purchase price of $15
million. Including $4 million of transaction costs, total cash consideration for
the two acquisitions of Gulf of Mexico properties from BP totaled $528 million.
The acquisition of the U.K. North Sea properties closed on April 2, 2003,
at which time Apache paid a purchase price, adjusted for normal closing and
working capital adjustments, of $630 million. The acquisition of the North Sea
properties included a 96 percent interest in the Forties Field and established a
new core area for the Company. In conjunction with the Forties acquisition,
Apache may be required to issue a letter of credit to BP to cover the present
value of related asset retirement obligations if the rating of the Company's
senior unsecured debt is lowered by both Moody's and Standard and Poor's from
its current ratings of A3 and A-, respectively. Should this occur, the initial
letter of credit amount would be 129 million British pounds. Apache has agreed
to sell all of the North Sea production from those properties to BP through
December 31, 2004, at a combination of fixed and market sensitive prices
pursuant to a contract entered into in connection with the North Sea purchase
agreement.
Presented below is a breakdown of the cash consideration given for the BP
transaction as of the closing date.
U.S. - U.K. -
GULF OF MEXICO NORTH SEA TOTAL*
-------------- ------------- -----------
(In thousands)
Proved Property .................. $ 539,110 $ 854,835 $ 1,393,945
Unproved Property ................ 57,500 65,000 122,500
Working capital acquired, net .... -- 10,957 10,957
Asset Retirement Obligation ...... (69,000) (250,887) (319,887)
Deferred income tax liability .... -- (50,381) (50,381)
----------- ----------- -----------
Cash consideration .............. $ 527,610 $ 629,524 $ 1,157,134
=========== =========== ===========
* Property balance includes $12 million of transaction costs (U.S. - $4
million; North Sea - $8 million).
The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the acquisitions from BP
occurred on January 1 of each period presented. The pro forma information is
based in part on data provided by BP and on numerous assumptions and is not
necessarily indicative of future results of operations.
FOR THE SIX MONTHS ENDED JUNE 30, 2003
--------------------------------------
AS REPORTED PRO FORMA
----------- ----------
(In thousands, except per common share data)
Revenues and other .................. $2,020,965 $2,258,927
Net income .......................... 583,310 656,507
Preferred stock dividends ........... 2,840 2,840
Income attributable to common stock . 580,470 653,667
Net income per common share:
Basic ........................... $ 1.81 $ 2.03
Diluted ......................... 1.79 2.01
Average common shares outstanding (1) 320,973 323,160
(1) Pro forma shares assume the issuance of 19.8 million common
shares (adjusted for the five percent common stock dividend
and the two-for-one common stock split) as of the beginning of
each period presented.
7
On July 3, 2003, Apache announced that it had completed the acquisition of
producing properties on the Outer Continental Shelf of the Gulf of Mexico from
Shell Exploration and Production Company (Shell) for $200 million, subject to
normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced for a period of four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over the four-year term. The
VPP reserves and production will not be recorded by Apache.
Apache recorded estimated proved reserves of 124.6 billion cubic feet
(Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60 million
liability for the future cost to produce and deliver volumes subject to the VPP
was recorded by the Company because the overriding royalties are not burdened by
production costs. This liability is being amortized as the volumes are produced
and delivered to Morgan Stanley. The purchase agreement was effective as of July
1, 2003. The acquisition included interests in 26 fields covering 50 blocks
(approximately 209,000 acres) and interests in two onshore gas separation
plants. Apache operates 15 of the fields with 91 percent of the production. The
purchase price was funded by borrowings under the Company's lines of credit and
commercial paper program.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache uses a variety of strategies to manage its exposure to fluctuations
in commodity prices. As established by the Company's hedging policy, Apache
primarily enters into cash flow hedges in connection with selected acquisitions
to protect against commodity price volatility. The success of these acquisitions
is significantly influenced by Apache's ability to achieve targeted production
at forecasted prices. These hedges effectively reduce price risk on a portion of
the production from the acquisitions.
Apache entered into, and designated as cash flow hedges, natural gas
fixed-price swaps and natural gas option collars in conjunction with the BP and
certain South Louisiana property acquisitions. During the second quarter of
2004, Apache entered into crude oil option collars and puts designated as cash
flow hedges on existing base production in West Texas. These Nymex positions
were entered into in accordance with the Company's hedging policy and involved
several counterparties, all of which are rated A+ or better. As of June 30,
2004, the outstanding positions of our natural gas and crude oil cash flow
hedges were as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY)
- ---------- -------------------- ------------- ---------------- ----------------
(In thousands)
2004 Gas Collars 9,200,000 $ 3.25 / 5.81 $ (6,581)
Gas Fixed-Price Swap 25,760,000 4.33 (50,452)
Oil Collars 1,472,000 35.00 / 42.20 850
2005 Gas Collars 9,050,000 3.25 / 5.20 (12,254)
Oil Collars 1,387,000 28.00 / 38.90 (1,807)
Oil Put Option 1,533,000 28.00 1,724
2006 Oil Collars 1,387,000 28.00 / 38.90 (477)
Oil Put Option 1,533,000 28.00 2,521
In addition to the fixed-price swaps and option collars, Apache entered
into a separate crude oil physical sales contract with BP. The sales contract is
a normal purchase and sale under Statement of Financial Accounting Standards
(SFAS) No. 133 and, therefore, the Company has designated and accounted for the
contract under the accrual method. As of June 30, 2004, the outstanding terms of
the contract were as follows:
CRUDE OIL FIXED-PRICE PHYSICAL SALES CONTRACT (BRENT)
- -----------------------------------------------------
PRODUCTION TOTAL VOLUMES AVERAGE
PERIOD (BARRELS) FIXED PRICE
- ---------- ------------- -----------
2004 7,360,000 $ 22.06
In June 2004, Apache began hedging foreign currency exchange risk
associated with a portion of its forecasted Canadian and North Sea lease
operating expenditures by entering into forward purchase contracts. The Company
forward purchased $41 million Canadian dollars at an average exchange rate of
..735 and 12 million British pounds
8
at an average exchange rate of 1.835. The forward contracts mature in July
through December 2004. Combined, the fair market value of these contracts as of
June 30, 2004 was $315,000 ($204,000 after tax). Future changes in market value
will be recorded in Other Comprehensive Income.
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:
GROSS AFTER TAX
------------ ------------
(In thousands)
Unrealized loss on derivatives at December 31, 2003.................... $ (69,316) $ (43,193)
Net losses realized into earnings...................................... 42,198 26,374
Net change in derivative fair value.................................... (43,907) (27,435)
------------- --------------
Unrealized loss on derivatives at June 30, 2004........................ $ (71,025) $ (44,254)
============= ==============
Based on current market prices, the Company recorded an unrealized loss in
other comprehensive income of $71 million ($44 million after tax), primarily
representing oil and gas derivative hedges. Any loss will be realized in future
earnings contemporaneously with the related sales of natural gas production
applicable to specific hedges. Were current prices to hold, a loss of $69
million ($43 million after tax) would be realized over the next 12 months.
However, these amounts could vary materially as a result of changes in market
conditions. The contracts designated as hedges qualified and continue to qualify
for hedge accounting in accordance with SFAS No. 133, as amended.
3. DEBT
On May 15, 2003, Apache Finance Canada Corporation (Apache Finance Canada)
issued $350 million of 4.375 percent, 12-year, senior unsecured notes in a
private placement. On March 4, 2004, the Company completed an exchange offer
with the holders of the notes, issuing publicly traded, registered notes of the
same principal amount and with the same interest rates, payment terms and
maturity. The notes are irrevocably and unconditionally guaranteed by Apache and
are redeemable, as a whole or in part, at Apache Finance Canada's option,
subject to a make-whole premium. Interest is payable semi-annually on May 15 and
November 15 of each year commencing on November 15, 2003. The proceeds of the
original note offering were used to reduce bank debt and outstanding commercial
paper and for general corporate purposes.
On May 28, 2004, the Company's $750 million 364-day credit facility
matured and was replaced with a new 5-year credit facility. The financial
covenants of the new 5-year facility require the Company to maintain a ratio of
debt-to-capitalization of not greater than 60 percent at the end of any fiscal
quarter. At the Company's option, the interest rate is based on (i) the greater
of (a) The JPMorgan Chase Bank prime rate or (b) the federal funds rate plus
one-half of one percent or (ii) the London Interbank Offered Rate (LIBOR) plus a
margin determined by the Company's senior long-term debt rating. The facility
also allows the Company to borrow under competitive auctions. On June 30, 2004,
the margin over LIBOR for committed loans was .27 percent. If the total amount
of the loans borrowed under the facility equals or exceeds 50 percent of the
total facility commitments, then an additional .10 percent will be added to the
margins over LIBOR. The Company also pays a quarterly facility fee of .08
percent on the total amount of the facility.
Also on May 28, 2004, the Company amended its existing global credit
facility agreements in order to make their terms consistent with the new 5-year
credit facility. Significant changes included raising the cross default
threshold and eliminating covenants which established minimum levels for
tangible net worth and book values for assets of Apache and certain
subsidiaries.
4. CAPITAL STOCK
On January 22, 2003, the Company completed a public offering of 19.8
million shares of Apache common stock (adjusted for the five percent common
stock dividend and the two-for-one common stock split) including underwriters'
over-allotment option, for net proceeds of approximately $554 million. The
proceeds were used to purchase producing properties in the North Sea and the
Gulf of Mexico from BP.
9
On September 12, 2003, the Company announced that its Board of Directors
voted to increase the quarterly cash dividend on its common stock to 12 cents
per share from 10 cents per share (six cents per share from five cents per share
adjusted for the two-for-one stock split), effective with the November 2003
payment, and to split its common stock two-for-one early in 2004, subject to
shareholder approval of an increase in the authorized number of common shares.
On December 18, 2003, the Company announced that holders of its common
stock approved an increase in the number of authorized common shares to 430
million from 215 million in order to complete the previously announced
two-for-one stock split. The record date for the stock split was December 31,
2003, and the additional shares were distributed on January 14, 2004.
On January 26, 2004, the Nasdaq Stock Market, Inc. (NASDAQ) approved
Apache for listing on the Nasdaq National Market, an intention we first
announced on January 12, 2004. Apache's common stock is now listed on the NASDAQ
as well as the New York Stock Exchange and the Chicago Stock Exchange.
5. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED JUNE 30,
------------------------------------------------------------------
2004 2003
--------------------------------- ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- ------- --------- --------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock ....... $ 371,718 325,668 $ 1.14 $ 242,961 323,409 $ .75
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ................... - 3,695 - 2,711
--------- ------- --------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions ............ $ 371,718 329,363 $ 1.13 $ 242,961 326,120 $ .74
========= ======= ========= ========= ======= =========
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
2004 2003
--------------------------------- ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- ------- --------- --------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock ....... $ 719,382 325,335 $ 2.21 $ 580,470 320,973 $ 1.81
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ................... - 3,718 - 2,681
--------- ------- --------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions ............ $ 719,382 329,053 $ 2.19 $ 580,470 323,654 $ 1.79
========= ======= ========= ========= ======= =========
6. STOCK-BASED COMPENSATION
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, prospectively to all employee awards granted, modified,
or settled after January 1, 2003. However, on May 1, 2003, the Company began
issuing stock appreciation rights to certain employees in lieu of stock options.
The Company records compensation expense with respect to stock appreciation
rights as the price of the Company's common stock fluctuates and the awards
vest. On May 1, 2003 and May 6, 2004, Apache granted stock appreciation rights
for 1,802,210 shares and 1,325,100 shares of Apache common stock, respectively.
On June 30, 2004, stock appreciation rights for 2,913,564 shares of Apache
common stock were outstanding with an average exercise price of $35.01.
10
For stock options granted prior to 2003, the Company accounted for its
stock-based employee compensation plans under the recognition and measurement
principles of Accounting Principals Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. For the stock options granted
prior to 2003, no material stock-based employee compensation cost is reflected
in net income. All options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant.
In October 2000, the Company adopted the 2000 Share Appreciation Plan
under which grants were made to the Company's officers and substantially all
full-time employees. The 2000 Share Appreciation Plan provides for issuance of
Apache common stock, based on attainment of one or more of three share price
goals (Share Price Goals) and/or a separate production goal. The Share Price
Goals are based on achieving a closing share price for Apache stock of $43.29,
$51.95 and $77.92 per share ($100, $120 and $180 before the five and 10 percent
stock dividends and the two-for-one stock split) on any 10 days out of any 30
consecutive trading days before January 1, 2005. As of April 28, 2004, Apache's
share price exceeded the first threshold for the 10-day requirement. As such,
Apache will issue approximately 900,000 shares of its common stock, after
minimum tax withholding requirements, in three equal installments. The first
installment was issued in May 2004. The second and third installments will be
issued in 2005 and 2006 to employees remaining with the Company during that
period. Expense recognition is based on the percentage of the employees' service
period and will reduce Apache's 2004 net income by approximately $16 million
after tax, or five cents per diluted common share.
The cost related to stock-based employee compensation included in the
determination of net income for 2003 and 2004 is different than that which would
have been recognized if the fair value based method had been applied to all
awards. The following table illustrates the effect on income attributable to
common stock and earnings per share had the fair value based provisions of SFAS
No. 123, as amended, been applied to all outstanding and unvested awards.
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
(In thousands, except for per common share amounts)
Income attributable to common stock, as reported. $ 371,718 $ 242,961 $ 719,382 $ 580,470
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects................................... 14,698 34 15,472 391
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (5,063) (6,364) (10,642) (10,866)
---------- ---------- ---------- ----------
Pro forma income attributable to common stock.... $ 381,353 $ 236,631 $ 724,212 $ 569,995
========== ========== ========== ==========
Net Income per Common Share:
Basic:
As reported................................. $ 1.14 $ .75 $ 2.21 $ 1.81
Pro forma................................... 1.17 .73 2.23 1.78
Diluted:
As reported................................. 1.13 .74 2.19 1.79
Pro forma................................... 1.16 .72 2.20 1.75
The effects of applying SFAS No. 123, as amended, in this pro forma
disclosure should not be interpreted as being indicative of future effects. SFAS
No. 123, as amended, does not apply to awards prior to 1995, and the extent and
timing of additional future awards cannot be predicted.
11
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
-------------- --------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)............................. $ 49,584 $ 47,471
Income taxes (net of refunds)..................................... 246,879 166,762
8. PENSION AND POST-RETIREMENT BENEFITS
Effective July 1, 2003, as part of the BP North Sea acquisition, Apache
assumed a defined benefit pension plan covering existing BP North Sea employees
hired by the Company as part of the acquisition. The pension plan provides
defined benefits based on years of service and final average salary.
The following table sets forth the components of the net periodic cost of
Apache's pension and other post-retirement benefit plans for the six-month
period ended June 30, 2004. The pension and post-retirement benefit plans did
not materially impact the Company for equivalent prior-year periods.
FOR THE SIX MONTHS ENDED JUNE 30, 2004
-------------------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
-------------- ---------------
(In thousands)
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost....................................................... $ 2,727 $ 484
Interest cost...................................................... 1,813 314
Expected return on assets.......................................... (1,793) -
Amortization of:
Transition obligation........................................... - 22
Actuarial (gain)/loss........................................... - 125
-------------- --------------
Net periodic benefit cost.......................................... $ 2,747 $ 945
============== ==============
Apache disclosed in its financial statements for the year ended December
31, 2003, that it expected to contribute $5 million to its pension plan in 2004.
Approximately $3 million of the original estimate was contributed as of June 30,
2004. The remaining $2 million is expected to be contributed by year-end. Apache
also contributed an additional $12 million to fund prior years' benefit
obligations.
The Company did not make any material contributions to the post-retirement
benefit plan during the period and does not anticipate any material
contributions or benefit payments to be made in future years.
12
9. BUSINESS SEGMENT INFORMATION
Apache has five reportable segments which are primarily in the business of
natural gas and crude oil exploration and production. The Company
evaluates segment performance based on results from oil and gas sales and
lease-level expenses. Apache's reportable segments are managed separately
because of their geographic locations. Financial information by operating
segment is presented below:
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL
---------- ---------- ---------- ---------- ---------- ------------- -----------
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Oil and Gas Production Revenues........... $1,100,335 $ 469,937 $ 412,662 $ 189,649 $ 186,129 $ 41,454 $ 2,400,166
========== ========== ========== ========== ========== ========== ===========
Operating Income (1)...................... $ 597,116 $ 258,033 $ 277,239 $ 88,841 $ 74,714 $ 16,149 $ 1,312,092
========== ========== ========== ========== ========== ==========
Other Income (Expense):
Other.................................. (9,494)
General and administrative............. (80,329)
Share Appreciation Plan - general and
administrative...................... (11,012)
China litigation....................... (71,216)
Financing costs, net................... (54,713)
-----------
Income Before Income Taxes................ $ 1,085,328
===========
Total Assets.............................. $5,868,356 $3,243,373 $1,890,102 $1,018,298 $1,041,801 $ 188,021 $13,249,951
========== ========== ========== ========== ========== ========== ===========
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Oil and Gas Production Revenues........... $ 994,699 $ 427,940 $ 320,274 $ 194,952 $ 77,858 $ 3,769 $ 2,019,492
========== ========== ========== ========== ========== ========== ===========
Operating Income (1)...................... $ 570,629 $ 248,346 $ 190,795 $ 98,060 $ 3,332 $ 1,158 $ 1,112,320
========== ========== ========== ========== ========== ==========
Other Income (Expense):
Other.................................. 1,473
General and administrative............. (58,405)
Preferred interests of subsidiaries.... (6,692)
Financing costs, net................... (54,839)
-----------
Income Before Income Taxes................ $ 993,857
===========
Total Assets.............................. $5,340,053 $2,775,921 $1,684,445 $ 936,575 $ 985,841 $ 173,200 $11,896,035
========== ========== ========== ========== ========== ========== ===========
1) Operating Income consists of oil and gas production revenues less
depreciation, depletion and amortization, asset retirement obligation
accretion, international impairments, lease operating costs, share
appreciation plan - lease operating costs, gathering and transportation
costs, and severance and other taxes.
10. ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Company adopted 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. Apache's asset retirement obligations primarily relate
to the plugging and abandonment of oil and gas properties.
13
The following table describes all changes to the Company's ARO liability
for the current year (in thousands):
Asset retirement obligation as of December 31, 2003................................ $ 739,775
Liabilities incurred............................................................... 5,418
Liabilities settled................................................................ (21,893)
Accretion expense.................................................................. 21,652
Revisions.......................................................................... 14,665
-----------
Asset retirement obligation as of June 30, 2004.................................... $ 759,617
===========
Liabilities incurred during the period primarily relate to obligations in
connection with the Company's drilling activity. Liabilities settled during the
period primarily relate to individually immaterial properties plugged and
abandoned or sold during the period.
11. LITIGATION
Apache recorded a reserve in the second quarter of 2004 to fully reflect a
pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco
China). In September 2001, Texaco China initiated an arbitration proceeding
against Apache China Corporation LDC (Apache China), later adding Apache Bohai
to the arbitration. In the arbitration Texaco China claimed damages, plus
interest, arising from Apache Bohai's alleged failure to drill three wells,
prior to re-assignment of the interest to Texaco China. Apache believes that the
finding of the arbitrator is unsupported by the facts and the law, and Apache
expects to pursue an appeal of the award in federal court.
12. SUPPLEMENTAL GUARANTOR INFORMATION
Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada are subsidiaries of Apache, that have issuances of publicly traded
securities and require the following condensed consolidating financial
statements be provided as an alternative to filing separate financial
statements.
Each of the companies presented in the condensed consolidating financial
statements has been fully consolidated in Apache's consolidated financial
statements. As such, the condensed consolidating financial statements should be
read in conjunction with the financial statements of Apache Corporation and
Subsidiaries and notes thereto of which this note is an integral part.
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2004
APACHE APACHE APACHE
APACHE NORTH FINANCE FINANCE
CORPORATION AMERICA AUSTRALIA CANADA
----------- ----------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 568,421 $ - $ - $ -
Equity in net income (loss) of affiliates 223,195 10,420 13,488 53,454
Other ................................... (1,148) - - -
----------- ----------- ----------- -----------
790,468 10,420 13,488 53,454
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 137,844 - - -
Asset retirement obligation accretion ... 5,805 - - -
Lease operating costs ................... 85,892 - - -
Share appreciation plan - LOE ........... 5,737 - - -
Gathering and transportation costs ...... 7,891 - - -
Severance and other taxes ............... 15,416 - - -
General and administrative .............. 28,423 - - -
Share appreciation plan - G&A ........... 10,034 - - -
China litigation ........................ - - - -
Financing costs, net .................... 20,253 - 4,510 9,936
----------- ----------- ----------- -----------
317,295 - 4,510 9,936
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 473,173 10,420 8,978 43,518
Provision (benefit) for income taxes .... 100,035 - (1,442) (3,280)
----------- ----------- ----------- -----------
NET INCOME ................................. 373,138 10,420 10,420 46,798
Preferred stock dividends ............... 1,420 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 371,718 $ 10,420 $ 10,420 $ 46,798
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 756,030 $ (77,039) $ 1,247,412
Equity in net income (loss) of affiliates (9,724) (290,833) -
Other ................................... (5,531) - (6,679)
----------- ----------- -----------
740,775 (367,872) 1,240,733
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 157,893 - 295,737
Asset retirement obligation accretion ... 5,086 - 10,891
Lease operating costs ................... 188,244 (77,039) 197,097
Share appreciation plan - LOE ........... 5,255 - 10,992
Gathering and transportation costs ...... 12,271 - 20,162
Severance and other taxes ............... 6,179 - 21,595
General and administrative .............. 8,056 - 36,479
Share appreciation plan - G&A ........... 978 - 11,012
China litigation ........................ 71,216 - 71,216
Financing costs, net .................... (7,132) - 27,567
----------- ----------- -----------
448,046 (77,039) 702,748
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 292,729 (290,833) 537,985
Provision (benefit) for income taxes .... 69,534 - 164,847
----------- ----------- -----------
NET INCOME ................................. 223,195 (290,833) 373,138
Preferred stock dividends ............... - - 1,420
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 223,195 $ (290,833) $ 371,718
=========== =========== ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2003
APACHE APACHE APACHE
APACHE NORTH FINANCE FINANCE
CORPORATION AMERICA AUSTRALIA CANADA
----------- ----------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 438,796 $ - $ - $ -
Equity in net income (loss) of affiliates 76,802 7,782 10,760 6,407
Other ................................... (2,641) - - -
----------- ----------- ----------- -----------
512,957 7,782 10,760 6,407
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 93,593 - - -
Asset retirement obligation accretion ... 3,778 - - -
Lease operating costs ................... 66,007 - - -
Gathering and transportation costs ...... 4,412 - - -
Severance and other taxes ............... 13,042 - - 11
General and administrative .............. 25,138 - - -
Financing costs, net .................... 27,345 - 4,513 10,010
----------- ----------- ----------- -----------
233,315 - 4,513 10,021
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES ........ - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 279,642 7,782 6,247 (3,614)
Provision (benefit) for income taxes .... 35,261 - (1,535) (3,318)
----------- ----------- ----------- -----------
NET INCOME ................................. 244,381 7,782 7,782 (296)
Preferred stock dividends ............... 1,420 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 242,961 $ 7,782 $ 7,782 $ (296)
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 648,859 $ (43,325) $ 1,044,330
Equity in net income (loss) of affiliates (9,681) (92,070) -
Other ................................... 12,667 - 10,026
----------- ----------- -----------
651,845 (135,395) 1,054,356
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 178,763 - 272,356
Asset retirement obligation accretion ... 6,667 - 10,445
Lease operating costs ................... 163,604 (43,325) 186,286
Gathering and transportation costs ...... 10,719 - 15,131
Severance and other taxes ............... 19,689 - 32,742
General and administrative .............. 5,436 - 30,574
Financing costs, net .................... (12,950) - 28,918
----------- ----------- -----------
371,928 (43,325) 576,452
----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES ........ 3,330 - 3,330
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 276,587 (92,070) 474,574
Provision (benefit) for income taxes .... 199,785 - 230,193
----------- ----------- -----------
NET INCOME ................................. 76,802 (92,070) 244,381
Preferred stock dividends ............... - - 1,420
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 76,802 $ (92,070) $ 242,961
=========== =========== ===========
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
APACHE APACHE APACHE
APACHE NORTH FINANCE FINANCE
CORPORATION AMERICA AUSTRALIA CANADA
----------- ----------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 1,097,459 $ - $ - $ -
Equity in net income (loss) of affiliates 416,687 18,682 24,716 91,399
Other ................................... (1,911) - - -
----------- ----------- ----------- -----------
1,512,235 18,682 24,716 91,399
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 269,054 - - -
Asset retirement obligation accretion ... 11,600 - - -
Lease operating costs ................... 170,127 - - -
Share appreciation plan - LOE ........... 5,737 - - -
Gathering and transportation costs ...... 15,223 - - -
Severance and other taxes ............... 28,796 - - 18
General and administrative .............. 63,352 - - -
Share appreciation plan - G&A ........... 10,034 - - -
China litigation ........................ - - - -
Financing costs, net .................... 42,016 - 9,022 20,043
----------- ----------- ----------- -----------
615,939 - 9,022 20,061
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 896,296 18,682 15,694 71,338
Provision (benefit) for income taxes .... 174,074 - (2,988) (6,785)
----------- ----------- ----------- -----------
NET INCOME ................................. 722,222 18,682 18,682 78,123
Preferred stock dividends ............... 2,840 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 719,382 $ 18,682 $ 18,682 $ 78,123
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues ......... $ 1,457,921 $ (155,214) $ 2,400,166
Equity in net income (loss) of affiliates (19,310) (532,174) -
Other ................................... (7,583) - (9,494)
----------- ----------- -----------
1,431,028 (687,388) 2,390,672
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 312,911 - 581,965
Asset retirement obligation accretion ... 10,052 - 21,652
Lease operating costs ................... 388,213 (155,214) 403,126
Share appreciation plan - LOE ........... 5,255 - 10,992
Gathering and transportation costs ...... 24,573 - 39,796
Severance and other taxes ............... 1,729 - 30,543
General and administrative .............. 16,977 - 80,329
Share appreciation plan - G&A ........... 978 - 11,012
China litigation ........................ 71,216 - 71,216
Financing costs, net .................... (16,368) - 54,713
----------- ----------- -----------
815,536 (155,214) 1,305,344
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .......... 615,492 (532,174) 1,085,328
Provision (benefit) for income taxes .... 198,805 - 363,106
----------- ----------- -----------
NET INCOME ................................. 416,687 (532,174) 722,222
Preferred stock dividends ............... - - 2,840
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 416,687 $ (532,174) $ 719,382
=========== =========== ===========
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- ----------- --------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues................. $ 814,963 $ - $ - $ -
Equity in net income (loss) of affiliates....... 256,160 16,729 22,685 34,602
Other........................................... (6,257) - - -
----------- ----------- ----------- -----------
1,064,866 16,729 22,685 34,602
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 161,211 - - -
Asset retirement obligation accretion........... 6,542 - - -
Lease operating costs........................... 124,774 - - -
Gathering and transportation costs.............. 8,897 - - -
Severance and other taxes....................... 27,399 - - 53
General and administrative...................... 48,841 - - -
Financing costs, net............................ 48,444 - 9,025 20,179
----------- ----------- ----------- -----------
426,108 - 9,025 20,232
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES................ - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 638,758 16,729 13,660 14,370
Provision (benefit) for income taxes............ 75,205 - (3,069) (7,430)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE............................. 563,553 16,729 16,729 21,800
Cumulative effect of change in accounting
principle, net of income tax.................. 19,757 - - -
----------- ----------- ----------- -----------
NET INCOME......................................... 583,310 16,729 16,729 21,800
Preferred stock dividends....................... 2,840 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 580,470 $ 16,729 $ 16,729 $ 21,800
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues................. $ 1,303,126 $ (98,597) $ 2,019,492
Equity in net income (loss) of affiliates....... (18,758) (311,418) -
Other........................................... 7,730 - 1,473
----------- ------------ ------------
1,292,098 (410,015) 2,020,965
----------- ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 325,494 - 486,705
Asset retirement obligation accretion........... 9,216 - 15,758
Lease operating costs........................... 294,244 (98,597) 320,421
Gathering and transportation costs.............. 18,095 - 26,992
Severance and other taxes....................... 29,844 - 57,296
General and administrative...................... 9,564 - 58,405
Financing costs, net............................ (22,809) - 54,839
----------- ------------ ------------
663,648 (98,597) 1,020,416
----------- ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES................ 6,692 - 6,692
----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. 621,758 (311,418) 993,857
Provision (benefit) for income taxes............ 372,473 - 437,179
----------- ------------ ------------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE............................. 249,285 (311,418) 556,678
Cumulative effect of change in accounting
principle, net of income tax.................. 6,875 - 26,632
----------- ------------ ------------
NET INCOME......................................... 256,160 (311,418) 583,310
Preferred stock dividends....................... - - 2,840
----------- ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 256,160 $ (311,418) $ 580,470
=========== ============ ============
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- ----------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 678,621 $ - $ (8,219) $ (19,521)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (311,910) - - -
Investment in subsidiaries, net.................. (182,525) (9,025) - -
Other, net....................................... (8,957) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (503,392) (9,025) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 274 - (806) 242
Payments on long-term debt....................... (135,300) - - -
Dividends paid................................... (41,838) - - -
Common stock activity............................ 13,383 9,025 9,025 19,281
Treasury stock activity, net..................... 7,663 - - -
Cost of debt and equity transactions............. (2,050) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... (157,868) 9,025 8,219 19,523
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 17,361 - - 2
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ - - 2 1
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 17,361 $ - $ 2 $ 3
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 648,171 $ - $ 1,299,052
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (746,239) - (1,058,149)
Investment in subsidiaries, net.................. (26,792) 218,342 -
Other, net....................................... (10,231) - (19,188)
----------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.............. (783,262) 218,342 (1,077,337)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 165,023 (164,329) 404
Payments on long-term debt....................... - - (135,300)
Dividends paid................................... - - (41,838)
Common stock activity............................ 16,682 (54,013) 13,383
Treasury stock activity, net..................... - - 7,663
Cost of debt and equity transactions............. - - (2,050)
----------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 181,705 (218,342) (157,738)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 46,614 - 63,977
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 33,500 - 33,503
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 80,114 $ - $ 97,480
=========== ============ ============
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- ----------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 422,811 $ - $ (10,411) $ 326,493
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (191,034) - - -
Acquisitions..................................... (527,610) - - -
Investment in subsidiaries, net.................. (204,329) (9,025) - -
Other, net....................................... (15,393) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (938,366) (9,025) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 660,873 - 1,386 (347,282)
Payments on long-term debt....................... (678,900) - - -
Dividends paid................................... (34,366) - - -
Common stock activity............................ 570,363 9,025 9,025 20,662
Treasury stock activity, net..................... 3,399 - - -
Cost of debt and equity transactions............. (4,039) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 517,330 9,025 10,411 (326,620)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 1,775 - - (127)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 224 - 2 127
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 1,999 $ - $ 2 $ -
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 485,272 $ - $ 1,224,165
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (580,012) - (771,046)
Acquisitions..................................... (629,524) - (1,157,134)
Investment in subsidiaries, net.................. 156,790 56,564 -
Other, net....................................... (16,949) - (32,342)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (1,069,695) 56,564 (1,960,522)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 76,315 651,126 1,042,418
Payments on long-term debt....................... (173,405) - (852,305)
Dividends paid................................... - - (34,366)
Common stock activity............................ 668,978 (707,690) 570,363
Treasury stock activity, net..................... - - 3,399
Cost of debt and equity transactions............. - - (4,039)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 571,888 (56,564) 725,470
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. (12,535) - (10,887)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 51,533 - 51,886
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 38,998 $ - $ 40,999
============ ============ ===========
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- ------ -----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 17,361 $ - $ 2 $ 3 $ 80,114
Receivables, net of allowance........... 267,307 - - - 544,326
Inventories............................. 18,620 - - - 109,217
Drilling advances and others............ 40,747 - - - 80,167
----------- -------- -------- ---------- -----------
344,035 - 2 3 813,824
----------- -------- -------- ---------- -----------
PROPERTY AND EQUIPMENT, NET................. 5,332,984 - - - 6,482,454
----------- -------- -------- ---------- -----------
OTHER ASSETS:
Intercompany receivable, net............ 1,456,525 - (1,054) 93,555 (1,549,026)
Goodwill, net........................... - - - - 189,252
Equity in affiliates.................... 3,510,976 242,695 494,048 1,192,419 (802,073)
Deferred charges and other.............. 42,774 - - 4,772 39,851
----------- -------- -------- ---------- -----------
$10,687,294 $242,695 $492,996 $1,290,749 $ 5,174,282
=========== ======== ======== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 246,143 $ - $ - $ - $ 168,836
Other accrued expenses.................. 282,241 - (102) 2,951 275,530
----------- -------- -------- ---------- -----------
528,384 - (102) 2,951 444,366
----------- -------- -------- ---------- -----------
LONG-TERM DEBT.............................. 1,270,858 - 269,088 646,769 5,355
----------- -------- -------- ---------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes............................ 961,950 - (18,685) (670) 843,719
Advances from gas purchasers............ 100,135 - - - -
Asset retirement obligation............. 407,129 - - - 352,488
Oil and gas derivative instruments...... 1,233 - - - -
Other................................... 143,416 - - - 17,378
----------- -------- -------- ---------- -----------
1,613,863 - (18,685) (670) 1,213,585
----------- -------- -------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................ 7,274,189 242,695 242,695 641,699 3,510,976
----------- -------- -------- ---------- -----------
$10,687,294 $242,695 $492,996 $1,290,749 $ 5,174,282
=========== ======== ======== ========== ===========
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
-------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ - $ 97,480
Receivables, net of allowance........... - 811,633
Inventories............................. - 127,837
Drilling advances and others............ - 120,914
----------- -----------
- 1,157,864
----------- -----------
PROPERTY AND EQUIPMENT, NET................. - 11,815,438
----------- -----------
OTHER ASSETS:
Intercompany receivable, net............ - -
Goodwill, net........................... - 189,252
Equity in affiliates.................... (4,638,065) -
Deferred charges and other.............. - 87,397
----------- -----------
$(4,638,065) $13,249,951
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ - $ 414,979
Other accrued expenses.................. - 560,620
----------- -----------
- 975,599
----------- -----------
LONG-TERM DEBT.............................. - 2,192,070
----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes............................ - 1,786,314
Advances from gas purchasers............ - 100,135
Asset retirement obligation............. - 759,617
Oil and gas derivative instruments...... - 1,233
Other................................... - 160,794
----------- -----------
- 2,808,093
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................ (4,638,065) 7,274,189
----------- -----------
$(4,638,065) $13,249,951
=========== ===========
21
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
ALL OTHER
APACHE SUBSIDIARIES
APACHE APACHE FINANCE APACHE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA FINANCE CANADA CORPORATION
----------- ------------- --------- -------------- -----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ - $ - $ 2 $ 1 $ 33,500
Receivables, net of allowance............. 204,078 - - - 434,977
Inventories............................... 17,646 - - - 108,221
Drilling advances and other............... 60,159 - - - 40,488
---------- -------- -------- ---------- -----------
281,883 - 2 1 617,186
---------- -------- -------- ---------- -----------
PROPERTY AND EQUIPMENT, NET................... 5,235,717 - - - 6,024,368
---------- -------- -------- ---------- -----------
OTHER ASSETS:
Intercompany receivable, net.............. 1,291,503 - (1,961) 93,768 (1,383,310)
Goodwill, net............................. - - - - 189,252
Equity in affiliates...................... 3,077,152 183,617 437,860 1,084,711 (803,409)
Deferred charges and other................ 36,672 - - 4,767 26,278
---------- -------- -------- ---------- -----------
$9,922,927 $183,617 $435,901 $1,183,247 $ 4,670,365
========== ======== ======== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 189,031 $ - $ - $ - $ 111,567
Other accrued expenses.................... 238,555 - 1,621 1,803 277,801
---------- -------- -------- ---------- -----------
427,586 - 1,621 1,803 389,368
---------- -------- -------- ---------- -----------
LONG-TERM DEBT................................ 1,405,882 - 268,987 646,741 5,356
---------- -------- -------- ---------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.............................. 879,044 - (18,324) (842) 837,360
Advances from gas purchasers.............. 109,207 - - - -
Asset retirement obligation............... 401,349 - - - 338,426
Oil and gas derivative instruments........ 5,931 - - - -
Other..................................... 161,130 - - - 22,703
---------- -------- -------- ---------- -----------
1,556,661 - (18,324) (842) 1,198,489
---------- -------- -------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.......................... 6,532,798 183,617 183,617 535,545 3,077,152
---------- -------- -------- ---------- -----------
$9,922,927 $183,617 $435,901 $1,183,247 $ 4,670,365
========== ======== ======== ========== ===========
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
-------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ - $ 33,503
Receivables, net of allowance............. - 639,055
Inventories............................... - 125,867
Drilling advances and other............... - 100,647
----------- ------------
- 899,072
----------- ------------
PROPERTY AND EQUIPMENT, NET................... - 11,260,085
----------- ------------
OTHER ASSETS:
Intercompany receivable, net.............. - -
Goodwill, net............................. - 189,252
Equity in affiliates...................... (3,979,931) -
Deferred charges and other................ - 67,717
----------- ------------
$(3,979,931) $ 12,416,126
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ - $ 300,598
Other accrued expenses.................... - 519,780
----------- ------------
- 820,378
----------- ------------
LONG-TERM DEBT................................ - 2,326,966
----------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.............................. - 1,697,238
Advances from gas purchasers.............. - 109,207
Asset retirement obligation............... - 739,775
Oil and gas derivative instruments........ - 5,931
Other..................................... - 183,833
----------- ------------
- 2,735,984
----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.......................... (3,979,931) 6,532,798
----------- ------------
$(3,979,931) $ 12,416,126
=========== ============
22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache Corporation (Apache or the Company) reported record
second-quarter 2004 earnings of $372 million despite a pre-tax charge of $71
million for China litigation (see Note 11) and $22 million of expenses
associated with attainment of the first share price goal under the 2000 Share
Appreciation Plan (see Note 6). Second-quarter 2004 earnings were 53 percent
higher than the comparable 2003 quarter. The Company also reported record
earnings of $719 million for the first half of 2004, 24 percent higher than the
comparative 2003 period. Net cash provided by operating activities totaled $1.3
billion for the six-month period compared to $1.2 billion in the prior-year
period. The improved results were driven by strong crude oil prices, higher
crude oil production, higher gas production and a lower effective income tax
rate.
Production from outside the U.S. increased four percent from the 2003
quarter to 58 percent of worldwide production. Our second-quarter 2004
production mix remained balanced at a 47/53 percent natural gas to liquids,
compared to 48/52 percent in 2003. The change in production mix reflects the
impact of the pure oil plays in the North Sea and China. Natural gas production
of 1,251 MMcf/d was essentially flat to the second-quarter of 2003, while crude
oil production increased six percent to 224,602 b/d.
Our 2004 worldwide capital expenditures exceeded $500 million for the
second consecutive quarter with two-thirds dedicated to our North American
regions, consistent with the first quarter. Five notable discovery and appraisal
wells since the end of the first quarter 2004 are discussed below:
- On May 19, 2004, we announced the Stickle-1 well, our third
wildcat discovery in the Exmouth Sub-Basin of the Carnarvon
Basin offshore Western Australia. Additional exploration and
appraisal wells are planned this year.
- On May 20, 2004, the Sheiba 18-3 discovery was announced. It
is the first commercial oil discovery in the eastern part of
the Shell-operated North East Abu Gharadig concession in
Egypt's Western Desert. A proposal for further exploration of
this area has been reviewed and supported by the state-owned
Egyptian General Petroleum Corporation (EGPC).
- On June 23, 2004, we announced that the Ozoris-4 well
discovered new field pays in the Ozoris/Qasr area of the
Khalda concession, opening up large new plays in the Shushan
Basin. Additionally, this discovery confirmed the
seismically-defined northeastern limits of the Qasr field.
Appraisal drilling of the deeper sands will be undertaken
after producing oil encountered in several shallower
reservoirs.
- On July 1, 2004, we announced that the Qasr-5 appraisal well
successfully extended the Qasr field to the southwest, further
confirming the overall seismically-defined structure of the
field. This is our third successful appraisal well in what is
certainly the largest natural gas discovery in Apache's
history. Additional appraisal wells will be drilled later this
year.
- On July 13, 2004, we announced that the Ravensworth-2
appraisal well in the Exmouth Basin encountered an oil column
49 feet higher than we expected, thereby extending the area of
the field considerably farther north than we had mapped based
on the Ravensworth-1 discovery well.
On April 22, 2004, we announced completion of a 25-year Gas Sales
Agreement with EGPC covering natural gas from the Qasr field. Principle terms
include supplying 300 MMcf of gas per day to the Egyptian market. The pricing
terms under the agreement set a minimum price of $1.50 per million British
thermal units (MMBtu) and a maximum price of $2.65 per MMBtu. Field development,
final engineering design and tendering operations are underway to allow us to
reach the full contracted quantity during 2005.
23
On May 24, 2004, Apache signed a letter of intent with ExxonMobil to
explore and develop properties in West Texas, Western Canada, Louisiana and the
Gulf of Mexico. The program will capitalize on the respective strengths and
assets of both companies in these areas. The agreement provides for transfers
and joint venture activity across a broad range of prospective and mature
properties. Apache's participation will include an estimated cash payment of
$385 million as of the effective date. The parties are negotiating definitive
agreements, based on the letter of intent which included the following:
- ExxonMobil will transfer its interest in 28 mature producing
oil and gas fields in West Texas and New Mexico, retaining a
revenue interest indexed to oil price through 2009 and a 50
percent working interest in all properties beneath the
currently producing intervals.
- ExxonMobil Canada will farm out its interest in approximately
300,000 acres of undeveloped property interests in the Western
Canada Province of Alberta to Apache Canada Ltd. ExxonMobil
Canada will retain a 37.5 percent lessor royalty interest in
fee lands and a 35 percent working interest on ExxonMobil
leaseholds as to any production resulting from the drilling
program to be undertaken by Apache, currently targeted to
include at least 250 wells.
- The companies will explore jointly for deep gas on
approximately 800,000 acres of Apache onshore Louisiana and
Gulf of Mexico properties for an initial five-year period,
with provisions for extension.
In July 2004, the Company signed an amendment agreement with EGPC
which, among other things, extended the life of the Khalda, Khalda West and
Salam development leases through 2024. These development leases would have
expired in 2011, 2012 and 2010, respectively. We also received a five-year
extension on our Khalda Offset exploration acreage, with an option for an
additional 3-year extension. As part of this agreement and in conjunction with
the Qasr 25-year Gas Sales Agreement previously discussed, we agreed to re-price
natural gas volume in excess of 100 MMcf/d produced from the Khalda Concession
development leases. Under the new pricing formula, Apache will receive a minimum
price of $1.50 per MMbtu and a maximum price of $2.65 per MMbtu. The overall
effect of the new price terms will have a minimal effect on financial results.
As discussed in Note 6 of this Form 10-Q, on April 28, 2004, Apache's
share price exceeded the first threshold for the 10-day requirement under its
2000 Share Appreciation Plan. As such, the Company will issue approximately
900,000 shares of its common stock, after minimum tax withholding requirements,
in three equal installments. The first installment was issued in May 2004. The
second and third installments will be issued in 2005 and 2006 to employees
remaining with the Company during that period. The incentives will reduce
Apache's 2004 net income by approximately $16 million after tax or five cents
per diluted common share.
The balance of the year appears favorable considering that current
NYMEX futures markets indicate that crude oil and natural gas prices should
equal or exceed the average NYMEX prices in the first half of 2004. We believe
our earnings and cash flow will remain strong and we expect a solid balance
sheet, as evidenced by our 23.2 percent debt-to-capitalization ratio and
increasing cash reserve.
24
RESULTS OF OPERATIONS
Revenues
The following table presents each segment's oil revenues and gas
revenues as a percentage of total oil revenues and gas revenues, respectively.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES
-------------- -------------- -------------- --------------
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
United States.. 34% 35% 58% 63% 34% 35% 59% 61%
Canada ........ 13% 13% 28% 27% 13% 14% 28% 28%
--- --- --- --- --- --- --- ---
North America.. 47% 48% 86% 90% 47% 49% 87% 89%
Egypt ......... 25% 21% 11% 7% 24% 25% 10% 9%
Australia ..... 12% 16% 3% 3% 12% 18% 3% 2%
North Sea ..... 14% 15% - - 14% 8% - -
China ......... 2% - - - 3% - - -
--- --- --- --- --- --- --- ---
Total.. 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
Crude Oil Contribution
The only appreciable changes in the geographic mix of our
second-quarter 2004 crude oil revenues compared to 2003 occurred in areas
outside of North America. Revenue contributions from North America remained
relatively constant quarter-to-quarter. China, which did not contribute any
second-quarter 2003 revenues, contributed two percent of second-quarter 2004
crude oil revenues. Australia's overall contribution declined four percent as
quarter-over-quarter revenues were relatively flat, while revenues rose in most
other areas. While Australia saw higher crude oil prices, the benefit was offset
by lower production. Egypt saw both higher prices and production growth pushing
their contribution to 25 percent of consolidated crude oil revenues, four
percent above the 2003 quarter.
Contributions for the six-month period were similar to quarter
contributions with the most significant change involving the North Sea and
Australia. The North Sea contributions increased six percent to 14 percent while
Australia's fell six percent to 12 percent on 2004 revenues. Australia's overall
contribution declined six percent for the reasons discussed above and because of
the contributions from the North Sea and China. The two percent decline in North
America's contribution to consolidated crude oil revenues is related to the
addition of the North Sea and China.
Natural Gas Contribution
The North American regions continue to contribute the vast majority of
our natural gas revenues. However, Egypt's contribution to second-quarter
revenues increased four percent to 11 percent of consolidated natural gas
revenues. Egypt's gain was at the expense of the U.S. This shift occurred
because U.S. second-quarter 2004 natural gas revenues declined three percent
compared to the 2003 quarter, while Egypt's revenues surged 50 percent. Egypt
saw a 24 percent improvement in realized natural gas price and a 21 percent
rise in production. New discoveries enabled higher utilization rates at the
Salam and Tarek gas plants. The U.S. revenues were down on lower production.
Segment contributions to revenue for the six-month period were similar,
although the period-over-period change was not as dramatic.
25
The table below presents oil and gas production revenues, production
and average prices received from sales of natural gas, oil and natural gas
liquids.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------- ----------------------------------------
INCREASE INCREASE
2004 2003 (DECREASE) 2004 2003 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
Revenues (in thousands):
Natural gas .................... $ 550,509 $ 523,478 5% $1,077,363 $1,043,838 3%
Oil ............................ 675,654 504,468 34% 1,278,289 942,811 36%
Natural gas liquids ............ 21,249 16,384 30% 44,514 32,843 36%
---------- ---------- ---------- ----------
Total ................... 1,247,412 $1,044,330 19% $2,400,166 $2,019,492 19%
========== ========== ========== ==========
Natural Gas Volume - Mcf per day:
United States .................. 665,167 702,109 (5%) 654,815 627,858 4%
Canada ......................... 327,537 317,079 3% 320,800 313,164 2%
Egypt .......................... 137,329 113,169 21% 132,997 118,415 12%
Australia ...................... 115,824 106,698 9% 117,323 103,941 13%
North Sea ...................... 1,661 2,103 (21%) 1,631 1,057 54%
Argentina ...................... 3,334 7,741 (57%) 4,247 7,267 (42%)
---------- ---------- ---------- ----------
Total ................... 1,250,852 1,248,899 - 1,231,813 1,171,702 5%
========== ========== ========== ==========
Average Natural Gas price - Per Mcf:
United States .................. $ 5.31 $ 5.19 2% $ 5.33 $ 5.64 (6%)
Canada ......................... 5.11 4.81 6% 5.10 5.08 -
Egypt .......................... 4.66 3.77 24% 4.39 4.15 6%
Australia ...................... 1.65 1.40 18% 1.67 1.35 24%
North Sea ...................... 5.05 2.08 143% 4.70 2.08 126%
Argentina ...................... .67 .50 34% .55 .46 20%
Total ................... 4.84 4.61 5% 4.81 4.92 (2%)
Oil Volume - Barrels per day:
United States .................. 69,080 72,477 (5%) 68,167 64,947 5%
Canada ......................... 26,226 24,890 5% 25,746 24,813 4%
Egypt .......................... 53,410 47,687 12% 51,254 46,704 10%
Australia ...................... 22,200 32,673 (32%) 22,928 31,562 (27%)
North Sea ...................... 47,179 33,387 41% 45,739 16,786 173%
China .......................... 5,966 - - 6,703 - -
Argentina ...................... 541 587 (8%) 547 592 (8%)
---------- ---------- ---------- ----------
Total ................... 224,602 211,701 6% 221,084 185,404 19%
========== ========== ========== ==========
Average Oil price - Per barrel:
United States .................. $ 37.00 $ 26.90 38% $ 34.71 $ 27.81 25%
Canada ......................... 35.91 27.80 29% 34.48 29.92 15%
Egypt .......................... 34.24 24.45 40% 32.85 27.37 20%
Australia ...................... 39.03 26.61 47% 36.88 29.67 24%
North Sea ...................... 21.70 25.50 (15%) 22.19 25.50 (13%)
China .......................... 31.73 - - 30.84 - -
Argentina ...................... 35.10 27.02 30% 34.26 29.49 16%
Total ................... 33.06 26.19 26% 31.77 28.09 13%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States .............. 7,585 7,448 2% 7,856 6,769 16%
Canada ..................... 2,601 1,894 37% 2,600 1,652 57%
---------- ---------- ---------- ----------
Total ................... 10,186 9,342 9% 10,456 8,421 24%
========== ========== ========== ==========
Average NGL Price - Per barrel:
United States .............. $ 22.48 $ 20.24 11% $ 23.92 $ 22.07 8%
Canada ..................... 24.23 15.46 57% 21.78 19.39 12%
Total ................... 22.92 19.27 19% 23.39 21.55 9%
26
Natural Gas Revenues
The Company's second-quarter 2004 natural gas revenues were $27 million
higher than the comparable 2003 quarter. Virtually all of the improvement was
related to higher natural gas prices, which improved $.23 per Mcf over the
prior-year quarter. Consolidated natural gas production increased slightly over
the 2003 period, adding nominal revenues. Production in U.S. declined 37 MMcf/d,
primarily because of natural decline in mature fields, particularly in the Gulf
of Mexico. Egypt's production was up 24 MMcf/d as the Salam and Tarek gas plants
began operating close to full capacity, following completion of new wells on
several concessions. Canada's production increased 10 MMcf/d with production
from new wells offsetting natural decline in mature fields. Australia saw a 9
MMcf/d increase on higher customer demand and new contractual sales.
Apache uses a variety of strategies to manage its exposure to
fluctuations in natural gas prices, including fixed-price physical contracts and
derivatives. Approximately nine percent of our second-quarter 2004 domestic
natural gas production was subject to long-term fixed-price physical contracts,
up from eight percent in the second quarter of 2003. We also amortized small
amounts of unrealized gains and losses on derivative positions closed in October
and November 2001. The impact on our realized price was negligible in 2004 and
2003. The following table shows the impact on average prices for these items:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2004 2003 2004 2003
----- ----- ----- -----
(Per Mcf)
Fixed-price physical.. $(.10) $(.08) $(.09) $(.12)
Derivatives .......... (.20) (.02) (.13) (.09)
Amortization ......... - (.01) - (.01)
Crude Oil Revenues
The Company added $171 million to second-quarter 2004 crude oil
revenues on a $6.87 per barrel improvement in realized crude oil price and a
12,901 b/d rise in production. The higher realized price contributed almost 80
percent of the additional revenues. The increase in production came from the
North Sea, China and Egypt. The North Sea's production is up 13,792 b/d,
reflecting additional production from new wells and operational enhancements
since the second quarter of 2003. A portion of the revenue from the North Sea is
tied to a separate crude oil physical sales contract entered into in conjunction
with the acquisition. See Note 2 of this Form 10-Q for a discussion of the terms
of this contract. Production in China, which commenced in July 2003, added 5,966
b/d. Egypt's production is up 5,723 b/d on exploration and development activity.
Partially offsetting these production gains were a 10,473 b/d decline in
Australia and a 3,397 b/d decline in the U.S. Australia's decline is related to
natural declines in new wells and performance at Legendre field. The U.S.
decline is attributed to natural decline in our Gulf Coast region production.
Apache also manages its exposure to fluctuations in crude oil prices
using derivatives. We continue to amortize the unrealized gains and losses over
the original production life of derivative positions closed in October and
November 2001. The following table shows the impact on prices of each of these
items:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
2004 2003 2004 2003
---- ------ ------ -------
(Per bbl)
Derivatives......... $ - $ (.54) $ (.29) $ (1.00)
Amortization........ - .02 - .03
27
Operating Expenses
The table below presents a comparison of our expenses on an absolute
dollar basis and an equivalent unit of production (boe) basis. Our discussion
may reference either expenses on a boe basis or expenses on an absolute dollar
basis, or both, depending on their relevance. To maintain comparability between
the periods, we elected to disclose separately expenses related to the 2000
Share Appreciation Plan and the reserve for the China litigation.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
------ ------ ------ ------ ------ ------ ------ ------
(In millions) (Per Boe) (In millions) (Per Boe)
Depreciation, depletion and amortization
(DD&A):
Oil and gas property and equipment ......... $ 278 $ 255 $ 6.88 $ 6.53 $ 546 $ 453 $ 6.87 $ 6.43
Other assets ............................... 18 17 .45 .44 36 34 .45 .48
Asset retirement obligation accretion .......... 11 10 .27 .27 22 16 .27 .22
Lease operating costs (LOE) .................... 197 186 4.89 4.77 403 320 5.07 4.55
Share appreciation plan - LOE .................. 11 - .27 - 11 - .14 -
Gathering and transportation costs ............. 20 15 .50 .39 40 27 .50 .38
Severance and other taxes ...................... 22 33 .54 .84 30 57 .38 .81
General and administrative expense (G&A) ....... 36 31 .90 .78 80 58 1.01 .83
Share appreciation plan - G&A .................. 11 - .28 - 11 - .14 -
China litigation ............................... 71 - 1.77 - 71 - .90 -
Financing costs, net ........................... 28 29 .68 .74 55 55 .69 .78
------ ------ ------ ------ ------ ------ ------ ------
Total .................................. $ 703 $ 576 $17.43 $14.76 $1,305 $1,020 $16.42 $14.48
====== ====== ====== ====== ====== ====== ====== ======
Depreciation, Depletion and Amortization
Apache's full-cost DD&A expense is driven by many factors including
certain costs incurred in the exploration, development, and acquisition of
producing reserves, production levels, estimates of proved reserve quantities
and future development and abandonment costs.
Second-quarter 2004 full-cost DD&A expense of $278 million is $23
million higher than 2003, with 40 percent ($9 million) of the increase
attributable to volume growth. The 2004 expense is mainly comprised of the U.S.,
$133 million; Canada, $45 million; Egypt, $39 million; Australia, $26 million;
the North Sea, $28 million and China, $7 million. Second-quarter 2003 full-cost
DD&A expense of $255 million is mainly comprised of the U.S., $126 million;
Canada, $37 million; Egypt, $42 million; Australia, $28 million and the North
Sea, $22 million.
On a boe basis, our second-quarter 2004 full-cost DD&A rate of $6.88 is
$.35 higher than the second-quarter 2003 rate. The rate increase is incremental
over sequential quarters and only increased $.03 from the first quarter of 2004.
The U.S. added $.30 to the rate on higher finding and future development costs.
Canada added $.15 to the rate on higher finding costs. China, which had higher
finding and development costs than other regions, added $.09 to the rate since
initial production in the third quarter of 2003. Australia added $.08 to the
rate. Egypt and the North Sea's rates reduced the worldwide rate $.23 and $.06,
respectively, as both regions added lower cost reserves.
Lease Operating Costs
While second-quarter 2004 lease operating costs were $11 million higher
than the second quarter of 2003, they were $9 million less than the first
quarter of 2004. Over 70 percent of the increase from 2003 related to the Shell
acquisition and initial production in China, both of which were third-quarter
2003 events. On a unit of production basis, second-quarter 2004 costs were up
$.12 from 2003 to $4.89 per boe.
Geographically, second-quarter costs in the U.S. were up $10 million.
On a unit of production basis, the U.S. added $.36 per boe to the consolidated
rate. Approximately one-third of the rate increase in the U.S. is related to
lower production, with the balance attributed to higher workover activity and
various miscellaneous costs. Australia, where absolute costs were up marginally,
added $.11 per boe on lower production. Canada's costs were up $5 million on
contract labor, lease rentals and other miscellaneous costs associated with
increase in activity and a higher well count. Canada added $.09 per boe to the
consolidated rate. Egypt reduced the consolidated rate $.11 per boe on higher
production. The North Sea reduced the consolidated rate $.33 per boe on lower
costs and a 41 percent increase in production. The North Sea had less workover
activity, less turnaround expense and lower repair cost in the second quarter of
2004, compared to 2003.
28
Lease operating costs for the 2004 six-month period were $83 million
higher than 2003, $72 million of which occurred in the first quarter of 2004,
when comparability between the periods was affected by our April 2003 entrance
into the North Sea, initial production in China which occurred in July 2003, and
the 2003 BP and Shell acquisitions in the U.S. Our year-to-date rate of $5.07
per boe is $.52 higher than 2003. Approximately 44 percent or $.23 per boe of
the increase is attributable to our U.S. operations for the reasons discussed
above, higher repair and maintenance cost, and additional incentive compensation
recorded in the first quarter of 2004. Australia added $.09 per boe to the
consolidated rate on flat cost and lower production. Canada added $.10 per boe
for the reasons discussed above and the weaker first-quarter U.S.-to-Canadian
dollar exchange rate. The North Sea added $.06, a combination of its initial
impact on the consolidated rate and the improvement in the second quarter noted
above. Egypt added $.03 because of the loss of a diesel fuel subsidy in the
third quarter of 2003 and higher variable cost (consumables, trucking, chemicals
and transportation) associated with production from newer concessions.
Share Appreciation Plan - Lease Operating Costs
These costs represent the portion of the 2000 Share Appreciation Plan
expenses (see Note 6) attributed to personnel involved in lease operating
activities.
Gathering and Transportation Costs
Apache sells oil and natural gas under two types of transactions, both
of which include a transportation charge. One is a netback arrangement, under
which Apache sells oil or natural gas at the wellhead and collects a price, net
of transportation incurred by the purchaser. Under the other arrangement, Apache
sells oil or natural gas at a specific delivery point, pays transportation to a
third-party carrier and receives from the purchaser a price with no deduction
for transportation cost. In the U.S. and Canada, Apache sells oil and natural
gas under both types of arrangements. In the North Sea and China, Apache pays
transportation to third parties and receives payments with no transportation
deduction. In our North American operations these costs are primarily related to
the transportation of natural gas. In the North Sea these costs are related to
transportation of oil. In Egypt and Australia, oil and natural gas are sold
under the netback arrangement. Gathering and transportation costs paid to
third-party carriers and disclosed here vary based on the volume and distance
shipped, and the fee charged by the transporter, which may be price sensitive.
These costs totaled $20 million in the second quarter of 2004, up $5
million from the 2003 comparative quarter. For the 2004 six-month period, these
costs totaled $40 million compared to $27 million in 2003. The table below
presents a comparison of these expenses.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(In millions)
U.S. ............................. $ 7.8 $ 4.6 $15.2 $ 9.6
Canada ........................... 7.4 7.2 14.7 14.1
North Sea ........................ 4.9 3.3 9.7 3.3
China ............................ .1 - .2 -
----- ----- ----- -----
Total Gathering and Transportation $20.2 $15.1 $39.8 $27.0
===== ===== ===== =====
The higher cost in the U.S. is related to an increase in volumes
transported under third - party transportation contracts and sold at specific
delivery points in 2004, compared to the prior-year periods. Transportation cost
in the North Sea increase in conjunction with higher production.
Severance and Other Taxes
Severance and other taxes are comprised primarily of severance taxes on
properties onshore and in state or provincial waters in the U.S. and Australia,
the Australian Petroleum Resource Rent Tax (PRRT), the U.K. Petroleum Revenue
Tax (PRT), the Canadian Large Corporation Tax, Saskatchewan Capital Tax,
Saskatchewan Resource Surtax and Freehold Mineral Tax. Egyptian operations are
not subject to these various taxes. During the second quarter of 2004,
production from our Legendre field in Australia crossed a cumulative production
threshold, triggering an excise tax of approximately $3 million.
29
Second-quarter and year-to-date 2004 severance and other taxes totaled
$22 million and $31 million, respectively, $11 million and $27 million, less
than the prior year periods. A detail of these taxes follows:
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(In millions)
Severance taxes ............... $ 26.1 $19.5 $ 45.4 $40.5
U.K. PRT ...................... (12.4) 5.6 (29.1) 5.6
Canadian taxes ................ 4.8 4.8 9.9 7.9
Other ......................... 3.1 2.8 4.3 3.3
----- ----- ----- -----
Total Severance and Other Taxes $ 21.6 $32.7 $ 30.5 $57.3
===== ===== ===== =====
Virtually all of the increase in second-quarter 2004 severance taxes is
related to higher severance taxes in Australia. The U.K.'s PRT tax benefits
reflect the impact from higher capital spending, compared to the prior year
periods.
General and Administrative Expense
Second-quarter G&A costs of $36 million were $6 million above the 2003
comparable quarter. Approximately half of the additional expense is related to
the impact on compensation programs related to the rising price of Apache's
common stock, and 2004 incentive compensation expense. The impact from the
higher stock price stems from Apache's decision, effective January 1, 2003, to
expense stock-based compensation plans. The balance is related to the Company's
decision to increase charitable contributions and its North Sea operations.
For the six-month period, G&A expenses of $80 million were $22 million
above the 2003 period. As noted above, the stock-based compensation plans and
incentive compensation plans accounted for over half of the increase. The
compensation expenses included incremental 2003 incentive compensation paid in
2004, as noted in the first quarter. The balance is related to our North Sea
operations, charitable contributions, expansion of our gas marketing group and
higher comparative legal costs.
Share Appreciation Plan - General and Administrative
These costs represent the portion of the 2000 Share Appreciation Plan
expenses (see Note 6) attributed to personnel involved in general corporate
activities.
China Litigation
Apache recorded a reserve in the second quarter of 2004 to fully
reflect a $71 million international arbitration award to Texaco China B.V.
(Texaco China). In September 2001, Texaco China initiated an arbitration
proceeding against Apache China Corporation LDC (Apache China), later adding
Apache Bohai to the arbitration. In the arbitration Texaco China claimed
damages, plus interest, arising from Apache Bohai's alleged failure to drill
three wells, prior to re-assignment of the interest to Texaco China. Apache
believes that the finding of the arbitrator is unsupported by the facts and the
law, and Apache expects to pursue an appeal of the award in federal court.
Provision for Income Taxes
Second-quarter 2004 income tax expense was $65 million less than the
2003 quarter, on a lower effective tax rate. The current quarter benefited from
a reduction in Canadian federal statutory rates in the fourth quarter of 2003, a
reduction in Alberta Canada's provincial statutory income tax rate in the second
quarter of 2004 and the impact on Australia's deferred tax expense from a
stronger U.S. dollar. Also, Canada's 2003 second-quarter deferred income tax
expense was impacted by a weaker U.S. dollar, while the 2004 quarter benefited
from a strengthened U.S. dollar. For the six-month period, 2004 income tax
expense was $74 million less than the 2003 period for the reasons previously
discussed.
30
OIL AND GAS CAPITAL EXPENDITURES
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003
----------- -----------
(In thousands)
Exploration and development:
United States ....................................... $ 378,147 $ 198,294
Canada .............................................. 339,663 300,209
Egypt ............................................... 140,183 123,843
Australia ........................................... 65,876 46,396
North Sea ........................................... 132,636 12,577
China ............................................... 4,333 14,563
Other International ................................. 669 653
----------- -----------
$ 1,061,507 $ 696,535
=========== ===========
Capitalized Interest ...................................... $ 26,358 $ 23,850
=========== ===========
Gas gathering, transmission and processing facilities ..... $ 40,363 $ 6,528
=========== ===========
Acquisitions:
Oil and gas properties .............................. $ (1,539) $ 1,230,814
Gas gathering, transmission and processing
facilities ........................................ - 5,484
----------- -----------
$ (1,539) $ 1,236,298
=========== ===========
CAPITAL RESOURCES
Apache's primary cash needs are for exploration, development and
acquisition of oil and gas properties, operating expenses, repayment of
principal and interest on outstanding debt, and payment of dividends. The
Company funds its exploration and development activities primarily through
internally generated cash flows. Apache budgets capital expenditures based upon
projected cash flows and routinely adjusts its capital expenditures in response
to changes in oil and natural gas prices and corresponding changes in cash flow.
The Company cannot accurately predict future oil and gas prices.
Net Cash Provided by Operating Activities
Apache's net cash provided by operating activities during the first
half of 2004 totaled $1.3 billion, an increase of six percent from $1.2 billion
in the first half of 2003. This increase generally reflects the impact of higher
prices on oil and gas production revenues and higher production levels relative
to the prior-year period.
LIQUIDITY
The Company had $97 million in cash and cash equivalents on hand on
June 30, 2004, up from $34 million on December 31, 2003. Apache's ratio of
current assets to current liabilities on June 30, 2004 was 1.19 compared to 1.10
on December 31, 2003.
On January 22, 2003, the Company completed a public offering of 19.8
million shares of Apache common stock (adjusted for the five percent common
stock dividend and the two-for-one common stock split) including underwriters'
over-allotment option, for net proceeds of approximately $554 million. The
proceeds were used toward Apache's acquisition from BP of producing properties
in the North Sea and the Gulf of Mexico.
On May 15, 2003, Apache Finance Canada Corporation (Apache Finance
Canada) issued $350 million of 4.375 percent, 12-year, senior unsecured notes in
a private placement. On March 4, 2004, the Company completed an exchange offer
with the holders of the notes, issuing publicly traded, registered notes of the
same principal amount and with the same interest rates, payment terms and
maturity. The notes are irrevocably and unconditionally guaranteed by Apache and
are redeemable, as a whole or in part, at Apache Finance Canada's option,
subject to a make-whole premium. Interest is payable semi-annually on May 15 and
November 15 of each year commencing on November 15, 2003. The proceeds of the
original note offering were used to reduce bank debt and outstanding commercial
paper and for general corporate purposes.
31
Apache believes that cash on hand, net cash generated from operations,
short-term investments, and unused committed borrowing capacity under its credit
facilities will be adequate to satisfy future financial obligations and
liquidity needs. In addition, Apache's strong credit ratings should facilitate
continued access to capital markets. As of June 30, 2004, Apache's available
borrowing capacity under its credit facilities was $1.5 billion.
FUTURE TRENDS
Our objective is to build a company of lasting value by pursuing
profitable growth through a combination of drilling and acquisitions. Our
investment decisions are subjected to strict rate of return criteria and
generally fall in the categories identified below, depending on which phase of
the price and cost cycle we may be in. Those categories include:
- exploiting our existing property base;
- acquiring properties to which we can add value; and
- drilling high-potential exploration prospects.
Exploiting Existing Asset Base
We seek to maximize the value of our existing asset base by increasing
production and reserves while operating in the most cost efficient manner. In
order to achieve these objectives, we actively pursue production enhancement
opportunities such as workovers, recompletions and moderate risk drilling, while
divesting marginal and non-strategic properties and identifying other activities
to reduce costs. Given the significant acquisitions and discoveries over the
last few years, including the properties acquired from BP and Shell, we have an
abundant inventory of exploitation opportunities.
Acquiring Properties to Which We Can Add Value
We seek to purchase reserves at appropriate prices by generally
avoiding auction processes, where we are competing against other buyers and by
targeting properties to which we believe we can add value. Our aim is to follow
each acquisition with a cycle of reserve enhancement, property consolidation and
cash flow acceleration, facilitating asset growth and debt reduction.
Investing in High-Potential Exploration Prospects
We seek to concentrate our exploratory investments in a select number
of international areas and to become one of the dominant operators in those
regions. We believe that these investments, although higher-risk, offer
potential for attractive investment returns and significant reserve additions.
Our international investments and exploration activities are a significant
component of our long-term growth strategy. They complement our domestic
operations, which are more development oriented.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Major market risk exposure continues to be the pricing applicable to
our oil and gas production. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to our
United States and Canadian natural gas production. Historically, prices received
for oil and gas production have been volatile and unpredictable.
Apache generally sells all of its Egyptian crude oil and natural gas
production to EGPC for U.S. dollars. Weak economic conditions in Egypt continue
to impact the timeliness of receipts from EGPC; however, the situation has not
deteriorated since year-end and Apache continues to receive payments.
The information set forth under "Commodity Risk," "Interest Rate Risk"
and "Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2003, is incorporated herein by reference. Information
about market risks for the quarter ended June 30, 2004 does not differ
materially from the disclosure in our 2003 Form 10-K, except as noted below.
32
Although Apache uses floating-rate debt on a short-term basis, all of
the Company's debt was at fixed-rates as of June 30, 2004. Apache's annual
interest costs in 2004 are not expected to fluctuate materially. Therefore, the
Company considers its interest rate risk exposure to be minimal.
On June 30, 2004, the Company had open natural gas derivative positions
with a fair value of $(69.3) million. A 10 percent increase in natural gas
prices would change the fair value by $(25.4) million. A 10 percent decrease in
prices would change the fair value by $23.8 million. The Company also had open
oil derivative positions with a fair value of $2.8 million on June 30, 2004. A
10 percent increase in crude oil prices would change the fair value by $(8.1)
million. A 10 percent decrease in prices would change the fair value by $9.2
million. See Note 2 to the Company's consolidated financial statements for
notional volumes associated with the Company's derivative contracts.
ITEM 4 - CONTROLS AND PROCEDURES
G. Steven Farris, the Company's President, Chief Executive Officer and
Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice
President and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of June 30, 2004, 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 Company's disclosure controls were
effective, providing effective means to insure that information we are required
to disclose under applicable laws and regulations is recorded, processed,
summarized and reported in a timely manner. Also, no significant changes were
made to internal controls over financial reporting during the quarter ending
June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
We periodically review the design and effectiveness of our disclosure
controls, including compliance with various laws and regulations that apply to
our operations both inside and outside the United States. We make modifications
to improve the design and effectiveness of our disclosure controls, and may take
other corrective action, if our reviews identify deficiencies or weaknesses in
our controls.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent upon certain events, risks and uncertainties that
may be outside the Company'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 the
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. Although Apache may
make use of futures contracts, swaps, options and fixed-price physical contracts
to mitigate risk, fluctuations in oil and gas prices, or a prolonged
continuation of low prices, may adversely affect the Company's financial
position, results of operations and cash flows.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 11 to the Consolidated Financial
Statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 2003 (filed with the SEC on March 12, 2004)
and Note 11 to the Financial Statements under Part I, Item 1 of this
quarterly report are incorporated herein by reference.
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
The Company's annual meeting of stockholders was held in Houston, Texas
at 10:00 a.m. local time, on Thursday, May 6, 2004. Proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended.
Out of a total of 325,153,372 shares of the Company's common stock
outstanding and entitled to vote, 287,037,394 shares were present at
the meeting in person or by proxy, representing 88.3 percent. Matters
voted upon at the meeting were as follows:
Election of four directors to serve on the Company's board of
directors. There was no solicitation in opposition to the
nominees for election as directors as listed in the proxy
statement, and all nominees were elected. Mr. Fiedorek, Dr.
Graham, Mr. Merelli, and Mr. Plank were elected to serve until
the annual meeting in 2007. The vote tabulation with respect
to each nominee was as follows:
AUTHORITY
NOMINEE FOR WITHHELD
------- --- --------
Eugene C. Fiedorek 274,927,722 12,109,672
Patricia Albjerg Graham 279,366,345 7,671,049
F. H. Merelli 188,278,757 98,758,637
Raymond Plank 279,385,792 7,651,602
Stockholder proposal relating to climate change. The
stockholder proposal was not approved and the vote tabulation
was as follows:
For 85,848,021
Against 145,622,521
Abstain 15,425,312
Broker Non-Vote 40,141,539
ITEM 5. OTHER INFORMATION
None
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Form of Five-Year Credit Agreement, dated as of May
28, 2004, among Registrant, the Lenders named
therein, JPMorgan Chase Bank, as Administrative
Agent, Citibank, N.A. and Bank of America, N.A., as
Co-Syndication Agents, and Barclays Bank PLC and UBS
Loan Finance LLC, as Co-Documentation Agents
(excluding exhibits and schedules).
10.2 - Form of First Amendment to Combined Credit
Agreements, dated as of May 28, 2004, among
Registrant, Apache Energy Limited , Apache Canada
Ltd, the Lenders named therein, JPMorgan Chase Bank,
as Global Administrative Agent, Bank of America,
N.A., as Global Syndication Agent, and Citibank,
N.A., as Global Documentation Agent (excluding
exhibits and schedules).
12.1 - Statement of computation of ratio of earnings to
fixed charges and combined fixed charges and
preferred stock dividends.
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
The following current reports on Form 8-K were filed by Apache
during the fiscal quarter ended June 30, 2004:
Item 5 - Other Events - dated May 24, 2004, filed May 27, 2004
On May 24, 2004, ExxonMobil Corporation and Apache announced
that they agreed to enter into a series of transactions that
will provide for transfers and joint venture activity across a
broad range of prospective and mature properties in West
Texas, Western Canada, onshore Louisiana and the Gulf of
Mexico Continental Shelf. Apache's participation in this
agreement will include a cash payment of $385 million.
Completion of the transaction is subject to negotiation of
definitive agreements and receipt of applicable corporate and
regulatory approvals.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: August 6, 2004 / s / ROGER B. PLANK
-----------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: August 6, 2004 / s / THOMAS L. MITCHELL
-----------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
(a) Exhibits
10.1 - Form of Five-Year Credit Agreement, dated as of May
28, 2004, among Registrant, the Lenders named
therein, JPMorgan Chase Bank, as Administrative
Agent, Citibank, N.A. and Bank of America, N.A., as
Co-Syndication Agents, and Barclays Bank PLC and UBS
Loan Finance LLC, as Co-Documentation Agents
(excluding exhibits and schedules).
10.2 - Form of First Amendment to Combined Credit
Agreements, dated as of May 28, 2004, among
Registrant, Apache Energy Limited , Apache Canada
Ltd, the Lenders named therein, JPMorgan Chase Bank,
as Global Administrative Agent, Bank of America,
N.A., as Global Syndication Agent, and Citibank,
N.A., as Global Documentation Agent (excluding
exhibits and schedules).
12.1 - Statement of computation of ratio of earnings to
fixed charges and combined fixed charges and
preferred stock dividends.
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.