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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 September 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
2000 Post Oak Boulevard, Houston, TX 77056-4400
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
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 September 30,
2004.....................326,471,301
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues...................... $ 1,414,128 $ 1,110,015 $ 3,814,294 $ 3,129,507
Other................................................ (7,126) (5,474) (16,620) (4,001)
------------ ------------ ------------ ------------
1,407,002 1,104,541 3,797,674 3,125,506
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization............. 313,520 292,885 895,485 779,590
Asset retirement obligation accretion................ 11,071 11,342 32,723 27,100
Lease operating costs................................ 204,890 194,574 608,016 514,995
Share appreciation plan - lease operating costs..... 874 - 11,866 -
Gathering and transportation costs................... 20,902 16,948 60,698 43,940
Severance and other taxes............................ 47,148 41,587 77,691 98,883
General and administrative........................... 35,121 34,692 115,450 93,097
Share appreciation plan - general and administrative. 854 - 11,866 -
China litigation provision........................... - - 71,216 -
Financing costs:
Interest expense.................................. 41,753 48,784 122,495 127,908
Amortization of deferred loan costs............... 652 557 1,814 1,624
Capitalized interest.............................. (12,593) (14,222) (38,951) (38,072)
Interest income................................... (962) (1,247) (1,795) (2,749)
------------ ------------ ------------ ------------
663,230 625,900 1,968,574 1,646,316
PREFERRED INTERESTS OF SUBSIDIARIES...................... - 1,976 - 8,668
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES............................... 743,772 476,665 1,829,100 1,470,522
Provision for income taxes........................... 310,037 199,704 673,143 636,883
------------ ------------ ------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING
PRINCIPLE.............................................. 433,735 276,961 1,155,957 833,639
Cumulative effect of change in accounting principle,
net of income tax................................. - - - 26,632
------------ ------------ ------------ ------------
NET INCOME............................................... 433,735 276,961 1,155,957 860,271
Preferred stock dividends............................ 1,420 1,420 4,260 4,260
------------ ------------ ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK...................... $ 432,315 $ 275,541 $ 1,151,697 $ 856,011
============ ============ ============ ============
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle................ $ 1.32 $ .85 $ 3.54 $ 2.58
Cumulative effect of change in accounting principle.. - - - .08
------------ ------------ ------------ ------------
$ 1.32 $ .85 $ 3.54 $ 2.66
============ ============ ============ ============
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle................ $ 1.31 $ .84 $ 3.50 $ 2.56
Cumulative effect of change in accounting principle.. - - - .08
------------ ------------ ------------ ------------
$ 1.31 $ .84 $ 3.50 $ 2.64
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 1,155,957 $ 860,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................... 895,485 779,590
Asset retirement obligation accretion.................................. 32,723 27,100
Provision for deferred income taxes.................................... 215,464 352,479
Cumulative effect of change in accounting principle.................... - (26,632)
Other.................................................................. 40,971 21,650
Changes in operating assets and liabilities:
(Increase) decrease in receivables..................................... (143,155) (75,366)
(Increase) decrease in drilling advances and other..................... (13,514) (937)
(Increase) decrease in inventories..................................... 5,123 (3,680)
(Increase) decrease in deferred charges and other...................... (44,880) (22,046)
Increase (decrease) in accounts payable................................ 114,512 61,612
Increase (decrease) in accrued expenses................................ 80,698 142,089
Increase (decrease) in advances from gas purchasers.................... (13,116) (11,667)
Increase (decrease) in deferred credits and noncurrent liabilities..... (5,730) (25,354)
------------- -------------
Net cash provided by operating activities.......................... 2,320,538 2,079,109
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......................................... (1,682,037) (1,115,349)
Acquisition of BP properties................................................. - (1,154,962)
Acquisition of Shell properties.............................................. - (201,813)
Acquisition of Occidental properties......................................... - (22,000)
Acquisition of Anadarko properties........................................... (92,699) -
Acquisition of ExxonMobil properties......................................... (347,352) -
Restricted cash for acquisition settlement................................... (444,734) -
Proceeds from sales of oil and gas properties................................ - 16,202
Other, net................................................................... (55,422) (44,302)
------------- -------------
Net cash used in investing activities.............................. (2,622,244) (2,522,224)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings......................................................... 543,366 1,769,658
Payments on long-term debt................................................... (135,300) (1,414,929)
Dividends paid............................................................... (62,825) (51,967)
Common stock activity........................................................ 19,324 574,881
Treasury stock activity, net................................................. 11,412 3,743
Cost of debt and equity transactions......................................... (2,250) (4,520)
Repurchase of preferred interests of subsidiaries............................ - (443,000)
------------- -------------
Net cash provided by (used in) financing activities................ 373,727 433,866
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 72,021 (9,249)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 33,503 51,886
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 105,524 $ 42,637
============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 105,524 $ 33,503
Restricted cash for acquisition settlement.......................... 444,734 -
Receivables, net of allowance....................................... 783,681 639,055
Inventories......................................................... 137,453 125,867
Drilling advances................................................... 64,494 58,062
Prepaid assets and other............................................ 51,304 42,585
------------- -------------
1,587,190 899,072
------------- -------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties................................................ 18,677,148 16,277,930
Unproved properties and properties under
development, not being amortized.............................. 673,179 795,161
Gas gathering, transmission and processing facilities............... 887,514 828,169
Other............................................................... 274,237 239,548
------------- -------------
20,512,078 18,140,808
Less: Accumulated depreciation, depletion and amortization.......... (7,774,786) (6,880,723)
------------- -------------
12,737,292 11,260,085
------------- -------------
OTHER ASSETS:
Goodwill, net....................................................... 189,252 189,252
Deferred charges and other.......................................... 108,981 67,717
------------- -------------
$ 14,622,715 $ 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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ---------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 440,288 $ 300,598
Accrued operating expense............................................ 59,080 72,250
Accrued exploration and development.................................. 265,428 212,028
Accrued compensation and benefits.................................... 54,806 56,237
Accrued interest..................................................... 45,630 32,621
Accrued income taxes................................................. 100,446 18,936
Derivative instruments............................................... 83,898 63,542
Other................................................................ 95,252 64,166
------------- ---------------
1,144,828 820,378
------------- ---------------
LONG-TERM DEBT.......................................................... 2,735,032 2,326,966
------------- ---------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes......................................................... 1,906,057 1,697,238
Advances from gas purchasers......................................... 96,091 109,207
Asset retirement obligation.......................................... 869,778 739,775
Derivative instruments............................................... 26,750 5,931
Other................................................................ 172,562 183,833
------------- ---------------
3,071,238 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,
333,986,392 and 332,509,478 shares issued, respectively........... 208,741 207,818
Paid-in capital...................................................... 4,109,811 4,038,007
Retained earnings.................................................... 3,532,184 2,445,698
Treasury stock, at cost, 7,515,091 and 8,012,302 shares,
respectively...................................................... (98,109) (105,169)
Accumulated other comprehensive loss................................. (179,397) (151,943)
------------- ---------------
7,671,617 6,532,798
------------- ---------------
$ 14,622,715 $ 12,416,126
============= ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B
COMPREHENSIVE PREFERRED COMMON PAID-IN RETAINED
(In thousands) INCOME STOCK STOCK CAPITAL EARNINGS
--------------- ---------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2002.............. $ 98,387 $ 194,331 $ 3,427,450 $ 1,427,607
Comprehensive income (loss):
Net income........................... $ 860,271 - - - 860,271
Commodity hedges, net of income tax
benefit of $10,157................. (17,530) - - - -
--------------
Comprehensive income................... $ 842,741
==============
Dividends:
Preferred............................ - - - (4,260)
Common ($.16 per share).............. - - - (53,217)
Five percent common stock dividend..... - 581 25,333 (25,914)
Common shares issued................... - 12,575 567,945 -
Treasury shares issued, net............ - - 2,904 -
Other.................................. - - 122 -
---------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 2003............. $ 98,387 $ 207,487 $ 4,023,754 $ 2,204,487
========== ========== ============ ===========
BALANCE AT DECEMBER 31, 2003.............. $ 98,387 $ 207,818 $ 4,038,007 $ 2,445,698
Comprehensive income (loss):
Net income........................... $ 1,155,957 - - - 1,155,957
Commodity hedges, net of income tax
benefit of $16,280................. (27,454) - - - -
--------------
Comprehensive income................... $ 1,128,503
==============
Dividends:
Preferred............................ - - - (4,260)
Common ($.20 per share).............. - - - (65,211)
Common shares issued................... - 923 59,807 -
Treasury shares issued, net............ - - 7,579 -
Other.................................. - - 4,418 -
---------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 2004............. $ 98,387 $ 208,741 $ 4,109,811 $ 3,532,184
========== ========== ============ ===========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) STOCK INCOME (LOSS) EQUITY
---------- ------------- -------------
BALANCE AT DECEMBER 31, 2002.............. $ (110,559) $ (112,936) $ 4,924,280
Comprehensive income (loss):
Net income........................... - - 860,271
Commodity hedges, net of income tax
benefit of $10,157................. - (17,530) (17,530)
Comprehensive income...................
Dividends:
Preferred............................ - - (4,260)
Common ($.16 per share).............. - - (53,217)
Five percent common stock dividend..... - - -
Common shares issued................... - - 580,520
Treasury shares issued, net............ 3,995 - 6,899
Other.................................. - - 122
---------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2003............. $ (106,564) $ (130,466) $ 6,297,085
========== ============= =============
BALANCE AT DECEMBER 31, 2003.............. $ (105,169) $ (151,943) $ 6,532,798
Comprehensive income (loss):
Net income........................... - - 1,155,957
Commodity hedges, net of income tax
benefit of $16,280................. - (27,454) (27,454)
Comprehensive income...................
Dividends:
Preferred............................ - - (4,260)
Common ($.20 per share).............. - - (65,211)
Common shares issued................... - - 60,730
Treasury shares issued, net............ 7,060 - 14,639
Other.................................. - - 4,418
---------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2004............. $ (98,109) $ (179,397) $ 7,671,617
========== ============= =============
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.
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
EXXONMOBIL
During the third quarter of 2004, Apache entered into separate
arrangements with Exxon Mobil Corporation and its affiliates (ExxonMobil) that
provided for property transfers and joint operating and exploration activity
across a broad range of prospective and mature properties in (1) Western Canada,
(2) West Texas and New Mexico, and (3) onshore Louisiana and the Gulf of
Mexico-Outer Continental Shelf. Apache's participation included cash payments of
approximately $347 million, subject to normal post closing adjustments. The
following details these transactions:
Western Canada
In August 2004, Apache signed a farm-in agreement with Exxon Mobil
covering approximately 380,000 gross acres of undeveloped properties in the
Western Canadian Province of Alberta. Under the agreement, Apache has the right
to earn acreage blocks by drilling and carrying ExxonMobil on an initial well on
each block earned. By drilling at least 250 wells during an initial two-year
earning period, Apache earns a one-year extension to earn additional interests
in the acreage. As to any interest in the properties earned by Apache from the
farm-in agreement, ExxonMobil will retain a 37 1/2 percent royalty on fee lands
and 35 percent of its working interest on leasehold properties. Under certain
circumstances, ExxonMobil has the right to convert its 35 percent working
interest into a 12 1/2 percent overriding royalty.
West Texas and New Mexico
In September 2004, Apache acquired interests from ExxonMobil in 23 mature
producing oil and gas fields in West Texas and New Mexico for $318 million and
contributed approximately $29 million into a partnership to obtain additional
interests in the properties. ExxonMobil will retain interests in the properties
through the partnership, including the right to receive, on certain fields, 60
percent of the oil proceeds above $30 per barrel in 2004, $29 per barrel in 2005
and $28 per barrel during the period from 2006 thru 2009.
The partnership is subject to the provisions of Financial Accounting
Standards Board (FASB) Interpretation 46 "variable interest entities" (FIN46).
Apache has concluded that it is not the primary beneficiary of the partnership
as defined in that interpretation and will proportionately consolidate its
portion of the oil and gas properties. Apache's maximum exposure to loss as a
result of its involvement with the partnership is equal to the Company's
contribution to the partnership, which is currently $29 million. Under the
partnership agreement, the Company's subsidiaries are also subject to
environmental and legal claims that could arise in the ordinary course of
business. Apache will operate the oil and gas properties under contract for the
partnership.
6
Louisiana and Gulf of Mexico-Outer Continental Shelf
Also in September 2004, Apache and ExxonMobil entered into joint
exploration agreements to explore approximately 800,000 gross acres in South
Louisiana and the Gulf of Mexico-Outer Continental Shelf. The agreements provide
for an initial term of five years, with the potential for an additional five
years based on expenditures by ExxonMobil. Pursuant to the agreement covering
South Louisiana, Apache leased 50 percent of its interests below certain
producing or productive formations in the acreage to ExxonMobil, subject to
retention of a 20 percent royalty interest. Pursuant to the agreement covering
the Gulf of Mexico-Outer Continental Shelf, no assignments will be made until a
prospect has been proposed and the initial well has been drilled. Apache will
retain all rights in each prospect above certain producing or productive
formations and further will retain a three percent overriding royalty interest
in any property assigned to ExxonMobil.
ANADARKO PETROLEUM
On August 20, 2004, Apache signed a definitive agreement to acquire all of
Anadarko Petroleum Corporation's (Anadarko) Gulf of Mexico-Outer Continental
Shelf properties (excluding certain deepwater properties) for $537 million,
subject to normal post-closing adjustments, including preferential rights. The
purchase agreement is effective as of October 1, 2004. Prior to the transaction,
Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Anadarko $646 million
to acquire an overriding royalty interest in these properties. Anadarko's sale
of an overriding royalty interest to Morgan Stanley is commonly known in the
industry as a volumetric production payment (VPP), the obligations of which
Apache assumed along with its purchase. Under the terms of the VPP, Morgan
Stanley is to receive a fixed volume of oil and natural gas production over four
years beginning in October 2004. The VPP reserves and production will not be
recorded by Apache.
Apache closed the transaction with Anadarko in two stages. Properties
subject to preferential rights that had expired or been waived and
non-preferential right properties closed on September 24, 2004. At that time,
Apache paid Anadarko $92 million and deposited $445 million into escrow awaiting
resolution of third-party preferential rights to purchase these properties. This
escrow balance is reflected as restricted cash on the accompanying September 30,
2004 balance sheet. The escrow properties closed on October 22, 2004 in the
amount of $435 million.
In total, Apache paid $527 million for the properties and will record
estimated proved reserves of 60 million barrels of oil equivalent (boe), of
which 50 percent is natural gas. In addition, an $84 million liability for the
future cost to produce and deliver VPP volumes will be recorded by the Company
because the overriding royalties are not burdened by production costs. This
liability will be amortized as the volumes are produced and delivered to Morgan
Stanley. Apache will record abandonment obligations for the properties estimated
at $134 million and other obligations assumed from Anadarko in the amount of $27
million. The acquisition included interests in 74 fields covering 232 offshore
blocks (approximately 664,000 acres), including 89 undeveloped blocks and 104
platforms. Apache will operate 49 of the fields with 70 percent of the
production. The purchase price was funded by borrowings under the Company's
lines of credit and commercial paper program.
7
PRO FORMA DISCLOSURE
In January 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. (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 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 NINE MONTHS ENDED
SEPTEMBER 30, 2003
----------------------------
AS REPORTED PRO FORMA
------------- -----------
(In thousands, except per
common share data)
Revenues and other................................... $ 3,125,506 $ 3,363,468
Net income........................................... 860,271 933,468
Preferred stock dividends............................ 4,260 4,260
Income attributable to common stock.................. 856,011 929,208
Net income per common share:
Basic............................................ $ 2.66 $ 2.87
Diluted.......................................... 2.64 2.85
Average common shares outstanding (1)................ 321,908 323,360
(1) 2003 Pro forma shares include the January 22, 2003, public offering of
19.8 million common shares (adjusted for the two-for-one common stock
split) issued on January 14, 2003, as if they were issued on January 1,
2003.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache uses a variety of strategies to manage its exposure to fluctuations
in crude oil and natural gas 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, various
fixed-price swaps, option collars and puts in conjunction with the BP,
ExxonMobil, Anadarko and certain South Louisiana property acquisitions. 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 September 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)
10/2004 - 12/2004 Gas Collars 4,600,000 $ 3.25 / 5.81 $ (4,806)
Gas Fixed-Price Swap 12,880,000 4.40 (29,288)
Gas Put Option 5,520,000 5.85 556
Oil Collars 736,000 35.00 / 42.20 (5,252)
Oil Put Option 276,000 39.00 41
2005 Gas Collars 34,600,000 5.28 / 6.36 (31,258)
Oil Collars 3,577,000 33.51 / 41.72 (17,100)
Oil Put Option 1,533,000 28.00 169
2006 Gas Collars 32,850,000 5.50 / 6.66 (6,386)
Oil Collars 4,307,000 32.07 / 40.66 (10,966)
Oil Put Option 1,533,000 28.00 753
2007 Gas Collars 24,570,000 5.25 / 6.20 (1,626)
Oil Collars 1,911,000 33.00 / 39.25 (2,698)
8
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. This contract terminates on December 31,
2004. As of September 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
- ------------------- --------------- -----------
10/2004 - 12/2004 3,680,000 $ 22.06
In June 2004, Apache began hedging a portion of its foreign currency
exchange risk associated with its forecasted Canadian and North Sea lease
operating expenditures by entering into forward purchase contracts. The Company
purchased a total of $89 million Canadian dollars at an average exchange rate of
..747 and 27 million British Pounds at an average exchange rate of 1.841. The
forward contracts mature in July through December 2004. The fair market value of
the remaining contracts as of September 30, 2004 was $1.7 million ($1.1 million
after tax). Future changes in market value are recorded in other comprehensive
income (loss).
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's commodity and foreign currency 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...................................... 64,205 40,118
Net change in derivative fair value.................................... (107,939) (67,572)
------------ ------------
Unrealized loss on derivatives at September 30, 2004................... $ (113,050) $ (70,647)
============ ============
Based on current market prices, the Company recorded an unrealized loss in
other comprehensive income (loss) of $113 million ($71 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 and
crude oil production applicable to specific hedges. Of the $113 million
unrealized loss on derivatives at September 30, 2004, approximately $83 million
($52 million after tax) applies to the next 12 months. However, these amounts
are likely to 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 28, 2004, the Company's $750 million 364-day U.S. credit facility
matured and was replaced with a new five-year credit facility. The financial
covenants of the new five-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
September 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
five-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.
9
4. CAPITAL STOCK
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.
On September 16, 2004, the Company announced that its Board of Directors
voted to increase the quarterly cash dividend on its common stock to eight cents
per share from six cents per share, effective with the November 2004 payment.
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 SEPTEMBER 30,
------------------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock.. $432,315 326,294 $ 1.32 $275,541 323,751 $ .85
======== ========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other.............. - 3,899 - 2,850
-------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions....... $432,315 330,193 $ 1.31 $275,541 326,601 $ .84
======== ======= ======== ======== ======= ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
2004 2003
---------------------------------- ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- -------- --------- -------- -------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock.. $1,151,697 325,657 $ 3.54 $856,011 321,908 $ 2.66
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other.............. - 3,801 - 2,742
---------- -------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions....... $1,151,697 329,458 $ 3.50 $856,011 324,650 $ 2.64
========== ======== ========= ======== ======= =========
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 1,328,400 shares of Apache common stock, respectively.
On September 30, 2004, stock appreciation rights for 2,836,581 shares of Apache
common stock were outstanding with an average exercise price of $35.11.
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. Since these stock options,
granted prior to 2003, had an exercise price equal to the market value of the
underlying common stock on the date of grant, no material stock-based employee
compensation cost is reflected in net income.
10
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 five and 10 percent stock dividends
and the two-for-one stock split) on 10 days out of any 30 consecutive trading
days before January 1, 2005. On April 28, 2004, Apache's share price exceeded
the $43.29 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 and will reduce Apache's 2004 net income by approximately $16 million
after tax, or $.05 per diluted common share. The second and third installments
will be issued in 2005 and 2006 to employees remaining with the Company during
those periods.
On October 26, 2004, Apache's share price exceeded the $51.95 threshold
for the 10-day requirement. As such, Apache will issue approximately 2.2 million
additional shares of its common stock, after minimum tax withholding
requirements, in three equal installments. The first installment will be issued
in November 2004 and will reduce Apache's 2004 net income by approximately $54
million after tax, or $.16 per diluted common share. The second and third
installments will be issued in 2005 and 2006 to employees remaining with the
Company during those periods.
Timing of expense recognition under the 2000 Share Appreciation Plan is
based on employee service period, beginning with adoption of the plan in 2000
and ending with the final vesting in 2006. Since roughly four years out of the
full six year service period was complete upon achievement of the $43.29 and
$51.95 thresholds, expense is more heavily waited to the 2004 period. The 2004
expense associated with achievement of both the first and second thresholds will
total $70 million after tax, or $.21 per diluted common share. Future expense
associated with both these thresholds is estimated to total $16 million after
tax, or $.05 per diluted common share, over the next two years.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except for per common share amounts)
Income attributable to common stock, as reported....... $ 432,315 $ 275,541 $1,151,697 $ 856,011
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects......................................... 2,114 - 17,586 391
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects... (4,702) (5,567) (15,344) (16,433)
---------- ---------- ---------- ----------
Pro forma income attributable to common stock.......... $ 429,727 $ 269,974 $1,153,939 $ 839,969
========== ========== ========== ==========
Net Income per Common Share:
Basic:
As reported....................................... $ 1.32 $ .85 $ 3.54 $ 2.66
Pro forma......................................... 1.32 .84 3.54 2.61
Diluted:
As reported....................................... 1.31 .84 3.50 2.64
Pro forma......................................... 1.30 .82 3.50 2.56
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 NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
------------ ----------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)...................................... $ 63,333 $ 58,821
Income taxes (net of refunds).............................................. 352,585 225,667
8. PENSION AND POST-RETIREMENT BENEFITS
Pension Plan
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 projected future salary.
Apache disclosed in its financial statements for the year ended December
31, 2003, that it expected to contribute $5 million to its pension plan
throughout 2004. Approximately $4 million of the original estimate was
contributed as of September 30, 2004. The remaining $1 million is expected to be
contributed by year end. Apache also contributed an additional $11 million to
fund prior years' benefit obligations.
Post-Retirement Benefit Plan
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.
The following table sets forth the components of the net periodic cost of
Apache's pension and other post-retirement benefit plans for the nine-month
period ended September 30, 2004. The pension and post-retirement benefit plans
did not materially impact the Company for equivalent prior-year periods.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
-----------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
----------- ---------------
(In thousands)
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost............................................... $ 4,091 $ 727
Interest cost.............................................. 2,718 471
Expected return on assets.................................. (2,689) -
Amortization of:
Transition obligation................................... - 33
Actuarial (gain)/loss................................... - 187
----------- ----------
Net periodic benefit cost.................................. $ 4,120 $ 1,418
=========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30,
2004
Oil and Gas Production Revenues........ $1,683,181 $ 723,266 $ 671,346 $ 345,600 $ 321,353 $ 69,548 $ 3,814,294
========== ========== =========== ========== ========== ========== ===========
Operating Income (1)................... $ 922,926 $ 398,751 $ 472,829 $ 168,578 $ 134,677 $ 30,054 $ 2,127,815
========== ========== =========== ========== ========== ==========
Other Income (Expense):
Other............................... (16,620)
General and administrative.......... (115,450)
Share Appreciation Plan - general
and administrative................. (11,866)
China litigation provision.......... (71,216)
Financing costs, net................ (83,563)
-----------
Income Before Income Taxes............. $ 1,829,100
===========
Total Assets........................... $6,949,034 $3,364,170 $ 1,960,751 $1,036,576 $1,121,214 $ 190,970 $14,622,715
========== ========== =========== ========== ========== ========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003
Oil and Gas Production Revenues........ $1,527,389 $ 627,861 $ 482,222 $ 297,787 $ 181,389 $ 12,859 $ 3,129,507
========== ========== =========== ========== ========== ========== ===========
Operating Income (1)................... $ 849,027 $ 350,924 $ 287,353 $ 150,687 $ 22,536 $ 4,472 $ 1,664,999
========== ========== =========== ========== ========== ==========
Other Income (Expense):
Other............................... (4,001)
General and administrative.......... (93,097)
Preferred interests of
subsidiaries....................... (8,668)
Financing costs, net................ (88,711)
-----------
Income Before Income Taxes............. $ 1,470,522
===========
Total Assets........................... $5,574,670 $2,829,605 $ 1,714,001 $ 955,209 $ 981,240 $ 185,320 $12,240,045
========== ========== =========== ========== ========== ========== ===========
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................................................... 137,026
Liabilities settled.................................................... (39,746)
Accretion expense...................................................... 32,723
-----------
Asset retirement obligation as of September 30, 2004................... $ 869,778
===========
Liabilities incurred during the period primarily relate to abandonment
obligations assumed in connection with the ExxonMobil acquisition and the
portion of the Anadarko properties closed in September 2004. Liabilities settled
during the period primarily relate to individually immaterial properties plugged
and abandoned or sold during the period.
11. LITIGATION
China - 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 Corporation LDC (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 has filed and is pursuing an
application to vacate the award in federal court. Texaco China has filed an
application to confirm the award in the same court.
Canada - In September 2004, the court in Canada that is hearing The
Predator Corporation Ltd. (Predator) counterclaim filed in February 2001 granted
Apache Canada's motion for summary judgment, in part dismissing more than $3.3
billion Canadian dollars of Predator's claims against the Company and Murphy Oil
Corporation (Murphy), and dismissing all claims against both Murphy's president
and Apache Canada's president. Predator has appealed the dismissal. Only
Predator's claims against Murphy and Apache Canada for mismanaging operations
survive in the trial court at this time. Those claims total approximately $363
million Canadian dollars, plus interest and attorneys' fees. Apache's share of
this exposure, under the joint operating agreement, would be approximately 37
percent of the total. Management believes that Predator's claim is without merit
and the likelihood of success is remote. Apache and Murphy's claims against
Predator, filed in December 2000, are still pending.
12. CHANGE IN CRITICAL ACCOUNTING POLICY
In September 2004, the SEC issued Staff Accounting Bulletin No. 106 ("SAB
106") to provide new guidance on how asset retirement obligations should impact
the calculation of the "ceiling test" or limitation on the amount of properties
that can be capitalized on the balance sheet under the full cost method of
accounting for oil and gas companies. The new guidance dictates that since the
asset retirement obligation is now reported on the balance sheet, related costs
in the future net cash flow calculation should be omitted to avoid
double-counting these costs. As allowed under existing guidance, Apache includes
such costs in its future net cash flow calculation, but adjusts the
corresponding amount on the balance sheet. The Company does not believe that
adoption of SAB 106 will have a material impact on financial results. Apache
will apply the new guidance outlined in SAB 106 prospectively.
13. 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 SEPTEMBER 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues... $ 581,632 $ - $ - $ - $ 909,350 $ (76,854) $ 1,414,128
Equity in net income (loss) of
affiliates...................... 239,994 11,286 14,242 25,869 (14,362) (277,029) -
Other............................. (2,547) - - - (4,579) - (7,126)
----------- ------------- --------- -------- ------------ ----------- ------------
819,079 11,286 14,242 25,869 890,409 (353,883) 1,407,002
----------- ------------- --------- -------- ------------ ----------- ------------
OPERATING EXPENSES:
Depreciation, depletion and
amortization.................... 136,169 - - - 177,351 - 313,520
Asset retirement obligation
accretion....................... 5,897 - - - 5,174 - 11,071
Lease operating costs............. 88,589 - - - 193,155 (76,854) 204,890
Share appreciation plan - LOE..... 445 - - - 429 - 874
Gathering and transportation costs 7,154 - - - 13,748 - 20,902
Severance and other taxes......... 17,527 - - - 29,621 - 47,148
General and administrative........ 27,506 - - - 7,615 - 35,121
Share appreciation plan - G&A..... 778 - - - 76 - 854
Financing costs, net.............. 19,572 - 4,512 9,936 (5,170) - 28,850
----------- ------------- --------- -------- ------------ ----------- ------------
303,637 - 4,512 9,936 421,999 (76,854) 663,230
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 515,442 11,286 9,730 15,933 468,410 (277,029) 743,772
Provision (benefit) for income
taxes........................... 81,707 - (1,556) 1,470 228,416 - 310,037
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCOME........................... 433,735 11,286 11,286 14,463 239,994 (277,029) 433,735
Preferred stock dividends......... 1,420 - - - - - 1,420
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.. $ 432,315 $ 11,286 $ 11,286 $ 14,463 $ 239,994 $ (277,029) $ 432,315
=========== ============= ========= ======== ============ =========== ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues... $ 452,358 $ - $ - $ - $ 704,664 $ (47,007) $ 1,110,015
Equity in net income (loss) of
affiliates...................... 171,661 6,614 9,591 30,809 (9,303) (209,372) -
Other............................. (331) - - - (5,143) - (5,474)
----------- ------------- --------- -------- ------------ ----------- ------------
623,688 6,614 9,591 30,809 690,218 (256,379) 1,104,541
----------- ------------- --------- -------- ------------ ----------- ------------
OPERATING EXPENSES:
Depreciation, depletion and
amortization.................... 104,743 - - - 188,142 - 292,885
Asset retirement obligation
accretion....................... 4,674 - - - 6,668 - 11,342
Lease operating costs............. 80,068 - - - 161,513 (47,007) 194,574
Gathering and transportation costs 5,522 - - - 11,426 - 16,948
Severance and other taxes......... 11,233 - - - 30,354 - 41,587
General and administrative........ 26,499 - - - 8,193 - 34,692
Financing costs, net.............. 27,042 - 4,509 9,945 (7,624) - 33,872
----------- ------------- --------- -------- ------------ ----------- ------------
259,781 - 4,509 9,945 398,672 (47,007) 625,900
----------- ------------- --------- -------- ------------ ----------- ------------
PREFERRED INTERESTS OF SUBSIDIARIES.. (25) - - - 2,001 - 1,976
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 363,932 6,614 5,082 20,864 289,545 (209,372) 476,665
Provision (benefit) for income
taxes........................... 86,971 - (1,532) (3,619) 117,884 - 199,704
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCOME........................... 276,961 6,614 6,614 24,483 171,661 (209,372) 276,961
Preferred stock dividends......... 1,420 - - - - - 1,420
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.. $ 275,541 $ 6,614 $ 6,614 $ 24,483 $ 171,661 $ (209,372) $ 275,541
=========== ============= ========= ======== ============ =========== ============
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues... $ 1,679,091 $ - $ - $ - $ 2,367,271 $ (232,068) $ 3,814,294
Equity in net income (loss) of
affiliates...................... 656,681 29,968 38,958 117,268 (33,672) (809,203) -
Other............................. (4,458) - - - (12,162) - (16,620)
----------- ------------- --------- -------- ------------ ----------- ------------
2,331,314 29,968 38,958 117,268 2,321,437 (1,041,271) 3,797,674
----------- ------------- --------- -------- ------------ ----------- ------------
OPERATING EXPENSES:
Depreciation, depletion and
amortization.................... 405,223 - - - 490,262 - 895,485
Asset retirement obligation
accretion....................... 17,497 - - - 15,226 - 32,723
Lease operating costs............. 258,716 - - - 581,368 (232,068) 608,016
Share appreciation plan - LOE..... 6,182 - - - 5,684 - 11,866
Gathering and transportation costs 22,377 - - - 38,321 - 60,698
Severance and other taxes......... 46,323 - - 18 31,350 - 77,691
General and administrative........ 90,858 - - - 24,592 - 115,450
Share appreciation plan - G&A..... 10,812 - - - 1,054 - 11,866
China litigation provision........ - - - - 71,216 - 71,216
Financing costs, net.............. 61,588 - 13,534 29,979 (21,538) - 83,563
----------- ------------- --------- -------- ------------ ----------- ------------
919,576 - 13,534 29,997 1,237,535 (232,068) 1,968,574
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 1,411,738 29,968 25,424 87,271 1,083,902 (809,203) 1,829,100
Provision (benefit) for income
taxes........................... 255,781 - (4,544) (5,315) 427,221 - 673,143
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCOME........................... 1,155,957 29,968 29,968 92,586 656,681 (809,203) 1,155,957
Preferred stock dividends......... 4,260 - - - - - 4,260
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.. $ 1,151,697 $ 29,968 $ 29,968 $ 92,586 $ 656,681 $ (809,203) $ 1,151,697
=========== ============= ========= ======== ============ =========== ============
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues... $ 1,267,321 $ - $ - $ - $ 2,007,790 $ (145,604) $ 3,129,507
Equity in net income (loss) of
affiliates...................... 427,821 23,343 32,276 65,411 (28,061) (520,790) -
Other............................. (6,588) - - - 2,587 - (4,001)
----------- ------------- --------- -------- ------------ ----------- ------------
1,688,554 23,343 32,276 65,411 1,982,316 (666,394) 3,125,506
----------- ------------- --------- -------- ------------ ----------- ------------
OPERATING EXPENSES:
Depreciation, depletion and
amortization.................... 265,954 - - - 513,636 - 779,590
Asset retirement obligation
accretion....................... 11,216 - - - 15,884 - 27,100
Lease operating costs............. 204,842 - - - 455,757 (145,604) 514,995
Gathering and transportation costs 14,419 - - - 29,521 - 43,940
Severance and other taxes......... 38,632 - - 53 60,198 - 98,883
General and administrative........ 75,340 - - - 17,757 - 93,097
Financing costs, net.............. 75,486 - 13,534 30,124 (30,433) - 88,711
----------- ------------- --------- -------- ------------ ----------- ------------
685,889 - 13,534 30,177 1,062,320 (145,604) 1,646,316
----------- ------------- --------- -------- ------------ ----------- ------------
PREFERRED INTERESTS OF SUBSIDIARIES.. (25) - - - 8,693 - 8,668
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 1,002,690 23,343 18,742 35,234 911,303 (520,790) 1,470,522
Provision (benefit) for income
taxes........................... 162,176 - (4,601) (11,049) 490,357 - 636,883
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE............... 840,514 23,343 23,343 46,283 420,946 (520,790) 833,639
Cumulative effect of change in
accounting principle, net of
income tax...................... 19,757 - - - 6,875 - 26,632
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCOME........................... 860,271 23,343 23,343 46,283 427,821 (520,790) 860,271
Preferred stock dividends......... 4,260 - - - - - 4,260
----------- ------------- --------- -------- ------------ ----------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.. $ 856,011 $ 23,343 $ 23,343 $ 46,283 $ 427,821 $ (520,790) $ 856,011
=========== ============= ========= ======== ============ =========== ============
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES......................... $ 1,162,884 $ - $ (11,831) $(19,435) $ 1,188,920 $ - $ 2,320,538
----------- ------------- --------- -------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (577,697) - - - (1,104,340) - (1,682,037)
Acquisition of Anadarko properties. (92,699) - - - - - (92,699)
Acquisition of ExxonMobil
properties....................... (347,352) - - - - - (347,352)
Restricted cash for acquisition
settlement....................... (444,734) - - - - - (444,734)
Investment in subsidiaries, net.... (45,720) (12,525) - - (30,748) 88,993 -
Other, net......................... (17,430) - - - (37,992) - (55,422)
----------- ------------- --------- -------- ------------ ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (1,525,632) (12,525) - - (1,173,080) 88,993 (2,622,244)
----------- ------------- --------- -------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............... 543,170 - (694) 156 19,507 (18,773) 543,366
Payments on long-term debt......... (135,300) - - - - - (135,300)
Dividends paid..................... (62,825) - - - - - (62,825)
Common stock activity.............. 19,324 12,525 12,525 19,281 25,889 (70,220) 19,324
Treasury stock activity, net....... 11,412 - - - - - 11,412
Cost of debt and equity
transactions..................... (2,250) - - - - - (2,250)
----------- ------------- --------- -------- ------------ ----------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES......................... 373,531 12,525 11,831 19,437 45,396 (88,993) 373,727
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 10,783 - - 2 61,236 - 72,021
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. - - 2 1 33,500 - 33,503
----------- ------------- --------- -------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD...................... $ 10,783 $ - $ 2 $ 3 $ 94,736 $ - $ 105,524
=========== ============= ========= ======== ============ =========== ============
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- --------- -------- ------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES......................... $ 883,634 $ - $ (13,791) $(22,893) $ 1,232,159 $ - $ 2,079,109
----------- ------------- --------- -------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (325,918) - - - (789,431) - (1,115,349)
Acquisitions....................... (739,072) - - - (639,703) - (1,378,775)
Proceeds from sales of oil and gas
properties....................... 4,192 - - - 12,010 - 16,202
Investment in subsidiaries, net.... (542,452) (12,525) - - (617) 555,594 -
Other, net......................... (23,531) - - - (20,771) - (44,302)
----------- ------------- --------- -------- ------------ ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (1,626,781) (12,525) - - (1,438,512) 555,594 (2,522,224)
----------- ------------- --------- -------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............... 1,531,596 - 1,266 2,103 (385,108) 619,801 1,769,658
Payments on long-term debt......... (1,227,288) - - - (187,641) - (1,414,929)
Dividends paid..................... (51,967) - - - - - (51,967)
Common stock activity.............. 574,881 12,525 12,525 20,663 1,129,682 (1,175,395) 574,881
Treasury stock activity, net....... 3,743 - - - - - 3,743
Cost of debt and equity
transactions..................... (4,520) - - - - - (4,520)
Repurchase of preferred interests
of subsidiaries.................. (82,000) - - - (361,000) - (443,000)
----------- ------------- --------- -------- ------------ ----------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES......................... 744,445 12,525 13,791 22,766 195,933 (555,594) 433,866
----------- ------------- --------- -------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,298 - - (127) (10,420) - (9,249)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 224 - 2 127 51,533 - 51,886
----------- ------------- --------- -------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD...................... $ 1,522 $ - $ 2 $ - $ 41,113 $ - $ 42,637
=========== ============= ========= ======== ============ =========== ============
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2004
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------- --------- ---------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 10,783 $ - $ 2 $ 3 $ 94,736 $ - $ 105,524
Restricted cash for acquisition
settlement....................... 444,734 - - - - - 444,734
Receivables, net of allowance...... 238,462 - - - 545,219 - 783,681
Inventories........................ 21,039 - - - 116,414 - 137,453
Drilling advances and others....... 35,770 - - - 80,028 - 115,798
----------- -------- --------- ---------- ------------ ----------- ------------
750,788 - 2 3 836,397 - 1,587,190
----------- -------- --------- ---------- ------------ ----------- ------------
PROPERTY AND EQUIPMENT, NET.......... 6,010,310 - - - 6,726,982 - 12,737,292
----------- -------- --------- ---------- ------------ ----------- ------------
OTHER ASSETS:
Intercompany receivable, net....... 1,311,510 - (1,114) 93,656 (1,404,052) - -
Goodwill, net...................... - - - - 189,252 - 189,252
Equity in affiliates............... 3,755,494 257,429 508,291 1,218,497 (811,495) (4,928,216) -
Deferred charges and other......... 41,588 - - 4,700 62,693 - 108,981
----------- -------- --------- ---------- ------------ ----------- ------------
$11,869,690 $257,429 $ 507,179 $1,316,856 $ 5,599,777 $(4,928,216) $ 14,622,715
=========== ======== ========= ========== ============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... 267,020 - - - 173,268 - 440,288
Other accrued expenses............. 347,140 - (557) 12,764 345,193 - 704,540
----------- -------- --------- ---------- ------------ ----------- ------------
614,160 - (557) 12,764 518,461 - 1,144,828
----------- -------- --------- ---------- ------------ ----------- ------------
LONG-TERM DEBT....................... 1,813,754 - 269,139 646,783 5,356 - 2,735,032
----------- -------- --------- ---------- ------------ ----------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes....................... 984,237 - (18,832) (555) 941,207 - 1,906,057
Advances from gas purchasers....... 96,091 - - - - - 96,091
Asset retirement obligation........ 508,558 - - - 361,220 - 869,778
Derivative instruments............. 26,750 - - - - - 26,750
Other.............................. 154,523 - - - 18,039 - 172,562
----------- -------- --------- ---------- ------------ ----------- ------------
1,770,159 - (18,832) (555) 1,320,466 - 3,071,238
----------- -------- --------- ---------- ------------ ----------- ------------
SHAREHOLDERS' EQUITY................. 7,671,617 257,429 257,429 657,864 3,755,494 (4,928,216) 7,671,617
----------- -------- --------- ---------- ------------ ----------- ------------
$11,869,690 $257,429 $ 507,179 $1,316,856 $ 5,599,777 $(4,928,216) $ 14,622,715
=========== ======== ========= ========== ============ =========== ============
21
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------- --------- ---------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ - $ - $ 2 $ 1 $ 33,500 $ - $ 33,503
Receivables, net of allowance...... 204,078 - - - 434,977 - 639,055
Inventories........................ 17,646 - - - 108,221 - 125,867
Drilling advances and other........ 60,159 - - - 40,488 - 100,647
----------- -------- --------- ---------- ------------ ----------- ------------
281,883 - 2 1 617,186 - 899,072
----------- -------- --------- ---------- ------------ ----------- ------------
PROPERTY AND EQUIPMENT, NET.......... 5,235,717 - - - 6,024,368 - 11,260,085
----------- -------- --------- ---------- ------------ ----------- ------------
OTHER ASSETS:
Intercompany receivable, net....... 1,291,503 - (1,961) 93,768 (1,383,310) - -
Goodwill, net...................... - - - - 189,252 - 189,252
Equity in affiliates............... 3,077,152 183,617 437,860 1,084,711 (803,409) (3,979,931) -
Deferred charges and other......... 36,672 - - 4,767 26,278 - 67,717
----------- -------- --------- ---------- ------------ ----------- ------------
$ 9,922,927 $183,617 $ 435,901 $1,183,247 $ 4,670,365 $(3,979,931) $ 12,416,126
=========== ======== ========= ========== ============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 189,031 $ - $ - $ - $ 111,567 $ - $ 300,598
Other accrued expenses............. 238,555 - 1,621 1,803 277,801 - 519,780
----------- -------- --------- ---------- ------------ ----------- ------------
427,586 - 1,621 1,803 389,368 - 820,378
----------- -------- --------- ---------- ------------ ----------- ------------
LONG-TERM DEBT....................... 1,405,882 - 268,987 646,741 5,356 - 2,326,966
----------- -------- --------- ---------- ------------ ----------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes....................... 879,044 - (18,324) (842) 837,360 - 1,697,238
Advances from gas purchasers....... 109,207 - - - - - 109,207
Asset retirement obligation........ 401,349 - - - 338,426 - 739,775
Oil and gas derivative instruments. 5,931 - - - - - 5,931
Other.............................. 161,130 - - - 22,703 - 183,833
----------- -------- --------- ---------- ------------ ----------- ------------
1,556,661 - (18,324) (842) 1,198,489 - 2,735,984
----------- -------- --------- ---------- ------------ ----------- ------------
SHAREHOLDERS' EQUITY................. 6,532,798 183,617 183,617 535,545 3,077,152 (3,979,931) 6,532,798
----------- -------- --------- ---------- ------------ ----------- ------------
$ 9,922,927 $183,617 $ 435,901 $1,183,247 $ 4,670,365 $(3,979,931) $ 12,416,126
=========== ======== ========= ========== ============ =========== ============
22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Higher crude oil prices and crude oil production drove Apache
Corporation's (Apache or the Company) third-quarter 2004 revenues and earnings
to a record $1.4 billion and $432 million, respectively, despite the impact on
Gulf of Mexico production operations from Hurricane Ivan, a mid-September 2004
event. Third-quarter 2004 earnings were 57 percent higher than the equivalent
2003 quarter. The Company also reported record revenues and earnings of $3.8
billion and $1.15 billion, respectively, for the first nine months of 2004. The
improved results for the nine-month period were driven by strong crude oil
prices, higher crude oil and natural gas production, and a lower effective
income tax rate. Net cash provided by operating activities totaled $2.3 billion
for the nine-month period compared to $2.1 billion in the prior-year period.
On a barrel of oil equivalent basis (boe), 2004 third-quarter production
was up two percent to a record 458,412 boe/d, despite the 4,042 b/d of oil
production and 21.4 MMcf/d of natural gas production lost to Hurricane Ivan.
Production on a boe basis from outside the U.S. increased to 61 percent of
worldwide production, primarily reflecting growth in Egypt and the North Sea.
Our third-quarter 2004 production mix of 45/55 percent natural gas to liquids
compared to 47/53 percent in 2003. The change in production mix reflects the
impact of oil production in the North Sea and China. Natural gas production of
1,234 MMcf/d was 30 MMcf/d below the third-quarter of 2003, with over two-thirds
of the drop related to Hurricane Ivan. Third-quarter crude oil production
increased five percent to a record 241,072 b/d. While we are working to restore
our Gulf of Mexico production impacted by the hurricane, transportation
pipelines have been damaged by subsea mudslides and may delay a return to full
production until 2005. Apache maintains business interruption insurance that
reimburses the Company for lost oil and gas production revenues, including
revenues lost as a result of damage to third-party facilities. The damages are
based on prevailing oil and natural gas prices and lost production, subject to a
deductible which was met at the end of September. The Company also maintains
insurance for physical damage that covers costs in excess of our deductible.
The higher crude oil prices and strong natural gas prices continues to
drive up our cash flows, enabling us to increase our capital expenditures for
drilling and acquisition opportunities. During the 2004 third quarter, we
invested approximately $600 million worldwide on exploration and development
capital projects and announced two significant acquisitions. Notable discoveries
and appraisal wells announced since the end of the second quarter 2004, are
discussed below:
- During the third quarter, we announced two successful appraisal
wells and completion of one development well on Egypt's Khalda
Concession. On July 1, we announced that the Qasr-5 appraisal well
successfully extended the Qasr field to the southwest. On September
7, we announced that the Qasr-6 appraisal well successfully extended
the Qasr field to the west. These were our third and fourth
successful Qasr appraisal wells and both wells provided further
confirmation of the overall seismically-defined structure of the
field. Production will follow after additional pipeline and
processing infrastructure is completed. Also, on September 7, we
announced completion of the Qasr-9 development well, which commenced
commercial production in early September.
- On August 19, we announced two gas wells that would flow through
Apache's Tarek gas plant in Egypt. The Imhotep-1X on the Khalda
Offset Concession was brought on production immediately. The
Mihos-1X appraisal well on the Matruh Concession commenced
production in early September and brought the Tarek gas plant up to
its full capacity of 100 MMcf per day.
- On July 13, we announced that the Ravensworth-2 appraisal well in
the Exmouth Basin offshore Western Australia encountered an oil
column 49 feet higher than expected, thereby extending the area of
the field farther north than mapped based on the Ravensworth-1
discovery well.
Also during the third quarter, we closed on separate agreements with
ExxonMobil that would capitalize on the respective strengths and assets of both
companies related to exploration and development on properties in West Texas,
Western Canada, Louisiana, and the Gulf of Mexico. Additionally, Apache signed a
definitive agreement to acquire all of Anadarko Petroleum Corporation's
(Anadarko) Gulf of Mexico Outer-Continental Shelf properties. Because some
properties were subject to preferential rights, we closed the Anadarko
acquisition in two stages,
23
September 24, 2004 and October 22, 2004. The ExxonMobil and Anadarko
transactions are discussed in Note 1 of this Form 10-Q.
In July 2004, the Company signed an amendment agreement with the Egyptian
General Petroleum Corporation (EGPC) which, among other things, extended the
term 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 three-year extension. As part of this agreement
and in conjunction with the Qasr 25-year Gas Sales Agreement discussed in our
Form 10-Q for the quarter ended June 30, 2004, we agreed to re-price natural gas
volumes in excess of 100 MMcf/d produced from the Khalda Concession development
leases and future Khalda Offset development leases. Under the new pricing
formula, Apache will receive a price indexed to crude oil, with a minimum price
of $1.50 per MMbtu and a maximum price of $2.65 per MMbtu. Pricing for the first
100 MMcf/d remains subject to the original contract price, which is indexed to
oil pricing, but without a minimum or maximum. The pricing for this first 100
MMcf/d continues until January 1, 2013 at which time all Khalda area gas will be
priced at the new pricing formula. For the third quarter, Apache's price
averaged $4.45 per Mcf, which was a blend of the old and new contracts.
As discussed in Note 6 of this Form 10-Q, on October 26, 2004, Apache's
share price exceeded the second threshold ($51.95) for the 10-day requirement
under the Company's 2000 Share Appreciation Plan. As such, Apache will issue
approximately 2.2 million additional shares of its common stock, after minimum
tax withholding requirements, in three equal installments. The first installment
will be issued in November 2004 and will reduce Apache's 2004 net income by
approximately $54 million after tax, or $.16 cents per diluted common share. The
second and third installments will be issued in 2005 and 2006 to employees
remaining with the Company during those periods.
Timing of expense recognition under the 2000 Share Appreciation Plan is
based on employee service period, beginning with adoption of the plan in 2000
and ending with the final vesting in 2006. Since roughly four years out of the
full six year service period was complete upon achievement of the $43.29 and
$51.95 thresholds, expense is more heavily waited to the 2004 period. The 2004
expense associated with achievement of both the first and second thresholds will
total $70 million after tax, or $.21 per diluted common share. Future expense
associated with both these thresholds is estimated to total $16 million after
tax, or $.05 per diluted common share, over the next two years.
The outlook for the fourth quarter appears favorable considering that
current NYMEX futures markets indicate that crude oil and natural gas prices
will be above third-quarter levels. We believe our earnings and cash flow will
remain strong, given the impact of currently favorable price indications on our
base properties and the recent addition of the ExxonMobil and Anadarko
properties.
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 SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------------
OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES
--------------- ---------------- ----------------- -----------------
2004 2003 2004 2003 2004 2003 2004 2003
------ ------ ------ ------ ------ ------ ------ ------
United States.............. 30% 33% 58% 64% 32% 34% 58% 62%
Canada..................... 11% 11% 28% 25% 12% 13% 28% 27%
--- --- --- --- --- --- --- ---
North America.............. 41% 44% 86% 89% 44% 47% 86% 89%
Egypt...................... 24% 21% 11% 8% 24% 23% 10% 8%
Australia.................. 16% 15% 3% 3% 14% 17% 4% 3%
North Sea.................. 16% 18% - - 15% 12% - -
China...................... 3% 1% - - 3% - - -
Other...................... - 1% - - - 1% - -
--- --- --- --- --- --- --- ---
Total................. 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
Crude Oil Contribution
Apache's third-quarter 2004 consolidated crude oil revenues increased
significantly compared to the third quarter of 2003 on significantly higher
crude oil price realizations in all core areas except the North Sea. U.S. crude
oil revenues continue to be the highest among all core areas, but dropped
slightly to 30 percent of consolidated revenues on a 14 percent reduction in
third quarter production, largely attributable to Hurricane Ivan. All other core
areas, except for the North Sea, had similar price gains on top of production
growth or smaller production declines.
24
Canada's contribution remained steady at 11 percent of consolidated revenues.
Egypt saw both higher prices and production growth pushing its contribution to
24 percent of consolidated crude oil revenues, three percent above the 2003
quarter. The North Sea's contribution was off two percent to 16 percent.
Although the North Sea saw a 38 percent increase in production, a five percent
decline in realized prices constrained revenue growth. Approximately two-thirds
of the North Sea's third-quarter production was subject to a physical sales
contract with BP, p.l.c. (see Note 2 of this Form 10-Q), at prices approximately
12 percent below the prior-year quarter's contractual price. Australia's
contribution rose one percent to 16 percent as quarterly revenues benefited from
a 61 percent increase in price, outpacing all other areas. China, which
initiated production on a limited basis during the third quarter of 2003,
contributed three percent of third-quarter 2004 crude oil revenues, up two
percent.
For the nine-month period, the North Sea saw the largest absolute increase
in consolidated crude oil revenues, as the 2003 period only included six months
of revenue. China contributed three percent for the reasons previously
discussed. Australia, the U.S. and Canada's contributions fell three percent,
two percent and one percent, respectively, primarily because of the addition of
the North Sea and China. Egypt's overall contribution rose one percent to 24
percent as revenues surged 44 percent on higher production and prices.
Natural Gas Contribution
The North American regions continue to contribute the majority of our
natural gas revenues; however, they were down three percent to 86 percent.
Egypt's contribution to third-quarter revenues increased to 11 percent of
consolidated natural gas revenues on the strength of a 40 percent rise in
production. Canada's contribution increased to 28 percent on a 14 percent rise
in realized prices relative to other areas and a small increase in production.
Egypt's and Canada's gains were at the expense of the U.S. This shift occurred
because U.S. third-quarter 2004 natural gas revenues declined five percent on an
11 percent hurricane-induced decline in production, compared to the 2003
quarter, while Egypt's revenues surged 44 percent and Canada's improved 16
percent. Egypt's production gains were attributable to new discoveries which
enabled higher utilization rates at the Salam and Tarek gas plants.
Segment contributions to revenue for the nine-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 SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ---------------------------------------
INCREASE INCREASE
2004 2003 (DECREASE) 2004 2003 (DECREASE)
----------- ----------- ---------- ----------- ----------- ----------
Revenues (in thousands):
Natural gas...................... $ 541,489 $ 517,891 5% $ 1,618,852 $ 1,561,729 4%
Oil.............................. 843,572 575,201 47% 2,121,861 1,518,012 40%
Natural gas liquids.............. 29,067 16,923 72% 73,581 49,766 48%
----------- ----------- ----------- -----------
Total........................ $ 1,414,128 $ 1,110,015 27% $ 3,814,294 $ 3,129,507 22%
=========== =========== =========== ===========
Natural Gas Volume - Mcf per day:
United States.................... 640,467 717,988 (11%) 649,997 658,231 (1%)
Canada........................... 325,535 319,522 2% 322,390 315,307 2%
Egypt............................ 141,072 100,965 40% 135,709 112,534 21%
Australia........................ 121,088 114,248 6% 118,587 107,415 10%
North Sea........................ 2,043 3,321 (38%) 1,769 1,820 (3%)
China............................ - - - - - -
Argentina........................ 3,467 7,858 (56%) 3,985 7,466 (47%)
----------- ----------- ----------- -----------
Total........................ 1,233,672 1,263,902 (2%) 1,232,437 1,202,773 2%
=========== =========== =========== ===========
Average Natural Gas price - Per Mcf:
United States.................... $ 5.30 $ 5.00 6% $ 5.32 $ 5.40 (1%)
Canada........................... 5.10 4.47 14% 5.10 4.87 5%
Egypt............................ 4.45 4.31 3% 4.41 4.20 5%
Australia........................ 1.58 1.47 7% 1.64 1.39 18%
North Sea........................ 4.36 1.88 132% 4.57 1.95 134%
China............................ - - - - - -
Argentina........................ .78 .50 56% .62 .48 29%
Total........................ 4.77 4.45 7% 4.79 4.76 1%
Oil Volume - Barrels per day:
United States.................... 65,017 75,593 (14%) 67,110 68,535 (2%)
Canada........................... 24,743 25,790 (4%) 25,409 25,143 1%
Egypt............................ 52,602 48,788 8% 51,706 47,406 9%
Australia........................ 32,199 32,711 (2%) 26,041 31,949 (18%)
North Sea........................ 58,031 42,111 38% 49,866 25,320 97%
China............................ 7,948 3,131 154% 7,121 1,055 575%
Argentina........................ 532 574 (7%) 542 586 (8%)
----------- ----------- ----------- -----------
Total........................ 241,072 228,698 5% 227,795 199,994 14%
=========== =========== =========== ===========
Average Oil price - Per barrel:
United States.................... $ 41.45 $ 27.03 53% $ 36.90 $ 27.52 34%
Canada........................... 41.34 27.90 48% 36.72 29.23 26%
Egypt............................ 41.51 27.16 53% 35.81 27.30 31%
Australia........................ 46.72 29.04 61% 40.96 29.45 39%
North Sea........................ 25.18 26.58 (5%) 23.36 26.10 (10%)
China............................ 35.99 25.10 43% 32.77 25.10 31%
Argentina........................ 31.28 28.42 10% 33.28 29.14 14%
Total........................ 38.04 27.34 39% 34.00 27.80 22%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States.................. 8,934 8,241 8% 8,218 7,265 13%
Canada......................... 2,794 1,445 93% 2,665 1,582 68%
----------- ----------- ----------- -----------
Total........................ 11,728 9,686 21% 10,883 8,847 23%
=========== =========== =========== ===========
Average NGL Price - Per barrel:
United States.................. $ 27.56 $ 19.23 43% $ 25.25 $ 20.99 20%
Canada......................... 24.94 17.62 42% 22.90 18.85 21%
Total........................ 26.94 18.99 42% 24.67 20.60 20%
26
Natural Gas Revenues
The Company's third-quarter 2004 natural gas revenues were $24 million
higher than the third quarter of 2003. All of the improvement was related to
higher natural gas prices, which improved $.32 per Mcf over the prior-year
quarter. Consolidated natural gas production was down 30 MMcf/d, or two percent,
from the 2003 period. Production in the U.S. declined 78 MMcf/d, primarily
because of natural decline in mature fields particularly in the Gulf of Mexico,
Hurricane Ivan and downtime. Egypt's production was up 40 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
six MMcf/d with production from new wells offsetting natural decline in mature
fields. Australia saw a seven 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 eight percent of our third-quarter 2004 and third-quarter 2003
domestic natural gas production was subject to long-term, fixed-price physical
contracts. We also amortized small amounts of unrealized gains and losses from
derivative positions closed in October and November 2001 with negligible impact
on prices. The following table shows the impact on average prices for these
items:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(Per Mcf)
Fixed-price physical................ $ (.09) $ (.06) $ (.09) $ (.10)
Derivatives......................... (.18) .02 (.15) (.05)
Amortization........................ - (.01) - (.01)
Crude Oil Revenues
The Company added $268 million to 2004 third-quarter crude oil revenues on
a $10.70 per barrel improvement in realized crude oil price and a 12,374 b/d
rise in production. The higher realized price contributed almost 84 percent of
the additional revenues. The increase in production came from the North Sea,
China and Egypt. The North Sea's production is up 15,920 b/d, reflecting
additional production from new wells and operational enhancements since the
third 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 4,817 b/d.
Egypt's production is up 3,814 b/d on exploration and development activity.
Partially offsetting these production gains were a 10,576 b/d decline in the
U.S. and a 1,047 b/d decline in Canada. The U.S. decline is related to Hurricane
Ivan, downtime and natural decline in mature fields. Canada's lower production
is related to property sales and downtime.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(Per bbl)
Derivatives......................... $ (.07) $ (.79) $ (.21) $ (.92)
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, the expenses related to the 2000 Share Appreciation Plan and the
China litigation provision are disclosed separately.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 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...... $ 295 $ 275 $ 7.00 $ 6.65 $ 841 $ 728 $ 6.91 $ 6.51
Other assets............................ 18 18 .43 .44 54 52 .44 .46
Asset retirement obligation accretion...... 11 11 .26 .27 33 27 .27 .24
Lease operating costs (LOE)................ 205 195 4.86 4.71 608 515 4.99 4.61
Share appreciation plan - LOE.............. 1 - .02 - 12 - .10 -
Gathering and transportation costs......... 21 17 .51 .41 61 44 .50 .39
Severance and other taxes.................. 47 41 1.12 1.01 78 99 .64 .88
General and administrative expense (G&A)... 35 35 .83 .84 115 93 .95 .83
Share appreciation plan - G&A.............. 1 - .02 - 12 - .10 -
China litigation provision................. - - - - 71 - .59 -
Financing costs, net....................... 29 34 .68 .82 84 88 .69 .79
------ ------ ------ ------ ------ ------ ------ ------
Total................................. $ 663 $ 626 $15.73 $15.15 $1,969 $1,646 $16.18 $14.71
====== ====== ====== ====== ====== ====== ====== ======
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.
Third-quarter 2004 full-cost DD&A expense of $295 million is $20 million
higher than 2003, with approximately one-third ($7 million) of the increase
attributable to volume growth. The 2004 expense is mainly comprised of the U.S.,
$131 million; Canada, $49 million; Egypt, $36 million; the North Sea, $36
million; Australia, $32 million; and China, $10 million. Third-quarter 2003
full-cost DD&A expense of $275 million is mainly comprised of the U.S., $135
million; Egypt, $41 million; Canada, $39 million; Australia, $30 million; the
North Sea, $27 million; and China, $3 million.
On a boe basis, our third-quarter 2004 full-cost DD&A rate of $7.00 is
$.35 higher than the third-quarter 2003 rate. The rate increase is incremental
over sequential quarters and only increased $.12 from the second quarter of
2004. The U.S. added $.23 to the third quarter rate compared to the same period
last year on higher finding and future development costs. Canada added $.22 to
the rate on higher finding costs. China, which had higher finding and
development costs, added $.10 to the rate since initial production in the third
quarter of 2003. Australia added $.05 to the rate. Egypt reduced the worldwide
rate $.26, adding lower cost reserves, while the impact of the North Sea was
negligible.
Lease Operating Costs
Third-quarter 2004 lease operating costs were $10 million higher than the
third quarter of 2003 and increased $.15 per boe produced to $4.86 per boe.
While third-quarter costs in the U.S. were down $1 million, the region
added $.20 per boe to the consolidated rate. The increase in rate is associated
with the Gulf of Mexico and is related to natural decline and the impact of
Hurricane Ivan. Canada's costs were up $6 million on contract labor, lease
rentals and other miscellaneous costs associated with an increase in activity
and a higher well count. Canada added $.13 per boe to the consolidated rate.
Egypt reduced the consolidated rate $.06 per boe on a 16 percent rise in
production compared to a nine percent increase in associated cost. Approximately
two-thirds of Egypt's production growth is related to natural gas, which is less
expensive to produce. The North Sea reduced the worldwide consolidated rate $.11
per boe on a 37 percent increase in production compared to an eight percent
increase in costs. Lifting cost in the North Sea is mostly comprised of fixed
costs, which lowers the rate when spread over higher production levels.
28
Lease operating costs for the 2004 nine-month period were $93 million
higher than 2003, $72 million of which occurred in the first quarter of 2004.
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 $4.99 per
boe is $.38 higher than 2003, of which $.21 per boe is attributable to our U.S.
operations and was driven by properties acquired from BP and Shell, which carry
a higher rate per boe. Also, additional incentive compensation was recorded in
the first quarter of 2004. Australia added $.06 per boe to the consolidated rate
on flat costs and lower production. Canada added $.11 per boe for the reasons
discussed above and the weaker U.S.-to-Canadian dollar exchange rate.
Share Appreciation Plan - Lease Operating Costs
These costs represent the portion of the 2000 Share Appreciation Plan
expenses (see Note 6 of this Form 10-Q) 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 $21 million in the third quarter of 2004, up $4
million from the 2003 comparative quarter. For the 2004 nine-month period, these
costs totaled $61 million compared to $44 million in 2003. The table below
presents a comparison of these expenses.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
(In millions)
U.S.......................................... $ 7 $ 6 $ 22 $ 16
Canada....................................... 8 7 22 21
North Sea.................................... 6 4 16 7
China........................................ - - 1 -
------ ----- ------ ------
Total Gathering and Transportation........... $ 21 $ 17 $ 61 $ 44
====== ===== ====== ======
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), Australian excise taxes, 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.
29
Third-quarter 2004 severance and other taxes totaled $47 million, $6
million more than the 2003 period. Year-to-date 2004 severance and other taxes
totaled $78 million, $21 million, less than 2003. A detail of these taxes
follows:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
(In millions)
Severance taxes.............................. $ 47 $ 18 $ 93 $ 58
U.K. PRT..................................... (5) 17 (35) 23
Canadian taxes............................... 5 6 15 14
Other........................................ - - 5 4
----- ------ ----- ------
Total Severance and Other Taxes.............. $ 47 $ 41 $ 78 $ 99
===== ====== ===== ======
Virtually all of the increase in severance taxes is related to the
Australian excise taxes previously mentioned in addition to the higher prices in
2004 compared to 2003. The U.K.'s PRT tax benefits reflect the impact from
higher capital spending, compared to the prior year periods.
General and Administrative Expense
Third-quarter G&A costs of $35 million were flat to the comparable 2003
quarter, while costs for the nine-month period were $22 million above the 2003
period. Approximately $13 million of the additional expense incurred in the 2004
nine-month period is related to the impact on compensation programs of the
rising price of Apache's common stock, and 2004 incentive compensation expense,
as noted in our Forms 10-Q for the quarters ended March 31 and June 30, 2004.
The impact from the higher stock price stems from Apache's decision, effective
January 1, 2003, to expense stock-based compensation plans. The balance of the
increase is related to the Company's decision to increase charitable
contributions, expansion to support its gas marketing activities and its North
Sea operations.
Share Appreciation Plan - General and Administrative
These costs represent the portion of the 2000 Share Appreciation Plan
expenses (see Note 6 of this Form 10-Q) attributed to personnel involved in
general corporate activities.
China Litigation Provision
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. (see
Note 11 of this Form 10-Q).
Provision for Income Taxes
Third-quarter 2004 income tax expense was $110 million more than the 2003
quarter, reflecting the impact from higher oil and gas production revenues.
While our effective tax rate was flat quarter-to-quarter, both the 2004 and 2003
tax rates were impacted by additional deferred tax expense recognized on
Canadian operations related to the weakening of the U.S. dollar relative to the
Canadian dollar. For the nine-month period, 2004 income tax expense was $36
million more than the 2003 period for the reasons previously discussed.
30
OIL AND GAS CAPITAL EXPENDITURES
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
----------- -----------
(In thousands)
Exploration and development:
United States........................................... $ 602,526 $ 318,490
Canada.................................................. 495,192 419,636
Egypt................................................... 219,333 188,098
Australia............................................... 97,445 87,544
North Sea............................................... 220,644 23,189
China................................................... 12,774 24,108
Other International..................................... 1,098 3,890
----------- -----------
$ 1,649,012 $ 1,064,955
=========== ===========
Capitalized Interest........................................ $ 38,951 $ 38,072
=========== ===========
Gas gathering, transmission and processing facilities....... $ 59,563 $ 14,439
=========== ===========
Acquisitions:
Oil and gas properties.................................. $ 490,832 $ 1,501,312
Gas gathering, transmission and processing facilities... - 5,484
----------- -----------
$ 490,832 $ 1,506,796
=========== ===========
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 nine months
of 2004 totaled $2.3 billion, an increase of 12 percent from $2.1 billion in the
first nine months 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 $106 million in cash and cash equivalents on hand on
September 30, 2004, up from $34 million on December 31, 2003. Apache's ratio of
current assets to current liabilities on September 30, 2004 was 1.39 compared to
1.10 on December 31, 2003.
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 September 30, 2004, Apache's
available borrowing capacity under its global credit facilities was $957
million.
31
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 properties acquired from BP, Shell, ExxonMobil and
Anadarko, 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 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 average number of days past
due is comparable to year-end 2003 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 September 30, 2004 does not differ
materially from the disclosure in our 2003 Form 10-K, except as noted below.
The Company considers its interest rate risk exposure to be minimal as a
result of fixing interest rates on approximately 80 percent of the Company's
debt. At September 30, 2004, total debt included $543 million of floating-rate
debt. As a result, Apache's annual interest costs in 2004 will fluctuate based
on short-term interest rates on approximately 20 percent of its total debt
outstanding at September 30, 2004. The impact on cash flow of a 10 percent
change in the floating interest rate would be approximately $260,000 per
quarter.
32
On September 30, 2004, the Company had open natural gas derivative
positions with a fair value of $(72.8) million. A 10 percent increase in natural
gas prices would change the fair value by $(40.8) million. A 10 percent decrease
in prices would change the fair value by $39.8 million. The Company also had
open oil derivative positions with a fair value of $(35.1) million on September
30, 2004. A 10 percent increase in crude oil prices would change the fair value
by $(32.9) million. A 10 percent decrease in prices would change the fair value
by $30.4 million. See Note 2 of this Form 10-Q 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 September 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. Effective July 1, 2004,
the Company converted the accounting function for North Sea operations acquired
in 2003 from an outsourced arrangement to in-house. No significant changes were
made to internal controls over financial reporting during the quarter ending
September 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) is
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 September 30, 2004:
Item 5 - Other Events - dated July 1, 2004, filed July 2, 2004
An international arbitrator hearing the claims made by Texaco
China, B.V., against Apache's subsidiaries Apache China
Corporation LDC and Apache Bohai Corporation LDC, involving a
1998 farmout in Bohai Bay, People's Republic of China, issued an
award against Apache China and Apache Bohai and in favor of
Texaco China in the amount of $71 million, which includes
interest. 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.
(See Note 11 of this Form 10-Q for updated information on this
matter.)
34
Item 5 - Other Events - dated August 20, 2004, filed August 20,
2004
On August 20, 2004, Apache announced that it signed a definitive
agreement to acquire all of Anadarko Petroleum Corporation's
properties located on the Outer Continental Shelf of the Gulf of
Mexico for $537 million, effective as of October 1, 2004. The
acquisition includes 78 fields on 241 offshore blocks
(approximately 693,000 net acres), including 93 undeveloped
blocks and 112 platforms. Apache will operate 53 of the fields
with 80 percent of the production and 85 percent of the net
reserves. Apache will book proved reserves of approximately 61
million barrels of oil equivalent (MMboe) of which 51 percent is
natural gas.
Prior to the Apache transaction, Morgan Stanley Capital Group
Inc. agreed to pay Anadarko $775 million to acquire an
overriding royalty interest in 24 MMboe of lower-risk reserves
estimated to be produced over the next four years. Apache will
record a $99 million liability to reflect the future cost of
producing and delivering the reserves to Morgan Stanley but will
not book these reserves. Apache will book the remaining reserves
at a lower cost per barrel equivalent and retains all of the
potential upside from future exploration and development
activities. Apache's share of the acquired production is
estimated to average 50 million cubic feet of natural gas and
3,000 barrels of liquid hydrocarbons per day in the fourth
quarter 2004.
(See Note 1 of this Form 10-Q for updated information on this
matter.)
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: November 8, 2004 /s/ ROGER B. PLANK
---------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer
Dated: November 8, 2004 /s/ THOMAS L. MITCHELL
---------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibits
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.