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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE THREE MONTHS ENDED MARCH 31, 2003
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 0-8933
APCO ARGENTINA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS
(STATE OR OTHER JURISDICTION OF EIN 98-0199453
INCORPORATION OR ORGANIZATION)
ONE WILLIAMS CENTER, 26TH FLOOR
TULSA, OKLAHOMA 74172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (918) 573-2164
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 [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT APRIL 30, 2003
ORDINARY SHARES, $.01 PAR VALUE 7,360,311 SHARES
APCO ARGENTINA INC. AND SUBSIDIARY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Operations - Three
Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE 17
DISCLOSURE ABOUT MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K 19
Portions of this document may constitute forward-looking statements as defined
by federal law. Although Apco Argentina Inc. believes any such statements are
based on reasonable assumptions; there is no assurance that actual outcomes will
not be materially different. Additional information about issues that could lead
to material changes in performance is contained in the section Apco Argentina
Inc.'s annual report on Form 10-K.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share and Per Share Amounts) March 31, December 31,
2003 2002
-------- --------
ASSETS (Unaudited)
- ------
Current Assets:
Cash and cash equivalents $ 16,418 $ 15,065
Accounts receivable 2,791 2,223
Inventory 342 310
Other current assets 133 144
-------- --------
Total Current Assets 19,684 17,742
-------- --------
Property and Equipment:
Cost, successful efforts method of accounting 62,233 61,613
Accumulated depreciation, depletion and amortization (32,506) (31,494)
-------- --------
29,727 30,119
-------- --------
Argentine investments, equity method 39,321 36,809
Other assets 973 1,052
-------- --------
$ 89,705 $ 85,722
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 1,123 $ 917
Affiliate payable 154 220
Accrued liabilities 928 710
Argentine taxes payable 4,407 3,116
Dividends payable 1,196 1,196
-------- --------
Total Current Liabilities 7,808 6,159
-------- --------
Long-term liabilities 833 581
Deferred Argentine income taxes 311 269
Stockholders' Equity:
Ordinary shares, par value $.01 per share;
15,000,000 shares authorized;
7,360,311 shares outstanding 74 74
Additional paid-in capital 9,326 9,326
Accumulated other comprehensive income (235) --
Retained earnings 71,588 69,313
-------- --------
Total Stockholders' Equity 80,753 78,713
-------- --------
$ 89,705 $ 85,722
======== ========
The accompanying notes are an integral part of these consolidated statements.
3
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in Thousands Except Per Share) Three Months Ended
March 31,
-------------------
2003 2002*
------- -------
REVENUES:
Operating revenue $ 6,632 $ 4,551
Equity income (loss) from Argentine investments 2,333 (282)
Financial and other revenues 24 51
------- -------
8,989 4,320
------- -------
COSTS AND EXPENSES:
Operating expense 1,072 683
Provincial production taxes 612 427
Transportation and storage 95 89
Selling and administrative 615 310
Depreciation, depletion and amortization 1,002 973
Argentine taxes other than income 645 82
Foreign exchange losses 331 1,100
Other expense, net 50 201
------- -------
4,422 3,865
------- -------
Income (loss) before Argentine income taxes and cumulative effect 4,567 455
of change in accounting principle
Argentine income taxes 1,096 772
------- -------
Income (loss) before cumulative effect of change in accounting principle 3,471 (317)
Cumulative effect of change in accounting principle, net of Argentine
income taxes of $583 -- 2,378
------- -------
NET INCOME $ 3,471 $ 2,061
======= =======
* Restated to reflect the cumulative effect described in Note 7.
The accompanying notes are an integral part of these consolidated statements.
4
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONT.)
(UNAUDITED)
(Amounts in Thousands Except Per Share) Three Months Ended
March 31,
-----------------------
2003 2002
--------- ---------
NET INCOME $ 3,471 $ 2,061
========= =========
Earnings per ordinary share - basic and diluted
income (loss) before cumulative effect of
change in accounting principle $ 0.47 $ (0.04)
Cumulative effect of change in
accounting principle
-- .32
--------- ---------
NET INCOME $ 0.47 $ 0.26
========= =========
Average ordinary shares outstanding -
basic and diluted 7,360 7,360
========= =========
The accompanying notes are an integral part of these consolidated statements.
5
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in Thousands, Except Per Share) Three Months Ended
March 31
----------------------
CASH FLOW FROM OPERATING ACTIVITIES: 2003 2002
-------- --------
Net income $ 3,471 $ 2,061
Adjustments to reconcile to net cash
provided (used) by operating activities:
Equity (income) loss from Argentine investment (2,333) 282
Dividends from investments 1,632 --
Deferred income tax 7 (980)
Cumulative effect of change in accounting principle -- (2,378)
Depreciation, depletion and amortization 1,002 973
Changes in accounts receivable (568) (739)
Changes in inventory (32) 263
Changes in other current assets 11 26
Changes in accounts payable 206 (1,520)
Changes in affiliate payable (66) --
Changes in accrued liabilities 1,509 661
Changes in other assets, other liabilities and other 140 1,212
-------- --------
Net cash provided (used) by operating activities 4,979 (139)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (619) (186)
Purchase of investments (1,811) --
-------- --------
Net cash used in investing activities (2,430) (186)
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid ($0.1625/share) (1,196) (1,196)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,353 (1,521)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 15,065 16,048
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 16,418 $ 14,527
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for Argentine income taxes $ 240 $ --
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The unaudited, consolidated financial statements of Apco Argentina Inc.
and subsidiary (the "Company"), included herein, do not include all
footnote disclosures normally included in annual financial statements and,
therefore, should be read in conjunction with the financial statements and
notes thereto included in the Company's 2002 Form 10-K.
In the opinion of the Company, all adjustments have been made to present
fairly the results of the three months ended March 31, 2003 and 2002. The
results for the periods presented are not necessarily indicative of the
results for the respective complete years.
(2) REVENUE RECOGNITION
The Company recognizes revenues from sales of oil, gas, and plant products
at the time the product is delivered to the purchaser and title has
passed. Any product produced that has not been delivered is reported as
inventory and is valued at the lower of cost or market. When cost is
calculated, it includes total per unit operating cost and depreciation.
Transportation and storage costs are recorded as expenses when incurred.
The Company has had no contract imbalances relating to either oil or gas
production.
(3) PROPERTY AND EQUIPMENT
The Company uses the successful-efforts method of accounting for oil and
gas exploration and production operations, whereby costs of acquiring
non-producing acreage and costs of drilling successful exploration wells
and development costs are capitalized. Costs of unsuccessful drilling are
expensed as incurred. Oil and gas properties are depreciated over their
productive lives using the units of production method based on proved
producing reserves. Non oil and gas property is recorded at cost and is
depreciated on a straight-line basis, using estimated useful lives of 3 to
15 years.
The Company reviews its proved properties for impairment on a concession
by concession basis and recognizes an impairment whenever events or
circumstances, such as declining oil and gas prices, indicate that a
property's carrying value may not be recoverable. If impairment is
indicated, then a provision is recognized to the extent that the carrying
value exceeds the present value of the estimated future net revenues
("fair value"). In estimating future net revenues, the Company assumes
costs will escalate annually and applies an oil and gas price forecast
that it believes to be reasonable after reviewing long-term forecasts of
professional energy consultants. Due to the volatility of oil and gas
prices, it is possible that the Company's assumptions regarding oil and
gas prices may change in the future. For the three-month periods ended
March 31, 2003 and 2002, the Company did not record any impairment expense
as the estimated future undiscounted net revenues exceeded the carrying
value of its properties.
(4) FOREIGN EXCHANGE
The policy followed in the translation of the Company's financial
statements of foreign operations into United States dollars is in
accordance with Statement of Financial
7
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounting Standards No. 52, Foreign Currency Translation, using the
United States dollar as the functional currency. Accordingly, translation
gain and losses that arise from exchange rate fluctuations applicable to
transactions denominated in a currency other than the United States dollar
are included in results of operations as incurred.
(5) INCOME TAXES
As described in Note 8 of Notes to Consolidated Financial Statements
included in the Company's 2002 Form 10-K, the Company believes its
earnings are not subject to U.S. income taxes, nor Cayman Islands income
or corporation taxes. Income derived by the Company from its Argentine
operations is subject to Argentine income tax at a rate of thirty five
percent and is included in the Consolidated Statements of Operations as
Argentine income taxes.
The effective income tax rate reflected in the Consolidated Statement of
Operations differs from Argentina's statutory rate of 35% because the
Company incurs income taxes only in Argentina, the country where all of
its income generating activities are located. As a result, differences
between the Company's consolidated effective rate and the statutory rate
of 35% are caused primarily by income and expense generated and incurred
outside of Argentina that do not affect the amount of income taxes paid by
the Company. Such items include interest income resulting from the
Company's cash and cash equivalents deposited in its Cayman Island banks,
general and administrative expenses incurred by the Company in its
headquarters office in Tulsa, Oklahoma, equity income from the Company's
investment in Petrolera that is recorded by the Company on an after tax
basis, and foreign exchange losses resulting from the devaluation of the
peso which losses are not deductible Argentina.
Provision is made for deferred Argentine income taxes applicable to
temporary differences between the financial statement and tax basis of the
assets and liabilities, if any.
(6) INVESTMENT IN PETROLERA PEREZ COMPANC S. A.
The Company uses the equity method to account for its investment in
Petrolera Perez Companc S. A., a non-public Argentine corporation. In
January 2003, the Company acquired an additional 1.58 percent of Petrolera
for $ 1.8 million and increased it's ownership to 40.8 percent.
Under the equity method of accounting, the Company's share of Petrolera's
net income (loss) is reflected as an increase (decrease) in its investment
in Petrolera and is also recorded as equity income (loss) from Argentine
investments. Dividends from Petrolera are recorded as a reduction of the
investment.
(7) IMPLEMENTATION OF SFAS 143
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
is required to be adopted by companies for financial statements issued for
fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company elected to adopt SFAS 143 in connection with the
preparation of its June 30, 2002 financial statements. The adoption was
retroactive to January 1, 2002. Accordingly, the financial statements
presented herein for the three months ended March 31, 2002 have been
restated to reflect the effect of adoption.
As part of the adoption of SFAS 143, an engineering analysis was obtained
which projects that through 2016, the last year of the Entre Lomas
concession's term, the joint venture partners would be required to plug
and abandon 98 wells at an average estimated cost of $24,500 per well.
After considering inflation and present value factors, the estimated asset
retirement obligation as of January 1, 2002 for the Company's 23% direct
interest totaled $433 thousand ($441 thousand on March 31, 2002 and $475
thousand on March 31, 2003). The equity share of the estimated asset
retirement obligation as of January 1, 2002, imbedded in the Company's
investment in Petrolera totaled $464 thousand ($472 thousand on March 31,
2002 and $551 thousand at March 31, 2003).
The above described asset retirement obligation is based on estimates of
the number of wells expected to be abandoned in 2016, the last year of the
Entre Lomas concession's term, and an estimated cost to plug and abandon a
well as discussed with field service
8
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
companies that would be expected to perform such services. Both estimates
were provided by Petrolera's engineers and are considered to be the best
estimates that can be derived today based on present information. Such
estimates are, however, subject to significant change as time passes.
Given the uncertainty inherent in the process of estimating future oil and
gas reserves and future oil and gas production streams, the estimate of
the number of future wells to be plugged and abandoned could change as new
information is obtained. Also, given the current economic situation in
Argentina and uncertainties associated with future levels of inflation in
the country and devaluation of the peso, any future estimate of the cost
to plug and abandon a well is subject to a wide range of outcomes as the
estimate is updated as time passes. The total asset retirement obligation
included in the Company's Balance Sheets will also be subject to change as
SFAS 143 requires the Company to take into consideration future estimates
of inflation and present value factors based on the Company's credit
standing. Given the current economic situation in Argentina, future
inflation rates and interest rates, upon which present value factors are
based, as recent history demonstrates, may be subject to large variations
over short periods of time.
As the amount accrued by the Company prior to adoption of SFAS 143 was in
excess of the amount required under the provision of SFAS 143,
implementation of the standard resulted in a credit adjustment to income
of $2.4 million, which was classified as a cumulative effect of change in
accounting principle and is reflected as such in the consolidated
statement of operations for 2002.
(8) COMPREHENSIVE INCOME
Comprehensive income is as follows:
Three months ended
March 31,
--------------------
(Amounts in thousands) 2003 2002
------ ------
Net income $3,471 $2,061
Other comprehensive loss:
Minimum pension liability adjustment (361) --
------ ------
Other comprehensive loss before Argentine
income taxes (361) --
Income tax benefit on other comprehensive loss 126 --
------ ------
Other comprehensive loss (235) --
------ ------
Comprehensive income $3,236 $2,061
====== ======
9
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(9) SUMMARIZED INCOME STATEMENT INFORMATION FOR PETROLERA
The Company accounts for its investment in Petrolera using the equity
method of accounting. Summarized unaudited income statement information
for Petrolera for the three month periods ended March 31, 2003 and 2002
are as follows:
March 31,
------------------------
2003 2002
-------- --------
(In U.S. $000's, Argentine GAAP)
Revenues $ 20,417 $ 12,983
-------- --------
Operating expenses 3,477 2,250
Provincial production tax 1,917 1,327
Transportation and selling 447 308
Depreciation 2,493 2,826
Other (income) expense - net (70) 588
Argentine taxes 5,089 3,373
Foreign exchange losses 1,259 3,870
-------- --------
Total expenses 14,612 14,542
-------- --------
Net income (loss) $ 5,805 $ (1,559)
======== ========
Reconciliation of net income (loss) to U.S. GAAP:
Apco share of net income under Argentine
GAAP $ 2,361 $ (525)
Differences in depreciation (99) (109)
Retirement obligation adjustments -- (10)
Deferred income tax effects 71 19
Amortization of basis difference -- 27
Foreign exchange loss effects -- 316
-------- --------
Apco equity income (loss) under U.S. GAAP $ 2,333 $ (282)
======== ========
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 11 for a description of the impact recent
economic events have had on Petrolera. Because Petrolera's sole business is its
interest and operatorship of the Entre Lomas concession the description of how
these events impact the Company serves to explain the impact on Petrolera.
During the first quarter 2003, Petrolera began recording retirement obligation
adjustments. Accordingly, retirement obligation adjustments are no longer a
reconciling item.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion explains the significant factors that have
affected the Company's financial condition and results of operations
during the periods covered by this report.
FINANCIAL CONDITION
Internally generated cash flow from the Company's interests in the Entre
Lomas joint venture is the Company's primary source of liquidity. In the
past, both during calm periods and turbulent periods in Argentina's
economy, the Entre Lomas operation has had the ability to finance the
Company's development and exploration expenditures with internally
generated cash flow and generate excess cash flow for the Company. The
past fifteen months certainly classifies as a turbulent period for
Argentina's economy. The year 2002 tested both the profitability and cash
generating ability of the Company's Argentine operations. It bears
repeating here that, in spite of Argentina's economic crisis, in 2002, the
Company generated net cash provided by operating activities of $14 million
that included dividends received from its investment in Petrolera Perez
Companc S.A. ("Petrolera") totaling $6.4 million.
During the three months ended March 31, 2003, the Company generated net
cash provided by operating activities of $5 million that included
dividends received from Petrolera of $1.6 million.
Reference is made to the section "Argentine Economic and Political
Environment" for a description of Argentina's economic crisis. However,
since the third quarter of 2002, although Argentina has made little
progress toward solving the root causes of its economic problems, its
economy, by two of the most visible measures, seems to be emitting signs
of stabilization. Since September 30, 2002, when the peso to US dollar
exchange rate was 3.74:1, the Argentine peso has regained value vis-a-vis
the US dollar and by March 31, 2003 the exchange rate was 2.98:1. In
addition, inflation, which surged after Argentina abandoned the
convertibility plan at the start of 2002, has slowed to an annual rate of
10 percent in the first quarter of 2003.
The improvement in these two measures is not evidence that Argentina has
solved its economic troubles, but rather, they may be signs, in particular
with respect to the value of the peso, that possibly currency markets over
reacted by driving the value of the peso down by almost 75 percent during
the first nine months of 2002. Progress still needs to be made in three
important areas of the economy. Argentina's sovereign debt remains in
default with only modest progress having been made in negotiations between
the government and the International Monetary Fund. The country's economy
is barely coming out of its four year long recession, and unemployment is
still at historic proportions.
Nevertheless, the operating environment in which the Company operates
improved as 2002 came to a close and during the first three months of
2003.
11
OIL PRICES
World oil prices gradually improved throughout 2002, increasing quite
sharply during the fourth quarter of 2002 and the first three months of
2003, primarily the result of a national oil strike in Venezuela, civil
unrest in Nigeria, and the threat of war in Iraq that resulted in oil
price speculation. In spite of a specific price limitation imposed by the
Argentine government during the first quarter of 2003 that is described in
the following paragraph, world oil market conditions resulted in much
improved oil sales prices for the Company during the period.
As reflected in the table of sales prices and production costs on page 16,
the average per barrel crude oil sales price for the current quarter
averaged $30.75 as compared with $17.52 for oil sold during the comparable
quarter in 2002.
In January 2003, due to the rapid increase in world oil prices and the
Argentine government's desire to maintain stability in domestic fuel
prices, the Argentine government requested that crude oil producers and
refiners agree to cap amounts payable for domestic oil sales contracts at
a price of $28.50 per barrel. In addition, producers and refiners also
agreed that the difference between the actual price of West Texas
Intermediate ("WTI"), the reference price used to determine the Company's
oil sales prices, and the $28.50 temporary cap would be payable at such
time as WTI fell below $28.50. The debt payable by domestic refiners to
producers accrues interest at an annual rate of 7 percent. This agreement
that was originally scheduled to expire on March 31, 2003, was recently
extended through May 31, 2003. During the first quarter of 2003, the
Company's cumulative sales resulting from actual prices exceeding the
price cap totaled $560 thousand.
The Company continues to export a significant amount of its crude oil to
Brazil. During the quarter, export sales as a percentage of overall oil
sales totaled 41 percent. Exports are not affected by the $28.50 price
cap, however, they are subject to the 16.67 percent tax on oil exports
implemented by the Argentine government on April 1, 2002. During the
current quarter, the Company paid $525 thousand of export taxes.
NATURAL GAS PRICES
The Company's gas is sold to Argentine customers pursuant to peso
denominated contracts with occasional spot market sales. As a result of
economic Emergency Law 25,561 enacted by the Argentine government in
January of 2002, the Company's natural gas prices have decreased
significantly since the end of 2001 due to the pesofication of contracts
required by that law. In addition, since gas contracts were converted to
pesos, the Argentine government has not permitted natural gas prices at
the wellhead to increase.
As reflected in the table of sales prices and production costs on page 16,
the Company's average natural gas sales price per thousand cubic foot
("mcf") for the current quarter averaged $.36 as compared with $.54 for
natural gas sold during the comparable quarter in 2002.
The price of natural gas in Argentina may improve over time as drilling
for gas in Argentina declines in response to these unfavorable prices and
the supply of gas in the country begins to decline. Indeed, the Company,
as have many other natural gas
12
producers in Argentina, has suspended gas development activities until
market conditions improve.
CAPITAL PROGRAM UNDERWAY
The Company's capital program for 2003 will continue development efforts
in all producing fields in the Entre Lomas concession. This year's Entre
Lomas investment program provides for the drilling of 10 wells, or 6 less
than were drilled in 2002, partly to provide the cash needed for the
Company to fund a substantial Argentine income tax payment of $3.5 million
that was paid on May 7, 2003. So far during the first quarter, the Company
has participated in the drilling of 4 wells in the Entre Lomas concession,
of which 1 was put on production by the end of the quarter, and the other
3 are in various stages of drilling and completion. All wells are expected
to be productive. As described previously, gas development efforts in
Entre Lomas have been suspended until the gas price environment in
Argentina improves.
No gas development expenditures are scheduled in 2003 in the Acambuco
concession. However, as a result of the successful reactivation in 2002 of
oil production from the Tupambi formation in the old San Pedro oil field,
the Acambuco partners plan to workover 5 more wells in this field and
drill a well targeting the Tupambi formation in the Macueta structure in
the northern part of the concession.
For the three months ended March 31, 2003, the Company's capital
investments totaled $2.4 million that includes $1.8 million for the
Company's purchase of Fimaipu S.A. described in the following paragraphs.
GROWTH OPPORTUNITIES
In the previous 15 months, the Company deployed cash resources to purchase
additional interests in the Entre Lomas concession. In October 2002, the
Company paid $6.9 million to acquire an additional 5.54 percent of the
outstanding shares of Petrolera, the operator of the Entre Lomas
concession and owner of a 73.15 percent interest in the Entre Lomas joint
venture. Subsequently, in January 2003, the Company purchased all
outstanding shares of Fimaipu S.A. for $1.8 million. Fimaipu is a private
Argentine holding Company whose sole asset is ownership of 1.58 percent of
the outstanding shares of Petrolera. These two purchases increased the
Company's combined direct and indirect interests in the Entre Lomas joint
venture to 52.85 percent.
Also in January, 2003, the Company purchased an additional 36.82 percent
interest in the Canadon Ramirez concession for a consideration of $155
thousand. The purchase increased the Company's interest in the property to
81.82 percent.
After increasing the Company's interest in its core asset during 2002,
management continues to search for additional growth opportunities in
2003.
CAPRICORN PERMIT
In April 2003, the Company entered into a farm-in agreement with
Netherfield Corporation ("Netherfield"), a wholly owned subsidiary of
Antrim Energy Inc., a Canadian company with offices in Calgary, Alberta.
The agreement entitles the Company to earn a 50 percent interest in an
exploration permit granted over the Yacimiento Norte 1/B
13
Block, commonly known as the Capricorn block. Capricorn block has a
surface area of 8,182.87 square kilometers, or approximately 2.1 million
acres located in the province of Salta in northern Argentina. The farm in
requires the Company to acquire 40 square kilometers of three dimensional
seismic near a recent oil discovery in an adjacent concession. This
seismic is estimated to cost approximately $800 thousand, and will fulfill
Netherfield's work commitment for the first exploration period pursuant to
the terms of an exploration permit granted to it. At this time Netherfield
holds a 100 percent interest in the exploration permit that was granted in
2001. The permit is subject to publication in Argentina's official
Gazette.
The seismic program over Capricorn Permit is expected to commence in May
2003. Seismic processing is estimated to be complete by July 2003.
Thereafter the parties will evaluate the attractiveness of drilling
prospects in the area over which the seismic was acquired and decide what
other actions are appropriate to fully evaluate the exploration potential
of the block.
Capricorn acreage completely surrounds the Puesto Guardian concession that
currently produces 900 barrels per day of oil. The El Vinalar concession,
that is immediately to the east of Puesto Guardian and which is also oil
productive, is bounded on three sides by Capricorn. Prospective reservoirs
in Capricorn lie at depths below 3,000 meters, or 10,000 feet.
PRESIDENTIAL ELECTIONS
As Argentina's economy worsened throughout 2001, then President De La
Rua's administration tried to implement highly unpopular economic policies
in a country where unemployment had reached 20 percent. Due to a lack of
both political and public support, President De La Rua was forced to
resign in December 2001. Thereafter, three Presidents were appointed to
office by Argentina's congress but quickly resigned in reaction to public
outcry. Finally, Eduardo Duhalde was appointed President with a plan to
hold office until the next regularly scheduled Presidential elections in
2003. Throughout President Duhalde's tenure, his administration has been
unable to make progress toward resolving Argentina's debt default crisis.
However, in January 2003, the IMF approved a rescheduling of approximately
$7 billion of debts maturing before August 2003 in order to provide the
country with a stabilizing effect at least through the Presidential
elections that were held on April 27, 2003.
The Presidential elections were held as scheduled and of the several
candidates that ran for office, the two receiving the highest percentage
vote were Carlos Menem and Nestor Kirchner. They will move to a runoff
election to be held in May. Carlos Menem previously served as President of
Argentina from 1989 though 1999 and was responsible for the free market
reforms that were implemented in Argentina in the early 1990's, including
the convertibility plan under which the peso was tied to the dollar at an
exchange rate of 1 peso to 1 US dollar, and the privatization of the
country's oil and gas industry. Nestor Kirchner is the candidate supported
by current President Duhalde. He has been governor of the province of
Santa Cruz since 1991. As of this time, neither candidate is expected to
make changes that will alter significantly Argentina's oil and gas
industry and the environment in which the Company currently operates.
14
RESULTS OF OPERATIONS
During the three months ended March 31, 2003, the Company generated net
income of $3.5 million compared with $2.1 million for the comparable
period in 2002. Net income for the three months ended March 31, 2002
included the cumulative effect of implementing SFAS No. 143 that resulted
in increasing 2002 net income by $2.4 million. Before the cumulative
effect of implementing SFAS 143, for the three months ended March 31, 2002
the Company generated a net loss of $317 thousand.
The following variance explanations will focus on net income for the three
months in 2003 compared with the net loss for the three months in 2002
before the effect of implementing SFAS 143.
Operating revenues increased by $2.1 million, or 45 percent. Higher oil
revenues constituted almost the entire increase as strong oil prices
prevailed throughout the entire quarter. The Company's per barrel oil
sales price during the quarter averaged $30.75, compared with $17.52 in
2002.
Foreign exchange losses decreased by $769 thousand as a result of a
stabilized Argentine peso during the period compared with the significant
devaluation that occurred in the first quarter of 2002.
The improvements in operating revenues and foreign exchange losses were
partially offset by the following negative variances.
Operating expense increased by $389 thousand due to higher workover costs
and other oilfield services, and compensation adjustments given to
employees of Petrolera in the second half of 2002 and in the first quarter
of 2003 in response to levels of inflation in the prior year. During the
first quarter 2002, the peso cost of salaries, wages and oilfield services
in Argentina remained unchanged due to the high level of uncertainty in
Argentina's overall business environment that resulted from the onset of
the economic crisis. As 2002 progressed, the cost of these items increased
in response to inflation and tariff adjustments were granted to oil field
service companies for work performed during the first quarter of 2002.
Selling and administrative expenses increased by $305 thousand due to
increased engineering consulting fees, higher audit expenses, greater
costs of other services associated with increased regulatory compliance
and related governance issues, and expenses related with the Company's
pursuit of growth opportunities.
The increase of $563 thousand in Argentine taxes other than income is
entirely due to the 16.67 percent oil export tax paid by the Company
during the quarter. This tax, which was new in 2002, did not take effect
until the second quarter of last year.
Provincial production taxes and Argentine income taxes increased by $185
thousand and $324 thousand. These increases are directly associated with
the increases in operating revenues and income before income taxes,
respectively.
Equity income (loss) from Argentina investments increased by $2.5 million.
Since equity income is comprised solely of the Company's share of
Petrolera's earnings, the variance explanations in the preceding
paragraphs also serve to explain this increase. Petrolera's
15
sole business is its interest and operatorship of the Entre Lomas
concession and as a result its revenues and expenses are essentially
derived from the same operations as the Company's.
The following table illustrates total sales of crude oil, condensate,
natural gas and gas liquids and average sale prices and production costs
for the three months ended March 31, for the years indicated.
2003 2002
--------- ---------
Volumes consolidated interests
Crude oil and condensate (bbls) 196,511 220,563
Gas (mcf) 518,661 720,999
LPG (tons) 1,523 1,111
Volumes equity interest in Petrolera
Crude oil and condensate (bbls) 249,740 234,410
Gas (mcf) 497,504 661,718
LPG (tons) 1,970 1,190
Total Volumes
Crude oil and condensate (bbls) 446,251 454,973
Gas (mcf) 1,016,164 1,382,717
LPG (tons) 3,493 2,301
Average Sales Prices (us U.S. dollars)
Oil (per bbl) $ 30.75 $ 17.52
Gas (per mcf) .36 .54
LPG (per ton) 261.13 84.75
Average Production Costs (us U.S. dollars)
Oil (per bbl) $ 9.30 $ 7.53
Gas (per mcf) .31 .18
LPG (per ton) 20.84 21.52
Volumes presented in the above table represent those sold to customers and
have not been reduced by the 12 percent provincial production tax that is
paid separately and is accounted for as an expense by the Company. In
calculating provincial production tax payments, Argentine producers are
entitled to deduct gathering, storage, treating and compression costs.
Average production cost is calculated by taking into consideration all
costs of production including the costs of well workovers and depreciation
of property and equipment. The per unit cost of depreciation included in
average oil and gas production costs are for the year 2003, $4.29 per
barrel and $.22 per mcf, and for 2002, $4.37 per barrel and $.15 per mcf.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's operations are exposed to market risks as a result of
changes in commodity prices and foreign currency exchange rates.
COMMODITY PRICE RISK
The Company produces and sells crude oil and natural gas. As a result, the
Company's financial results can be significantly impacted by fluctuations
in commodity prices due to changing market forces. The Company has
historically not entered into price hedging contracts and no such
contracts are currently in place. However, with the view to reducing
commodity price risk inherent in the exploration and production business,
the Company has adopted a hedging policy that management can use at
appropriate times as a tool with which to mitigate volatility of crude oil
prices. Argentina's current economic crisis complicates considerably the
process of hedging prices when a Company's operations are located in
Argentina.
FOREIGN CURRENCY AND OPERATIONS RISK
The Company's operations are located in Argentina. Therefore, the
Company's financial results may be affected by factors such as risks
associated with changes in foreign currency exchange rates, weak economic
conditions, or changes in Argentina's political climate.
ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT
During the decade of the 1990's Argentina's government pursued free market
policies, including the privatization of state owned companies,
deregulation of the oil and gas industry, tax reforms to equalize tax
rates for domestic and foreign investors, liberalization of import and
export laws and the lifting of exchange controls. The cornerstone of these
reforms was the 1991 convertibility law that established an exchange rate
of one Argentine peso to one US dollar. These policies were successful as
evidenced by the elimination of inflation and substantial economic growth
during the early to mid 1990's. However, throughout the decade, the
Argentine government failed to balance its fiscal budget, incurring
repeated significant fiscal deficits that by the end of 2001 resulted in
the accumulation of $130 billion of debt.
Late in 2001, the country was unable to obtain additional funding from the
IMF. As economic instability increased, substantial withdrawals of cash
from the Argentine banking system occurred over a short period of time and
the government was forced to implement monetary restrictions severely
limiting the transfer of funds out of the country without the
authorization of the Central Bank of the Republic of Argentina. Such
unpopular measures ultimately led to the resignation of President De la
Rua and his entire administration. After the resignation of President De
la Rua in December 2001, there was for a few weeks a revolving door of
Presidents that were appointed to office by Argentina's congress but
quickly resigned in reaction to public outcry. Eduardo Duhalde was
appointed President of Argentina in January 2002 to hold office until the
next regularly scheduled Presidential election in 2003.
17
In January 2002, the government declared default on Argentina's $130
billion of debt and the national Congress passed Emergency Law 25,561,
which among other things overturned the long standing but unsustainable
convertibility plan. The government eventually adopted a floating rate of
exchange in February 2002.
Since taking office, President Duhalde, with the single exception of
rescheduling approximately $7 billion of debt in January 2003, has been
unable to obtain financial assistance from international lending agencies
such as the International Monetary Fund and the World Bank and his
administrations inability to make significant progress in resolving the
country's economic crisis has resulted in an almost total loss of public
support.
The abandonment of the convertibility plan and the decision to allow the
peso to float in international exchange markets resulted in strong
devaluation of the peso. By September 30, 2002, the peso to U.S. dollar
exchange rate had increased from 1:1 to 3.74:1. However, since the end of
the third quarter 2002, although Argentina has made little progress toward
solving the root causes of its economic problems, its economy seems to be
showing signs of stabilization.
Elections to replace Eduardo Duhalde as President of Argentina were held
on April 27, 2003.
Refer to the section "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 11 through 16 for a
description of the outcome of the elections and a discussion of a
stabilization in the Argentine peso and a reduction in the level of
inflation.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of Apco
Argentina's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14 (c) under
the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Ralph A. Hill, Chief Executive Officer of Apco
Argentina Inc.
99.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Landy L. Fullmer, Chief Financial Officer of Apco
Argentina Inc.
(b) None
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APCO ARGENTINA INC.
-------------------------
(Registrant)
By: /s/ Thomas Bueno
-----------------------------
President, Chief Operating and
Chief Accounting Officer
(Duly Authorized Officer of the Registrant)
May 14, 2003
20
CERTIFICATIONS
I, Ralph A. Hill, Chief Executive Officer of Apco Argentina Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apco Argentina
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Ralph A. Hill
-----------------------
Ralph A. Hill
Chief Executive Officer
21
I, Landy L. Fullmer, Chief Financial Officer of Apco Argentina Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Apco Argentina
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Landy L. Fullmer
-----------------------
Landy L. Fullmer
Chief Financial Officer
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by Ralph A. Hill, Chief Executive
Officer of Apco Argentina Inc.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 by Landy L. Fullmer, Chief Financial
Officer of Apco Argentina Inc.