UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 1-4300
APACHE CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central 77056-4400
2000 Post Oak Boulevard, Houston, TX ----------
------------------------------------ (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of October 31,
2003............324,075,864
EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003 to respond to certain comments received by
us from the Staff of the Securities and Exchange Commission ("SEC") in
connection with its review of our Registration Statement on Form S-3 (File No.
333-105536). Our consolidated financial position and consolidated results of
operations for the periods presented have not been restated from the
consolidated financial position and consolidated results of operations
originally reported. Except where otherwise indicated, all share amounts and per
share amounts have been adjusted to reflect the effects of the two-for-one stock
split for our common stock declared in September 2003.
For convenience and ease of reference we are filing this Quarterly Report
in its entirety with the applicable changes. Unless otherwise stated, all
information contained in this amendment is as of November 14, 2003, the filing
date of our Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2003. Accordingly, this Amendment No. 1 to the Quarterly Report on Form
10-Q/A should be read in conjunction with our subsequent filings with the SEC.
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,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues.......................... $ 1,110,015 $ 655,917 $ 3,129,507 $ 1,837,570
Other.................................................... (5,474) (10,728) (4,001) (8,070)
----------- ----------- ----------- -----------
1,104,541 645,189 3,125,506 1,829,500
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization................. 292,885 208,788 779,590 630,617
Asset retirement obligation accretion.................... 11,342 - 27,100 -
International impairments................................ - - - 4,600
Lease operating costs.................................... 194,574 116,314 514,995 339,544
Gathering and transportation costs....................... 16,948 9,869 43,940 29,214
Severance and other taxes................................ 41,587 16,064 98,883 48,769
General and administrative............................... 34,692 25,463 93,097 78,830
Financing costs:
Interest expense...................................... 48,784 38,787 127,908 117,120
Amortization of deferred loan costs................... 557 530 1,624 1,330
Capitalized interest.................................. (14,222) (10,029) (38,072) (30,493)
Interest income....................................... (1,247) (1,215) (2,749) (3,427)
----------- ----------- ----------- -----------
625,900 404,571 1,646,316 1,216,104
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES........................ 1,976 3,922 8,668 12,584
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES................................. 476,665 236,696 1,470,522 600,812
Provision for income taxes............................... 199,704 90,168 636,883 227,302
----------- ----------- ----------- -----------
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE............... 276,961 146,528 833,639 373,510
Cumulative effect of change in accounting principle,
net of income tax..................................... - - 26,632 -
----------- ----------- ----------- -----------
NET INCOME................................................. 276,961 146,528 860,271 373,510
Preferred stock dividends................................ 1,420 1,406 4,260 9,395
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK........................ $ 275,541 $ 145,122 $ 856,011 $ 364,115
=========== =========== =========== ===========
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle.................... $ .85 $ .48 $ 2.58 $ 1.23
Cumulative effect of change in accounting principle...... - - 0.08 -
----------- ----------- ----------- -----------
$ .85 $ .48 $ 2.66 $ 1.23
=========== =========== =========== ===========
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle.................... $ .84 $ .48 $ 2.56 $ 1.21
Cumulative effect of change in accounting principle...... - - .08 -
----------- ----------- ----------- -----------
$ .84 $ .48 $ 2.64 $ 1.21
=========== =========== =========== ===========
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,
--------------------------
2003 2002
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 860,271 $ 373,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ............................. 779,590 630,617
Asset retirement obligation accretion ................................ 27,100 -
Provision for deferred income taxes .................................. 352,479 83,271
International impairments ............................................ - 4,600
Cumulative effect of change in accounting principle .................. (26,632) -
Other ................................................................ 21,650 9,090
Changes in operating assets and liabilities:
(Increase) decrease in receivables ................................... (75,366) (72,939)
(Increase) decrease in inventories ................................... (3,680) (526)
(Increase) decrease in drilling advances and other ................... (937) (18,383)
(Increase) decrease in deferred charges and other .................... (22,046) 961
Increase (decrease) in accounts payable .............................. 61,612 61,459
Increase (decrease) in accrued expenses .............................. 142,089 (9,981)
Increase (decrease) in advances from gas purchasers .................. (11,667) (10,437)
Increase (decrease) in deferred credits and noncurrent liabilities.... (25,354) (41,973)
----------- -----------
Net cash provided by operating activities ......................... 2,079,109 1,009,269
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ........................................ (1,115,349) (747,216)
Acquisition of BP properties ............................................... (1,154,962) -
Acquisition of Shell properties ............................................ (201,813) -
Acquisition of Occidental properties ....................................... (22,000) (11,000)
Proceeds from sales of oil and gas properties .............................. 16,202 -
Proceeds from sale of short-term investments ............................... - 17,006
Other, net ................................................................. (44,302) (24,506)
----------- -----------
Net cash used in investing activities ............................. (2,522,224) (765,716)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ....................................................... 1,769,658 1,246,296
Payments on long-term debt ................................................. (1,414,929) (1,327,471)
Dividends paid ............................................................. (51,967) (53,059)
Common stock activity ...................................................... 574,349 27,407
Treasury stock activity, net ............................................... 4,275 1,861
Cost of debt and equity transactions ....................................... (4,520) (6,741)
Repurchase of preferred interests of subsidiaries .......................... (443,000) -
----------- -----------
Net cash provided by (used in) financing activities ............... 433,866 (111,707)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... (9,249) 131,846
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................... 51,886 35,625
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 42,637 $ 167,471
=========== ===========
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,
2003 2002
------------- ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 42,637 $ 51,886
Receivables, net of allowance ................................... 619,508 527,687
Inventories ..................................................... 126,180 109,204
Drilling advances ............................................... 31,509 45,298
Prepaid assets and other ........................................ 49,505 32,706
------------ ------------
869,339 766,781
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties ............................................ 15,702,029 12,827,459
Unproved properties and properties under
development, not being amortized ........................... 1,033,869 656,272
Gas gathering, transmission and processing facilities ........... 804,194 784,271
Other ........................................................... 230,007 194,685
------------ ------------
17,770,099 14,462,687
Less: Accumulated depreciation, depletion and amortization ...... (6,646,795) (5,997,102)
------------ ------------
11,123,304 8,465,585
------------ ------------
OTHER ASSETS:
Goodwill, net ................................................... 189,252 189,252
Deferred charges and other ...................................... 58,150 38,233
------------ ------------
$ 12,240,045 $ 9,459,851
============ ============
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,
2003 2002
------------ ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 284,941 $ 214,288
Accrued operating expense ............................................ 83,133 47,382
Accrued exploration and development .................................. 181,140 146,871
Accrued compensation and benefits .................................... 41,432 32,680
Accrued interest ..................................................... 45,736 30,880
Accrued income taxes ................................................. 105,000 44,256
Oil and gas derivative instruments ................................... 22,078 -
Other ................................................................ 65,844 15,878
------------ ------------
829,304 532,235
------------ ------------
LONG-TERM DEBT ......................................................... 2,514,118 2,158,815
------------ ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes ......................................................... 1,520,586 1,120,609
Advances from gas purchasers ......................................... 113,786 125,453
Asset retirement obligation .......................................... 778,673 -
Oil and gas derivative instruments ................................... 12,068 3,507
Other ................................................................ 174,425 158,326
------------ ------------
2,599,538 1,407,895
------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES .................................... - 436,626
------------ ------------
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, $.625 par, 430,000,000 shares authorized,
331,979,616 and 310,929,080 shares issued, respectively ............ 207,487 194,331
Paid-in capital ...................................................... 4,023,754 3,427,450
Retained earnings .................................................... 2,204,487 1,427,607
Treasury stock, at cost, 8,118,532 and 8,422,656 shares,
respectively ....................................................... (106,564) (110,559)
Accumulated other comprehensive loss ................................. (130,466) (112,936)
------------ ------------
6,297,085 4,924,280
------------ ------------
$ 12,240,045 $ 9,459,851
============ ============
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 SERIES C
COMPREHENSIVE PREFERRED PREFERRED COMMON PAID-IN
(In thousands) INCOME STOCK STOCK STOCK CAPITAL
------------- --------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 2001...................... $ 98,387 $ 208,207 $ 185,288 $ 2,803,825
Comprehensive income (loss):
Net income.................................. $ 373,510 - - - -
Currency translation adjustments............ 5,328 - - - -
Commodity hedges, net of income tax
benefit of $8,105...................... (11,300) - - - -
Marketable securities, net of income
tax benefit of $67..................... (125) - - - -
----------
Comprehensive income............................ $ 367,413
==========
Dividends:
Preferred................................... - - - -
Common ($.15 per share)..................... - - - -
Common shares issued............................ - - 742 24,525
Conversion of Series C Preferred Stock.......... - (208,207) 8,193 200,014
Treasury shares issued, net..................... - - - 37
Other........................................... - - - 598
-------- ---------- --------- -----------
BALANCE AT SEPTEMBER 30, 2002..................... $ 98,387 $ - $ 194,223 $ 3,028,999
======== ========== ========= ===========
BALANCE AT DECEMBER 31, 2002...................... $ 98,387 $ - $ 194,331 $ 3,427,450
Comprehensive income (loss):
Net income.................................. $ 860,271 - - - -
Commodity hedges, net of income tax
benefit of $10,157..................... (17,530) - - - -
----------
Comprehensive income............................ $ 842,741
==========
Dividends:
Preferred................................... - - - -
Common ($.16 per share)..................... - - - -
Five percent common stock dividend.............. - - 581 25,333
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
======== ========== ========= ===========
ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) EARNINGS STOCK INCOME (LOSS) EQUITY
------------ --------- ------------- ------------
BALANCE AT DECEMBER 31, 2001...................... $ 1,336,478 $(111,885) $(101,817) $4,418,483
Comprehensive income (loss):
Net income.................................. 373,510 - - 373,510
Currency translation adjustments............ - - 5,328 5,328
Commodity hedges, net of income tax
benefit of $8,105...................... - - (11,300) (11,300)
Marketable securities, net of income
tax benefit of $67..................... - - (125) (125)
Comprehensive income............................
Dividends:
Preferred................................... (9,395) - - (9,395)
Common ($.15 per share)..................... (42,512) - - (42,512)
Common shares issued............................ - - - 25,267
Conversion of Series C Preferred Stock.......... - - - -
Treasury shares issued, net..................... - 1,269 - 1,306
Other........................................... - - - 598
------------ --------- --------- ----------
BALANCE AT SEPTEMBER 30, 2002..................... $ 1,658,081 $(110,616) $(107,914) $4,761,160
============ ========= ========= ==========
BALANCE AT DECEMBER 31, 2002...................... $ 1,427,607 $(110,559) $(112,936) $4,924,280
Comprehensive income (loss):
Net income.................................. 860,271 - - 860,271
Commodity hedges, net of income tax
benefit of $10,157..................... - - (17,530) (17,530)
Comprehensive income............................
Dividends:
Preferred................................... (4,260) - - (4,260)
Common ($.16 per share)..................... (53,217) - - (53,217)
Five percent common stock dividend.............. (25,914) - - -
Common shares issued............................ - - - 580,520
Treasury shares issued, net..................... - 3,995 - 6,899
Other........................................... - - - 122
------------ --------- --------- ----------
BALANCE AT SEPTEMBER 30, 2003..................... $ 2,204,487 $(106,564) $(130,466) $6,297,085
============ ========= ========= ==========
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 December 18, 2002, the Company declared a five percent stock
dividend payable on April 2, 2003, to shareholders of record on March 12, 2003.
On September 11, 2003, the Company declared a two-for-one stock split, paid
January 14, 2004, to shareholders of record on December 31, 2003. Quarterly
share and per share information for 2002 and 2003 have been restated to reflect
this stock dividend and the two-for-one stock split.
Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentations.
1. ACQUISITIONS
On January 13, 2003, Apache announced that it had entered into
agreements to purchase producing properties in the North Sea and Gulf of Mexico
from subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3
billion, with $670 million allocated to the Gulf of Mexico properties and $630
million allocated to properties in the North Sea. The properties included
estimated proved reserves of 233.2 million barrels of oil equivalent (MMboe),
147.6 MMboe located in the North Sea with the balance in the Gulf of Mexico.
Both purchase agreements were effective as of January 1, 2003. As is customary,
Apache assumed BP's abandonment obligation for the properties, which was
considered in determining the purchase price. Both the Gulf of Mexico and North
Sea assets acquired from BP were funded with net proceeds of approximately $554
million from the issuance of 19.8 million shares of common stock in January
2003, adjusted for the five percent common stock dividend and the two-for-one
common stock split, and proceeds from additional debt of approximately $604
million borrowed under existing lines of credit and commercial paper.
Apache and BP closed the above referenced acquisition of the Gulf of
Mexico properties on March 13, 2003, which included BP's interest in 56
producing fields, and 104 blocks. At closing, the $670 million purchase price
was adjusted for normal closing items and preferential rights exercised by third
parties. The exercise of preferential rights by third parties reduced the
purchase price by $73 million and estimated reserves by 9.6 MMboe. The purchase
price was further adjusted for various normal closing items, including revenues
and expenditures related to the properties for the period between the effective
and closing dates. As a result, cash consideration of $509 million was paid by
Apache upon closing. In a separate transaction closed February 21, 2003, Apache
purchased BP's interest in several other Gulf of Mexico properties with
estimated proved reserves of 2.1 MMboe for an adjusted purchase price of $15
million. Including $4 million of transaction costs, total cash consideration for
the two acquisitions of Gulf of Mexico properties from BP totaled $528 million.
The acquisition of the U.K. North Sea properties closed on April 2,
2003, at which time Apache paid a purchase price, adjusted for normal closing
and working capital adjustments, of $630 million. The acquisition of the North
Sea properties includes a 96 percent interest in the Forties Field and
establishes a new core area for the Company. In conjunction with the Forties
acquisition, Apache may be required to issue a letter of credit to BP to cover
the present value of related asset retirement obligations if the rating of the
Company's senior unsecured debt is lowered by both Moody's and Standard and
Poor's from its current ratings of A3 and A-, respectively. Should this occur,
the initial letter of credit amount would be 175 million British pounds. Apache
has agreed to sell all of the North Sea production from those properties over
the next two years to BP at a combination of fixed and market sensitive prices
pursuant to a contract entered into in connection with the North Sea purchase
agreement.
6
The BP purchase prices were allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as of the date of
acquisition, as follows:
U.S. - U.K. -
GULF OF MEXICO NORTH SEA TOTAL*
-------------- ------------- ----------
(In thousands)
Proved property $ 539,110 $ 854,835 $1,393,945
Unproved property 57,500 65,000 122,500
Working capital acquired, net - 10,957 10,957
Asset retirement obligation (69,000) (250,887) (319,887)
Deferred income tax liability - (50,381) (50,381)
---------- --------- ----------
Cash consideration $ 527,610 $ 629,524 $1,157,134
========== ========= ==========
* Property balance includes $12 million of transaction costs (U.S. - $4 million;
North Sea - $8 million).
The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the acquisitions from BP
occurred on January 1 of each period presented. The pro forma information is
based in part on data provided by BP and on numerous assumptions and is not
necessarily indicative of future results of operations.
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003 ENDED SEPTEMBER 30, 2002
-------------------------- ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ---------
(In thousands, except per common share data)
Revenues and other........................ $ 3,125,506 $ 3,363,468 $ 1,829,500 $ 2,520,630
Net income................................ 860,271 933,468 373,510 455,565
Preferred stock dividends................. 4,260 4,260 9,395 9,395
Income attributable to common stock....... 856,011 929,208 364,115 446,170
Net income per common share:
Basic................................... $ 2.66 $ 2.87 $ 1.23 $ 1.42
Diluted................................. 2.64 2.85 1.21 1.39
Average common shares outstanding (1)..... 321,908 323,360 295,432 315,234
(1) Pro forma shares assume the issuance of 19.8 million common shares,
adjusted for the five percent common stock dividend and the two-for-one
common stock split, as of the beginning of each period presented.
On July 3, 2003, Apache announced that it had completed the acquisition
of producing properties on the Outer Continental Shelf of the Gulf of Mexico
from Shell Exploration and Production Company (Shell) for $200 million, subject
to normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced over the next four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over approximately four years
beginning in August 2003 for gas and November 2003 for oil. The VPP reserves and
production will not be recorded by Apache.
Apache will record estimated proved reserves of 124.6 billion cubic
feet (Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60
million liability for the future cost to produce and deliver volumes subject to
the VPP 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. The purchase agreement was
effective as of July 1, 2003. The acquisition included interests in 26 fields
covering 50 blocks (approximately 209,000 acres) and interests in two onshore
gas plants. Apache will operate 15 of the fields with 91 percent of the
production. The purchase price was funded by borrowings under the Company's
lines of credit and commercial paper program.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache uses a variety of strategies to manage its exposure to
fluctuations in commodity prices. As established by the Company's hedging
policy, Apache primarily enters into cash flow hedges in connection with
selected acquisitions to protect against commodity price volatility. The success
of these acquisitions is significantly
7
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.
During the first quarter of 2003, in conjunction with the acquisitions
from BP and during the fourth quarter of 2002, in conjunction with the South
Louisiana properties acquisition, Apache entered into, and designated as cash
flow hedges, natural gas and crude oil fixed-price swaps and natural gas option
collars. These positions were entered into in accordance with the Company's
hedging policy and involved several counterparties which are rated A+ or better.
As of September 30, 2003, the outstanding positions of our cash flow hedges were
as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY)
------ --------------- ----------- ------------- -----------
(In thousands)
10/2003 - 12/2003 Gas Collars 4,600,000 $ 3.50 / 6.09 $ (320)
Gas Fixed-Price Swap 18,400,000 5.17 7,053
Oil Fixed-Price Swap 4,600,000 26.59 (9,919)
2004 Gas Collars 18,300,000 3.25 / 5.81 (5,893)
Gas Fixed-Price Swap 51,240,000 4.52 (18,561)
Oil Fixed-Price Swap 1,550,000 26.59 (2,070)
2005 Gas Collars 9,050,000 3.25 / 5.20 (4,436)
In addition to the fixed-price swaps and option collars, Apache entered
into a separate crude oil physical sales contract with BP. The sales contract is
a normal purchase and sale under Statement of Financial Accounting Standards
(SFAS) No. 133 and, therefore, the Company has designated and accounted for the
contract under the accrual method. As of September 30, 2003, 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
----------------- ------------- -----------
10/2003 - 12/2003 2,300,000 $ 25.32
2004 14,175,000 22.24
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:
GROSS AFTER TAX
---------- ---------
(In thousands)
Unrealized loss on derivatives at December 31, 2002........ $ (7,141) $ (4,186)
Net losses realized into earnings.......................... 69,379 43,135
Net change in derivative fair value........................ (97,066) (60,665)
--------- ---------
Unrealized loss on derivatives at September 30, 2003....... $ (34,828) $ (21,716)
========= =========
Based on current market prices, the Company recorded an unrealized loss
in other comprehensive income of $34.8 million ($21.7 million after tax). Any
loss will be realized in future earnings contemporaneously with the related
sales of natural gas and crude oil production applicable to specific hedges.
Were current prices to hold, a loss of $22.8 million ($14.2 million after tax)
would be realized over the next 12 months. However, these amounts could vary
materially as a result of changes in market conditions. The contracts designated
as hedges qualified and continue to qualify for hedge accounting in accordance
with SFAS No. 133, as amended.
8
3. DEBT
On May 15, 2003, Apache Finance Canada Corporation (Apache Finance
Canada) issued $350 million of 4.375 percent, 12-year, senior unsecured notes in
a private placement. The notes are irrevocably and unconditionally guaranteed by
Apache. Interest is payable semi-annually on May 15 and November 15 of each year
commencing on November 15, 2003. The notes were sold pursuant to Rule 144A and
Regulation S, and may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Securities Act of 1933, as amended.
If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.
4. PREFERRED INTERESTS OF SUBSIDIARIES
On September 26, 2003, Apache repurchased and retired preferred
interests issued by three of its subsidiaries for approximately $443 million,
plus an additional $1 million for accrued dividends and distributions. The
transactions involved the purchase of preferred stock issued by two of the
Company's subsidiaries for approximately $82 million and the retirement of a
limited partnership interest in a partnership controlled by a subsidiary of the
Company for approximately $361 million. Apache funded the transactions with
available cash on hand and by issuing commercial paper under its existing
commercial paper facility.
5. CAPITAL STOCK
On January 22, 2003, the Company completed a public offering of 19.8
million shares of Apache common stock, adjusted for the five percent common
stock dividend and the two-for-one common stock split, including underwriters'
over-allotment option, for net proceeds of approximately $554 million. The
proceeds were used to purchase producing properties in the North Sea and the
Gulf of Mexico from BP.
On September 12, 2003, the Company announced that its Board of
Directors voted to increase the quarterly cash dividend on its common stock to
12 cents per share from 10 cents per share (six cents per share from five cents,
adjusted for the two-for-one split), effective with the November 2003 payment,
and to split its common stock two-for-one early in 2004, subject to shareholder
approval of an increase in the authorized number of common shares.
6. FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency gains and losses in
accordance with SFAS No. 52 "Foreign Currency Translation." Foreign currency
translation gains and losses related to deferred taxes are recorded as a
component of its provision for income taxes, while all other foreign currency
gains and losses are reflected in Revenues and Other. For the first nine months
of 2003, the Company recorded additional deferred tax expense of $77 million as
a result of the weaker U.S. dollar. Net foreign currency gains and losses
reflected in Revenues and Other totaled $(1) million for the nine-month period.
9
7. 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,
------------------------------------------------------------
2003 2002
------------------------------ ----------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock.......... $ 275,541 323,751 $ .85 $145,122 302,194 $ .48
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other...................... - 2,850 - 2,476
---------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions.............. $ 275,541 326,601 $ .84 $145,122 304,670 $ .48
========== ======= ========= ======== ======= =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2003 2002
------------------------------ ----------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock.......... $ 856,011 321,908 $ 2.66 $364,115 295,432 $ 1.23
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other...................... - 2,742 - 2,708
Series C Preferred Stock .................... - - 5,149 6,434
---------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions.............. $ 856,011 324,650 $ 2.64 $369,264 304,574 $ 1.21
========== ======= ========= ======== ======= =========
10
8. STOCK-BASED COMPENSATION
On September 30, 2003, the Company had several stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price of those options is equal to or greater than the
market price of the Company's common stock on the date of grant, unless the
awards are subsequently modified. The following table illustrates the effect on
income attributable to common stock and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, to stock-based employee compensation for
the Company's option and performance plans.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except for per common share amounts)
Income attributable to common stock, as reported.............. $275,541 $145,122 $856,011 $364,115
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects............................................. - 275 391 751
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects....... (5,567) (5,240) (16,433) (15,312)
-------- -------- -------- --------
Pro forma income attributable to common stock................. $269,974 $140,157 $839,969 $349,554
======== ======== ======== ========
Net Income per Common Share:
Basic:
As reported......................................... $ .85 $ .48 $ 2.66 $ 1.23
Pro forma........................................... .84 .47 2.61 1.19
Diluted:
As reported......................................... $ .84 $ .48 $ 2.64 $ 1.21
Pro forma........................................... .82 .46 2.56 1.16
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.
During the second quarter of 2003, the Company issued a total of
1,802,210 stock appreciation rights (SARs), adjusted for the two-for-one stock
split, to non-executive employees in lieu of stock options. The SARs will be
settled in cash upon exercise. The vesting period is over four years and the
Company will record compensation expense on the vested SARs outstanding as the
price of the Company's common stock fluctuates. The related after tax expense
was $.7 million and $1.0 million for the third quarter and year-to-date,
respectively. The Company issued a 2003 award of 121,000 shares, adjusted for
the two-for-one stock split, of restricted common stock to executives in May of
2003.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
-------- --------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)........ $ 58,821 $57,649
Income taxes (net of refunds)................ 225,667 15,363
11
10. 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, 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
========== ========== ========== ========= ========= ============= ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Oil and Gas Production Revenues............ $ 799,716 $ 385,424 $ 402,236 $ 245,300 $ - $ 4,894 $ 1,837,570
========== ========== ========== ========= ========= ============= ===========
Operating Income (Loss) (1)................ $ 285,896 $ 149,584 $ 231,665 $ 120,529 $ - $ (2,848) $ 784,826
========== ========== ========== ========= ========= =============
Other Income (Expense):
Other................................. (8,070)
General and administrative............ (78,830)
Preferred interests of subsidiaries... (12,584)
Financing costs, net.................. (84,530)
-----------
Income Before Income Taxes................. $ 600,812
===========
Total Assets............................... $4,111,676 $2,303,297 $1,668,826 $ 998,643 $ - $ 166,267 $ 9,248,709
========== ========== ========== ========= ========= ============= ===========
(1) Operating Income (Loss) consists of oil and gas production revenues
less depreciation, depletion and amortization, asset retirement
obligation accretion, international impairments, lease operating costs,
gathering and transportation costs, and severance and other taxes.
11. LITIGATION
In June 2003, Apache and Cinergy Marketing and Trading, LLC (Cinergy)
agreed to terminate their agreement concerning marketing of Apache's U.S.
natural gas production and to dismiss the arbitration between them. The parties
reached an amicable settlement, the amounts of which were immaterial to Apache's
financial position and results of operations. Consequently, the Company began
marketing its U.S. natural gas production previously marketed by Cinergy
beginning with July 2003 production.
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 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
12
expense will be recognized over time as the discounted liability is accreted to
its expected settlement value. The fair value of the ARO is measured using
expected future cash outflows discounted at the company's credit-adjusted
risk-free interest rate.
The company adopted SFAS No. 143 on January 1, 2003, which resulted in
an increase to net oil and gas properties of $410 million and additional
liabilities related to asset retirement obligations of $369 million. These
amounts reflect the ARO of the company had the provisions of SFAS No. 143 been
applied since inception and resulted in a non-cash cumulative effect increase to
earnings of $27 million ($41 million pretax). In accordance with the provisions
of SFAS No. 143, Apache records an abandonment liability associated with its oil
and gas wells and platforms when those assets are placed in service, rather than
its past practice of accruing the expected abandonment costs on a
unit-of-production basis over the productive life of the associated full-cost
pool. Under SFAS No. 143 depletion expense is reduced since a discounted ARO is
depleted in the property balance rather than the undiscounted value previously
depleted under the old rules. The lower depletion expense under SFAS No. 143 is
offset, however, by accretion expense, which is recognized over time as the
discounted liability is accreted to its expected settlement value.
Inherent in the present value calculation of ARO are numerous
assumptions and judgments including the ultimate settlement amounts, inflation
factors, credit adjusted discount rates, timing of settlement, and changes in
the legal, regulatory, environmental and political environments. To the extent
future revisions to these assumptions impact the present value of the existing
ARO liability, a corresponding adjustment is made to the oil and gas property
balance.
The $27 million ($41 million pretax) cumulative increase to earnings
upon adoption did not take into consideration potential impacts of adopting SFAS
No. 143 on previous full-cost property impairment tests. The company chose not
to re-calculate historical full-cost impairment tests ("ceiling test") upon
adoption even though historical oil and gas property balances would have been
higher had we applied the provisions of the statement. Management believes this
approach is appropriate because SFAS No. 143 is silent on this issue and was not
effective during the prior ceiling test periods. Had we re-calculated the
historical full-cost ceiling tests and included the impact as a component of the
cumulative effect of adoption, the ultimate gain recognized would have
potentially been reduced. A ceiling test calculation was performed upon adoption
and at the end of each reporting period subsequent to adoption and no impairment
was necessary. In calculating ceiling limitations, the company includes the
undiscounted ARO as part of future development costs, essentially reducing the
present value of its future net revenues and full-cost ceiling limit. To compare
the property balance, which included the ARO component, to the full-cost ceiling
limit, which has been reduced by a similar abandonment cost, we net the ARO
liability against the property balance. The company believes this is appropriate
since there must be a comparable basis between the net book value of the
properties and the full-cost ceiling limitation.
The following table describes all changes to the Company's asset
retirement obligation liability since adoption (in thousands):
Asset retirement obligation upon adoption on January 1, 2003..... $368,537
Liabilities incurred............................................. 389,480
Liabilities settled.............................................. (6,444)
Accretion expense................................................ 27,100
--------
Asset retirement obligation at September 30, 2003................ $778,673
========
Liabilities incurred during the period primarily relate to asset
retirement obligations assumed in connection with the BP Gulf of Mexico, BP
North Sea and Shell property acquisitions. Liabilities settled during the period
relate to individual properties plugged and abandoned or sold during the period.
The pro forma asset retirement obligation would have been approximately $334
million at January 1, 2002 had the Company adopted SFAS No. 143 on January 1,
2002. For the three and nine-month periods ended September 30, 2002, the pro
forma effect on Income Attributable to Common Stock and Net Income per Common
Share would not have been materially different than reported amounts had SFAS
No. 143 been adopted by the Company on January 1, 2002.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51." Interpretation No. 46 requires a company to consolidate a variable
interest entity (VIE) if the company has a variable interest (or combination of
variable interests) that is exposed to a majority of the entity's expected
losses if they occur, receive a majority of the entity's expected
13
residual returns if they occur, or both. In addition, more extensive disclosure
requirements apply to the primary and other significant variable interest owners
of the VIE. This interpretation applies immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. It is also effective for the first fiscal year or interim period
beginning after December 31, 2003, to VIEs in which a company holds a variable
interest that is acquired before February 1, 2003. The guidance regarding this
interpretation is extremely complex and, although we do not believe we have an
interest in a VIE, the Company continues to assess the impact, if any, this
interpretation will have on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards on how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. The
statement requires that the Company classify as liabilities the fair value of
all mandatorily redeemable financial instruments that had previously been
recorded as equity or elsewhere in the consolidated financial statements. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise effective for all existing financial instruments
beginning in the third quarter of 2003. As stated in Note 4, the Company paid
off the Preferred Interests of Subsidiaries in September 2003; therefore, this
statement did not have a material impact on the Company's financial statements.
13. RECENT ACCOUNTING DEVELOPMENTS
The Company has taken note of a July 2003 inquiry to the Financial Accounting
Standards Board regarding whether or not contract-based oil and gas mineral
rights held by lease or contract ("mineral rights") should be recorded or
disclosed as intangible assets. The inquiry presents a view that these mineral
rights are intangible assets as defined in SFAS No. 141, "Business
Combinations," and, therefore, should be classified separately on the balance
sheet as intangible assets. SFAS No. 141, and SFAS No. 142, "Goodwill and Other
Intangible Assets," became effective for transactions subsequent to June 30,
2001 with the disclosure requirements of SFAS No. 142 required as of January 1,
2002. SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and that intangible assets
be disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 scopes out
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies. Apache does not believe that SFAS No. 141 or 142 change the
classification of oil and gas mineral rights and the Company continues to
classify these assets as part of oil and gas properties. The Emerging Issues
Task Force (EITF) has added the treatment of oil and gas mineral rights to an
upcoming agenda, which may result in a change in how Apache classifies these
assets.
Should such a change be required, the amounts related to business
combinations and major asset purchases after June 30, 2001 that would be
classified as "intangible undeveloped mineral interest" was $265 million as of
September 30, 2003. The amounts related to business combinations and major asset
purchases after June 30, 2001 that would be classified as "intangible developed
mineral interest" was $1.4 billion as of September 30, 2003. Intangible
developed mineral interest amounts are presented net of accumulated depletion,
depreciation and amortization (DD&A). Accumulated DD&A was estimated using
historical depletion rates applied proportionately to the costs of the
acquisitions to be classified as "intangible developed mineral interest". The
amounts noted above only include mineral rights acquired in business
combinations or major asset purchases, and exclude those acquired individually
or in groups as we have not historically tracked these in this manner. The
Company has also not historically tracked the amount of mineral rights in the
proved property balances related to producing leases or relinquished leases. We
are currently identifying a methodology to do so for transactions subsequent to
June 30, 2001.
The numbers above are based on our understanding of the issue before
the EITF, if all mineral rights associated with unevaluated property and
producing reserves were deemed to be intangible assets:
- mineral rights with proved reserves that were acquired after
June 30, 2001 and mineral rights with no proved reserves would
be classified as intangible assets and would not be included
in oil and gas properties on our consolidated balance sheet;
14
- results of operations and cash flows would not be materially affected
because mineral rights would continue to be amortized in accordance
with full cost accounting rules; and
- disclosures required by SFAS Nos. 141 and 142 relative to intangibles
would be included in the notes to our financial statements.
If the accounting for mineral rights is ultimately changed, transitional
guidance for intangible assets permits the reclassification of only amounts
acquired after the effective date of SFAS Nos. 141 and 142 if records were not
previously maintained to track acquisition costs based on their intangible or
tangible nature. Lack of these records prior to the effective date could result
in the loss of comparability between historical balances of tangible and
intangible asset balances and among companies in the industry.
14. 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 and subsidiaries and
notes thereto of which this note is an integral part.
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- ------------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 452,358 $ - $ - $ -
Equity in net income (loss) of affiliates..... 171,661 6,614 9,591 30,809
Other......................................... (331) - - -
----------- ------------- ------------- -----------
623,688 6,614 9,591 30,809
----------- ------------- ------------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 104,743 - - -
Asset retirement obligation accretion......... 4,674 - - -
Lease operating costs......................... 80,068 - - -
Gathering and transportation costs............ 5,522 - - -
Severance and other taxes..................... 11,233 - - -
General and administrative.................... 26,499 - - -
Financing costs, net.......................... 27,042 - 4,509 9,945
----------- ------------- ------------- -----------
259,781 - 4,509 9,945
----------- ------------- ------------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. (25) - - -
----------- ------------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 363,932 6,614 5,082 20,864
Provision (benefit) for income taxes.......... 86,971 - (1,532) (3,619)
----------- ------------- ------------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 276,961 6,614 6,614 24,483
Cumulative effect of change in accounting
principle, net of income tax............... - - - -
----------- ------------- ------------- -----------
NET INCOME....................................... 276,961 6,614 6,614 24,483
Preferred stock dividends..................... 1,420 - - -
----------- ------------- ------------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 275,541 $ 6,614 $ 6,614 $ 24,483
=========== ============= ============= ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............ $ 704,664 $ (47,007) $ 1,110,015
Equity in net income (loss) of affiliates... (9,303) (209,372) -
Other ...................................... (5,143) - (5,474)
----------- ----------- -----------
690,218 (256,379) 1,104,541
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 188,142 - 292,885
Asset retirement obligation accretion ...... 6,668 - 11,342
Lease operating costs ...................... 161,513 (47,007) 194,574
Gathering and transportation costs ......... 11,426 - 16,948
Severance and other taxes .................. 30,354 - 41,587
General and administrative ................. 8,193 - 34,692
Financing costs, net ....................... (7,624) - 33,872
----------- ----------- -----------
398,672 (47,007) 625,900
----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES ........... 2,001 - 1,976
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............. 289,545 (209,372) 476,665
Provision (benefit) for income taxes ....... 117,884 - 199,704
----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE ........................ 171,661 (209,372) 276,961
Cumulative effect of change in accounting
principle, net of income tax ......... - - -
----------- ----------- -----------
NET INCOME .................................... 171,661 (209,372) 276,961
Preferred stock dividends .................. - - 1,420
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........... $ 171,661 $ (209,372) $ 275,541
=========== =========== ===========
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ---------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............ $ 206,029 $ - $ - $ -
Equity in net income (loss) of affiliates... 105,002 6,534 9,512 15,714
Other ...................................... (497) - - -
--------- --------- --------- ---------
310,534 6,534 9,512 15,714
--------- --------- --------- ---------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 46,851 - - -
Lease operating costs ...................... 52,289 - - -
Gathering and transportation costs ......... 4,250 - - -
Severance and other taxes .................. 8,695 - - 90
General and administrative ................. 21,496 - - -
Financing costs, net ....................... 18,470 - 4,512 10,268
--------- --------- --------- ---------
152,051 - 4,512 10,358
--------- --------- --------- ---------
PREFERRED INTERESTS OF SUBSIDIARIES ........... - - - -
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............. 158,483 6,534 5,000 5,356
Provision (benefit) for income taxes ....... 11,955 - (1,534) (4,948)
--------- --------- --------- ---------
NET INCOME .................................... 146,528 6,534 6,534 10,304
Preferred stock dividends .................. 1,406 - - -
--------- --------- --------- ---------
INCOME ATTRIBUTABLE TO COMMON STOCK ........... $ 145,122 $ 6,534 $ 6,534 $ 10,304
========= ========= ========= =========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ........... $ 485,979 $ (36,091) $ 655,917
Equity in net income (loss) of affiliates.. (8,388) (128,374) -
Other ..................................... (10,231) - (10,728)
--------- --------- ---------
467,360 (164,465) 645,189
--------- --------- ---------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 161,937 - 208,788
Lease operating costs ..................... 100,116 (36,091) 116,314
Gathering and transportation costs ........ 5,619 - 9,869
Severance and other taxes ................. 7,279 - 16,064
General and administrative ................ 3,967 - 25,463
Financing costs, net ...................... (5,177) - 28,073
--------- --------- ---------
273,741 (36,091) 404,571
--------- --------- ---------
PREFERRED INTERESTS OF SUBSIDIARIES .......... 3,922 - 3,922
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............ 189,697 (128,374) 236,696
Provision (benefit) for income taxes ...... 84,695 - 90,168
--------- --------- ---------
NET INCOME ................................... 105,002 (128,374) 146,528
Preferred stock dividends ................. - - 1,406
--------- --------- ---------
INCOME ATTRIBUTABLE TO COMMON STOCK .......... $ 105,002 $(128,374) $ 145,122
========= ========= =========
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ........... $ 1,267,321 $ - $ - $ -
Equity in net income (loss) of affiliates.. 427,821 23,343 32,276 65,411
Other ..................................... (6,588) - - -
----------- ----------- ----------- -----------
1,688,554 23,343 32,276 65,411
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 265,954 - - -
Asset retirement obligation accretion ..... 11,216 - - -
Lease operating costs ..................... 204,842 - - -
Gathering and transportation costs ........ 14,419 - - -
Severance and other taxes ................. 38,632 - - 53
General and administrative ................ 75,340 - - -
Financing costs, net ...................... 75,486 - 13,534 30,124
----------- ----------- ----------- -----------
685,889 - 13,534 30,177
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES .......... (25) - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 1,002,690 23,343 18,742 35,234
Provision (benefit) for income taxes ...... 162,176 - (4,601) (11,049)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE ....................... 840,514 23,343 23,343 46,283
Cumulative effect of change in accounting
principle, net of income tax ............ 19,757 - - -
----------- ----------- ----------- -----------
NET INCOME ................................... 860,271 23,343 23,343 46,283
Preferred stock dividends ................. 4,260 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK .......... $ 856,011 $ 23,343 $ 23,343 $ 46,283
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ........... $ 2,007,790 $ (145,604) $ 3,129,507
Equity in net income (loss) of affiliates.. (28,061) (520,790) -
Other ..................................... 2,587 - (4,001)
----------- ----------- -----------
1,982,316 (666,394) 3,125,506
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 513,636 - 779,590
Asset retirement obligation accretion ..... 15,884 - 27,100
Lease operating costs ..................... 455,757 (145,604) 514,995
Gathering and transportation costs ........ 29,521 - 43,940
Severance and other taxes ................. 60,198 - 98,883
General and administrative ................ 17,757 - 93,097
Financing costs, net ...................... (30,433) - 88,711
----------- ----------- -----------
1,062,320 (145,604) 1,646,316
----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES .......... 8,693 - 8,668
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 911,303 (520,790) 1,470,522
Provision (benefit) for income taxes ...... 490,357 - 636,883
----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE ....................... 420,946 (520,790) 833,639
Cumulative effect of change in accounting
principle, net of income tax ............ 6,875 - 26,632
----------- ----------- -----------
NET INCOME ................................... 427,821 (520,790) 860,271
Preferred stock dividends ................. - - 4,260
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK .......... $ 427,821 $ (520,790) $ 856,011
=========== =========== ===========
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ........... $ 582,789 $ - $ - $ -
Equity in net income (loss) of affiliates.. 277,729 15,618 24,552 52,817
Other ..................................... (402) - - -
----------- ----------- ----------- -----------
860,116 15,618 24,552 52,817
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 161,698 - - -
International impairments ................. - - - -
Lease operating costs ..................... 152,615 - - -
Gathering and transportation costs ........ 12,259 - - -
Severance and other taxes ................. 23,828 - - 116
General and administrative ................ 66,882 - - -
Financing costs, net ...................... 54,512 - 13,537 30,715
----------- ----------- ----------- -----------
471,794 - 13,537 30,831
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES .......... - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 388,322 15,618 11,015 21,986
Provision (benefit) for income taxes ...... 14,812 - (4,603) (13,874)
----------- ----------- ----------- -----------
NET INCOME ................................... 373,510 15,618 15,618 35,860
Preferred stock dividends ................. 9,395 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK .......... $ 364,115 $ 15,618 $ 15,618 $ 35,860
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ........... $ 1,378,151 $ (123,370) $ 1,837,570
Equity in net income (loss) of affiliates.. (25,891) (344,825) -
Other ..................................... (7,668) - (8,070)
----------- ----------- -----------
1,344,592 (468,195) 1,829,500
----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 468,919 - 630,617
International impairments ................. 4,600 - 4,600
Lease operating costs ..................... 310,299 (123,370) 339,544
Gathering and transportation costs ........ 16,955 - 29,214
Severance and other taxes ................. 24,825 - 48,769
General and administrative ................ 11,948 - 78,830
Financing costs, net ...................... (14,234) - 84,530
----------- ----------- -----------
823,312 (123,370) 1,216,104
----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES .......... 12,584 - 12,584
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 508,696 (344,825) 600,812
Provision (benefit) for income taxes ...... 230,967 - 227,302
----------- ----------- -----------
NET INCOME ................................... 277,729 (344,825) 373,510
Preferred stock dividends ................. - - 9,395
----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK .......... $ 277,729 $ (344,825) $ 364,115
=========== =========== ===========
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ........................................ $ 883,634 $ - $ (13,791) $ (22,893)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............... (325,918) - - -
Acquisitions ...................................... (739,072) - - -
Proceeds from sales of oil and gas properties ..... 4,192 - - -
Investment in subsidiaries, net ................... (542,452) (12,525) - -
Other, net ........................................ (23,531) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............... (1,626,781) (12,525) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings .............................. 1,531,596 - 1,266 2,103
Payments on long-term debt ........................ (1,227,288) - - -
Dividends paid .................................... (51,967) - - -
Common stock activity ............................. 574,349 12,525 12,525 20,663
Treasury stock activity, net ...................... 4,275 - - -
Cost of debt and equity transactions .............. (4,520) - - -
Repurchase of preferred interests of subsidiaries.. (82,000) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........... 744,445 12,525 13,791 22,766
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................. 1,298 - - (127)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ................................. 224 - 2 127
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ..................................... $ 1,522 $ - $ 2 $ -
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ........................................ $ 1,232,159 $ - $ 2,079,109
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............... (789,431) - (1,115,349)
Acquisitions ...................................... (639,703) - (1,378,775)
Proceeds from sales of oil and gas properties ..... 12,010 - 16,202
Investment in subsidiaries, net ................... (617) 555,594 -
Other, net ........................................ (20,771) - (44,302)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............... (1,438,512) 555,594 (2,522,224)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings .............................. (385,108) 619,801 1,769,658
Payments on long-term debt ........................ (187,641) - (1,414,929)
Dividends paid .................................... - - (51,967)
Common stock activity ............................. 1,129,682 (1,175,395) 574,349
Treasury stock activity, net ...................... - - 4,275
Cost of debt and equity transactions .............. - - (4,520)
Repurchase of preferred interests of subsidiaries.. (361,000) - (443,000)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........... 195,933 (555,594) 433,866
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................. (10,420) - (9,249)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ................................. 51,533 - 51,886
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ..................................... $ 41,113 $ - $ 42,637
=========== =========== ===========
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ......................................... $ 379,276 $ - $ (12,525) $ (28,581)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................ (182,908) - - -
Acquisitions ....................................... (11,000) - - -
Proceeds from sales of oil and gas properties ...... - - - -
Proceeds from sale of U.S. Government Agency Notes.. - - - -
Investment in subsidiaries, net .................... (270,250) (12,525) - -
Other, net ......................................... (10,757) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................ (474,915) (12,525) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ............................... 1,259,436 - - 3,449
Payments on long-term debt ......................... (1,136,800) - - -
Dividends paid ..................................... (53,059) - - -
Common stock activity .............................. 27,407 12,525 12,525 25,132
Treasury stock activity, net ....................... 1,861 - - -
Cost of debt and equity transactions ............... (6,741) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............ 92,104 12,525 12,525 28,581
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... (3,535) - - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR .................................. 6,383 - 2 -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ...................................... $ 2,848 $ - $ 2 $ -
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ......................................... $ 671,099 $ - $ 1,009,269
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................ (564,308) - (747,216)
Acquisitions ....................................... - - (11,000)
Proceeds from sales of oil and gas properties ...... - - -
Proceeds from sale of U.S. Government Agency Notes.. 17,006 - 17,006
Investment in subsidiaries, net .................... (238,450) 521,225 -
Other, net ......................................... (13,749) - (24,506)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................ (799,501) 521,225 (765,716)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ............................... 358,522 (375,111) 1,246,296
Payments on long-term debt ......................... (190,671) - (1,327,471)
Dividends paid ..................................... - - (53,059)
Common stock activity .............................. 95,932 (146,114) 27,407
Treasury stock activity, net ....................... - - 1,861
Cost of debt and equity transactions ............... - - (6,741)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............ 263,783 (521,225) (111,707)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... 135,381 - 131,846
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR .................................. 29,240 - 35,625
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ...................................... $ 164,621 $ - $ 167,471
=========== =========== ===========
21
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 1,522 $ - $ 2 $ -
Receivables, net of allowance ............ 202,341 - - -
Inventories .............................. 17,851 - - -
Drilling advances and other .............. 29,663 - - -
------------ ------------ ------------ ------------
251,377 - 2 -
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET ................ 4,587,732 - - -
------------ ------------ ------------ ------------
OTHER ASSETS:
Intercompany receivable, net ............. 262,764 - (1,785) 93,753
Goodwill, net ............................ - - - -
Equity in affiliates ..................... 4,658,877 178,018 434,743 1,040,841
Deferred charges and other ............... 35,155 - - 4,833
------------ ------------ ------------ ------------
$ 9,795,905 $ 178,018 $ 432,960 $ 1,139,427
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................... $ 180,489 $ - $ - $ -
Other accrued expenses ................... 224,518 - (1,944) 11,483
------------ ------------ ------------ ------------
405,007 - (1,944) 11,483
------------ ------------ ------------ ------------
LONG-TERM DEBT ............................. 1,593,098 - 268,938 646,726
------------ ------------ ------------ ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ............................. 858,436 - (12,052) (1,105)
Advances from gas purchasers ............. 113,786 - - -
Asset retirement obligation .............. 326,905 - - -
Oil and gas derivative instruments ....... 34,146 - - -
Other .................................... 167,442 - - -
------------ ------------ ------------ ------------
1,500,715 - (12,052) (1,105)
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ....................... 6,297,085 178,018 178,018 482,323
------------ ------------ ------------ ------------
$ 9,795,905 $ 178,018 $ 432,960 $ 1,139,427
============ ============ ============ ============
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 41,113 $ - $ 42,637
Receivables, net of allowance ............ 417,167 - 619,508
Inventories .............................. 108,329 - 126,180
Drilling advances and other .............. 51,351 - 81,014
------------ ------------ ------------
617,960 - 869,339
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET ................ 6,535,572 - 11,123,304
------------ ------------ ------------
OTHER ASSETS:
Intercompany receivable, net ............. (354,732) - -
Goodwill, net ............................ 189,252 - 189,252
Equity in affiliates ..................... (815,243) (5,497,236) -
Deferred charges and other ............... 18,162 - 58,150
------------ ------------ ------------
$ 6,190,971 $ (5,497,236) $ 12,240,045
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................... $ 104,452 $ - $ 284,941
Other accrued expenses ................... 310,306 - 544,363
------------ ------------ ------------
414,758 - 829,304
------------ ------------ ------------
LONG-TERM DEBT ............................. 5,356 - 2,514,118
------------ ------------ ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ............................. 675,307 - 1,520,586
Advances from gas purchasers ............. - - 113,786
Asset retirement obligation .............. 451,768 - 778,673
Oil and gas derivative instruments ....... (22,078) - 12,068
Other .................................... 6,983 - 174,425
------------ ------------ ------------
1,111,980 - 2,599,538
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ....................... 4,658,877 (5,497,236) 6,297,085
------------ ------------ ------------
$ 6,190,971 $ (5,497,236) $ 12,240,045
============ ============ ============
22
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 224 $ - $ 2 $ 127
Receivables, net of allowance ............ 121,410 - - -
Inventories .............................. 15,509 - - -
Drilling advances and other .............. 19,468 - - -
----------- ----------- ----------- -----------
156,611 - 2 127
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET ................ 3,403,716 - - -
----------- ----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net ............. 1,146,086 - (662) (253,851)
Goodwill, net ............................ - - - -
Equity in affiliates ..................... 2,994,954 142,422 402,596 958,382
Deferred charges and other ............... 31,804 - - 2,472
----------- ----------- ----------- -----------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................... $ 124,152 $ - $ - $ -
Other accrued expenses ................... 134,191 - 2,229 1,263
----------- ----------- ----------- -----------
258,343 - 2,229 1,263
----------- ----------- ----------- -----------
LONG-TERM DEBT ............................. 1,550,645 - 268,795 297,019
----------- ----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ............................. 736,661 - (11,510) (1,205)
Advances from gas purchasers ............. 125,453 - - -
Oil and gas derivative instruments ....... 3,507 - - -
Other .................................... 134,282 - - -
----------- ----------- ----------- -----------
999,903 - (11,510) (1,205)
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES ........ - - - -
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ....................... 4,924,280 142,422 142,422 410,053
----------- ----------- ----------- -----------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
----------- -------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 51,533 $ - $ 51,886
Receivables, net of allowance ............ 406,277 - 527,687
Inventories .............................. 93,695 - 109,204
Drilling advances and other .............. 58,536 - 78,004
----------- ----------- -----------
610,041 - 766,781
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET ................ 5,061,869 - 8,465,585
----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net ............. (891,573) - -
Goodwill, net ............................ 189,252 - 189,252
Equity in affiliates ..................... (808,503) (3,689,851) -
Deferred charges and other ............... 3,957 - 38,233
----------- ----------- -----------
$ 4,165,043 $(3,689,851) $ 9,459,851
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................... $ 90,136 $ - $ 214,288
Other accrued expenses ................... 180,264 - 317,947
----------- ----------- -----------
270,400 - 532,235
----------- ----------- -----------
LONG-TERM DEBT ............................. 42,356 - 2,158,815
----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ............................. 396,663 - 1,120,609
Advances from gas purchasers ............. - - 125,453
Oil and gas derivative instruments ....... - - 3,507
Other .................................... 24,044 - 158,326
----------- ----------- -----------
420,707 - 1,407,895
----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES ........ 436,626 - 436,626
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ....................... 2,994,954 (3,689,851) 4,924,280
----------- ----------- -----------
$ 4,165,043 $(3,689,851) $ 9,459,851
=========== =========== ===========
23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Apache reported third-quarter earnings of $276 million, 90 percent above
the $145 million reported in the prior-year quarter. Third-quarter cash from
operating activities of $855 million set a new quarterly record and compared to
$385 million in the 2002 period. The quarter-over-quarter gains were primarily
fueled by:
- Record oil production of 228,698 Bopd, 51 percent above the prior-year
period.
- Record gas production of 1.26 Bcf/d, 19 percent above the comparable
2002 quarter.
- A 62 percent rise in natural gas price realizations.
Other notable operational highlights include:
- Production was initiated on the Zhao Dong block in the Bohai Bay,
offshore China in late July, further diversifying our production base.
- We completed the acquisition of fields in the Gulf of Mexico from
Shell Exploration and Production Company (Shell).
- We announced two significant exploration successes in Egypt during the
second quarter of 2003, the Qasr-1X well in the Khalda Concession, and
the Alexandrite-1X well in the Matruh Concession. The Qasr-1X tested at
a combined rate of 51.8 million cubic feet per day (MMcf/d) and 2,688
barrels of condensate per day from two zones. The Alexandrite-1X well
flowed at a daily rate of 20 MMcf/d and 1,683 barrels of condensate per
day from one interval. Initial production is anticipated in the fourth
quarter of 2003. Apache operates with a 100 percent contractor interest
in both concessions. On November 5, 2003, we completed drilling of the
Qasr-2X appraisal well, which confirmed the Qasr-1X discovery announced
in July. The Qasr-2X well has a 707-foot gross hydrocarbon column and
logs indicate net Jurassic pay at 669 feet. We expect additional
exploratory drilling and 3-D seismic acquisition in the near future.
- We announced two oil discoveries in Western Australia's offshore
Exmouth Sub-Basin, the Ravensworth-1 discovered in July, 2003 and the
Crosby-1 discovered in early October 2003. The Crosby-1 discovery
provides additional assurance that we have opened a new oil-play south
of our existing Carnarvon Basin operations. Appraisal of both fields
along with additional exploration drilling will be undertaken in early
2004.
For the nine-month period ending September 30, 2003, we reported record
earnings of $856 million, 135 percent above the comparable prior-year period.
Cash from operating activities, which totaled a record $2.1 billion, more than
doubled the 2002 nine-month period.
The outlook for the fourth quarter remains strong. Current NYMEX futures
markets are showing oil and natural gas prices remaining above historical trends
through the end of the year. Coupled with our current production profile, we
expect solid results in the fourth quarter.
On September 12, 2003, Apache's Board of Directors voted to increase the
quarterly cash dividend on our common stock 20 percent to 12 cents per share
from 10 cents (six cents per share from five cents, adjusted for the two-for-one
stock split). The Board also voted to split the stock two-for-one early in 2004,
subject to shareholder approval of an increase in the authorized number of
common shares.
To take advantage of historically low interest rates on commercial paper
and better position ourselves to pay down debt, if we so elect, the Company, on
September 26, 2003, repurchased and retired preferred interests issued by three
of its subsidiaries for approximately $443 million, plus an additional $1
million for accrued dividends and distributions.
24
CRITICAL ACCOUNTING POLICY
The Company has taken note of a July 2003 inquiry to the Financial
Accounting Standards Board regarding whether or not contract-based oil and gas
mineral rights held by lease or contract ("mineral rights") should be recorded
or disclosed as intangible assets. The inquiry presents a view that these
mineral rights are intangible assets as defined in SFAS No. 141, "Business
Combinations," and, therefore, should be classified separately on the balance
sheet as intangible assets. SFAS No. 141, and SFAS No. 142, "Goodwill and Other
Intangible Assets," became effective for transactions subsequent to June 30,
2001 with the disclosure requirements of SFAS No. 142 required as of January 1,
2002. SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and that intangible assets
be disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 scopes out
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies. Apache does not believe that SFAS No. 141 or 142 change the
classification of oil and gas mineral rights and the Company continues to
classify these assets as part of oil and gas properties. The Emerging Issues
Task Force (EITF) has added the treatment of oil and gas mineral rights to an
upcoming agenda, which may result in a change in how Apache classifies these
assets.
Should such a change be required, the amounts related to business
combinations and major asset purchases after June 30, 2001 that would be
classified as "intangible undeveloped mineral interest" was $265 million as of
September 30, 2003. The amounts related to business combinations and major asset
purchases after June 30, 2001 that would be classified as "intangible developed
mineral interest" was $1.4 billion as of September 30, 2003. Intangible
developed mineral interest amounts are presented net of accumulated depletion,
depreciation and amortization (DD&A). Accumulated DD&A was estimated using
historical depletion rates applied proportionately to the costs of the
acquisitions to be classified as "intangible developed mineral interest". The
amounts noted above only include mineral rights acquired in business
combinations or major asset purchases, and exclude those acquired individually
or in groups as we have not historically tracked these in this manner. The
Company has also not historically tracked the amount of mineral rights in the
proved property balances related to producing leases or relinquished leases. We
are currently identifying a methodology to do so for transactions subsequent to
June 30, 2001.
The numbers above are based on our understanding of the issue before the
EITF, if all mineral rights associated with unevaluated property and producing
reserves were deemed to be intangible assets:
- mineral rights with proved reserves that were acquired after June 30,
2001 and mineral rights with no proved reserves would be classified as
intangible assets and would not be included in oil and gas properties
on our consolidated balance sheet;
- results of operations and cash flows would not be materially affected
because mineral rights would continue to be amortized in accordance
with full cost accounting rules; and
- disclosures required by SFAS Nos. 141 and 142 relative to intangibles
would be included in the notes to our financial statements.
If the accounting for mineral rights is ultimately changed, transitional
guidance for intangible assets permits the reclassification of only amounts
acquired after the effective date of SFAS Nos. 141 and 142 if records were not
previously maintained to track acquisition costs based on their intangible or
tangible nature. Lack of these records prior to the effective date could result
in the loss of comparability between historical balances of tangible and
intangible asset balances and among companies in the industry.
25
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.
OIL REVENUES GAS REVENUES
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
United States.................... 33% 36% 64% 53%
Canada........................... 11% 16% 25% 25%
--- --- --- ---
North America.................... 44% 52% 89% 78%
Egypt............................ 21% 28% 8% 16%
Australia........................ 15% 20% 3% 6%
North Sea........................ 18% - - -
Other International.............. 2% - - -
--- --- --- ---
Total......................... 100% 100% 100% 100%
=== === === ===
OIL REVENUES GAS REVENUES
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
United States.................... 34% 36% 62% 52%
Canada........................... 13% 15% 27% 28%
--- --- --- ---
North America.................... 47% 51% 89% 80%
Egypt............................ 23% 29% 8% 15%
Australia........................ 17% 20% 3% 5%
North Sea........................ 12% - - -
Other International.............. 1% - - -
--- --- --- ---
Total......................... 100% 100% 100% 100%
=== === === ===
Crude Oil Contribution
The geographic mix of our 2003 third quarter oil revenues changed
appreciably compared to the 2002 comparable quarter with the addition of the
North Sea properties, which contributed 18 percent of consolidated oil revenues.
North America's oil revenues declined eight percent, to 44 percent, with the
U.S. contributing 33 percent and Canada contributing 11 percent. Egypt and
Australia contributed 21 percent and 15 percent, respectively.
On a year-to-date basis, the North Sea, with two quarters of revenue,
contributed 12 percent of consolidated oil revenues. The U.S. contributed 34
percent, while Canada's contribution totaled 13 percent. Egypt and Australia's
contributions totaled 23 percent and 17 percent, respectively.
Natural Gas Contribution
Third quarter North American natural gas revenues totaled 89 percent of
consolidated natural gas revenues, an increase of 11 percent over the comparable
quarter of 2002. The U.S. contribution rose 11 percent to 64 percent, while
Canada's contribution remained constant at 25 percent. Egypt and Australia
contributed eight percent and three percent, respectively.
For the six-month period, North American natural gas revenues totaled
89 percent of consolidated natural gas revenues, up nine percent from the
comparable prior-year period. Egypt and Australia contributed eight percent and
three percent, respectively.
26
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
2003 2002 (DECREASE) 2003 2002 (DECREASE)
----------- ----------- ---------- ----------- ----------- ----------
Revenues (in thousands):
Natural gas...................... $ 517,891 $ 267,768 93% $ 1,561,729 $ 791,906 97%
Oil.............................. 575,201 377,437 52% 1,518,012 1,013,717 50%
Natural gas liquids.............. 16,923 10,712 58% 49,766 31,947 56%
----------- ----------- ----------- -----------
Total........................ $ 1,110,015 $ 655,917 69% $ 3,129,507 $ 1,837,570 70%
=========== =========== =========== ===========
Natural Gas Volume - Mcf per day:
United States.................... 717,988 492,165 46% 658,231 515,603 28%
Canada........................... 319,522 316,307 1% 315,307 317,542 (1%)
Egypt............................ 100,965 117,781 (14%) 112,534 117,803 (4%)
Australia........................ 114,248 122,922 (7%) 107,415 123,421 (13%)
North Sea........................ 3,321 - - 1,820 - -
China............................ - - - - - -
Argentina........................ 7,858 11,250 (30%) 7,466 7,931 (6%)
----------- ----------- ----------- -----------
Total........................ 1,263,902 1,060,425 19% 1,202,773 1,082,300 11%
=========== =========== =========== ===========
Average Natural Gas price - Per Mcf:
United States.................... $ 5.00 $ 3.13 60% $ 5.40 $ 2.93 84%
Canada........................... 4.47 2.29 95% 4.87 2.53 92%
Egypt............................ 4.31 4.06 6% 4.20 3.58 17%
Australia........................ 1.47 1.34 10% 1.39 1.29 8%
North Sea........................ 1.88 - - 1.95 - -
China............................ - - - - - -
Argentina........................ .50 .40 25% .48 .43 12%
Total........................ 4.45 2.74 62% 4.76 2.68 78%
Oil Volume - Barrels per day:
United States.................... 75,593 52,510 44% 68,535 54,255 26%
Canada........................... 25,790 25,231 2% 25,143 25,178 -
Egypt............................ 48,788 42,319 15% 47,406 43,540 9%
Australia........................ 32,711 30,462 7% 31,949 30,297 5%
North Sea........................ 42,111 - - 25,320 - -
China............................ 3,131 - - 1,055 - -
Argentina........................ 574 621 (8%) 586 627 (7%)
----------- ----------- ----------- -----------
Total........................ 228,698 151,143 51% 199,994 153,897 30%
=========== =========== =========== ===========
Average Oil price - Per barrel:
United States.................... $ 27.03 $ 27.81 (3%) $ 27.52 $ 24.59 12%
Canada........................... 27.90 25.98 7% 29.23 22.80 28%
Egypt............................ 27.16 26.72 2% 27.30 24.14 13%
Australia........................ 29.04 27.55 5% 29.45 24.39 21%
North Sea........................ 26.58 - - 26.10 - -
China............................ 25.10 - - 25.10 - -
Argentina........................ 28.42 26.67 7% 29.14 23.15 26%
Total........................ 27.34 27.14 1% 27.80 24.13 15%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States.................. 8,241 6,745 22% 7,265 6,836 6%
Canada......................... 1,445 1,336 8% 1,582 1,436 10%
----------- ----------- ----------- -----------
Total........................ 9,686 8,081 20% 8,847 8,272 7%
=========== =========== =========== ===========
Average NGL Price - Per barrel:
United States.................. $ 19.23 $ 14.33 34% $ 20.99 $ 14.48 45%
Canada......................... 17.62 14.82 19% 18.85 12.58 50%
Total........................ 18.99 14.41 32% 20.60 14.15 46%
Natural Gas Revenues
The Company's third-quarter 2003 natural gas production increased 203
MMcf/d, compared to the same period last year, which increased natural gas
revenues by $83 million. Production in the U.S. climbed 226 MMcf/d,
27
concentrated in the Gulf Coast region. Production in the Gulf Coast region
includes production from Gulf of Mexico properties acquired from Shell in July
2003, BP p.l.c. (BP) in the first quarter of 2003, and production from the South
Louisiana properties acquired in the fourth quarter of 2002. These increases
offset natural declines in mature fields and production declines associated with
well performance, facility downtime and a hurricane. The Gulf Coast region,
which contributed 71 percent of Apache's U.S. 2003 production, is characterized
by reservoirs which demonstrate high initial rates followed by steep declines
when compared to other U.S. producing regions. A successful workover and
recompletion program, particularly offshore, helped to stem the natural declines
in the U.S. Natural decline drove down production in our U.S. Central region.
Egypt's lower production is related to scheduled facility downtime on the Khalda
Salam gas plant for maintenance and unrelated operational problems experienced
during start-up, following maintenance. The impact on production from the gas
plant events was partially offset by new wells on the Ras El Hekma and Matruh
concessions. In Australia, a gas contract expired in October 2002, reflecting
lower customer demand and resulting in 9 MMcf/d of lower sales in the third
quarter of 2003 versus the same period last year. Higher natural gas prices
contributed $167 million to third-quarter 2003 worldwide natural gas revenues.
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 2003 U.S. natural
gas production was subject to long-term fixed-price physical contracts, down
from 11 percent in the third quarter of 2002. We continue to amortize the
unrealized gains and losses of derivative positions closed in October and
November 2001, which were negligible in the third quarter of 2003. The following
table shows the impact on average prices of each of these items:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2003 2002 2003 2002
-------- ------ -------- ------
(Per Mcf)
Fixed-price physical................ $ (0.05) $ 0.01 $ (0.04) $ 0.01
Derivatives......................... 0.02 - (0.05) -
Amortization........................ (0.01) 0.04 (0.01) 0.05
Year-to-date natural gas production increased 11 percent compared to
the same period last year, increasing our natural gas revenues by $156 million.
Higher production rates in the U.S. Gulf Coast region, primarily for the reasons
discussed above, were partially offset by lower demand in Australia. Canada saw
a marginal decline in production, while Egypt's production was down four percent
year-over-year for the reasons discussed above. Natural gas prices increased 78
percent, increasing natural gas revenues by $613 million.
Approximately nine percent of our first nine-month 2003 domestic
natural gas production was subject to long-term fixed-price physical contracts,
down from 11 percent in the 2002 period.
Crude Oil Revenues
The Company's third-quarter 2003 oil production increased 77,555
barrels per day (b/d), compared to the same period last year, increasing
third-quarter crude oil revenues by $195 million. Production growth occurred in
all regions, primarily concentrated in the U.S. Gulf Coast and North Sea, which
benefited by the acquisitions discussed above. Egypt's production rose 15
percent as several new wells on the East Bahariya, South Umbarka, Umbarka and
Ras El Hekma concessions were brought online, more than offsetting lower
production from the Qarun concession related to increasing water cuts. Other
contributors were China, where production commenced in late July 2003, and
Australia, where several new wells were brought online, offsetting natural
decline on other wells. A one percent increase in oil price contributed $3
million to crude oil revenues.
28
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,
--------------------- -------------------------
2003 2002 2003 2002
-------- ------ -------- ------
(Per bbl)
Derivatives......................... $ (0.79) $ - $ (0.92) $ -
Amortization........................ 0.02 0.22 0.03 0.12
Year-to-date oil production increased 30 percent for the reasons
discussed above, contributing $350 million to oil sales. Realized oil prices
rose 15 percent, increasing oil sales by $154 million.
Operating Expenses
The table below presents a detail of our expenses:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2003 2002 2003 2002
-------- ------ -------- --------
(In millions)
Depreciation, depletion and amortization (DD&A):
Oil and gas property and equipment.............. $ 275 $ 194 $ 728 $ 586
Other assets.................................... 18 15 52 45
Asset retirement obligation accretion............. 11 - 27 -
International impairments......................... - - - 5
Lease operating costs (LOE)....................... 195 116 515 339
Gathering and transportation costs................ 17 10 44 29
Severance and other taxes......................... 41 16 98 49
General and administrative expense (G&A).......... 35 26 93 79
Financing costs, net.............................. 34 28 89 84
------ ------ -------- --------
Total...................................... $ 626 $ 405 $ 1,646 $ 1,216
====== ====== ======== ========
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 2003 full-cost DD&A expense of $275 million is mainly
comprised of the U.S., $135 million, Canada, $39 million, Egypt, $41 million,
Australia, $30 million, the North Sea, $27 million, and China, $3 million.
Full-cost DD&A expense increased $81 million compared to last year's third
quarter. The majority of the increase in absolute costs was the U.S., up $44
million and the North Sea, up $27 million, related to their increases in
production driven by our recent acquisitions. First production in China
contributed an additional $3 million to DD&A expense. The remaining increase in
DD&A expense is concentrated in Egypt and Australia, which is consistent with
their overall increase in production.
On a boe basis, our full-cost DD&A rate increased $.39 from $6.26 in
the third quarter of 2002 to $6.65 in 2003. The U.S. contributed $.12 to the
increase in the overall rate, reflecting the impact of our acquisitions of the
Gulf of Mexico properties and Shell. The North Sea contributed $.06 to the
increase in the overall rate driven by the acquisition of the North Sea
properties. Initial production activity in China increased the overall rate
$.03. Egypt contributed $.14 and Australia contributed $.12 to the increase in
the overall rate impacted by higher finding and development costs, while Canada
lowered the overall rate $.08 per boe.
Year-to-date full-cost DD&A expense of $728 million is mainly comprised
of the U.S., $357 million, Canada, $113 million, Egypt, $121 million, Australia,
$83 million, the North Sea, $49 million, and China, $3 million. Full-cost DD&A
expense increased $142 million compared to the same period last year. The U.S.
and the North Sea contributed $74 million and $49 million of the increase,
respectively, which is mainly related to their acquisitions as
29
discussed above. China contributed $3 million to DD&A expense, as discussed
above. The remaining increase in DD&A expense is concentrated in Egypt and
Australia.
On a boe basis, our full-cost DD&A rate rose $.24 from $6.27 in 2002 to
$6.51 in 2003. Egypt contributed $.12 and Australia contributed $.14 to the
increase in the overall rate. The impact from Egypt is related to increases in
estimated future development costs. The impact from Australia is primarily
related to higher finding costs. The North Sea contributed $.04 to the increase
in the overall rate, related to the acquisition of the North Sea properties in
2003. China contributed an additional $.01 to the overall rate driven by initial
production activity. China and the North Sea properties carry a higher DD&A rate
than our historical worldwide rate, while the impact from Canada lowered the
overall rate $.08 per boe.
Lease Operating Costs
LOE increased $78 million compared to last year's third quarter.
Seventy-three percent of the increase ($57 million) in absolute costs was
related to the acquisition of Gulf of Mexico and North Sea properties in 2003
and South Louisiana properties in the fourth quarter of 2002. Canada saw an
increase of $12 million primarily related to acquisitions completed in the
second half of 2002, higher electricity rates, and the impact of a weaker U.S.
dollar. The Company also had a higher level of workover activity compared to the
prior year.
LOE increased 52 percent, or $175 million in the first nine months of
2003 compared to the same period in 2002. As indicated above, 69 percent of the
increase in absolute costs was related to the BP, Shell and South Louisiana
acquisitions. The remaining increase occurred in all regions, primarily in
Canada as noted above.
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
transportation deduction. In both the U.S. and Canada, Apache sells oil and
natural gas under both types of arrangements. In the North Sea, Apache pays
transportation to a third-party carrier and receives payments with no
transportation deduction. 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.
Third quarter costs for gathering and transportation were $ 7 million
in Canada, $ 6 million in the U.S. and $ 4 million in the North Sea. Canada and
U.S. costs primarily related to the transportation of natural gas, while the
North Sea related to the transportation of crude oil. Prior year costs totaled
$5 million in Canada and $4 million in the U.S. The North Sea and Gulf of Mexico
properties acquired from BP in the second quarter and U.S. properties acquired
from Shell in the third quarter contributed to the increase over the comparable
period in 2002.
Year-to-date costs totaled $ 21 million in Canada, $ 16 million in the
U.S. and $ 7 million in the North Sea. In the 2002 period these costs totaled
$16 million in Canada and $13 million in the U.S. The increase over the prior
year was attributable to increased volumes in North America and the addition of
the North Sea properties.
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 Resources Rent Tax (PRRT), to which Apache first became
subject in 2002, the Petroleum Revenue Tax (PRT) on the North Sea properties,
and the Canadian Large Corporation Tax, Saskatchewan Capital Tax, Saskatchewan
Resource Surtax and Freehold Mineral Tax. Egyptian operations are not subject to
these various taxes.
In the third quarter of 2003, severance and other taxes totaled $42
million, primarily comprised of the North Sea, $17 million, the U.S., $12
million, Australia, $6 million, and Canada, $6 million. The $42 million
represents a $25 million increase from the comparable 2002 quarter. Sixty-eight
percent of the increase is related to the North Sea's $17 million of PRT
expense. Canada's taxes increased $5 million, a result of higher prices, a
weakened U.S. dollar, and the fact that the 2002-period benefited from a refund
of Saskatchewan Resource Surtax. The U.S. and Australia's severance taxes
increased $3 million and $1 million, respectively.
30
For the first nine-month period we incurred $99 million of severance
and other taxes, primarily in the U.S., $40 million, the North Sea, $23 million,
Australia, $21 million, and Canada, $14 million. Severance and other taxes more
than doubled the 2002 period, increasing $50 million. Twenty-three million
dollars of the increase was associated with North Sea's PRT expense. Canadian
taxes were $7 million higher as previously discussed. U.S. and Australia
severance taxes increased $16 million and $5 million, respectively, in line with
higher production revenues.
General and Administrative Expense
Third-quarter 2003 G&A costs were $9 million higher than the year-ago
quarter. The additional $9 million is related to one-time transition costs
incurred on the Gulf of Mexico properties acquired from Shell, incremental G&A
related to North Sea operations and our new gas marketing operations. On a boe
basis, our G&A costs were $.02 per boe higher than the year-ago quarter.
On a year-to-date basis, G&A costs were $14 million higher than the
comparable period in 2002. Forty-eight percent of the increase was associated
with G&A costs related to the acquisitions from BP and Shell discussed above.
Fifteen percent was related to the increase in the size of our gas marketing
department necessary to support the decision to market our U.S. natural gas,
which began in July 2003. The remaining 37 percent was spread among several
departments including higher insurance costs on our larger asset base,
consistent with our growth.
Financing Costs, Net
Net financing costs for the third quarter of 2003 increased $6 million
compared to the prior-year quarter. Interest expense increased $10 million with
$5 million related to the write-off of unamortized fees triggered by the
retirement of preferred interests of subsidiaries noted below. Capitalized
interest increased $4 million driven by a higher unproved property balance. If
net financing costs included distributions from Preferred Interests of
Subsidiaries, net financing costs would have increased by approximately $4
million.
For the first nine months of 2003, net financing costs increased $4
million compared to the same period in 2002 driven by an $11 million increase in
interest expense for the reasons discussed above. Higher unproved property
balances increased capitalized interest by $8 million. If net financing costs
included distributions from Preferred Interests of Subsidiaries, net financing
costs would have increased by less than $1 million.
Preferred Interests of Subsidiaries
On September 26, 2003, Apache repurchased and retired preferred
interests issued by three of its subsidiaries for approximately $443 million,
plus an additional $1 million for accrued dividends and distributions. The
transactions involved the purchase of preferred stock issued by two of the
Company's subsidiaries for approximately $82 million and the retirement of a
limited partnership interest in a partnership controlled by a subsidiary of the
Company for approximately $361 million. Apache funded the transactions with
available cash on hand and by issuing commercial paper under its existing
commercial paper facility.
Provision for Income Taxes
Third-quarter 2003 income tax expense was $110 million or 121 percent
higher than the comparable prior-year quarter. The higher taxes related to both
a higher net income in the 2003 quarter and $21 million of deferred tax expense
recognized on Canadian operations related to the weakening of the U.S. dollar
relative to the Canadian dollar. Our effective tax rate in the third quarter of
2003 of 41.90 percent compared to 38.09 percent in the 2002 quarter was a
consequence of the $21 million additional deferred tax expenses discussed above.
For the nine-month period of 2003, income tax expense was $410 million or 180
percent higher than the comparable 2002-period as discussed above. Similarly,
our effective tax rate of 43.31 percent for the nine-month period of 2003
compared to 37.83 percent in 2002. The additional deferred tax expense related
to changes in foreign currency exchange rates totaled $77 million for the
nine-month period of 2003.
31
OIL AND GAS CAPITAL EXPENDITURES
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2003 2002
------------ ----------
(In thousands)
Exploration and development:
United States.......................................... $ 318,490 $ 232,372
Canada................................................. 419,636 192,216
Egypt.................................................. 188,098 114,335
Australia.............................................. 87,544 64,559
North Sea.............................................. 23,189 -
Other International.................................... 27,998 21,448
------------ ----------
$ 1,064,955 $ 624,930
============ ==========
Capitalized Interest....................................... $ 38,072 $ 30,493
============ ==========
Gas gathering, transmission and processing facilities...... $ 14,439 $ 23,905
============ ==========
Acquisitions:
Oil and gas properties................................. $ 1,501,312 $ 29,855
Gas gathering, transmission and processing facilities.. 5,484 -
------------ ----------
$ 1,506,796 $ 29,855
============ ==========
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 forecasts, for internal use by
management, an annual cash flow. The annual forecasts are revised monthly and
capital budgets are reviewed by management and adjusted as warranted by market
conditions. The Company cannot accurately predict future oil and gas prices.
Net Cash Provided by Operating Activities
Apache's net cash provided by operating activities during the first
nine months of 2003 totaled $2.1 billion, an increase of 106 percent from $1.0
billion in the first nine months of 2002. 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.
Stock Transactions
On September 12, 2003, the Company announced that its Board of
Directors voted to increase the quarterly cash dividend on its common stock to
12 cents per share from 10 cents (six cents per share from five cents, adjusted
for the two-for-one stock split), effective with the November 2003 payment, and
to split its common stock two-for-one early in 2004, subject to shareholder
approval of an increase in the authorized number of common shares.
LIQUIDITY
The Company had $43 million in cash and cash equivalents on hand at
September 30, 2003, down from $52 million at December 31, 2002. Apache's ratio
of current assets to current liabilities at September 30, 2003 was 1.05 compared
to 1.44 at December 31, 2002.
On January 22, 2003, the Company completed a public offering of 19.8
million shares of Apache common stock, adjusted for the five percent common
stock dividend and the two-for-one common stock split, including underwriters'
over-allotment option, for net proceeds of approximately $554 million. The
proceeds were used toward Apache's acquisition from BP of producing properties
in the North Sea and the Gulf of Mexico.
32
Apache believes that cash on hand, net cash generated from operations,
short-term investments, and unused committed borrowing capacity under its $1.5
billion global credit facility will be adequate to satisfy future financial
obligations and liquidity needs. The $750 million 364-day U.S. credit facility,
which was scheduled to mature on June 1, 2003, was extended on the same terms
for an additional one-year period and is currently scheduled to mature on May
28, 2004. As of September 30, 2003, Apache's available borrowing capacity under
its global credit facility was $1.2 billion.
Occasionally, the Company accesses capital markets to fund
acquisitions, repay debt, and enhance liquidity. On May 15, 2003, Apache Finance
Canada Corporation (Apache Finance Canada) issued $350 million of 4.375 percent,
12-year, senior unsecured notes in a private placement. The notes are
irrevocably and unconditionally guaranteed by Apache. Interest is payable
semi-annually on May 15 and November 15 of each year commencing on November 15,
2003. The notes were sold pursuant to Rule 144A and Regulation S, and may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act of 1933, as
amended. If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.
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 reducing operating costs per unit. In order to
achieve these objectives, we actively pursue production enhancement
opportunities such as workovers, recompletions and moderate risk drilling, while
divesting marginal and non-strategic properties and identifying other activities
to reduce costs. Given the significant acquisitions and discoveries over the
last few years, including the properties recently acquired from BP and Shell, we
have increased our 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. 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.
33
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 sells all of its Egyptian crude oil and natural gas production
to the Egyptian General Petroleum Corporation (EGPC) for U.S. dollars. Weak
economic conditions in Egypt continue to impact the timeliness of receipts from
EGPC; however, the situation has not deteriorated since year-end and Apache
continues to receive payments.
U.S. and Canadian energy markets continue to evolve into a single
energy market. In light of this ongoing transformation, we adopted the U.S.
dollar as our functional currency in Canada, effective October 1, 2002. The U.S.
dollar is now the functional currency for all of our foreign operations.
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, 2002, is incorporated herein by reference. Information
about market risks for the quarter ended September 30, 2003 does not differ
materially from the disclosure in our 2002 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 87 percent of the Company's
debt. At September 30, 2003, total debt included $323 million of floating-rate
debt. As a result, Apache's annual interest costs in 2003 will fluctuate based
on short-term interest rates on approximately 13 percent of its total debt
outstanding at September 30, 2003. The impact on cash flow of a 10 percent
change in the floating interest rate would be approximately $100,000 per
quarter.
On September 30, 2003, the Company had open natural gas derivative
positions with a fair value of $(22) million. A 10 percent change in natural gas
prices would change the fair value by plus or minus $38 million. The Company
also had open oil price swap positions with a fair value of $(12) million. A 10
percent change in oil prices would change the fair value by plus or minus $17
million. See Note 2 to the Company's consolidated financial statements for
notional volumes associated with the Company's derivative contracts.
ITEM 4 - CONTROLS AND PROCEDURES
G. Steven Farris, the Company's President, Chief Executive Officer and
Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice
President and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures within the last 90 days preceding the date of
this report. Based on that review and as of the date of that evaluation, the
Company's disclosure controls were found to be adequate, providing effective
means to insure that we timely and accurately disclose the information we are
required to disclose under applicable laws and regulations. Also, we made no
significant changes in internal controls or any other factors that could affect
our internal controls since our most recent internal controls evaluation.
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
34
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.
35
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, 2002 (filed with the Securities and Exchange
Commission on March 25, 2003) is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
36
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.
------------
* Previously filed.
(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, 2003:
Item 5 - Other Events - dated September 12, 2003, filed
September 18, 2003
Apache announced (i) an increase in the cash dividend on its
common stock to 12 cents per share from 10 cents per share (six
cents per share from five cents, adjusted for the two-for-one
stock split) and (ii) a split of its common stock two-for-one,
subject to shareholder approval of an increase in the authorized
number of common shares.
Item 5 - Other Events - dated September 26, 2003, filed
September 30, 2003
In a series of related transactions on September 26, 2003, the
corporation repurchased and retired preferred interests issued
by three of its subsidiaries for approximately $444 million. The
transactions involved the purchase of preferred stock issued by
two of the corporation's subsidiaries for approximately $82
million and the retirement of a limited partnership interest in
a partnership controlled by a subsidiary of the corporation for
approximately $362 million. The amounts included $1 million for
accrued dividends and distributions.
37
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: January 23, 2004 /s/ ROGER B. PLANK
-------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: January 23, 2004 /s/ THOMAS L. MITCHELL
-------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
*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.
------------
* Previously filed.