10-Q 1 h91800e10-q.txt APACHE CORPORATION - 9/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ------------------- ------------------- Commission File Number 1-4300 APACHE CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 41-0747868 ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Suite 100, One Post Oak Central 2000 Post Oak Boulevard, Houston, TX 77056-4400 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (713) 296-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of Registrant's common stock, outstanding as of September 30, 2001.............124,627,521
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, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (In thousands, except per common share data) REVENUES: Oil and gas production revenues $ 658,995 $ 623,543 $ 2,256,638 $ 1,557,866 Equity in income of affiliates -- (446) -- 1,084 Other revenues (losses) (6,571) (4,584) (8,628) (5,833) ------------ ------------ ------------ ------------ 652,424 618,513 2,248,010 1,553,117 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Depreciation, depletion and amortization 217,021 153,905 598,203 422,392 International impairments -- -- 65,000 -- Lease operating costs 103,301 66,510 294,828 186,463 Severance and other taxes 16,656 16,021 58,197 36,104 Administrative, selling and other 22,794 18,089 66,363 49,331 Financing costs: Interest expense 44,140 43,775 138,106 126,958 Amortization of deferred loan costs 1,089 487 2,123 2,219 Capitalized interest (15,520) (16,011) (44,388) (44,852) Interest income (1,988) (551) (4,240) (1,655) ------------ ------------ ------------ ------------ 387,493 282,225 1,174,192 776,960 ------------ ------------ ------------ ------------ Minority interest 3,189 -- 3,189 -- ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 261,742 336,288 1,070,629 776,157 Provision for income taxes 104,909 134,040 425,850 312,681 ------------ ------------ ------------ ------------ INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 156,833 202,248 644,779 463,476 Cumulative effect of change in accounting principle, net of income tax -- -- -- (7,539) ------------ ------------ ------------ ------------ NET INCOME 156,833 202,248 644,779 455,937 Preferred stock dividends 4,908 4,908 14,693 15,080 ------------ ------------ ------------ ------------ INCOME ATTRIBUTABLE TO COMMON STOCK $ 151,925 $ 197,340 $ 630,086 $ 440,857 ============ ============ ============ ============ BASIC NET INCOME PER COMMON SHARE: Before change in accounting principle $ 1.22 $ 1.64 $ 5.05 $ 3.87 Cumulative effect of change in accounting principle -- -- -- (.07) ------------ ------------ ------------ ------------ $ 1.22 $ 1.64 $ 5.05 $ 3.80 ============ ============ ============ ============ DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle $ 1.19 $ 1.58 $ 4.88 $ 3.74 Cumulative effect of change in accounting principle -- -- -- (.06) ------------ ------------ ------------ ------------ $ 1.19 $ 1.58 $ 4.88 $ 3.68 ============ ============ ============ ============
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, ------------------------------ 2001 2000 ------------ ------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 644,779 $ 455,937 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 598,203 422,392 Provision for deferred income taxes 277,234 202,783 International impairments 65,000 -- Cumulative effect of change in accounting principle -- 7,539 Other (45,339) 6,562 Other non-cash items -- (1,087) Changes in operating assets and liabilities: (Increase) decrease in receivables 162,703 (157,081) (Increase) decrease in advances to oil and gas ventures and other (40,789) (1,856) (Increase) decrease in deferred charges and other (5,562) (5,139) (Increase) decrease in product inventory 1,061 (17,290) Increase (decrease) in payables (57,587) 55,842 Increase (decrease) in accrued expenses (4,671) 18,260 Increase (decrease) in advances from gas purchasers (9,336) (20,293) Increase (decrease) in deferred credits and noncurrent liabilities (36,217) (5,448) ------------ ------------ Net cash provided by operating activities 1,549,479 961,121 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,175,892) (679,338) Non-cash portion of net oil and gas property additions 40,053 10,586 Acquisition of Fletcher subsidiaries (465,018) -- Acquisition of Repsol properties (446,933) (119,278) Acquisition of Collins & Ware properties -- (320,049) Acquisition of Occidental properties (11,000) (332,020) Proceeds from sales of oil and gas properties 233,281 20,124 Purchase of U.S. Government Agency Notes (116,737) -- Other, net (58,530) (10,834) ------------ ------------ Net cash used in investing activities (2,000,776) (1,430,809) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings 2,278,414 619,849 Payments on long-term debt (2,185,160) (541,706) Dividends paid (14,686) (30,741) Payments to repurchase Series C Preferred Stock -- (2,613) Common stock activity, net 7,404 457,475 Treasury stock activity, net (43,003) (17,727) Cost of debt and equity transactions (1,648) (739) Proceeds from minority interest, net of issuance cost 440,654 -- ------------ ------------ Net cash provided by financing activities 481,975 483,798 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 30,678 14,110 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,173 13,171 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,851 $ 27,281 ============ ============
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, 2001 2000 ------------- ------------ (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 67,851 $ 37,173 Receivables 436,605 506,723 Inventories 86,596 54,764 Advances to oil and gas ventures and other 76,582 31,360 Oil and gas derivative instruments 37,045 -- ------------- ------------ 704,679 630,020 ------------- ------------ PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties 11,073,940 9,423,922 Unproved properties and properties under development, not being amortized 929,576 977,491 Gas gathering, transmission and processing facilities 705,636 573,621 Other 161,638 119,590 ------------- ------------ 12,870,790 11,094,624 Less: Accumulated depreciation, depletion and amortization (4,919,679) (4,282,162) ------------- ------------ 7,951,111 6,812,462 ------------- ------------ OTHER ASSETS: Goodwill, net 192,155 -- Long-term investments 116,312 -- Oil and gas derivative instruments 62,791 -- Deferred charges and other 39,687 39,468 ------------- ------------ $ 9,066,735 $ 7,481,950 ============= ============
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, 2001 2000 ------------- ------------ (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ 25,000 Oil and gas derivative instruments 22,003 -- Accounts payable 289,843 259,120 Accrued operating expense 32,397 23,893 Accrued exploration and development 182,642 143,916 Accrued compensation and benefits 25,896 34,695 Accrued interest 39,164 25,947 Accrued income taxes 7,743 9,123 Other accrued expenses 16,777 31,653 ------------- ------------ 616,465 553,347 ------------- ------------ LONG-TERM DEBT 2,311,512 2,193,258 ------------- ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes 986,494 699,833 Advances from gas purchasers 143,770 153,106 Oil and gas derivative instruments 65,435 -- Other 104,192 127,766 ------------- ------------ 1,299,891 980,705 ------------- ------------ MINORITY INTEREST 440,665 -- ------------- ------------ 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 Series C, 6.5% Conversion Preferred Stock, 138,482 shares issued and outstanding 208,207 208,207 Common stock, $1.25 par, 215,000,000 shares authorized, 128,328,059 and 126,500,776 shares issued, respectively 160,410 158,126 Paid-in capital 2,825,998 2,173,183 Retained earnings 1,276,673 1,226,531 Treasury stock, at cost, 3,700,538 and 2,866,028 shares, respectively (111,938) (69,562) Accumulated other comprehensive loss (59,535) (40,232) ------------- ------------ 4,398,202 3,754,640 ------------- ------------ $ 9,066,735 $ 7,481,950 ============= ============
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 RETAINED (In thousands) INCOME STOCK STOCK STOCK CAPITAL EARNINGS ------------- --------- --------- ---------- ------------ ---------- BALANCE AT DECEMBER 31, 1999 $ 98,387 $ 210,490 $ 145,504 $ 1,717,027 $ 558,721 Comprehensive income: Net income $ 455,937 -- -- -- -- 455,937 Currency translation adjustments (35,344) -- -- -- -- -- Unrealized loss on marketable securities, net of applicable income tax benefit of $174 (304) -- -- -- -- -- ------------- Comprehensive income $ 420,289 ============= Cash dividends: Preferred -- -- -- -- (14,750) Common ($.21 per share) -- -- -- -- (25,252) Common shares issued -- -- 12,468 443,889 -- Series C Preferred Stock purchased -- (2,283) -- -- (330) Treasury shares purchased, net -- -- -- 414 -- --------- --------- ---------- ------------ ---------- BALANCE AT SEPTEMBER 30, 2000 $ 98,387 $ 208,207 $ 157,972 $ 2,161,330 $ 974,326 ========= ========= ========== ============ ========== BALANCE AT DECEMBER 31, 2000 $ 98,387 $ 208,207 $ 158,126 $ 2,173,183 $1,226,531 Comprehensive income: Net income $ 644,779 -- -- -- -- 644,779 Currency translation adjustments (60,681) -- -- -- -- -- Unrealized loss on marketable securities, net of applicable income tax benefit of $278 (539) -- -- -- -- -- Unrealized gain on derivatives, net of applicable income tax provision of $30,115 41,917 -- -- -- -- -- ------------- Comprehensive income $ 625,476 ============= Cash dividends: Preferred -- -- -- -- (14,693) Common ($.28 per share) -- -- -- -- (34,894) Ten percent common stock dividend -- -- -- 545,050 (545,050) Common shares issued -- -- 2,284 106,554 -- Treasury shares purchased, net -- -- -- 1,211 -- --------- --------- ---------- ------------ ---------- BALANCE AT SEPTEMBER 30, 2001 $ 98,387 $ 208,207 $ 160,410 $ 2,825,998 $1,276,673 ========= ========= ========== ============ ========== ACCUMULATED OTHER TOTAL TREASURY COMPREHENSIVE SHAREHOLDERS' (In thousands) STOCK INCOME (LOSS) EQUITY ----------- ------------- ------------- BALANCE AT DECEMBER 31, 1999 $ (52,256) $ (8,446) $ 2,669,427 Comprehensive income: Net income -- -- 455,937 Currency translation adjustments -- (35,344) (35,344) Unrealized loss on marketable securities, net of applicable income tax benefit of $174 -- (304) (304) Comprehensive income Cash dividends: Preferred -- -- (14,750) Common ($.21 per share) -- -- (25,252) Common shares issued -- -- 456,357 Series C Preferred Stock purchased -- -- (2,613) Treasury shares purchased, net (17,309) -- (16,895) ----------- ------------- ------------- BALANCE AT SEPTEMBER 30, 2000 $ (69,565) $ (44,094) $ 3,486,563 =========== ============= ============= BALANCE AT DECEMBER 31, 2000 $ (69,562) $ (40,232) $ 3,754,640 Comprehensive income: Net income -- -- 644,779 Currency translation adjustments -- (60,681) (60,681) Unrealized loss on marketable securities, net of applicable income tax benefit of $278 -- (539) (539) Unrealized gain on derivatives, net of applicable income tax provision of $30,115 -- 41,917 41,917 Comprehensive income Cash dividends: Preferred -- -- (14,693) Common ($.28 per share) -- -- (34,894) Ten percent common stock dividend -- -- -- Common shares issued -- -- 108,838 Treasury shares purchased, net (42,376) -- (41,165) ----------- ------------- ------------- BALANCE AT SEPTEMBER 30, 2001 $ (111,938) $ (59,535) $ 4,398,202 =========== ============= =============
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 (SEC), and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the 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. Change in Accounting Principle - In December 2000, the staff of the SEC announced that commodity inventories should be carried at cost, not market value, despite longstanding industry practice. As a result, Apache changed its accounting for crude oil inventories in the fourth quarter of 2000, retroactive to the beginning of the year, and recognized a non-cash cumulative-effect charge to earnings effective January 1, 2000. Quarterly results for 2000 have been restated to reflect this change in accounting. 1. ACQUISITIONS AND DIVESTITURES Acquisitions - In June 2000, Apache completed the acquisition of long-lived producing properties in the Permian Basin and South Texas from Collins & Ware, Inc. (Collins & Ware) for $320.7 million. The acquisition included estimated proved reserves of 83.7 million barrels of oil equivalent (MMboe) as of the acquisition date. One-third of the reserves are liquid hydrocarbons. In August 2000, Apache completed the acquisition of a Delaware limited liability company (LLC) owned by subsidiaries of Occidental Petroleum Corporation (Occidental) and the related natural gas production for $321.2 million, plus future payments of approximately $44.0 million over four years. The Occidental properties are located in 32 fields on 93 blocks on the Outer Continental Shelf of the Gulf of Mexico. The acquisition included estimated proved reserves of 53.1 MMboe as of the acquisition date. In December 2000, Apache completed the acquisition of Canadian properties from Canadian affiliates of Phillips Petroleum Company (Phillips) for $490.3 million. The acquisition included estimated proved reserves of approximately 70.0 MMboe as of the acquisition date. The properties comprise approximately 212,000 net developed acres and 275,000 net undeveloped acres, 786 square miles of 3-D seismic and 4,155 miles of 2-D seismic located in the Zama area of Northwest Alberta. The assets also include three sour gas plants with a total capacity of 150 million cubic feet (MMcf) per day, 13 compressor stations and 150 miles of owned and operated gas gathering lines. On March 22, 2001, Apache completed the acquisition of substantially all of Repsol YPF's (Repsol) oil and gas concession interests in Egypt for approximately $446.9 million in cash, subject to normal post closing adjustments. The properties include interests in seven Western Desert concessions and have estimated proved reserves of 66 MMboe as of the acquisition date. The Company already holds interests in five of the seven concessions. On March 27, 2001, Apache completed the acquisition of subsidiaries of Fletcher Challenge Energy (Fletcher) for approximately $465.0 million in cash and 1.64 million restricted shares of Apache common stock issued to Shell Overseas Holdings (valued at $61.04 per share), subject to normal post closing adjustments. The transaction included properties located in Canada's Western Sedimentary Basin and in Argentina and estimated proved reserves of 120.8 MMboe as of the acquisition date. Apache assumed a liability of $103.5 million representing the fair value of derivative instruments and fixed-price commodity contracts entered into by Fletcher. 6 The Fletcher and Repsol purchase prices were allocated to the assets acquired and liabilities assumed based upon their fair values on the date of acquisition, as follows:
FLETCHER REPSOL ---------- --------- (In thousands) Value of properties acquired, including gathering and transportation facilities $ 571,718 $ 299,933 Goodwill 107,200 90,000 Derivative instruments and fixed-price contracts (103,486) -- Common stock issued (100,325) -- Working capital acquired, net (8,202) 57,000 Deferred income tax liability (1,887) -- ---------- --------- Cash paid, net of cash acquired $ 465,018 $ 446,933 ========== =========
The following unaudited pro forma information shows the effect on the Company's consolidated results of operations as if the Fletcher, Repsol, Collins & Ware, Occidental and Phillips acquisitions occurred on January 1, 2000. The pro forma information is based on numerous assumptions and is not necessarily indicative of future results of operations.
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------- ---------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ------------ ------------ ------------ (In thousands, except per share data) Revenues $ 2,248,010 $ 2,354,965 $ 1,553,117 $ 2,201,608 Net income 644,779 670,356 455,937 621,444 Preferred stock dividends 14,693 14,693 15,080 15,080 Income attributable to common stock 630,086 655,663 440,857 606,364 Net income per common share: Basic $ 5.05 $ 5.24 $ 3.80 $ 4.86 Diluted 4.88 5.05 3.68 4.69 Average common shares outstanding 124,684 125,196 116,009 124,838
On August 23, 2001, Apache completed the acquisition of properties located in Texas, Oklahoma and New Mexico with estimated proved reserves of 9.2 MMboe as of the acquisition date for approximately $42.5 million in cash and the assumption of certain liabilities, representing the fair value of derivative instruments of $9.2 million, subject to normal post closing adjustments. Divestitures - During the nine months ended September 30, 2001, Apache sold 66.4 MMboe of proved reserves from largely marginal United States and Canadian properties, collecting cash of $233.3 million. 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Apache periodically enters into commodity derivatives contracts to manage its exposure to oil and gas price volatility. Commodity derivatives contracts, which are usually placed with major financial institutions that the Company believes are minimal credit risks, may take the form of futures contracts, swaps or options. The oil and gas reference prices upon which these commodity derivatives contracts are based, reflect various market indices that have a high degree of historical correlation with actual prices received by the Company. Realized gains and losses from the Company's price risk management activities are recognized in oil and gas production revenues when the associated production occurs and the resulting cash flows are reported as cash flows from operating activities. Effective January 1, 2001, Apache adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that all derivative instruments (including derivative instruments embedded in other contracts), as defined, be recorded in the balance sheet as either an asset or liability measured at fair value and 7 requires that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Hedge accounting treatment allows unrealized gains and losses to be deferred in other comprehensive income (for the effective portion of the hedge) until such time as the forecasted transaction occurs, and requires that a company formally document, designate, and assess the effectiveness of derivative instruments that receive hedge accounting treatment. Upon adoption, Apache formally documented and designated all hedging relationships and verified that its hedging instruments are effective in offsetting changes in actual prices received by the Company. Such effectiveness is monitored at least quarterly and any ineffectiveness is reported in other revenues (losses) in the statement of consolidated operations. Apache's derivative positions break down into three general categories: advances from gas purchasers, Apache hedging activity and derivatives inherited as part of the Fletcher and August 23, 2001 acquisitions. The carrying values at transition and September 30, 2001 are summarized below:
TRANSITION SEPTEMBER 30, JANUARY 1, 2001 2001 --------------- ------------- (In thousands) Advances from Gas Purchasers: Derivatives - asset $ 121,453 $ 53,165 Embedded derivatives - liability (121,453) (53,165) Apache Hedging Activity: Fixed-price swaps $ (30,872) $ (11,548) Zero-cost collars - time value (35,083) 23,884 Zero-cost collars - intrinsic value (50,274) 22,787 --------------- ------------- $ (116,229) $ 35,123 =============== =============
ACQUISITION CLOSING DATE SEPTEMBER 30, MARCH 27, 2001 2001 -------------- ------------- (In thousands) Fletcher Acquisition: Derivatives $ (89,401) $ (16,096) Fixed-price physical contracts (14,085) (2,109) -------------- ------------- $ (103,486) $ (18,205) ============== =============
ACQUISITION CLOSING DATE SEPTEMBER 30, AUGUST 23, 2001 2001 --------------- ------------- (In thousands) August 23, 2001 Acquisition: Derivatives $ (9,156) $ (4,520) =============== =============
On the transition date, January 1, 2001, Apache recognized a derivative asset of $121.5 million reflecting the fair value of gas price swaps entered into in connection with certain advance payments received from gas purchasers in 1998 and 1997. Apache also recognized a derivative liability of $121.5 million as an embedded derivative in the contracts under which the advance payments were received. The liability reflects the obligation to deliver gas at market prices in excess of the contractual prices determined at the inception of these transactions. The balance of Apache's derivative instruments relate to cash flow hedges on forecasted oil and gas sales, primarily entered into as the result of Apache's acquisition hedging strategy. On the transition date, the fair value of these derivative instruments represented a net liability of $116.2 million. The time value of zero-cost collars at September 30, 2001 was $23.9 million. In connection with the Fletcher acquisition, Apache assumed liabilities for derivative instruments (fixed-price swaps and put options) and fixed-price physical contracts entered into by Fletcher. The $103.5 million fair value on the closing date was recorded as a cost of the Fletcher acquisition (see Note 1). 8 In connection with the acquisition completed August 23, 2001, Apache assumed liabilities for derivative instruments (fixed-price swaps and put options) with a fair value of $9.2 million on the closing date, which was recorded as a cost of the acquisition (see Note 1). 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) Cumulative effect of change in accounting principle $ (116,229) $ (71,286) Reclassification of net realized losses into earnings 70,288 42,304 Net change in derivative fair value 117,973 70,899 ----------- --------- Accumulated other comprehensive income related to derivatives at September 30, 2001 $ 72,032 $ 41,917 =========== =========
In early November 2001, due to credit issues surrounding the derivative market, Apache began to close out substantially all of its hedging positions. The Company does not expect to recognize a material gain or loss from the expected proceeds received in connection with termination of these positions. 3. 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, ---------------------------------------------------------------------- 2001 2000 --------------------------------- ----------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE --------- --------- ----------- ---------- --------- ----------- (In thousands, except per share amounts) BASIC: Income attributable to common stock $ 151,925 124,719 $ 1.22 $ 197,340 120,197 $ 1.64 =========== =========== EFFECT OF DILUTIVE SECURITIES: Stock options and other -- 721 -- 1,221 Series C Preferred Stock 3,488 5,676 3,488 5,676 --------- --------- ---------- --------- DILUTED: Income attributable to common stock, including assumed conversions $ 155,413 131,116 $ 1.19 $ 200,828 127,094 $ 1.58 ========= ========= =========== ========== ========= ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2001 2000 --------------------------------- ----------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE --------- --------- ----------- ---------- --------- ----------- (In thousands, except per share amounts) BASIC: Income attributable to common stock $ 630,086 124,684 $ 5.05 $ 440,857 116,009 $ 3.80 =========== =========== EFFECT OF DILUTIVE SECURITIES: Stock options and other -- 981 -- 943 Series C Preferred Stock 10,464 5,676 10,820 5,676 --------- --------- ---------- --------- DILUTED: Income attributable to common stock, including assumed conversions $ 640,550 131,341 $ 4.88 $ 451,677 122,628 $ 3.68 ========= ========= =========== ========== ========= ==========
9 4. DEBT The Company's 9.25 percent notes due June 2002 are classified as long-term debt in the accompanying consolidated balance sheet as the Company has the ability and intent to refinance such amount on a long-term basis through either the issuance of commercial paper or borrowing under the U.S. portion of the global credit facility and the 364-day revolving credit facility. 5. STOCK DIVIDEND On September 13, 2001, the Company's Board of Directors declared a 10 percent stock dividend payable on January 21, 2002 to shareholders of record on December 31, 2001. No fractional shares will be issued and payments will be made in lieu of fractional shares. In connection with the dividend, a reclassification was made to transfer $545 million from retained earnings to additional paid-in-capital in the accompanying consolidated balance sheet as of September 30, 2001. The following pro forma information shows the effect on the Company's consolidated results of operations as if the stock dividend were made on January 1, 2000.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ----------------------- ------------------------- ----------------------- ------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- ----------- --------- (In thousands, except per share data) Weighted average shares outstanding: Basic 124,719 137,190 124,684 137,152 120,197 132,217 116,009 127,610 Diluted 131,116 144,228 131,341 144,475 127,094 139,804 122,628 134,890 Net income per common share: Basic $ 1.22 $ 1.11 $ 5.05 $ 4.59 $ 1.64 $ 1.49 $ 3.80 $ 3.45 Diluted 1.19 1.08 4.88 4.43 1.58 1.44 3.68 3.35
6. MINORITY INTEREST In August 2001, Apache entered into a series of financing transactions, described below, to raise a total of $440.7 million for investments, to pay down existing debt and increase financial flexibility. Apache contributed interests in various fields valued at $923 million to new subsidiaries in connection with the financing transactions. Additionally, on August 7, 2001, Apache purchased $116.7 million in U.S. Government Agency Notes, maturing in October 2002, which were contributed to the subsidiaries. Unrelated institutional investors contributed $443 million ($440.7 million, net of issuance costs) to the various subsidiaries in exchange for preferred stock of the subsidiaries and a limited partner interest in one of the entities. The third party investors are entitled to receive a weighted average return of 123 basis points above the prevailing LIBOR interest rate. The preferred and limited partner interests are repayable from the assets of the subsidiaries with limited recourse to Apache. The assets, liabilities and operations of the subsidiaries are included in Apache's consolidated financial statements at historical costs, with the preferred and limited partner interests of the subsidiaries reflected as a minority interest. The U.S. Government Agency Notes are accounted for as "held-to-maturity" securities shown as long-term investments in the accompanying balance sheet. 7. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes accounting and reporting standards discontinuing goodwill amortization and requiring a periodic review for impairments. Apache's goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in the Fletcher and Repsol acquisitions (see Note 1). The goodwill currently is being amortized on a straight-line basis over 20 years. Apache will continue to record amortization of approximately $2.5 million per quarter through December 31, 2001. The 10 Company will adopt SFAS No. 142 on January 1, 2002. No impairment of goodwill is currently anticipated; however, the Company will continue to assess recoverability of goodwill on an ongoing basis. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." The statement requires entities to record the fair value of legal obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company is currently assessing the impact of adopting SFAS No. 143 on its financial condition and results of operations and has not determined the timing of adoption. 8. SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH INVESTING AND FINANCING ACTIVITIES In January 2000, the Company acquired producing properties formerly owned by a subsidiary of Repsol for cash, plus assumed liabilities of $29.8 million. In March 2001, the Company acquired substantially all of Repsol's oil and gas concession interests in Egypt for cash and the assumption of certain non-cash liabilities. The accompanying financial statements include the non-cash amounts detailed in Note 1. In March 2001, the Company acquired subsidiaries of Fletcher for cash, 1.64 million restricted shares of common stock and the assumption of certain non-cash liabilities. The accompanying financial statements include the non-cash amounts detailed in Note 1. In August 2001, the Company acquired properties located in Texas, Oklahoma and New Mexico for cash and the assumption of certain non-cash liabilities. The accompanying financial statements include the non-cash amounts detailed in Note 1. CASH PAID FOR INTEREST AND TAXES The following table provides supplemental disclosure of cash flow information:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2001 2000 ------------- ------------- (In thousands) Cash paid during the period for: Interest (net of amounts capitalized) $ 80,501 $ 78,643 Income taxes (net of refunds) 149,996 95,358
11 9. BUSINESS SEGMENT INFORMATION Apache has five reportable segments which are primarily in the business of natural gas and crude oil exploration and production. The Company evaluates performance based on profit or loss from oil and gas operations before income and expense items incidental to oil and gas operations and income taxes. Apache's reportable segments are managed separately because of their geographic locations. Financial information by operating segment is presented below:
OTHER UNITED STATES CANADA EGYPT AUSTRALIA INTERNATIONAL TOTAL ------------- --------- --------- --------- ------------- ----------- (In thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Oil and Gas Production Revenues .......... $ 1,211,714 $ 492,050 $ 357,786 $ 195,088 $ -- $ 2,256,638 ============= ========== ========== ========= ============= =========== Operating Income (Loss) (1) (2) .......... $ 689,412 $ 279,710 $ 230,351 $ 105,968 $ (65,031) $ 1,240,410 ============= ========== ========== ========= ============= Other Income (Expense): Other revenues (losses) ............... (8,628) Administrative, selling and other ..... (66,363) Minority interest ..................... (3,189) Financing costs, net .................. (91,601) ----------- Income Before Income Taxes ............... $ 1,070,629 =========== Total Assets ............................. $ 4,372,952 $2,183,618 $1,505,507 $ 878,381 $ 126,277 $ 9,066,735 ============= ========== ========== ========= ============= =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Oil and Gas Production Revenues .......... $ 893,563 $ 217,611 $ 277,646 $ 169,046 $ -- $ 1,557,866 ============= ========== ========== ========= ============= =========== Operating Income (Loss) (1) .............. $ 490,044 $ 128,846 $ 195,042 $ 99,011 $ (36) $ 912,907 ============= ========== ========== ========= ============= Other Income (Expense): Equity in income of affiliates ........ 1,084 Other revenues (losses) ............... (5,833) Administrative, selling and other ..... (49,331) Financing costs, net .................. (82,670) ----------- Income Before Income Taxes ............... $ 776,157 =========== Total Assets ............................. $ 3,848,036 $ 923,975 $ 956,424 $ 833,427 $ 170,697 $ 6,732,559 ============= ========== ========== ========= ============= ===========
(1) Operating income consists of oil and gas production revenues less depreciation, depletion and amortization (DD&A) expense, international impairments, lease operating costs, and severance and other taxes. (2) During the second quarter of 2001, the Company recorded a nonrecurring $65 million impairment ($41 million after-tax) of unproved property costs in Poland and China. 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Record natural gas production and strong oil production both contributed to solid third quarter and nine-month results, mitigating the impact of declining commodity prices. On a barrel-of-oil-equivalent (Boe) basis, third quarter daily production increased 89,483 barrels of oil equivalent per day (Boe/d) to a record 359,979 Boe/d, 33 percent higher than the third quarter of last year. Following are the 2001 third quarter and nine-month highlights: o Natural gas production rose to a record 1.2 billion cubic feet per day (Bcf/d) in the third quarter, slightly exceeding the record setting second quarter of 2001 and 35 percent above the prior-year period. Third quarter oil production increased 37,496 barrels of oil per day (Bbl/d) to 153,369 Bbl/d, 32 percent above the year-ago period. For the nine-month period, production rates of 1.1 Bcf/d and 143,311 Bbl/d were 40 percent and 25 percent ahead of 2000, respectively. o Year-to-date income attributable to common stock of $630.1 million ($5.05 per basic common share) exceeded the prior year by $189.2 million, or 43 percent, while third quarter earnings of $151.9 million declined 23 percent from the comparable period. Record production mitigated the impact of a $.90 per thousand cubic feet (Mcf) decline in gas price realizations and a $4.96 per barrel decline in oil prices from third quarter 2000. o Net cash provided by operating activities increased $588.4 million, or 61 percent, to $1.5 billion from the $1.0 billion generated during the first nine months of 2000. Commodity Prices - Apache's third quarter realized oil price declined $4.96 to $24.15 per barrel from $29.11 in the third quarter of 2000, decreasing revenues by $52.9 million. Third quarter natural gas price realizations declined $.90 to $2.80 per Mcf from $3.70 per Mcf in the year-ago period, negatively impacting revenues by $72.6 million. For the nine-month period oil price realizations decreased $1.85 to $25.01 per barrel from $26.86 in 2000, decreasing revenues by $58 million. Year-to-date natural gas price realizations of $4.05 per Mcf exceeded the prior year by $.92, positively impacting revenues by $201.2 million. Production - Oil production increased 25 percent during the first nine months of 2001 when compared to the same period last year, which positively impacted revenues by $195.2 million. The improvement was primarily the result of production from acquisitions completed since the first half of 2000, completion of the Gipsy/North Gipsy development in Australia and first production from the Legendre field in Australia. Gas production increased 40 percent during the first nine months of 2001 compared to the same period last year, positively impacting revenues by $350.3 million. The increase was primarily attributable to production from the acquisitions mentioned above and strong results from the Ladyfern area in Canada. RESULTS OF OPERATIONS Apache reported 2001 third quarter income attributable to common stock of $151.9 million compared to income of $197.3 million in the prior year. Basic net income per common share of $1.22 for the third quarter of 2001, decreased 26 percent from the $1.64 reported in 2000. The variance to the prior-year quarter was attributable to lower commodity prices, which offset higher volumes, and higher DD&A expense and lease operating costs. For the first nine months of 2001, income attributable to common stock of $630.1 million, or $5.05 per basic common share, compared to $440.9 million, or $3.80 per share, in the comparable year-earlier period. The increase resulted primarily from increased oil and gas production revenues partially offset by higher DD&A expense, lease operating costs, severance and other taxes and impairments of unproved property costs in Poland and China. For the third quarter of 2001, total revenues increased five percent to $652.4 million compared to $618.5 million in 2000. The increase was the result of a 35 percent increase in natural gas production, a 32 percent increase in oil production, partially offset by a 24 percent decrease in the average realized price for natural gas and a 17 percent decrease in the average realized price for oil. Crude oil, including natural gas liquids, contributed 54 percent and natural gas contributed 46 percent of oil and gas production revenues during the third quarter of 2001. 13 For the first nine months of 2001, total revenues increased 45 percent to $2.2 billion compared to $1.6 billion for the same period in 2000. Revenues from oil and gas production increased 45 percent over the same period in 2000, with crude oil, including natural gas liquids, contributing 45 percent and natural gas contributing 55 percent of oil and gas production revenues. The increase in oil and gas production revenues was the result of a 40 percent increase in gas production, a 29 percent increase in the average realized gas price and a 25 percent increase in oil production. Volume and price information for the Company's oil and gas production is summarized in the following table:
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- --------------------------------------- INCREASE INCREASE 2001 2000 (DECREASE) 2001 2000 (DECREASE) ---------- --------- ---------- ---------- --------- ---------- Natural Gas Volume - Mcf per day: United States 618,729 571,728 8% 619,887 511,152 21% Canada 341,951 134,363 154% 284,667 130,651 118% Australia 122,450 121,833 1% 119,507 106,573 12% Egypt 104,444 49,801 110% 91,008 47,281 92% ---------- --------- ---------- --------- Total 1,187,574 877,725 35% 1,115,069 795,657 40% ========== ========= ========== ========= Average Natural Gas price - Per Mcf: United States $ 2.73 $ 4.22 (35)% $ 4.61 $ 3.46 33% Canada 3.21 3.28 (2)% 4.11 2.77 48% Australia 1.20 1.32 (9)% 1.21 1.38 (12)% Egypt 3.68 4.66 (21)% 3.80 4.56 (17)% Total 2.80 3.70 (24)% 4.05 3.13 29% Oil Volume - Barrels per day: United States 56,831 57,820 (2)% 58,244 55,276 5% Canada 26,568 16,108 65% 25,936 14,599 78% Australia 27,162 16,854 61% 21,684 15,668 38% Egypt 42,808 25,091 71% 37,447 28,758 30% ---------- --------- ---------- --------- Total 153,369 115,873 32% 143,311 114,301 25% ========== ========= ========== ========= Average Oil price - Per barrel: United States $ 25.49 $ 29.15 (13%) $ 26.13 $ 26.83 (3)% Canada 19.92 22.91 (13%) 20.35 21.88 (7)% Australia 24.77 33.32 (26%) 26.27 29.98 (12)% Egypt 24.60 30.17 (18%) 25.75 27.74 (7)% Total 24.15 29.11 (17%) 25.01 26.86 (7)% Natural Gas Liquids (NGL) Volume - Barrels per day: United States 7,335 7,014 5% 7,599 5,567 37% Canada 1,346 1,321 2% 1,151 1,292 (11)% ---------- --------- ---------- --------- Total 8,681 8,335 4% 8,750 6,859 28% ========== ========= ========== ========= Average NGL Price - Per barrel: United States $ 15.79 $ 19.18 (18)% $ 18.18 $ 18.42 (1)% Canada 15.97 19.88 (20)% 20.53 16.92 21% Total 15.81 19.29 (18)% 18.49 18.14 2%
14 THIRD QUARTER 2001 REVENUES COMPARED TO 2000 Natural gas sales for the third quarter of 2001 totaled $305.6 million, slightly more than the third quarter of 2000. Average realized natural gas prices decreased 24 percent, negatively impacting revenues by $72.6 million. The net result of derivative instruments increased the Company's realized gas price by $.18 per Mcf during the third quarter of 2001 and $.06 per Mcf for the same period in 2000. Natural gas production increased 309.8 million cubic feet per day (MMcf/d), or 35 percent, on a worldwide basis, favorably impacting revenues by $79.7 million. Production from properties acquired from Phillips in December 2000 and Fletcher in March 2001, and strong results from the Ladyfern area were the primary contributors to the 207.6 MMcf/d, or 154 percent, gas production increase in Canada. The U.S. increased 47 MMcf/d primarily the result of production from properties acquired from Occidental in August 2000. Egypt increased 54.6 MMcf/d, or 110 percent, due to production from properties acquired from Repsol in March 2001. The Company's crude oil sales for the third quarter of 2001 totaled $340.7 million, a 10 percent increase from the third quarter of 2000, due to increased production volumes. Average realized oil prices decreased $4.96 per barrel, negatively impacting revenues by $52.9 million. Realized losses from hedging positions negatively impacted the Company's realized oil price by $.47 per barrel during the third quarter of 2001 and $1.88 per barrel in the third quarter of 2000. Oil production increased 32 percent compared to the prior year, favorably impacting revenues by $83.3 million. Canada increased 10,460 Bbl/d and Egypt increased 17,717 Bbl/d, primarily due to production from properties acquired from Phillips, Fletcher and Repsol, as mentioned above. Completion of the Gipsy/North Gipsy development and first production from the Legendre field were the primary contributors to the 10,308 Bbl/d increase in Australia. Revenue from the sale of natural gas liquids totaled $12.6 million for the third quarter of 2001, compared to $14.8 million for the third quarter of 2000 in response to an 18 percent drop in realized prices. YEAR-TO-DATE 2001 REVENUES COMPARED TO 2000 Natural gas sales for the first nine months of 2001 of $1.2 billion increased $551.5 million, or 81 percent, from the same period of 2000. Average realized natural gas prices increased 29 percent, positively affecting revenues by $201.2 million. U.S. natural gas production, which comprised 56 percent of the Company's worldwide gas production, sold at an average price of $4.61 per Mcf, 33 percent higher than in 2000, positively impacting natural gas revenues by $161.9 million. The net result of derivative instruments increased the Company's realized gas price by a $.04 per Mcf during the first nine months of 2001 and 2000. Production from properties acquired from Phillips and Fletcher and strong results from the Ladyfern area were the primary contributors to the 154 MMcf/d gas production increase in Canada. The U.S. increased 108.7 MMcf/d due to the production from properties acquired from Collins & Ware and Occidental, and Egypt increased 43.7 MMcf/d due to producing properties acquired from Repsol. For the first nine months of 2001, oil revenues of $978.3 million, increased $137.2 million, or 16 percent, from the same period in 2000 due to higher production. On a worldwide basis, average oil prices decreased $1.85 per barrel, or seven percent, to $25.01 per barrel negatively impacting oil revenues by $58 million. Realized losses from hedging positions negatively impacted the Company's realized oil price by $.57 per barrel during the first nine months of 2001 and $1.83 per barrel during the first nine months of 2000. Oil production increased 11,337 Bbl/d in Canada, 2,968 Bbl/d in the U.S. and 8,689 Bbl/d in Egypt, primarily driven by production from properties acquired from Phillips, Fletcher, Repsol, Collins & Ware and Occidental as mentioned above. Completion of the Gipsy/North Gipsy development and first production from the Legendre field were the primary contributors to the 6,016 Bbl/d increase in Australia. Natural gas liquids revenues for the first nine months of 2001 of $44.2 million increased $10.1 million, or 30 percent, from the same period in 2000. Natural gas liquids prices increased by $.35 per barrel, or two percent, and natural gas liquids production increased 1,891 barrels per day, or 28 percent. 15 EXPENSES The Company's DD&A expense for the third quarter and first nine months of 2001 increased $63.1 million and $175.8 million, respectively, over the comparable periods of 2000. Full cost DD&A expense increased $.23 per Boe, from $5.82 per Boe in the third quarter of 2000 to $6.05 per Boe in 2001. For the nine months ended September 30, 2001, the full cost DD&A rate increased $.31 per Boe, from $5.70 per Boe to $6.01 per Boe. For the first nine months of 2001, the full cost DD&A rate for the U.S. increased $.44 per Boe from $6.13 per Boe to $6.57 per Boe, primarily the result of the acquisition of the Occidental properties in August 2000 and rising U.S. drilling and finding costs. The acquisition of the Phillips properties in December 2000 carry higher DD&A costs, which helped push the full cost DD&A rate in Canada from $5.55 per Boe to $5.87 per Boe. During the second quarter of 2001, the Company recorded a nonrecurring $65 million impairment ($41 million after-tax) of unproved property costs in Poland and China. Lease operating expense (LOE) for the third quarter and first nine months of 2001 increased $36.8 million and $108.4 million, respectively, over the comparable periods of 2000. On an equivalent barrel basis, LOE increased $.45 per Boe to $3.12 per Boe in the third quarter and $.52 per Boe to $3.20 per Boe in the first nine months of 2001 compared to the same periods in the prior year. The higher costs were partially attributable to the acquisition of Canadian and offshore oil properties, which carried a higher LOE per Boe rate than the Company's base production. Increased workover activities in the U.S. and Canada and rising fuel cost for electric power also contributed to the increase. The workovers accelerated production, allowing Apache to maximize the benefits of high oil and gas prices. Severance and other taxes increased $.6 million in the third quarter and $22.1 million in the first nine months of 2001 primarily due to the impact of higher oil and gas prices on severance taxes, which generally are based on a percentage of oil and gas production revenues. Also contributing to the increase were higher effective production tax rates due to a loss of incentives in Oklahoma and an increase in Canadian Large Corporation Tax due to the added production from the Fletcher acquisition properties. G&A expense in the third quarter and first nine months of 2001 increased $4.7 million or 26 percent, and $17 million or 35 percent, respectively, from a year ago. The Company's overall infrastructure was enlarged to properly handle increased responsibilities associated with recent producing property acquisitions. On an equivalent barrel basis, G&A expenses decreased $.04, to $.69 per Boe, for the third quarter of 2001 as compared to $.73 per Boe for the same period in 2000. Net financing costs for the third quarter remained flat, while first nine months of 2001 increased $8.9 million, or 11 percent, compared to a year ago. This increase is primarily due to higher gross interest expense, the result of a higher average outstanding debt balance related to acquisition activity in the second half of 2000 and the first quarter of 2001. MARKET RISK COMMODITY RISK The Company's major market risk exposure continues to be the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to its United States and Canadian natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable. Price volatility is expected to continue. See "Results of Operations" above. In early November 2001, due to credit issues surrounding the derivative market, Apache began to close out substantially all of its hedging positions. The Company does not expect to recognize a material gain or loss from the expected proceeds received in connection with termination of these positions. INTEREST RATE RISK The Company considers its interest rate risk exposure to be minimal as a result of fixed interest rates on approximately 67 percent of the Company's debt. At September 30, 2001, total debt included $768 million of floating-rate debt. As a result, Apache's annual interest cost in 2001 will fluctuate based on short-term interest rates 16 on approximately 33 percent of it total debt outstanding at September 30, 2001. The Company did not have any open derivative contracts relating to interest rates at September 30, 2001. Minority Interest - At September 30, 2001, the Company's minority interest included $443 million in contributions by unrelated institutional investors. The third party investors are entitled to receive a weighted average return of 123 basis points above the prevailing LIBOR interest rate. As a result, Apache's annual minority interest cost will fluctuate based on short-term LIBOR interest rates. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES CAPITAL COMMITMENTS Apache's primary cash needs are for exploration, development and acquisition of oil and gas properties, repayment of principal and interest on outstanding debt, payment of dividends and capital obligations for affiliated ventures. The Company may also elect to use cash flow to pay down debt. Apache budgets capital expenditures based upon projected cash flow and routinely adjusts its capital expenditures in response to changes in oil and natural gas prices and corresponding changes in cash flow. The Company cannot accurately predict future oil and gas prices. Capital Expenditures - A summary of oil and gas capital expenditures during the first nine months of 2001 and 2000 is presented below:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2001 2000 ----------- ------------ (In thousands) Exploration and development: United States $ 567,865 $ 347,783 Canada 326,571 93,781 Egypt 86,846 66,518 Australia 67,167 42,902 Other international 7,861 14,289 ----------- ------------ 1,056,310 565,273 Capitalized Interest 44,388 44,852 ----------- ------------ Total $ 1,100,698 $ 610,125 =========== ============ Acquisitions of oil and gas properties $ 817,849 $ 883,794 =========== ============
On March 22, 2001, Apache completed the acquisition of substantially all of Repsol's oil and gas concession interests in Egypt for approximately $446.9 million in cash, subject to normal post-closing adjustments. The properties include interests in seven Western Desert concessions and have estimated proved reserves of 66 MMboe as of the acquisition date. The Company already holds interests in five of the seven concessions. The transaction was funded through the issuance of commercial paper. On March 27, 2001, Apache completed the acquisition of subsidiaries of Fletcher for approximately $465.0 million in cash and 1.64 million restricted shares of Apache common stock (valued at $61.04 per share), subject to normal post closing adjustments. The transaction included properties located in Canada's Western Sedimentary Basin and in Argentina and have estimated proved reserves of 120.8 MMboe as of the acquisition date. Apache assumed a liability of $103.5 million representing the fair value of derivative instruments and fixed-price commodity contracts entered into by Fletcher. The cash portion of the acquisition was funded through the issuance of commercial paper, as well as advances under the Canadian portion of the global credit facility. CAPITAL RESOURCES AND LIQUIDITY Net Cash Provided by Operating Activities - Apache's net cash provided by operating activities during the first nine months of 2001 totaled $1.5 billion, an increase of 61 percent from $961.1 million in the first nine months of 17 2000. This increase was primarily due to higher oil and gas revenues generated from properties acquired since the first half of 2000 and higher realized gas prices as compared to last year. Liquidity - The Company had $67.9 million in cash and cash equivalents on hand at September 30, 2001, up from $37.2 million at December 31, 2000. Apache's ratio of current assets to current liabilities was 1.14 at September 30, 2001 and December 31, 2000. Apache believes that cash on hand, net cash generated from operations, and unused committed borrowing capacity under its global credit facility will be adequate to satisfy the Company's financial obligations to meet future liquidity needs for the foreseeable future. As of September 30, 2001, Apache's available borrowing capacity under its global credit facility and 364-day credit facility was $771 million. FUTURE TRENDS Apache's strategy is to increase its oil and gas reserves, production, cash flow and earnings through a balanced growth program that involves: o Exploiting our existing asset base through workovers and development wells to increase productive capacity. o Drilling exploration wells to add new reserves. o Acquiring properties to which we can add value. EXPLOITING OUR EXISTING ASSET BASE THROUGH WORKOVERS AND DEVELOPMENT WELLS TO INCREASE PRODUCTIVE CAPACITY Apache seeks to maximize the value of our existing asset base by conducting workovers and development drilling within known limits of previously recognized reservoirs to increase productive capacity and/or the efficiency or rate of existing fields. DRILLING EXPLORATION WELLS TO ADD NEW RESERVES Apache seeks to add new reserves through drilling exploratory wells in all our regions. Higher risk, higher reward exploration is conducted in Canada and select international core areas. Our international investments and exploration activities are a significant component of our long-term growth strategy. They complement our United States operations, which are more development oriented. ACQUIRING PROPERTIES TO WHICH WE CAN ADD VALUE Apache seeks to purchase reserves at reasonable 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. A critical component in implementing our three-pronged growth strategy is maintenance of significant financial flexibility. We are committed to preserving a strong balance sheet and credit position that gives us the foundation required to pursue our growth initiatives. 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 18 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 makes use of futures contracts, swaps, options and fixed-price physical contracts to mitigate risk, fluctuations in oil and gas prices, or a prolonged continuation of low prices, may substantially adversely affect the Company's financial position, results of operations and cash flows. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 10 to the Consolidated Financial Statements contained in the Company's annual report on Form 10-K for the year ended December 31, 2000 (filed with the SEC on March 23, 2001) 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 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.01 - Apache Corporation 1990 Stock Incentive Plan, as amended and restated September 13, 2001. 10.02 - Apache Corporation 1995 Stock Option Plan, as amended and restated September 13, 2001. 10.03 - Apache Corporation 1996 Performance Stock Option Plan, as amended and restated September 13, 2001. 10.04 - Apache Corporation 1998 Stock Option Plan, as amended and restated September 13, 2001. 10.05 - Apache Corporation 2000 Stock Option Plan, as amended and restated September 13, 2001. 12.1 - Statement of Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends (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, 2001: None. 21