-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ODwMxmE2KOXnkZpO5NMiUvjbMwLjVXSkaeCoGyZCJRHvYK6W2cTRcOume1T46ifN qFugRBk7CZG7iiPZD/4vUA== 0000950129-03-005663.txt : 20031114 0000950129-03-005663.hdr.sgml : 20031114 20031114095819 ACCESSION NUMBER: 0000950129-03-005663 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APACHE CORP CENTRAL INDEX KEY: 0000006769 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 410747868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04300 FILM NUMBER: 031000735 BUSINESS ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: ONE POST OAK CENTER STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 BUSINESS PHONE: 7132966000 MAIL ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 FORMER COMPANY: FORMER CONFORMED NAME: APACHE OIL CORP DATE OF NAME CHANGE: 19660830 10-Q 1 h10582e10vq.txt APACHE CORPORATION - SEPTEMBER 30, 2003 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, 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 2000 Post Oak Boulevard, Houston, TX 77056-4400 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (713) 296-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Number of shares of Registrant's common stock, outstanding as of October 31, 2003 162,037,932 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............... $ 1.70 $ 0.96 $ 5.15 $ 2.46 Cumulative effect of change in accounting principle. - - 0.17 - ------------ ------------ ------------ ------------ $ 1.70 $ 0.96 $ 5.32 $ 2.46 ============ ============ ============ ============ DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle............... $ 1.69 $ 0.95 $ 5.11 $ 2.42 Cumulative effect of change in accounting principle. - - 0.16 - ------------ ------------ ------------ ------------ $ 1.69 $ 0.95 $ 5.27 $ 2.42 ============ ============ ============ ============
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................................................................... 19,686 (11,936) 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...... (23,390) (20,947) ------------- ------------- 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, $1.25 par, 215,000,000 shares authorized, 165,989,808 and 155,464,540 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, 4,059,266 and 4,211,328 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 RETAINED (In thousands) INCOME STOCK STOCK STOCK CAPITAL EARNINGS ---------- ------------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 2001.............. $ 98,387 $ 208,207 $ 185,288 $2,803,825 $ 1,336,478 Comprehensive income (loss): Net income........................... $ 373,510 - - - - 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............................ - - - - (9,395) Common ($.29 per share).............. - - - - (42,512) 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 $ 1,658,081 ========== ========== ========== ========== =========== BALANCE AT DECEMBER 31, 2002.............. $ 98,387 $ - $ 194,331 $3,427,450 $ 1,427,607 Comprehensive income (loss): Net income........................... $ 860,271 - - - - 860,271 Commodity hedges, net of income tax benefit of $10,157................. (17,530) - - - - - ---------- Comprehensive income................... $ 842,741 ========== Dividends: Preferred............................ - - - - (4,260) Common ($.32 per share).............. - - - - (53,217) Five percent common stock dividend..... - - 581 25,333 (25,914) Common shares issued................... - - 12,575 567,945 - Treasury shares issued, net............ - - - 2,904 - Other.................................. - - - 122 - ---------- ---------- ---------- ---------- ---------- BALANCE AT SEPTEMBER 30, 2003............. $ 98,387 $ - $ 207,487 $4,023,754 $2,204,487 ========== ========== ========== ========== ==========
ACCUMULATED OTHER TOTAL TREASURY COMPREHENSIVE SHAREHOLDERS' (In thousands) STOCK INCOME (LOSS) EQUITY ---------- ------------- ------------- BALANCE AT DECEMBER 31, 2001.............. $ (111,885) $(101,817) $4,418,483 Comprehensive income (loss): Net income........................... - - 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 $67................. - (125) (125) Comprehensive income................... Dividends: Preferred............................ - - (9,395) Common ($.29 per share).............. - - (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............. $ (110,616) $ (107,914) $4,761,160 ========== ========== ========== BALANCE AT DECEMBER 31, 2002.............. $ (110,559) $ (112,936) $4,924,280 Comprehensive income (loss): Net income........................... - - 860,271 Commodity hedges, net of income tax benefit of $10,157................. - (17,530) (17,530) Comprehensive income................... Dividends: Preferred............................ - - (4,260) Common ($.32 per share).............. - - (53,217) Five percent common stock dividend..... - - - Common shares issued................... - - 580,520 Treasury shares issued, net............ 3,995 - 6,899 Other.................................. - - 122 ---------- ---------- ---------- BALANCE AT SEPTEMBER 30, 2003............. $ (106,564) $ (130,466) $6,297,085 ========== ========== ==========
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. Quarterly share and per share information for 2002 have been restated to reflect this stock dividend. 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 9.9 million shares of common stock in January 2003, 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................................... $ 5.32 $ 5.75 $ 2.46 $ 2.83 Diluted................................. 5.27 5.70 2.42 2.78 Average common shares outstanding (1)....... 160,954 161,680 147,716 157,617
(1) Pro forma shares assume the issuance of 9.9 million common shares 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 9.9 million shares of Apache common stock, adjusted for the five percent common stock dividend, 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, 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. $ 275,541 161,875 $ 1.70 $ 145,122 151,097 $ 0.96 ========== ========== EFFECT OF DILUTIVE SECURITIES: Stock options and other............. - 1,425 - 1,238 ---------- --------- ----------- ---------- DILUTED: Income attributable to common stock, including assumed conversions...... $ 275,541 163,300 $ 1.69 $ 145,122 152,335 $ 0.95 ========== ========== ========== =========== ========== ==========
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. $ 856,011 160,954 $ 5.32 $ 364,115 147,716 $ 2.46 ========== ========== EFFECT OF DILUTIVE SECURITIES: Stock options and other............. - 1,371 - 1,354 Series C Preferred Stock ........... - - 5,149 3,217 ---------- --------- ----------- ---------- DILUTED: Income attributable to common stock, including assumed conversions...... $ 856,011 162,325 $ 5.27 $ 369,264 152,287 $ 2.42 ========== ========= ========== =========== ========== ==========
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................................. $ 1.70 $ 0.96 $ 5.32 $ 2.46 Pro forma................................... 1.67 0.93 5.22 2.37 Diluted: As reported................................. $ 1.69 $ 0.95 $ 5.27 $ 2.42 Pro forma................................... 1.63 0.91 5.12 2.31
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 901,105 stock appreciation rights (SARs) 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 60,500 shares 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).............................................. 225,667 115,363
11 10. GEOGRAPHIC AREA INFORMATION Apache's exploration and production operations are a single line of business conducted in five core geographic regions. Each of those regions confronts the same operational concerns and has similar types of customers and demands for our products. Where appropriate to an understanding of our business, we will discuss the results of operations or risks and uncertainties in an individual geographic area. Additional information regarding our geographic locations is provided in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q, and in both Item 7A - Quantitative and Qualitative Disclosures About Market Risk and Item 15 - - Notes to the Consolidated Financial Statements of our 2002 Form 10-K.
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 (8,668) subsidiaries................... 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 (12,584) subsidiaries................... 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 Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," 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 entries reflect the asset retirement obligation of Apache had the provisions of SFAS No. 143 been applied since inception and resulted in a non-cash cumulative- 12 effect increase to earnings of $27 million ($41 million pretax). Prior to adoption of SFAS No. 143, abandonment obligations were accrued over the productive lives of the assets through depreciation, depletion and amortization of oil and gas properties without recording a separate liability for such amounts. 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 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. 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. 13 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 ============ ============= ============
14 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 =========== ============ ===========
15 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 ============= ============ ===========
16 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 =========== ============ ===========
17 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 =========== ============ ===========
18 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, net....................... 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 =========== ============ ===========
19 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 =========== ============ ===========
20 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 =========== ============ ===========
21 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: o Record oil production of 228,698 Bopd, 51 percent above the prior-year period. o Record gas production of 1.26 Bcf/d, 19 percent above the comparable 2002 quarter. o A 62 percent rise in natural gas price realizations. Other notable operational highlights include: o Production was initiated on the Zhao Dong block in the Bohai Bay, offshore China in late July, further diversifying our production base. o We completed the acquisition of fields in the Gulf of Mexico from Shell Exploration and Production Company (Shell). o 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. o 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. 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. 22 CRITICAL ACCOUNTING POLICY In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Intangible assets with a determinable useful life will continue to be amortized over that period. SFAS No. 141 and 142 clarify that more assets should be distinguished and classified between tangible and intangible. The Company did not change or reclassify contractual mineral rights included in oil and gas properties on the balance sheet upon adoption of SFAS No. 141 and 142. The Company believes the treatment of such mineral rights as property continues to be appropriate under the full cost method of accounting for crude oil and natural gas properties. An issue has arisen regarding whether contractual mineral rights should be classified as intangible assets rather than properties for oil and gas companies. The amount that could be potentially reclassified cannot be quantified until resolution regarding classification of use rights for oil and gas companies, including full cost companies, is reached. Our current practice, as described above, may change based upon a change in the guidance over these costs. 23 RESULTS OF OPERATIONS Revenues 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........................ 0.50 .40 25% 0.48 .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%
24 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, 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. 25 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. On an equivalent barrel basis, full-cost DD&A expense increased $.39 from $6.26 per boe in the third quarter of 2002 to $6.65 per boe in 2003. The increase in the worldwide rate was driven by rate increases in the U.S., reflecting the impact of our recent acquisitions, the addition of the North Sea properties, first production in China and higher estimates of future costs to extract reserves. The China and North Sea properties carry a higher DD&A rate than our historical worldwide rate. 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. 26 Gathering and Transportation Costs Gathering and transportation costs include amounts paid by Apache to third parties to transport oil and gas to a purchaser-specified delivery point. Such costs vary based on the volume and distance shipped, and the fee charged by the transporter, which may be price sensitive. During the third quarter of 2003, the Company incurred $7 million more costs than in the comparable 2002 quarter, $4 million of which related to the North Sea. During the first nine months of 2003, gathering and transportation costs were $15 million more than in the first nine months of 2002. The higher year-over-year costs were from the North Sea ($7 million), Canada ($5 million) and the U.S. ($3 million). Severance and Other Taxes Severance and other taxes, which generally are based on a percentage of oil and gas production revenues were $25 million higher in the third quarter of 2003 compared to the same quarter last year. Severance taxes increased $4 million as a result of increased revenues. Other taxes were $21 million higher than the 2002 quarter, $17 million of which was related to the petroleum revenue tax (PRT) on the North Sea properties acquired from BP. The balance of the change was primarily attributable to higher Canadian tax expense, a result of higher prices, a weakened U.S. dollar and the fact that the 2002-period benefited from a tax refund. Severance and other taxes were 103 percent higher in the first nine months of 2003 compared to the same period in 2002. Severance taxes were $22 million higher, a result of higher revenues, while other taxes were $28 million higher. For the reasons above, the North Sea PRT tax and Canadian taxes were $23 million and $7 million higher, respectively, than the prior year. 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. 27 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. 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. 28 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, 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 9.9 million shares of Apache common stock, adjusted for the five percent common stock dividend, 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. 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. 29 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. 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. Notional volumes associated with the Company's derivative contracts are shown in Note 2 to the Company's consolidated financial statements. 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. 30 FORWARD-LOOKING STATEMENTS AND RISK Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company's control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Although Apache may make use of futures contracts, swaps, options and fixed-price physical contracts to mitigate risk, fluctuations in oil and gas prices, or a prolonged continuation of low prices, may adversely affect the Company's financial position, results of operations and cash flows. 31 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 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12.1 - Statement of computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends. 31.1 - Certification of Chief Executive Officer. 31.2 - Certification of Chief Financial Officer. 32.1 - Certification of Chief Executive Officer and Chief Financial Officer. (b) Reports filed on Form 8-K The following current reports on Form 8-K were filed by Apache during the fiscal quarter ended September 30, 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 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. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APACHE CORPORATION Dated: November 14, 2003 /s/ Roger B. Plank ------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Dated: November 14, 2003 /s/ Thomas L. Mitchell ------------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 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. EX-12.1 3 h10582exv12w1.txt COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 APACHE CORPORATION STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ----------- EARNINGS Pretax income (loss) from continuing operations before preferred interests of subsidiaries..................... $1,479,190 $ 613,396 $ 915,194 $1,206,863 $1,203,681 $ 344,573 $ (187,563) Add: Fixed charges excluding capitalized interest and preferred interest requirements of consolidated subsidiaries........................ 99,810 97,397 128,730 134,484 116,190 90,398 78,728 ---------- ---------- ---------- ---------- ---------- ---------- ----------- Adjusted Earnings.................... $1,579,000 $ 710,793 $1,043,924 $1,341,347 $1,319,871 $ 434,971 $ (108,835) ========== ========== ========== ========== ========== ========== =========== FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Interest expense including capitalized interest(1)............ $ 131,910 $ 117,120 $ 155,667 $ 178,915 $ 168,121 $ 132,986 $ 119,703 Amortization of debt expense......... 1,624 1,330 1,859 2,460 2,726 4,854 4,496 Interest component of lease rental expenditures(2).................... 8,350 9,440 11,895 9,858 7,343 5,789 3,808 Preferred interest requirements of consolidated subsidiaries(3).... 11,842 15,179 19,581 8,608 - - - ---------- ---------- ---------- ---------- ---------- ---------- ----------- Fixed charges........................ 153,726 143,069 189,002 199,841 178,190 143,629 128,007 Preferred stock dividend requirements(4).................... 7,515 15,112 17,540 32,495 33,386 24,788 2,905 ---------- ---------- ---------- ---------- ---------- ---------- ----------- Combined Fixed Charges and Preferred Stock Dividends.......... $ 161,241 $ 158,181 $ 206,542 $ 232,336 $ 211,576 $ 168,417 $ 130,912 ========== ========== ========== ========== ========== ========== =========== Ratio of Earnings to Fixed Charges...... 10.27 4.97 5.52 6.71 7.41 3.03 -(5) ========== ========== ========== ========== ========== ========== =========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends............................. 9.79 4.49 5.05 5.77 6.24 2.58 -(5) ========== ========== ========== ========== ========== ========== ===========
- --------------------- (1) The Company does not receive a tax benefit for the $5 million of transaction costs written off to interest expense when the Company retired its preferred interests of subsidiaries in September 2003. Given the non-deductibility of the charge, $9 million of pre-tax income is required to cover the $5 million write-off. Accordingly, interest expense has been grossed up by $4 million. (2) Represents the portion of rental expense assumed to be attributable to interest factors of related rental obligations determined at interest rates appropriate for the period during which the rental obligations were incurred. Approximately 32 to 34 percent applies for all periods presented. (3) The Company does not receive a tax benefit for a portion of its preferred interests of consolidated subsidiaries. This amount represents the pre-tax earnings that would be required to cover preferred interests requirements of consolidated subsidiaries. In September 2003, the Company retired its preferred interests of subsidiaries. (4) The Company does not receive a tax benefit for its preferred stock dividends. This amount represents the pre-tax earnings that would be required to cover its preferred stock dividends. (5) Earnings in 1998 were inadequate to cover fixed charges and combined fixed charges and preferred stock dividends by $237 million and $240 million, respectively. EX-31.1 4 h10582exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATIONS I, G. Steven Farris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ G. Steven Farris - -------------------------------------- G. Steven Farris President, Chief Executive Officer and Chief Operating Officer Date: November 14, 2003 EX-31.2 5 h10582exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATIONS I, Roger B. Plank, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Roger B. Plank - ---------------------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Date: November 14, 2003 EX-32.1 6 h10582exv32w1.txt CERTIFICATION OF CEO & CFO PURSUANT TO SECTION 906 EXHIBIT 32.1 APACHE CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER I, G. Steven Farris, certify that the Quarterly Report of Apache Corporation on Form 10-Q for the quarterly period ending September 30, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. ss.78m or ss.78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Corporation. /s/ G. Steven Farris - ------------------------------------------- By: G. Steven Farris Title: President, Chief Executive Officer and Chief Operating Officer I, Roger B. Plank, certify that the Quarterly Report of Apache Corporation on Form 10-Q for the quarterly period ending September 30, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. ss.78m or ss.78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Corporation. /s/ Roger B. Plank - -------------------------------------------- By: Roger B. Plank Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----