10-Q 1 h15047e10vq.txt APACHE CORPORATION - MARCH 31, 2004 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 March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ___________________ to _____________________ Commission File Number 1-4300 APACHE CORPORATION ---------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 41-0747868 ------------------------------ -------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Suite 100, One Post Oak Central 77056-4400 2000 Post Oak Boulevard, Houston, TX ---------- ------------------------------------ (Zip Code) (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (713) 296-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Number of shares of Registrant's common stock, outstanding as of March 31, 2004......................325,228,989 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, -------------------------------------------- 2004 2003 ------------------ ------------------ (In thousands, except per common share data) REVENUES AND OTHER: Oil and gas production revenues.............................................. $ 1,152,754 $ 975,162 Other........................................................................ (2,815) (8,553) ------------------ ------------------ 1,149,939 966,609 ------------------ ------------------ OPERATING EXPENSES: Depreciation, depletion and amortization..................................... 286,228 214,349 Asset retirement obligation accretion........................................ 10,761 5,313 Lease operating costs........................................................ 206,029 134,135 Gathering and transportation costs........................................... 19,634 11,861 Severance and other taxes.................................................... 8,948 24,554 General and administrative................................................... 43,850 27,831 Financing costs: Interest expense........................................................ 40,549 37,696 Amortization of deferred loan costs..................................... 567 531 Capitalized interest.................................................... (13,650) (11,232) Interest income......................................................... (320) (1,074) ------------------ ------------------ 602,596 443,964 ------------------ ------------------ PREFERRED INTERESTS OF SUBSIDIARIES............................................. - 3,362 ------------------ ------------------ INCOME BEFORE INCOME TAXES...................................................... 547,343 519,283 Provision for income taxes................................................... 198,259 206,986 ------------------ ------------------ INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE.................................... 349,084 312,297 Cumulative effect of change in accounting principle, net of income tax.............................................................. - 26,632 ------------------ ------------------ NET INCOME...................................................................... 349,084 338,929 Preferred stock dividends.................................................... 1,420 1,420 ------------------ ------------------ INCOME ATTRIBUTABLE TO COMMON STOCK............................................. $ 347,664 $ 337,509 ================== ================== BASIC NET INCOME PER COMMON SHARE: Before change in accounting principle........................................ $ 1.07 $ .98 Cumulative effect of change in accounting principle.......................... - .08 ------------------ ------------------ $ 1.07 $ 1.06 ================== ================== DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle........................................ $ 1.06 $ .97 Cumulative effect of change in accounting principle.......................... - .08 ------------------ ------------------ $ 1.06 $ 1.05 ================== ==================
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 QUARTER ENDED MARCH 31, -------------------------------------------- 2004 2003 ------------------ ------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................... $ 349,084 $ 338,929 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................ 286,228 214,349 Asset retirement obligation accretion............................... 10,761 5,313 Provision for deferred income taxes................................. 83,799 103,427 Cumulative effect of change in accounting principle................. - (26,632) Other............................................................... 6,854 9,368 Changes in operating assets and liabilities: (Increase) decrease in receivables.................................. (63,969) (229,087) (Increase) decrease in advances to oil and gas ventures and other... (2,093) (4,268) (Increase) decrease in product inventory............................ 5,894 1,009 (Increase) decrease in deferred charges and other................... (7,775) 2,368 Increase (decrease) in payables..................................... 20,391 98,551 Increase (decrease) in accrued expenses............................. (27,362) 42,225 Increase (decrease) in advances from gas purchasers................. (4,833) (4,304) Increase (decrease) in deferred credits and noncurrent liabilities.. (4,647) (13,207) ------------------ ------------------ Net cash provided by operating activities...................... 652,332 538,041 ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.......................................... (469,833) (344,183) Acquisition of BP Gulf of Mexico properties.................................. - (527,610) Other, net................................................................... (9,509) (12,226) ------------------ ------------------ Net cash used in investing activities.......................... (479,342) (884,019) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings......................................................... 251 64,753 Payments on long-term debt................................................... (135,300) (280,300) Dividends paid............................................................... (20,898) (16,787) Common stock activity........................................................ 7,534 564,442 Treasury stock activity, net................................................. 3,746 2,476 Cost of debt and equity transactions......................................... (673) (534) ------------------ ------------------ Net cash provided by/(used in) financing activities............ (145,340) 334,050 ------------------ ------------------ NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............................ 27,650 (11,928) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 33,503 51,886 ------------------ ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 61,153 $ 39,958 ================== ==================
The accompanying notes to consolidated financial statements are an integral part of this statement. 2 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, DECEMBER 31, 2004 2003 ------------------ ------------------ (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents.................................................... $ 61,153 $ 33,503 Receivables, net of allowance................................................ 704,454 639,055 Inventories.................................................................. 118,686 125,867 Drilling advances............................................................ 60,788 58,062 Prepaid assets and other..................................................... 42,769 42,585 ------------------ ------------------ 987,850 899,072 ------------------ ------------------ PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties....................................................... 16,801,481 16,277,930 Unproved properties and properties under development, not being amortized.................................... 803,113 795,161 Gas gathering, transmission and processing facilities........................ 848,490 828,169 Other........................................................................ 245,957 239,548 ------------------ ------------------ 18,699,041 18,140,808 Less: Accumulated depreciation, depletion and amortization................... (7,166,685) (6,880,723) ------------------ ------------------ 11,532,356 11,260,085 ------------------ ------------------ OTHER ASSETS: Goodwill, net................................................................ 189,252 189,252 Deferred charges and other................................................... 76,252 67,717 ------------------ ------------------ $ 12,785,710 $ 12,416,126 ================== ==================
The accompanying notes to consolidated financial statements are an integral part of this statement. 3 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, DECEMBER 31, 2004 2003 ------------------ ------------------ (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................................. $ 327,373 $ 300,598 Accrued operating expense.................................................... 50,675 72,250 Accrued exploration and development.......................................... 283,675 212,028 Accrued compensation and benefits............................................ 43,314 56,237 Accrued interest............................................................. 45,711 32,621 Accrued income taxes......................................................... 68,350 18,936 Oil and gas derivative instruments........................................... 77,093 63,542 Other........................................................................ 18,370 64,166 ------------------ ------------------ 914,561 820,378 ------------------ ------------------ LONG-TERM DEBT.................................................................. 2,191,917 2,326,966 ------------------ ------------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes................................................................. 1,771,001 1,697,238 Advances from gas purchasers................................................. 104,374 109,207 Asset retirement obligation.................................................. 748,400 739,775 Oil and gas derivative instruments........................................... 2,729 5,931 Other........................................................................ 180,289 183,833 ------------------ ------------------ 2,806,793 2,735,984 ------------------ ------------------ SHAREHOLDERS' EQUITY: Preferred stock, no par value, 5,000,000 shares authorized - Series B, 5.68% Cumulative Preferred Stock, 100,000 shares issued and outstanding....... 98,387 98,387 Common stock, $0.625 par, 430,000,000 shares authorized, 333,083,117 and 332,509,478 shares issued, respectively................. 208,177 207,818 Paid-in capital.............................................................. 4,053,413 4,038,007 Retained earnings............................................................ 2,773,359 2,445,698 Treasury stock, at cost, 7,854,128 and 8,012,302 shares, respectively............................................................ (102,537) (105,169) Accumulated other comprehensive loss......................................... (158,360) (151,943) ------------------ ------------------ 6,872,439 6,532,798 ------------------ ------------------ $ 12,785,710 $ 12,416,126 ================== ==================
The accompanying notes to consolidated financial statements are an integral part of this statement. 4 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES B COMPREHENSIVE PREFERRED COMMON PAID-IN RETAINED INCOME STOCK STOCK CAPITAL EARNINGS ------------- --------- --------- ---------- ---------- (In thousands) BALANCE AT DECEMBER 31, 2002............... $ 98,387 $ 194,331 $3,427,450 $1,427,607 Comprehensive income (loss): Net income........................... $ 338,929 - - - 338,929 Commodity hedges, net of income tax benefit of $7,625................. (12,859) - - - - ------------- Comprehensive income.................... $ 326,070 ============= Dividends: Preferred............................ - - - (1,420) Common ($.05 per share).............. - - - (17,116) Five percent common stock dividend...... - 607 25,307 (25,914) Common shares issued.................... - 12,228 556,068 - Treasury shares issued, net............. - - 482 - Other................................... - - 396 - --------- --------- ---------- ---------- BALANCE AT MARCH 31, 2003.................. $ 98,387 $ 207,166 $4,009,703 $1,722,086 ========= ========= ========== ========== BALANCE AT DECEMBER 31, 2003............... $ 98,387 $ 207,818 $4,038,007 $2,445,698 Comprehensive income (loss): Net income........................... $ 349,084 - - - 349,084 Commodity hedges, net of income tax benefit of $3,850................. (6,417) - - - - ------------- Comprehensive income.................... $ 342,667 ============= Dividends: Preferred............................ - - - (1,420) Common ($.06 per share).............. - - - (20,003) Common shares issued.................... - 359 12,287 - Treasury shares issued, net............. - - 2,206 - Other................................... - - 913 - --------- --------- ---------- ---------- BALANCE AT MARCH 31, 2004.................. $ 98,387 $ 208,177 $4,053,413 $2,773,359 ========= ========= ========== ========== ACCUMULATED OTHER TOTAL TREASURY COMPREHENSIVE SHAREHOLDERS' STOCK INCOME (LOSS) EQUITY --------- ------------- ------------- (In thousands) BALANCE AT DECEMBER 31, 2002............... $(110,559) $ (112,936) $ 4,924,280 Comprehensive income (loss): Net income........................... - - 338,929 Commodity hedges, net of income tax benefit of $7,625................. - (12,859) (12,859) Comprehensive income.................... Dividends: Preferred............................ - - (1,420) Common ($.05 per share).............. - - (17,116) Five percent common stock dividend...... - - - Common shares issued.................... - - 568,296 Treasury shares issued, net............. 2,112 - 2,594 Other................................... - - 396 --------- ------------- ------------- BALANCE AT MARCH 31, 2003.................. $(108,447) $ (125,795) $ 5,803,100 ========= ============= ============= BALANCE AT DECEMBER 31, 2003............... $(105,169) $ (151,943) $ 6,532,798 Comprehensive income (loss): Net income........................... - - 349,084 Commodity hedges, net of income tax benefit of $3,850................. - (6,417) (6,417) Comprehensive income.................... Dividends: Preferred............................ - - (1,420) Common ($.06 per share).............. - - (20,003) Common shares issued.................... - - 12,646 Treasury shares issued, net............. 2,632 - 4,838 Other................................... - - 913 --------- ------------- ------------- BALANCE AT MARCH 31, 2004.................. $(102,537) $ (158,360) $ 6,872,439 ========= ============= =============
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, distributed on April 2, 2003, to shareholders of record on March 12, 2003. On September 11, 2003, the Company declared a two-for-one stock split, distributed on January 14, 2004, to shareholders of record on December 31, 2003. Quarterly share and per share information for 2003 has been restated to reflect this stock dividend and the two-for-one stock split. Reclassifications Certain prior period amounts have been reclassified to conform with current year presentations. 1. ACQUISITIONS On January 13, 2003, Apache announced that it had entered into agreements to purchase producing properties in the North Sea and Gulf of Mexico from subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion, with $670 million allocated to the Gulf of Mexico properties and the remaining $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. The Gulf of Mexico properties were subject to normal closing adjustments and preferential rights by third parties. 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. The purchase price for both BP transactions was paid in cash funded by the sale of Apache common stock and borrowings under existing lines of credit and commercial paper. The offering of Apache's common stock provided net proceeds of approximately $554 million. Apache and BP closed the transaction for the Gulf of Mexico properties on March 13, 2003, which included BP's interest in 56 producing fields, including 104 blocks. Upon closing, Apache paid a purchase price, adjusted for normal closing and preferential rights exercised by third parties, of $509 million. The Gulf of Mexico purchase price and reserves were reduced by $73 million and 9.6 MMboe, respectively, primarily for the exercise of preferential rights by third parties. As of January 1, 2003, the Gulf of Mexico properties acquired from BP had estimated proved reserves of 76 MMboe. 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. As of January 1, 2003, the North Sea properties acquired from BP had estimated proved reserves of 147.6 MMboe. 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 our senior unsecured debt is lowered by both Moody's and Standard and Poor's from the Company's current ratings of A- and A3, respectively. Should this occur, the current letter of credit amount would be 129 million British pounds. Apache agreed to sell all of the North Sea production from those properties through December 31, 2004, 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 Presented below is a breakdown of the cash consideration given for the BP transactions as of the closing date:
U.S. - U.K. - IN THOUSANDS GULF OF MEXICO NORTH SEA TOTAL* ----------------------------- -------------- ---------- ----------- 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 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 Gulf of Mexico and North Sea acquisitions from BP occurred on January 1, 2003. The pro forma information is based in part on data provided by BP and on numerous assumptions. The information is not necessarily indicative of future results of operations.
FOR THE THREE MONTHS ENDED MARCH 31, 2003 -------------------------------------------- AS REPORTED PRO FORMA ------------------- ------------------ (In thousands, except per common share data) Revenues...................................... $ 966,609 $ 1,204,571 Net income.................................... 338,929 412,126 Preferred stock dividends..................... 1,420 1,420 Income attributable to common stock........... 337,509 410,706 Net income per common share: Basic.................................... $ 1.06 $ 1.27 Diluted.................................. 1.05 1.26 Average common shares outstanding (1)......... 318,509 322,910
(1) Pro forma shares assume the issuance of 19.8 million common shares, adjusted for the five percent common stock dividend and the two-for-one common stock split as of January 1, 2003. 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 receives 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 were not recorded by Apache. Apache recorded 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 was 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. 7 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 certain acquisitions to protect against commodity price volatility. The success of these acquisitions is significantly influenced by Apache's ability to achieve targeted production at forecasted prices. These hedges effectively reduce price risk on a portion of the production from the acquisitions. During the first quarter of 2003, in conjunction with the BP acquisitions and during the fourth quarter of 2002, in conjunction with an acquisition of certain South Louisiana properties, 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 March 31, 2004, the outstanding positions of our cash flow hedges were as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/ PERIOD INSTRUMENT TYPE (MMBTU) FLOOR/CEILING (LIABILITY) ---------- -------------------- ------------- ---------------- ----------------- (In thousands) 2004 Collars 13,750,000 $ 3.25 / 5.81 $ (8,001) Gas Fixed-Price Swap 38,500,000 4.33 (62,547) 2005 Collars 9,050,000 3.25 / 5.20 (9,274)
In addition to the fixed-price swaps and options, Apache entered into a separate crude oil physical sales contract with BP. The sales contract qualifies for the normal purchase and sale exemption of 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 March 31, 2004, the outstanding terms of the contract were as follows:
CRUDE OIL FIXED-PRICE PHYSICAL SALES CONTRACT (BRENT) -------------------------------------------------------- PRODUCTION TOTAL VOLUMES AVERAGE PERIOD (BARRELS) FIXED PRICE ---------- ------------- ----------- 2004 11,000,000 $ 22.06
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 (in thousands):
GROSS AFTER-TAX --------- --------- Unrealized loss on derivatives at December 31, 2003..... $ (69,316) $ (43,193) Net losses realized into earnings....................... 19,772 12,356 Net change in derivative fair value..................... (30,039) (18,773) --------- --------- Unrealized loss on derivatives at March 31, 2004........ $ (79,583) $ (49,610) ========= =========
The unrealized loss in other comprehensive income of $79.6 million is expected to be realized in future earnings contemporaneously with the related sales of natural gas and crude oil production applicable to specific hedges. Losses of $76.9 million ($47.9 million after tax) are expected to be realized over the next twelve 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. CAPITAL STOCK On January 22, 2003, the Company completed a public offering of 19.8 million shares of Apache common stock, adjusted for the five percent common stock dividend and the two-for-one common stock split, including underwriters' over-allotment option, for net proceeds of approximately $554 million. The proceeds were used toward Apache's acquisition from BP of producing properties in the U.K. North Sea and the Gulf of Mexico. On September 12, 2003, the Company announced that its Board of Directors voted to increase the quarterly cash dividend on its common stock to 12 cents per share from 10 cents per share (six cents per share from five cents per share adjusted for the two-for-one stock split), effective with the November 2003 payment, and to split its common stock two-for-one early in 2004, subject to shareholder approval of an increase in the authorized number of common shares. On December 18, 2003, the Company announced that holders of its common stock approved an increase in the number of authorized common shares to 430 million from 215 million in order to complete the previously announced two-for-one stock split. The record date for the stock split was December 31, 2003 and the additional shares were distributed on January 14, 2004. On January 26, 2004, the Nasdaq Stock Market, Inc. (NASDAQ) approved Apache for listing on the Nasdaq National Market, an intention we first announced on January 12, 2004. Apache's common stock is now listed on the NASDAQ as well as the New York Stock Exchange and the Chicago Stock Exchange. 4. 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 MARCH 31, ----------------------------------------------------------------- 2004 2003 ------------------------------- ------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE --------- ------- --------- --------- ------- --------- (In thousands, except per share amounts) BASIC: Income attributable to common stock........ $ 347,664 325,003 $ 1.07 $ 337,509 318,509 $ 1.06 ========= ========= EFFECT OF DILUTIVE SECURITIES: Stock options and other.................... - 3,011 - 2,650 --------- ------- --------- ------- DILUTED: Income attributable to common stock, including assumed conversions............. $ 347,664 328,014 $ 1.06 $ 337,509 321,159 $ 1.05 ========= ======= ========= ========= ======= =========
9 5. STOCK-BASED COMPENSATION On March 31, 2004, the Company had several stock-based employee compensation plans. Prior to 2003, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No material stock-based employee compensation cost is reflected in net income for options granted prior to 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, prospectively to all employee awards granted, modified, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123, as amended. The following table illustrates the effect on income attributable to common stock and earnings per share had the fair value based provisions of SFAS No. 123, as amended, been applied to all outstanding and unvested awards.
FOR THE QUARTER ENDED MARCH 31, ------------------------------- 2004 2003 -------------- -------------- (In thousands) Income attributable to Common Stock, as reported......... $ 347,664 $ 337,509 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects.......................................... 773 356 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects........... (5,579) (4,501) -------------- -------------- Pro forma Income Attributable to Common Stock............ $ 342,858 $ 333,364 ============== ============== Net Income per Common Share: Basic: As reported....................................... $ 1.07 $ 1.06 Pro forma......................................... 1.05 1.05 Diluted: As reported....................................... 1.06 1.05 Pro forma......................................... 1.05 1.03
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. On May 1, 2003, the Company began issuing stock appreciation rights to certain employees in lieu of stock options. The Company records compensation expense with respect to stock appreciation rights as the price of the Company's common stock fluctuates and the awards vest. 6. SUPPLEMENTAL CASH FLOW INFORMATION The following table provides supplemental disclosure of cash flow information:
FOR THE QUARTER ENDED MARCH 31, ------------------------------- 2004 2003 -------------- -------------- (In thousands) Cash paid during the period for: Interest (net of amounts capitalized)................. $ 11,308 $ 12,017 Income taxes (net of refunds)......................... 64,705 61,948
10 7. PENSION AND POST-RETIREMENT BENEFITS Effective July 1, 2003, as part of the BP North Sea acquisition, Apache assumed a defined benefit pension plan covering existing BP North Sea employees hired by the Company as part of the acquisition. The pension plan provides defined benefits based on years of service and final average salary. The following table sets forth the components of the net periodic cost of Apache's pension and other post-retirement benefit plans for the three-month period ended March 31, 2004. The pension and post-retirement benefit plans did not materially impact the Company for equivalent prior-year periods.
FOR THE QUARTER ENDED MARCH 31, 2004 ------------------------------------ POST-RETIREMENT PENSION BENEFITS BENEFITS ---------------- --------------- (In thousands) COMPONENTS OF NET PERIODIC BENEFIT COSTS Service cost.......................................... $ 1,386 $ 250 Interest cost......................................... 921 150 Expected return on assets............................. (911) - Amortization of: Prior service cost................................ - - Transition obligation............................. - - Actuarial (gain)/loss............................. - 75 ---------------- --------------- Net periodic benefit cost............................. $ 1,396 $ 475 ================ ===============
Apache disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $5 million to its pension plan in 2004, of which $1 million was contributed as of March 31, 2004 and at least an additional $4 million is expected by year-end 2004. The Company did not make any material contributions to the post-retirement benefit plan during the period and does not anticipate any material contributions or benefit payments to be made in future years. 11 8. BUSINESS SEGMENT INFORMATION Apache has six reportable segments which are primarily in the business of crude oil and natural gas exploration and production. The Company evaluates performance based on profit or loss from oil and gas operations before income and expense items incidental to oil and gas operations, and income taxes. Apache's reportable segments are managed separately based on their geographic locations. Financial information by operating segment is presented below:
UNITED OTHER STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL ---------- ---------- ---------- ---------- --------- ------------- ----------- (In thousands) FOR THE QUARTER ENDED MARCH 31, 2004 Oil and Gas Production Revenues......... $ 530,756 $ 226,041 $ 188,007 $ 93,440 $ 92,216 $ 22,294 $ 1,152,754 ========== ========== ========== ========== ========= ============= =========== Operating Income (1).................... $ 287,003 $ 123,061 $ 117,814 $ 47,792 $ 7,436 $ 8,048 $ 621,154 ========== ========== ========== ========== ========= ============= Other Income (Expense): Other................................ (2,815) General and administrative........... (43,850) Financing costs, net................. (27,146) ----------- Income Before Income Taxes.............. $ 547,343 =========== Total Assets............................ $5,695,986 $3,123,622 $1,799,449 $1,000,008 $ 990,647 $ 175,998 $12,785,710 ========== ========== ========== ========== ========= ============= =========== FOR THE QUARTER ENDED MARCH 31, 2003 Oil and Gas Production Revenues......... $ 472,153 $ 223,403 $ 175,363 $ 102,274 $ - $ 1,969 $ 975,162 ========== ========== ========== ========== ========= ============= =========== Operating Income (1).................... $ 277,941 $ 136,575 $ 113,706 $ 56,059 $ - $ 669 $ 584,950 ========== ========== ========== ========== ========= ============= Other Income (Expense): Other................................ (8,553) General and administrative........... (27,831) Preferred interests of subsidiaries.. (3,362) Financing costs, net................. (25,921) ----------- Income Before Income Taxes.............. $ 519,283 =========== Total Assets............................ $5,345,524 $2,652,260 $1,749,675 $ 950,629 $ - $ 174,194 $10,872,282 ========== ========== ========== ========== ========= ============= ===========
(1) Operating income (loss) consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, lease operating costs, gathering and transportation costs, and severance and other taxes. 9. ASSET RETIREMENT OBLIGATIONS Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash outflows discounted at the Company's credit-adjusted risk-free interest rate. Apache's asset retirement obligations primarily relate to the plugging and abandonment of oil and gas properties. Upon adoption, Apache recorded an increase to net oil and gas properties of $410 million and additional liabilities related to asset retirement obligations of $369 million. These amounts reflect the ARO of the Company had the provisions of SFAS No. 143 been applied since inception and resulted in a non-cash cumulative effect increase to 2003 earnings of $27 million ($41 million pretax). 12 The following table describes all changes to the Company's asset retirement obligation liability for the current year (in thousands): Asset retirement obligation as of December 31, 2003... $ 739,775 Liabilities incurred.................................. 4,112 Liabilities settled................................... (14,173) Accretion expense..................................... 10,761 Revisions............................................. 7,925 --------- Asset retirement obligation as of March 31, 2004......... $ 748,400 =========
Liabilities incurred during the period primarily relate to obligations in connection with the Company's drilling activity. Liabilities settled during the period primarily relate to individually immaterial properties plugged and abandoned or sold during the period. 10. SUBSEQUENT EVENT In October 2000, the Company adopted the 2000 Share Appreciation Plan under which grants were made to the Company's officers and substantially all full-time employees. The 2000 Share Appreciation Plan provides for issuance of Apache common stock, based on attainment of one or more of three share price goals (Share Price Goals) and/or a separate production goal. The Share Price Goals are based on achieving a closing share price for Apache stock of $43.29, $51.95 and $77.92 per share ($100, $120 and $180 before the five and 10 percent stock dividends and the two-for-one stock split) on any 10 days out of any 30 consecutive trading days before January 1, 2005. As of April 28, 2004, Apache's share price exceeded the first threshold for the 10-day requirement. As such, Apache will issue approximately 1.3 million shares of its common stock, before any minimum tax withholding requirements, valued at approximately $59 million. These awards will be issued in three equal installments in 2004, 2005 and 2006 to employees remaining with the Company during that period. Expense recognition is based on the percentage of the employees' service period and will reduce Apache's 2004 net income by approximately $16 million after tax, or five cents per diluted common share. Please refer to our 2003 Form 10-K for additional details concerning the 2000 Share Appreciation Plan. 11. SUPPLEMENTAL GUARANTOR INFORMATION Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance Canada Corporation (Apache Finance Canada) are subsidiaries of Apache, that have issuances of publicly traded securities and require the following condensed consolidating financial statements be provided as an alternative to filing separate financial statements. Each of the companies presented in the condensed consolidating financial statements has been fully consolidated in Apache's consolidated financial statements. As such, the condensed consolidating financial statements should be read in conjunction with the financial statements of Apache Corporation and Subsidiaries and notes thereto of which this note is an integral part. 13 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues............. $ 529,038 $ - $ - $ - Equity in net income (loss) of affiliates... 193,492 8,262 11,228 37,945 Other....................................... (763) - - - ----------- ------------- --------- ------- 721,767 8,262 11,228 37,945 ----------- ------------- --------- ------- OPERATING EXPENSES: Depreciation, depletion and amortization.... 131,210 - - - Asset retirement obligation accretion....... 5,795 - - - Lease operating costs....................... 84,235 - - - Gathering and transportation costs.......... 7,332 - - - Severance and other taxes................... 13,380 - - 18 General and administrative.................. 34,929 - - - Financing costs, net........................ 21,763 - 4,512 10,107 ----------- ------------- --------- ------- 298,644 - 4,512 10,125 ----------- ------------- --------- ------- INCOME (LOSS) BEFORE INCOME TAXES.............. 423,123 8,262 6,716 27,820 Provision (benefit) for income taxes........ 74,039 - (1,546) (3,505) ----------- ------------- --------- ------- NET INCOME..................................... 349,084 8,262 8,262 31,325 Preferred stock dividends................... 1,420 - - - ----------- ------------- --------- ------- INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 347,664 $ 8,262 $ 8,262 $31,325 =========== ============= ========= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues............. $ 701,891 $ (78,175) $ 1,152,754 Equity in net income (loss) of affiliates... (9,586) (241,341) - Other....................................... (2,052) - (2,815) ------------ ----------------- ------------ 690,253 (319,516) 1,149,939 ------------ ----------------- ------------ OPERATING EXPENSES: Depreciation, depletion and amortization.... 155,018 - 286,228 Asset retirement obligation accretion....... 4,966 - 10,761 Lease operating costs....................... 199,969 (78,175) 206,029 Gathering and transportation costs.......... 12,302 - 19,634 Severance and other taxes................... (4,450) - 8,948 General and administrative.................. 8,921 - 43,850 Financing costs, net........................ (9,236) - 27,146 ------------ ----------------- ------------ 367,490 (78,175) 602,596 ------------ ----------------- ------------ INCOME (LOSS) BEFORE INCOME TAXES.............. 322,763 (241,341) 547,343 Provision (benefit) for income taxes........ 129,271 - 198,259 ------------ ----------------- ------------ NET INCOME..................................... 193,492 (241,341) 349,084 Preferred stock dividends................... - - 1,420 ------------ ----------------- ------------ INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 193,492 $ (241,341) $ 347,664 ============ ================= ============
14 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2003
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues............. $ 376,167 $ - $ - $ - Equity in net income (loss) of affiliates... 179,358 8,947 11,925 28,195 Other....................................... (3,616) - - - ----------- ------------- --------- ------- 551,909 8,947 11,925 28,195 ----------- ------------- --------- ------- OPERATING EXPENSES: Depreciation, depletion and amortization.... 67,618 - - - Asset retirement obligation accretion....... 2,764 - - - Lease operating costs....................... 58,767 - - - Gathering and transportation costs.......... 4,485 - - - Severance and other taxes................... 14,357 - - 42 General and administrative.................. 23,703 - - - Financing costs, net........................ 21,099 - 4,512 10,169 ----------- ------------- --------- ------- 192,793 - 4,512 10,211 ----------- ------------- --------- ------- PREFERRED INTERESTS OF SUBSIDIARIES............ - - - - ----------- ------------- --------- ------- INCOME (LOSS) BEFORE INCOME TAXES.............. 359,116 8,947 7,413 17,984 Provision (benefit) for income taxes........ 39,944 - (1,534) (4,112) ----------- ------------- --------- ------- INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE......................... 319,172 8,947 8,947 22,096 Cumulative effect of change in accounting principle, net of income tax............ 19,757 - - - ----------- ------------- --------- ------- NET INCOME..................................... 338,929 8,947 8,947 22,096 Preferred stock dividends................... 1,420 - - - ----------- ------------- --------- ------- INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 337,509 $ 8,947 $ 8,947 $22,096 =========== ============= ========= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues............. $ 654,267 $ (55,272) $ 975,162 Equity in net income (loss) of affiliates... (9,077) (219,348) - Other....................................... (4,937) - (8,553) ------------ ----------------- ------------ 640,253 (274,620) 966,609 ------------ ----------------- ------------ OPERATING EXPENSES: Depreciation, depletion and amortization.... 146,731 - 214,349 Asset retirement obligation accretion....... 2,549 - 5,313 Lease operating costs....................... 130,640 (55,272) 134,135 Gathering and transportation costs.......... 7,376 - 11,861 Severance and other taxes................... 10,155 - 24,554 General and administrative.................. 4,128 - 27,831 Financing costs, net........................ (9,859) - 25,921 ------------ ----------------- ------------ 291,720 (55,272) 443,964 ------------ ----------------- ------------ PREFERRED INTERESTS OF SUBSIDIARIES............ 3,362 - 3,362 ------------ ----------------- ------------ INCOME (LOSS) BEFORE INCOME TAXES.............. 345,171 (219,348) 519,283 Provision (benefit) for income taxes........ 172,688 - 206,986 ------------ ----------------- ------------ INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE......................... 172,483 (219,348) 312,297 Cumulative effect of change in accounting principle, net of income tax............ 6,875 - 26,632 ------------ ----------------- ------------ NET INCOME..................................... 179,358 (219,348) 338,929 Preferred stock dividends................... - - 1,420 ------------ ----------------- ------------ INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 179,358 $ (219,348) $ 337,509 ============ ================= ============
15 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... $ 315,934 $ - $ (3,704) $ 205 ----------- ------------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment......... (120,615) - - - Investment in subsidiaries, net............. (15,778) (3,500) - - Other, net.................................. (8,109) - - - ----------- ------------- --------- ------- NET CASH USED IN INVESTING ACTIVITIES.......... (144,502) (3,500) - - ----------- ------------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings........................ 187 - 204 (204) Payments on long-term debt.................. (135,300) - - - Dividends paid.............................. (20,898) - - - Common stock activity....................... 7,534 3,500 3,500 - Treasury stock activity, net................ 3,746 - - - Cost of debt and equity transactions........ (673) - - - ----------- ------------- --------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... (145,404) 3,500 3,704 (204) ----------- ------------- --------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 26,028 - - 1 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ - - 2 1 ----------- ------------- --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 26,028 $ - $ 2 $ 2 =========== ============= ========= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... $ 339,897 $ - $ 652,332 ------------ ----------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment......... (349,218) - (469,833) Investment in subsidiaries, net............. (3,816) 23,094 - Other, net.................................. (1,400) - (9,509) ------------ ----------------- ------------ NET CASH USED IN INVESTING ACTIVITIES.......... (354,434) 23,094 (479,342) ------------ ----------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings........................ 12,658 (12,594) 251 Payments on long-term debt.................. - - (135,300) Dividends paid.............................. - - (20,898) Common stock activity....................... 3,500 (10,500) 7,534 Treasury stock activity, net................ - - 3,746 Cost of debt and equity transactions........ - - (673) ------------ ----------------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... 16,158 (23,094) (145,340) ------------ ----------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 1,621 - 27,650 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 33,500 - 33,503 ------------ ----------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 35,121 $ - $ 61,153 ============ ================= ============
16 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2003
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... $ 134,160 $ - $ (3,500) $(4,333) ----------- ------------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment......... (87,688) - - - Acquisitions................................ (527,610) - - - Investment in subsidiaries, net............. 113,844 (3,500) - - Other, net.................................. (3,953) - - - ----------- ------------- --------- ------- NET CASH USED IN INVESTING ACTIVITIES.......... (505,407) (3,500) - - ----------- ------------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings........................ 104,488 - - (66) Payments on long-term debt.................. (280,300) - - - Dividends paid.............................. (16,787) - - - Common stock activity....................... 564,442 3,500 3,500 4,363 Treasury stock activity, net................ 2,476 - - - Cost of debt and equity transactions........ (534) - - - ----------- ------------- --------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES...... 373,785 3,500 3,500 4,297 ----------- ------------- --------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 2,538 - - (36) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 224 - 2 127 ----------- ------------- --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 2,762 $ - $ 2 $ 91 =========== ============= ========= ======= ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... $ 411,714 $ - $ 538,041 ------------ ----------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment......... (256,495) - (344,183) Acquisitions................................ - - (527,610) Investment in subsidiaries, net............. (91,727) (18,617) - Other, net.................................. (8,273) - (12,226) ------------ ----------------- ------------ NET CASH USED IN INVESTING ACTIVITIES.......... (356,495) (18,617) (884,019) ------------ ----------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings........................ (90,957) 51,288 64,753 Payments on long-term debt.................. - - (280,300) Dividends paid.............................. - - (16,787) Common stock activity....................... 21,308 (32,671) 564,442 Treasury stock activity, net................ - - 2,476 Cost of debt and equity transactions........ - - (534) ------------ ----------------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES...... (69,649) 18,617 334,050 ------------ ----------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (14,430) - (11,928) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 51,533 - 51,886 ------------ ----------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 37,103 $ - $ 39,958 ============ ================= ============
17 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 26,028 $ - $ 2 $ 2 Receivables, net of allowance............... 243,614 - - - Inventories................................. 16,090 - - - Drilling advances and others................ 38,385 - - - ----------- ------------- --------- ---------- 324,117 - 2 2 ----------- ------------- --------- ---------- PROPERTY AND EQUIPMENT, NET.................... 5,245,995 - - - ----------- ------------- --------- ---------- OTHER ASSETS: Intercompany receivable, net................ 1,304,161 - (2,115) 93,986 Goodwill, net............................... - - - - Equity in affiliates........................ 3,278,124 226,278 480,039 1,138,827 Deferred charges and other.................. 37,909 - - 4,791 ----------- ------------- --------- ---------- $10,190,306 $ 226,278 $ 477,926 $1,237,606 =========== ============= ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................ $ 197,991 $ - $ - $ - Other accrued expenses...................... 282,393 - 1,115 12,499 ----------- ------------- --------- ---------- 480,384 - 1,115 12,499 ----------- ------------- --------- ---------- LONG-TERM DEBT................................. 1,270,770 - 269,037 646,754 ----------- ------------- --------- ---------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes................................ 905,472 - (18,504) (752) Advances from gas purchasers................ 104,374 - - - Asset retirement obligation................. 401,562 - - - Other....................................... 155,305 - - - ----------- ------------- --------- ---------- 1,566,713 - (18,504) (752) ----------- ------------- --------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................... 6,872,439 226,278 226,278 579,105 ----------- ------------- --------- ---------- $10,190,306 $ 226,278 $ 477,926 $1,237,606 =========== ============= ========= ========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 35,121 $ - $ 61,153 Receivables, net of allowance............... 460,840 - 704,454 Inventories................................. 102,596 - 118,686 Drilling advances and others................ 65,172 - 103,557 ------------ ----------------- ------------ 663,729 - 987,850 ------------ ----------------- ------------ PROPERTY AND EQUIPMENT, NET.................... 6,286,361 - 11,532,356 ------------ ----------------- ------------ OTHER ASSETS: Intercompany receivable, net................ (1,396,032) - - Goodwill, net............................... 189,252 - 189,252 Equity in affiliates........................ (813,483) (4,309,785) - Deferred charges and other.................. 33,552 - 76,252 ------------ ----------------- ------------ $ 4,963,379 $ (4,309,785) $ 12,785,710 ============ ================= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................ $ 129,382 $ - $ 327,373 Other accrued expenses...................... 291,181 - 587,188 ------------ ----------------- ------------ 420,563 - 914,561 ------------ ----------------- ------------ LONG-TERM DEBT................................. 5,356 - 2,191,917 ------------ ----------------- ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes................................ 884,785 - 1,771,001 Advances from gas purchasers................ - - 104,374 Asset retirement obligation................. 346,838 - 748,400 Other....................................... 27,713 - 183,018 ------------ ----------------- ------------ 1,259,336 - 2,806,793 ------------ ----------------- ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................... 3,278,124 (4,309,785) 6,872,439 ------------ ----------------- ------------ $ 4,963,379 $ (4,309,785) $ 12,785,710 ============ ================= ============
18 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- --------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ - $ - $ 2 $ 1 Receivables, net of allowance............... 204,078 - - - Inventories................................. 17,646 - - - Drilling advances and other................. 60,159 - - - ----------- ------------- --------- ---------- 281,883 - 2 1 ----------- ------------- --------- ---------- PROPERTY AND EQUIPMENT, NET.................... 5,235,717 - - - ----------- ------------- --------- ---------- OTHER ASSETS: Intercompany receivable, net................ 1,291,503 - (1,961) 93,768 Goodwill, net............................... - - - - Equity in affiliates........................ 3,077,152 183,617 437,860 1,084,711 Deferred charges and other.................. 36,672 - - 4,767 ----------- ------------- --------- ---------- $ 9,922,927 $ 183,617 $ 435,901 $1,183,247 =========== ============= ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................ $ 189,031 $ - $ - $ - Other accrued expenses...................... 238,555 - 1,621 1,803 ----------- ------------- --------- ---------- 427,586 - 1,621 1,803 ----------- ------------- --------- ---------- LONG-TERM DEBT................................. 1,405,882 - 268,987 646,741 ----------- ------------- --------- ---------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes................................ 879,044 - (18,324) (842) Advances from gas purchasers................ 109,207 - - - Asset retirement obligation................. 401,349 - - - Oil and gas derivative instruments.......... 5,931 - - - Other....................................... 161,130 - - - ----------- ------------- --------- ---------- 1,556,661 - (18,324) (842) ----------- ------------- --------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................... 6,532,798 183,617 183,617 535,545 ----------- ------------- --------- ---------- $ 9,922,927 $ 183,617 $ 435,901 $1,183,247 =========== ============= ========= ========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 33,500 $ - $ 33,503 Receivables, net of allowance............... 434,977 - 639,055 Inventories................................. 108,221 - 125,867 Drilling advances and other................. 40,488 - 100,647 ------------ ----------------- ------------ 617,186 - 899,072 ------------ ----------------- ------------ PROPERTY AND EQUIPMENT, NET.................... 6,024,368 - 11,260,085 ------------ ----------------- ------------ OTHER ASSETS: Intercompany receivable, net................ (1,383,310) - - Goodwill, net............................... 189,252 - 189,252 Equity in affiliates........................ (803,409) (3,979,931) - Deferred charges and other.................. 26,278 - 67,717 ------------ ----------------- ------------ $ 4,670,365 $ (3,979,931) $ 12,416,126 ============ ================= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................ $ 111,567 $ - $ 300,598 Other accrued expenses...................... 277,801 - 519,780 ------------ ----------------- ------------ 389,368 - 820,378 ------------ ----------------- ------------ LONG-TERM DEBT................................. 5,356 - 2,326,966 ------------ ----------------- ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes................................ 837,360 - 1,697,238 Advances from gas purchasers................ - - 109,207 Asset retirement obligation................. 338,426 - 739,775 Oil and gas derivative instruments.......... - - 5,931 Other....................................... 22,703 - 183,833 ------------ ----------------- ------------ 1,198,489 - 2,735,984 ------------ ----------------- ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................... 3,077,152 (3,979,931) 6,532,798 ------------ ----------------- ------------ $ 4,670,365 $ (3,979,931) $ 12,416,126 ============ ================= ============
19 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Apache Corporation reported record first-quarter 2004 earnings of $348 million, up from the previous record established in the first quarter of 2003 of $338 million. The 2003 quarter benefited from a $27 million cumulative effect adjustment for a change in accounting principle regarding asset retirement obligations (see Note 9). The Company also reported net cash provided by operating activities of $652 million, an increase of $114 million from the prior-year period. The improved results were driven by a 23 percent increase in equivalent daily production over the prior-year period. While crude oil and natural gas prices remained strong during the first quarter of 2004, both were below the comparative price realizations of the year-ago quarter. The Company's first-quarter 2004 production profile includes production from the North Sea assets acquired from subsidiaries of BP p.l.c. (BP) early in the second quarter of 2003 and China, where production commenced in the third quarter of 2003. Production from these areas, combined with drilling successes and production from Gulf of Mexico properties acquired during 2003 from BP and Shell Exploration and Production Company (Shell), drove first-quarter 2004 daily crude oil production to 217,567 barrels, up 37 percent from the comparable 2003 quarter. Over 75 percent of the increase in daily crude oil production came from the North Sea. Our first-quarter 2004 natural gas production of 1,213 MMcf/d increased 11 percent from the year-earlier period, relating primarily to the Gulf of Mexico properties discussed above and, to a lesser extent, higher demand in Australia and various drilling successes. Our first-quarter 2004 equivalent production from outside the U.S. increased to 58 percent from 55 percent in the 2003 quarter. First-quarter 2004 worldwide capital expenditures for exploration and development activity exceeded $500 million. Approximately two-thirds of our capital expenditures were dedicated to our North American regions to take advantage of high North American commodity prices, especially natural gas. Internationally, we had two notable discoveries: - On January 6, 2004, we announced that the Thomas Bright-2 appraisal well in the John Brookes field in the Carnarvon Basin offshore Western Australia extended the boundary of the reservoir, essentially doubling the estimated gross recoverable reserves. A portion of the John Brookes reserves is dedicated to supply 20 million cubic feet (MMcf) of gas per day over the next 15 years, with first sales scheduled for the fourth quarter of 2004. - On March 2, 2004, we announced completion of the Qasr-3X Jurassic appraisal well on Egypt's Khalda Concession which confirmed our original preliminary estimate of ultimate recoverable reserves in the range of one trillion to three trillion cubic feet (Tcf) of natural gas and 20 million to 60 million barrels of condensate. Several deep Jurassic delineation wells and at least one shallower Cretaceous well are planned during 2004. The Qasr discovery is perhaps the most significant discovery in Apache's history. On April 22, 2004, we announced completion of a 25-year Gas Sales Agreement with the Egyptian General Petroleum Company (EGPC) covering 2.1 Tcf of natural gas from the Qasr field. Principle terms include supplying 300 MMcf of gas per day to the Egyptian market. The pricing terms under the agreement set a minimum price of $1.50 per million British thermal units (MMBtu) and a maximum price of $2.65 per MMBtu. Field development, final engineering design and tendering operations are underway to allow us to reach the full contracted quantity during 2005. On January 14, 2004, we completed the two-for-one common stock split approved by our Board of Directors in September 2003. Separately, on January 26, 2004, the Nasdaq Stock Market, Inc. (NASDAQ) approved Apache for listing on the Nasdaq National Market, an intention we first announced on January 12, 2004. Our common stock is now listed on the NASDAQ as well as the New York Stock Exchange and Chicago Stock Exchange. As discussed in Note 10 of this Form 10-Q, on April 28, 2004, Apache's share price exceeded the first threshold for the 10-day requirement under its 2000 Share Appreciation Plan. As such, the Company will issue 1.3 million shares of its common stock valued at approximately $59 million in three annual installments. The incentives will reduce Apache's 2004 net income by approximately $16 million after tax or five cents per diluted common share. 20 The present outlook for the remainder of 2004 appears favorable, considering our existing production profile and that current NYMEX futures markets indicate crude oil and natural gas prices should remain above historical averages. With a debt-to-capitalization ratio of 24.2 percent at quarter end and a positive outlook for earnings and cash flow, we are well positioned to take advantage of opportunities that may arise. RESULTS OF OPERATIONS Revenues The following table presents each segment's oil revenues and gas revenues as a percentage of total oil revenues and gas revenues, respectively.
OIL REVENUES GAS REVENUES FOR THE QUARTER ENDED FOR THE QUARTER ENDED MARCH 31 , MARCH 31 , --------------------- --------------------- 2004 2003 2004 2003 --------- --------- --------- --------- United States........ 33% 34% 59% 59% Canada............... 13% 16% 28% 29% --------- --------- --------- --------- North America........ 46% 50% 87% 88% Egypt................ 23% 29% 9% 10% Australia............ 13% 21% 4% 2% North Sea............ 15% - - - China................ 3% - - - --------- --------- --------- --------- Total............ 100% 100% 100% 100% ========= ========= ========= =========
Crude Oil Contribution The geographic mix of our first-quarter 2004 crude oil revenues changed appreciably when compared to the first-quarter 2003 revenues. Crude oil revenues from outside the U.S. increased to 67 percent, up one percent from the prior-year quarter. The North Sea properties contributed 15 percent of first-quarter 2004 consolidated oil revenues while China contributed three percent. Neither of these countries contributed to first-quarter 2003 revenues. Percentage contributions from all other areas fell, reflecting the impact of our new operations in the North Sea and China. Natural Gas Contribution First-quarter 2004 North American natural gas revenues totaled 87 percent of consolidated natural gas revenues, down one percent from the comparable 2003 quarter. The U.S. contributed 59 percent of natural gas revenues, flat to the prior-year quarter as production growth from acquisitions and drilling more than offset the impact from lower natural gas prices. Canada and Egypt's contributions declined one percent to 28 percent and nine percent, respectively, on lower prices. Australia's gas revenues rose to four percent of consolidated gas revenues on both higher production and higher prices. Australia's gas price benefited from a stronger Australian dollar compared to the first quarter of 2003. 21 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 MARCH 31, ------------------------------------ INCREASE 2004 2003 (DECREASE) ---------- ---------- ---------- Revenues (in thousands): Natural gas........................ $ 526,854 $ 520,360 1% Oil................................ 602,635 438,343 37% Natural gas liquids................ 23,265 16,459 41% ---------- ---------- Total........................ $1,152,754 $ 975,162 18% ========== ========== Natural Gas Volume - Mcf per day: United States...................... 644,462 552,783 17% Canada............................. 314,064 309,205 2% Egypt.............................. 128,665 123,719 4% Australia.......................... 118,822 101,153 17% North Sea.......................... 1,602 - - China - - - Argentina.......................... 5,160 6,788 (24%) ---------- ---------- Total........................ 1,212,775 1,093,648 11% ========== ========== Average Natural Gas Price - Per Mcf: United States...................... $ 5.35 $ 6.22 (14%) Canada............................. 5.09 5.35 (5%) Egypt.............................. 4.10 4.50 (9%) Australia.......................... 1.70 1.31 30% North Sea.......................... 4.34 - - China - - - Argentina.......................... 0.47 0.42 12% Total........................ 4.77 5.29 (10%) Oil Volume - Barrels per day: United States...................... 67,255 57,334 17% Canada............................. 25,266 24,735 2% Egypt.............................. 49,097 45,710 7% Australia.......................... 23,658 30,439 (22%) North Sea.......................... 44,299 - - China.............................. 7,440 - - Argentina.......................... 552 597 (8%) ---------- ---------- Total........................ 217,567 158,815 37% ========== ========== Average Oil Price - Per barrel: United States...................... $ 32.36 $ 28.97 12% Canada............................. 33.00 32.09 3% Egypt 31.34 30.46 3% Australia.......................... 34.86 33.00 6% North Sea.......................... 22.72 - - China 30.12 - - Argentina.......................... 33.44 31.95 5% Total........................ 30.44 30.67 (1%) Natural Gas Liquids (NGL) Volume - Barrels per day: United States................... 8,128 6,083 34% Canada.......................... 2,598 1,406 85% ---------- ---------- Total........................ 10,726 7,489 43% ========== ========== Average NGL Price - Per barrel: United States................... $ 25.27 $ 24.34 4% Canada.......................... 19.34 24.75 (22%) Total........................ 23.83 24.42 (2%)
22 Natural Gas Revenues The Company's natural gas production increased 119 million cubic feet per day (MMcf/d), adding $57 million to first-quarter natural gas revenues. Production in the U.S. climbed 92 MMcf/d, with the Gulf Coast region's production rising 88 MMcf/d on a full quarter of production from the Gulf of Mexico properties acquired from BP, production from properties acquired from Shell in July 2003 and drilling and recompletion programs. These increases offset natural declines in mature fields and downtime associated with well performance. Production in the Central region was up 4 MMcf/d as new discoveries and a successful recompletion program offset natural declines in mature fields. Australian production increased 18 MMcf/d, reflecting higher demand and new contracts that replaced contracts with a Perth gas distribution company which expired in October 2002. Worldwide, our average natural gas price dropped $.52 per Mcf, reducing first-quarter natural gas revenues by $50 million. Apache uses a variety of strategies to manage its exposure to fluctuations in natural gas prices, including fixed-price physical contracts and derivatives. Approximately nine percent of our first quarter 2004 domestic natural gas production was subject to long-term fixed-price physical contracts, down from 11 percent in the first quarter of 2003. We also amortized small amounts of unrealized gains and losses on derivative positions closed in October and November 2001. The impact on our realized price was negligible in 2004 and 2003. The following table shows the impact on average prices for these items:
FOR THE QUARTER ENDED MARCH 31, ------------------------------------- 2004 2003 ----------------- ----------------- (Per Mcf) Fixed-price physical.................. $ (.09) $ (.15) Derivatives........................... (.07) (.17)
Crude Oil Revenues The Company added $168 million to first-quarter crude oil revenues on a 58,752 barrel per day (b/d) rise in production. Two areas contributing production to the current quarter that were not included in the first quarter of 2003 were the North Sea properties acquired from BP in early April 2003 and China, where production commenced in the third quarter of 2003. The North Sea's production averaged 44,299 b/d for the quarter, while China added 7,440 b/d. A portion of the revenue from the North Sea is tied to a separate crude oil physical sales contract entered into in conjunction with the acquisition. See Note 2 of this Form 10-Q for a discussion of the terms of this contract. Production in the Gulf Coast region was up 8,883 b/d on drilling successes and production from Gulf of Mexico properties acquired during 2003 from BP and Shell. Egypt's production rose 3,387 b/d on exploration and development activity on several concessions, while Australia's production was down 6,781 b/d as natural decline, cyclone and downtime at Legendre, Stag and Simpson fields more than offset successful drilling results. Apache also manages its exposure to fluctuations in crude oil prices using derivatives. In addition, the Company amortized unrealized gains and losses related to derivative positions closed in October and November 2001. The following table shows the impact on prices for these items.
FOR THE QUARTER ENDED MARCH 31, ----------------------------------- 2004 2003 -------------- -------------- (Per Bbl) Derivatives........................... $ (.60) $ (1.61) Amortization.......................... - .03
23 Operating Expenses The table below presents a comparison of our expenses on an absolute dollar basis and an equivalent unit of production (boe) basis. Our discussion may reference either expenses on a boe basis or expenses on an absolute dollar basis, or both, depending on their relevance. First quarter 2004 costs include the full impact from our 2003 acquisitions, whereas the first quarter of 2003 only includes a partial month of costs associated with the BP Gulf of Mexico acquisition.
FOR THE QUARTER ENDED MARCH 31, FOR THE QUARTER ENDED MARCH 31, ------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- -------------- ------------- --------------- (In millions) (Per Boe) Depreciation, depletion and amortization: Oil and gas property and equipment........................ $ 268 $ 198 $ 6.85 $ 6.31 Other assets.............................................. 18 16 .46 .52 Asset retirement obligation accretion........................ 11 5 .27 .17 Lease operating expenses (LOE)............................... 206 134 5.26 4.28 Gathering and transportation costs........................... 20 12 .50 .38 Severance and other taxes.................................... 9 25 .23 .78 General and administrative expense (G&A)..................... 44 28 1.12 .89 Financing costs, net......................................... 27 26 .69 .83 -------------- -------------- ------------- --------------- Total............................................. $ 603 $ 444 $ 15.38 $ 14.16 ============== ============== ============= ===============
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. First-quarter 2004 full-cost DD&A expense of $268 million is $70 million higher than 2003, with 78 percent ($55 million) of the increase attributable to volume growth from our 2003 acquisitions. The 2004 expense is mainly comprised of the U.S., $126 million; Canada, $43 million; Egypt, $40 million; Australia, $25 million; the North Sea, $25 million and China, $9 million. First-quarter 2003 full-cost DD&A expense of $198 million is mainly comprised of the U.S., $97 million; Canada, $37 million; Egypt, $38 million and Australia, $25 million. On a boe basis, our first-quarter 2004 full-cost DD&A rate of $6.85 is $.54 higher than the first-quarter 2003 rate. The rate increase is incremental over sequential quarters and only increased $.07 from the fourth quarter of 2003. Over half of the rate increase since the first quarter of 2003 occurred in the U.S on higher finding, acquisition and future development costs. Canada added $.16 to the rate on higher finding costs. China, which had higher finding and development costs than other regions, added $.12 to the rate since initial production in the third quarter of 2003. Australia added $.05 to the rate. Egypt and the North Sea's rates reduced the worldwide rate $.05 and $.04, respectively, as both regions added lower cost reserves. Lease Operating Expenses Apache's LOE per boe was $5.26 in first-quarter 2004, an increase of $.98 per boe from the first quarter of 2003. Approximately $.56 of the increase was a result of our entrance into the North Sea ($.54) and first production in China ($.02). These areas primarily produce oil, which carries a higher LOE per boe rate. The remaining increase was related to our other areas of operations as follows: Egypt ($.17), Canada ($.11), Australia ($.07), and the U.S ($.06). Egypt was impacted by the loss of a diesel fuel subsidy in the third quarter of last year and higher variable costs with higher production (consumables, trucking, chemicals and transportation). Approximately half of Canada's increase was related to the weaker U.S. dollar, the remainder being generally higher costs. The increase in Australia was a result of lower production, as absolute costs decreased. In the U.S., approximately two-thirds of the increase was related to higher repair and maintenance costs, the balance driven by additional incentive compensation. 24 Gathering and Transportation Costs Apache sells oil and natural gas under two types of transactions, both of which include a transportation charge. One is a netback arrangement, under which Apache sells oil or natural gas at the wellhead and collects a price, net of transportation incurred by the purchaser. Under the other arrangement, Apache sells oil or natural gas at a specific delivery point beyond the wellhead, pays the cost of transportation to a third-party carrier and receives from the purchaser a price with no deduction for transportation cost. In the U.S. and Canada, Apache sells oil and natural gas under both types of arrangements. In the North Sea, Apache pays transportation to a third-party carrier. In Egypt and Australia, oil and natural gas are sold under the netback arrangement. Gathering and transportation costs paid to third-party carriers and disclosed here vary based on the volume, distance shipped, and the fee charged by the transporter, which may be price sensitive. For the first quarter of 2004, these costs are primarily related to the transportation of natural gas in our North American operations and transportation of oil in the North Sea. First quarter 2004 gathering and transportation costs totaled $7 million in Canada, $7 million in the U.S. and $5 million in the North Sea. In the 2003 quarter, these costs totaled $7 million and $5 million in Canada and the U.S., respectively. Apache did not enter the North Sea until the second quarter of 2003. The $.12 increase in transportation on a boe basis is primarily related to transportation of North Sea oil, which is more expensive to transport. Severance and Other Taxes Severance and other taxes are comprised primarily of severance taxes on properties onshore and in state or provincial waters in the U.S. and Australia, the Australian Petroleum Resource Rent Tax (PRRT), the Canadian Large Corporation Tax, Saskatchewan Capital Tax, Saskatchewan Resource Surtax and Freehold Mineral Tax, and the North Sea Petroleum Revenue Tax (PRT). Egyptian operations are not subject to these various taxes. First quarter 2004 severance and other taxes totaled $9 million, $16 million less than the year-ago quarter. A detail of these taxes follows:
2004 2003 -------------- -------------- (In millions) Severance taxes.............................................. $ 19.3 $ 21.0 North Sea PRT................................................ (16.7) - Canadian taxes............................................... 5.0 3.1 Other........................................................ 1.3 .5 -------------- -------------- Total Severance and Other Taxes.............................. $ 8.9 $ 24.6 ============== ==============
The $17 million North Sea PRT credit resulted from capital expenditures. Absent this PRT credit in the North Sea, first-quarter 2004 severance and other taxes would have been up $1 million. Severance taxes in the U.S. and Canada were marginally lower than the 2003 quarter. Canada's taxes increased as a result of the increase in the value of the Canadian dollar and a higher freehold mineral tax. General and Administrative Expense G&A costs were $16 million higher compared to the first quarter of 2003. Approximately 48 percent of the additional cost is related to the impact on compensation programs of the rising price of Apache's common stock and incremental 2003 incentive compensation paid in 2004. The higher stock related compensation expense stems from Apache's decision, effective January 1, 2003, to expense stock-based compensation plans. Another 17 percent of the increase is related to our new North Sea operations. The balance of the increase is related to the Company's decision to increase its charitable contributions, expansion of the Company's new gas marketing group, higher comparative legal costs. Provision for Income Taxes First-quarter 2004 income tax expense was $9 million less than the prior-year quarter, even though the March 31, 2004 quarter had higher taxable income. The lower income tax expense was driven by a lower effective tax rate of 36.2 percent compared to 39.9 percent in the prior-year quarter, which was impacted by a weaker U.S. dollar. The current quarter effective tax rate was largely unaffected by foreign currency charges, unlike the prior- 25 year quarter. Additionally, the Canadian federal statutory income tax rates were lowered in the fourth quarter of 2003. OIL AND GAS CAPITAL EXPENDITURES
FOR THE QUARTER ENDED MARCH 31, ------------------------------- 2004 2003 -------------- -------------- (In thousands) Exploration and development: United States........................................... $ 155,807 $ 87,280 Canada.................................................. 194,716 165,047 Egypt................................................... 63,666 60,327 Australia............................................... 32,165 25,247 North Sea............................................... 67,005 - China................................................... 794 4,012 Other International..................................... 444 363 -------------- -------------- $ 514,597 $ 342,276 ============== ============== Capitalized Interest......................................... $ 13,650 $ 11,232 ============== ============== Gas gathering, transmission and processing facilities........ $ 20,321 $ 3,061 ============== ============== Acquisitions: Oil and gas properties.................................. $ 1,329 $ 544,371 Gas gathering, transmission and processing facilities... - 5,484 -------------- -------------- $ 1,329 $ 549,855 ============== ==============
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 budgets capital expenditures based upon projected cash flows and routinely adjusts capital expenditures in response to changes in oil and natural gas prices and corresponding changes in cash flow. The Company cannot accurately predict future oil and gas prices. Net Cash Provided by Operating Activities Apache's net cash provided by operating activities for the first three months of 2004 totaled $652 million, a 21 percent increase from $538 million in the first three months of 2003 on a 23 percent increase in equivalent production partially offset by lower gas prices. LIQUIDITY The Company had $61 million in cash and cash equivalents on March 31, 2004, up from $34 million on December 31, 2003. Apache's ratio of current assets to current liabilities on March 31, 2004 was 1.08 compared to 1.10 on December 31, 2003. Apache believes that cash on hand, net cash generated from operations, short-term investments, and unused committed borrowing capacity under its $1.5 billion global credit facility will be adequate to satisfy future financial obligations and liquidity needs. The global credit facility includes a $750 million 364-day U.S. credit facility which expires in May 2004. The Company is currently negotiating a 5-year credit facility to replace the 364-day facility. As of March 31, 2004, Apache's available borrowing capacity under its global credit facility was $1.5 billion. 26 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 cycles we may be in. Those categories include: - exploiting our existing property base; - acquiring properties to which we can add value; and - drilling high-potential exploration prospects. Exploiting Existing Asset Base We seek to maximize the value of our existing asset base by increasing production and reserves while operating in the most cost efficient manner. In order to achieve these objectives, we actively pursue production enhancement opportunities such as workovers, recompletions and moderate risk drilling, while divesting marginal and non-strategic properties and identifying other activities to reduce costs. Given the significant acquisitions and discoveries over the last few years, including the recent properties acquired from BP and Shell, we have an abundant inventory of exploitation opportunities. Acquiring Properties to Which We Can Add Value We seek to purchase reserves at appropriate prices by generally avoiding auction processes, where we are competing against other buyers and by targeting properties to which we believe we can add value. Our aim is to follow each acquisition with a cycle of reserve enhancement, property consolidation and cash flow acceleration, facilitating asset growth and debt reduction. Investing in High-Potential Exploration Prospects We seek to concentrate our exploratory investments in a select number of international areas and to become one of the dominant operators in those regions. We believe that these investments, although higher-risk, offer potential for attractive investment returns and significant reserve additions. Our international investments and exploration activities are a significant component of our long-term growth strategy. They complement our domestic operations, which are more development oriented. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Major market risk exposure continues to be the pricing applicable to our oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to our United States and Canadian natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable. Apache sells all of its Egyptian crude oil and natural gas 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. The information set forth under "Commodity Risk," "Interest Rate Risk" and "Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the year ended December 31, 2003, is incorporated herein by reference. Information about market risks for the quarter ended March 31, 2004 does not differ materially from our 2003 Form 10-K disclosure except as noted below. Although Apache uses floating-rate debt on a short-term basis, all of the Company's debt was at fixed-rates as of March 31, 2004. Apache's annual interest costs in 2004 are not expected to fluctuate materially. Therefore, the Company considers its interest rate risk exposure to be minimal. 27 On March 31, 2004, the Company had open natural gas derivative positions with a fair value of $(80) million. A 10 percent increase in natural gas prices would change the fair value by $(27) million. A 10 percent decrease in prices would change the fair value by $25 million. The Company did not have any open oil price swap positions on March 31, 2004. See Note 2 to the Company's consolidated financial statements for notional volumes associated with the Company's derivative contracts. ITEM 4 - CONTROLS AND PROCEDURES G. Steven Farris, the Company's President, Chief Executive Officer and Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2004, the end of the period covered by this report. Based on that evaluation and as of the date of that evaluation, these officers concluded that the Company's disclosure controls to be effective, providing effective means to insure that information we are required to disclose under applicable laws and regulations is recorded, processed, summarized and reported in a timely manner. We also made no significant changes in internal controls over financial reporting during the quarter ending March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We periodically review the design and effectiveness of our disclosure controls, including compliance with various laws and regulations that apply to our operations both inside and outside the United States. We make modifications to improve the design and effectiveness of our disclosure controls, and may take other corrective action, if our reviews identify deficiencies or weaknesses in our controls. FORWARD-LOOKING STATEMENTS AND RISK Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company's control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Although Apache may make use of futures contracts, swaps, options and fixed-price physical contracts to mitigate risk, fluctuations in oil and gas prices, or a prolonged continuation of low prices, may adversely affect the Company's financial position, results of operations and cash flows. 28 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 11 to the Consolidated Financial Statements contained in the Company's annual report on Form 10-K for the year ended December 31, 2003 (filed with the SEC on March 12, 2004) is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 - Form of Certificate for Registrant's Common Stock. 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 March 31, 2004: Item 5 - Other Events - dated December 16, 2003, filed January 8, 2004 On December 16, 2003, Apache filed with the Delaware Secretary of State a Certificate of Elimination with respect to Apache's previously outstanding Series C Preferred Stock. On December 17, 2003, Apache filed with the Delaware Secretary of State an Agreement and Plan of Merger under which Apache Clearwater Operations, Inc., a Delaware corporation and a wholly owned subsidiary of Apache, was merged with and into Apache, effective as of December 31, 2003. On January 5, 2004, Apache filed with the Delaware Secretary of State a Certificate of Amendment to Apache's Restated Certificate of Incorporation providing for an increase in the number of authorized shares of Apache's common stock and reducing the par value thereof, all effective as of January 13, 2004. 29 Item 5 - Other Events - dated and filed January 12, 2004 On January 12, 2004, Apache announced that its common stock would be dually listed for trading on the NASDAQ as well as the New York Stock Exchange, pending application approval by NASDAQ. Apache will continue to trade under its existing three-letter stock symbol "APA" on both exchanges. Item 5 - Other Events - dated January 29, 2004, filed January 30, 2004 On January 29, 2004, Apache reported full-year 2003 earnings of $1.1 billion, or $3.43 per diluted common share, on strong commodity prices and record production, up 105 percent from $544 million, or $1.80 per share in 2002. 30 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: May 7, 2004 /s/ ROGER B. PLANK -------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Dated: May 7, 2004 /s/ THOMAS L. MITCHELL -------------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS 4.1 - Form of Certificate for Registrant's Common Stock. 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.