10-Q 1 h17057e10vq.txt APACHE CORPORATION - JUNE 30, 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 June 30, 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 June 30, 2004.............326,002,236 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
FOR THE QUARTER FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------- ------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (In thousands, except per common share data) REVENUES AND OTHER: Oil and gas production revenues .................... $1,247,412 $1,044,330 $2,400,166 $2,019,492 Other .............................................. (6,679) 10,026 (9,494) 1,473 ---------- ---------- ---------- ---------- 1,240,733 1,054,356 2,390,672 2,020,965 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Depreciation, depletion and amortization ........... 295,737 272,356 581,965 486,705 Asset retirement obligation accretion .............. 10,891 10,445 21,652 15,758 Lease operating costs .............................. 197,097 186,286 403,126 320,421 Share appreciation plan - lease operating costs .... 10,992 - 10,992 - Gathering and transportation costs ................. 20,162 15,131 39,796 26,992 Severance and other taxes .......................... 21,595 32,742 30,543 57,296 General and administrative ......................... 36,479 30,574 80,329 58,405 Share appreciation plan - general and administrative 11,012 - 11,012 - China litigation ................................... 71,216 - 71,216 - Financing costs: Interest expense ............................ 40,193 41,428 80,742 79,124 Amortization of deferred loan costs ......... 595 536 1,162 1,067 Capitalized interest ........................ (12,708) (12,618) (26,358) (23,850) Interest income ............................. (513) (428) (833) (1,502) ---------- ---------- ---------- ---------- 702,748 576,452 1,305,344 1,020,416 PREFERRED INTERESTS OF SUBSIDIARIES ....................... - 3,330 - 6,692 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ................................ 537,985 474,574 1,085,328 993,857 Provision for income taxes ......................... 164,847 230,193 363,106 437,179 ---------- ---------- ---------- ---------- INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE ............................................... 373,138 244,381 722,222 556,678 Cumulative effect of change in accounting principle, net of income tax ........................... - - - 26,632 ---------- ---------- ---------- ---------- NET INCOME ................................................ 373,138 244,381 722,222 583,310 Preferred stock dividends .......................... 1,420 1,420 2,840 2,840 ---------- ---------- ---------- ---------- INCOME ATTRIBUTABLE TO COMMON STOCK ....................... $ 371,718 $ 242,961 $ 719,382 $ 580,470 ========== ========== ========== ========== BASIC NET INCOME PER COMMON SHARE: Before change in accounting principle .............. $ 1.14 $ .75 $ 2.21 $ 1.73 Cumulative effect of change in accounting principle - - - .08 ---------- ---------- ---------- ---------- $ 1.14 $ .75 $ 2.21 $ 1.81 ========== ========== ========== ========== DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle .............. $ 1.13 $ .74 $ 2.19 $ 1.71 Cumulative effect of change in accounting principle - - - .08 ---------- ---------- ---------- ---------- $ 1.13 $ .74 $ 2.19 $ 1.79 ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral partof this statement. 1 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------- 2004 2003 ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................................... $ 722,222 $ 583,310 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization ......................... 581,965 486,705 Asset retirement obligation accretion ............................ 21,652 15,758 Provision for deferred income taxes .............................. 99,098 221,370 Cumulative effect of change in accounting principle .............. - (26,632) Other ............................................................ 32,759 3,311 Changes in operating assets and liabilities: (Increase) decrease in receivables ............................... (174,184) (147,208) (Increase) decrease in drilling advances and other ............... (20,548) (14,951) (Increase) decrease in inventories ............................... 4,426 4,410 (Increase) decrease in deferred charges and other ................ (19,637) (12,636) Increase (decrease) in accounts payable .......................... 105,697 56,575 Increase (decrease) in accrued expenses .......................... (21,467) 81,009 Increase (decrease) in advances from gas purchasers .............. (9,072) (8,088) Increase (decrease) in deferred credits and noncurrent liabilities (23,859) (18,768) ----------- ----------- Net cash provided by operating activities ................. 1,299,052 1,224,165 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ........................................... (1,058,149) (771,046) Acquisition of BP properties .................................................. - (1,157,134) Other, net .................................................................... (19,188) (32,342) ----------- ----------- Net cash used in investing activities ..................... (1,077,337) (1,960,522) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings .......................................................... 404 1,042,418 Payments on long-term debt .................................................... (135,300) (852,305) Dividends paid ................................................................ (41,838) (34,366) Common stock activity ......................................................... 13,383 570,363 Treasury stock activity, net .................................................. 7,663 3,399 Cost of debt and equity transactions .......................................... (2,050) (4,039) ----------- ----------- Net cash provided by (used in) financing activities ....... (157,738) 725,470 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 63,977 (10,887) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................................... 33,503 51,886 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................................... $ 97,480 $ 40,999 =========== ===========
The accompanying notes to consolidated financial statements are an integral partof this statement. 2 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, DECEMBER 31, 2004 2003 ------------ ------------ (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................. $ 97,480 $ 33,503 Receivables, net of allowance ............................. 811,633 639,055 Inventories ............................................... 127,837 125,867 Drilling advances ......................................... 62,451 58,062 Prepaid assets and other .................................. 58,463 42,585 ------------ ------------ 1,157,864 899,072 ------------ ------------ PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties .................................. 17,391,779 16,277,930 Unproved properties and properties under development, not being amortized ............. 767,807 795,161 Gas gathering, transmission and processing facilities ..... 868,315 828,169 Other ..................................................... 249,494 239,548 ------------ ------------ 19,277,395 18,140,808 Less: Accumulated depreciation, depletion and amortization ................................. (7,461,957) (6,880,723) ------------ ------------ 11,815,438 11,260,085 ------------ ------------ OTHER ASSETS: Goodwill, net ............................................. 189,252 189,252 Deferred charges and other ................................ 87,397 67,717 ------------ ------------ $ 13,249,951 $ 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)
JUNE 30, DECEMBER 31, 2004 2003 ------------ ------------ (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ..................................................... $ 414,979 $ 300,598 Accrued operating expense ............................................ 55,661 72,250 Accrued exploration and development .................................. 252,462 212,028 Accrued compensation and benefits .................................... 41,748 56,237 Accrued interest ..................................................... 32,527 32,621 Accrued income taxes ................................................. 35,801 18,936 Oil and gas derivative instruments ................................... 69,771 63,542 Other ................................................................ 72,650 64,166 ------------ ------------ 975,599 820,378 ------------ ------------ LONG-TERM DEBT ............................................................ 2,192,070 2,326,966 ------------ ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes ......................................................... 1,786,314 1,697,238 Advances from gas purchasers ......................................... 100,135 109,207 Asset retirement obligation .......................................... 759,617 739,775 Oil and gas derivative instruments ................................... 1,233 5,931 Other ................................................................ 160,794 183,833 ------------ ------------ 2,808,093 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, 333,669,932 and 332,509,478 shares issued, respectively ....... 208,544 207,818 Paid-in capital ...................................................... 4,094,351 4,038,007 Retained earnings .................................................... 3,126,013 2,445,698 Treasury stock, at cost, 7,667,696 and 8,012,302 shares, respectively .................................................. (100,102) (105,169) Accumulated other comprehensive loss ................................. (153,004) (151,943) ------------ ------------ 7,274,189 6,532,798 ------------ ------------ $ 13,249,951 $ 12,416,126 ============ ============
The accompanying notes to consolidated financial statements are an integral partof this statement. 4 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES B COMPREHENSIVE PREFERRED COMMON PAID-IN (In thousands) INCOME STOCK STOCK CAPITAL --------------- ---------- -------- ---------- BALANCE AT DECEMBER 31, 2002.............. $ 98,387 $194,331 $3,427,450 Comprehensive income (loss): Net income........................... $ 583,310 - - - Commodity hedges, net of income tax benefit of $30,902................. (51,870) - - - --------------- Comprehensive income................... $ 531,440 =============== Dividends: Preferred............................ - - - Common ($.10 per share).............. - - - Five percent common stock dividend..... - 581 25,333 Common shares issued................... - 12,444 563,050 Treasury shares issued, net............ - - 2,113 Other.................................. - - (509) ---------- -------- ----------- BALANCE AT JUNE 30, 2003.................. $ 98,387 $207,356 $4,017,437 ========== ======== =========== BALANCE AT DECEMBER 31, 2003.............. $ 98,387 $207,818 $4,038,007 Comprehensive income (loss): Net income........................... $ 722,222 - - - Commodity hedges, net of income tax benefit of $648.................... (1,061) - - - --------------- Comprehensive income................... $ 721,161 =============== Dividends: Preferred............................ - - - Common ($.12 per share).............. - - - Common shares issued................... - 726 49,201 Treasury shares issued, net............ - - 4,738 Other.................................. - - 2,405 ---------- -------- ----------- BALANCE AT JUNE 30, 2004.................. $ 98,387 $208,544 $4,094,351 ========== ======== ===========
ACCUMULATED OTHER TOTAL RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS' (In thousands) EARNINGS STOCK INCOME (LOSS) EQUITY ----------- ---------- ------------- -------------- BALANCE AT DECEMBER 31, 2002.............. $1,427,607 $(110,559) $ (112,936) $ 4,924,280 Comprehensive income (loss): Net income........................... 583,310 - - 583,310 Commodity hedges, net of income tax benefit of $30,902................. - - (51,870) (51,870) Comprehensive income................... Dividends: Preferred............................ (2,840) - - (2,840) Common ($.10 per share).............. (33,705) - - (33,705) Five percent common stock dividend..... (25,914) - - - Common shares issued................... - - - 575,494 Treasury shares issued, net............ - 3,257 - 5,370 Other.................................. (6) - - (515) ----------- ---------- ------------ -------------- BALANCE AT JUNE 30, 2003.................. $1,948,452 $(107,302) $ (164,806) $ 5,999,524 =========== ========== ============ ============== BALANCE AT DECEMBER 31, 2003.............. $2,445,698 $(105,169) $ (151,943) $ 6,532,798 Comprehensive income (loss): Net income........................... 722,222 - - 722,222 Commodity hedges, net of income tax benefit of $648.................... - - (1,061) (1,061) Comprehensive income................... Dividends: Preferred............................ (2,840) - - (2,840) Common ($.12 per share).............. (39,067) - - (39,067) Common shares issued................... - - - 49,927 Treasury shares issued, net............ - 5,067 - 9,805 Other.................................. - - 2,405 ----------- ---------- ------------ -------------- BALANCE AT JUNE 30, 2004.................. $3,126,013 $(100,102) $ (153,004) $ 7,274,189 =========== ========== ============ ==============
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 September 11, 2003, the Company declared a two-for-one stock split, distributed January 14, 2004, to shareholders of record on December 31, 2003. Quarterly share and per share information for 2003 have been restated to reflect the two-for-one stock split. Reclassifications Certain prior period amounts have been reclassified to conform with current year presentations. 1. ACQUISITIONS On May 24, 2004, Apache signed a letter of intent with ExxonMobil to explore and develop properties in West Texas, Western Canada, Louisiana and the Gulf of Mexico. The program will capitalize on the respective strengths and assets of both companies in these areas. The agreement provides for transfers and joint venture activity across a broad range of prospective and mature properties. Apache's participation will include an estimated cash payment of $385 million as of the effective date. The parties are negotiating definitive agreements, based on the letter of intent which included the following: - ExxonMobil will transfer its interest in 28 mature producing oil and gas fields in West Texas and New Mexico, retaining a revenue interest indexed to oil price through 2009 and a 50 percent working interest in all properties beneath the currently producing intervals. - ExxonMobil Canada will farm out its interest in approximately 300,000 acres of undeveloped property interests in the Western Canada Province of Alberta to Apache Canada Ltd. ExxonMobil Canada will retain a 37.5 percent lessor royalty interest in fee lands and a 35 percent working interest on ExxonMobil leaseholds as to any production resulting from the drilling program to be undertaken by Apache, currently targeted to include at least 250 wells. - The companies will explore jointly for deep gas on approximately 800,000 acres of Apache onshore Louisiana and Gulf of Mexico properties for an initial five-year period, with provisions for extension. On January 13, 2003, Apache announced that it had entered into agreements to purchase producing properties in the North Sea and Gulf of Mexico from subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion, with $670 million allocated to the Gulf of Mexico properties and $630 million allocated to properties in the North Sea. The properties included estimated proved reserves of 233.2 million barrels of oil equivalent (MMboe), 147.6 MMboe located in the North Sea with the balance in the Gulf of Mexico. Both purchase agreements were effective as of January 1, 2003. As is customary, Apache assumed BP's abandonment obligation for the properties, which was considered in determining the purchase price. Both the Gulf of Mexico and North Sea assets acquired from BP were funded with available cash on hand, the issuance 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) and borrowings under the Company's lines of credit and commercial paper program. The offering of Apache's common stock provided net proceeds of approximately $554 million. 6 Apache and BP closed the above referenced acquisition of the Gulf of Mexico properties on March 13, 2003, which included BP's interest in 56 producing fields, and 104 blocks. At closing, the $670 million purchase price was adjusted for normal closing items and preferential rights exercised by third parties. The exercise of preferential rights by third parties reduced the purchase price by $73 million and estimated reserves by 9.6 MMboe. The purchase price was further adjusted for various normal closing items, including revenues and expenditures related to the properties for the period between the effective and closing dates. As a result, cash consideration of $509 million was paid by Apache upon closing. In a separate transaction closed February 21, 2003, Apache purchased BP's interest in several other Gulf of Mexico properties with estimated proved reserves of 2.1 MMboe for an adjusted purchase price of $15 million. Including $4 million of transaction costs, total cash consideration for the two acquisitions of Gulf of Mexico properties from BP totaled $528 million. The acquisition of the U.K. North Sea properties closed on April 2, 2003, at which time Apache paid a purchase price, adjusted for normal closing and working capital adjustments, of $630 million. The acquisition of the North Sea properties included a 96 percent interest in the Forties Field and established a new core area for the Company. In conjunction with the Forties acquisition, Apache may be required to issue a letter of credit to BP to cover the present value of related asset retirement obligations if the rating of the Company's senior unsecured debt is lowered by both Moody's and Standard and Poor's from its current ratings of A3 and A-, respectively. Should this occur, the initial letter of credit amount would be 129 million British pounds. Apache has agreed to sell all of the North Sea production from those properties to BP through December 31, 2004, at a combination of fixed and market sensitive prices pursuant to a contract entered into in connection with the North Sea purchase agreement. Presented below is a breakdown of the cash consideration given for the BP transaction as of the closing date.
U.S. - U.K. - GULF OF MEXICO NORTH SEA TOTAL* -------------- ------------- ----------- (In thousands) Proved Property .................. $ 539,110 $ 854,835 $ 1,393,945 Unproved Property ................ 57,500 65,000 122,500 Working capital acquired, net .... -- 10,957 10,957 Asset Retirement Obligation ...... (69,000) (250,887) (319,887) Deferred income tax liability .... -- (50,381) (50,381) ----------- ----------- ----------- Cash consideration .............. $ 527,610 $ 629,524 $ 1,157,134 =========== =========== ===========
* Property balance includes $12 million of transaction costs (U.S. - $4 million; North Sea - $8 million). The following unaudited pro forma information shows the effect on the Company's consolidated results of operations as if the acquisitions from BP occurred on January 1 of each period presented. The pro forma information is based in part on data provided by BP and on numerous assumptions and is not necessarily indicative of future results of operations.
FOR THE SIX MONTHS ENDED JUNE 30, 2003 -------------------------------------- AS REPORTED PRO FORMA ----------- ---------- (In thousands, except per common share data) Revenues and other .................. $2,020,965 $2,258,927 Net income .......................... 583,310 656,507 Preferred stock dividends ........... 2,840 2,840 Income attributable to common stock . 580,470 653,667 Net income per common share: Basic ........................... $ 1.81 $ 2.03 Diluted ......................... 1.79 2.01 Average common shares outstanding (1) 320,973 323,160
(1) Pro forma shares assume the issuance of 19.8 million common shares (adjusted for the five percent common stock dividend and the two-for-one common stock split) as of the beginning of each period presented. 7 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 for a period of four years. Shell's sale of an overriding royalty interest to Morgan Stanley is commonly known in the industry as a volumetric production payment (VPP). Under the terms of the VPP, Morgan Stanley is to receive a fixed volume of oil and gas production over the four-year term. The VPP reserves and production will not be 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 is being 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 separation plants. Apache operates 15 of the fields with 91 percent of the production. The purchase price was funded by borrowings under the Company's lines of credit and commercial paper program. 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Apache uses a variety of strategies to manage its exposure to fluctuations in commodity prices. As established by the Company's hedging policy, Apache primarily enters into cash flow hedges in connection with selected acquisitions to protect against commodity price volatility. The success of these acquisitions is significantly 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. Apache entered into, and designated as cash flow hedges, natural gas fixed-price swaps and natural gas option collars in conjunction with the BP and certain South Louisiana property acquisitions. During the second quarter of 2004, Apache entered into crude oil option collars and puts designated as cash flow hedges on existing base production in West Texas. These Nymex positions were entered into in accordance with the Company's hedging policy and involved several counterparties, all of which are rated A+ or better. As of June 30, 2004, the outstanding positions of our natural gas and crude oil cash flow hedges were as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/ PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY) ---------- -------------------- ------------- ---------------- ---------------- (In thousands) 2004 Gas Collars 9,200,000 $ 3.25 / 5.81 $ (6,581) Gas Fixed-Price Swap 25,760,000 4.33 (50,452) Oil Collars 1,472,000 35.00 / 42.20 850 2005 Gas Collars 9,050,000 3.25 / 5.20 (12,254) Oil Collars 1,387,000 28.00 / 38.90 (1,807) Oil Put Option 1,533,000 28.00 1,724 2006 Oil Collars 1,387,000 28.00 / 38.90 (477) Oil Put Option 1,533,000 28.00 2,521
In addition to the fixed-price swaps and option collars, Apache entered into a separate crude oil physical sales contract with BP. The sales contract is a normal purchase and sale under Statement of Financial Accounting Standards (SFAS) No. 133 and, therefore, the Company has designated and accounted for the contract under the accrual method. As of June 30, 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 7,360,000 $ 22.06
In June 2004, Apache began hedging foreign currency exchange risk associated with a portion of its forecasted Canadian and North Sea lease operating expenditures by entering into forward purchase contracts. The Company forward purchased $41 million Canadian dollars at an average exchange rate of .735 and 12 million British pounds 8 at an average exchange rate of 1.835. The forward contracts mature in July through December 2004. Combined, the fair market value of these contracts as of June 30, 2004 was $315,000 ($204,000 after tax). Future changes in market value will be recorded in Other Comprehensive Income. A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders' equity related to Apache's derivative activities is presented in the table below:
GROSS AFTER TAX ------------ ------------ (In thousands) Unrealized loss on derivatives at December 31, 2003.................... $ (69,316) $ (43,193) Net losses realized into earnings...................................... 42,198 26,374 Net change in derivative fair value.................................... (43,907) (27,435) ------------- -------------- Unrealized loss on derivatives at June 30, 2004........................ $ (71,025) $ (44,254) ============= ==============
Based on current market prices, the Company recorded an unrealized loss in other comprehensive income of $71 million ($44 million after tax), primarily representing oil and gas derivative hedges. Any loss will be realized in future earnings contemporaneously with the related sales of natural gas production applicable to specific hedges. Were current prices to hold, a loss of $69 million ($43 million after tax) would be realized over the next 12 months. However, these amounts could vary materially as a result of changes in market conditions. The contracts designated as hedges qualified and continue to qualify for hedge accounting in accordance with SFAS No. 133, as amended. 3. DEBT On May 15, 2003, Apache Finance Canada Corporation (Apache Finance Canada) issued $350 million of 4.375 percent, 12-year, senior unsecured notes in a private placement. On March 4, 2004, the Company completed an exchange offer with the holders of the notes, issuing publicly traded, registered notes of the same principal amount and with the same interest rates, payment terms and maturity. The notes are irrevocably and unconditionally guaranteed by Apache and are redeemable, as a whole or in part, at Apache Finance Canada's option, subject to a make-whole premium. Interest is payable semi-annually on May 15 and November 15 of each year commencing on November 15, 2003. The proceeds of the original note offering were used to reduce bank debt and outstanding commercial paper and for general corporate purposes. On May 28, 2004, the Company's $750 million 364-day credit facility matured and was replaced with a new 5-year credit facility. The financial covenants of the new 5-year facility require the Company to maintain a ratio of debt-to-capitalization of not greater than 60 percent at the end of any fiscal quarter. At the Company's option, the interest rate is based on (i) the greater of (a) The JPMorgan Chase Bank prime rate or (b) the federal funds rate plus one-half of one percent or (ii) the London Interbank Offered Rate (LIBOR) plus a margin determined by the Company's senior long-term debt rating. The facility also allows the Company to borrow under competitive auctions. On June 30, 2004, the margin over LIBOR for committed loans was .27 percent. If the total amount of the loans borrowed under the facility equals or exceeds 50 percent of the total facility commitments, then an additional .10 percent will be added to the margins over LIBOR. The Company also pays a quarterly facility fee of .08 percent on the total amount of the facility. Also on May 28, 2004, the Company amended its existing global credit facility agreements in order to make their terms consistent with the new 5-year credit facility. Significant changes included raising the cross default threshold and eliminating covenants which established minimum levels for tangible net worth and book values for assets of Apache and certain subsidiaries. 4. CAPITAL STOCK On January 22, 2003, the Company completed a public offering of 19.8 million shares of Apache common stock (adjusted for the five percent common stock dividend and the two-for-one common stock split) including underwriters' over-allotment option, for net proceeds of approximately $554 million. The proceeds were used to purchase producing properties in the North Sea and the Gulf of Mexico from BP. 9 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. 5. 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 JUNE 30, ------------------------------------------------------------------ 2004 2003 --------------------------------- ------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE --------- ------- --------- --------- ------- --------- (In thousands, except per share amounts) BASIC: Income attributable to common stock ....... $ 371,718 325,668 $ 1.14 $ 242,961 323,409 $ .75 ========= ========= EFFECT OF DILUTIVE SECURITIES: Stock options and other ................... - 3,695 - 2,711 --------- ------- --------- ------- DILUTED: Income attributable to common stock, including assumed conversions ............ $ 371,718 329,363 $ 1.13 $ 242,961 326,120 $ .74 ========= ======= ========= ========= ======= =========
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------ 2004 2003 --------------------------------- ------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE --------- ------- --------- --------- ------- --------- (In thousands, except per share amounts) BASIC: Income attributable to common stock ....... $ 719,382 325,335 $ 2.21 $ 580,470 320,973 $ 1.81 ========= ========= EFFECT OF DILUTIVE SECURITIES: Stock options and other ................... - 3,718 - 2,681 --------- ------- --------- ------- DILUTED: Income attributable to common stock, including assumed conversions ............ $ 719,382 329,053 $ 2.19 $ 580,470 323,654 $ 1.79 ========= ======= ========= ========= ======= =========
6. STOCK-BASED COMPENSATION 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. However, 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. On May 1, 2003 and May 6, 2004, Apache granted stock appreciation rights for 1,802,210 shares and 1,325,100 shares of Apache common stock, respectively. On June 30, 2004, stock appreciation rights for 2,913,564 shares of Apache common stock were outstanding with an average exercise price of $35.01. 10 For stock options granted prior to 2003, the Company accounted for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For the stock options granted prior to 2003, no material stock-based employee compensation cost is reflected in net income. 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. 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 900,000 shares of its common stock, after minimum tax withholding requirements, in three equal installments. The first installment was issued in May 2004. The second and third installments will be issued in 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. The cost related to stock-based employee compensation included in the determination of net income for 2003 and 2004 is different than that which would have been recognized if the fair value based method had been applied to all awards. 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 FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- (In thousands, except for per common share amounts) Income attributable to common stock, as reported. $ 371,718 $ 242,961 $ 719,382 $ 580,470 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects................................... 14,698 34 15,472 391 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,063) (6,364) (10,642) (10,866) ---------- ---------- ---------- ---------- Pro forma income attributable to common stock.... $ 381,353 $ 236,631 $ 724,212 $ 569,995 ========== ========== ========== ========== Net Income per Common Share: Basic: As reported................................. $ 1.14 $ .75 $ 2.21 $ 1.81 Pro forma................................... 1.17 .73 2.23 1.78 Diluted: As reported................................. 1.13 .74 2.19 1.79 Pro forma................................... 1.16 .72 2.20 1.75
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. 11 7. SUPPLEMENTAL CASH FLOW INFORMATION The following table provides supplemental disclosure of cash flow information:
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------- 2004 2003 -------------- -------------- (In thousands) Cash paid during the period for: Interest (net of amounts capitalized)............................. $ 49,584 $ 47,471 Income taxes (net of refunds)..................................... 246,879 166,762
8. 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 six-month period ended June 30, 2004. The pension and post-retirement benefit plans did not materially impact the Company for equivalent prior-year periods.
FOR THE SIX MONTHS ENDED JUNE 30, 2004 ------------------------------------- PENSION POST-RETIREMENT BENEFITS BENEFITS -------------- --------------- (In thousands) COMPONENTS OF NET PERIODIC BENEFIT COSTS Service cost....................................................... $ 2,727 $ 484 Interest cost...................................................... 1,813 314 Expected return on assets.......................................... (1,793) - Amortization of: Transition obligation........................................... - 22 Actuarial (gain)/loss........................................... - 125 -------------- -------------- Net periodic benefit cost.......................................... $ 2,747 $ 945 ============== ==============
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. Approximately $3 million of the original estimate was contributed as of June 30, 2004. The remaining $2 million is expected to be contributed by year-end. Apache also contributed an additional $12 million to fund prior years' benefit obligations. 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. 12 9. BUSINESS SEGMENT INFORMATION Apache has five reportable segments which are primarily in the business of natural gas and crude oil exploration and production. The Company evaluates segment performance based on results from oil and gas sales and lease-level expenses. Apache's reportable segments are managed separately because of their geographic locations. Financial information by operating segment is presented below:
UNITED OTHER STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL ---------- ---------- ---------- ---------- ---------- ------------- ----------- (IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 2004 Oil and Gas Production Revenues........... $1,100,335 $ 469,937 $ 412,662 $ 189,649 $ 186,129 $ 41,454 $ 2,400,166 ========== ========== ========== ========== ========== ========== =========== Operating Income (1)...................... $ 597,116 $ 258,033 $ 277,239 $ 88,841 $ 74,714 $ 16,149 $ 1,312,092 ========== ========== ========== ========== ========== ========== Other Income (Expense): Other.................................. (9,494) General and administrative............. (80,329) Share Appreciation Plan - general and administrative...................... (11,012) China litigation....................... (71,216) Financing costs, net................... (54,713) ----------- Income Before Income Taxes................ $ 1,085,328 =========== Total Assets.............................. $5,868,356 $3,243,373 $1,890,102 $1,018,298 $1,041,801 $ 188,021 $13,249,951 ========== ========== ========== ========== ========== ========== =========== FOR THE SIX MONTHS ENDED JUNE 30, 2003 Oil and Gas Production Revenues........... $ 994,699 $ 427,940 $ 320,274 $ 194,952 $ 77,858 $ 3,769 $ 2,019,492 ========== ========== ========== ========== ========== ========== =========== Operating Income (1)...................... $ 570,629 $ 248,346 $ 190,795 $ 98,060 $ 3,332 $ 1,158 $ 1,112,320 ========== ========== ========== ========== ========== ========== Other Income (Expense): Other.................................. 1,473 General and administrative............. (58,405) Preferred interests of subsidiaries.... (6,692) Financing costs, net................... (54,839) ----------- Income Before Income Taxes................ $ 993,857 =========== Total Assets.............................. $5,340,053 $2,775,921 $1,684,445 $ 936,575 $ 985,841 $ 173,200 $11,896,035 ========== ========== ========== ========== ========== ========== ===========
1) Operating Income consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, international impairments, lease operating costs, share appreciation plan - lease operating costs, gathering and transportation costs, and severance and other taxes. 10. 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. 13 The following table describes all changes to the Company's ARO liability for the current year (in thousands): Asset retirement obligation as of December 31, 2003................................ $ 739,775 Liabilities incurred............................................................... 5,418 Liabilities settled................................................................ (21,893) Accretion expense.................................................................. 21,652 Revisions.......................................................................... 14,665 ----------- Asset retirement obligation as of June 30, 2004.................................... $ 759,617 ===========
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. 11. LITIGATION Apache recorded a reserve in the second quarter of 2004 to fully reflect a pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco China). In September 2001, Texaco China initiated an arbitration proceeding against Apache China Corporation LDC (Apache China), later adding Apache Bohai to the arbitration. In the arbitration Texaco China claimed damages, plus interest, arising from Apache Bohai's alleged failure to drill three wells, prior to re-assignment of the interest to Texaco China. Apache believes that the finding of the arbitrator is unsupported by the facts and the law, and Apache expects to pursue an appeal of the award in federal court. 12. SUPPLEMENTAL GUARANTOR INFORMATION Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance Canada are subsidiaries of Apache, that have issuances of publicly traded securities and require the following condensed consolidating financial statements be provided as an alternative to filing separate financial statements. Each of the companies presented in the condensed consolidating financial statements has been fully consolidated in Apache's consolidated financial statements. As such, the condensed consolidating financial statements should be read in conjunction with the financial statements of Apache Corporation and Subsidiaries and notes thereto of which this note is an integral part. 14 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004
APACHE APACHE APACHE APACHE NORTH FINANCE FINANCE CORPORATION AMERICA AUSTRALIA CANADA ----------- ----------- ----------- ----------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ......... $ 568,421 $ - $ - $ - Equity in net income (loss) of affiliates 223,195 10,420 13,488 53,454 Other ................................... (1,148) - - - ----------- ----------- ----------- ----------- 790,468 10,420 13,488 53,454 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 137,844 - - - Asset retirement obligation accretion ... 5,805 - - - Lease operating costs ................... 85,892 - - - Share appreciation plan - LOE ........... 5,737 - - - Gathering and transportation costs ...... 7,891 - - - Severance and other taxes ............... 15,416 - - - General and administrative .............. 28,423 - - - Share appreciation plan - G&A ........... 10,034 - - - China litigation ........................ - - - - Financing costs, net .................... 20,253 - 4,510 9,936 ----------- ----------- ----------- ----------- 317,295 - 4,510 9,936 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 473,173 10,420 8,978 43,518 Provision (benefit) for income taxes .... 100,035 - (1,442) (3,280) ----------- ----------- ----------- ----------- NET INCOME ................................. 373,138 10,420 10,420 46,798 Preferred stock dividends ............... 1,420 - - - ----------- ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 371,718 $ 10,420 $ 10,420 $ 46,798 =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ REVENUES AND OTHER: Oil and gas production revenues ......... $ 756,030 $ (77,039) $ 1,247,412 Equity in net income (loss) of affiliates (9,724) (290,833) - Other ................................... (5,531) - (6,679) ----------- ----------- ----------- 740,775 (367,872) 1,240,733 ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 157,893 - 295,737 Asset retirement obligation accretion ... 5,086 - 10,891 Lease operating costs ................... 188,244 (77,039) 197,097 Share appreciation plan - LOE ........... 5,255 - 10,992 Gathering and transportation costs ...... 12,271 - 20,162 Severance and other taxes ............... 6,179 - 21,595 General and administrative .............. 8,056 - 36,479 Share appreciation plan - G&A ........... 978 - 11,012 China litigation ........................ 71,216 - 71,216 Financing costs, net .................... (7,132) - 27,567 ----------- ----------- ----------- 448,046 (77,039) 702,748 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 292,729 (290,833) 537,985 Provision (benefit) for income taxes .... 69,534 - 164,847 ----------- ----------- ----------- NET INCOME ................................. 223,195 (290,833) 373,138 Preferred stock dividends ............... - - 1,420 ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 223,195 $ (290,833) $ 371,718 =========== =========== ============
15 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003
APACHE APACHE APACHE APACHE NORTH FINANCE FINANCE CORPORATION AMERICA AUSTRALIA CANADA ----------- ----------- ----------- ----------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ......... $ 438,796 $ - $ - $ - Equity in net income (loss) of affiliates 76,802 7,782 10,760 6,407 Other ................................... (2,641) - - - ----------- ----------- ----------- ----------- 512,957 7,782 10,760 6,407 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 93,593 - - - Asset retirement obligation accretion ... 3,778 - - - Lease operating costs ................... 66,007 - - - Gathering and transportation costs ...... 4,412 - - - Severance and other taxes ............... 13,042 - - 11 General and administrative .............. 25,138 - - - Financing costs, net .................... 27,345 - 4,513 10,010 ----------- ----------- ----------- ----------- 233,315 - 4,513 10,021 ----------- ----------- ----------- ----------- PREFERRED INTERESTS OF SUBSIDIARIES ........ - - - - ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 279,642 7,782 6,247 (3,614) Provision (benefit) for income taxes .... 35,261 - (1,535) (3,318) ----------- ----------- ----------- ----------- NET INCOME ................................. 244,381 7,782 7,782 (296) Preferred stock dividends ............... 1,420 - - - ----------- ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 242,961 $ 7,782 $ 7,782 $ (296) =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ......... $ 648,859 $ (43,325) $ 1,044,330 Equity in net income (loss) of affiliates (9,681) (92,070) - Other ................................... 12,667 - 10,026 ----------- ----------- ----------- 651,845 (135,395) 1,054,356 ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 178,763 - 272,356 Asset retirement obligation accretion ... 6,667 - 10,445 Lease operating costs ................... 163,604 (43,325) 186,286 Gathering and transportation costs ...... 10,719 - 15,131 Severance and other taxes ............... 19,689 - 32,742 General and administrative .............. 5,436 - 30,574 Financing costs, net .................... (12,950) - 28,918 ----------- ----------- ----------- 371,928 (43,325) 576,452 ----------- ----------- ----------- PREFERRED INTERESTS OF SUBSIDIARIES ........ 3,330 - 3,330 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 276,587 (92,070) 474,574 Provision (benefit) for income taxes .... 199,785 - 230,193 ----------- ----------- ----------- NET INCOME ................................. 76,802 (92,070) 244,381 Preferred stock dividends ............... - - 1,420 ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 76,802 $ (92,070) $ 242,961 =========== =========== ===========
16 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
APACHE APACHE APACHE APACHE NORTH FINANCE FINANCE CORPORATION AMERICA AUSTRALIA CANADA ----------- ----------- ----------- ----------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues ......... $ 1,097,459 $ - $ - $ - Equity in net income (loss) of affiliates 416,687 18,682 24,716 91,399 Other ................................... (1,911) - - - ----------- ----------- ----------- ----------- 1,512,235 18,682 24,716 91,399 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 269,054 - - - Asset retirement obligation accretion ... 11,600 - - - Lease operating costs ................... 170,127 - - - Share appreciation plan - LOE ........... 5,737 - - - Gathering and transportation costs ...... 15,223 - - - Severance and other taxes ............... 28,796 - - 18 General and administrative .............. 63,352 - - - Share appreciation plan - G&A ........... 10,034 - - - China litigation ........................ - - - - Financing costs, net .................... 42,016 - 9,022 20,043 ----------- ----------- ----------- ----------- 615,939 - 9,022 20,061 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 896,296 18,682 15,694 71,338 Provision (benefit) for income taxes .... 174,074 - (2,988) (6,785) ----------- ----------- ----------- ----------- NET INCOME ................................. 722,222 18,682 18,682 78,123 Preferred stock dividends ............... 2,840 - - - ----------- ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 719,382 $ 18,682 $ 18,682 $ 78,123 =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ REVENUES AND OTHER: Oil and gas production revenues ......... $ 1,457,921 $ (155,214) $ 2,400,166 Equity in net income (loss) of affiliates (19,310) (532,174) - Other ................................... (7,583) - (9,494) ----------- ----------- ----------- 1,431,028 (687,388) 2,390,672 ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization 312,911 - 581,965 Asset retirement obligation accretion ... 10,052 - 21,652 Lease operating costs ................... 388,213 (155,214) 403,126 Share appreciation plan - LOE ........... 5,255 - 10,992 Gathering and transportation costs ...... 24,573 - 39,796 Severance and other taxes ............... 1,729 - 30,543 General and administrative .............. 16,977 - 80,329 Share appreciation plan - G&A ........... 978 - 11,012 China litigation ........................ 71,216 - 71,216 Financing costs, net .................... (16,368) - 54,713 ----------- ----------- ----------- 815,536 (155,214) 1,305,344 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES .......... 615,492 (532,174) 1,085,328 Provision (benefit) for income taxes .... 198,805 - 363,106 ----------- ----------- ----------- NET INCOME ................................. 416,687 (532,174) 722,222 Preferred stock dividends ............... - - 2,840 ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK ........ $ 416,687 $ (532,174) $ 719,382 =========== =========== ===========
17 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- ----------- -------------- (IN THOUSANDS) REVENUES AND OTHER: Oil and gas production revenues................. $ 814,963 $ - $ - $ - Equity in net income (loss) of affiliates....... 256,160 16,729 22,685 34,602 Other........................................... (6,257) - - - ----------- ----------- ----------- ----------- 1,064,866 16,729 22,685 34,602 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Depreciation, depletion and amortization........ 161,211 - - - Asset retirement obligation accretion........... 6,542 - - - Lease operating costs........................... 124,774 - - - Gathering and transportation costs.............. 8,897 - - - Severance and other taxes....................... 27,399 - - 53 General and administrative...................... 48,841 - - - Financing costs, net............................ 48,444 - 9,025 20,179 ----------- ----------- ----------- ----------- 426,108 - 9,025 20,232 ----------- ----------- ----------- ----------- PREFERRED INTERESTS OF SUBSIDIARIES................ - - - - ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.................. 638,758 16,729 13,660 14,370 Provision (benefit) for income taxes............ 75,205 - (3,069) (7,430) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE............................. 563,553 16,729 16,729 21,800 Cumulative effect of change in accounting principle, net of income tax.................. 19,757 - - - ----------- ----------- ----------- ----------- NET INCOME......................................... 583,310 16,729 16,729 21,800 Preferred stock dividends....................... 2,840 - - - ----------- ----------- ----------- ----------- INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 580,470 $ 16,729 $ 16,729 $ 21,800 =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ REVENUES AND OTHER: Oil and gas production revenues................. $ 1,303,126 $ (98,597) $ 2,019,492 Equity in net income (loss) of affiliates....... (18,758) (311,418) - Other........................................... 7,730 - 1,473 ----------- ------------ ------------ 1,292,098 (410,015) 2,020,965 ----------- ------------ ------------ OPERATING EXPENSES: Depreciation, depletion and amortization........ 325,494 - 486,705 Asset retirement obligation accretion........... 9,216 - 15,758 Lease operating costs........................... 294,244 (98,597) 320,421 Gathering and transportation costs.............. 18,095 - 26,992 Severance and other taxes....................... 29,844 - 57,296 General and administrative...................... 9,564 - 58,405 Financing costs, net............................ (22,809) - 54,839 ----------- ------------ ------------ 663,648 (98,597) 1,020,416 ----------- ------------ ------------ PREFERRED INTERESTS OF SUBSIDIARIES................ 6,692 - 6,692 ----------- ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES.................. 621,758 (311,418) 993,857 Provision (benefit) for income taxes............ 372,473 - 437,179 ----------- ------------ ------------ INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE............................. 249,285 (311,418) 556,678 Cumulative effect of change in accounting principle, net of income tax.................. 6,875 - 26,632 ----------- ------------ ------------ NET INCOME......................................... 256,160 (311,418) 583,310 Preferred stock dividends....................... - - 2,840 ----------- ------------ ------------ INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 256,160 $ (311,418) $ 580,470 =========== ============ ============
18 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- ----------- -------------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................................... $ 678,621 $ - $ (8,219) $ (19,521) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.............. (311,910) - - - Investment in subsidiaries, net.................. (182,525) (9,025) - - Other, net....................................... (8,957) - - - ----------- ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.............. (503,392) (9,025) - - ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings............................. 274 - (806) 242 Payments on long-term debt....................... (135,300) - - - Dividends paid................................... (41,838) - - - Common stock activity............................ 13,383 9,025 9,025 19,281 Treasury stock activity, net..................... 7,663 - - - Cost of debt and equity transactions............. (2,050) - - - ----------- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.......... (157,868) 9,025 8,219 19,523 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 17,361 - - 2 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ - - 2 1 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 17,361 $ - $ 2 $ 3 =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................................... $ 648,171 $ - $ 1,299,052 ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.............. (746,239) - (1,058,149) Investment in subsidiaries, net.................. (26,792) 218,342 - Other, net....................................... (10,231) - (19,188) ----------- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES.............. (783,262) 218,342 (1,077,337) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings............................. 165,023 (164,329) 404 Payments on long-term debt....................... - - (135,300) Dividends paid................................... - - (41,838) Common stock activity............................ 16,682 (54,013) 13,383 Treasury stock activity, net..................... - - 7,663 Cost of debt and equity transactions............. - - (2,050) ----------- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 181,705 (218,342) (157,738) ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 46,614 - 63,977 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 33,500 - 33,503 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 80,114 $ - $ 97,480 =========== ============ ============
19 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003
APACHE APACHE APACHE APACHE FINANCE FINANCE CORPORATION NORTH AMERICA AUSTRALIA CANADA ----------- ------------- ----------- -------------- (IN THOUSANDS) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................................... $ 422,811 $ - $ (10,411) $ 326,493 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.............. (191,034) - - - Acquisitions..................................... (527,610) - - - Investment in subsidiaries, net.................. (204,329) (9,025) - - Other, net....................................... (15,393) - - - ----------- ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.............. (938,366) (9,025) - - ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings............................. 660,873 - 1,386 (347,282) Payments on long-term debt....................... (678,900) - - - Dividends paid................................... (34,366) - - - Common stock activity............................ 570,363 9,025 9,025 20,662 Treasury stock activity, net..................... 3,399 - - - Cost of debt and equity transactions............. (4,039) - - - ----------- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 517,330 9,025 10,411 (326,620) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 1,775 - - (127) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 224 - 2 127 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 1,999 $ - $ 2 $ - =========== =========== =========== =========== ALL OTHER SUBSIDIARIES OF APACHE RECLASSIFICATIONS CORPORATION & ELIMINATIONS CONSOLIDATED ------------ ----------------- ------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................................... $ 485,272 $ - $ 1,224,165 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.............. (580,012) - (771,046) Acquisitions..................................... (629,524) - (1,157,134) Investment in subsidiaries, net.................. 156,790 56,564 - Other, net....................................... (16,949) - (32,342) ------------ ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES.............. (1,069,695) 56,564 (1,960,522) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings............................. 76,315 651,126 1,042,418 Payments on long-term debt....................... (173,405) - (852,305) Dividends paid................................... - - (34,366) Common stock activity............................ 668,978 (707,690) 570,363 Treasury stock activity, net..................... - - 3,399 Cost of debt and equity transactions............. - - (4,039) ------------ ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 571,888 (56,564) 725,470 ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. (12,535) - (10,887) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 51,533 - 51,886 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 38,998 $ - $ 40,999 ============ ============ ===========
20 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2004
ALL OTHER APACHE APACHE SUBSIDIARIES APACHE APACHE FINANCE FINANCE OF APACHE CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION ----------- ------------- --------- ------ ----------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents............... $ 17,361 $ - $ 2 $ 3 $ 80,114 Receivables, net of allowance........... 267,307 - - - 544,326 Inventories............................. 18,620 - - - 109,217 Drilling advances and others............ 40,747 - - - 80,167 ----------- -------- -------- ---------- ----------- 344,035 - 2 3 813,824 ----------- -------- -------- ---------- ----------- PROPERTY AND EQUIPMENT, NET................. 5,332,984 - - - 6,482,454 ----------- -------- -------- ---------- ----------- OTHER ASSETS: Intercompany receivable, net............ 1,456,525 - (1,054) 93,555 (1,549,026) Goodwill, net........................... - - - - 189,252 Equity in affiliates.................... 3,510,976 242,695 494,048 1,192,419 (802,073) Deferred charges and other.............. 42,774 - - 4,772 39,851 ----------- -------- -------- ---------- ----------- $10,687,294 $242,695 $492,996 $1,290,749 $ 5,174,282 =========== ======== ======== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................ $ 246,143 $ - $ - $ - $ 168,836 Other accrued expenses.................. 282,241 - (102) 2,951 275,530 ----------- -------- -------- ---------- ----------- 528,384 - (102) 2,951 444,366 ----------- -------- -------- ---------- ----------- LONG-TERM DEBT.............................. 1,270,858 - 269,088 646,769 5,355 ----------- -------- -------- ---------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes............................ 961,950 - (18,685) (670) 843,719 Advances from gas purchasers............ 100,135 - - - - Asset retirement obligation............. 407,129 - - - 352,488 Oil and gas derivative instruments...... 1,233 - - - - Other................................... 143,416 - - - 17,378 ----------- -------- -------- ---------- ----------- 1,613,863 - (18,685) (670) 1,213,585 ----------- -------- -------- ---------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................ 7,274,189 242,695 242,695 641,699 3,510,976 ----------- -------- -------- ---------- ----------- $10,687,294 $242,695 $492,996 $1,290,749 $ 5,174,282 =========== ======== ======== ========== ===========
RECLASSIFICATIONS & ELIMINATIONS CONSOLIDATED -------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents............... $ - $ 97,480 Receivables, net of allowance........... - 811,633 Inventories............................. - 127,837 Drilling advances and others............ - 120,914 ----------- ----------- - 1,157,864 ----------- ----------- PROPERTY AND EQUIPMENT, NET................. - 11,815,438 ----------- ----------- OTHER ASSETS: Intercompany receivable, net............ - - Goodwill, net........................... - 189,252 Equity in affiliates.................... (4,638,065) - Deferred charges and other.............. - 87,397 ----------- ----------- $(4,638,065) $13,249,951 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................ $ - $ 414,979 Other accrued expenses.................. - 560,620 ----------- ----------- - 975,599 ----------- ----------- LONG-TERM DEBT.............................. - 2,192,070 ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes............................ - 1,786,314 Advances from gas purchasers............ - 100,135 Asset retirement obligation............. - 759,617 Oil and gas derivative instruments...... - 1,233 Other................................... - 160,794 ----------- ----------- - 2,808,093 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY........................ (4,638,065) 7,274,189 ----------- ----------- $(4,638,065) $13,249,951 =========== ===========
21 APACHE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
ALL OTHER APACHE SUBSIDIARIES APACHE APACHE FINANCE APACHE OF APACHE CORPORATION NORTH AMERICA AUSTRALIA FINANCE CANADA CORPORATION ----------- ------------- --------- -------------- ----------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................. $ - $ - $ 2 $ 1 $ 33,500 Receivables, net of allowance............. 204,078 - - - 434,977 Inventories............................... 17,646 - - - 108,221 Drilling advances and other............... 60,159 - - - 40,488 ---------- -------- -------- ---------- ----------- 281,883 - 2 1 617,186 ---------- -------- -------- ---------- ----------- PROPERTY AND EQUIPMENT, NET................... 5,235,717 - - - 6,024,368 ---------- -------- -------- ---------- ----------- OTHER ASSETS: Intercompany receivable, net.............. 1,291,503 - (1,961) 93,768 (1,383,310) Goodwill, net............................. - - - - 189,252 Equity in affiliates...................... 3,077,152 183,617 437,860 1,084,711 (803,409) Deferred charges and other................ 36,672 - - 4,767 26,278 ---------- -------- -------- ---------- ----------- $9,922,927 $183,617 $435,901 $1,183,247 $ 4,670,365 ========== ======== ======== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................... $ 189,031 $ - $ - $ - $ 111,567 Other accrued expenses.................... 238,555 - 1,621 1,803 277,801 ---------- -------- -------- ---------- ----------- 427,586 - 1,621 1,803 389,368 ---------- -------- -------- ---------- ----------- LONG-TERM DEBT................................ 1,405,882 - 268,987 646,741 5,356 ---------- -------- -------- ---------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes.............................. 879,044 - (18,324) (842) 837,360 Advances from gas purchasers.............. 109,207 - - - - Asset retirement obligation............... 401,349 - - - 338,426 Oil and gas derivative instruments........ 5,931 - - - - Other..................................... 161,130 - - - 22,703 ---------- -------- -------- ---------- ----------- 1,556,661 - (18,324) (842) 1,198,489 ---------- -------- -------- ---------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY.......................... 6,532,798 183,617 183,617 535,545 3,077,152 ---------- -------- -------- ---------- ----------- $9,922,927 $183,617 $435,901 $1,183,247 $ 4,670,365 ========== ======== ======== ========== ===========
RECLASSIFICATIONS & ELIMINATIONS CONSOLIDATED -------------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................. $ - $ 33,503 Receivables, net of allowance............. - 639,055 Inventories............................... - 125,867 Drilling advances and other............... - 100,647 ----------- ------------ - 899,072 ----------- ------------ PROPERTY AND EQUIPMENT, NET................... - 11,260,085 ----------- ------------ OTHER ASSETS: Intercompany receivable, net.............. - - Goodwill, net............................. - 189,252 Equity in affiliates...................... (3,979,931) - Deferred charges and other................ - 67,717 ----------- ------------ $(3,979,931) $ 12,416,126 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................... $ - $ 300,598 Other accrued expenses.................... - 519,780 ----------- ------------ - 820,378 ----------- ------------ LONG-TERM DEBT................................ - 2,326,966 ----------- ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes.............................. - 1,697,238 Advances from gas purchasers.............. - 109,207 Asset retirement obligation............... - 739,775 Oil and gas derivative instruments........ - 5,931 Other..................................... - 183,833 ----------- ------------ - 2,735,984 ----------- ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY.......................... (3,979,931) 6,532,798 ----------- ------------ $(3,979,931) $ 12,416,126 =========== ============
22 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Apache Corporation (Apache or the Company) reported record second-quarter 2004 earnings of $372 million despite a pre-tax charge of $71 million for China litigation (see Note 11) and $22 million of expenses associated with attainment of the first share price goal under the 2000 Share Appreciation Plan (see Note 6). Second-quarter 2004 earnings were 53 percent higher than the comparable 2003 quarter. The Company also reported record earnings of $719 million for the first half of 2004, 24 percent higher than the comparative 2003 period. Net cash provided by operating activities totaled $1.3 billion for the six-month period compared to $1.2 billion in the prior-year period. The improved results were driven by strong crude oil prices, higher crude oil production, higher gas production and a lower effective income tax rate. Production from outside the U.S. increased four percent from the 2003 quarter to 58 percent of worldwide production. Our second-quarter 2004 production mix remained balanced at a 47/53 percent natural gas to liquids, compared to 48/52 percent in 2003. The change in production mix reflects the impact of the pure oil plays in the North Sea and China. Natural gas production of 1,251 MMcf/d was essentially flat to the second-quarter of 2003, while crude oil production increased six percent to 224,602 b/d. Our 2004 worldwide capital expenditures exceeded $500 million for the second consecutive quarter with two-thirds dedicated to our North American regions, consistent with the first quarter. Five notable discovery and appraisal wells since the end of the first quarter 2004 are discussed below: - On May 19, 2004, we announced the Stickle-1 well, our third wildcat discovery in the Exmouth Sub-Basin of the Carnarvon Basin offshore Western Australia. Additional exploration and appraisal wells are planned this year. - On May 20, 2004, the Sheiba 18-3 discovery was announced. It is the first commercial oil discovery in the eastern part of the Shell-operated North East Abu Gharadig concession in Egypt's Western Desert. A proposal for further exploration of this area has been reviewed and supported by the state-owned Egyptian General Petroleum Corporation (EGPC). - On June 23, 2004, we announced that the Ozoris-4 well discovered new field pays in the Ozoris/Qasr area of the Khalda concession, opening up large new plays in the Shushan Basin. Additionally, this discovery confirmed the seismically-defined northeastern limits of the Qasr field. Appraisal drilling of the deeper sands will be undertaken after producing oil encountered in several shallower reservoirs. - On July 1, 2004, we announced that the Qasr-5 appraisal well successfully extended the Qasr field to the southwest, further confirming the overall seismically-defined structure of the field. This is our third successful appraisal well in what is certainly the largest natural gas discovery in Apache's history. Additional appraisal wells will be drilled later this year. - On July 13, 2004, we announced that the Ravensworth-2 appraisal well in the Exmouth Basin encountered an oil column 49 feet higher than we expected, thereby extending the area of the field considerably farther north than we had mapped based on the Ravensworth-1 discovery well. On April 22, 2004, we announced completion of a 25-year Gas Sales Agreement with EGPC covering 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. 23 On May 24, 2004, Apache signed a letter of intent with ExxonMobil to explore and develop properties in West Texas, Western Canada, Louisiana and the Gulf of Mexico. The program will capitalize on the respective strengths and assets of both companies in these areas. The agreement provides for transfers and joint venture activity across a broad range of prospective and mature properties. Apache's participation will include an estimated cash payment of $385 million as of the effective date. The parties are negotiating definitive agreements, based on the letter of intent which included the following: - ExxonMobil will transfer its interest in 28 mature producing oil and gas fields in West Texas and New Mexico, retaining a revenue interest indexed to oil price through 2009 and a 50 percent working interest in all properties beneath the currently producing intervals. - ExxonMobil Canada will farm out its interest in approximately 300,000 acres of undeveloped property interests in the Western Canada Province of Alberta to Apache Canada Ltd. ExxonMobil Canada will retain a 37.5 percent lessor royalty interest in fee lands and a 35 percent working interest on ExxonMobil leaseholds as to any production resulting from the drilling program to be undertaken by Apache, currently targeted to include at least 250 wells. - The companies will explore jointly for deep gas on approximately 800,000 acres of Apache onshore Louisiana and Gulf of Mexico properties for an initial five-year period, with provisions for extension. In July 2004, the Company signed an amendment agreement with EGPC which, among other things, extended the life of the Khalda, Khalda West and Salam development leases through 2024. These development leases would have expired in 2011, 2012 and 2010, respectively. We also received a five-year extension on our Khalda Offset exploration acreage, with an option for an additional 3-year extension. As part of this agreement and in conjunction with the Qasr 25-year Gas Sales Agreement previously discussed, we agreed to re-price natural gas volume in excess of 100 MMcf/d produced from the Khalda Concession development leases. Under the new pricing formula, Apache will receive a minimum price of $1.50 per MMbtu and a maximum price of $2.65 per MMbtu. The overall effect of the new price terms will have a minimal effect on financial results. As discussed in Note 6 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 approximately 900,000 shares of its common stock, after minimum tax withholding requirements, in three equal installments. The first installment was issued in May 2004. The second and third installments will be issued in 2005 and 2006 to employees remaining with the Company during that period. The incentives will reduce Apache's 2004 net income by approximately $16 million after tax or five cents per diluted common share. The balance of the year appears favorable considering that current NYMEX futures markets indicate that crude oil and natural gas prices should equal or exceed the average NYMEX prices in the first half of 2004. We believe our earnings and cash flow will remain strong and we expect a solid balance sheet, as evidenced by our 23.2 percent debt-to-capitalization ratio and increasing cash reserve. 24 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.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------- ---------------------------------- OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES -------------- -------------- -------------- -------------- 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- United States.. 34% 35% 58% 63% 34% 35% 59% 61% Canada ........ 13% 13% 28% 27% 13% 14% 28% 28% --- --- --- --- --- --- --- --- North America.. 47% 48% 86% 90% 47% 49% 87% 89% Egypt ......... 25% 21% 11% 7% 24% 25% 10% 9% Australia ..... 12% 16% 3% 3% 12% 18% 3% 2% North Sea ..... 14% 15% - - 14% 8% - - China ......... 2% - - - 3% - - - --- --- --- --- --- --- --- --- Total.. 100% 100% 100% 100% 100% 100% 100% 100% === === === === === === === ===
Crude Oil Contribution The only appreciable changes in the geographic mix of our second-quarter 2004 crude oil revenues compared to 2003 occurred in areas outside of North America. Revenue contributions from North America remained relatively constant quarter-to-quarter. China, which did not contribute any second-quarter 2003 revenues, contributed two percent of second-quarter 2004 crude oil revenues. Australia's overall contribution declined four percent as quarter-over-quarter revenues were relatively flat, while revenues rose in most other areas. While Australia saw higher crude oil prices, the benefit was offset by lower production. Egypt saw both higher prices and production growth pushing their contribution to 25 percent of consolidated crude oil revenues, four percent above the 2003 quarter. Contributions for the six-month period were similar to quarter contributions with the most significant change involving the North Sea and Australia. The North Sea contributions increased six percent to 14 percent while Australia's fell six percent to 12 percent on 2004 revenues. Australia's overall contribution declined six percent for the reasons discussed above and because of the contributions from the North Sea and China. The two percent decline in North America's contribution to consolidated crude oil revenues is related to the addition of the North Sea and China. Natural Gas Contribution The North American regions continue to contribute the vast majority of our natural gas revenues. However, Egypt's contribution to second-quarter revenues increased four percent to 11 percent of consolidated natural gas revenues. Egypt's gain was at the expense of the U.S. This shift occurred because U.S. second-quarter 2004 natural gas revenues declined three percent compared to the 2003 quarter, while Egypt's revenues surged 50 percent. Egypt saw a 24 percent improvement in realized natural gas price and a 21 percent rise in production. New discoveries enabled higher utilization rates at the Salam and Tarek gas plants. The U.S. revenues were down on lower production. Segment contributions to revenue for the six-month period were similar, although the period-over-period change was not as dramatic. 25 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 JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------------- ---------------------------------------- INCREASE INCREASE 2004 2003 (DECREASE) 2004 2003 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- Revenues (in thousands): Natural gas .................... $ 550,509 $ 523,478 5% $1,077,363 $1,043,838 3% Oil ............................ 675,654 504,468 34% 1,278,289 942,811 36% Natural gas liquids ............ 21,249 16,384 30% 44,514 32,843 36% ---------- ---------- ---------- ---------- Total ................... 1,247,412 $1,044,330 19% $2,400,166 $2,019,492 19% ========== ========== ========== ========== Natural Gas Volume - Mcf per day: United States .................. 665,167 702,109 (5%) 654,815 627,858 4% Canada ......................... 327,537 317,079 3% 320,800 313,164 2% Egypt .......................... 137,329 113,169 21% 132,997 118,415 12% Australia ...................... 115,824 106,698 9% 117,323 103,941 13% North Sea ...................... 1,661 2,103 (21%) 1,631 1,057 54% Argentina ...................... 3,334 7,741 (57%) 4,247 7,267 (42%) ---------- ---------- ---------- ---------- Total ................... 1,250,852 1,248,899 - 1,231,813 1,171,702 5% ========== ========== ========== ========== Average Natural Gas price - Per Mcf: United States .................. $ 5.31 $ 5.19 2% $ 5.33 $ 5.64 (6%) Canada ......................... 5.11 4.81 6% 5.10 5.08 - Egypt .......................... 4.66 3.77 24% 4.39 4.15 6% Australia ...................... 1.65 1.40 18% 1.67 1.35 24% North Sea ...................... 5.05 2.08 143% 4.70 2.08 126% Argentina ...................... .67 .50 34% .55 .46 20% Total ................... 4.84 4.61 5% 4.81 4.92 (2%) Oil Volume - Barrels per day: United States .................. 69,080 72,477 (5%) 68,167 64,947 5% Canada ......................... 26,226 24,890 5% 25,746 24,813 4% Egypt .......................... 53,410 47,687 12% 51,254 46,704 10% Australia ...................... 22,200 32,673 (32%) 22,928 31,562 (27%) North Sea ...................... 47,179 33,387 41% 45,739 16,786 173% China .......................... 5,966 - - 6,703 - - Argentina ...................... 541 587 (8%) 547 592 (8%) ---------- ---------- ---------- ---------- Total ................... 224,602 211,701 6% 221,084 185,404 19% ========== ========== ========== ========== Average Oil price - Per barrel: United States .................. $ 37.00 $ 26.90 38% $ 34.71 $ 27.81 25% Canada ......................... 35.91 27.80 29% 34.48 29.92 15% Egypt .......................... 34.24 24.45 40% 32.85 27.37 20% Australia ...................... 39.03 26.61 47% 36.88 29.67 24% North Sea ...................... 21.70 25.50 (15%) 22.19 25.50 (13%) China .......................... 31.73 - - 30.84 - - Argentina ...................... 35.10 27.02 30% 34.26 29.49 16% Total ................... 33.06 26.19 26% 31.77 28.09 13% Natural Gas Liquids (NGL) Volume - Barrels per day: United States .............. 7,585 7,448 2% 7,856 6,769 16% Canada ..................... 2,601 1,894 37% 2,600 1,652 57% ---------- ---------- ---------- ---------- Total ................... 10,186 9,342 9% 10,456 8,421 24% ========== ========== ========== ========== Average NGL Price - Per barrel: United States .............. $ 22.48 $ 20.24 11% $ 23.92 $ 22.07 8% Canada ..................... 24.23 15.46 57% 21.78 19.39 12% Total ................... 22.92 19.27 19% 23.39 21.55 9%
26 Natural Gas Revenues The Company's second-quarter 2004 natural gas revenues were $27 million higher than the comparable 2003 quarter. Virtually all of the improvement was related to higher natural gas prices, which improved $.23 per Mcf over the prior-year quarter. Consolidated natural gas production increased slightly over the 2003 period, adding nominal revenues. Production in U.S. declined 37 MMcf/d, primarily because of natural decline in mature fields, particularly in the Gulf of Mexico. Egypt's production was up 24 MMcf/d as the Salam and Tarek gas plants began operating close to full capacity, following completion of new wells on several concessions. Canada's production increased 10 MMcf/d with production from new wells offsetting natural decline in mature fields. Australia saw a 9 MMcf/d increase on higher customer demand and new contractual sales. 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 second-quarter 2004 domestic natural gas production was subject to long-term fixed-price physical contracts, up from eight percent in the second 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 FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2004 2003 2004 2003 ----- ----- ----- ----- (Per Mcf) Fixed-price physical.. $(.10) $(.08) $(.09) $(.12) Derivatives .......... (.20) (.02) (.13) (.09) Amortization ......... - (.01) - (.01)
Crude Oil Revenues The Company added $171 million to second-quarter 2004 crude oil revenues on a $6.87 per barrel improvement in realized crude oil price and a 12,901 b/d rise in production. The higher realized price contributed almost 80 percent of the additional revenues. The increase in production came from the North Sea, China and Egypt. The North Sea's production is up 13,792 b/d, reflecting additional production from new wells and operational enhancements since the second quarter of 2003. 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 China, which commenced in July 2003, added 5,966 b/d. Egypt's production is up 5,723 b/d on exploration and development activity. Partially offsetting these production gains were a 10,473 b/d decline in Australia and a 3,397 b/d decline in the U.S. Australia's decline is related to natural declines in new wells and performance at Legendre field. The U.S. decline is attributed to natural decline in our Gulf Coast region production. Apache also manages its exposure to fluctuations in crude oil prices using derivatives. We continue to amortize the unrealized gains and losses over the original production life of derivative positions closed in October and November 2001. The following table shows the impact on prices of each of these items:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ------------------------ 2004 2003 2004 2003 ---- ------ ------ ------- (Per bbl) Derivatives......... $ - $ (.54) $ (.29) $ (1.00) Amortization........ - .02 - .03
27 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. To maintain comparability between the periods, we elected to disclose separately expenses related to the 2000 Share Appreciation Plan and the reserve for the China litigation.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- 2004 2003 2004 2003 2004 2003 2004 2003 ------ ------ ------ ------ ------ ------ ------ ------ (In millions) (Per Boe) (In millions) (Per Boe) Depreciation, depletion and amortization (DD&A): Oil and gas property and equipment ......... $ 278 $ 255 $ 6.88 $ 6.53 $ 546 $ 453 $ 6.87 $ 6.43 Other assets ............................... 18 17 .45 .44 36 34 .45 .48 Asset retirement obligation accretion .......... 11 10 .27 .27 22 16 .27 .22 Lease operating costs (LOE) .................... 197 186 4.89 4.77 403 320 5.07 4.55 Share appreciation plan - LOE .................. 11 - .27 - 11 - .14 - Gathering and transportation costs ............. 20 15 .50 .39 40 27 .50 .38 Severance and other taxes ...................... 22 33 .54 .84 30 57 .38 .81 General and administrative expense (G&A) ....... 36 31 .90 .78 80 58 1.01 .83 Share appreciation plan - G&A .................. 11 - .28 - 11 - .14 - China litigation ............................... 71 - 1.77 - 71 - .90 - Financing costs, net ........................... 28 29 .68 .74 55 55 .69 .78 ------ ------ ------ ------ ------ ------ ------ ------ Total .................................. $ 703 $ 576 $17.43 $14.76 $1,305 $1,020 $16.42 $14.48 ====== ====== ====== ====== ====== ====== ====== ======
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. Second-quarter 2004 full-cost DD&A expense of $278 million is $23 million higher than 2003, with 40 percent ($9 million) of the increase attributable to volume growth. The 2004 expense is mainly comprised of the U.S., $133 million; Canada, $45 million; Egypt, $39 million; Australia, $26 million; the North Sea, $28 million and China, $7 million. Second-quarter 2003 full-cost DD&A expense of $255 million is mainly comprised of the U.S., $126 million; Canada, $37 million; Egypt, $42 million; Australia, $28 million and the North Sea, $22 million. On a boe basis, our second-quarter 2004 full-cost DD&A rate of $6.88 is $.35 higher than the second-quarter 2003 rate. The rate increase is incremental over sequential quarters and only increased $.03 from the first quarter of 2004. The U.S. added $.30 to the rate on higher finding and future development costs. Canada added $.15 to the rate on higher finding costs. China, which had higher finding and development costs than other regions, added $.09 to the rate since initial production in the third quarter of 2003. Australia added $.08 to the rate. Egypt and the North Sea's rates reduced the worldwide rate $.23 and $.06, respectively, as both regions added lower cost reserves. Lease Operating Costs While second-quarter 2004 lease operating costs were $11 million higher than the second quarter of 2003, they were $9 million less than the first quarter of 2004. Over 70 percent of the increase from 2003 related to the Shell acquisition and initial production in China, both of which were third-quarter 2003 events. On a unit of production basis, second-quarter 2004 costs were up $.12 from 2003 to $4.89 per boe. Geographically, second-quarter costs in the U.S. were up $10 million. On a unit of production basis, the U.S. added $.36 per boe to the consolidated rate. Approximately one-third of the rate increase in the U.S. is related to lower production, with the balance attributed to higher workover activity and various miscellaneous costs. Australia, where absolute costs were up marginally, added $.11 per boe on lower production. Canada's costs were up $5 million on contract labor, lease rentals and other miscellaneous costs associated with increase in activity and a higher well count. Canada added $.09 per boe to the consolidated rate. Egypt reduced the consolidated rate $.11 per boe on higher production. The North Sea reduced the consolidated rate $.33 per boe on lower costs and a 41 percent increase in production. The North Sea had less workover activity, less turnaround expense and lower repair cost in the second quarter of 2004, compared to 2003. 28 Lease operating costs for the 2004 six-month period were $83 million higher than 2003, $72 million of which occurred in the first quarter of 2004, when comparability between the periods was affected by our April 2003 entrance into the North Sea, initial production in China which occurred in July 2003, and the 2003 BP and Shell acquisitions in the U.S. Our year-to-date rate of $5.07 per boe is $.52 higher than 2003. Approximately 44 percent or $.23 per boe of the increase is attributable to our U.S. operations for the reasons discussed above, higher repair and maintenance cost, and additional incentive compensation recorded in the first quarter of 2004. Australia added $.09 per boe to the consolidated rate on flat cost and lower production. Canada added $.10 per boe for the reasons discussed above and the weaker first-quarter U.S.-to-Canadian dollar exchange rate. The North Sea added $.06, a combination of its initial impact on the consolidated rate and the improvement in the second quarter noted above. Egypt added $.03 because of the loss of a diesel fuel subsidy in the third quarter of 2003 and higher variable cost (consumables, trucking, chemicals and transportation) associated with production from newer concessions. Share Appreciation Plan - Lease Operating Costs These costs represent the portion of the 2000 Share Appreciation Plan expenses (see Note 6) attributed to personnel involved in lease operating activities. Gathering and Transportation Costs Apache sells oil and natural gas under two types of transactions, both of which include a transportation charge. One is a netback arrangement, under which Apache sells oil or natural gas at the wellhead and collects a price, net of transportation incurred by the purchaser. Under the other arrangement, Apache sells oil or natural gas at a specific delivery point, pays transportation to a third-party carrier and receives from the purchaser a price with no 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 and China, Apache pays transportation to third parties and receives payments with no transportation deduction. In our North American operations these costs are primarily related to the transportation of natural gas. In the North Sea these costs are related to transportation of oil. In Egypt and Australia, oil and natural gas are sold under the netback arrangement. Gathering and transportation costs paid to third-party carriers and disclosed here vary based on the volume and distance shipped, and the fee charged by the transporter, which may be price sensitive. These costs totaled $20 million in the second quarter of 2004, up $5 million from the 2003 comparative quarter. For the 2004 six-month period, these costs totaled $40 million compared to $27 million in 2003. The table below presents a comparison of these expenses.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (In millions) U.S. ............................. $ 7.8 $ 4.6 $15.2 $ 9.6 Canada ........................... 7.4 7.2 14.7 14.1 North Sea ........................ 4.9 3.3 9.7 3.3 China ............................ .1 - .2 - ----- ----- ----- ----- Total Gathering and Transportation $20.2 $15.1 $39.8 $27.0 ===== ===== ===== =====
The higher cost in the U.S. is related to an increase in volumes transported under third - party transportation contracts and sold at specific delivery points in 2004, compared to the prior-year periods. Transportation cost in the North Sea increase in conjunction with higher production. 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 U.K. Petroleum Revenue Tax (PRT), the Canadian Large Corporation Tax, Saskatchewan Capital Tax, Saskatchewan Resource Surtax and Freehold Mineral Tax. Egyptian operations are not subject to these various taxes. During the second quarter of 2004, production from our Legendre field in Australia crossed a cumulative production threshold, triggering an excise tax of approximately $3 million. 29 Second-quarter and year-to-date 2004 severance and other taxes totaled $22 million and $31 million, respectively, $11 million and $27 million, less than the prior year periods. A detail of these taxes follows:
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (In millions) Severance taxes ............... $ 26.1 $19.5 $ 45.4 $40.5 U.K. PRT ...................... (12.4) 5.6 (29.1) 5.6 Canadian taxes ................ 4.8 4.8 9.9 7.9 Other ......................... 3.1 2.8 4.3 3.3 ----- ----- ----- ----- Total Severance and Other Taxes $ 21.6 $32.7 $ 30.5 $57.3 ===== ===== ===== =====
Virtually all of the increase in second-quarter 2004 severance taxes is related to higher severance taxes in Australia. The U.K.'s PRT tax benefits reflect the impact from higher capital spending, compared to the prior year periods. General and Administrative Expense Second-quarter G&A costs of $36 million were $6 million above the 2003 comparable quarter. Approximately half of the additional expense is related to the impact on compensation programs related to the rising price of Apache's common stock, and 2004 incentive compensation expense. The impact from the higher stock price stems from Apache's decision, effective January 1, 2003, to expense stock-based compensation plans. The balance is related to the Company's decision to increase charitable contributions and its North Sea operations. For the six-month period, G&A expenses of $80 million were $22 million above the 2003 period. As noted above, the stock-based compensation plans and incentive compensation plans accounted for over half of the increase. The compensation expenses included incremental 2003 incentive compensation paid in 2004, as noted in the first quarter. The balance is related to our North Sea operations, charitable contributions, expansion of our gas marketing group and higher comparative legal costs. Share Appreciation Plan - General and Administrative These costs represent the portion of the 2000 Share Appreciation Plan expenses (see Note 6) attributed to personnel involved in general corporate activities. China Litigation Apache recorded a reserve in the second quarter of 2004 to fully reflect a $71 million international arbitration award to Texaco China B.V. (Texaco China). In September 2001, Texaco China initiated an arbitration proceeding against Apache China Corporation LDC (Apache China), later adding Apache Bohai to the arbitration. In the arbitration Texaco China claimed damages, plus interest, arising from Apache Bohai's alleged failure to drill three wells, prior to re-assignment of the interest to Texaco China. Apache believes that the finding of the arbitrator is unsupported by the facts and the law, and Apache expects to pursue an appeal of the award in federal court. Provision for Income Taxes Second-quarter 2004 income tax expense was $65 million less than the 2003 quarter, on a lower effective tax rate. The current quarter benefited from a reduction in Canadian federal statutory rates in the fourth quarter of 2003, a reduction in Alberta Canada's provincial statutory income tax rate in the second quarter of 2004 and the impact on Australia's deferred tax expense from a stronger U.S. dollar. Also, Canada's 2003 second-quarter deferred income tax expense was impacted by a weaker U.S. dollar, while the 2004 quarter benefited from a strengthened U.S. dollar. For the six-month period, 2004 income tax expense was $74 million less than the 2003 period for the reasons previously discussed. 30 OIL AND GAS CAPITAL EXPENDITURES
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2004 2003 ----------- ----------- (In thousands) Exploration and development: United States ....................................... $ 378,147 $ 198,294 Canada .............................................. 339,663 300,209 Egypt ............................................... 140,183 123,843 Australia ........................................... 65,876 46,396 North Sea ........................................... 132,636 12,577 China ............................................... 4,333 14,563 Other International ................................. 669 653 ----------- ----------- $ 1,061,507 $ 696,535 =========== =========== Capitalized Interest ...................................... $ 26,358 $ 23,850 =========== =========== Gas gathering, transmission and processing facilities ..... $ 40,363 $ 6,528 =========== =========== Acquisitions: Oil and gas properties .............................. $ (1,539) $ 1,230,814 Gas gathering, transmission and processing facilities ........................................ - 5,484 ----------- ----------- $ (1,539) $ 1,236,298 =========== ===========
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 its capital expenditures in response to changes in oil and natural gas prices and corresponding changes in cash flow. The Company cannot accurately predict future oil and gas prices. Net Cash Provided by Operating Activities Apache's net cash provided by operating activities during the first half of 2004 totaled $1.3 billion, an increase of six percent from $1.2 billion in the first half of 2003. This increase generally reflects the impact of higher prices on oil and gas production revenues and higher production levels relative to the prior-year period. LIQUIDITY The Company had $97 million in cash and cash equivalents on hand on June 30, 2004, up from $34 million on December 31, 2003. Apache's ratio of current assets to current liabilities on June 30, 2004 was 1.19 compared to 1.10 on December 31, 2003. On January 22, 2003, the Company completed a public offering of 19.8 million shares of Apache common stock (adjusted for the five percent common stock dividend and the two-for-one common stock split) including underwriters' over-allotment option, for net proceeds of approximately $554 million. The proceeds were used toward Apache's acquisition from BP of producing properties in the North Sea and the Gulf of Mexico. On May 15, 2003, Apache Finance Canada Corporation (Apache Finance Canada) issued $350 million of 4.375 percent, 12-year, senior unsecured notes in a private placement. On March 4, 2004, the Company completed an exchange offer with the holders of the notes, issuing publicly traded, registered notes of the same principal amount and with the same interest rates, payment terms and maturity. The notes are irrevocably and unconditionally guaranteed by Apache and are redeemable, as a whole or in part, at Apache Finance Canada's option, subject to a make-whole premium. Interest is payable semi-annually on May 15 and November 15 of each year commencing on November 15, 2003. The proceeds of the original note offering were used to reduce bank debt and outstanding commercial paper and for general corporate purposes. 31 Apache believes that cash on hand, net cash generated from operations, short-term investments, and unused committed borrowing capacity under its credit facilities will be adequate to satisfy future financial obligations and liquidity needs. In addition, Apache's strong credit ratings should facilitate continued access to capital markets. As of June 30, 2004, Apache's available borrowing capacity under its credit facilities was $1.5 billion. FUTURE TRENDS Our objective is to build a company of lasting value by pursuing profitable growth through a combination of drilling and acquisitions. Our investment decisions are subjected to strict rate of return criteria and generally fall in the categories identified below, depending on which phase of the price and cost cycle we may be in. Those categories include: - exploiting our existing property base; - acquiring properties to which we can add value; and - drilling high-potential exploration prospects. Exploiting Existing Asset Base We seek to maximize the value of our existing asset base by increasing production and reserves while 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 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 generally sells all of its Egyptian crude oil and natural gas production to 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 June 30, 2004 does not differ materially from the disclosure in our 2003 Form 10-K, except as noted below. 32 Although Apache uses floating-rate debt on a short-term basis, all of the Company's debt was at fixed-rates as of June 30, 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. On June 30, 2004, the Company had open natural gas derivative positions with a fair value of $(69.3) million. A 10 percent increase in natural gas prices would change the fair value by $(25.4) million. A 10 percent decrease in prices would change the fair value by $23.8 million. The Company also had open oil derivative positions with a fair value of $2.8 million on June 30, 2004. A 10 percent increase in crude oil prices would change the fair value by $(8.1) million. A 10 percent decrease in prices would change the fair value by $9.2 million. See Note 2 to the Company's consolidated financial statements for notional volumes associated with the Company's derivative contracts. ITEM 4 - CONTROLS AND PROCEDURES G. Steven Farris, the Company's President, Chief Executive Officer and Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 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 were 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. Also, no significant changes were made to internal controls over financial reporting during the quarter ending June 30, 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. 33 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) and Note 11 to the Financial Statements under Part I, Item 1 of this quarterly report are 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 The Company's annual meeting of stockholders was held in Houston, Texas at 10:00 a.m. local time, on Thursday, May 6, 2004. Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. Out of a total of 325,153,372 shares of the Company's common stock outstanding and entitled to vote, 287,037,394 shares were present at the meeting in person or by proxy, representing 88.3 percent. Matters voted upon at the meeting were as follows: Election of four directors to serve on the Company's board of directors. There was no solicitation in opposition to the nominees for election as directors as listed in the proxy statement, and all nominees were elected. Mr. Fiedorek, Dr. Graham, Mr. Merelli, and Mr. Plank were elected to serve until the annual meeting in 2007. The vote tabulation with respect to each nominee was as follows:
AUTHORITY NOMINEE FOR WITHHELD ------- --- -------- Eugene C. Fiedorek 274,927,722 12,109,672 Patricia Albjerg Graham 279,366,345 7,671,049 F. H. Merelli 188,278,757 98,758,637 Raymond Plank 279,385,792 7,651,602
Stockholder proposal relating to climate change. The stockholder proposal was not approved and the vote tabulation was as follows: For 85,848,021 Against 145,622,521 Abstain 15,425,312 Broker Non-Vote 40,141,539
ITEM 5. OTHER INFORMATION None 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Form of Five-Year Credit Agreement, dated as of May 28, 2004, among Registrant, the Lenders named therein, JPMorgan Chase Bank, as Administrative Agent, Citibank, N.A. and Bank of America, N.A., as Co-Syndication Agents, and Barclays Bank PLC and UBS Loan Finance LLC, as Co-Documentation Agents (excluding exhibits and schedules). 10.2 - Form of First Amendment to Combined Credit Agreements, dated as of May 28, 2004, among Registrant, Apache Energy Limited , Apache Canada Ltd, the Lenders named therein, JPMorgan Chase Bank, as Global Administrative Agent, Bank of America, N.A., as Global Syndication Agent, and Citibank, N.A., as Global Documentation Agent (excluding exhibits and schedules). 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 June 30, 2004: Item 5 - Other Events - dated May 24, 2004, filed May 27, 2004 On May 24, 2004, ExxonMobil Corporation and Apache announced that they agreed to enter into a series of transactions that will provide for transfers and joint venture activity across a broad range of prospective and mature properties in West Texas, Western Canada, onshore Louisiana and the Gulf of Mexico Continental Shelf. Apache's participation in this agreement will include a cash payment of $385 million. Completion of the transaction is subject to negotiation of definitive agreements and receipt of applicable corporate and regulatory approvals. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. APACHE CORPORATION Dated: August 6, 2004 / s / ROGER B. PLANK ----------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Dated: August 6, 2004 / s / THOMAS L. MITCHELL ----------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS (a) Exhibits 10.1 - Form of Five-Year Credit Agreement, dated as of May 28, 2004, among Registrant, the Lenders named therein, JPMorgan Chase Bank, as Administrative Agent, Citibank, N.A. and Bank of America, N.A., as Co-Syndication Agents, and Barclays Bank PLC and UBS Loan Finance LLC, as Co-Documentation Agents (excluding exhibits and schedules). 10.2 - Form of First Amendment to Combined Credit Agreements, dated as of May 28, 2004, among Registrant, Apache Energy Limited , Apache Canada Ltd, the Lenders named therein, JPMorgan Chase Bank, as Global Administrative Agent, Bank of America, N.A., as Global Syndication Agent, and Citibank, N.A., as Global Documentation Agent (excluding exhibits and schedules). 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.