10. CAPITAL STOCK

Common Stock Outstanding


	2014			2013			2012
Balance, beginning of year		395,772,908			391,640,770			384,117,643
Shares issued for stock-based compensation plans:
Treasury shares issued		17,454			25,214			60,767
Common shares issued		1,665,259			929,596			1,189,693
Common shares issued for conversion of preferred shares		—			14,399,247			—
Treasury shares acquired		(20,950,729	)		(11,221,919	)		—
Cordillera consideration (Note 2)		—			—			6,272,667

Balance, end of year		376,504,892			395,772,908			391,640,770

Net Income per Common Share

A reconciliation of the components of basic and diluted net income per common share for the years ended December 31, 2014, 2013, and 2012 is presented in the table below.


	2014								2013								2012
	Income			Shares		Per Share			Income			Shares		Per Share			Income		Shares		Per Share
	(In millions, except per share amounts)
Basic:
Income (loss) from continuing operations	$	(4,886	)		384	$	(12.72	)	$	2,380			395	$	6.02		$	1,911		389	$	4.91
Income (loss) from discontinued operations		(517	)		384		(1.34	)		(192	)		395		(0.49	)		14		389		0.04

Income (loss) attributable to common stock	$	(5,403	)		384	$	(14.06	)	$	2,188			395	$	5.53		$	1,925		389	$	4.95

Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock	$	—			—				$	44			9				$	—		—
Stock options and other		—			—					—			2					—		2

Diluted:
Income (loss) from continuing operations	$	(4,886	)		384	$	(12.72	)	$	2,424			406	$	5.97		$	1,911		391	$	4.89
Income (loss) from discontinued operations		(517	)		384		(1.34	)		(192	)		406		(0.47	)		14		391		0.03

Income (loss) attributable to common stock	$	(5,403	)		384	$	(14.06	)	$	2,232			406	$	5.50		$	1,925		391	$	4.92

The diluted EPS calculation excludes options and restricted shares that were anti-dilutive totaling 4.5 million, 4.9 million, and 4.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. For the year ended December 31, 2012, 14.3 million shares related to the assumed conversion of the Mandatory Convertible Preferred Stock were also anti-dilutive.

Stock Repurchase Program

Apache’s Board of Directors has authorized the purchase of up to 40 million shares of the Company’s common stock. Shares may be purchased either in the open market or through privately held negotiated transactions. The Company initiated the buyback program on June 10, 2013, and through December 31, 2014, has repurchased a total of 32.2 million shares at an average price of $88.96 per share. For the year ended December 31, 2014, the Company repurchased a total of 21.0 million shares at an average price of $89.00 per share. The Company is not obligated to acquire any specific number of shares.

Common Stock Dividend

The Company paid common stock dividends of $0.95 per share in 2014, $0.77 per share in 2013, and $0.66 per share in 2012.

Stock Compensation Plans

The Company has several stock-based compensation plans, which include stock options, stock appreciation rights, restricted stock, and conditional restricted stock unit plans. On May 5, 2011, the Company’s shareholders approved the 2011 Omnibus Equity Compensation Plan (the 2011 Plan), which is intended to provide eligible employees with equity-based incentives. The 2011 Plan provides for the granting of Incentive Stock Options, Non-Qualified Stock Options, Performance Awards, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, or any combination of the foregoing. A total of 18.3 million shares were authorized and available for grant under the 2011 Plan as of December 31, 2014. Previously approved plans remain in effect solely for the purpose of governing grants still outstanding that were issued prior to approval of the 2011 Plan. All new grants are issued from the 2011 Plan.

For 2014, 2013, and 2012, stock-based compensation expensed was $148 million, $136 million, and $167 million ($95 million, $94 million, and $119 million after tax), respectively. Costs related to the plans are capitalized or expensed based on the nature of each employee’s activities. A description of the Company’s stock-based compensation plans and related costs follows:


	2014		2013		2012
	(In millions)
Stock-based compensation expensed:
General and administrative	$	107	$	89	$	104
Lease operating expenses		41		47		63
Stock-based compensation capitalized		62		55		67

	$	210	$	191	$	234

Stock Options

As of December 31, 2014, the Company had issued options to purchase shares of the Company’s common stock under one or more of the employee stock option plans adopted in 2000 and 2005 (collectively, the Stock Option Plans), as well as the 2007 Omnibus Equity Compensation Plan (the 2007 Plan), and the 2011 Plan discussed above (together, the Omnibus Plans). New shares of Company stock will be issued for employee stock option exercises; however, under the 2000 Stock Option Plan, shares of treasury stock are used for employee stock option exercises to the extent treasury stock is held. Under the Stock Option Plans and the Omnibus Plans, the exercise price of each option equals the closing price of Apache’s common stock on the date of grant. Options generally become exercisable ratably over a four-year period and expire 10 years after granted. The Omnibus Plans and all of the Stock Option Plans, except for the 2000 Stock Option Plan, were submitted to and approved by the Company’s shareholders.

A summary of stock options issued and outstanding under the Stock Option Plans and the Omnibus Plans is presented in the table and narrative below:


	2014
	Shares Under Option			Weighted Average Exercise Price
	(In thousands)
Outstanding, beginning of year		7,563		$	89.71
Granted		—			—
Exercised		(664	)		74.32
Forfeited or expired		(454	)		103.48

Outstanding, end of year(1)		6,445			90.34

Expected to vest(1)		1,366			89.30

Exercisable, end of year(1)		4,876			90.88

(1)

As of December 31, 2014, the weighted average remaining contractual life for options outstanding, expected to vest, and exercisable is 5.2 years, 7.5 years, and 4.4 years, respectively. The aggregate intrinsic value of options outstanding, expected to vest, and exercisable at year-end was $2 million, $0, and $2 million, respectively.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions used in the valuation are disclosed in the following table. Expected volatilities are based on historical volatility of the Company’s common stock and other factors. The expected dividend yield is based on historical yields on the date of grant. The expected term of stock options granted represents the period of time that the stock options are expected to be outstanding and is derived from historical exercise behavior, current trends, and values derived from lattice-based models. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.


	2014		2013			2012
Expected volatility		N/A		33.60	%		34.94	%
Expected dividend yields		N/A		0.99	%		0.82	%
Expected term (in years)		N/A		5.5			5.5
Risk-free rate		N/A		0.79	%		0.78	%
Weighted-average grant-date fair value		N/A	$	23.18		$	26.41

The intrinsic value of options exercised during 2014, 2013, and 2012 was approximately $13 million, $4 million and $12 million, respectively. The cash received from exercise of options during 2014 was approximately $49 million. The Company realized an additional tax benefit of approximately $4.7 million for the amount of intrinsic value in excess of compensation cost recognized in 2014. As of December 31, 2014, the total compensation cost related to non-vested options not yet recognized was $24 million, which will be recognized over the remaining vesting period of the options.

Restricted Stock and Restricted Stock Units

The Company has restricted stock and restricted stock unit plans for eligible employees including officers. The programs created under the Omnibus Plans have been approved by Apache’s Board of Directors. In 2014, the Company awarded 3,046,744 restricted stock units at a weighted-average per-share market price of $86.87. In 2013 and 2012, the Company awarded 3,098,029 and 1,219,886 restricted stock units at a weighted-average per-share market price of $82.95 and $85.67, respectively. The value of the stock issued was established by the market price on the date of grant and is being recorded as compensation expense ratably over the vesting terms. During 2014, 2013, and 2012, $93 million ($60 million after tax), $82 million ($53 million after tax), and $74 million ($48 million after tax), respectively, was charged to expense. In 2014, 2013, and 2012, $43 million, $30 million, and $25 million was capitalized, respectively. As of December 31, 2014, there was $316 million of total unrecognized compensation cost related to 4,783,524 unvested restricted stock units. The weighted-average remaining life of unvested restricted stock units is approximately 1.2 years.

The fair value of the awards vested during 2014, 2013 and 2012 was approximately $138 million, $88 million, and $114 million, respectively. A summary of restricted stock activity for the year ended December 31, 2014, is presented below.


	Shares			Weighted- Average Grant- Date Fair Value
	(In thousands)
Non-vested at January 1, 2014		3,953		$	86.70
Granted		3,047			86.87
Vested		(1,597	)		86.42
Forfeited		(619	)		85.89

Non-vested at December 31, 2014		4,784			85.18

Total Shareholder Return and Conditional Restricted Stock Units

To provide long-term incentives for Apache employees to deliver competitive returns to the Company’s stockholders, the Company has granted conditional restricted stock units to eligible employees. The ultimate number of shares awarded from these conditional restricted stock units is based upon measurement of total shareholder return of Apache common stock as compared to a designated peer group during a three-year performance period. Should any restricted stock units be awarded at the end of the three-year performance period, 50 percent of restricted stock units awarded will immediately vest, and an additional 25 percent will vest on succeeding anniversaries of the end of the performance period. Grants from two total shareholder return programs were outstanding at December 31, 2014, as described below:

•

In January 2012 the Company’s Board of Directors approved the 2012 Performance Program, pursuant to the 2011 Plan. In January 2012 eligible employees received initial conditional restricted stock unit awards totaling 851,985 units. Based on measurements of total shareholder return relative to the designated peer group at December 31, 2014, zero shares were awarded and all unvested conditional restricted stock units were cancelled. Upon cancellation, all remaining unamortized expense related to these awards was immediately amortized.

•

In January 2013 the Company’s Board of Directors approved the 2013 Performance Program, pursuant to the 2011 Plan. In January 2013 eligible employees received initial conditional restricted stock unit awards totaling 1,232,176 units. In May 2013, the Company’s Board of Directors cancelled 918,016 awards under the 2013 Performance Program for nonexecutive employees. A total of 236,704 awards were outstanding at December 31, 2014, from which a minimum of zero and a maximum of 591,760 units could be awarded.

•

In January 2014 the Company’s Board of Directors approved the 2014 Performance Program, pursuant to the 2011 Plan. In January 2014 eligible employees received initial conditional restricted stock unit awards totaling 157,406 units. A total of 117,007 awards were outstanding at December 31, 2014, from which a minimum of zero and a maximum of 234,014 units could be awarded.

The fair value cost of the awards was estimated on the date of grant and is being recorded as compensation expense ratably over the vesting terms. During 2014, 2013, and 2012, $18 million ($11 million after tax), $27 million ($17 million after tax), and $47 million ($31 million after tax), respectively, was charged to expense. During 2014, 2013, and 2012, $7 million, $13 million, and $21 million was capitalized, respectively. As of December 31, 2014, there was $15 million of total unrecognized compensation cost related to 353,711 unvested conditional restricted stock units. The weighted-average remaining life of the unvested conditional restricted stock units is approximately 2.1 years.


	Shares			Weighted- Average Grant- Date Fair Value(1)
	(In thousands)
Non-vested at January 1, 2014		1,021		$	72.45
Granted		158			79.66
Vested		(1	)		70.30
Forfeited or expired		(824	)		71.39

Non-vested at December 31, 2014		354			78.13

(1)

The fair value of each conditional restricted stock unit award is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a three-year continuous risk-free interest rate; (ii) a constant volatility assumption based on the historical realized stock price volatility of the Company and the designated peer group; and (iii) the historical stock prices and expected dividends of the common stock of the Company and its designated peer group.