UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________________ to _____________________
Commission File Number 1-4300
APACHE CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
----------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central
2000 Post Oak Boulevard, Houston, TX 77056-4400
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of June 30,
2003..........................323,594,972
EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 to respond to certain comments received by us
from the Staff of the Securities and Exchange Commission ("SEC") in connection
with its review of our Registration Statement on Form S-3 (File No. 333-105536).
Our consolidated financial position and consolidated results of operations for
the periods presented have not been restated from the consolidated financial
position and consolidated results of operations originally reported. Except
where otherwise indicated, all share amounts and per share amounts have been
adjusted to reflect the effects of the two-for-one stock split for our common
stock declared in September 2003.
For convenience and ease of reference we are filing this Quarterly Report
in its entirety with the applicable changes. Unless otherwise stated, all
information contained in this amendment is as of August 14, 2003, the filing
date of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2003. Accordingly, this Amendment No. 1 to the Quarterly Report on Form 10-Q/A
should be read in conjunction with our subsequent filings with the SEC.
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,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues..................... $ 1,044,330 $ 652,264 $ 2,019,492 $ 1,181,653
Other............................................... 10,026 4,051 1,473 2,658
------------ ------------ ------------ ------------
1,054,356 656,315 2,020,965 1,184,311
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization............ 272,356 210,790 486,705 421,829
Asset retirement obligation accretion............... 10,445 - 15,758 -
International impairments........................... - - - 4,600
Lease operating costs............................... 186,286 112,087 320,421 223,230
Gathering and transportation costs.................. 15,131 11,112 26,992 19,345
Severance and other taxes........................... 32,742 17,345 57,296 32,705
General and administrative.......................... 30,574 28,015 58,405 53,367
Financing costs:
Interest expense................................. 41,428 41,451 79,124 78,333
Amortization of deferred loan costs.............. 536 466 1,067 800
Capitalized interest............................. (12,618) (10,442) (23,850) (20,464)
Interest income.................................. (428) (1,043) (1,502) (2,212)
------------ ------------ ------------ ------------
576,452 409,781 1,020,416 811,533
------------ ------------ ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES..................... 3,330 5,129 6,692 8,662
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES.............................. 474,574 241,405 993,857 364,116
Provision for income taxes.......................... 230,193 95,095 437,179 137,134
------------ ------------ ------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING
PRINCIPLE............................................. 244,381 146,310 556,678 226,982
Cumulative effect of change in accounting principle,
net of income tax................................ - - 26,632 -
------------ ------------ ------------ ------------
NET INCOME.............................................. 244,381 146,310 583,310 226,982
Preferred stock dividends........................... 1,420 3,081 2,840 7,989
------------ ------------ ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK..................... $ 242,961 $ 143,229 $ 580,470 $ 218,993
============ ============ ============ ============
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle............... $ 0.75 $ 0.48 $ 1.73 $ 0.75
Cumulative effect of change in accounting principle. - - 0.08 -
------------ ------------ ------------ ------------
$ 0.75 $ 0.48 $ 1.81 $ 0.75
============ ============ ============ ============
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle............... $ 0.74 $ 0.48 $ 1.71 $ 0.74
Cumulative effect of change in accounting principle. - - 0.08 -
------------ ------------ ------------ ------------
$ 0.74 $ 0.48 $ 1.79 $ 0.74
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 583,310 $ 226,982
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................................ 486,705 421,829
Asset retirement obligation accretion................................... 15,758 -
Provision for deferred income taxes..................................... 221,370 38,153
International impairments............................................... - 4,600
Cumulative effect of change in accounting principle..................... (26,632) -
Other................................................................... 3,311 800
Changes in operating assets and liabilities:
(Increase) decrease in receivables...................................... (147,208) (22,013)
(Increase) decrease in drilling advances and other...................... (14,951) (15,134)
(Increase) decrease in inventories...................................... 4,410 (1,127)
(Increase) decrease in deferred charges and other....................... (12,636) (293)
Increase (decrease) in accounts payable................................. 56,575 39,898
Increase (decrease) in accrued expenses................................. 81,009 (48,678)
Increase (decrease) in advances from gas purchasers..................... (8,088) (7,279)
Increase (decrease) in deferred credits and noncurrent liabilities...... (18,768) (13,653)
------------- -------------
Net cash provided by operating activities........................... 1,224,165 624,085
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................................... (771,046) (464,228)
Acquisition of BP properties.................................................. (1,157,134) -
Proceeds from sale of short-term investments.................................. - 17,006
Other, net.................................................................... (32,342) (14,911)
------------- -------------
Net cash used in investing activities............................... (1,960,522) (462,133)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................................................... 1,042,418 1,105,859
Payments on long-term debt.................................................... (852,305) (1,144,970)
Dividends paid................................................................ (34,366) (37,257)
Common stock activity......................................................... 570,024 15,542
Treasury stock activity, net.................................................. 3,738 1,715
Cost of debt and equity transactions.......................................... (4,039) (6,487)
------------- -------------
Net cash provided by (used in) financing activities................. 725,470 (65,598)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (10,887) 96,354
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 51,886 35,625
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 40,999 $ 131,979
============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------------- ---------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 40,999 $ 51,886
Receivables, net of allowance........................................ 698,115 527,687
Inventories.......................................................... 118,272 109,204
Drilling advances.................................................... 43,331 45,298
Prepaid assets and other............................................. 51,741 32,706
--------------- ---------------
952,458 766,781
--------------- ---------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties................................................. 15,083,057 12,827,459
Unproved properties and properties under
development, not being amortized............................... 959,690 656,272
Gas gathering, transmission and processing facilities................ 796,283 784,271
Other................................................................ 220,889 194,685
--------------- ---------------
17,059,919 14,462,687
Less: Accumulated depreciation, depletion and amortization.......... (6,354,423) (5,997,102)
--------------- ---------------
10,705,496 8,465,585
--------------- ---------------
OTHER ASSETS:
Goodwill, net........................................................ 189,252 189,252
Deferred charges and other........................................... 48,829 38,233
--------------- ---------------
$ 11,896,035 $ 9,459,851
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------------- ---------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 271,216 $ 214,288
Accrued operating expense............................................ 80,741 47,382
Accrued exploration and development.................................. 135,792 146,871
Accrued compensation and benefits.................................... 21,175 32,680
Accrued interest..................................................... 32,621 30,880
Accrued income taxes................................................. 95,073 44,256
Oil and gas derivative instruments................................... 61,908 -
Other................................................................ 44,343 15,878
--------------- ---------------
742,869 532,235
--------------- ---------------
LONG-TERM DEBT.......................................................... 2,349,502 2,158,815
--------------- ---------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes......................................................... 1,370,181 1,120,609
Advances from gas purchasers......................................... 117,365 125,453
Asset retirement obligation.......................................... 711,404 -
Oil and gas derivative instruments................................... 26,274 3,507
Other................................................................ 141,301 158,326
--------------- ---------------
2,366,525 1,407,895
--------------- ---------------
PREFERRED INTERESTS OF SUBSIDIARIES..................................... 437,615 436,626
--------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized -
Series B, 5.68% Cumulative Preferred Stock,
100,000 shares issued and outstanding.......................... 98,387 98,387
Common stock, $0.625 par, 430,000,000 shares authorized,
331,769,736 and 310,929,080 shares issued, respectively........... 207,356 194,331
Paid-in capital...................................................... 4,017,437 3,427,450
Retained earnings.................................................... 1,948,452 1,427,607
Treasury stock, at cost, 8,174,764 and 8,422,656 shares,
respectively...................................................... (107,302) (110,559)
Accumulated other comprehensive loss................................. (164,806) (112,936)
--------------- ---------------
5,999,524 4,924,280
--------------- ---------------
$ 11,896,035 $ 9,459,851
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B SERIES C
COMPREHENSIVE PREFERRED PREFERRED COMMON PAID-IN
(In thousands) INCOME STOCK STOCK STOCK CAPITAL
-------------- ---------- ---------- ---------- ------------
BALANCE AT DECEMBER 31, 2001.............. $ 98,387 $ 208,207 $ 185,288 $ 2,803,825
Comprehensive income (loss):
Net income........................... $ 226,982 - - - -
Currency translation adjustments..... 80,488 - - - -
Commodity hedges, net of income tax
benefit of $5,232.................. (7,063) - - - -
Marketable securities, net of income
tax benefit of $67................. (125) - - - -
--------------
Comprehensive income................... $ 300,282
==============
Dividends:
Preferred............................ - - - 13
Common ($.10 per share).............. - - - -
Common shares issued................... - - 539 16,782
Conversion of Series C Preferred Stock. - (208,207) 8,193 200,014
Treasury shares issued, net............ - - - 28
Other.................................. - - - (209)
---------- ---------- ---------- ------------
BALANCE AT JUNE 30, 2002.................. $ 98,387 $ - $ 194,020 $ 3,020,453
========== ========== ========== ============
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
========== ========== ========== ============
ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) EARNINGS STOCK INCOME (LOSS) EQUITY
----------- ---------- ------------- -------------
BALANCE AT DECEMBER 31, 2001.............. $ 1,336,478 $ (111,885) $ (101,817) $ 4,418,483
Comprehensive income (loss):
Net income........................... 226,982 - - 226,982
Currency translation adjustments..... - - 80,488 80,488
Commodity hedges, net of income tax
benefit of $5,232.................. - - (7,063) (7,063)
Marketable securities, net of income
tax benefit of $67................. - - (125) (125)
Comprehensive income...................
Dividends:
Preferred............................ (7,989) - - (7,976)
Common ($.10 per share).............. (27,103) - - (27,103)
Common shares issued................... - - - 17,321
Conversion of Series C Preferred Stock. - - - -
Treasury shares issued, net............ - 928 - 956
Other.................................. - - - (209)
----------- ---------- ------------- ------------
BALANCE AT JUNE 30, 2002.................. $ 1,528,368 $ (110,957) $ (28,517) $ 4,701,754
=========== ========== ============= ============
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
=========== ========== ============= ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation
(Apache or the Company) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission, and reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the summary of
significant accounting policies and notes thereto included in the Company's most
recent annual report on Form 10-K.
On December 18, 2002, the Company declared a five percent stock
dividend payable on April 2, 2003, to shareholders of record on March 12, 2003.
On September 11, 2003, the Company declared a two-for-one stock split, paid
January 14, 2004, to shareholders of record on December 31, 2003. Quarterly
share and per share information for 2002 and 2003 have been restated to reflect
this stock dividend and the two-for-one stock split.
Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentations.
1. ACQUISITIONS
On January 13, 2003, Apache announced that it had entered into
agreements to purchase producing properties in the North Sea and Gulf of Mexico
from subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3
billion, with $670 million allocated to the Gulf of Mexico properties and $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, with the proceeds from additional debt approximating $604 million.
Apache and BP closed the above referenced acquisition of the Gulf of
Mexico properties on March 13, 2003, which included BP's interest in 56
producing fields, and 104 blocks. At closing, the $670 million purchase price
was adjusted for normal closing items and preferential rights exercised by third
parties. The exercise of preferential rights by third parties reduced the
purchase price by $73 million and estimated reserves by 9.6 MMboe. The purchase
price was further adjusted for various normal closing items, including revenues
and expenditures related to the properties for the period between the effective
and closing dates. As a result, cash consideration of $509 million was paid by
Apache upon closing. In a separate transaction closed February 21, 2003, Apache
purchased BP's interest in several other Gulf of Mexico properties with
estimated proved reserves of 2.1 MMboe for an adjusted purchase price of $15
million. Including $4 million of transaction costs, total cash consideration for
the two acquisitions of Gulf of Mexico properties from BP totaled $528 million.
The acquisition of the U.K. North Sea properties closed on April 2,
2003, at which time Apache paid a purchase price, adjusted for normal closing
and working capital adjustments, of $630 million. The acquisition of the North
Sea properties includes a 96 percent interest in the Forties Field and
establishes a new core area for the Company. In conjunction with the Forties
acquisition, Apache may be required to issue a letter of credit to BP to cover
the present value of related asset retirement obligations if the rating of the
Company's senior unsecured debt is lowered by both Moody's and Standard and
Poor's from its current ratings of A3 and A-, respectively. Should this occur,
the initial letter of credit amount would be 175 million British pounds. Apache
has agreed to sell all of the North Sea production from those properties over
the next two years to BP at a combination of fixed and market sensitive prices
pursuant to a contract entered into in connection with the North Sea purchase
agreement.
6
The BP purchase prices were allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as of the date of
acquisition, as follows:
U.S. - U.K. -
GULF OF MEXICO NORTH SEA TOTAL*
---------------- ---------------- ----------------
(In thousands)
Proved Property $ 520,110 $ 854,835 $ 1,374,945
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 $ 508,610 $ 629,524 $ 1,138,134
================ ================ ================
* 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 FOR THE SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2002
------------------------------- ------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
(In thousands, except per common share data)
Revenues.................................... $ 2,020,965 $ 2,258,927 $ 1,184,311 $ 1,638,211
Net income.................................. 583,310 656,507 226,982 286,502
Preferred stock dividends................... 2,840 2,840 7,989 7,989
Income attributable to common stock......... 580,470 653,667 218,993 278,513
Net income per common share:
Basic................................... $ 1.81 $ 2.03 $ .75 $ .90
Diluted................................. 1.79 2.01 .74 .88
Average common shares outstanding (1)....... 320,973 323,160 291,994 311,796
(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.
On July 3, 2003, Apache announced that it had completed the acquisition
of producing properties on the Outer Continental Shelf of the Gulf of Mexico
from Shell Exploration and Production Company (Shell) for $200 million, subject
to normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced over the next four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over the four-year term. The
VPP reserves and production will not be recorded by Apache.
Apache will record estimated proved reserves of 124.6 billion cubic
feet (Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60
million liability for the future cost to produce and deliver volumes subject to
the VPP will be recorded by the Company because the overriding royalties are not
burdened by production costs. This liability will be amortized as the volumes
are produced and delivered to Morgan Stanley. The purchase agreement was
effective as of July 1, 2003. The acquisition included interests in 26 fields
covering 50 blocks (approximately 209,000 acres) and interests in two onshore
gas plants. Apache will operate 15 of the fields with 91 percent of the
production. The purchase price was funded by borrowings under the Company's
lines of credit and commercial paper program.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache uses a variety of strategies to manage its exposure to
fluctuations in commodity prices. As established by the Company's hedging
policy, Apache primarily enters into cash flow hedges in connection with
selected
7
acquisitions to protect against commodity price volatility. The success of these
acquisitions is significantly influenced by Apache's ability to achieve targeted
production at forecasted prices. These hedges effectively reduce price risk on a
portion of the production from the acquisitions.
During the first quarter of 2003, in conjunction with the acquisitions
from BP and during the fourth quarter of 2002, in conjunction with the South
Louisiana properties acquisition, Apache entered into, and designated as cash
flow hedges, natural gas and crude oil fixed-price swaps and natural gas option
collars. These positions were entered into in accordance with the Company's
hedging policy and involved several counterparties which are rated A+ or better.
As of June 30, 2003, the outstanding positions of our cash flow hedges were as
follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBtu/Bbl) FLOOR/CEILING (LIABILITY)
---------------- -------------------- ------------- ---------------- -----------------
(In thousands)
7/2003 - 12/2003 Gas Collars 9,200,000 $ 3.50 / 6.09 $ (2,822)
Gas Fixed-Price Swap 36,800,000 5.12 (14,458)
Oil Fixed-Price Swap 9,200,000 26.59 (21,503)
2004 Gas Collars 18,300,000 3.25 / 5.81 (9,026)
Gas Fixed-Price Swap 51,240,000 4.52 (33,727)
Oil Fixed-Price Swap 1,550,000 26.59 (1,198)
2005 Gas Collars 9,050,000 3.25 / 5.20 (5,448)
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, 2003, the outstanding terms of
the contract were as follows:
CRUDE OIL FIXED-PRICE PHYSICAL SALES CONTRACT (BRENT)
------------------------------------------------------------
PRODUCTION TOTAL VOLUMES AVERAGE
PERIOD (BARRELS) FIXED PRICE
---------------- ------------- -----------
7/2003 - 12/2003 4,600,000 $ 25.32
2004 14,175,000 22.24
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:
GROSS AFTER TAX
------------ ------------
(In thousands)
Unrealized loss on derivatives at December 31, 2002.................. $ (7,141) $ (4,186)
Net losses realized into earnings.................................... 53,837 33,506
Net change in derivative fair value.................................. (136,609) (85,376)
------------ ------------
Unrealized loss on derivatives at June 30, 2003...................... $ (89,913) $ (56,056)
============ ============
Based on current market prices, the Company recorded an unrealized loss
in other comprehensive income of $89.9 million ($56.1 million after tax). This
loss will be realized in future earnings contemporaneously with the related
sales of natural gas and crude oil production applicable to specific hedges. A
loss of $63.6 million ($46.2 million after tax) will 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 133, as amended.
8
3. DEBT
On May 15, 2003, Apache Finance Canada Corporation (Apache Finance
Canada) issued $350 million of 4.375 percent, 12-year, senior unsecured notes in
a private placement. The notes are irrevocably and unconditionally guaranteed by
Apache. Interest is payable semi-annually on May 15 and November 15 of each year
commencing on November 15, 2003. The notes were sold pursuant to Rule 144A and
Regulation S, and may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Securities Act of 1933, as amended.
If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.
4. 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 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.
5. FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency gains and losses in
accordance with SFAS 52 "Foreign Currency Translation." Foreign currency
translation gains and losses related to deferred taxes are recorded as a
component of its provision for income taxes, while all other foreign currency
gains and losses are reflected in revenues other. For the first six months of
2003, the Company recorded additional deferred tax expense of $56 million as a
result of the weaker U.S. dollar. Net gains and losses reflected in revenues
other totaled $.5 million for the six-month period.
9
6. 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,
--------------------------------------------------------------------------
2003 2002
---------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock. $242,961 323,409 $ .75 $143,229 295,629 $ .48
======== ========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other............. - 2,711 - 2,167
Series C Preferred Stock ........... - - 1,661 6,334
-------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions...... $242,961 326,120 $ .74 $144,890 304,130 $ .48
======== ======= ======== ======== ======= ========
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
2003 2002
--------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock. $580,470 320,973 $ 1.81 $218,993 291,994 $ .75
======== ========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other............. - 2,681 - 2,658
Series C Preferred Stock ........... - - 5,149 9,704
-------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions...... $580,470 323,654 $ 1.79 $224,142 304,356 $ .74
======== ======= ======== ========= ======= ========
10
7. STOCK-BASED COMPENSATION
On June 30, 2003, the Company had several stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price of those options is equal to or greater than the
market price of the Company's common stock on the date of grant, unless the
awards are subsequently modified. The following table illustrates the effect on
income attributable to common stock and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, to stock-based employee compensation for
the Company's option and performance plans.
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
-----------------------------------------------------------
(In thousands, except for per common share amounts)
Income attributable to common stock, as reported....... $ 242,961 $ 143,229 $ 580,470 $ 218,993
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects......................................... 34 - 391 476
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects... (6,364) (5,252) (10,866) (10,072)
---------- ---------- ---------- ----------
Pro forma income attributable to common stock.......... $ 236,631 $ 137,977 $ 569,995 $ 209,397
========== ========== ========== ==========
Net Income per Common Share:
Basic:
As reported....................................... $ .75 $ .48 $ 1.81 $ .75
Pro forma......................................... .73 .47 1.78 .72
Diluted:
As reported....................................... .75 .48 1.79 .74
Pro forma......................................... .72 .46 1.75 .70
The effects of applying SFAS No. 123, as amended, in this pro forma
disclosure should not be interpreted as being indicative of future effects. SFAS
No. 123, as amended, does not apply to awards prior to 1995, and the extent and
timing of additional future awards cannot be predicted.
During the second quarter of 2003, the Company issued a total of
1,802,210 stock appreciation rights (SARs) to non-executive employees in lieu of
stock options. The Company issued 121,000 shares of restricted common stock to
executives in May of 2003. The SARs will be settled in cash upon exercise, if
the price on the date of exercise is equal to or greater than the closing price
of the Company's stock on the date of grant. The vesting period is over four
years and the Company will record compensation expense on the vested SARs
outstanding as the price of the Company's common stock fluctuates. The related
second-quarter expense was $.3 million after tax.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2003 2002
------------ ------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)...................................... $ 47,471 $ 41,631
Income taxes (net of refunds).............................................. 166,762 86,641
11
9. BUSINESS SEGMENT INFORMATION
Apache has five reportable segments which are primarily in the business
of natural gas and crude oil exploration and production. The Company evaluates
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, 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
========================================================================
Revenues other (Expense):
Other revenues......................... 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
=====================================================================================
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Oil and Gas Production Revenues........... $ 514,825 $ 256,711 $ 254,203 $ 152,952 $ - $ 2,962 $ 1,181,653
=====================================================================================
Operating Income (Loss) (1).............. $ 172,278 $ 100,579 $ 139,725 $ 71,000 $ - $ (3,638) $ 479,944
========================================================================
Revenues other (Expense):
Other revenues......................... 2,658
General and administrative............. (53,367)
Preferred interests of subsidiaries.... (8,662)
Financing costs, net................... (56,457)
-----------
Income Before Income Taxes................ $ 364,116
===========
Total Assets.............................. $4,100,006 $2,318,998 $1,632,287 $ 948,496 $ - $ 166,161 $ 9,165,948
=====================================================================================
(1) Operating Income (Loss) consists of oil and gas production revenues
less depreciation, depletion and amortization, asset retirement
obligation accretion, international impairments, lease operating costs,
gathering and transportation costs, and severance and other taxes.
10. LITIGATION
In June 2003, Apache and Cinergy Marketing and Trading, LLC (Cinergy)
agreed to terminate their agreement concerning marketing of Apache's U.S.
natural gas production and to dismiss the arbitration between them. The parties
reached an amicable settlement, the amounts of which were immaterial to Apache's
financial position and results of operations. Consequently, the Company began
marketing its U.S. natural gas production previously marketed by Cinergy
beginning with July 2003 production.
11. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations," which resulted in an increase to
net oil and gas properties of $410 million and additional liabilities related to
asset retirement obligations of $369 million. These entries reflect the asset
retirement obligation of Apache had the provisions of SFAS No. 143 been applied
since inception and resulted in a non-cash cumulative-effect increase to
earnings of $27 million ($41 million pretax). Prior to adoption of SFAS No. 143,
abandonment obligations were accrued over the productive lives of the assets
through depreciation, depletion and amortization of oil and gas properties
without recording a separate liability for such amounts.
12
The following table describes all changes to the Company's asset
retirement obligation liability since adoption (in thousands):
Asset retirement obligation upon adoption on January 1, 2003......... $ 368,537
Liabilities incurred................................................. 331,692
Liabilities settled.................................................. (4,583)
Accretion expense.................................................... 15,758
---------------
Asset retirement obligation at June 30, 2003......................... $ 711,404
===============
Liabilities incurred during the period primarily relate to obligations
assumed in connection with the Gulf of Mexico and North Sea properties acquired
from BP. Liabilities settled during the period relate to individual properties
plugged and abandoned or sold during the period. The pro forma asset retirement
obligation would have been approximately $334 million at January 1, 2002 had the
Company adopted SFAS No. 143 on January 1, 2002. For the three and six month
periods ended June 30, 2002, the pro forma effect on Income Attributable to
Common Stock and Net Income per Common Share would not have been materially
different than reported amounts had SFAS No. 143 been adopted by the Company on
January 1, 2002.
In January 2003, the FASB issued Interpretation No., 46, "Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51." Interpretation No. 46 requires a company to consolidate a variable
interest entity (VIE) if the company has a variable interest (or combination of
variable interests) that is exposed to a majority of the entity's expected
losses if they occur, receive a majority of the entity's expected residual
returns if they occur, or both. In addition, more extensive disclosure
requirements apply to the primary and other significant variable interest owners
of the VIE. This interpretation applies immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. It is also effective for the first fiscal year or interim period
beginning after June 15, 2003, to VIEs in which a company holds a variable
interest that is acquired before February 1, 2003. The guidance regarding this
interpretation is extremely complex and, although we do not believe we have an
interest in a VIE, the Company continues to assess the impact, if any, this
interpretation will have on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards on how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. The
statement requires that the Company classify as liabilities the fair value of
all mandatorily redeemable financial instruments that had previously been
recorded as equity or elsewhere in the consolidated financial statements. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise effective for all existing financial instruments
beginning in the third quarter of 2003. Apache is continuing to assess the
impact of adopting this statement, which may require a significant portion, if
not all, of its Preferred Interests of Subsidiaries to be reclassified as a
component of debt. In any event, the Company has in the past provided pro forma
information about how viewing the Company's Preferred Interests of Subsidiaries
as debt would impact its debt-as-a-percentage-of-capitalization calculation (see
page 2 of Annual Report on Form 10-K for the year ended December 31, 2002).
Preferred Interests related to any portion reclassified would prospectively be
reflected as interest expense instead of Preferred Interests of Subsidiaries in
the Consolidated Statement of Operations.
12. RECENT ACCOUNTING DEVELOPMENTS
The Company has taken note of a July 2003 inquiry to the Financial
Accounting Standards Board regarding whether or not contract-based oil and gas
mineral rights held by lease or contract ("mineral rights") should be recorded
or disclosed as intangible assets. The inquiry presents a view that these
mineral rights are intangible assets as defined in SFAS No. 141, "Business
Combinations," and, therefore, should be classified separately on the balance
sheet as intangible assets. SFAS No. 141, and SFAS No. 142, "Goodwill and Other
Intangible Assets," became effective for transactions subsequent to June 30,
2001 with the disclosure requirements of SFAS No. 142 required as of January 1,
2002. SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and that intangible assets
be disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 scopes out
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure
13
provisions apply to oil and gas companies. Apache does not believe that SFAS No.
141 or 142 change the classification of oil and gas mineral rights and the
Company continues to classify these assets as part of oil and gas properties.
The Emerging Issues Task Force (EITF) has added the treatment of oil and gas
mineral rights to an upcoming agenda, which may result in a change in how Apache
classifies these assets.
Should such a change be required, the amounts related to business
combinations and major asset purchases after June 30, 2001 that would be
classified as "intangible undeveloped mineral interest" was $192 million as of
June 30, 2003. The amounts related to business combinations and major asset
purchases after June 30, 2001 that would be classified as "intangible developed
mineral interest" was $1.2 billion as of June 30, 2003. Intangible developed
mineral interest amounts are presented net of accumulated depletion,
depreciation and amortization (DD&A). Accumulated DD&A was estimated using
historical depletion rates applied proportionately to the costs of the
acquisitions to be classified as "intangible developed mineral interest". The
amounts noted above only include mineral rights acquired in business
combinations or major asset purchases, and exclude those acquired individually
or in groups as we have not historically tracked these in this manner. The
Company has also not historically tracked the amount of mineral rights in the
proved property balances related to producing leases or relinquished leases. We
are currently identifying a methodology to do so for transactions subsequent to
June 30, 2001.
The numbers above are based on our understanding of the issue before
the EITF, if all mineral rights associated with unevaluated property and
producing reserves were deemed to be intangible assets:
- mineral rights with proved reserves that were acquired after
June 30, 2001 and mineral rights with no proved reserves would
be classified as intangible assets and would not be included
in oil and gas properties on our consolidated balance sheet;
- results of operations and cash flows would not be materially
affected because mineral rights would continue to be amortized
in accordance with full cost accounting rules; and
- disclosures required by SFAS Nos. 141 and 142 relative to
intangibles would be included in the notes to our financial
statements.
If the accounting for mineral rights is ultimately changed,
transitional guidance for intangible assets permits the reclassification of only
amounts acquired after the effective date of SFAS Nos. 141 and 142 if records
were not previously maintained to track acquisition costs based on their
intangible or tangible nature. Lack of these records prior to the effective date
could result in the loss of comparability between historical balances of
tangible and intangible asset balances and among companies in the industry.
13. SUPPLEMENTAL GUARANTOR INFORMATION
Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada are subsidiaries of Apache, that have issuances of publicly traded
securities and require the following condensed consolidating financial
statements be provided as an alternative to filing separate financial
statements.
Each of the companies presented in the condensed consolidating
financial statements has been fully consolidated in Apache's consolidated
financial statements. As such, the condensed consolidating financial statements
should be read in conjunction with the financial statements of Apache and
subsidiaries and notes thereto of which this note is an integral part.
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER 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............... $ 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)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 244,381 7,782 7,782 (296)
Cumulative effect of change in accounting
principle, net of income tax.................. - - - -
----------- ----------- ----------- -----------
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
----------- ------------ ------------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 76,802 (92,070) 244,381
Cumulative effect of change in accounting
principle, net of income tax.................. - - -
----------- ------------ ------------
NET INCOME....................................... 76,802 (92,070) 244,381
Preferred stock dividends..................... - - 1,420
----------- ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 76,802 $ (92,070) $ 242,961
=========== ============ ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------ ------------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 214,891 $ - $ - $ -
Equity in net income (loss) of affiliates..... 104,111 4,582 7,560 22,665
Other......................................... (90) - - -
----------- ----------- ----------- -----------
318,912 4,582 7,560 22,665
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 61,143 - - -
International impairments..................... - - - -
Lease operating costs......................... 49,359 - - -
Gathering and transportation costs............ 5,068 - - -
Severance and other taxes..................... 8,501 - - 17
General and administrative.................... 23,911 - - -
Financing costs, net.......................... 20,359 - 4,513 10,218
----------- ----------- ----------- -----------
168,341 - 4,513 10,235
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 150,571 4,582 3,047 12,430
Provision (benefit) for income taxes.......... 4,261 - (1,535) (4,462)
----------- ----------- ----------- -----------
NET INCOME....................................... 146,310 4,582 4,582 16,892
Preferred stock dividends..................... 3,081 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 143,229 $ 4,582 $ 4,582 $ 16,892
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 484,631 $ (47,258) $ 652,264
Equity in net income (loss) of affiliates..... (8,751) (130,167) -
Other......................................... 4,141 - 4,051
----------- ------------ ------------
480,021 (177,425) 656,315
----------- ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 149,647 - 210,790
International impairments..................... - - -
Lease operating costs......................... 109,986 (47,258) 112,087
Gathering and transportation costs............ 6,044 - 11,112
Severance and other taxes..................... 8,827 - 17,345
General and administrative.................... 4,104 - 28,015
Financing costs, net.......................... (4,658) - 30,432
----------- ------------ ------------
273,950 (47,258) 409,781
----------- ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 5,129 - 5,129
----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................ 200,942 (130,167) 241,405
Provision (benefit) for income taxes.......... 96,831 - 95,095
----------- ------------ ------------
NET INCOME....................................... 104,111 (130,167) 146,310
Preferred stock dividends..................... - - 3,081
----------- ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 104,111 $ (130,167) $ 143,229
=========== ============ ============
16
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
------------ ----------------- ------------
(IN THOUSANDS)
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
=========== ============ ============
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------ ------------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 376,760 $ - $ - $ -
Equity in net income (loss) of affiliates..... 172,727 9,084 15,040 37,103
Other......................................... 95 - - -
----------- ----------- ----------- -----------
549,582 9,084 15,040 37,103
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 114,847 - - -
International impairments..................... - - - -
Lease operating costs......................... 100,326 - - -
Gathering and transportation costs............ 8,009 - - -
Severance and other taxes..................... 15,133 - - 26
General and administrative.................... 45,386 - - -
Financing costs, net.......................... 36,042 - 9,025 20,447
----------- ----------- ----------- -----------
319,743 - 9,025 20,473
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 229,839 9,084 6,015 16,630
Provision (benefit) for income taxes.......... 2,857 - (3,069) (8,926)
----------- ----------- ----------- -----------
NET INCOME....................................... 226,982 9,084 9,084 25,556
Preferred stock dividends..................... 7,989 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 218,993 $ 9,084 $ 9,084 $ 25,556
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 892,172 $ (87,279) $ 1,181,653
Equity in net income (loss) of affiliates..... (17,503) (216,451) -
Other......................................... 2,563 - 2,658
----------- ------------ ------------
877,232 (303,730) 1,184,311
----------- ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 306,982 - 421,829
International impairments..................... 4,600 - 4,600
Lease operating costs......................... 210,183 (87,279) 223,230
Gathering and transportation costs............ 11,336 - 19,345
Severance and other taxes..................... 17,546 - 32,705
General and administrative.................... 7,981 - 53,367
Financing costs, net.......................... (9,057) - 56,457
----------- ------------ ------------
549,571 (87,279) 811,533
----------- ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 8,662 - 8,662
----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................ 318,999 (216,451) 364,116
Provision (benefit) for income taxes.......... 146,272 - 137,134
----------- ------------ ------------
NET INCOME....................................... 172,727 (216,451) 226,982
Preferred stock dividends..................... - - 7,989
----------- ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 172,727 $ (216,451) $ 218,993
=========== ============ ============
18
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....................................... $ (189,177) $ - $ (10,411) $ 326,493
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (191,034) - - -
Acquisitions..................................... (527,610) - - -
Investment in subsidiaries, net.................. 407,659 (9,025) - -
Other, net....................................... (15,393) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (326,378) (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............................ 570,024 9,025 9,025 20,662
Treasury stock activity, net..................... 3,738 - - -
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
------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 1,097,260 $ - $ 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 (555,424) -
Other, net....................................... (16,949) - (32,342)
----------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (1,069,695) (555,424) (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............................ 56,990 (95,702) 570,024
Treasury stock activity, net..................... - - 3,738
Cost of debt and equity transactions............. - - (4,039)
----------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... (40,100) 555,424 725,470
----------- ------------ -----------
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
=========== ============ ===========
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
---------------- --------------- --------------- ----------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................................... $ 300,039 $ - $ (9,025) $ (3,682)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..................... (119,011) - - -
Proceeds from sales of oil and gas properties........... - - - -
Proceeds from sale of U.S. Government Agency Notes...... - - - -
Investment in subsidiaries, net......................... (218,462) (9,025) - -
Other, net.............................................. (6,065) - - -
------------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES...................... (343,538) (9,025) - -
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity................................. 1,048,884 - - 3,682
Payments on long-term debt.............................. (982,731) - - -
Dividends paid.......................................... (37,257) - - -
Common stock activity................................... 15,542 9,025 9,025 -
Treasury stock activity, net............................ 1,715 - - -
Cost of debt and equity transactions.................... (6,487) - - -
------------- ------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 39,666 9,025 9,025 3,682
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... (3,833) - - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR........................................ 6,383 - 2 -
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD............................................ $ 2,550 $ - $ 2 $ -
============= ============= ============= =============
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
--------------- ----------------- ---------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................................... $ 336,753 $ - $ 624,085
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..................... (345,217) - (464,228)
Proceeds from sales of oil and gas properties........... - - -
Proceeds from sale of U.S. Government Agency Notes...... 17,006 - 17,006
Investment in subsidiaries, net......................... (138,451) 365,938 -
Other, net.............................................. (8,846) - (14,911)
------------- -------------- -------------
NET CASH USED IN INVESTING ACTIVITIES...................... (475,508) 365,938 (462,133)
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity................................. 344,682 (291,389) 1,105,859
Payments on long-term debt.............................. (162,239) - (1,144,970)
Dividends paid.......................................... - - (37,257)
Common stock activity................................... 56,499 (74,549) 15,542
Treasury stock activity, net............................ - - 1,715
Cost of debt and equity transactions.................... - - (6,487)
------------- -------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 238,942 (365,938) (65,598)
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... 100,187 - 96,354
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR........................................ 29,240 - 35,625
------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD............................................ $ 129,427 $ - $ 131,979
============= ============== =============
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
---------------- --------------- --------------- ----------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 1,999 $ - $ 2 $ -
Receivables, net of allowance......................... 257,011 - - -
Inventories........................................... 13,970 - - -
Drilling advances and others.......................... 34,672 - - -
------------- ------------- ------------- -------------
307,652 - 2 -
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET.............................. 4,267,550 - - -
------------- ------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net.......................... 526,127 - (2,048) (93,431)
Goodwill, net......................................... - - - -
Equity in affiliates.................................. 3,921,624 167,952 425,152 1,009,730
Deferred charges and other............................ 34,611 - - 4,740
------------- ------------- ------------- -------------
$ 9,057,564 $ 167,952 $ 423,106 $ 921,039
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 165,426 $ - $ - $ -
Other accrued expenses................................ 249,165 - (1,864) 1,062
------------- ------------- ------------- -------------
414,591 - (1,864) 1,062
------------- ------------- ------------- -------------
LONG-TERM DEBT........................................... 1,377,308 - 268,889 646,713
------------- ------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.......................................... 743,104 - (11,871) (1,276)
Advances from gas purchasers.......................... 117,365 - - -
Asset retirement obligation........................... 266,826 - - -
Oil and gas derivative instruments.................... 26,274 - - -
Other................................................. 112,572 - - -
------------- ------------- ------------- -------------
1,266,141 - (11,871) (1,276)
------------- ------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES...................... - - - -
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY..................................... 5,999,524 167,952 167,952 274,540
------------- ------------- ------------- -------------
$ 9,057,564 $ 167,952 $ 423,106 $ 921,039
============= ============= ============= =============
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
--------------- ----------------- ---------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 38,998 $ - $ 40,999
Receivables, net of allowance......................... 441,104 - 698,115
Inventories........................................... 104,302 - 118,272
Drilling advances and others.......................... 60,400 - 95,072
------------- -------------- -------------
644,804 - 952,458
------------- -------------- -------------
PROPERTY AND EQUIPMENT, NET.............................. 6,437,946 - 10,705,496
------------- -------------- -------------
OTHER ASSETS:
Intercompany receivable, net.......................... (430,648) - -
Goodwill, net......................................... 189,252 - 189,252
Equity in affiliates.................................. (992,390) (4,532,068) -
Deferred charges and other............................ 9,478 - 48,829
------------- -------------- -------------
$ 5,858,442 $ (4,532,068) $ 11,896,035
============= ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 105,790 $ - $ 271,216
Other accrued expenses................................ 223,290 - 471,653
------------- -------------- -------------
329,080 - 742,869
------------- -------------- -------------
LONG-TERM DEBT........................................... 56,592 - 2,349,502
------------- -------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.......................................... 640,224 - 1,370,181
Advances from gas purchasers.......................... - - 117,365
Asset retirement obligation........................... 444,578 - 711,404
Oil and gas derivative instruments.................... - - 26,274
Other................................................. 28,729 - 141,301
------------- -------------- -------------
1,113,531 - 2,366,525
------------- -------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES...................... 437,615 - 437,615
------------- -------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY..................................... 3,921,624 (4,532,068) 5,999,524
------------- -------------- -------------
$ 5,858,442 $ (4,532,068) $ 11,896,035
============= ============== =============
21
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
APACHE
APACHE APACHE FINANCE APACHE
CORPORATION NORTH AMERICA AUSTRALIA FINANCE CANADA
---------------- --------------- --------------- ----------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 224 $ - $ 2 $ 127
Receivables, net of allowance.......................... 121,410 - - -
Inventories............................................ 15,509 - - -
Drilling advances and others........................... 19,468 - - -
------------- ------------- ------------- -------------
156,611 - 2 127
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET............................... 3,403,716 - - -
------------- ------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net........................... 1,146,086 - (662) (253,851)
Goodwill, net.......................................... - - - -
Equity in affiliates................................... 2,994,954 142,422 402,596 958,382
Deferred charges and other............................. 31,804 - - 2,472
------------- ------------- ------------- -------------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 124,152 $ - $ - $ -
Other accrued expenses................................. 134,191 - 2,229 1,263
------------- ------------- ------------- -------------
258,343 - 2,229 1,263
------------- ------------- ------------- -------------
LONG-TERM DEBT............................................ 1,550,645 - 268,795 297,019
------------- ------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes........................................... 736,661 - (11,510) (1,205)
Advances from gas purchasers........................... 125,453 - - -
Oil and gas derivative instruments..................... 3,507 - - -
Other.................................................. 134,282 - - -
------------- ------------- ------------- -------------
999,903 - (11,510) (1,205)
------------- ------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES....................... - - - -
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY...................................... 4,924,280 142,422 142,422 410,053
------------- ------------- ------------- -------------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
============= ============= ============= =============
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
--------------- ----------------- ---------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 51,533 $ - $ 51,886
Receivables, net of allowance.......................... 406,277 - 527,687
Inventories............................................ 93,695 - 109,204
Drilling advances and others........................... 58,536 - 78,004
------------- -------------- -------------
610,041 - 766,781
------------- -------------- -------------
PROPERTY AND EQUIPMENT, NET............................... 5,061,869 - 8,465,585
------------- -------------- -------------
OTHER ASSETS:
Intercompany receivable, net........................... (891,573) - -
Goodwill, net.......................................... 189,252 - 189,252
Equity in affiliates................................... (808,503) (3,689,851) -
Deferred charges and other............................. 3,957 - 38,233
------------- -------------- -------------
$ 4,165,043 $ (3,689,851) $ 9,459,851
============= ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 90,136 $ - $ 214,288
Other accrued expenses................................. 180,264 - 317,947
------------- -------------- -------------
270,400 - 532,235
------------- -------------- -------------
LONG-TERM DEBT............................................ 42,356 - 2,158,815
------------- -------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes........................................... 396,663 - 1,120,609
Advances from gas purchasers........................... - - 125,453
Oil and gas derivative instruments..................... - - 3,507
Other.................................................. 24,044 - 158,326
------------- -------------- -------------
420,707 - 1,407,895
------------- -------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES....................... 436,626 - 436,626
------------- -------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY...................................... 2,994,954 (3,689,851) 4,924,280
------------- -------------- -------------
$ 4,165,043 $ (3,689,851) $ 9,459,851
============= ============== =============
22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache reported earnings totaling $580 million for the first half of
2003, establishing a new record for a six-month period and representing a 165
percent increase over the prior-year period. Cash provided by operating
activities totaled $1.2 billion and nearly doubled the comparable 2002 period,
establishing a six-month period record. Results for the second quarter of 2003,
while down from our record first quarter, were nonetheless strong.
Several milestones were achieved during the second quarter, as we
assimilated the assets acquired from BP p.l.c. (BP) into our operations:
- Apache achieved record production of approximately 429,000
barrels of oil equivalent (boe) per day, an increase of 26
percent from the prior-year period. Oil production increased
40 percent to 211,701 barrels per day, while daily gas
production rose 15 percent to 1.25 billion cubic feet (Bcf).
- Second-quarter oil and gas production revenues crossed the
billion dollar threshold, another quarterly-first for Apache.
- Fifty-four percent of our equivalent production came from
outside the U.S., as we commenced operations in the U.K. North
Sea, continuing the multi-year trend to establish a
diversified base of production and reserves.
- Single-day gross oil production records were set in Egypt and
from the Legendre field offshore Western Australia.
We had numerous drilling successes during the quarter, the most
significant of which was the Legendre North 4H, which flowed up to 25,000 gross
barrels per day and helped establish the daily production record in Australia
mentioned above. We also announced several significant discoveries in July which
are discussed below.
During the quarter, the Company issued $350 million of 12-year
unsecured notes at a 4.375-percent coupon rate; and filed a shelf registration
with the Securities and Exchange Commission that, when effective, will allow
Apache to sell up to $1.5 billion in stock and debt securities. Proceeds from
the 12-year unsecured notes were used to reduce bank debt and outstanding
commercial paper, and for general corporate purposes.
We had a very active first-half, and at mid-year we are encouraged by
the outlook for the remainder of 2003. Current NYMEX futures markets show oil
and natural gas prices remaining above historical trends for the balance of the
year, at a time in which Apache is establishing new production records. While we
are very pleased with our first-half results, our July 2003 acquisition and
several other important events (discussed below) are not reflected in our
reported results. Based on the expected impact of these events and our existing
production profile, we believe we are well positioned for the second half of
2003.
Below are several important events that will play a pivotal role in
defining not only the second half of the year but Apache's future for years to
come:
- Consistent with our policy of continued expansion through
selective acquisitions, Apache consummated an agreement
effective July 1, 2003 with Shell Exploration and Production
Company (Shell) to acquire interests in 26 oil and gas fields
on the outer Continental Shelf of the Gulf of Mexico and two
onshore gas plants for $200 million. Prior to the transaction,
Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell
$300 million to acquire an overriding royalty interest in a
portion of the reserves to be produced over the next four
years. Shell's sale of an overriding royalty interest to
Morgan Stanley is commonly known in the industry as a
volumetric production payment (VPP). Under the terms of the
VPP, Morgan Stanley is to receive a fixed volume of oil and
gas production over the four-year term. The VPP reserves and
production will not be recorded by Apache. In addition, a $60
million liability for the future cost to produce and deliver
volumes subject to the VPP will be recorded by the Company
because the overriding royalties are not burdened by
production costs. This liability will be amortized as the
volumes are produced and delivered to Morgan Stanley. Subject
to preferential rights, this acquisition will add
approximately 124.6 Bcf of natural gas and 6.6 million barrels
of oil to Apache's reserves. We estimate it
23
will add an average of 70 million cubic feet (MMcf) of natural
gas and 4,600 barrels of oil to our daily production in the
second half of 2003.
- Apache also began to market its U.S. natural gas effective
with July 2003 production. With our North American daily
natural gas production exceeding one Bcf, we felt it was
prudent to bring this responsibility back in-house.
- Production was initiated on the Zhao Dong block in the Bohai
Bay, offshore China in mid-July. Gross production is projected
to peak at 22,000 barrels a day during the first quarter of
2004.
- In July 2003, we announced two important exploration wells in
Egypt, the Qasr-1X on the Khalda Concession and the
Alexandrite-1X on the Matruh Concession. The Qasr-1X well
tested at a combined rate of 51.8 MMcf of natural gas and
2,688 barrels of condensate per day from two zones. One
interval on the Alexandrite-1X tested at a combined rate of 20
MMcf and 1,683 barrels of condensate per day.
- In July 2003, we announced that our Ravensworth-1 well
discovered oil in the Exmouth Sub-Basin offshore Western
Australia. This well creates a new play for Apache in an
oil-prone area south of existing operations in the Carnarvon
Basin and adds a new dimension to our exploration program
offshore Western Australia.
CRITICAL ACCOUNTING POLICY
The Company has taken note of a July 2003 inquiry to the Financial
Accounting Standards Board regarding whether or not contract-based oil and gas
mineral rights held by lease or contract ("mineral rights") should be recorded
or disclosed as intangible assets. The inquiry presents a view that these
mineral rights are intangible assets as defined in SFAS No. 141, "Business
Combinations," and, therefore, should be classified separately on the balance
sheet as intangible assets. SFAS No. 141, and SFAS No. 142, "Goodwill and Other
Intangible Assets," became effective for transactions subsequent to June 30,
2001 with the disclosure requirements of SFAS No. 142 required as of January 1,
2002. SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and that intangible assets
be disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 scopes out
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies. Apache does not believe that SFAS No. 141 or 142 change the
classification of oil and gas mineral rights and the Company continues to
classify these assets as part of oil and gas properties. The Emerging Issues
Task Force (EITF) has added the treatment of oil and gas mineral rights to an
upcoming agenda, which may result in a change in how Apache classifies these
assets.
Should such a change be required, the amounts related to business
combinations and major asset purchases after June 30, 2001 that would be
classified as "intangible undeveloped mineral interest" was $192 million as of
June 30, 2003. The amounts related to business combinations and major asset
purchases after June 30, 2001 that would be classified as "intangible developed
mineral interest" was $1.2 billion as of June 30, 2003. Intangible developed
mineral interest amounts are presented net of accumulated depletion,
depreciation and amortization (DD&A). Accumulated DD&A was estimated using
historical depletion rates applied proportionately to the costs of the
acquisitions to be classified as "intangible developed mineral interest". The
amounts noted above only include mineral rights acquired in business
combinations or major asset purchases, and exclude those acquired individually
or in groups as we have not historically tracked these in this manner. The
Company has also not historically tracked the amount of mineral rights in the
proved property balances related to producing leases or relinquished leases. We
are currently identifying a methodology to do so for transactions subsequent to
June 30, 2001.
24
The numbers above are based on our understanding of the issue before
the EITF, if all mineral rights associated with unevaluated property and
producing reserves were deemed to be intangible assets:
- mineral rights with proved reserves that were acquired after
June 30, 2001 and mineral rights with no proved reserves would
be classified as intangible assets and would not be included
in oil and gas properties on our consolidated balance sheet;
- results of operations and cash flows would not be materially
affected because mineral rights would continue to be amortized
in accordance with full cost accounting rules; and
- disclosures required by SFAS Nos. 141 and 142 relative to
intangibles would be included in the notes to our financial
statements.
If the accounting for mineral rights is ultimately changed,
transitional guidance for intangible assets permits the reclassification of only
amounts acquired after the effective date of SFAS Nos. 141 and 142 if records
were not previously maintained to track acquisition costs based on their
intangible or tangible nature. Lack of these records prior to the effective date
could result in the loss of comparability between historical balances of
tangible and intangible asset balances and among companies in the industry.
RESULTS OF OPERATIONS
Revenues
The following table presents each segment's oil revenues and gas revenues as a
percentage of total oil revenues and gas revenues, respectively.
OIL REVENUES GAS REVENUES
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
JUNE 30 , JUNE 30 ,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
United States............... 35% 37% 63% 53%
Canada...................... 13% 16% 27% 29%
---- ---- ---- ----
North America............... 48% 53% 90% 82%
Egypt....................... 21% 29% 7% 13%
Australia................... 16% 18% 3% 5%
North Sea................... 15% - - -
Other International......... - - - -
---- ---- ---- ----
Total................... 100% 100% 100% 100%
==== ==== ==== ====
OIL REVENUES GAS REVENUES
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
United States............... 35% 36% 61% 52%
Canada...................... 14% 15% 28% 29%
---- ---- ---- ----
North America............... 49% 51% 89% 81%
Egypt....................... 25% 29% 9% 14%
Australia................... 18% 20% 2% 5%
North Sea................... 8% - - -
Other International......... - - - -
---- ---- ---- ----
Total................... 100% 100% 100% 100%
==== ==== ==== ====
25
Crude Oil Contribution
The geographic mix of our 2003 second quarter oil revenues changed
appreciably compared to the 2002 second quarter with the addition of the North
Sea properties, which contributed 15 percent of consolidated oil revenues in its
inaugural quarter. North America's oil revenues declined five percent, to 48
percent, with the U.S. contributing 35 percent and Canada contributing 13
percent. Egypt and Australia contributed 21 percent and 16 percent,
respectively.
On a year-to-date basis, the North Sea, with only one quarter of
revenues, contributed eight percent of consolidated oil revenues. The U.S.
contributed 35 percent, while Canada's contribution totaled 14 percent. Egypt
and Australia's contributions totaled 25 percent and 18 percent, respectively.
Natural Gas Contribution
Second quarter North American natural gas revenues totaled 90 percent
of consolidated natural gas revenues, an increase of eight percent over the
second quarter of 2002. The U.S. contribution rose 10 percent to 63 percent,
while Canada's contribution fell two percent, to 27 percent. Egypt and Australia
contributed seven percent and three percent, respectively.
For the six-month period, North American natural gas revenues totaled
89 percent of consolidated natural gas revenues, up eight percent for the
comparable prior-year period. Egypt and Australia contributed nine percent and
two percent, respectively.
26
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
2003 2002 (DECREASE) 2003 2002 (DECREASE)
------------- ------------- ---------- ------------- ------------- ----------
Revenues (in thousands):
Natural gas............................ $ 523,478 $ 298,156 76% $ 1,043,838 $ 524,138 99%
Oil.................................... 504,468 342,143 47% 942,811 636,280 48%
Natural gas liquids.................... 16,384 11,965 37% 32,843 21,235 55%
------------- ------------- ------------- -------------
Total............................. $ 1,044,330 $ 652,264 60% $ 2,019,492 $ 1,181,653 71%
============= ============= ============= =============
Natural Gas Volume - Mcf per day:
United States.......................... 702,109 514,740 36% 627,858 527,516 19%
Canada................................. 317,079 321,641 (1%) 313,164 318,169 (2%)
Egypt 113,169 118,101 (4%) 118,415 117,815 1%
Australia.............................. 106,698 126,670 (16%) 103,941 123,675 (16%)
North Sea.............................. 2,103 - - 1,057 - -
Argentina.............................. 7,741 8,607 (10%) 7,267 6,244 16%
------------- ------------- ------------- -------------
Total............................. 1,248,899 1,089,759 15% 1,171,702 1,093,419 7%
============= ============= ============= =============
Average Natural Gas price - Per Mcf:
United States.......................... $ 5.19 $ 3.35 55% $ 5.64 $ 2.84 99%
Canada................................. 4.81 2.97 62% 5.08 2.65 92%
Egypt 3.77 3.63 4% 4.15 3.34 24%
Australia.............................. 1.40 1.31 7% 1.35 1.27 6%
North Sea.............................. 2.08 - - 2.08 - -
Argentina.............................. .50 .38 32% .46 .46 -
Total............................. 4.61 3.01 53% 4.92 2.65 86%
Oil Volume - Barrels per day:
United States.......................... 72,477 54,462 33% 64,947 55,142 18%
Canada................................. 24,890 24,965 - 24,813 25,150 (1%)
Egypt 47,687 43,945 9% 46,704 44,161 6%
Australia.............................. 32,673 27,515 19% 31,562 30,213 4%
North Sea.............................. 33,387 - - 16,786 - -
Argentina.............................. 587 593 (1%) 592 631 (6%)
------------- ------------- ------------- -------------
Total............................. 211,701 151,480 40% 185,404 155,297 19%
============= ============= ============= =============
Average Oil price - Per barrel:
United States.......................... $ 26.90 $ 25.55 5% $ 27.81 $ 23.04 21%
Canada................................. 27.80 23.50 18% 29.92 21.18 41%
Egypt 24.45 24.36 - 27.37 22.89 20%
Australia.............................. 26.61 25.34 5% 29.67 22.77 30%
North Sea.............................. 25.50 - - 25.50 - -
Argentina.............................. 27.02 22.87 18% 29.49 21.39 38%
Total............................. 26.19 24.82 6% 28.09 22.64 24%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States....................... 7,448 6,869 8% 6,769 6,882 (2%)
Canada.............................. 1,894 1,614 17% 1,652 1,487 11%
------------- ------------- ------------- -------------
Total............................. 9,342 8,483 10% 8,421 8,369 1%
============= ============= ============= =============
Average NGL Price - Per barrel:
United States....................... $ 20.24 $ 16.31 24% $ 22.07 $ 14.55 52%
Canada.............................. 15.46 12.05 28% 19.39 11.55 68%
Total............................. 19.27 15.50 24% 21.55 14.02 54%
27
Natural Gas Revenues
The Company's second-quarter 2003 natural gas production increased 159
million cubic feet per day (MMcf/d), compared to the same period last year,
which increased natural gas revenues by $67 million. Production in the U.S.
climbed 187 MMcf/d, concentrated in the Gulf Coast region. Production in the
Gulf Coast region includes production from the Gulf of Mexico properties
acquired from BP in the first quarter of 2003 and production from the South
Louisiana properties acquired in the fourth quarter of 2002. These increases
offset natural declines in mature fields and production declines associated with
well performance and facility downtime. A successful workover and recompletion
program, particularly offshore, helped to stem the natural declines in the U.S.
In Australia, a gas contract expired in October 2002, resulting in a net
decrease in production of 20 MMcf/d compared to the second quarter of 2002.
Higher natural gas prices contributed $159 million to second-quarter worldwide
natural gas revenues.
Apache uses a variety of strategies to manage its exposure to
fluctuations in natural gas prices, including fixed-price physical contracts and
derivatives. Approximately eight percent of our second quarter 2003 U.S. natural
gas production was subject to long-term fixed-price physical contracts, down
from 11 percent in the second quarter of 2002. We continue to amortize the
unrealized gains and losses of derivative positions closed in October and
November 2001, which were negligible in the second quarter of 2003. The
following table shows the impact on average prices of each of these items:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Per Mcf)
Fixed-price physical...................... $ (.09) $ (.01) $ (.05) $ .01
Derivatives............................... (.02) - (.09) -
Amortization.............................. (.01) .04 (.01) .05
Year-to-date natural gas production increased seven percent compared to
the same period last year, increasing our natural gas revenues by $70 million.
Production rates in the U.S. were higher and production rates in Australia were
lower as discussed above. Canada saw a marginal decline in production, while
Egypt's production was flat. Natural gas prices increased 86 percent increasing
natural gas revenues by $450 million.
Approximately 10 percent of our first six month 2003 domestic natural
gas production was subject to long-term fixed-price physical contracts, down
from 11 percent in the 2002 period.
Crude Oil Revenues
The Company's second-quarter 2003 oil production increased 60,221
barrels per day (b/d), increasing second-quarter crude oil revenues by $144
million. Production growth was concentrated in the Gulf Coast region and the
North Sea, which benefited by the acquisitions discussed above. Australia and
Egypt also contributed to the production growth as new production from drilling
and workovers offset natural declines. A six percent increase in oil price
contributed $19 million to crude oil revenues.
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,
-------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------- ------------
(Per bbl)
Derivatives............................... $ (.54) $ - $ (1.00) $ -
Amortization.............................. .02 .08 .03 .08
28
Year-to-date oil production increased 19 percent for the reasons
discussed above, contributing $153 million to oil sales. Realized oil prices
rose 24 percent, increasing oil sales by $153 million.
Operating Expenses
The table below presents a detail of our expenses:
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(In millions)
Depreciation, depletion and amortization (DD&A):
Oil and gas property and equipment............... $ 255 $ 196 $ 453 $ 393
Other assets..................................... 17 15 34 29
Asset retirement obligation accretion............... 10 - 16 -
International impairments........................... - - - 5
Lease operating costs (LOE)......................... 186 112 320 223
Gathering and transportation costs.................. 15 11 27 19
Severance and other taxes........................... 33 17 57 33
General and administrative expense (G&A)............ 31 28 58 53
Financing costs, net................................ 29 31 55 57
-------- -------- -------- --------
Total....................................... $ 576 $ 410 $ 1,020 $ 812
======== ======== ======== ========
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 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. Full-cost DD&A expense
increased $59 million compared to last year's second quarter. The majority of
the increase in absolute costs was the U.S., up $31 million and the North Sea,
up $22 million, related to their increases in production driven by our recent
acquisitions from BP. The remaining increase in DD&A expense is related to Egypt
and Australia, which is consistent with their overall increase in production.
On a boe basis, our full-cost DD&A rate increased $.23 from $6.30 in
the second quarter of 2002 to $6.53 in 2003. The increase in the consolidated
rate was driven by rate increases in Egypt and Australia and the addition of the
North Sea properties. Egypt contributed $.15 to the overall rate change impacted
by volume variances related to the dynamics of the Production Sharing Agreement
and increases in estimated future development costs. Australia contributed $.13
to the overall rate change driven by costs incurred for several long-lead
development projects and higher finding costs. The North Sea properties
contributed an additional $.06 and carry a higher DD&A rate than our historical
worldwide rate, while Canada lowered the overall rate $.09 per boe.
Full-cost DD&A expense for the first half of 2003 of $453 million is
mainly comprised of the U.S., $222 million, Canada, $74 million, Egypt, $80
million, Australia, $53 million, and the North Sea $22 million. Full-cost DD&A
expense increased $60 million compared to the same period last year. The U.S.
and the North Sea contributed $30 million and $22 million of the increase,
respectively, which is mainly related to their acquisitions as discussed above.
The remaining increase in DD&A expense is concentrated in Egypt and Australia.
On a boe basis, our full-cost DD&A rate rose $.16 from $6.27 in 2002 to
$6.43 in 2003. Egypt and Australia contributed $.11 and $.14, respectively, to
the increase in the overall rate. The impact from Egypt is related to increases
in estimated future development costs. The impact from Australia is primarily
related to higher finding costs and development costs as discussed above. The
North Sea added $.03 to the increase in the overall rate, related to the
acquisition of the North Sea properties, while Canada lowered the overall rate
$.08 per boe.
Lease Operating Costs
LOE increased $74 million compared to last year's second quarter.
Eighty percent of the increase ($59 million) in absolute costs was related to
the acquisition of Gulf of Mexico and North Sea properties from BP and of South
29
Louisiana properties in the fourth quarter of 2003. Canada saw an increase of
$13 million primarily related to acquisitions completed in the second half of
2002, higher electricity rates, and the impact of a weaker U.S. dollar. The
Company also had a higher level of workover activity compared to the prior year.
LOE increased 44 percent, or $97 million in the first half of 2003
compared to the first half of 2002. As indicated above, 63 percent of the
increase in absolute costs was related to the BP and South Louisiana
acquisitions. The remaining balance was primarily related to the increase in
Canada and increased workover activity.
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
transportation deduction. In both the U.S. and Canada, Apache sells oil and
natural gas under both types of arrangements. In the North Sea, Apache pays
transportation to a third-party carrier and receives payments with no
transportation deduction. 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.
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. Costs incurred in the second quarter of 2003 totaled $7
million in Canada, $5 million in the U.S. and $3 million in the North Sea. Costs
incurred in the second quarter of 2002 totaled $ 5 million in Canada and $ 6
million in the U.S. The increase over the 2002 second quarter primarily related
to North Sea operations, where operations commenced in the second quarter of
2003.
Year-to-date costs totaled $14 million in Canada, $ 10 million in the
U.S. and $ 3 million in the North Sea. In the 2002 period, these costs totaled
$11 million and $9 million in Canada and the U.S., respectively. The increase
over the prior year was primarily attributable to increased volumes in North
America and the addition of the North Sea properties.
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 Resources Rent Tax (PRRT), to which Apache first became
subject in 2002, the Petroleum Revenue Tax (PRT) on the North Sea properties,
and the Canadian Large Corporation Tax, Saskatchewan Capital Tax, Saskatchewan
Resource Surtax and Freehold Mineral Tax. Egyptian operations are not subject to
these various taxes.
In the second quarter of 2003, severance and other taxes totaled $33
million, consisting of the U.S., $13 million, Australia, $8 million, the North
Sea, $6 million, and Canada, $5 million. The $33 million represents a $15
million increase from the comparable 2002 quarter. The U.S. saw a $5 million
increase in severance taxes while Australia's rose $2 million. These increases
were consistent with higher oil and gas production revenues. Canada's taxes
increased $2 million over the prior-year quarter while the North Sea's $6
million represented initial PRT expense.
In the first half of 2003, severance and other taxes of $57 million
consisted of the U.S., $28 million, Australia, $15 million, Canada, $8 million,
and the North Sea, $6 million. First-half severance and other taxes increased
$25 million, with $17 million attributable to higher U.S. and Australian
severance taxes, up $13 million and $4 million, respectively. The U.S. and
Australian severance taxes increased for the reasons previously discussed. The
balance of the increase came from Canada and the North Sea.
General and Administrative Expense
Even though the Company acquired over a billion dollars in assets from
BP, our second-quarter 2003 G&A costs were only $3 million higher than the
year-ago quarter. The additional $3 million resulted from transition costs
incurred on the Gulf of Mexico properties acquired from BP and incremental G&A
related to North Sea operations. On a boe basis, our G&A costs were $.12 per boe
lower than the year-ago quarter, driven by the 26 percent increase in
production, discussed earlier.
30
On a year-to-date basis, G&A costs were $5 million higher than the
comparable period in 2002. Forty-two percent of the increase was associated with
G&A costs related to the acquisitions from BP discussed above. Eighteen percent
was related to the increase in the size of our gas marketing department
necessary to support the decision to market our U.S. natural gas beginning in
July 2003. The balance was spread among several departments, consistent with our
growth.
Financing Costs, Net
Net financing costs for the second quarter of 2003 decreased $2 million
(five percent) compared to the prior-year quarter, driven by an increase in
capitalized interest resulting from a higher unproved property balance. Had
financing costs included preferred interests of subsidiaries, they would have
decreased $3 million compared to the second quarter of 2002.
For the first half of 2003, net financing costs decreased $2 million
(three percent) compared to the same period in 2002. Higher unproved property
balances drove a $3 million increase in capitalized interest which was slightly
offset by an increase in gross interest of $1 million. The increase in gross
interest resulted from a slightly higher average interest rate offset by lower
average outstanding debt. Had financing costs included preferred interests of
subsidiaries, they would have decreased $4 million when compared to the same
period in 2002.
Provision for Income Taxes
Second-quarter 2003 income tax expense increased $135 million or 142
percent over the comparable prior-year quarter. The increase is related to both
a higher net income before taxes in the 2003 quarter and additional deferred tax
expense recognized on certain foreign operations as a result of the weaker U.S.
dollar. Our effective tax rate in the second quarter of 2003 increased to 48.51
percent from 39.39 percent in the 2002 quarter. For the first half of 2003,
income tax expense increased $300 million or 219 percent compared to the first
half of 2002 for the reasons discussed above. Our effective tax rate was 43.99
percent for the first half of 2003 compared to 37.66 percent in 2002. The
additional deferred tax expense related to changes in foreign currency exchange
rates totaled $51 million for the second quarter of 2003 and $56 million for the
first half of 2003.
31
OIL AND GAS CAPITAL EXPENDITURES
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2003 2002
-------------- --------------
(In thousands)
Exploration and development:
United States.................................................... $ 198,294 $ 129,594
Canada........................................................... 300,209 123,639
Egypt............................................................ 123,843 64,722
Australia........................................................ 46,396 42,522
North Sea........................................................ 12,577 -
Other International.............................................. 15,216 11,335
------------- -------------
$ 696,535 $ 371,812
============= =============
Capitalized Interest................................................. $ 23,850 $ 20,464
============= =============
Gas gathering, transmission and processing facilities................ $ 6,528 $ 19,527
============= =============
Acquisitions:
Oil and gas properties........................................... $ 1,230,814 $ 4,253
Gas gathering, transmission and processing facilities............ 5,484 -
------------- -------------
$ 1,236,298 $ 4,253
============= =============
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 2003 totaled $1.2 billion, an increase of 96 percent from $624 million
in the first half of 2002. This increase generally reflects the impact of higher
prices on oil and gas production revenues and higher production levels relative
to the prior-year period.
LIQUIDITY
The Company had $41 million in cash and cash equivalents on hand at
June 30, 2003, down from $52 million at December 31, 2002. Apache's ratio of
current assets to current liabilities at June 30, 2003 was 1.28 compared to 1.44
at December 31, 2002.
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.
Apache believes that cash on hand, net cash generated from operations,
short-term investments, and unused committed borrowing capacity under its $1.5
billion global credit facility will be adequate to satisfy future financial
obligations and liquidity needs. The $750 million 364-day U.S. credit facility,
which was scheduled to mature on June 1, 2003, was extended on the same terms
for an additional one-year period and is currently scheduled to mature on May
28, 2004. As of June 30, 2003, Apache's available borrowing capacity under its
global credit facility was $1.4 billion.
32
Occasionally, the Company accesses capital markets to fund
acquisitions, repay debt, and enhance liquidity. On May 15, 2003, Apache Finance
Canada Corporation (Apache Finance Canada) issued $350 million of 4.375 percent,
12-year, senior unsecured notes in a private placement. The notes are
irrevocably and unconditionally guaranteed by Apache. Interest is payable
semi-annually on May 15 and November 15 of each year commencing on November 15,
2003. The notes were sold pursuant to Rule 144A and Regulation S, and may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act of 1933, as
amended. If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.
FUTURE TRENDS
Our objective is to build a company of lasting value by pursuing
profitable growth through a combination of drilling and acquisitions. Our
investment decisions are subjected to strict rate of return criteria and
generally fall in the categories identified below, depending on which phase of
the price and cost cycle we may be in. Those categories include:
- exploiting our existing property base;
- acquiring properties to which we can add value; and
- drilling high-potential exploration prospects.
Exploiting Existing Asset Base
We seek to maximize the value of our existing asset base by increasing
production and reserves while reducing operating costs per unit. In order to
achieve these objectives, we actively pursue production enhancement
opportunities such as workovers, recompletions and moderate risk drilling, while
divesting marginal and non-strategic properties and identifying other activities
to reduce costs. Given the significant acquisitions and discoveries over the
last few years, including the properties recently acquired from BP and Shell, we
have 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. 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.
33
Apache sells all of its Egyptian crude oil and natural gas production
to the Egyptian General Petroleum Corporation (EGPC) for U.S. dollars. Weak
economic conditions in Egypt continue to impact the timeliness of receipts from
EGPC; however, the situation has not deteriorated since year-end and Apache
continues to receive payments.
U.S. and Canadian energy markets continue to evolve into a single
energy market. In light of this ongoing transformation, we adopted the U.S.
dollar as our functional currency in Canada, effective October 1, 2002. The U.S.
dollar is now the functional currency for all of our foreign operations.
The information set forth under "Commodity Risk," "Interest Rate Risk"
and "Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2002, is incorporated herein by reference. Information
about market risks for the quarter ended June 30, 2003 does not differ
materially from the disclosure in our 2002 Form 10-K, except as noted below.
The Company considers its interest rate risk exposure to be minimal as
a result of fixing interest rates on approximately 93 percent of the Company's
debt. At June 30, 2003, total debt included $158 million of floating-rate debt.
As a result, Apache's annual interest costs in 2003 will fluctuate based on
short-term interest rates on approximately seven percent of its total debt
outstanding at June 30, 2003. Additionally, our preferred interests of
subsidiaries of $438 million is subject to fluctuations in short-term interest
rates. The impact on annual cash flow of a 10 percent change in the floating
interest rate, including our preferred interests of subsidiaries, would be
approximately $1.5 million.
On June 30, 2003, the Company had open natural gas derivative positions
with a fair value of $(65.5) million. A 10 percent increase in natural gas
prices would change the fair value by $(57.8) million. A 10 percent decrease in
prices would change the fair value by $56.9 million. The Company also had open
oil price swap positions with a fair value of $(22.7) million. A 10 percent
increase in oil prices would change the fair value by $(32.8) million. A 10
percent decrease in oil prices would change the fair value by $32.8 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 within the last 90 days preceding the date of
this report. Based on that review and as of the date of that evaluation, the
Company's disclosure controls were found to be adequate, providing effective
means to insure that we timely and accurately disclose the information we are
required to disclose under applicable laws and regulations. Also, we made no
significant changes in internal controls or any other factors that could affect
our internal controls since our most recent internal controls evaluation.
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.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 11 to the Consolidated Financial
Statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 2002 (filed with the Securities and
Exchange Commission on March 25, 2003) is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held in Houston, Texas
at 10:00 a.m. local time, on Thursday, May 1, 2003. Proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended. There was no solicitation in
opposition to the nominees for election as directors as listed in the
proxy statement, and all nominees were elected.
Out of a total of 153,867,875 shares of the Company's common stock
outstanding and entitled to vote, 138,682,470 shares were present at
the meeting in person or by proxy, representing 90.1 percent. Matters
voted upon at the meeting were as follows:
Election of five directors to serve on the Company's board of
directors. Mr. Bohen, Mr. Lawrence, Mr. Patton, Mr. Pitman,
and Mr. Precourt were elected to serve until the annual
meeting in 2006. The vote tabulation with respect to each
nominee was as follows:
AUTHORITY
NOMINEE FOR WITHHELD
------------------------- ----------------- ----------------
Frederick M. Bohen 136,238,719 2,443,751
George D. Lawrence 97,155,702 41,526,768
Rodman D. Patton 132,231,888 6,450,582
Charles J. Pitman 136,261,535 2,420,935
Jay A. Precourt 136,223,297 2,759,173
The shares listed above have not been restated for the two-for-one common stock
split declared September 11, 2003.
ITEM 5. OTHER INFORMATION
None
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Apache Corporation Non-Employee Directors'
Compensation Plan, as amended and restated May 1,
2003, effective July 1, 2003.
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.
-------------------
* Previously filed.
(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, 2003:
Item 2 - Acquisition or Disposition of Assets - dated March
18, 2003, filed April 17, 2003
On March 18, 2003 and April 2, 2003, Apache announced the
closings of acquisitions from subsidiaries of BP p.l.c. of
interests in 61 producing fields, including 113 blocks located
in the Gulf of Mexico and two producing fields in the North
Sea. Upon closing, Apache paid a purchase price, adjusted for
normal closing and working capital adjustments and
preferential purchase rights, of $509 million for the Gulf of
Mexico properties and $630 million for the North Sea assets.
Amendment No. 1 on Form 8-K/A to Form 8-K dated March 18, 2003
On June 16, 2003, under Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits, Apache filed the
required financial statement and pro forma financial
information in connection with Apache's acquisition of
interests in producing fields located in the Gulf of Mexico
and in the North Sea.
Item 5 - Other Events - dated May 15, 2003, filed May 16, 2003
Apache announced the closing of a private offering of $350
million principal amount of 4.375% Notes due 2015, to be
issued by Apache Finance Canada Corporation, an Apache
subsidiary. The notes will be irrevocably and unconditionally
guaranteed by Apache and will be sold under Rule 144A and
offshore under Regulation S.
Item 5 - Other Events - dated June 24, 2003, filed July 14,
2003
On June 24, 2003, Apache announced (i) that it will begin
directly marketing its U.S. natural gas production, beginning
with July 2003 production and (ii) the termination of
marketing arrangements with Cinergy Marketing and Trading, LLC
and dismissal of arbitration pending between Apache and
Cinergy. On July 3, 2003, Apache announced that it had
acquired producing properties located in the Gulf of Mexico
from Shell Exploration and Production Company for $200
million, subject to normal post-closing adjustments, including
the exercise of preferential purchase rights. The properties
were subject to a volumetric production payment, which was
sold by Shell to Morgan Stanley Capital Group, Inc. for $300
million.
36
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: January 23, 2004 / s / ROGER B. PLANK
----------------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer
Dated: January 23, 2004 / s / THOMAS L. MITCHELL
----------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
*10.1 - Apache Corporation Non-Employee Directors'
Compensation Plan, as amended and restated May 1,
2003, effective July 1, 2003.
*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.
------------
* Previously filed