SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4300
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APACHE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 41-0747868
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 296-6000
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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 Apache Corporation common stock, $1.25 par value,
outstanding as of September 30, 1996 89,880,264
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
(In thousands, except per share data) For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Oil and gas production revenues $ 211,115 $ 159,590 $ 574,470 $ 477,298
Gathering, processing and marketing revenues 31,123 18,526 96,399 69,751
Other revenues 146 3,131 1,641 7,968
-------- -------- -------- --------
242,384 181,247 672,510 555,017
-------- -------- -------- --------
OPERATING EXPENSES:
Depreciation, depletion and amortization 81,384 74,630 229,564 223,255
Operating costs 56,636 54,421 163,508 154,938
Gathering, processing and marketing costs 30,071 16,232 92,366 64,359
Administrative, selling and other 8,920 7,731 26,049 27,841
Merger costs -- -- -- 9,977
Financing costs:
Interest expense 22,768 23,724 64,758 67,333
Amortization of deferred loan costs 1,186 1,118 3,515 3,491
Capitalized interest (9,165) (4,818) (21,704) (13,253)
Interest income (157) (769) (1,575) (2,695)
-------- -------- -------- --------
191,643 172,269 556,481 535,246
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 50,741 8,978 116,029 19,771
Provision for income taxes 20,604 1,936 45,800 8,109
-------- -------- -------- --------
NET INCOME $ 30,137 $ 7,042 $ 70,229 $ 11,662
======== ======== ======== ========
NET INCOME PER COMMON SHARE $ .34 $ .10 $ .83 $ .17
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 89,860 70,728 84,360 70,074
======== ======== ======== ========
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)
(In thousands) For the Nine Months
Ended September 30,
-------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70,229 $ 11,662
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 229,564 223,255
Amortization of deferred loan costs 3,515 3,491
Provision for deferred income taxes 37,406 21,709
Gain on sale of stock held for investment (770) (350)
Other -- 449
Changes in operating assets and liabilities:
Increase in receivables (3,810) (51,496)
Increase in advances to oil and gas ventures and other(10,643) (1,341)
Increase in other assets (461) (29,069)
Increase in accounts payable 14,767 18,298
Increase (decrease) in accrued expenses (38) 11,346
Decrease in advance from gas purchaser (6,310) (5,122)
Increase (decrease) in deferred credits and
other noncurrent liabilities 10,369 (2,566)
-------- --------
Net cash provided by operating activities 343,818 200,266
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (331,265) (225,562)
Acquisition of oil and gas properties (83,717) (744,950)
Non-cash portion of oil and gas property additions (3,453) (2,767)
Investment in Producers Energy Marketing, LLC, net (4,445) --
Acquisition of The Phoenix Resource Companies, Inc.,
net of cash acquired (43,294) --
Proceeds from sale of oil and gas properties 3,739 221,969
Purchase of stock held for investment -- (305)
Prepaid acquisition costs -- 25,377
Proceeds from sale of stock held for investment 7,193 5,428
Increase in inventory, net (5,923) (3,287)
Other capital expenditures, net (24,559) (16,543)
-------- --------
Net cash used by investing activities (485,724) (740,640)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 522,208 778,801
Payments on long-term debt (366,990) (423,869)
Proceeds from issuance of common stock 7,262 197,031
Treasury stock activity 57 (3)
Dividends paid (17,128) (13,499)
Costs of debt and equity transactions (3,901) (11,581)
-------- --------
Net cash provided by financing activities 141,508 526,880
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (398) (13,494)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,633 30,043
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,235 $ 16,549
======== ========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands) September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,235 $ 13,633
Receivables 182,810 175,949
Inventories 15,687 9,764
Advances to oil and gas ventures and other 22,766 8,990
---------- ----------
234,498 208,336
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 4,522,756 3,956,833
Unproved properties and properties
under development, not being amortized 414,258 335,842
International concession rights 99,000 --
Gas gathering, transmission and processing facilities 106,494 33,088
Other 56,019 51,341
---------- ----------
5,198,527 4,377,104
---------- ----------
Less: Accumulated depreciation, depletion
and amortization (2,198,674) (1,975,543)
---------- ----------
2,999,853 2,401,561
---------- ----------
OTHER ASSETS:
Deferred charges and other 62,908 71,553
---------- ----------
$ 3,297,259 $ 2,681,450
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands) September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 17,000 $ 3,000
Accounts payable 153,434 138,269
Accrued operating expense 23,549 26,863
Accrued exploration and development 26,801 30,251
Accrued interest 16,936 9,687
Accrued compensation and benefits 9,003 9,733
Other accrued expenses 10,158 12,546
---------- ----------
256,881 230,349
---------- ----------
LONG-TERM DEBT 1,225,794 1,072,076
---------- ----------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES:
Income taxes 230,943 181,575
Advances on gas contracts 54,028 60,338
Other 54,780 45,307
---------- ----------
339,751 287,220
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par, 215,000,000
shares authorized, 90,998,423 and
78,498,892 shares issued, respectively 113,748 98,124
Paid-in capital 1,002,254 687,465
Retained earnings 387,696 335,470
Currency translation adjustment (15,416) (15,776)
Treasury stock, at cost, 1,118,159 and
1,119,934 shares, respectively (13,449) (13,478)
---------- ----------
1,474,833 1,091,805
---------- ----------
$ 3,297,259 $ 2,681,450
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED RETAINED EARNINGS
(Unaudited)
(In thousands) For the Quarter
Ended September 30,
---------------------------
1996 1995
---------- -----------
RETAINED EARNINGS, beginning of period $ 363,851 $ 330,715
Net income 30,137 7,042
Dividends declared:
Common stock, $.07 per share (6,292) (5,415)
---------- ----------
RETAINED EARNINGS, end of period $ 387,696 $ 332,342
========== ==========
For the Nine Months
Ended September 30,
----------------------------
1996 1995
---------- ----------
RETAINED EARNINGS, beginning of year $ 335,470 $ 335,293
Net income 70,229 11,662
Dividends declared:
Common stock, $.21 per share (18,003) (14,613)
---------- ----------
RETAINED EARNINGS, end of period $ 387,696 $ 332,342
========== ==========
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)
The financial statements included herein 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 generally accepted accounting principles 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 latest annual report on Form
10-K.
1. INCOME TAXES
Under the liability method specified by Statement of Financial
Accounting Standards (SFAS) No. 109, deferred taxes are determined based on
the estimated future tax effect of differences between the financial
statement and tax bases of assets and liabilities given the provisions of
enacted laws.
2. INCOME PER SHARE
Primary income per common share was calculated by dividing net income
by the weighted average common shares outstanding. The effect of common
stock equivalents, including shares issuable upon the exercise of stock
options (calculated using the treasury stock method) and upon the assumed
conversion of the Company's 3.93-percent convertible notes, was not
significant for all periods presented. The assumed conversion of the six-
percent convertible debentures was not significant for the quarter ended
September 30, 1996, and was anti-dilutive for all other periods presented.
3. STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
the adoption of SFAS No. 123, "Accounting for Stock-Based Compensation" in
1996 had no effect on the Company's results of operations.
4. ACQUISITIONS
On May 20, 1996, Apache acquired The Phoenix Resource Companies, Inc.
(Phoenix), an oil and gas company operating primarily in the Arab Republic
of Egypt, through a merger (Merger) which resulted in Phoenix becoming a
wholly-owned subsidiary of Apache. The Merger was accounted for using the
purchase method of accounting, the results of which are included in the
financial statements of the Company since the date of acquisition.
Pursuant to the Merger agreement, each share of Phoenix common stock then
outstanding, and when exercised, outstanding Phoenix stock options (which
were assumed by Apache) were converted into the right to receive (a) .75
shares of Apache common stock with any fractional shares paid in cash,
without interest, and (b) $4.00 in cash. As a result, 12.2 million shares
of Apache common stock were issued in exchange for outstanding Phoenix
stock.
6
On March 1, 1995, Apache completed the acquisition of 315 oil and gas
fields from Texaco Exploration and Production Inc. (Texaco) for an adjusted
purchase price of $567 million. The acquisition of the Texaco properties
was accounted for using the purchase method of accounting and is included
in the financial statements of the Company since the date of the
acquisition.
The following unaudited pro forma financial information shows the
effect on the Company's consolidated results of operations as if the
Phoenix acquisition was effective on January 1 of each year presented and
as if the Texaco acquisition was effective on January 1, 1995. The pro
forma data presented is based on numerous assumptions and should not
necessarily be viewed as being indicative of future operations.
(In thousands, except per share data) For the Nine Months For the Nine Months
Ended September 30, 1996 Ended September 30, 1995
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Revenues and other income $ 672,510 $ 687,436 $ 555,017 $ 599,011
Net income $ 70,229 $ 73,842 $ 11,662 $ 14,685
Net income per common share $ .83 $ .82 $ .17 $ .18
Weighted average common shares outstanding 84,360 89,777 70,074 82,264
5. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing and financing activity is presented
below.
In May 1996, Apache acquired Phoenix for cash, Apache common stock and
options to acquire Apache common stock. The accompanying financial
statements include the following attributable to the acquisition:
(In thousands)
Value of properties acquired, including gathering facilities $ 386,237
Other non-cash assets acquired 7,901
Common stock and options to purchase common stock issued
(12.2 million and .8 million shares, respectively) (322,860)
Liabilities assumed (27,984)
----------
Cash paid, net of cash acquired $ 43,294
==========
Supplemental Disclosure of Cash Flow Information
The Company considers all highly liquid debt instruments purchased
with an initial maturity of three months or less to be cash equivalents.
These investments are carried at cost which approximates market.
The following table provides additional disclosure of cash payments:
(In thousands) For the Nine Months
Ended September 30,
-----------------------------
1996 1995
----------- -----------
Cash paid during the period for:
Interest (net of amounts capitalized) $ 31,367 $ 48,620
Income taxes (net of refunds) 5,465 (13,169)
7
6. DEBT
During February 1996, Apache completed its offering of $100 million
principal amount, $99.6 million net of discount, of senior unsecured 7.7-
percent notes due March 15, 2026. During April 1996, Apache issued an
additional $180 million principal amount, $178.5 million net of discount,
of senior unsecured 7.95-percent notes maturing on April 15, 2026. Neither
issue is redeemable prior to maturity and the same indenture governs both
notes and imposes certain obligations on the Company, including limits on
Apache's ability to incur debt secured by certain liens and its ability to
enter into certain sale and leaseback transactions.
On October 25, 1996, Apache redeemed, at par, the $22.1 million of DEK
Energy Company 10-percent notes due April 15, 1998. The notes were
redeemed using borrowings under the Company's revolving bank credit
facility.
On October 31, 1996, Apache replaced its existing $1 billion revolving
bank credit facility with a global credit arrangement that provides Apache
with greater borrowing availability, increased tax efficiency and a lower
cost of bank debt. Consisting of three separate bank facilities tied
together by an inter-creditor agreement, the new arrangement adds Apache's
oil and gas reserve values in Australia and Canada to those in the U.S. in
determining the Company's borrowing capacity. The facilities consist of
$125 million of credit commitments each in Australia and Canada, and a $750
million credit commitment in the U.S. Under the terms of the credit
agreement, the Company must (i) maintain a minimum tangible net worth of
$825 million, which is adjusted quarterly for subsequent earnings and
securities transaction, and (ii) maintain a ratio of (a) earnings before
interest, taxes, depreciation, depletion and amortization to (b)
consolidated interest expense of not less than 3.7:1. In connection with
securing the global credit facility, the Company terminated the Australian
acceptance and Canadian credit agreements using funds available under the
new facility.
The facility is scheduled to mature on October 31, 2001, and the
agreement provides for perpetual one-year extensions as requested year-by-
year by the Company, subject to the approval of the lenders. Interest on
amounts borrowed is charged at the London Interbank Offered Rates (LIBOR)
plus a margin determined by the Company's public senior debt rating and its
ratio of debt to total capital. At September 30, 1996, the margin was .35
percent. The margin decreased to .25 percent on October 31, 1996 with the
closing of the new facility. The Company also pays a facility fee of .10
percent on the total amount of each facility.
In November 1996, Apache offered $150 million principal amount, $149.2
million net of discount, of senior unsecured 7.625-percent debentures
maturing on November 1, 2096. The debentures are not redeemable prior to
maturity. However, Apache has the right to advance maturity, subject to
certain conditions. These debentures are governed by the same indenture
that governs the Company's senior unsecured notes and imposes obligations
on the Company, including limits on Apache's ability to incur debt secured
by certain liens and its ability to enter into certain sale and leaseback
transactions.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Apache's results of operations and financial position for the first
nine months of 1996 were significantly impacted by the following factors:
Commodity Prices - Current year earnings and cash flow continued to be
impacted by higher oil and natural gas price realizations. Apache's net
realized price for natural gas increased $.41 per thousand cubic feet (Mcf)
from $1.49 per Mcf in the first nine months of 1995 to $1.90 per Mcf in the
same period of 1996, favorably impacting revenues by $61.2 million. The
Company's realized oil price increased $2.82 per barrel from $17.04 per
barrel to $19.86 per barrel, contributing $39.6 million to the increase in
revenues.
Phoenix Acquisition - On May 20, 1996, Apache acquired The Phoenix
Resource Companies, Inc. (Phoenix), through a merger which resulted in
Phoenix becoming a wholly-owned subsidiary of Apache. The assets acquired
in the Phoenix acquisition contributed 8,657 barrels and 4,690 barrels of
oil per day (Bopd) of production during the three and nine months periods
ended September 30, 1996.
Long-Term Borrowings - During 1996, Apache has offered three issuances
of senior unsecured notes and debentures with principal amounts of $100
million in February, $180 million in April and $150 million in November.
In October 1996, Apache replaced its existing $1 billion revolving bank
credit facility with a global credit arrangement that provides Apache with
greater borrowing availability, increased tax efficiency and a lower cost
of bank debt. Additionally, in September and October of 1996, Apache
received rating upgrades on its long-term debt from Moody's Investors
Service and Duff and Phelps.
RESULTS OF OPERATIONS
Apache reported 1996 third quarter net income of $30.1 million versus
$7.0 million in the prior year. Earnings per share increased more than
threefold, to $.34 per share from $.10 per share. The increase over the
prior period was attributable to solid increases in both crude oil and
natural gas prices, increased crude oil production and lower financing
costs.
For the first nine months of 1996, net income of $70.2 million, or
$.83 per share, increased from $11.7 million, or $.17 per share, in the
comparable 1995 period. Higher product prices compared to a year ago
favorably impacted earnings but were partially offset by lower production
on a barrel of oil equivalent (Boe) basis and higher lease operating
expenses. Additionally, impacting results in the first nine months of 1995
was a one-time after-tax charge of $8.7 million, or $.12 per share,
associated with merger costs.
Revenues increased 34 percent, from $181.2 million in the third
quarter of 1995, to $242.4 million for the same period in 1996. Natural gas
and crude oil sales contributed 48 percent and 51 percent, respectively, to
the Company's total oil and gas production revenue during the third quarter,
with the remainder attributable to natural gas liquid sales.
For the first nine months of 1996, revenues increased 21 percent to
$672.5 million as compared to $555.0 million for the same period in 1995.
Crude oil and natural gas production revenue increased 20 percent over the
same period in 1995 with crude oil contributing 49 percent and natural gas
contributing 50 percent of total oil and gas sales revenue.
9
Volume and price information for the Company's 1996 and 1995 third
quarter and first nine months oil and gas production is summarized in the
following tables:
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
-------- --------- --------- -------- -------- ---------
Gas Volume - Mcf per day:
U.S. 468,583 488,191 (4%) 469,126 497,797 (6%)
Canada 78,161 64,778 21% 73,147 66,555 10%
Australia 13,520 15,237 (11%) 10,944 8,668 26%
Egypt 434 -- -- 243 -- --
-------- -------- -------- --------
Total 560,698 568,206 (1%) 553,460 573,020 (3%)
======== ======== ======== ========
Average Gas Price - Per Mcf:
U.S. $ 2.11 $ 1.55 36% $ 2.04 $ 1.55 32%
Canada .98 .97 1% .99 .99 --
Australia 2.01 1.85 9% 2.00 1.89 6%
Egypt 2.79 -- -- 2.87 -- --
Total 1.95 1.49 31% 1.90 1.49 28%
Oil Volume - Barrels per day:
U.S. 40,399 46,707 (14%) 40,674 45,796 (11%)
Canada 1,993 2,050 (3%) 1,949 2,026 (4%)
Australia 2,093 3,065 (32%) 2,269 3,166 (28%)
Egypt 10,761 -- -- 6,375 -- --
-------- -------- -------- --------
Total 55,246 51,822 7% 51,267 50,988 1%
======== ======== ======== ========
Average Oil Price - Per barrel:
U.S. $ 21.33 $ 16.68 28% $ 19.77 $ 16.94 17%
Canada 21.11 16.58 27% 20.05 17.03 18%
Australia 21.65 17.38 25% 21.10 18.46 14%
Egypt 20.88 -- -- 19.92 -- --
Total 21.25 16.72 27% 19.86 17.04 17%
NGL Volume - Barrels per day:
U.S. 1,172 1,441 (19%) 1,382 1,460 (5%)
Canada 592 567 4% 617 555 11%
-------- -------- -------- --------
Total 1,764 2,008 (12%) 1,999 2,015 (1%)
======== ======== ======== ========
NGL Price - Per barrel:
U.S. $ 16.81 $ 11.82 42% $ 15.51 $ 12.62 23%
Canada 13.14 9.08 45% 12.15 9.55 27%
Total 15.58 11.05 41% 14.47 11.77 23%
Third Quarter 1996 Compared to Third Quarter 1995
Natural gas sales for the third quarter of 1996 totaled $100.6
million, 29-percent higher than those recorded in the third quarter of 1995.
Average realized natural gas prices increased 31 percent, and favorably
impacted revenue by $23.7 million. The majority of this increase, and the
resulting impact on natural gas sales, arose in the U.S. where the Company
sold 84 percent of its worldwide gas production at an average price of
$2.11 per Mcf, $.56 per Mcf higher than last year. However, the Company
continues to be negatively impacted by low spot prices being received in
Canada where the Company sold 14 percent of its worldwide gas production at
an average price of only $.98 per Mcf, essentially unchanged from 1995.
The Company periodically engages in hedging activities and also enters into
fixed price physical contracts to reduce its exposure to price risk. The
result of these activities offset each other and had no impact on the
Company's realized price during the third quarter of 1996.
10
Third quarter 1996 gas production, when compared to 1995, decreased
slightly on a worldwide basis. In the U.S., the decreases were caused by
the loss of volumes associated with properties sold in the fourth quarter
of 1995 and natural decline in the Company's older offshore properties.
Australian declines, in the third quarter, resulted from the Company's
major Australian gas purchaser taking less volume under its take-or-pay
contract than during the corresponding quarter in 1995, when the purchaser
was making-up prior deficiencies under the contract. These decreases were
essentially offset by the increases associated with worldwide drilling
results during 1996.
The Company's crude oil sales for the third quarter of 1996 totaled
$108.0 million, a 35-percent increase from the third quarter of 1995. The
Company's realized price for third quarter sales of crude oil increased 27
percent, resulting in an increase in revenue of $23.0 million compared to
the same period in 1995.
Crude oil sales for the third quarter of 1996 were also impacted by a
seven-percent increase in production compared to the same period in 1995.
Egyptian oil production, primarily from the assets acquired from Phoenix,
added 10.8 thousand barrels of oil per day (Mb/d) in the third quarter,
contributing $16.6 million to oil and gas production revenue. Partially
offsetting the favorable impact of Egyptian sales was a decline in U.S. and
Australian production. U.S. oil production, which comprises 73 percent of
total third quarter 1996 oil production, declined 14 percent when compared
to the third quarter of 1995, due primarily to the sale of producing
properties in late 1995.
Revenue from the sale of natural gas liquids totaled $2.5 million for
the third quarter of 1996, as compared to $2.0 million for the same period
in 1995. Strong average realized prices in the U.S. and Canada contributed
$.5 million and $.2 million, respectively, partially offset by a $.2
million reduction of revenues due to the lower production that resulted
from the property sales in the fourth quarter of 1995.
Year-to-Date 1996 compared to Year-to-Date 1995
Natural gas sales for the first nine months of 1996 of $287.6 million
increased $53.9 million, or 23 percent, when compared to the same period in
1995, as the impact of favorable natural gas prices more than offset
production declines. A $.49 per Mcf increase in realized price
attributable to U.S. natural gas production, which comprised 85 percent of
worldwide gas production, contributed $61.9 million to the increase in
sales. Offsetting this increase was an $11.4 million reduction in sales due
to a decline in U.S. production compared to the same period in 1995. This
decline was due primarily to the sale of producing properties in late 1995.
Canadian and Australian gas sales contributed $1.8 million and $1.5
million, respectively, to the increase in revenue as a result of higher
realized prices in Australia and increased production in both countries.
The Company's net hedging activity reduced realized prices by $.09 per Mcf
during the nine months ended September 30, 1996, compared to a $.16 per Mcf
gain during the comparable period in 1995. The 1995 gain was driven
substantially by higher margins on the Company's premium priced gas
contracts, given the low spot market prices throughout 1995.
For the nine months ended September 30, 1996, oil sales increased 18
percent to $279.0 million due primarily to the assets acquired from
Phoenix. Egyptian oil sales contributed $34.8 million, or 83 percent, of
the increase in oil sales compared to 1995, and comprised 12 percent of
total oil production. U.S. oil sales were favorably impacted by a 17-
percent increase in realized prices which contributed $31.6 million to the
increase in revenue compared to the same period in 1995. Partially
offsetting the impact due to higher realized domestic prices was an 11-
percent decline in domestic oil production resulting from the property
sales recorded in late 1995, which reduced revenues by $23 million.
Canadian and Australian oil sales, which each comprised four percent of
total oil production in 1996, were impacted by higher realized prices,
offset by declines in production, resulting in a net impact on revenue of
$1.3 million and $(2.8) million, respectively, when compared to the same
period in 1995.
For the first nine months of 1996, natural gas liquid revenues
increased 22 percent to $7.9 million. Compared to the prior year, realized
prices increased 23 percent, contributing $1.5 million to the increase in
revenues, while production remained relatively flat.
11
OTHER REVENUES AND OPERATING EXPENSES
During the third quarter and first nine months of 1996, Apache's gas
gathering, processing and marketing revenues increased 68 percent and 38
percent, respectively, to $31.1 million and $96.4 million, driven primarily
by increased product prices. Although revenues have increased with respect
to these activities, lower crude oil marketing margins were realized for
the quarter and nine months ended September 30, 1996 compared to the same
periods in 1995.
Other revenue during the third quarter of 1996 declined $3.0 million
when compared to the same period of 1995. Current period other revenue
consists of Canadian royalty credits offset by the loss on the sale of
stock held for investment. Last year's results primarily included proceeds
received from contract settlements. For the first nine months of 1996,
other revenue included a gain on the sale of stock held for investment of
$.8 million and Canadian royalty credits of $.8 million. Prior year other
revenue was $6.3 million higher due primarily to the proceeds received from
contract settlements.
The Company's DD&A expense for the third quarter and first nine months
of 1996 totaled $81.4 million and $229.6 million, respectively, compared to
$74.6 million and $223.3 million for the comparable periods in 1995. On an
equivalent barrel basis, full cost DD&A increased $.23 per Boe, from $5.28
per Boe to $5.51 per Boe, in the third quarter of 1996 compared to the
third quarter of 1995. For the nine months ended September 30, 1996, the
full cost DD&A rate totaled $5.43 per Boe, compared to $5.34 per Boe in
1995.
Operating costs, including lease operating expense and severance
taxes, increased slightly from $54.4 million in the third quarter of 1995, to
$56.6 million for the same period in 1996. For the first nine months of
1996, operating costs totaled $163.5 million, an increase of $8.6 million,
or six percent, over the same period in 1995. For the third quarter and
first nine months of 1996, lease operating expense, excluding severance
taxes, totaled $47.5 million and $136.9 million, respectively, a slight
increase from the same periods in 1995. On an equivalent barrel basis,
lease operating expense for the third quarter declined from $3.46 per Boe
in 1995 to $3.43 per Boe in 1996, primarily as a result of cost reduction
efforts implemented in early 1996 and continued throughout the year. For
the first nine months of 1996, lease operating expense averaged $3.43 per
Boe, a five-percent increase from $3.27 for the same period in 1995. This
increase was due to the Company's property mix shifting more to longer-
lived onshore oil producing properties, resulting from the properties
obtained in the Texaco acquisition, which typically have a higher per-unit
cost than higher producing, shorter-lived offshore gas producing
properties. This shift did not occur until March 1995, and therefore, the
first nine months of 1995 do not fully reflect these activities. The
Company's Egyptian activities are also impacting 1996 results as the
operations are slightly additive to the Company's cost structure on an
equivalent barrel basis.
Administrative, selling and other costs in the third quarter of 1996
increased $1.2 million, or 15 percent, from a year ago, while costs for the
first nine months of 1996 decreased $1.8 million, or six percent. The
increase, when comparing third quarter 1996 to third quarter 1995, is the
result of one-time adjustments, related to the Company's adjustment of
costs to assimilate properties acquired in early 1995, in the third quarter
of 1995. The year-to-date decline is a result of the Company's continuing
efforts to control costs and its ability to integrate the assets and
operations acquired in 1995 with minimal increase in administrative staff.
On an equivalent barrel basis, general and administrative expense declined
five percent, to $.65 per Boe, for the first nine months of 1996, as
compared to the respective period in 1995.
12
Net financing costs for the third quarter decreased $4.6 million, or
24 percent, from the prior year due to lower gross interest costs incurred and
higher amounts of interest capitalized. Gross interest costs incurred
decreased $1.0 million due to a .39-percent decrease in Apache's weighted
average interest rate, partially offset by a $17.2 million increase in
average debt outstanding during the third quarter of 1996 as compared to
the third quarter of 1995. Capitalized interest, which is based on the
carrying value of unproved properties, increased $4.3 million for the third
quarter due to the acquisitions made in 1995 and 1996 and the resulting
increase in the unproved property base.
Net financing costs decreased 18 percent from $54.9 million in the
first nine months of 1995 to $45.0 million in the first nine months of 1996
due to a lower weighted average interest rate and an increase in
capitalized interest, partially offset by higher average debt outstanding
as compared to last year.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments
Apache's primary needs for cash are for exploration, development and
acquisition of oil and gas properties, repayment of principal and
interest on outstanding debt, and payment of dividends. The Company
generally funds its exploration and development activities through
internally generated cash flow. Apache budgets capital expenditures
based upon projected cash flow and routinely adjusts its capital
expenditures in response to changes in oil and natural gas prices and
corresponding changes in cash flow. The Company is not in a position to
predict future product prices.
Capital Expenditures - A summary of oil and gas capital expenditures
during the first nine months of 1996 and 1995 is presented below:
(In millions) 1996 1995
------- -------
Exploration and Development:
North America $ 245.1 $ 178.9
International 86.2 46.7
------- ------
Total $ 331.3 $ 225.6
======= ======
Acquisitions of Oil and Gas Properties $ 415.0 $ 744.9
======= ======
In North America, Apache completed 179 producing wells out of 240
wells drilled during the first nine months of 1996; while internationally, the
Company discovered 13 new producers of 21 wells drilled. Worldwide, Apache
was drilling or completing an additional 77 wells as of September 30, 1996.
In addition, the Company completed 307 production enhancement projects,
including 145 recompletions, during the first nine months of 1996. The
Company was able to fund its worldwide exploration and development
expenditures with cash provided by operating activities during the first
nine months of 1996.
Oil and gas property acquisitions, excluding gathering facilities,
totaled $415.0 million in the first nine months of 1996, consisting
primarily of $331.2 million related to the acquisition of proved and
unproved oil and gas properties from Phoenix. The remaining $83.8 million
in property acquisitions for 1996 reflects the Company's focus on expanding
its ownership to areas where it has significant existing operations and in
properties and fields in which it already holds an interest. Included in
1995 are the Company's purchases of 315 oil and gas fields from Texaco
Exploration and Production, Inc. in March 1995, and the acquisition of
substantially all the oil and gas assets of Aquila Energy Resources
Corporation in September 1995. Apache divested $222.0 million of non-core
oil and gas properties in the first nine months of 1995; and during the
first nine months of 1996, the Company divested a small number of non-core
properties for $3.7 million.
13
Capital Resources and Liquidity
Net Cash Provided by Operating Activities - Apache's net cash provided
by operating activities during the first nine months of 1996 totaled $343.8
million, an increase of 72 percent from the $200.3 million provided in
1995. This increase was due primarily to higher product prices and lower
working capital requirements as compared to last year.
Long-Term Borrowings - During February 1996, Apache completed the
issuance of $100 million principal amount, $99.6 million after discount,
of senior unsecured 7.7-percent notes due March 15, 2026. In April 1996,
the Company issued $180 million principal amount, $178.5 million net of
discount, of senior unsecured 7.95-percent notes due on April 15, 2026.
In November 1996, Apache completed the issuance of $150 million, $149.2
million after discount, of senior unsecured 7.625-percent debentures due
November 1, 2096. The proceeds from these issuances were used to repay a
portion of the Companys revolving credit facility and for general
corporate purposes.
The two 30-year note and the Century Bond offerings were placed during
periods when 30-year interest rates on Treasury bills were near historic
20-year lows. Further, the Century Bonds were issued following recent
upgrades of the Company's long-term debt ratings which resulted in a
significant narrowing in the spread over the treasury bond yields. In
addition to the benefits of securing longer-term financing at favorable
interest rates and reducing Apache's exposure to future adverse interest
rate fluctuations, the issuance of the 30-year notes improved the
Company's liquidity as the borrowing base under the Company's global
credit facility was reduced by an amount less than the net proceeds
received from issuing the notes.
On October 31, 1996, Apache replaced its existing $1 billion revolving
bank credit facility with a global credit arrangement that provides Apache
with greater borrowing availability, increased tax efficiency and a lower
cost of bank debt. Consisting of three separate bank facilities tied
together by an inter-creditor agreement, the new arrangement adds Apache's
oil and gas reserve values in Australia and Canada to those in the U.S. in
determining the Company's borrowing capacity. The facilities consist of
$125 million of credit commitments each in Australia and Canada, and a $750
million credit commitment in the U.S. In connection with securing the
global credit facility, the Company repaid certain of its subsidiary debt,
including the DEK Energy Company 10-percent notes and the Bank of Montreal
and AEL acceptance facilities, all of which had higher interest rates than
under the new facility. As of October 31, 1996, Apache's global borrowing
base under the new facility was $947 million, of which defined borrowing
base debt was $745 million, leaving $202 million available for additional
borrowing.
During September 1996, Moody's Investor's Service upgraded the
Company's senior long-term debt rating from Baa3 to Baa1. Historically,
such a two-notch rating improvement for an existing investment grade
company is uncommon. In addition, Apache's subordinated debt rating was
raised three levels, to Baa2 from Ba2. According to Moody's, the upgrade
was the result of several Apache developments, including the Company's
lower debt-to-equity ratio, higher earnings and cash flow, lower interest
expense, successful expansion in Egypt and Western Australia, and a shift
in the Company's strategy toward growing reserves and production
primarily through drilling. Also in September 1996, Standard & Poor's
revised its outlook to "positive" from "stable" on Apache's long-term
unsecured debt, currently rated BBB.
In October 1996, Duff & Phelps Credit Rating Co. upgraded the
Company's (i) senior debt and medium-term notes to A- from BBB+, (ii)
convertible subordinated eurobonds to BBB+ from BBB, and (iii) commercial
paper to D-1-(Single-D-Minus) from D-2.
Liquidity - The Company had $13.2 million in cash and cash equivalents
on hand at September 30, 1996, down slightly from the $13.6 million at
December 31, 1995. Apaches ratio of current assets to current
liabilities increased slightly from .90:1 at December 31, 1995, to .91:1
at September 30, 1996.
14
Management believes that cash on hand, net cash generated from
operations and unused committed borrowing capacity under its global
credit facility will be adequate to satisfy the Companys financial
obligations to meet future liquidity needs for at least the next two
fiscal years.
FUTURE TRENDS
Apaches growth strategy has been to increase oil and gas reserves,
production and cash flow through a combination of acquisitions, moderate-
risk drilling and development of existing properties. In recent years,
however, Apache has focused primarily on a number of large property
acquisitions. Having obtained a sizable, balanced and diversified base
of core assets in six North American and two international areas, the
Company expects to continue to focus, during the remainder of 1996 and
into 1997, on reserve enhancement and cash flow acceleration in these
areas. The Company projects international exploration and development
expenditures to double from those incurred in 1995, as Apache continues
to exploit its exploration and production interests in Western Australia
and in Egypt, and its exploration interests in, among other areas,
Indonesia and offshore of the Ivory Coast. Exploration and development
expenditures are being reviewed quarterly in light of fluctuating product
prices and Apache's objective to fund operations through internally
generated cash flow.
Natural Gas Marketing
In October 1995, subsidiaries of Apache, Oryx Energy Company and
Parker & Parsley Petroleum Company announced the formation of Producers
Energy Marketing, LLC (ProEnergy), a natural gas marketing company
organized to create a direct link between natural gas producers and
purchasers. In January 1996, Apache contributed $5.8 million for its
share of capital-funding obligations for the start-up of ProEnergy. In
April 1996, ProEnergy began purchasing and selling producer-owned gas
directly into the marketplace at index prices substantially equivalent to
spot market prices.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 ("PSLRA")
The foregoing discussion and analysis contains certain
"forward-looking statements" as defined by the PSLRA including, without
limitation, discussions as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning matters
discussed reflecting management's current expectations of the manner in
which the various factors discussed therein may affect the Company's
business in the future. Any matters that are not historical facts are
forward-looking and, accordingly, involve estimates, assumptions and
uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. There
is no assurance that the Company's expectations will be realized or that
unexpected events will not have an adverse impact on the Company's
business.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 8 to the Consolidated
Financial Statements contained in the Company's Form 10-K for the
year ended December 31, 1995 (filed with the Securities and
Exchange Commission on March 27, 1996) is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Earnings per Share.
27.1 Financial Data Table.
(b) Reports filed on Form 8-K.
The following current report was filed during the fiscal
quarter ended September 30, 1996:
Form 8-K dated September 24, 1996 -
Item 5. Cautionary Statement with Respect to Forward-
Looking Information - as required by the Safe Harbor Statement
under the Private Securities Litigation Reform Act of 1995,
Apache identified the factors that could cause their future
results and stockholder values to differ materially from those
expressed in any forward-looking statements made by or on
behalf of Apache. Factors discussed include reserves, prices,
hedging, acquisition risks, operating risks, insurance,
competition, government regulations, title to interests,
general economic conditions and risks of non-U.S. operations.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: November 14 ,1996 /s/ Mark A. Jackson
--------------------------------
Mark A. Jackson
Vice President and Chief Financial Officer
Dated: November 14 ,1996 /s/ Thomas L. Mitchell
-------------------------------
Thomas L. Mitchell
Controller and Chief Accounting Officer