SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 ofJune 30, 1997 90,318,888
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 Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES:
Oil and gas production revenues $ 218,733 $ 191,434 $ 481,128 $ 363,355
Gathering, processing and marketing revenues 39,325 31,327 99,419 65,276
Equity in loss of affiliates (204) -- (11) --
Other revenues 987 895 133 1,495
-------- -------- -------- --------
258,841 223,656 580,669 430,126
-------- -------- -------- --------
OPERATING EXPENSES:
Depreciation, depletion and amortization 93,481 76,319 182,799 148,180
Operating costs 57,739 54,360 117,711 106,872
Gathering, processing and marketing costs 38,910 29,885 98,264 62,295
Administrative, selling and other 8,941 8,271 18,083 17,129
Financing costs:
Interest expense 24,822 21,742 48,463 41,990
Amortization of deferred loan costs 1,251 1,174 2,578 2,329
Capitalized interest (9,158) (7,238) (17,798) (12,539)
Interest income (774) (739) (1,142) (1,418)
-------- -------- -------- --------
215,212 183,774 448,958 364,838
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 43,629 39,882 131,711 65,288
Provision for income taxes 17,883 15,445 53,088 25,196
-------- -------- -------- --------
NET INCOME $ 25,746 $ 24,437 $ 78,623 $ 40,092
======== ======== ======== ========
Primary net income per common share $ .29 $ .29 $ .85 $ .49
Fully diluted net income per common share .29 .29 .84 .49
Pro forma net income per share data (See Note 1)
Basic net income per common share $ .29 $ .29 $ .87 $ .49
Diluted net income per common share .28 .28 .84 .49
Weighted average common shares outstanding 90,288 85,738 90,216 81,580
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 Six Months
Ended June 30,
-------------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78,623 $ 40,092
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 182,799 148,180
Amortization of deferred loan costs 2,578 2,329
Provision for deferred income taxes 36,507 22,045
Cash distributions in excess of earnings of affiliates 138 --
Gain on sale of stock held for investment -- (834)
Changes in operating assets and liabilities:
(Increase) decrease in receivables 33,134 (12,111)
Increase in advances to oil and gas ventures and other (9,574) (2,689)
(Increase) decrease in other assets 1,610 (842)
Increase (decrease) in payables (34,703) 14,106
Increase (decrease) in accrued expenses 2,287 (1,179)
Decrease in advance from gas purchaser (4,875) (4,131)
Increase (decrease) in deferred credits and
other noncurrent liabilities (6,590) 9,085
--------- ---------
Net cash provided by operating activities 281,934 214,051
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (336,101) (220,258)
Acquisition of oil and gas properties (20,793) (2,835)
Gathering, transmission and processing expenditures (16,477) (7,467)
Non-cash portion of oil and gas property additions (13,993) (4,564)
Acquisition of Phoenix, net of cash acquired -- (43,294)
Investment in Producers Energy Marketing, LLC, net 6 (5,785)
Proceeds from sale of oil and gas properties 3,174 2,168
Proceeds from sale of stock held for investment -- 5,389
Other capital expenditures, net (3,370) (4,481)
Other, net (3,785) (3,884)
--------- ---------
Net cash used in investing activities (391,339) (285,011)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 371,270 412,408
Payments on long-term debt (252,377) (329,703)
Proceeds from issuance of common stock, net 5,512 5,260
Treasury stock activity, net (387) (7)
Dividends paid (12,622) (10,842)
Cost of debt and equity transactions (970) (3,638)
--------- ---------
Net cash provided by financing activities 110,426 73,478
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,021 2,518
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,161 13,633
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,182 $ 16,151
========= =========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands) June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,182 $ 13,161
Receivables 201,431 234,646
Inventories 17,664 13,963
Advances to oil and gas ventures and other 15,973 6,386
----------- ------------
249,250 268,156
----------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 5,033,058 4,713,113
Unproved properties and properties
under development, not being amortized 419,118 388,872
International concession rights, not being amortized 99,000 99,000
Gas gathering, transmission and processing facilities 137,923 121,446
Other 61,774 58,882
----------- ------------
5,750,873 5,381,313
Less: Accumulated depreciation, depletion and amortization (2,458,790) (2,281,252)
----------- ------------
3,292,083 3,100,061
----------- ------------
OTHER ASSETS:
Deferred charges and other 58,449 64,213
----------- -----------
$ 3,599,782 $ 3,432,430
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands) June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,500 $ 2,000
Accounts payable 140,219 174,941
Accrued operating expense 23,895 17,263
Accrued exploration and development 62,423 76,465
Accrued compensation and benefits 8,873 12,262
Other accrued expenses 25,770 26,726
---------- ----------
268,680 309,657
---------- ----------
LONG-TERM DEBT 1,349,099 1,235,706
---------- ----------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES:
Income taxes 291,059 254,789
Advance from gas purchaser 46,923 51,798
Other 55,373 61,964
---------- ----------
393,355 368,551
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par, 215,000,000
shares authorized, 91,495,577 and
91,224,028 shares issued, respectively 114,369 114,030
Paid-in capital 1,007,713 1,002,540
Retained earnings 498,571 432,588
Treasury stock, at cost, 1,176,689 and
1,165,231 shares, respectively (15,539) (15,152)
Currency translation adjustment (16,466) (15,490)
---------- ----------
1,588,648 1,518,516
---------- ----------
$ 3,599,782 $ 3,432,430
========== ==========
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 June 30,
---------------------------
1997 1996
---------- -----------
RETAINED EARNINGS, beginning of period $ 479,147 $ 345,700
Net income 25,746 24,437
Dividends declared:
Common stock, $.07 per share (6,322) (6,286)
---------- ----------
RETAINED EARNINGS, end of period $ 498,571 $ 363,851
========== ==========
For the Six Months
Ended June 30,
---------------------------
1997 1996
---------- -----------
RETAINED EARNINGS, beginning of year $ 432,588 $ 335,470
Net income 78,623 40,092
Dividends declared:
Common stock, $.14 per share (12,640) (11,711)
---------- ----------
RETAINED EARNINGS, end of period $ 498,571 $ 363,851
========== ==========
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 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 most recent annual report on
Form 10-K.
1. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". The new standard simplifies the computation of earnings per share
(EPS) and increases comparability to international standards. Under SFAS
No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
"Diluted" EPS, which is computed similarly to fully diluted EPS, reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
The Company is required to adopt the new standard in its year-end 1997
financial statements. All prior-period EPS information (including interim
EPS) is required to be restated at that time. Early adoption is not
permitted. Pro forma net income per common share, as if the Company
adopted SFAS No. 128 on January 1 of each period presented, is as follows:
For the Quarter Ended For the Six Months Ended
June 30, June 30,
------------------- ----------------
1997 1996 1997 1996
------- ------- --------- ---------
Basic net income per common share $ .29 $ .29 $ .87 $ .49
Diluted net income per common share .28 .28 .84 .49
2. HEDGING ACTIVITIES
Apache periodically enters into commodity derivatives contracts and
fixed-price physical contracts to manage its exposure to oil and gas price
volatility. Commodity derivatives contracts, which are usually placed with
major financial institutions that the Company believes are minimal credit
risks, may take the form of futures contracts, swaps or options. The oil
and gas reference prices upon which these commodity derivatives contracts
have a high degree of historical correlation with actual prices received by
the Company. The Company accounts for its commodity derivatives contracts
using the hedge (or deferral) method of accounting. Under this method,
realized gains and losses from the Company's price risk management
activities are recognized in oil and gas production revenues when the
associated production occurs and the resulting cash flows are reported as
cash flows from operating activities. Gains and losses on commodity
derivatives contracts that are closed before the hedged production occurs
are deferred until the production month originally hedged. In the event of
a loss of correlation between changes in oil and gas reference prices under
a commodity derivatives contract and actual oil and gas prices, a gain or
loss is recognized currently to the extent the commodity derivatives
contract has not offset changes in actual oil and gas prices.
6
3. 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. The merger (Merger) resulted in Phoenix becoming a wholly owned
subsidiary of Apache and was accounted for using the purchase method of
accounting. The financial results of Phoenix have been included since the
date of the acquisition. Pursuant to the Merger agreement, shares of
Phoenix common stock then outstanding and 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.
The following unaudited pro forma financial information shows the
effect on the Company's consolidated results of operations as if the Merger
occurred on January 1, 1996. The pro forma data is based on numerous
assumptions and is not necessarily indicative of future results of
operations.
For the Six Months
Ended June 30, 1996
-----------------------------
(In thousands, except per share data) As Reported Pro Forma
----------- ---------
Revenues $ 430,126 $ 445,052
Net income $ 40,092 $ 43,705
Primary net income per common share $ .49 $ .49
Weighted average common shares outstanding 81,580 89,684
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
The Company considers all highly liquid debt instruments purchased with
an original 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 Six Months
Ended June 30,
-----------------------------
1997 1996
----------- -----------
Cash paid during the period for:
Interest (net of amounts capitalized) $ 31,790 $ 20,898
Income taxes (net of refunds) 16,576 221
5. DEBT
In January 1997, the Company established a $300 million commercial
paper program (subsequently increased, as described below), which allows
Apache to borrow funds for up to 270 days at competitive interest rates.
The commercial paper program is supported by availability under the United
States portion of the Company's global credit facility.
Also in January 1997, Standard & Poor's upgraded the Company's senior
long-term debt from BBB to BBB+ and subordinated debt from BBB- to BBB.
In June 1997, the Company replaced its $1 billion global borrowing-base
credit facility with a new billion-dollar global corporate credit facility
that provides Apache with greater borrowing capacity, increased financial
flexibility and less restrictive covenants, while lowering its all-in
borrowing costs by 7-1/2 basis points.
The global corporate credit facility consists of three separate bank
facilities: a $700 million credit commitment in the United States; a $175
million facility in Australia; and a $125 million credit line in Canada.
The new global credit facility enables Apache to draw on its full $1
billion credit line without restrictions tied to periodic revaluations of
the Company's oil and gas reserves.
7
Under the financial covenants of the global corporate credit facility,
the Company must (i) maintain a minimum tangible net worth of $1.013
billion as of June 30, 1997, which is adjusted quarterly for subsequent
earnings, as defined, and (ii) maintain a ratio of debt to capitalization
of not greater than 60 percent at the end of any fiscal quarter. The
financial covenant under the previous global borrowing-base credit facility
requiring the Company to 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 has been eliminated. The Company
was in compliance with all financial covenants at June 30, 1997.
Also in June 1997, the Company expanded its commercial paper program to
$700 million from $300 million to provide access to additional low-cost,
short-term funds.
In August 1997, Apache offered $150 million principal amount, $148
million net of discount, of senior unsecured 7.375 percent debentures
maturing on August 15, 2047. The debentures are not redeemable prior to
maturity, however, Apache has the right to advance maturity, under certain
conditions. These debentures are governed by the same indenture that
governs certain of the Company's other senior unsecured notes which imposes
restrictions 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 six
months of 1997 were significantly impacted by the following factors:
Commodity Prices - Apache's average realized price for natural gas
increased $.40 per thousand cubic feet (Mcf) from $1.87 per Mcf in the
first six months of 1996 to $2.27 per Mcf in the same period of 1997,
favorably impacting revenues by $39.9 million. The realized oil price
increased $.86 per barrel from $19.07 per barrel to $19.93 per barrel,
contributing $7.7 million to the increase in revenues.
Phoenix Acquisition - On May 20, 1996, Apache acquired Phoenix through
a merger which resulted in Phoenix becoming a wholly owned subsidiary of
Apache. The assets acquired in the Phoenix acquisition contributed 13,267
barrels of oil per day during the first half of 1997.
RESULTS OF OPERATIONS
Apache reported 1997 second quarter net income of $25.7 million versus
$24.4 million in the prior year. Pro forma basic net income per common
share of $.29 for the second quarter was consistent with the comparable
period in 1996, but with a greater number of shares outstanding in 1997.
Higher production and gas prices compared to the same period in 1996
favorably impacted earnings but were partially offset by lower oil prices
and higher operating costs.
For the first half of 1997, net income of $78.6 million, or $.87 per
share, increased from $40.1 million, or $.49 per share, in the comparable
1996 period, with a greater number of shares outstanding in 1997. Higher
production and prices compared to a year ago favorably impacted earnings
but were partially offset by higher operating costs.
For the second quarter of 1997, revenues increased 16 percent to $258.8
million as compared to $223.7 million for the same period in 1996. Crude
oil and natural gas production revenues increased 14 percent over the same
period in 1996 with crude oil contributing 49 percent and natural gas
contributing 50 percent of total oil and gas production revenues.
For the first six months of 1997, total revenues increased 35 percent
to $580.7 million as compared to $430.1 million for the same period in
1996. Revenues from crude oil and natural gas production increased 32
percent over the same period in 1996, with crude oil contributing 48
percent and natural gas contributing 51 percent of total oil and gas
production revenue.
9
Volume and price information for the Company's 1997 and 1996 second
quarter and first six months oil and gas production is summarized in the
following table:
For the Quarter Ended For the Six Months Ended
June 30, June 30,
---------------------------- --------------------------------
Increase Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
-------- ------- --------- ------ ------- ---------
Gas Volume - Mcf per day:
U.S. 499,956 462,862 8% 492,500 469,400 5%
Canada 86,782 76,498 13% 82,839 70,612 17%
Egypt 441 296 49% 456 148 208%
Australia 21,783 6,157 254% 21,594 9,641 124%
-------- -------- -------- --------
Total 608,962 545,813 12% 597,389 549,801 9%
======== ======== ======== ========
Average Gas Price - Per Mcf:
U.S. $ 2.11 $ 2.06 2% $ 2.43 $ 2.00 22%
Canada 1.09 .91 20% 1.38 .99 39%
Egypt 2.59 2.99 (13%) 2.81 2.99 (6%)
Australia 1.86 2.02 (8%) 1.86 1.99 (7%)
Total 1.96 1.90 3% 2.27 1.87 21%
Oil Volume - Barrels per day:
U.S. 40,668 41,786 (3%) 40,622 40,812 --
Canada 1,820 1,886 (3%) 1,901 1,927 (1%)
Egypt 18,677 7,181 160% 17,969 4,159 332%
Australia 2,779 2,103 32% 2,909 2,358 23%
-------- -------- -------- --------
Total 63,944 52,956 21% 63,401 49,256 29%
======== ======== ======== ========
Average Oil Price - Per barrel:
U.S. $ 18.65 $ 19.65 (5%) $ 20.20 $ 18.99 6%
Canada 18.39 20.97 (12%) 20.01 19.49 3%
Egypt 17.64 18.68 (6%) 18.97 18.66 2%
Australia 20.72 20.78 -- 22.02 20.86 6%
Total 18.44 19.61 (6%) 19.93 19.07 5%
NGL Volume - Barrels per day:
U.S. 1,826 1,630 12% 1,844 1,488 24%
Canada 633 590 7% 638 630 1%
-------- -------- -------- --------
Total 2,459 2,220 11% 2,482 2,118 17%
======== ======== ======== ========
NGL Price - Per barrel:
U.S. $ 14.72 $ 14.92 (1%) $ 16.55 $ 14.98 10%
Canada 10.39 10.16 2% 14.85 11.68 27%
Total 13.61 13.66 -- 16.11 14.00 15%
Second Quarter 1997 Compared to Second Quarter 1996
Natural gas sales for the second quarter of 1997 totaled $108.4
million, 15 percent higher than those recorded in the second quarter of
1996. Production increased 63.1 million cubic feet per day (MMcf/d), or 12
percent, on a worldwide basis, favorably impacting revenue by $11.2
million. In the U.S., the increase in natural gas production was
principally due to the benefit from tactical acquisition activity.
Australian increases resulted from East Spar production, which came on line
in November 1996. In addition, prior year second quarter production was
negatively impacted by the Companys primary Australian gas purchaser
taking less volume under its take-or-pay contract. Nominations were at
normal levels during the second quarter of 1997.
Average realized natural gas prices increased three percent, favorably
impacting revenue by $3.0 million. The majority of this increase, and the
resulting impact on natural gas sales, was realized in the U.S. where the
Company sold 82 percent of its worldwide gas production at an average price
of $2.11 per Mcf, $.05 per Mcf higher than 1996. In addition, the Company
was favorably impacted by higher spot prices being received in Canada where
the Company sold 14 percent of its worldwide gas production at an average
price of $1.09 per Mcf, compared to only $.91 per Mcf in 1996. The
Company's net hedging activity, including fixed price physical and
financial contracts, increased realized prices by $.09 per Mcf during the
quarter ended June 30, 1997, compared to a $.10 per Mcf reduction in
realized prices attributable to hedging activities during the same period
in 1996.
The Company's crude oil sales for the second quarter of 1997 totaled
$107.3 million, a 14 percent increase from the second quarter of 1996, due
to production increases which were partially offset by lower realized
average prices.
10
Oil production increased 21 percent compared to the prior year second
quarter due primarily to the acquisition of Phoenix in May 1996. Egyptian
oil production comprised 29 percent of the Company's total oil production,
compared to only 14 percent in the second quarter of 1996, resulting in an
increase in revenues of $18.5 million. In addition to the favorable impact
of Egyptian production, Australian oil production increased 32 percent due
to liquid production associated with new gas wells in East Spar that came
on-line in November 1996. Offsetting these increases in production, were
slight declines between periods in U.S. and Canadian production.
The Company's realized price for sales of crude oil in the second
quarter of 1997 decreased $1.17 per barrel, or six percent, resulting in a
decrease in revenue of $5.6 million compared to the same period in 1996.
Revenue from the sale of natural gas liquids totaled $3.0 million for
the second quarter of 1997, as compared to $2.8 million for the same period
in 1996. Production increased 11 percent, driving the increase in revenues
while pricing remained relatively flat.
Year-to-Date 1997 Compared to Year-to-Date 1996
Natural gas sales for the first six months of 1997 of $245.2 million
increased $58.2 million, or 31 percent, when compared to the same period in
1996, as a result of favorable natural gas prices and increased production.
A $.43 per Mcf increase in realized prices attributable to U.S. natural gas
production, which comprised 82 percent of worldwide gas production,
contributed $37.3 million to the increase in sales. Sales were also
favorably impacted by a five percent increase in U.S. production, which
added another $9.0 million to the increase over the first six months of the
prior year. Canadian and Australian gas sales contributed $7.9 million and
$3.8 million, respectively, to the increase in revenue as a result of
higher realized prices in Canada and increased production in both
countries. The Companys net hedging activity increased realized prices by
$.03 per Mcf during the first six months of 1997 compared to a $.14 per Mcf
reduction in realized prices resulting from hedging activities during the
comparable period in 1996.
For the first half of 1997, oil sales increased 34 percent to $228.7
million compared to $171.0 million for the same period in 1996, due
primarily to sales of production from the Phoenix properties acquired in
May 1996. Egyptian oil sales contributed $47.6 million, or 82 percent, of
the increase in oil sales compared to the first half of 1996, and comprised
28 percent of Apache's worldwide oil production. U.S. oil sales were
favorably impacted by a six percent increase in realized prices, which
contributed $9.0 million to the increase in revenue compared to the same
period in 1996. Partially offsetting the impact of higher realized
domestic prices was a slight decline in domestic oil production, which
reduced revenues by $1.5 million. Australian production contributed an
additional $2.6 million to the increase in sales, which resulted from
increased production and higher realized prices compared to the same period
in 1996. Higher realized prices in Canada were mostly offset by slight
declines in production when compared to the first half of 1996.
Natural gas liquid revenue increased 34 percent to $7.2 million for the
first six months of 1997. Compared to the prior year, production increased
17 percent, contributing $1.0 million to the increase in revenues, and
higher realized prices added another $.8 million.
OTHER REVENUES AND OPERATING EXPENSES
During the second quarter and first six months of 1997, Apache's gas
gathering, processing and marketing revenues increased 25 percent and 52
percent, respectively, to $39.3 million and $99.4 million, due primarily to
higher volumes compared to the prior year periods. Although revenues have
increased with respect to these activities, lower crude oil marketing
margins were realized for the quarter and six months ended June 30, 1997
compared to the same periods in 1996.
11
Other revenues during the second quarter of 1997 totaled $1.0 million,
slightly higher than the comparable 1996 period. The current period other
revenue includes $.7 million in legal settlement proceeds and Canadian
royalty credits of $.3 million. Other revenue for the second quarter of
1996 included Canadian royalty credits and a $.8 million gain on the sale
of stock held for investment. For the first six months of 1997, other
revenue consisted primarily of the legal settlement proceeds and Canadian
royalty credits, partially offset by the impact of $.7 million of currency
transaction loss related to Canadian exchange rate fluctuations.
The Company's depreciation, depletion and amortization (DD&A) expense
for the second quarter and first six months of 1997 totaled $93.5 million
and $182.8 million, respectively, compared to $76.3 million and $148.2
million for the comparable periods in 1996. On an equivalent barrel basis,
full cost DD&A increased $.36 per boe, from $5.41 per boe to $5.77 per boe,
in the second quarter of 1997 compared to the comparable period in 1996.
For the six months ended June 30, 1997, the full cost DD&A rate totaled
$5.75 per boe compared to $5.38 in 1996. The increase is a function of (a)
downward reserve revisions due to price declines in 1997, (b) the May 1996
acquisition of Phoenix, and (c) costs added to the domestic amortizable
pool.
Operating costs, including lease operating expense and severance taxes,
increased six percent from $54.4 million in the second quarter of 1996, to
$57.7 million for the same period in 1997. For the first half of 1997,
operating costs totaled $117.7 million, an increase of $10.8 million, or
ten percent, over the same period in 1996. For the second quarter and
first six months of 1997, lease operating expense, excluding severance
taxes, totaled $48.6 million and $97.8 million, respectively, compared to
$45.2 million and $89.4 million for the comparable periods in 1996. On an
equivalent barrel basis, lease operating expense for the second quarter
declined from $3.40 per boe in 1996 to $3.18 per boe in 1997, primarily as
a result of Egyptian operating efficiencies and Australian production
increases. Egyptian per unit costs declined from the same period in 1996
due to reductions in both oil trucking expense and pipeline tariff rates.
Australian per unit costs were less than last year due to incremental
production from East Spar being added with minimal expense increases. For
the first six months of 1997, lease operating expense averaged $3.27 per
boe, a five-percent decrease from $3.43 per boe for the same period in
1996.
Administrative, selling and other costs in the second quarter of 1997
increased $.7 million, or eight percent, from a year ago, while costs for
the first six months of 1997 increased $1.0 million, or six percent. On an
equivalent barrel basis, general and administrative expenses declined eight
percent, to $.60 per boe, for the first six months of 1997 as compared to
$.66 per boe for the same period in 1996.
Net financing costs for the second quarter increased $1.2 million, or
eight percent, from the prior year due to higher gross interest expense,
partially offset by higher amounts of interest capitalized. Gross interest
expense increased $3.1 million due to a higher average outstanding debt
balance and a higher weighted average interest rate. Capitalized interest,
which is based on the carrying value of unproved properties, increased $1.9
million due to increased international activity and the resulting increase
on the unproved property base.
Net financing costs increased six percent from $30.4 million in the
first half of 1996 to $32.1 million in the comparable 1997 period due to
higher average debt outstanding compared to the prior year, partially
offset by a lower weighted average interest rate and an increase in
capitalized interest.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments
Apache's primary cash needs 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.
12
Capital Expenditures - A summary of oil and gas capital expenditures
during the first six months of 1997 and 1996 is presented below (in
millions):
1997 1996
------- -------
Exploration and Development:
United States $ 206.6 $ 136.1
Canada 31.2 29.5
Egypt 62.7 17.3
Australia 25.4 31.5
Other International 10.2 5.8
------- ------
Total $ 336.1 $ 220.2
======= =======
Acquisition of Oil and Gas Properties $ 20.8 $ 334.1
======= =======
In North America, Apache completed 167 producing wells out of 201 wells
drilled during the first half of 1997, while internationally the Company
discovered 11 new producers of 21 wells drilled. Worldwide, the Company
was drilling or completing an additional 110 wells as of June 30, 1997. In
addition, Apache completed 154 production enhancement projects, including
66 recompletions, during the first half of 1997.
Property acquisitions totaled $20.8 million in the first six months of
1997, primarily representing tactical acquisitions of properties in the
Company's existing focus areas.
Capital Resources and Liquidity
Net Cash Provided by Operating Activities - Apache's net cash provided
by operating activities during the first half of 1997 totaled $281.9
million, an increase of 32 percent from $214.1 million in 1996. This
increase was due primarily to higher product prices and production as
compared to last year.
Long-Term Borrowings - In January 1997, the Company established a $300
million commercial paper program (subsequently increased, as described
below), which allows Apache to borrow funds for up to 270 days at
competitive interest rates. The commercial paper program is supported by
availability under the United States portion of Apache's global credit
facility.
In January 1997, Standard & Poor's upgraded the Company's senior long-
term debt from BBB to BBB+ and subordinated debt from BBB- to BBB.
In June 1997, the Company replaced its $1 billion global borrowing-base
credit facility with a new billion-dollar global corporate credit facility
that provides Apache with greater borrowing capacity, increased financial
flexibility and less restrictive covenants, while lowering its all-in
borrowing costs by 7-1/2 basis points.
The global corporate credit facility consists of three separate bank
facilities: a $700 million credit commitment in the United States; a $175
million facility in Australia; and a $125 million credit line in Canada.
The new global credit facility enables Apache to draw on its full $1
billion credit line without restrictions tied to periodic revaluations of
the Company's oil and gas reserves.
Also in June 1997, the Company expanded its commercial paper program to
$700 million from $300 million to provide access to additional low-cost,
short-term funds.
In August 1997, Apache offered $150 million principal amount, $148
million net of discount, of senior unsecured 7.375 percent debentures due
August 15, 2047. The proceeds from this issuance will be used to reduce
the Company's commercial paper and for general corporate purposes.
Liquidity - The Company had $14.2 million in cash and cash equivalents
on hand at June 30, 1997, up from the $13.2 million at December 31, 1996.
Apache's ratio of current assets to current liabilities at June 30, 1997
was .93:1 compared to .87:1 at December 31, 1996.
Apache 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 Company's financial obligations to meet
future liquidity needs for at least the next two fiscal years.
13
FUTURE TRENDS
Apache's growth strategy is to increase oil and gas reserves,
production, cash flow and earnings through a combination of exploratory
drilling, development of its inventory of existing projects and
acquisitions. The Company's drilling program emphasizes economic reserve
additions through exploratory drilling primarily on its international
interests, and moderate-risk drilling primarily on its North American
interests. The Company also emphasizes reducing operating costs per unit
produced and selling marginal and non-strategic properties in order to
increase its profit margins.
Apache's international investments and operations are an increasingly
important component of its long-term growth strategy. Although
international exploration is recognized as higher-risk than most of
Apache's North American activities, it offers potential for greater rewards
and significant reserve additions. Apache will direct its international
efforts in 1997 toward development of certain discoveries offshore Western
Australia and in Egypt, and toward further exploration efforts on its
concessions in Australia, Egypt, The People's Republic of China, Indonesia,
Poland and offshore the Ivory Coast in western Africa.
For Apache, property acquisition is also an important aspect in a
continuing cycle of business growth. Apache's aim is to follow each
acquisition with a cycle of reserve enhancement, property consolidation and
cash flow acceleration, facilitating asset growth and debt reduction. This
approach requires a well-planned and carefully executed property
development program and, where appropriate, a selective program of property
dispositions. It motivates Apache to target acquisitions that have
ascertainable additional reserve potential and to apply an active drilling,
workover and recompletion program to realize the potential of the acquired
undeveloped and partially developed properties. Apache prefers to operate
its properties so that it can best influence their development. As a
result, the Company operates properties accounting for over 75 percent of
its production.
In 1997, Apache expects North American exploration and development
outlays to increase from 1996 levels as the Company focuses on increasing
reserves, production and cash flow through exploratory drilling and
development of its existing inventory. Internationally, the Company
projects capital expenditures for exploration and production to increase 68
percent over 1996 levels as Apache continues to exploit its concessions in
Egypt, Western Australia, China and Indonesia. Proposed exploration and
development expenditures in 1997 will be reviewed at least every quarter in
light of fluctuating product prices and Apache's objective to fund
operations through internally generated cash flow.
On May 1, 1997, Apache's shareholders approved the 1996 Share Price
Appreciation Plan, which provides for awards denominated in shares of
Apache common stock to be paid following attainment of share price goals of
$50 and $60, respectively, before January 1, 2000. Generally, any payments
will be made in three installments over 36 months. Between 30 and 50
percent of the award will be paid in cash based on the market value of
Apache common stock on the dates of payment, and the balance of the award
(up to a total of 2,000,000 shares in the aggregate) will be issued in
Apache common stock.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 ("PSLRA")
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provisions of the PSLRA as set
forth in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such information
includes, without limitation, discussions as to estimates, expectations,
beliefs, plans and objectives concerning the Company's future financial and
operating performance. Such forward-looking information is subject to
assumptions and beliefs based on current information known to the Company
and factors that could yield actual results differing materially from those
anticipated. Such factors include, without limitation, the prices received
for the Company's oil and natural gas production, the costs of acquiring,
finding, developing and producing reserves, the rates of production of the
Company's hydrocarbon reserves, the Company's success in acquiring or
finding additional reserves, unforeseen operational hazards, significant
changes in tax or regulatory environments, and the political and economic
uncertainties of foreign operations.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10 to the Consolidated
Financial Statements contained in the Company's Form 10-K for the
year ended December 31, 1996 (filed with the Securities and
Exchange Commission on March 28, 1997) 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
The Company's annual meeting of stockholders was held in
Houston, Texas at 10:00 a.m. local time, on Thursday, May 1, 1997.
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 90,238,772 shares of the Company's common
stock outstanding and entitled to vote, 80,836,686 shares were
present at the meeting in person or by proxy, representing
approximately 89.6 percent. Matters voted upon at the meeting
were as follows:
a) Election of five directors to serve on the Company's board
of directors. Messrs. Bohen, Hathaway, Lawrence and Rice were
elected to serve until the annual meeting in 2000, and Mr. Frazier
was elected to serve until the annual meeting in 1999. The vote
tabulation with respect to each nominee was as follows:
Nominee For Authority Withheld
- ------------------- ---------- ------------------
Frederick M. Bohen 78,007,493 2,829,193
A. D. Frazier, Jr. 78,016,985 2,819,701
Stanley K. Hathaway 77,931,850 2,904,836
George D. Lawrence Jr. 78,045,172 2,791,514
Joseph A. Rice 77,931,457 2,905,229
b) The Company's 1996 Share Price Appreciation Plan was
approved by a vote of 78,530,218 shares for, 1,958,894 shares
against, 347,574 abstentions, and zero broker non-votes.
ITEM 5. OTHER INFORMATION
None.
15
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 on Form 8-K was filed during the
fiscal quarter ended June 30, 1997:
June 13, 1997 - Item 5. Other Events.
Apache replaced its borrowing-base credit facility on June 12,
1997, with a new global credit facility consisting of several
principal agreements. Under the new global credit facility, (i)
borrowing availability is no longer restricted by a borrowing base
calculation, (ii) certain covenants and restrictions have been
eliminated, (iii) certain interest rates have been reduced, and
(iv) the U.S. portion of the credit facility is available as
backup for Apache's commercial paper program, which was expanded
to $700 million in June of 1997.
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: August 14, 1997 /s/ Roger B. Plank
---------------------------------
Roger B. Plank
Vice President and Chief Financial Officer
Dated: August 14, 1997 /s/ Thomas L. Mitchell
-----------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)