UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________________ to _____________________
Commission File Number 1-4300
APACHE CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central 77056-4400
2000 Post Oak Boulevard, Houston, TX ----------
- ---------------------------------------- (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Registrant's common stock, outstanding as of March 31,
2002.........................137,412,151
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE QUARTER ENDED MARCH 31,
---------------------------------
2002 2001
------------ ------------
(In thousands, except per common share data)
REVENUES:
Oil and gas production revenues ............... $ 521,729 $ 801,598
Other revenues (losses) ....................... (1,393) (6,455)
------------ ------------
520,336 795,143
------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization ...... 211,039 172,530
International impairments ..................... 4,600 --
Lease operating costs ......................... 112,577 90,107
Severance and other taxes ..................... 14,499 21,293
Administrative, selling and other ............. 25,352 20,376
Financing costs:
Interest expense ........................... 36,882 44,712
Amortization of deferred loan costs ........ 334 502
Capitalized interest ....................... (10,022) (15,085)
Interest income ............................ (1,169) (877)
------------ ------------
394,092 333,558
------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES .............. 3,533 --
------------ ------------
INCOME BEFORE INCOME TAXES ....................... 122,711 461,585
Provision for income taxes .................... 42,039 179,384
------------ ------------
NET INCOME ....................................... 80,672 282,201
Preferred stock dividends ..................... 4,908 4,908
------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK .............. $ 75,764 $ 277,293
============ ============
NET INCOME PER COMMON SHARE:
Basic ......................................... $ 0.55 $ 2.03
============ ============
Diluted ....................................... $ 0.55 $ 1.95
============ ============
</Table>
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)
<Table>
<Caption>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2002 2001
------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 80,672 $ 282,201
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ............................. 211,039 172,530
Provision for deferred income taxes .................................. (348) 98,920
International impairments ............................................ 4,600 --
Amortization of derivative (gains)/losses ............................ (7,089) --
Other ................................................................ 334 3,376
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in receivables ................................... (28,973) 44,477
(Increase) decrease in advances to oil and gas ventures and other .... (18,533) (20,672)
(Increase) decrease in product inventory ............................. 28 (107)
(Increase) decrease in deferred charges and other .................... (582) (1,310)
Increase (decrease) in payables ...................................... 12,774 58,364
Increase (decrease) in accrued expenses .............................. (42,464) 15,095
Increase (decrease) in advances from gas purchasers .................. (3,903) (3,547)
Increase (decrease) in deferred credits and noncurrent liabilities ... (2,290) (6,782)
------------ ------------
Net cash provided by operating activities ........................ 205,265 642,545
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ........................................ (208,111) (344,982)
Non-cash portion of net oil and gas property additions ..................... (36,973) 65,274
Acquisition of Fletcher subsidiaries ....................................... -- (465,018)
Acquisition of Repsol YPF properties ....................................... -- (446,933)
Proceeds from sales of oil and gas properties .............................. 796 128,663
Proceeds from sale of short-term investments ............................... 17,006 --
Other, net ................................................................. (3,954) (39,333)
------------ ------------
Net cash used in investing activities ............................ (231,236) (1,102,329)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ....................................................... 377,939 1,176,159
Payments on long-term debt ................................................. (344,331) (645,800)
Dividends paid ............................................................. (18,256) (4,870)
Common stock activity, net ................................................. 9,390 4,153
Treasury stock activity, net ............................................... (856) 98
Cost of debt and equity transactions ....................................... (18) (294)
------------ ------------
Net cash provided by financing activities ........................ 23,868 529,446
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (2,103) 69,662
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 35,625 37,173
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 33,522 $ 106,835
============ ============
</Table>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 33,522 $ 35,625
Receivables ..................................................... 433,726 404,793
Inventories ..................................................... 101,995 102,536
Advances to oil and gas ventures and other ...................... 70,373 51,845
Short-term investments .......................................... 85,914 102,950
-------------- --------------
725,530 697,749
-------------- --------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties ............................................ 11,614,142 11,390,692
Unproved properties and properties under
development, not being amortized .......................... 822,661 839,921
Gas gathering, transmission and processing facilities ........... 756,233 748,675
Other ........................................................... 172,938 168,915
-------------- --------------
13,365,974 13,148,203
Less: Accumulated depreciation, depletion and amortization ..... (5,350,050) (5,135,131)
-------------- --------------
8,015,924 8,013,072
-------------- --------------
OTHER ASSETS:
Goodwill ........................................................ 188,747 188,812
Deferred charges and other ...................................... 34,124 34,023
-------------- --------------
$ 8,964,325 $ 8,933,656
============== ==============
</Table>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................... $ 192,537 $ 179,778
Accrued operating expense ........................................................... 38,299 50,584
Accrued exploration and development ................................................. 138,955 175,943
Accrued compensation and benefits ................................................... 15,175 30,947
Accrued interest .................................................................... 38,364 28,592
Accrued income taxes ................................................................ 16,915 40,030
Other ............................................................................... 23,403 16,584
------------ ------------
463,648 522,458
------------ ------------
LONG-TERM DEBT ......................................................................... 2,277,965 2,244,357
------------ ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes ........................................................................ 985,832 991,723
Advances from gas purchasers ........................................................ 136,124 140,027
Other ............................................................................... 172,099 175,925
------------ ------------
1,294,055 1,307,675
------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES .................................................... 440,700 440,683
------------ ------------
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
Series C, 6.5% Conversion Preferred Stock, 138,458 and
138,482 shares issued and outstanding, respectively ........................... 208,171 208,207
Common stock, $1.25 par, 215,000,000 shares authorized,
141,434,298 and 141,171,793 shares issued, respectively .......................... 176,793 176,465
Paid-in capital ..................................................................... 2,823,533 2,812,648
Retained earnings ................................................................... 1,398,886 1,336,478
Treasury stock, at cost, 4,022,147 and 4,068,614 common shares,
respectively ..................................................................... (110,736) (111,885)
Accumulated other comprehensive loss ................................................ (107,077) (101,817)
------------ ------------
4,487,957 4,418,483
------------ ------------
$ 8,964,325 $ 8,933,656
============ ============
</Table>
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)
<Table>
<Caption>
SERIES B SERIES C
COMPREHENSIVE PREFERRED PREFERRED COMMON PAID-IN RETAINED
(In thousands) INCOME STOCK STOCK STOCK CAPITAL EARNINGS
------------- --------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2000 ............... $ 98,387 $ 208,207 $ 173,939 $ 2,157,370 $ 1,226,531
Comprehensive income:
Net income ............................ $ 282,201 -- -- -- -- 282,201
Currency translation adjustments ...... (56,515) -- -- -- -- --
Unrealized loss on derivatives, net
of income tax benefit of $31,427 .... (48,991) -- -- -- -- --
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $163 ................. (316) -- -- -- -- --
-----------
Comprehensive income .................... $ 176,379
===========
Preferred dividends ..................... -- -- -- -- (4,908)
Common shares issued .................... -- -- 2,399 102,618 --
Treasury shares issued, net ............. -- -- -- 974 --
----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2001 .................. $ 98,387 $ 208,207 $ 176,338 $ 2,260,962 $ 1,503,824
=========== =========== =========== =========== ===========
BALANCE AT DECEMBER 31,2001 ................ $ 98,387 $ 208,207 $ 176,465 $ 2,812,648 $ 1,336,478
Comprehensive income:
Net income ............................ $ 80,672 -- -- -- -- 80,672
Currency translation adjustments ...... (1,115) -- -- -- -- --
Reclassification of unrealized gains
into earnings:
Derivatives, net of income tax
benefit of $3,069 ................. (4,020) -- -- -- -- --
Marketable securities, net of
income tax benefit of $67 ......... (125) -- -- -- -- --
-----------
Comprehensive income .................... $ 75,412
===========
Dividends:
Preferred ............................. -- -- -- -- (4,908)
Common ($.10 per share) ............... -- -- -- -- (13,356)
Common shares issued .................... -- (36) 328 10,409 --
Treasury shares issued, net ............. -- -- -- 595 --
Other ................................... -- -- -- (119) --
----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2002 .................. $ 98,387 $ 208,171 $ 176,793 $ 2,823,533 $ 1,398,886
=========== =========== =========== =========== ===========
<Caption>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) STOCK INCOME (LOSS) EQUITY
-------- -------------- -------------
BALANCE AT DECEMBER 31, 2000 ............... $ (69,562) $ (40,232) $ 3,754,640
Comprehensive income:
Net income ............................ -- -- 282,201
Currency translation adjustments ...... -- (56,515) (56,515)
Unrealized loss on derivatives, net
of income tax benefit of $31,427 .... -- (48,991) (48,991)
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $163 ................. -- (316) (316)
Comprehensive income ....................
Preferred dividends ..................... -- -- (4,908)
Common shares issued .................... -- -- 105,017
Treasury shares issued, net ............. 663 -- 1,637
----------- ----------- -----------
BALANCE AT MARCH 31, 2001 .................. $ (68,899) $ (146,054) $ 4,032,765
=========== =========== ===========
BALANCE AT DECEMBER 31,2001 ................ $ (111,885) $ (101,817) $ 4,418,483
Comprehensive income:
Net income ............................ -- -- 80,672
Currency translation adjustments ...... -- (1,115) (1,115)
Reclassification of unrealized gains
into earnings:
Derivatives, net of income tax
benefit of $3,069 ................. -- (4,020) (4,020)
Marketable securities, net of
income tax benefit of $67 ......... -- (125) (125)
Comprehensive income ....................
Dividends:
Preferred ............................. -- -- (4,908)
Common ($.10 per share) ............... -- -- (13,356)
Common shares issued .................... -- -- 10,701
Treasury shares issued, net ............. 1,149 -- 1,744
Other ................................... -- -- (119)
----------- ----------- -----------
BALANCE AT MARCH 31, 2002 .................. $ (110,736) $ (107,077) $ 4,487,957
=========== =========== ===========
</Table>
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.
In September 2001, the Company declared a 10 percent stock dividend to
shareholders of record on December 31, 2001. Quarterly share and per share
information for 2001 have been restated to reflect the stock dividend.
1. ACQUISITIONS
In March 2001, the Company completed two significant acquisitions. Apache
acquired substantially all of Repsol YPF's (Repsol) oil and gas concession
interests in Egypt for approximately $447 million in cash, and subsidiaries of
Fletcher Challenge Energy (Fletcher) for approximately $465 million in cash and
1.8 million restricted shares of Apache common stock issued to Shell Overseas
Holdings (valued at $55.49 per share).
The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the Fletcher and Repsol
acquisitions occurred on January 1, 2001. The pro forma information is based on
numerous assumptions and is not necessarily indicative of future results of
operations.
<Table>
<Caption>
FOR THE QUARTER ENDED
MARCH 31, 2001
-----------------------------
AS REPORTED PRO FORMA
----------- ---------
(In thousands, except per common share data)
Revenues .............................. $ 795,143 $ 902,098
Net income ............................ 282,201 304,683
Preferred stock dividends ............. 4,908 4,908
Income attributable to common stock ... 277,293 299,775
Net income per common share:
Basic ............................. $ 2.03 $ 2.17
Diluted ........................... 1.95 2.08
Average common shares outstanding ..... 136,268 137,975
</Table>
2. DERIVATIVE INSTRUMENTS AND FIXED-PRICE PHYSICAL CONTRACTS
Due to the uncertainty of how the collapse of Enron Corp. would impact the
derivative markets, Apache closed out all of its derivative positions and
certain fixed-price physical contracts during October and November 2001 (the
"Unwind"). The Unwind of Apache's hedging activities and acquired derivative
contracts resulted in a net unrealized gain recorded to accumulated other
comprehensive income. This deferred gain will be reclassified into earnings over
the remaining periods of the original hedge contracts (approximately two years).
The remaining unrealized gain related to these contracts was $13 million and $20
million at March 31, 2002 and December 31, 2001, respectively.
As part of the Unwind, Apache also terminated the gas price swap associated
with its advances from gas purchasers, receiving proceeds of $78 million. These
proceeds will be realized into earnings over the original life of the contracts
and effectively increase the original contract's fixed prices by approximately
51 percent. As of March
6
31, 2002 and December 31, 2001, the Company had an unamortized gain of $76
million and $78 million related to the Unwind of the contracts.
3. 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:
<Table>
<Caption>
FOR THE QUARTER ENDED MARCH 31,
---------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock .... $ 75,764 137,293 $ .55 $ 277,293 136,268 $ 2.03
========== ==========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ................ -- 1,532 -- 1,338
Series C Preferred Stock ............... -- -- 3,488 6,243
---------- ---------- ---------- ----------
DILUTED:
Income attributable to common stock,
including assumed conversions ......... $ 75,764 138,825 $ .55 $ 280,781 143,849 $ 1.95
========== ========== ========== ========== ========== ==========
</Table>
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
<Table>
<Caption>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2002 2001
----------- -----------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) ...... $ 17,088 $ 23,945
Income taxes (net of refunds) .............. 32,656 33,306
</Table>
5. SHORT-TERM INVESTMENTS
At December 31, 2001, Apache had $103 million of U.S. Government Agency
Notes, $17 million of which were designated as "available for sale" securities.
In January 2002, the Company sold all of the "available for sale" securities for
approximately $17 million. The remaining $86 million is designated as "held to
maturity" and is carried at amortized cost. These notes pay interest at rates
from 6.25 percent to 6.375 percent and mature on October 15, 2002.
6. IMPAIRMENTS
During the first quarter of 2002, the Company recorded a nonrecurring $5
million impairment ($3 million after tax) of unproved property costs in Poland.
The Company will continue to evaluate its operations in Poland, which may result
in additional impairments during 2002.
7. SUBSEQUENT EVENTS
In April 2002, the Company issued $400 million principal amount, $397
million net of discount, of senior unsecured 6.25-percent notes maturing on
April 15, 2012. The notes are redeemable, as a whole or in part, at our option,
subject to a make-whole premium. The proceeds were used to repay a portion of
the Company's outstanding commercial paper and for general operations.
7
8. 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
performance based on profit or loss from oil and gas operations before income
and expense items incidental to oil and gas operations and income taxes.
Apache's reportable segments are managed separately because of their geographic
locations. Financial information by operating segment is presented below:
<Table>
<Caption>
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA INTERNATIONAL TOTAL
------------ ------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 2002
Oil and Gas Production Revenues ........... $ 220,252 $ 107,824 $ 117,777 $ 74,446 $ 1,430 $ 521,729
============ ============ ============ ============ ============ ============
Operating Income (Loss) (1) .............. $ 52,604 $ 35,947 $ 60,870 $ 33,635 $ (4,042) $ 179,014
============ ============ ============ ============ ============
Other Income (Expense):
Other revenues (losses) ................ (1,393)
Administrative, selling and other ...... (25,352)
Financing costs, net ................... (26,025)
Preferred interests of subsidiaries .... (3,533)
------------
Income Before Income Taxes ................ $ 122,711
============
Total Assets .............................. $ 4,089,657 $ 2,213,727 $ 1,597,582 $ 896,415 $ 166,944 $ 8,964,325
============ ============ ============ ============ ============ ============
FOR THE QUARTER ENDED MARCH 31, 2001
Oil and Gas Production Revenues ........... $ 532,563 $ 142,970 $ 76,729 $ 49,336 $ -- $ 801,598
============ ============ ============ ============ ============ ============
Operating Income (Loss) (1) ............... $ 353,465 $ 91,025 $ 45,744 $ 27,445 $ (11) $ 517,668
============ ============ ============ ============ ============
Other Income (Expense):
Other revenues (losses) ................ (6,455)
Administrative, selling and other ...... (20,376)
Financing costs, net ................... (29,252)
------------
Income Before Income Taxes ................ $ 461,585
============
Total Assets .............................. $ 4,209,502 $ 2,155,500 $ 1,443,559 $ 862,151 $ 185,582 $ 8,856,294
============ ============ ============ ============ ============ ============
</Table>
(1) Operating income (loss) consists of oil and gas production revenues less
depreciation, depletion and amortization, international impairments, lease
operating costs and severance and other taxes.
9. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142 "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17 "Intangible Assets". As a
result of this pronouncement, goodwill is no longer subject to amortization.
Rather, goodwill is subject to at least an annual assessment for impairment by
applying a fair-value-based test. Apache had goodwill of $189 million at March
31, 2002, representing the excess of the purchase price over the estimated fair
value of the assets acquired and liabilities assumed in the Fletcher and Repsol
acquisitions. The initial fair-value-based goodwill impairment assessment is
required to be completed by June 30, 2002. The Company is currently evaluating
the impairment test and its impact on the consolidated financial statements, if
any.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement requires companies to record
the fair value of legal obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount. Over
time, accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the
8
related asset. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002, with earlier adoption encouraged. The Company's asset retirement
obligations relate primarily to the dismantlement of offshore platforms. The
Company expects to adopt this new standard effective January 1, 2003. The
Company is currently evaluating the impact of adopting this new standard and
accordingly has not quantified the impact on the consolidated financial
statements.
10. SUPPLEMENTAL GUARANTOR INFORMATION
Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada Corporation (Apache Finance Canada) are subsidiaries of Apache, which
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 Corporation's consolidated
financial statements. As such, the condensed consolidating financial statements
should be read in conjunction with the financial statements of Apache
Corporation and subsidiaries and notes thereto of which this note is an integral
part.
9
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2002
<Table>
<Caption>
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
------------ ------------- ------------ ------------ -------------
(IN THOUSANDS)
REVENUES:
Oil and gas production revenues ............. $ 158,928 $ -- $ -- $ -- $ 402,822
Equity in net income (loss) of affiliates ... 68,616 4,502 7,480 14,438 (8,752)
Other revenues (losses) ..................... 185 -- -- -- (1,578)
------------ ------------ ------------ ------------ ------------
227,729 4,502 7,480 14,438 392,492
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 53,704 -- -- -- 157,335
International impairments ................... -- -- -- -- 4,600
Lease operating costs ....................... 50,967 -- -- -- 101,631
Severance and other taxes ................... 6,632 -- -- 9 7,858
Administrative, selling and other ........... 21,475 -- -- -- 3,877
Financing costs, net ........................ 15,683 -- 4,512 10,229 (4,399)
------------ ------------ ------------ ------------ ------------
148,461 -- 4,512 10,238 270,902
------------ ------------ ------------ ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES ............ -- -- -- -- 3,533
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .............. 79,268 4,502 2,968 4,200 118,057
Provision (benefit) for income taxes ........ (1,404) -- (1,534) (4,464) 49,441
------------ ------------ ------------ ------------ ------------
NET INCOME ..................................... 80,672 4,502 4,502 8,664 68,616
Preferred stock dividends ................... 4,908 -- -- -- --
------------ ------------ ------------ ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 75,764 $ 4,502 $ 4,502 $ 8,664 $ 68,616
============ ============ ============ ============ ============
<Caption>
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
(IN THOUSANDS)
REVENUES:
Oil and gas production revenues ............. $ (40,021) $ 521,729
Equity in net income (loss) of affiliates ... (86,284) --
Other revenues (losses) ..................... -- (1,393)
------------ ------------
(126,305) 520,336
------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... -- 211,039
International impairments ................... -- 4,600
Lease operating costs ....................... (40,021) 112,577
Severance and other taxes ................... -- 14,499
Administrative, selling and other ........... -- 25,352
Financing costs, net ........................ -- 26,025
------------ ------------
(40,021) 394,092
------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES ............ -- 3,533
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .............. (86,284) 122,711
Provision (benefit) for income taxes ........ -- 42,039
------------ ------------
NET INCOME ..................................... (86,284) 80,672
Preferred stock dividends ................... -- 4,908
------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ (86,284) $ 75,764
============ ============
</Table>
10
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2001
<Table>
<Caption>
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
-------------- -------------- -------------- --------------
(IN THOUSANDS)
REVENUES:
Oil and gas production revenues ............... $ 549,905 $ -- $ -- $ --
Equity in net income (loss) of affiliates ..... 69,121 2,047 3,040 16,764
Other revenues (losses) ....................... 529 -- 3,078 --
-------------- -------------- -------------- --------------
619,555 2,047 6,118 16,764
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Depreciation, depletion and amortization ...... 102,821 -- -- --
Lease operating costs ......................... 57,519 -- -- --
Severance and other taxes ..................... 18,659 -- -- --
Administrative, selling and other ............. 18,033 -- -- --
Financing costs, net .......................... 17,384 -- 4,582 6,609
-------------- -------------- -------------- --------------
214,416 -- 4,582 6,609
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES ................ 405,139 2,047 1,536 10,155
Provision (benefit) for income taxes .......... 122,938 -- (511) (2,882)
-------------- -------------- -------------- --------------
NET INCOME ....................................... 282,201 2,047 2,047 13,037
Preferred stock dividends ..................... 4,908 -- -- --
-------------- -------------- -------------- --------------
INCOME ATTRIBUTABLE TO COMMON STOCK .............. $ 277,293 $ 2,047 $ 2,047 $ 13,037
============== ============== ============== ==============
<Caption>
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
-------------- ----------------- --------------
(IN THOUSANDS)
REVENUES:
Oil and gas production revenues ............... $ 420,526 $ (168,833) $ 801,598
Equity in net income (loss) of affiliates ..... (4,720) (86,252) --
Other revenues (losses) ....................... (10,062) -- (6,455)
-------------- -------------- --------------
405,744 (255,085) 795,143
-------------- -------------- --------------
OPERATING EXPENSES:
Depreciation, depletion and amortization ...... 69,709 -- 172,530
Lease operating costs ......................... 201,421 (168,833) 90,107
Severance and other taxes ..................... 2,634 -- 21,293
Administrative, selling and other ............. 2,343 -- 20,376
Financing costs, net .......................... 677 -- 29,252
-------------- -------------- --------------
276,784 (168,833) 333,558
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES ................ 128,960 (86,252) 461,585
Provision (benefit) for income taxes .......... 59,839 -- 179,384
-------------- -------------- --------------
NET INCOME ....................................... 69,121 (86,252) 282,201
Preferred stock dividends ..................... -- -- 4,908
-------------- -------------- --------------
INCOME ATTRIBUTABLE TO COMMON STOCK .............. $ 69,121 $ (86,252) $ 277,293
============== ============== ==============
</Table>
11
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2002
<Table>
<Caption>
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
-------------- -------------- -------------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ............................................. $ (524,773) $ -- $ (3,545) $ (476)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .................... (69,337) -- -- --
Proceeds from sales of oil and gas properties .......... 650 -- -- --
Proceeds from sale of U.S. Government Agency Notes ..... -- -- -- --
Investment in subsidiaries, net ........................ (69,435) (3,500) -- --
Other, net ............................................. (846) -- -- --
-------------- -------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .................... (138,968) (3,500) -- --
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity, net ........................... 667,662 -- 45 476
Dividends paid ......................................... (18,256) -- -- --
Common stock activity, net ............................. 9,390 3,500 3,500 --
Treasury stock activity, net ........................... (856) -- -- --
Cost of debt and equity transactions ................... (18) -- -- --
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 657,922 3,500 3,545 476
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... (5,819) -- -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ...................................... 6,383 -- 2 --
-------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .......................................... $ 564 $ -- $ 2 $ --
============== ============== ============== ==============
<Caption>
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
-------------- ----------------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ............................................. $ 734,059 $ -- $ 205,265
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .................... (175,747) -- (245,084)
Proceeds from sales of oil and gas properties .......... 146 -- 796
Proceeds from sale of U.S. Government Agency Notes ..... 17,006 -- 17,006
Investment in subsidiaries, net ........................ (506,056) 578,991 --
Other, net ............................................. (3,108) -- (3,954)
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .................... (667,759) 578,991 (231,236)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity, net ........................... (89,261) (545,314) 33,608
Dividends paid ......................................... -- -- (18,256)
Common stock activity, net ............................. 26,677 (33,677) 9,390
Treasury stock activity, net ........................... -- -- (856)
Cost of debt and equity transactions ................... -- -- (18)
-------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ (62,584) (578,991) 23,868
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... 3,716 -- (2,103)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ...................................... 29,240 -- 35,625
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .......................................... $ 32,956 $ -- $ 33,522
============== ============== ==============
</Table>
12
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2001
<Table>
<Caption>
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
-------------- -------------- -------------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ....................................... $ 564,946 $ -- $ (1,550) $ (8)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .............. (150,819) -- -- --
Acquisitions ..................................... -- -- -- --
Proceeds from sales of oil and gas properties .... 81,434 -- -- --
Investment in subsidiaries, net .................. (894,794) (5,568) (5,568) (250,880)
Other, net ....................................... (1,782) -- -- --
-------------- -------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .............. (965,961) (5,568) (5,568) (250,880)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity, net ..................... 468,535 -- 1,552 250,888
Dividends paid ................................... (4,870) -- -- --
Common stock activity, net ....................... 4,153 5,568 5,568 --
Treasury stock activity, net ..................... 98 -- -- --
Cost of debt and equity transactions ............. (294) -- -- --
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 467,622 5,568 7,120 250,888
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. 66,607 -- 2 --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ................................ 5,257 -- -- --
-------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .................................... $ 71,864 $ -- $ 2 $ --
============== ============== ============== ==============
<Caption>
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
-------------- ----------------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ....................................... $ 79,157 $ -- $ 642,545
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .............. (128,889) -- (279,708)
Acquisitions ..................................... (911,951) -- (911,951)
Proceeds from sales of oil and gas properties .... 47,229 -- 128,663
Investment in subsidiaries, net .................. (256,448) 1,413,258 --
Other, net ....................................... (37,551) -- (39,333)
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .............. (1,287,610) 1,413,258 (1,102,329)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt activity, net ..................... 700,239 (890,855) 530,359
Dividends paid ................................... -- -- (4,870)
Common stock activity, net ....................... 511,267 (522,403) 4,153
Treasury stock activity, net ..................... -- -- 98
Cost of debt and equity transactions ............. -- -- (294)
-------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 1,211,506 (1,413,258) 529,446
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. 3,053 -- 69,662
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ................................ 31,916 -- 37,173
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .................................... $ 34,969 $ -- $ 106,835
============== ============== ==============
</Table>
13
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2002
<Table>
<Caption>
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 564 $ -- $ 2 $ --
Receivables .................................. 78,019 -- -- --
Inventories .................................. 18,198 -- -- --
Advances to oil and gas ventures and others .. 19,938 -- -- --
Short-term investments ....................... -- -- -- --
------------- ------------- ------------- -------------
116,719 -- 2 --
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET .................... 3,086,035 -- -- --
------------- ------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net ................. 1,429,083 -- (25) (251,493)
Goodwill, net ................................ -- -- -- --
Equity in affiliates ......................... 2,048,416 196,882 462,520 1,095,202
Deferred charges and other ................... 27,378 -- -- 2,541
------------- ------------- ------------- -------------
$ 6,707,631 $ 196,882 $ 462,497 $ 846,250
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 76,325 $ -- $ -- $ 23
Other accrued expenses ....................... 112,748 -- 2,709 6,827
------------- ------------- ------------- -------------
189,073 -- 2,709 6,850
------------- ------------- ------------- -------------
LONG-TERM DEBT ................................. 1,046,090 -- 268,660 296,996
------------- ------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ................................. 691,312 -- (5,754) 77
Advances from gas purchasers ................. 136,124 -- -- --
Other ........................................ 157,075 -- -- --
------------- ------------- ------------- -------------
984,511 -- (5,754) 77
------------- ------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES ............ -- -- -- --
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ........................... 4,487,957 196,882 196,882 542,327
------------- ------------- ------------- -------------
$ 6,707,631 $ 196,882 $ 462,497 $ 846,250
============= ============= ============= =============
<Caption>
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------- ----------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 32,956 $ -- $ 33,522
Receivables .................................. 355,707 -- 433,726
Inventories .................................. 83,797 -- 101,995
Advances to oil and gas ventures and others .. 50,435 -- 70,373
Short-term investments ....................... 85,914 -- 85,914
------------- ------------- -------------
608,809 -- 725,530
------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET .................... 4,929,889 8,015,924
------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net ................. (1,177,565) -- --
Goodwill, net ................................ 188,747 -- 188,747
Equity in affiliates ......................... (818,513) (2,984,507) --
Deferred charges and other ................... 4,205 -- 34,124
------------- ------------- -------------
$ 3,735,572 $ (2,984,507) $ 8,964,325
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 116,189 $ -- $ 192,537
Other accrued expenses ....................... 148,827 -- 271,111
------------- ------------- -------------
265,016 -- 463,648
------------- ------------- -------------
LONG-TERM DEBT ................................. 666,219 -- 2,277,965
------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ................................. 300,197 -- 985,832
Advances from gas purchasers ................. -- -- 136,124
Other ........................................ 15,024 -- 172,099
------------- ------------- -------------
315,221 -- 1,294,055
------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES ............ 440,700 -- 440,700
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ........................... 2,048,416 (2,984,507) 4,487,957
------------- ------------- -------------
$ 3,735,572 $ (2,984,507) $ 8,964,325
============= ============= =============
</Table>
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
<Table>
<Caption>
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 6,383 $ -- $ 2 $ --
Receivables .................................... 94,881 -- -- --
Inventories .................................... 17,024 -- -- --
Advances to oil and gas ventures and others .... 24,644 -- -- --
Short-term investments ......................... -- -- -- --
------------- ------------- ------------- -------------
142,932 -- 2 --
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET ...................... 3,098,485 -- -- --
------------- ------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net ................... 1,426,455 -- (25) (251,025)
Goodwill, net .................................. -- -- -- --
Equity in affiliates ........................... 2,566,969 188,925 455,039 1,082,328
Deferred charges and other ..................... 27,688 -- -- 2,564
------------- ------------- ------------- -------------
$ 7,262,529 $ 188,925 $ 455,016 $ 833,867
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 75,164 $ -- $ -- $ --
Other accrued expenses ......................... 165,858 -- 2,599 1,246
------------- ------------- ------------- -------------
241,022 -- 2,599 1,246
------------- ------------- ------------- -------------
LONG-TERM DEBT ................................... 1,605,201 -- 268,615 296,988
------------- ------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ................................... 696,441 -- (5,123) 18
Advances from gas purchasers ................... 140,027 -- -- --
Other .......................................... 161,355 -- -- --
------------- ------------- ------------- -------------
997,823 -- (5,123) 18
------------- ------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES .............. -- -- -- --
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ............................. 4,418,483 188,925 188,925 535,615
------------- ------------- ------------- -------------
$ 7,262,529 $ 188,925 $ 455,016 $ 833,867
============= ============= ============= =============
<Caption>
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------- ----------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 29,240 $ -- $ 35,625
Receivables .................................... 309,912 -- 404,793
Inventories .................................... 85,512 -- 102,536
Advances to oil and gas ventures and others .... 27,201 -- 51,845
Short-term investments ......................... 102,950 -- 102,950
------------- ------------- -------------
554,815 -- 697,749
------------- ------------- -------------
PROPERTY AND EQUIPMENT, NET ...................... 4,914,587 -- 8,013,072
------------- ------------- -------------
OTHER ASSETS:
Intercompany receivable, net ................... (1,175,405) -- --
Goodwill, net .................................. 188,812 -- 188,812
Equity in affiliates ........................... (812,827) (3,480,434) --
Deferred charges and other ..................... 3,771 -- 34,023
------------- ------------- -------------
$ 3,673,753 $ (3,480,434) $ 8,933,656
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 104,614 $ -- $ 179,778
Other accrued expenses ......................... 172,977 -- 342,680
------------- ------------- -------------
277,591 -- 522,458
------------- ------------- -------------
LONG-TERM DEBT ................................... 73,553 -- 2,244,357
------------- ------------- -------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ................................... 300,387 -- 991,723
Advances from gas purchasers ................... -- -- 140,027
Other .......................................... 14,570 -- 175,925
------------- ------------- -------------
314,957 -- 1,307,675
------------- ------------- -------------
PREFERRED INTERESTS OF SUBSIDIARIES .............. 440,683 -- 440,683
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ............................. 2,566,969 (3,480,434) 4,418,483
------------- ------------- -------------
$ 3,673,753 $ (3,480,434) $ 8,933,656
============= ============= =============
</Table>
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Led by production growth in our core international areas, we reported solid
first quarter results, generating income attributable to common stock of $76
million ($.55 per diluted share) and cash from operating activities of $205
million. We achieved these results despite a 61 percent decline in realized gas
prices and a 21 percent decline in realized oil prices, relative to the first
quarter of 2001.
Quarterly oil production increased 37,660 barrels of oil per day (b/d) to
159,156, a 31 percent increase from the first quarter of 2001. Egypt, Australia
and Canada oil production increased 71 percent, 110 percent and 26 percent,
respectively. Oil production from these countries now totals 65 percent of our
worldwide oil production, up from 51 percent in the prior-year quarter.
Our natural gas production increased 109.4 million cubic feet per day
(MMcf/d) to 1.1 billion cubic feet per day (Bcf/d) with production increases of
116 percent in Egypt and 73 percent in Canada leading the way. Gas production
from countries outside the U.S. has grown to 51 percent of our natural gas
production compared to 36 percent in the comparable 2001 quarter.
Our oil and gas production gains are a direct result of our commitment to
pursue opportunities outside of the U.S., while maintaining a strong domestic
base. Production growth in Egypt and Canada include the strategic acquisitions
and subsequent drilling activities on the properties we acquired from Repsol and
Fletcher late in the first quarter of 2001, and from Novus in the fourth quarter
of 2001. Australia had three significant development projects that began
producing in 2001. The Gypsy/North Gypsy field began producing late in the first
quarter of 2001, while the Legendre and Simpson fields commenced production in
May and November 2001, respectively.
Our international drilling program continued to show strong results during
the first quarter of 2002. We reported three discoveries in Egypt and initiated
production at the Ras Kanayes development lease. We also reported four Flag
Sandstone oil discoveries in the Carnarvon Basin of Western Australia.
Our first quarter capital expenditures (including exploration and
development, and expenditures related to gathering, transmission, and processing
facilities) of $206 million are 64 percent of the $320 million we expended
(excluding acquisitions) during the first quarter of 2001, a reflection of the
uncertainty surrounding commodity prices and difficulty oil and gas producers
face when planning capital budgets. We also had $1.1 billion of acquisitions in
the prior year quarter. We will continue to monitor commodity prices and
allocate our cash flow accordingly, not hesitating to pay down debt in lieu of
increasing capital expenditures.
To increase our financial flexibility and take advantage of historically
low interest rates, we issued $400 million of 10-year notes in early April at a
6.25 percent coupon rate. Although these notes carry a higher interest rate than
the short-term commercial paper we had been utilizing, we felt it prudent to
secure these long-term funds given the highly uncertain economic times in which
we find ourselves.
On May 15, 2002, the mandatory conversion of our Series C Preferred Stock
into approximately 6.2 million common shares will occur. This estimated number
of shares assumes our common stock price averages at least $35 per share
(quarter-end stock price was $56.88 per share) in the weeks preceding the
conversion date. The conversion will reduce our preferred dividends by
approximately $14 million a year and be replaced with $2 million of common
dividends for an annual savings of $12 million. If our stock price remains
consistent, converted holders will have seen an annualized return well above
market rates, while existing shareholders benefited from the growth facilitated
by the initial proceeds.
16
RESULTS OF OPERATIONS
Revenues
The table below presents oil and gas production revenues, production and
average prices received from sales of natural gas, oil and natural gas liquids.
<Table>
<Caption> FOR THE QUARTER
ENDED MARCH 31,
------------------------------- INCREASE
2002 2001 (DECREASE)
-------------- -------------- ----------
Revenues (in thousands):
Natural gas ............................ $ 219,453 $ 502,592 (56)%
Oil .................................... 293,006 282,250 4%
Natural gas liquids .................... 9,270 16,756 (45)%
-------------- --------------
Total ............................... $ 521,729 $ 801,598 (35)%
============== ==============
Natural Gas Volume - Mcf per day:
United States .......................... 540,433 636,547 (15)%
Canada ................................. 314,659 181,992 73%
Egypt .................................. 117,525 54,415 116%
Australia .............................. 120,645 114,718 5%
Argentina .............................. 3,856 -- --
-------------- --------------
Total ............................... 1,097,118 987,672 11%
============== ==============
Average Natural Gas price - Per Mcf:
United States .......................... $ 2.29 $ 6.63 (65)%
Canada ................................. 2.19 5.62 (61)%
Egypt .................................. 3.05 3.66 (17)%
Australia .............................. 1.23 1.26 (2)%
Argentina .............................. .64 -- --
Total ............................... 2.22 5.65 (61)%
Oil Volume - Barrels per day:
United States .......................... 55,829 59,736 (7)%
Canada ................................. 25,339 20,100 26%
Egypt .................................. 44,378 25,970 71%
Australia .............................. 32,941 15,690 110%
Argentina .............................. 669 -- --
-------------- --------------
Total ............................... 159,156 121,496 31%
============== ==============
Average Oil price - Per barrel:
United States .......................... $ 20.49 $ 27.38 (25)%
Canada ................................. 18.54 22.04 (16)%
Egypt .................................. 21.42 25.17 (15)%
Australia .............................. 20.60 25.75 (20)%
Argentina .............................. 20.07 -- --
Total ............................... 20.46 25.81 (21)%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States .......................... 6,895 7,595 (9)%
Canada ................................. 1,358 1,247 9%
-------------- --------------
Total ............................... 8,253 8,842 (7)%
============== ==============
Average NGL Price - Per barrel:
United States .......................... $ 12.78 $ 20.03 (36)%
Canada ................................. 10.95 27.28 (60)%
Total ............................... 12.48 21.06 (41)%
</Table>
17
Natural Gas Revenues
Our natural gas production increased 109.4 MMcf/d (11 percent),
contributing $22 million to our natural gas revenues. The production growth
mitigated the impact of the $3.43 per Mcf (61 percent) decline in natural gas
prices, which accounted for a $305 million reduction in revenues. The primary
drivers of the increase in gas production for the period were acquisition of and
subsequent drilling and development activities on properties in Canada and Egypt
acquired from Fletcher and Repsol late in the first quarter of 2001, and
properties acquired from Novus in the fourth quarter of 2001. Successful
drilling results at Ladyfern field in Canada also contributed to the increase.
These increases more than offset decreases related to property sales in the U.S.
and from natural decline on more mature properties.
Approximately 11 percent and 12 percent of our first quarter 2002 and 2001
domestic natural gas production, respectively, is subject to long-term
fixed-price physical contracts. These contracts added $.05 per Mcf to our 2002
worldwide realized price and reduced our 2001 worldwide realized price by $.38
per Mcf.
Crude Oil Revenues
A 31 percent increase (37,660 b/d) in production generated an additional
$69 million in revenues, more than offsetting the impact of the $5.35 per barrel
(21 percent) decline in oil prices. The primary drivers of the increase in oil
production for the period were the acquisitions and subsequent drilling and
development activities discussed above. Also positively impacting oil production
relative to the first quarter of 2001 was production from the Gypsy/North Gypsy
field in Australia, which began production late in the first quarter of 2001 and
the Legendre and Simpson fields in Australia where production commenced in May
and November of 2001, respectively. Legendre and Simpson each contributed 30
percent to the increase in first quarter 2002 oil production. These increases
more than offset decreases related to property sales in the U.S. and from
natural decline on more mature properties.
Operating Expenses
The table below presents a detail of our expenses.
<Table>
<Caption>
FOR THE QUARTER ENDED MARCH 31,
---------------------------------------
2002 2001
------------- -------------
(In millions)
Depreciation, depletion and amortization (DD&A):
Oil and gas property and equipment.................. $ 197 $ 161
Other assets........................................ 14 12
International impairments............................. 5 -
Lease operating costs (LOE)........................... 113 90
Severance and other taxes............................. 14 21
General and administrative expense (G&A).............. 25 20
Financing costs, net.................................. 26 30
------------- -------------
Total....................................... $ 394 $ 334
============== =============
</Table>
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, and estimates of proved reserve quantities and
future developmental costs. On an equivalent barrel basis, full cost DD&A
expense increased $.17 per barrel of oil equivalent (boe), from $6.07 per boe in
the first quarter of 2001 to $6.24 per boe in 2002. This increase was primarily
due to negative revisions for uneconomic reserves driven by the significant
decrease in commodity prices from first quarter 2001. Increases in service
costs, which resulted in higher drilling and finding costs in the U.S., plus
transfers of unevaluated costs to the full-cost pool also contributed to the
increase in rates. The DD&A rate for the U.S. increased $.66 per boe from $6.40
per boe, to $7.06 per boe. U.S. DD&A accounts for almost half of the Company's
full-cost DD&A expense.
18
Impairments
During the first quarter of 2002, the Company recorded a nonrecurring $5
million impairment ($3 million after tax) of unproved property costs in Poland.
The Company will continue to evaluate its operations in Poland, which may result
in additional impairments during 2002.
Lease Operating Costs
LOE increased $23 million in the first quarter of 2002. The increase on an
absolute dollar basis was partially attributable to the acquisition of Egyptian
and Canadian properties late in the first quarter 2001 and overall growth in
Canada. Increased oil production in Australia and higher costs on non-operated
properties in the Offshore Region also added to the rise in costs compared to
the year-earlier period. On an equivalent barrel basis, LOE increased $.18 per
boe to $3.57 per boe in the first quarter of 2002. Higher costs on Offshore
properties, primarily non-operated, accounted for the increase on a Boe basis.
Severance and Other Taxes
Severance and other taxes, which generally are based on a percentage of oil
and gas production revenues, decreased in the first quarter of 2002 primarily
due to a decline in U.S. and Australian oil and gas production revenues.
Administrative, Selling and Other Expenses
G&A expense in the first quarter of 2002 increased from a year ago
primarily due to higher insurance costs, higher employee separation costs, and
costs related to amendments to our stock option plans affecting certain retiring
employees. On an equivalent barrel basis, G&A expense for the first three months
of 2002 increased $.03 per boe, to $.80 per boe.
Financing Costs, Net
Net financing costs for the first quarter of 2002 decreased 11 percent from
the prior year primarily due to lower gross interest expense. Gross interest
expense decreased due to a lower average effective rate, partially offset by
higher average debt outstanding.
MARKET RISK
The Company's major market risk exposure continues to be the pricing
applicable to its oil and gas production. Realized pricing is primarily driven
by the prevailing worldwide price for crude oil and spot prices applicable to
its United States and Canadian natural gas production. Historically, prices
received for oil and gas production have been volatile and unpredictable.
The information set forth under "Commodity Risk", "Interest Rate Risk" and
"Foreign Currency Risk" in Item 7A of the Company's annual report on Form 10-K
for the year ended December 31, 2001, is incorporated herein by reference.
19
OIL AND GAS CAPITAL EXPENDITURES
<Table>
<Caption>
FOR THE QUARTER ENDED
MARCH 31,
-------------------------------
2002 2001
-------------- --------------
(In thousands)
Exploration and development:
United States ................................................ $ 55,132 $ 176,989
Canada ....................................................... 82,245 105,752
Egypt ........................................................ 32,624 17,719
Australia .................................................... 24,242 24,817
Other International* ......................................... 4,005 (1,308)
-------------- --------------
$ 198,248 $ 323,969
============== ==============
Capitalized Interest ............................................. $ 10,022 $ 15,085
============== ==============
Gas gathering, transmission and processing facilities ............ $ 7,646 $ (3,933)
============== ==============
Acquisitions:
Oil and gas properties ....................................... $ 108 $ 752,511
Gas gathering, transmission and processing facilities ........ -- 129,000
Goodwill ..................................................... -- 197,200
-------------- --------------
$ 108 $ 1,078,711
============== ==============
</Table>
* Includes reimbursement from the Chinese government in 2001 for previously
paid costs.
In March 2001, Apache completed the acquisition of substantially all of
Repsol's oil and gas concession interests in Egypt for approximately $447
million in cash, subject to normal post closing adjustments. The properties
include interests in seven Western Desert concessions and had estimated proved
reserves of 66 million barrels of oil equivalent (MMboe) as of the acquisition
date. The Company previously held interests in five of the seven concessions.
In March 2001, Apache also completed the acquisition of subsidiaries of
Fletcher for approximately $465 million in cash and 1.8 million restricted
shares of Apache common stock issued to Shell Overseas Holdings (valued at
$55.49 per share), subject to normal post closing adjustments. The transaction
included properties located primarily in Canada's Western Sedimentary Basin.
Estimated proved reserves totaled 120.8 MMboe as of the acquisition date. Apache
assumed a liability of $103 million representing the fair value of derivative
instruments and fixed-price commodity contracts entered into by Fletcher.
CAPITAL RESOURCES
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 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 three
months of 2002 totaled $205 million, a decrease of 67 percent from $643 million
in the first three months of 2001. This decrease was primarily due to lower oil
and gas revenues as a result of lower realized oil and gas prices as compared to
last year.
20
LIQUIDITY
The Company had $34 million in cash and cash equivalents on hand at March
31, 2002, down from $36 million at December 31, 2001. Apache's ratio of current
assets to current liabilities at March 31, 2002 was 1.56 compared to 1.34 at
December 31, 2001.
The Company had $86 million in short-term securities (U.S. Government
Agency Notes) at March 31, 2002, which will be available to reduce long-term
debt after August 2002.
During 2001, several of our subsidiaries issued a total of $443 million
($441 million, net of issuance costs) of preferred stock and limited partner
interests to unrelated institutional investors. We pay a weighted average return
to the investors of 123 basis points above the prevailing LIBOR interest rate.
These subsidiaries are consolidated in the accompanying financial statements.
For the quarter ending March 31, 2002, the subsidiaries paid $4 million to
investors which is reflected as Preferred Interest of Subsidiaries on the
Statement of Consolidated Operations.
In April 2002, the Company issued $400 million principal amount, $397
million net of discount, of senior unsecured 6.25-percent notes maturing on
April 15, 2012. The notes are redeemable, as a whole or in part, at our option,
subject to a make-whole premium. The proceeds were used to repay a portion of
the Company's outstanding commercial paper and for general operations.
Apache believes that cash on hand, net cash generated from operations,
short-term investments and unused committed borrowing capacity under its global
credit facility and 364-day credit facility will be adequate to satisfy the
Company's financial obligations to meet future liquidity needs for the
foreseeable future. As of March 31, 2002, Apache's available borrowing capacity
under its global credit facility and 364-day credit facility was $811 million.
FUTURE TRENDS
Apache's strategy is to increase its oil and gas reserves, production, cash
flow and earnings through a balanced growth program that involves:
o exploiting our existing asset base;
o acquiring properties to which we can add incremental value; and
o investing in high-potential exploration prospects.
In order to maximize financial flexibility during a period of highly
volatile natural gas prices coupled with a faltering U.S. economy, Apache
reduced initially planned 2002 worldwide capital expenditures for exploratory
and development drilling to approximately $590 million from $1.4 billion in
2001. Any excess cash flow will be used to reduce debt until such time that we
elect either to increase drilling expenditures or to pursue acquisition
opportunities should they become available at reasonable prices.
Exploiting Existing Asset Base
Apache seeks 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 rigorously 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 completed over the last two
years, Apache's inventory of exploitation opportunities has never been larger.
Acquiring Properties to Which We Can Add Incremental Value
Apache seeks 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. Recently exorbitant acquisition prices have caused Apache to sideline
its acquisition activities until appropriate opportunities arise at reasonable
prices.
21
Investing in High-Potential Exploration Prospects
Apache seeks to concentrate our exploratory investments in a select number
of international areas and to become the dominant operator 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 North American operations,
which are more development oriented.
A critical component in implementing our three-pronged growth strategy is
maintenance of significant financial flexibility. "A-ratings" on Apache's senior
unsecured long-term debt from Moody's and Standard & Poor's illustrate our
commitment to preserving a strong balance sheet and building a solid foundation
and competitive advantage with which to pursue our growth initiatives.
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.
22
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, 2001 (filed with the SEC on March 22,
2002) 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Bylaws of Registrant, as amended May 2, 2002.
10.1 - Amendment to Apache Corporation 401(k) Savings Plan, dated
December 27, 2001, effective January 1, 2002.
10.2 - Amendment to Apache Corporation Money Purchase Retirement
Plan, dated December 27, 2001, effective January 1, 2002.
12.1 - Statement of computation of ratio of earnings to fixed
charges and combined fixed charges and preferred stock
dividends.
(b) Reports filed on Form 8-K
The following current report on Form 8-K was filed by Apache
during the fiscal quarter ended March 31, 2002:
Item 4 - Changes in Registrant's Certifying Accountant - dated
March 29, 2002, filed April 2, 2002.
On March 29, 2002, Apache determined (i) not to engage Arthur
Andersen LLP to act as Apache's independent public accountants
and (ii) to engage Ernst & Young LLP to serve as Apache's
independent public accountants for the fiscal year ending
December 31, 2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: May 13, 2002 /s/ Roger B. Plank
-----------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: May 13, 2002 /s/ Thomas L. Mitchell
-----------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 - Bylaws of Registrant, as amended May 2, 2002.
10.1 - Amendment to Apache Corporation 401(k) Savings Plan, dated
December 27, 2001, effective January 1, 2002.
10.2 - Amendment to Apache Corporation Money Purchase Retirement Plan,
dated December 27, 2001, effective January 1, 2002.
12.1 - Statement of computation of ratio of earnings to fixed charges
and combined fixed charges and preferred stock dividends.
</Table>