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, 2004
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of March 31,
2004......................325,228,989
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED MARCH 31,
--------------------------------------------
2004 2003
------------------ ------------------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues.............................................. $ 1,152,754 $ 975,162
Other........................................................................ (2,815) (8,553)
------------------ ------------------
1,149,939 966,609
------------------ ------------------
OPERATING EXPENSES:
Depreciation, depletion and amortization..................................... 286,228 214,349
Asset retirement obligation accretion........................................ 10,761 5,313
Lease operating costs........................................................ 206,029 134,135
Gathering and transportation costs........................................... 19,634 11,861
Severance and other taxes.................................................... 8,948 24,554
General and administrative................................................... 43,850 27,831
Financing costs:
Interest expense........................................................ 40,549 37,696
Amortization of deferred loan costs..................................... 567 531
Capitalized interest.................................................... (13,650) (11,232)
Interest income......................................................... (320) (1,074)
------------------ ------------------
602,596 443,964
------------------ ------------------
PREFERRED INTERESTS OF SUBSIDIARIES............................................. - 3,362
------------------ ------------------
INCOME BEFORE INCOME TAXES...................................................... 547,343 519,283
Provision for income taxes................................................... 198,259 206,986
------------------ ------------------
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE.................................... 349,084 312,297
Cumulative effect of change in accounting principle, net of
income tax.............................................................. - 26,632
------------------ ------------------
NET INCOME...................................................................... 349,084 338,929
Preferred stock dividends.................................................... 1,420 1,420
------------------ ------------------
INCOME ATTRIBUTABLE TO COMMON STOCK............................................. $ 347,664 $ 337,509
================== ==================
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle........................................ $ 1.07 $ .98
Cumulative effect of change in accounting principle.......................... - .08
------------------ ------------------
$ 1.07 $ 1.06
================== ==================
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle........................................ $ 1.06 $ .97
Cumulative effect of change in accounting principle.......................... - .08
------------------ ------------------
$ 1.06 $ 1.05
================== ==================
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED
MARCH 31,
--------------------------------------------
2004 2003
------------------ ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 349,084 $ 338,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................ 286,228 214,349
Asset retirement obligation accretion............................... 10,761 5,313
Provision for deferred income taxes................................. 83,799 103,427
Cumulative effect of change in accounting principle................. - (26,632)
Other............................................................... 6,854 9,368
Changes in operating assets and liabilities:
(Increase) decrease in receivables.................................. (63,969) (229,087)
(Increase) decrease in advances to oil and gas ventures and other... (2,093) (4,268)
(Increase) decrease in product inventory............................ 5,894 1,009
(Increase) decrease in deferred charges and other................... (7,775) 2,368
Increase (decrease) in payables..................................... 20,391 98,551
Increase (decrease) in accrued expenses............................. (27,362) 42,225
Increase (decrease) in advances from gas purchasers................. (4,833) (4,304)
Increase (decrease) in deferred credits and noncurrent liabilities.. (4,647) (13,207)
------------------ ------------------
Net cash provided by operating activities...................... 652,332 538,041
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......................................... (469,833) (344,183)
Acquisition of BP Gulf of Mexico properties.................................. - (527,610)
Other, net................................................................... (9,509) (12,226)
------------------ ------------------
Net cash used in investing activities.......................... (479,342) (884,019)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings......................................................... 251 64,753
Payments on long-term debt................................................... (135,300) (280,300)
Dividends paid............................................................... (20,898) (16,787)
Common stock activity........................................................ 7,534 564,442
Treasury stock activity, net................................................. 3,746 2,476
Cost of debt and equity transactions......................................... (673) (534)
------------------ ------------------
Net cash provided by/(used in) financing activities............ (145,340) 334,050
------------------ ------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............................ 27,650 (11,928)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 33,503 51,886
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 61,153 $ 39,958
================== ==================
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------------ ------------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 61,153 $ 33,503
Receivables, net of allowance................................................ 704,454 639,055
Inventories.................................................................. 118,686 125,867
Drilling advances............................................................ 60,788 58,062
Prepaid assets and other..................................................... 42,769 42,585
------------------ ------------------
987,850 899,072
------------------ ------------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties....................................................... 16,801,481 16,277,930
Unproved properties and properties under
development, not being amortized.................................... 803,113 795,161
Gas gathering, transmission and processing facilities........................ 848,490 828,169
Other........................................................................ 245,957 239,548
------------------ ------------------
18,699,041 18,140,808
Less: Accumulated depreciation, depletion and amortization................... (7,166,685) (6,880,723)
------------------ ------------------
11,532,356 11,260,085
------------------ ------------------
OTHER ASSETS:
Goodwill, net................................................................ 189,252 189,252
Deferred charges and other................................................... 76,252 67,717
------------------ ------------------
$ 12,785,710 $ 12,416,126
================== ==================
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------------ ------------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 327,373 $ 300,598
Accrued operating expense.................................................... 50,675 72,250
Accrued exploration and development.......................................... 283,675 212,028
Accrued compensation and benefits............................................ 43,314 56,237
Accrued interest............................................................. 45,711 32,621
Accrued income taxes......................................................... 68,350 18,936
Oil and gas derivative instruments........................................... 77,093 63,542
Other........................................................................ 18,370 64,166
------------------ ------------------
914,561 820,378
------------------ ------------------
LONG-TERM DEBT.................................................................. 2,191,917 2,326,966
------------------ ------------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes................................................................. 1,771,001 1,697,238
Advances from gas purchasers................................................. 104,374 109,207
Asset retirement obligation.................................................. 748,400 739,775
Oil and gas derivative instruments........................................... 2,729 5,931
Other........................................................................ 180,289 183,833
------------------ ------------------
2,806,793 2,735,984
------------------ ------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized - Series B, 5.68%
Cumulative Preferred Stock, 100,000 shares issued and outstanding....... 98,387 98,387
Common stock, $0.625 par, 430,000,000 shares authorized,
333,083,117 and 332,509,478 shares issued, respectively................. 208,177 207,818
Paid-in capital.............................................................. 4,053,413 4,038,007
Retained earnings............................................................ 2,773,359 2,445,698
Treasury stock, at cost, 7,854,128 and 8,012,302 shares,
respectively............................................................ (102,537) (105,169)
Accumulated other comprehensive loss......................................... (158,360) (151,943)
------------------ ------------------
6,872,439 6,532,798
------------------ ------------------
$ 12,785,710 $ 12,416,126
================== ==================
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B
COMPREHENSIVE PREFERRED COMMON PAID-IN RETAINED
INCOME STOCK STOCK CAPITAL EARNINGS
------------- --------- --------- ---------- ----------
(In thousands)
BALANCE AT DECEMBER 31, 2002............... $ 98,387 $ 194,331 $3,427,450 $1,427,607
Comprehensive income (loss):
Net income........................... $ 338,929 - - - 338,929
Commodity hedges, net of income tax
benefit of $7,625................. (12,859) - - - -
-------------
Comprehensive income.................... $ 326,070
=============
Dividends:
Preferred............................ - - - (1,420)
Common ($.05 per share).............. - - - (17,116)
Five percent common stock dividend...... - 607 25,307 (25,914)
Common shares issued.................... - 12,228 556,068 -
Treasury shares issued, net............. - - 482 -
Other................................... - - 396 -
--------- --------- ---------- ----------
BALANCE AT MARCH 31, 2003.................. $ 98,387 $ 207,166 $4,009,703 $1,722,086
========= ========= ========== ==========
BALANCE AT DECEMBER 31, 2003............... $ 98,387 $ 207,818 $4,038,007 $2,445,698
Comprehensive income (loss):
Net income........................... $ 349,084 - - - 349,084
Commodity hedges, net of income tax
benefit of $3,850................. (6,417) - - - -
-------------
Comprehensive income.................... $ 342,667
=============
Dividends:
Preferred............................ - - - (1,420)
Common ($.06 per share).............. - - - (20,003)
Common shares issued.................... - 359 12,287 -
Treasury shares issued, net............. - - 2,206 -
Other................................... - - 913 -
--------- --------- ---------- ----------
BALANCE AT MARCH 31, 2004.................. $ 98,387 $ 208,177 $4,053,413 $2,773,359
========= ========= ========== ==========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME (LOSS) EQUITY
--------- ------------- -------------
(In thousands)
BALANCE AT DECEMBER 31, 2002............... $(110,559) $ (112,936) $ 4,924,280
Comprehensive income (loss):
Net income........................... - - 338,929
Commodity hedges, net of income tax
benefit of $7,625................. - (12,859) (12,859)
Comprehensive income....................
Dividends:
Preferred............................ - - (1,420)
Common ($.05 per share).............. - - (17,116)
Five percent common stock dividend...... - - -
Common shares issued.................... - - 568,296
Treasury shares issued, net............. 2,112 - 2,594
Other................................... - - 396
--------- ------------- -------------
BALANCE AT MARCH 31, 2003.................. $(108,447) $ (125,795) $ 5,803,100
========= ============= =============
BALANCE AT DECEMBER 31, 2003............... $(105,169) $ (151,943) $ 6,532,798
Comprehensive income (loss):
Net income........................... - - 349,084
Commodity hedges, net of income tax
benefit of $3,850................. - (6,417) (6,417)
Comprehensive income....................
Dividends:
Preferred............................ - - (1,420)
Common ($.06 per share).............. - - (20,003)
Common shares issued.................... - - 12,646
Treasury shares issued, net............. 2,632 - 4,838
Other................................... - - 913
--------- ------------- -------------
BALANCE AT MARCH 31, 2004.................. $(102,537) $ (158,360) $ 6,872,439
========= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation
(Apache or the Company) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission, and reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the summary of
significant accounting policies and notes thereto included in the Company's most
recent annual report on Form 10-K.
On December 18, 2002, the Company declared a five percent stock dividend,
distributed on April 2, 2003, to shareholders of record on March 12, 2003. On
September 11, 2003, the Company declared a two-for-one stock split, distributed
on January 14, 2004, to shareholders of record on December 31, 2003. Quarterly
share and per share information for 2003 has been restated to reflect this stock
dividend and the two-for-one stock split.
Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentations.
1. ACQUISITIONS
On January 13, 2003, Apache announced that it had entered into agreements
to purchase producing properties in the North Sea and Gulf of Mexico from
subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion,
with $670 million allocated to the Gulf of Mexico properties and the remaining
$630 million allocated to properties in the North Sea. The properties included
estimated proved reserves of 233.2 million barrels of oil equivalent (MMboe),
147.6 MMboe located in the North Sea with the balance in the Gulf of Mexico. The
Gulf of Mexico properties were subject to normal closing adjustments and
preferential rights by third parties. Both purchase agreements were effective as
of January 1, 2003. As is customary, Apache assumed BP's abandonment obligation
for the properties, which was considered in determining the purchase price. The
purchase price for both BP transactions was paid in cash funded by the sale of
Apache common stock and borrowings under existing lines of credit and commercial
paper. The offering of Apache's common stock provided net proceeds of
approximately $554 million.
Apache and BP closed the transaction for the Gulf of Mexico properties on
March 13, 2003, which included BP's interest in 56 producing fields, including
104 blocks. Upon closing, Apache paid a purchase price, adjusted for normal
closing and preferential rights exercised by third parties, of $509 million. The
Gulf of Mexico purchase price and reserves were reduced by $73 million and 9.6
MMboe, respectively, primarily for the exercise of preferential rights by third
parties. As of January 1, 2003, the Gulf of Mexico properties acquired from BP
had estimated proved reserves of 76 MMboe.
The acquisition of the U.K. North Sea properties closed on April 2, 2003,
at which time Apache paid a purchase price, adjusted for normal closing and
working capital adjustments, of $630 million. As of January 1, 2003, the North
Sea properties acquired from BP had estimated proved reserves of 147.6 MMboe.
The acquisition of the North Sea properties includes a 96 percent interest in
the Forties Field and establishes a new core area for the Company. In
conjunction with the Forties acquisition, Apache may be required to issue a
letter of credit to BP to cover the present value of related asset retirement
obligations if the rating of our senior unsecured debt is lowered by both
Moody's and Standard and Poor's from the Company's current ratings of A- and A3,
respectively. Should this occur, the current letter of credit amount would be
129 million British pounds. Apache agreed to sell all of the North Sea
production from those properties through December 31, 2004, to BP at a
combination of fixed and market sensitive prices pursuant to a contract entered
into in connection with the North Sea purchase agreement.
6
Presented below is a breakdown of the cash consideration given for the BP
transactions as of the closing date:
U.S. - U.K. -
IN THOUSANDS GULF OF MEXICO NORTH SEA TOTAL*
- ----------------------------- -------------- ---------- -----------
Proved Property $ 539,110 $ 854,835 $ 1,393,945
Unproved Property 57,500 65,000 122,500
Working Capital acquired, net - 10,957 10,957
Asset Retirement Obligation (69,000) (250,887) (319,887)
Deferred Tax Liability - (50,381) (50,381)
-------------- ---------- -----------
Cash consideration $ 527,610 $ 629,524 $ 1,157,134
============== ========== ===========
* Property balance includes $12 million of transaction costs (U.S. - $4 million;
North Sea - $8 million).
The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the Gulf of Mexico and North
Sea acquisitions from BP occurred on January 1, 2003. The pro forma information
is based in part on data provided by BP and on numerous assumptions. The
information is not necessarily indicative of future results of operations.
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
--------------------------------------------
AS REPORTED PRO FORMA
------------------- ------------------
(In thousands, except per common share data)
Revenues...................................... $ 966,609 $ 1,204,571
Net income.................................... 338,929 412,126
Preferred stock dividends..................... 1,420 1,420
Income attributable to common stock........... 337,509 410,706
Net income per common share:
Basic.................................... $ 1.06 $ 1.27
Diluted.................................. 1.05 1.26
Average common shares outstanding (1)......... 318,509 322,910
(1) Pro forma shares assume the issuance of 19.8 million common shares,
adjusted for the five percent common stock dividend and the two-for-one
common stock split as of January 1, 2003.
On July 3, 2003, Apache announced that it had completed the acquisition of
producing properties on the Outer Continental Shelf of the Gulf of Mexico from
Shell Exploration and Production Company (Shell) for $200 million, subject to
normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced over the next four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley receives a
fixed volume of oil and gas production over approximately four years beginning
in August 2003 for gas and November 2003 for oil. The VPP reserves and
production were not recorded by Apache.
Apache recorded estimated proved reserves of 124.6 billion cubic feet
(Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60 million
liability for the future cost to produce and deliver volumes subject to the VPP
was recorded by the Company because the overriding royalties are not burdened by
production costs. This liability will be amortized as the volumes are produced
and delivered to Morgan Stanley. The purchase agreement was effective as of July
1, 2003. The acquisition included interests in 26 fields covering 50 blocks
(approximately 209,000 acres) and interests in two onshore gas plants. Apache
will operate 15 of the fields with 91 percent of the production. The purchase
price was funded by borrowings under the Company's lines of credit and
commercial paper program.
7
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache uses a variety of strategies to manage its exposure to fluctuations
in commodity prices. As established by the Company's hedging policy, Apache
primarily enters into cash flow hedges in connection with certain acquisitions
to protect against commodity price volatility. The success of these acquisitions
is significantly influenced by Apache's ability to achieve targeted production
at forecasted prices. These hedges effectively reduce price risk on a portion of
the production from the acquisitions.
During the first quarter of 2003, in conjunction with the BP acquisitions
and during the fourth quarter of 2002, in conjunction with an acquisition of
certain South Louisiana properties, Apache entered into, and designated as cash
flow hedges, natural gas and crude oil fixed-price swaps and natural gas option
collars. These positions were entered into in accordance with the Company's
hedging policy and involved several counterparties which are rated A+ or better.
As of March 31, 2004, the outstanding positions of our cash flow hedges were as
follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU) FLOOR/CEILING (LIABILITY)
- ---------- -------------------- ------------- ---------------- -----------------
(In thousands)
2004 Collars 13,750,000 $ 3.25 / 5.81 $ (8,001)
Gas Fixed-Price Swap 38,500,000 4.33 (62,547)
2005 Collars 9,050,000 3.25 / 5.20 (9,274)
In addition to the fixed-price swaps and options, Apache entered into a
separate crude oil physical sales contract with BP. The sales contract qualifies
for the normal purchase and sale exemption of Statement of Financial Accounting
Standards (SFAS) No. 133 and, therefore, the Company has designated and
accounted for the contract under the accrual method. As of March 31, 2004, the
outstanding terms of the contract were as follows:
CRUDE OIL FIXED-PRICE PHYSICAL SALES CONTRACT (BRENT)
- --------------------------------------------------------
PRODUCTION TOTAL VOLUMES AVERAGE
PERIOD (BARRELS) FIXED PRICE
- ---------- ------------- -----------
2004 11,000,000 $ 22.06
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below (in thousands):
GROSS AFTER-TAX
--------- ---------
Unrealized loss on derivatives at December 31, 2003..... $ (69,316) $ (43,193)
Net losses realized into earnings....................... 19,772 12,356
Net change in derivative fair value..................... (30,039) (18,773)
--------- ---------
Unrealized loss on derivatives at March 31, 2004........ $ (79,583) $ (49,610)
========= =========
The unrealized loss in other comprehensive income of $79.6 million is
expected to be realized in future earnings contemporaneously with the related
sales of natural gas and crude oil production applicable to specific hedges.
Losses of $76.9 million ($47.9 million after tax) are expected to be realized
over the next twelve months; however, these amounts could vary materially as a
result of changes in market conditions. The contracts designated as hedges
qualified and continue to qualify for hedge accounting in accordance with SFAS
No. 133, as amended.
8
3. CAPITAL STOCK
On January 22, 2003, the Company completed a public offering of 19.8
million shares of Apache common stock, adjusted for the five percent common
stock dividend and the two-for-one common stock split, including underwriters'
over-allotment option, for net proceeds of approximately $554 million. The
proceeds were used toward Apache's acquisition from BP of producing properties
in the U.K. North Sea and the Gulf of Mexico.
On September 12, 2003, the Company announced that its Board of Directors
voted to increase the quarterly cash dividend on its common stock to 12 cents
per share from 10 cents per share (six cents per share from five cents per share
adjusted for the two-for-one stock split), effective with the November 2003
payment, and to split its common stock two-for-one early in 2004, subject to
shareholder approval of an increase in the authorized number of common shares.
On December 18, 2003, the Company announced that holders of its common
stock approved an increase in the number of authorized common shares to 430
million from 215 million in order to complete the previously announced
two-for-one stock split. The record date for the stock split was December 31,
2003 and the additional shares were distributed on January 14, 2004.
On January 26, 2004, the Nasdaq Stock Market, Inc. (NASDAQ) approved
Apache for listing on the Nasdaq National Market, an intention we first
announced on January 12, 2004. Apache's common stock is now listed on the NASDAQ
as well as the New York Stock Exchange and the Chicago Stock Exchange.
4. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED MARCH 31,
-----------------------------------------------------------------
2004 2003
------------------------------- -------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- ------- --------- --------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock........ $ 347,664 325,003 $ 1.07 $ 337,509 318,509 $ 1.06
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other.................... - 3,011 - 2,650
--------- ------- --------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions............. $ 347,664 328,014 $ 1.06 $ 337,509 321,159 $ 1.05
========= ======= ========= ========= ======= =========
9
5. STOCK-BASED COMPENSATION
On March 31, 2004, the Company had several stock-based employee
compensation plans. Prior to 2003, the Company accounted for these plans under
the recognition and measurement provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No material stock-based employee compensation cost is reflected
in net income for options granted prior to 2003, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, prospectively to all
employee awards granted, modified, or settled after January 1, 2003. Therefore,
the cost related to stock-based employee compensation included in the
determination of net income for 2003 is less than that which would have been
recognized if the fair value based method had been applied to all awards since
the original effective date of SFAS No. 123, as amended. The following table
illustrates the effect on income attributable to common stock and earnings per
share had the fair value based provisions of SFAS No. 123, as amended, been
applied to all outstanding and unvested awards.
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2004 2003
-------------- --------------
(In thousands)
Income attributable to Common Stock, as reported......... $ 347,664 $ 337,509
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects.......................................... 773 356
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........... (5,579) (4,501)
-------------- --------------
Pro forma Income Attributable to Common Stock............ $ 342,858 $ 333,364
============== ==============
Net Income per Common Share:
Basic:
As reported....................................... $ 1.07 $ 1.06
Pro forma......................................... 1.05 1.05
Diluted:
As reported....................................... 1.06 1.05
Pro forma......................................... 1.05 1.03
The effects of applying SFAS No. 123, as amended, in this pro forma
disclosure should not be interpreted as being indicative of future effects. SFAS
No. 123, as amended, does not apply to awards prior to 1995, and the extent and
timing of additional future awards cannot be predicted.
On May 1, 2003, the Company began issuing stock appreciation rights to
certain employees in lieu of stock options. The Company records compensation
expense with respect to stock appreciation rights as the price of the Company's
common stock fluctuates and the awards vest.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2004 2003
-------------- --------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)................. $ 11,308 $ 12,017
Income taxes (net of refunds)......................... 64,705 61,948
10
7. PENSION AND POST-RETIREMENT BENEFITS
Effective July 1, 2003, as part of the BP North Sea acquisition, Apache
assumed a defined benefit pension plan covering existing BP North Sea employees
hired by the Company as part of the acquisition. The pension plan provides
defined benefits based on years of service and final average salary.
The following table sets forth the components of the net periodic cost of
Apache's pension and other post-retirement benefit plans for the three-month
period ended March 31, 2004. The pension and post-retirement benefit plans did
not materially impact the Company for equivalent prior-year periods.
FOR THE QUARTER ENDED MARCH 31, 2004
------------------------------------
POST-RETIREMENT
PENSION BENEFITS BENEFITS
---------------- ---------------
(In thousands)
COMPONENTS OF NET PERIODIC BENEFIT COSTS
Service cost.......................................... $ 1,386 $ 250
Interest cost......................................... 921 150
Expected return on assets............................. (911) -
Amortization of:
Prior service cost................................ - -
Transition obligation............................. - -
Actuarial (gain)/loss............................. - 75
---------------- ---------------
Net periodic benefit cost............................. $ 1,396 $ 475
================ ===============
Apache disclosed in its financial statements for the year ended December
31, 2003, that it expected to contribute $5 million to its pension plan in 2004,
of which $1 million was contributed as of March 31, 2004 and at least an
additional $4 million is expected by year-end 2004.
The Company did not make any material contributions to the post-retirement
benefit plan during the period and does not anticipate any material
contributions or benefit payments to be made in future years.
11
8. BUSINESS SEGMENT INFORMATION
Apache has six reportable segments which are primarily in the business of
crude oil and natural gas 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 based on their geographic
locations. Financial information by operating segment is presented below:
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL
---------- ---------- ---------- ---------- --------- ------------- -----------
(In thousands)
FOR THE QUARTER ENDED MARCH 31, 2004
Oil and Gas Production Revenues......... $ 530,756 $ 226,041 $ 188,007 $ 93,440 $ 92,216 $ 22,294 $ 1,152,754
========== ========== ========== ========== ========= ============= ===========
Operating Income (1).................... $ 287,003 $ 123,061 $ 117,814 $ 47,792 $ 7,436 $ 8,048 $ 621,154
========== ========== ========== ========== ========= =============
Other Income (Expense):
Other................................ (2,815)
General and administrative........... (43,850)
Financing costs, net................. (27,146)
-----------
Income Before Income Taxes.............. $ 547,343
===========
Total Assets............................ $5,695,986 $3,123,622 $1,799,449 $1,000,008 $ 990,647 $ 175,998 $12,785,710
========== ========== ========== ========== ========= ============= ===========
FOR THE QUARTER ENDED MARCH 31, 2003
Oil and Gas Production Revenues......... $ 472,153 $ 223,403 $ 175,363 $ 102,274 $ - $ 1,969 $ 975,162
========== ========== ========== ========== ========= ============= ===========
Operating Income (1).................... $ 277,941 $ 136,575 $ 113,706 $ 56,059 $ - $ 669 $ 584,950
========== ========== ========== ========== ========= =============
Other Income (Expense):
Other................................ (8,553)
General and administrative........... (27,831)
Preferred interests of subsidiaries.. (3,362)
Financing costs, net................. (25,921)
-----------
Income Before Income Taxes.............. $ 519,283
===========
Total Assets............................ $5,345,524 $2,652,260 $1,749,675 $ 950,629 $ - $ 174,194 $10,872,282
========== ========== ========== ========== ========= ============= ===========
(1) Operating income (loss) consists of oil and gas production revenues less
depreciation, depletion and amortization, asset retirement obligation
accretion, lease operating costs, gathering and transportation costs, and
severance and other taxes.
9. ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," which requires that an asset retirement
obligation (ARO) associated with the retirement of a tangible long-lived asset
be recognized as a liability in the period in which it is incurred and becomes
determinable, with an offsetting increase in the carrying amount of the
associated asset. The cost of the tangible asset, including the initially
recognized ARO, is depleted such that the cost of the ARO is recognized over the
useful life of the asset. The ARO is recorded at fair value, and accretion
expense will be recognized over time as the discounted liability is accreted to
its expected settlement value. The fair value of the ARO is measured using
expected future cash outflows discounted at the Company's credit-adjusted
risk-free interest rate. Apache's asset retirement obligations primarily relate
to the plugging and abandonment of oil and gas properties.
Upon adoption, Apache recorded an increase to net oil and gas properties
of $410 million and additional liabilities related to asset retirement
obligations of $369 million. These amounts reflect the ARO of the Company had
the provisions of SFAS No. 143 been applied since inception and resulted in a
non-cash cumulative effect increase to 2003 earnings of $27 million ($41 million
pretax).
12
The following table describes all changes to the Company's asset
retirement obligation liability for the current year (in thousands):
Asset retirement obligation as of December 31, 2003... $ 739,775
Liabilities incurred.................................. 4,112
Liabilities settled................................... (14,173)
Accretion expense..................................... 10,761
Revisions............................................. 7,925
---------
Asset retirement obligation as of March 31, 2004......... $ 748,400
=========
Liabilities incurred during the period primarily relate to obligations in
connection with the Company's drilling activity. Liabilities settled during the
period primarily relate to individually immaterial properties plugged and
abandoned or sold during the period.
10. SUBSEQUENT EVENT
In October 2000, the Company adopted the 2000 Share Appreciation Plan
under which grants were made to the Company's officers and substantially all
full-time employees. The 2000 Share Appreciation Plan provides for issuance of
Apache common stock, based on attainment of one or more of three share price
goals (Share Price Goals) and/or a separate production goal. The Share Price
Goals are based on achieving a closing share price for Apache stock of $43.29,
$51.95 and $77.92 per share ($100, $120 and $180 before the five and 10 percent
stock dividends and the two-for-one stock split) on any 10 days out of any 30
consecutive trading days before January 1, 2005. As of April 28, 2004, Apache's
share price exceeded the first threshold for the 10-day requirement. As such,
Apache will issue approximately 1.3 million shares of its common stock, before
any minimum tax withholding requirements, valued at approximately $59 million.
These awards will be issued in three equal installments in 2004, 2005 and 2006
to employees remaining with the Company during that period. Expense recognition
is based on the percentage of the employees' service period and will reduce
Apache's 2004 net income by approximately $16 million after tax, or five cents
per diluted common share. Please refer to our 2003 Form 10-K for additional
details concerning the 2000 Share Appreciation Plan.
11. SUPPLEMENTAL GUARANTOR INFORMATION
Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada Corporation (Apache Finance Canada) are subsidiaries of Apache, that have
issuances of publicly traded securities and require the following condensed
consolidating financial statements be provided as an alternative to filing
separate financial statements.
Each of the companies presented in the condensed consolidating financial
statements has been fully consolidated in Apache's consolidated financial
statements. As such, the condensed consolidating financial statements should be
read in conjunction with the financial statements of Apache Corporation and
Subsidiaries and notes thereto of which this note is an integral part.
13
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- -------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............. $ 529,038 $ - $ - $ -
Equity in net income (loss) of affiliates... 193,492 8,262 11,228 37,945
Other....................................... (763) - - -
----------- ------------- --------- -------
721,767 8,262 11,228 37,945
----------- ------------- --------- -------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 131,210 - - -
Asset retirement obligation accretion....... 5,795 - - -
Lease operating costs....................... 84,235 - - -
Gathering and transportation costs.......... 7,332 - - -
Severance and other taxes................... 13,380 - - 18
General and administrative.................. 34,929 - - -
Financing costs, net........................ 21,763 - 4,512 10,107
----------- ------------- --------- -------
298,644 - 4,512 10,125
----------- ------------- --------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 423,123 8,262 6,716 27,820
Provision (benefit) for income taxes........ 74,039 - (1,546) (3,505)
----------- ------------- --------- -------
NET INCOME..................................... 349,084 8,262 8,262 31,325
Preferred stock dividends................... 1,420 - - -
----------- ------------- --------- -------
INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 347,664 $ 8,262 $ 8,262 $31,325
=========== ============= ========= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............. $ 701,891 $ (78,175) $ 1,152,754
Equity in net income (loss) of affiliates... (9,586) (241,341) -
Other....................................... (2,052) - (2,815)
------------ ----------------- ------------
690,253 (319,516) 1,149,939
------------ ----------------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 155,018 - 286,228
Asset retirement obligation accretion....... 4,966 - 10,761
Lease operating costs....................... 199,969 (78,175) 206,029
Gathering and transportation costs.......... 12,302 - 19,634
Severance and other taxes................... (4,450) - 8,948
General and administrative.................. 8,921 - 43,850
Financing costs, net........................ (9,236) - 27,146
------------ ----------------- ------------
367,490 (78,175) 602,596
------------ ----------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.............. 322,763 (241,341) 547,343
Provision (benefit) for income taxes........ 129,271 - 198,259
------------ ----------------- ------------
NET INCOME..................................... 193,492 (241,341) 349,084
Preferred stock dividends................... - - 1,420
------------ ----------------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 193,492 $ (241,341) $ 347,664
============ ================= ============
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- -------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............. $ 376,167 $ - $ - $ -
Equity in net income (loss) of affiliates... 179,358 8,947 11,925 28,195
Other....................................... (3,616) - - -
----------- ------------- --------- -------
551,909 8,947 11,925 28,195
----------- ------------- --------- -------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 67,618 - - -
Asset retirement obligation accretion....... 2,764 - - -
Lease operating costs....................... 58,767 - - -
Gathering and transportation costs.......... 4,485 - - -
Severance and other taxes................... 14,357 - - 42
General and administrative.................. 23,703 - - -
Financing costs, net........................ 21,099 - 4,512 10,169
----------- ------------- --------- -------
192,793 - 4,512 10,211
----------- ------------- --------- -------
PREFERRED INTERESTS OF SUBSIDIARIES............ - - - -
----------- ------------- --------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 359,116 8,947 7,413 17,984
Provision (benefit) for income taxes........ 39,944 - (1,534) (4,112)
----------- ------------- --------- -------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE......................... 319,172 8,947 8,947 22,096
Cumulative effect of change in accounting
principle, net of income tax............ 19,757 - - -
----------- ------------- --------- -------
NET INCOME..................................... 338,929 8,947 8,947 22,096
Preferred stock dividends................... 1,420 - - -
----------- ------------- --------- -------
INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 337,509 $ 8,947 $ 8,947 $22,096
=========== ============= ========= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............. $ 654,267 $ (55,272) $ 975,162
Equity in net income (loss) of affiliates... (9,077) (219,348) -
Other....................................... (4,937) - (8,553)
------------ ----------------- ------------
640,253 (274,620) 966,609
------------ ----------------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization.... 146,731 - 214,349
Asset retirement obligation accretion....... 2,549 - 5,313
Lease operating costs....................... 130,640 (55,272) 134,135
Gathering and transportation costs.......... 7,376 - 11,861
Severance and other taxes................... 10,155 - 24,554
General and administrative.................. 4,128 - 27,831
Financing costs, net........................ (9,859) - 25,921
------------ ----------------- ------------
291,720 (55,272) 443,964
------------ ----------------- ------------
PREFERRED INTERESTS OF SUBSIDIARIES............ 3,362 - 3,362
------------ ----------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.............. 345,171 (219,348) 519,283
Provision (benefit) for income taxes........ 172,688 - 206,986
------------ ----------------- ------------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE......................... 172,483 (219,348) 312,297
Cumulative effect of change in accounting
principle, net of income tax............ 6,875 - 26,632
------------ ----------------- ------------
NET INCOME..................................... 179,358 (219,348) 338,929
Preferred stock dividends................... - - 1,420
------------ ----------------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK............ $ 179,358 $ (219,348) $ 337,509
============ ================= ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- -------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ 315,934 $ - $ (3,704) $ 205
----------- ------------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (120,615) - - -
Investment in subsidiaries, net............. (15,778) (3,500) - -
Other, net.................................. (8,109) - - -
----------- ------------- --------- -------
NET CASH USED IN INVESTING ACTIVITIES.......... (144,502) (3,500) - -
----------- ------------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................ 187 - 204 (204)
Payments on long-term debt.................. (135,300) - - -
Dividends paid.............................. (20,898) - - -
Common stock activity....................... 7,534 3,500 3,500 -
Treasury stock activity, net................ 3,746 - - -
Cost of debt and equity transactions........ (673) - - -
----------- ------------- --------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................... (145,404) 3,500 3,704 (204)
----------- ------------- --------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. 26,028 - - 1
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR............................ - - 2 1
----------- ------------- --------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................................ $ 26,028 $ - $ 2 $ 2
=========== ============= ========= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ 339,897 $ - $ 652,332
------------ ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (349,218) - (469,833)
Investment in subsidiaries, net............. (3,816) 23,094 -
Other, net.................................. (1,400) - (9,509)
------------ ----------------- ------------
NET CASH USED IN INVESTING ACTIVITIES.......... (354,434) 23,094 (479,342)
------------ ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................ 12,658 (12,594) 251
Payments on long-term debt.................. - - (135,300)
Dividends paid.............................. - - (20,898)
Common stock activity....................... 3,500 (10,500) 7,534
Treasury stock activity, net................ - - 3,746
Cost of debt and equity transactions........ - - (673)
------------ ----------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................... 16,158 (23,094) (145,340)
------------ ----------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. 1,621 - 27,650
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR............................ 33,500 - 33,503
------------ ----------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................................ $ 35,121 $ - $ 61,153
============ ================= ============
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- -------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ 134,160 $ - $ (3,500) $(4,333)
----------- ------------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (87,688) - - -
Acquisitions................................ (527,610) - - -
Investment in subsidiaries, net............. 113,844 (3,500) - -
Other, net.................................. (3,953) - - -
----------- ------------- --------- -------
NET CASH USED IN INVESTING ACTIVITIES.......... (505,407) (3,500) - -
----------- ------------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................ 104,488 - - (66)
Payments on long-term debt.................. (280,300) - - -
Dividends paid.............................. (16,787) - - -
Common stock activity....................... 564,442 3,500 3,500 4,363
Treasury stock activity, net................ 2,476 - - -
Cost of debt and equity transactions........ (534) - - -
----------- ------------- --------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 373,785 3,500 3,500 4,297
----------- ------------- --------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. 2,538 - - (36)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR............................ 224 - 2 127
----------- ------------- --------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................................ $ 2,762 $ - $ 2 $ 91
=========== ============= ========= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ 411,714 $ - $ 538,041
------------ ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (256,495) - (344,183)
Acquisitions................................ - - (527,610)
Investment in subsidiaries, net............. (91,727) (18,617) -
Other, net.................................. (8,273) - (12,226)
------------ ----------------- ------------
NET CASH USED IN INVESTING ACTIVITIES.......... (356,495) (18,617) (884,019)
------------ ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................ (90,957) 51,288 64,753
Payments on long-term debt.................. - - (280,300)
Dividends paid.............................. - - (16,787)
Common stock activity....................... 21,308 (32,671) 564,442
Treasury stock activity, net................ - - 2,476
Cost of debt and equity transactions........ - - (534)
------------ ----------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... (69,649) 18,617 334,050
------------ ----------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. (14,430) - (11,928)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR............................ 51,533 - 51,886
------------ ----------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................................ $ 37,103 $ - $ 39,958
============ ================= ============
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 26,028 $ - $ 2 $ 2
Receivables, net of allowance............... 243,614 - - -
Inventories................................. 16,090 - - -
Drilling advances and others................ 38,385 - - -
----------- ------------- --------- ----------
324,117 - 2 2
----------- ------------- --------- ----------
PROPERTY AND EQUIPMENT, NET.................... 5,245,995 - - -
----------- ------------- --------- ----------
OTHER ASSETS:
Intercompany receivable, net................ 1,304,161 - (2,115) 93,986
Goodwill, net............................... - - - -
Equity in affiliates........................ 3,278,124 226,278 480,039 1,138,827
Deferred charges and other.................. 37,909 - - 4,791
----------- ------------- --------- ----------
$10,190,306 $ 226,278 $ 477,926 $1,237,606
=========== ============= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 197,991 $ - $ - $ -
Other accrued expenses...................... 282,393 - 1,115 12,499
----------- ------------- --------- ----------
480,384 - 1,115 12,499
----------- ------------- --------- ----------
LONG-TERM DEBT................................. 1,270,770 - 269,037 646,754
----------- ------------- --------- ----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................ 905,472 - (18,504) (752)
Advances from gas purchasers................ 104,374 - - -
Asset retirement obligation................. 401,562 - - -
Other....................................... 155,305 - - -
----------- ------------- --------- ----------
1,566,713 - (18,504) (752)
----------- ------------- --------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................... 6,872,439 226,278 226,278 579,105
----------- ------------- --------- ----------
$10,190,306 $ 226,278 $ 477,926 $1,237,606
=========== ============= ========= ==========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 35,121 $ - $ 61,153
Receivables, net of allowance............... 460,840 - 704,454
Inventories................................. 102,596 - 118,686
Drilling advances and others................ 65,172 - 103,557
------------ ----------------- ------------
663,729 - 987,850
------------ ----------------- ------------
PROPERTY AND EQUIPMENT, NET.................... 6,286,361 - 11,532,356
------------ ----------------- ------------
OTHER ASSETS:
Intercompany receivable, net................ (1,396,032) - -
Goodwill, net............................... 189,252 - 189,252
Equity in affiliates........................ (813,483) (4,309,785) -
Deferred charges and other.................. 33,552 - 76,252
------------ ----------------- ------------
$ 4,963,379 $ (4,309,785) $ 12,785,710
============ ================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 129,382 $ - $ 327,373
Other accrued expenses...................... 291,181 - 587,188
------------ ----------------- ------------
420,563 - 914,561
------------ ----------------- ------------
LONG-TERM DEBT................................. 5,356 - 2,191,917
------------ ----------------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................ 884,785 - 1,771,001
Advances from gas purchasers................ - - 104,374
Asset retirement obligation................. 346,838 - 748,400
Other....................................... 27,713 - 183,018
------------ ----------------- ------------
1,259,336 - 2,806,793
------------ ----------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................... 3,278,124 (4,309,785) 6,872,439
------------ ----------------- ------------
$ 4,963,379 $ (4,309,785) $ 12,785,710
============ ================= ============
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ - $ - $ 2 $ 1
Receivables, net of allowance............... 204,078 - - -
Inventories................................. 17,646 - - -
Drilling advances and other................. 60,159 - - -
----------- ------------- --------- ----------
281,883 - 2 1
----------- ------------- --------- ----------
PROPERTY AND EQUIPMENT, NET.................... 5,235,717 - - -
----------- ------------- --------- ----------
OTHER ASSETS:
Intercompany receivable, net................ 1,291,503 - (1,961) 93,768
Goodwill, net............................... - - - -
Equity in affiliates........................ 3,077,152 183,617 437,860 1,084,711
Deferred charges and other.................. 36,672 - - 4,767
----------- ------------- --------- ----------
$ 9,922,927 $ 183,617 $ 435,901 $1,183,247
=========== ============= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 189,031 $ - $ - $ -
Other accrued expenses...................... 238,555 - 1,621 1,803
----------- ------------- --------- ----------
427,586 - 1,621 1,803
----------- ------------- --------- ----------
LONG-TERM DEBT................................. 1,405,882 - 268,987 646,741
----------- ------------- --------- ----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................ 879,044 - (18,324) (842)
Advances from gas purchasers................ 109,207 - - -
Asset retirement obligation................. 401,349 - - -
Oil and gas derivative instruments.......... 5,931 - - -
Other....................................... 161,130 - - -
----------- ------------- --------- ----------
1,556,661 - (18,324) (842)
----------- ------------- --------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................... 6,532,798 183,617 183,617 535,545
----------- ------------- --------- ----------
$ 9,922,927 $ 183,617 $ 435,901 $1,183,247
=========== ============= ========= ==========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 33,500 $ - $ 33,503
Receivables, net of allowance............... 434,977 - 639,055
Inventories................................. 108,221 - 125,867
Drilling advances and other................. 40,488 - 100,647
------------ ----------------- ------------
617,186 - 899,072
------------ ----------------- ------------
PROPERTY AND EQUIPMENT, NET.................... 6,024,368 - 11,260,085
------------ ----------------- ------------
OTHER ASSETS:
Intercompany receivable, net................ (1,383,310) - -
Goodwill, net............................... 189,252 - 189,252
Equity in affiliates........................ (803,409) (3,979,931) -
Deferred charges and other.................. 26,278 - 67,717
------------ ----------------- ------------
$ 4,670,365 $ (3,979,931) $ 12,416,126
============ ================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 111,567 $ - $ 300,598
Other accrued expenses...................... 277,801 - 519,780
------------ ----------------- ------------
389,368 - 820,378
------------ ----------------- ------------
LONG-TERM DEBT................................. 5,356 - 2,326,966
------------ ----------------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................ 837,360 - 1,697,238
Advances from gas purchasers................ - - 109,207
Asset retirement obligation................. 338,426 - 739,775
Oil and gas derivative instruments.......... - - 5,931
Other....................................... 22,703 - 183,833
------------ ----------------- ------------
1,198,489 - 2,735,984
------------ ----------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY........................... 3,077,152 (3,979,931) 6,532,798
------------ ----------------- ------------
$ 4,670,365 $ (3,979,931) $ 12,416,126
============ ================= ============
19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Apache Corporation reported record first-quarter 2004 earnings of $348
million, up from the previous record established in the first quarter of 2003 of
$338 million. The 2003 quarter benefited from a $27 million cumulative effect
adjustment for a change in accounting principle regarding asset retirement
obligations (see Note 9). The Company also reported net cash provided by
operating activities of $652 million, an increase of $114 million from the
prior-year period. The improved results were driven by a 23 percent increase in
equivalent daily production over the prior-year period. While crude oil and
natural gas prices remained strong during the first quarter of 2004, both were
below the comparative price realizations of the year-ago quarter.
The Company's first-quarter 2004 production profile includes production
from the North Sea assets acquired from subsidiaries of BP p.l.c. (BP) early in
the second quarter of 2003 and China, where production commenced in the third
quarter of 2003. Production from these areas, combined with drilling successes
and production from Gulf of Mexico properties acquired during 2003 from BP and
Shell Exploration and Production Company (Shell), drove first-quarter 2004 daily
crude oil production to 217,567 barrels, up 37 percent from the comparable 2003
quarter. Over 75 percent of the increase in daily crude oil production came from
the North Sea. Our first-quarter 2004 natural gas production of 1,213 MMcf/d
increased 11 percent from the year-earlier period, relating primarily to the
Gulf of Mexico properties discussed above and, to a lesser extent, higher demand
in Australia and various drilling successes. Our first-quarter 2004 equivalent
production from outside the U.S. increased to 58 percent from 55 percent in the
2003 quarter.
First-quarter 2004 worldwide capital expenditures for exploration and
development activity exceeded $500 million. Approximately two-thirds of our
capital expenditures were dedicated to our North American regions to take
advantage of high North American commodity prices, especially natural gas.
Internationally, we had two notable discoveries:
- On January 6, 2004, we announced that the Thomas Bright-2 appraisal
well in the John Brookes field in the Carnarvon Basin offshore
Western Australia extended the boundary of the reservoir,
essentially doubling the estimated gross recoverable reserves. A
portion of the John Brookes reserves is dedicated to supply 20
million cubic feet (MMcf) of gas per day over the next 15 years,
with first sales scheduled for the fourth quarter of 2004.
- On March 2, 2004, we announced completion of the Qasr-3X Jurassic
appraisal well on Egypt's Khalda Concession which confirmed our
original preliminary estimate of ultimate recoverable reserves in
the range of one trillion to three trillion cubic feet (Tcf) of
natural gas and 20 million to 60 million barrels of condensate.
Several deep Jurassic delineation wells and at least one shallower
Cretaceous well are planned during 2004. The Qasr discovery is
perhaps the most significant discovery in Apache's history.
On April 22, 2004, we announced completion of a 25-year Gas Sales
Agreement with the Egyptian General Petroleum Company (EGPC) covering 2.1 Tcf of
natural gas from the Qasr field. Principle terms include supplying 300 MMcf of
gas per day to the Egyptian market. The pricing terms under the agreement set a
minimum price of $1.50 per million British thermal units (MMBtu) and a maximum
price of $2.65 per MMBtu. Field development, final engineering design and
tendering operations are underway to allow us to reach the full contracted
quantity during 2005.
On January 14, 2004, we completed the two-for-one common stock split
approved by our Board of Directors in September 2003. Separately, on January 26,
2004, the Nasdaq Stock Market, Inc. (NASDAQ) approved Apache for listing on the
Nasdaq National Market, an intention we first announced on January 12, 2004. Our
common stock is now listed on the NASDAQ as well as the New York Stock Exchange
and Chicago Stock Exchange.
As discussed in Note 10 of this Form 10-Q, on April 28, 2004, Apache's
share price exceeded the first threshold for the 10-day requirement under its
2000 Share Appreciation Plan. As such, the Company will issue 1.3 million shares
of its common stock valued at approximately $59 million in three annual
installments. The incentives will reduce Apache's 2004 net income by
approximately $16 million after tax or five cents per diluted common share.
20
The present outlook for the remainder of 2004 appears favorable,
considering our existing production profile and that current NYMEX futures
markets indicate crude oil and natural gas prices should remain above historical
averages. With a debt-to-capitalization ratio of 24.2 percent at quarter end and
a positive outlook for earnings and cash flow, we are well positioned to take
advantage of opportunities that may arise.
RESULTS OF OPERATIONS
Revenues
The following table presents each segment's oil revenues and gas revenues as a
percentage of total oil revenues and gas revenues, respectively.
OIL REVENUES GAS REVENUES
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
MARCH 31 , MARCH 31 ,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
United States........ 33% 34% 59% 59%
Canada............... 13% 16% 28% 29%
--------- --------- --------- ---------
North America........ 46% 50% 87% 88%
Egypt................ 23% 29% 9% 10%
Australia............ 13% 21% 4% 2%
North Sea............ 15% - - -
China................ 3% - - -
--------- --------- --------- ---------
Total............ 100% 100% 100% 100%
========= ========= ========= =========
Crude Oil Contribution
The geographic mix of our first-quarter 2004 crude oil revenues changed
appreciably when compared to the first-quarter 2003 revenues. Crude oil revenues
from outside the U.S. increased to 67 percent, up one percent from the
prior-year quarter. The North Sea properties contributed 15 percent of
first-quarter 2004 consolidated oil revenues while China contributed three
percent. Neither of these countries contributed to first-quarter 2003 revenues.
Percentage contributions from all other areas fell, reflecting the impact of our
new operations in the North Sea and China.
Natural Gas Contribution
First-quarter 2004 North American natural gas revenues totaled 87 percent
of consolidated natural gas revenues, down one percent from the comparable 2003
quarter. The U.S. contributed 59 percent of natural gas revenues, flat to the
prior-year quarter as production growth from acquisitions and drilling more than
offset the impact from lower natural gas prices. Canada and Egypt's
contributions declined one percent to 28 percent and nine percent, respectively,
on lower prices. Australia's gas revenues rose to four percent of consolidated
gas revenues on both higher production and higher prices. Australia's gas price
benefited from a stronger Australian dollar compared to the first quarter of
2003.
21
The table below presents oil and gas production revenues, production and
average prices received from sales of natural gas, oil and natural gas liquids.
FOR THE QUARTER ENDED MARCH 31,
------------------------------------
INCREASE
2004 2003 (DECREASE)
---------- ---------- ----------
Revenues (in thousands):
Natural gas........................ $ 526,854 $ 520,360 1%
Oil................................ 602,635 438,343 37%
Natural gas liquids................ 23,265 16,459 41%
---------- ----------
Total........................ $1,152,754 $ 975,162 18%
========== ==========
Natural Gas Volume - Mcf per day:
United States...................... 644,462 552,783 17%
Canada............................. 314,064 309,205 2%
Egypt.............................. 128,665 123,719 4%
Australia.......................... 118,822 101,153 17%
North Sea.......................... 1,602 - -
China - - -
Argentina.......................... 5,160 6,788 (24%)
---------- ----------
Total........................ 1,212,775 1,093,648 11%
========== ==========
Average Natural Gas Price - Per Mcf:
United States...................... $ 5.35 $ 6.22 (14%)
Canada............................. 5.09 5.35 (5%)
Egypt.............................. 4.10 4.50 (9%)
Australia.......................... 1.70 1.31 30%
North Sea.......................... 4.34 - -
China - - -
Argentina.......................... 0.47 0.42 12%
Total........................ 4.77 5.29 (10%)
Oil Volume - Barrels per day:
United States...................... 67,255 57,334 17%
Canada............................. 25,266 24,735 2%
Egypt.............................. 49,097 45,710 7%
Australia.......................... 23,658 30,439 (22%)
North Sea.......................... 44,299 - -
China.............................. 7,440 - -
Argentina.......................... 552 597 (8%)
---------- ----------
Total........................ 217,567 158,815 37%
========== ==========
Average Oil Price - Per barrel:
United States...................... $ 32.36 $ 28.97 12%
Canada............................. 33.00 32.09 3%
Egypt 31.34 30.46 3%
Australia.......................... 34.86 33.00 6%
North Sea.......................... 22.72 - -
China 30.12 - -
Argentina.......................... 33.44 31.95 5%
Total........................ 30.44 30.67 (1%)
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States................... 8,128 6,083 34%
Canada.......................... 2,598 1,406 85%
---------- ----------
Total........................ 10,726 7,489 43%
========== ==========
Average NGL Price - Per barrel:
United States................... $ 25.27 $ 24.34 4%
Canada.......................... 19.34 24.75 (22%)
Total........................ 23.83 24.42 (2%)
22
Natural Gas Revenues
The Company's natural gas production increased 119 million cubic feet per
day (MMcf/d), adding $57 million to first-quarter natural gas revenues.
Production in the U.S. climbed 92 MMcf/d, with the Gulf Coast region's
production rising 88 MMcf/d on a full quarter of production from the Gulf of
Mexico properties acquired from BP, production from properties acquired from
Shell in July 2003 and drilling and recompletion programs. These increases
offset natural declines in mature fields and downtime associated with well
performance. Production in the Central region was up 4 MMcf/d as new discoveries
and a successful recompletion program offset natural declines in mature fields.
Australian production increased 18 MMcf/d, reflecting higher demand and new
contracts that replaced contracts with a Perth gas distribution company which
expired in October 2002. Worldwide, our average natural gas price dropped $.52
per Mcf, reducing first-quarter natural gas revenues by $50 million.
Apache uses a variety of strategies to manage its exposure to fluctuations
in natural gas prices, including fixed-price physical contracts and derivatives.
Approximately nine percent of our first quarter 2004 domestic natural gas
production was subject to long-term fixed-price physical contracts, down from 11
percent in the first quarter of 2003. We also amortized small amounts of
unrealized gains and losses on derivative positions closed in October and
November 2001. The impact on our realized price was negligible in 2004 and 2003.
The following table shows the impact on average prices for these items:
FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
2004 2003
----------------- -----------------
(Per Mcf)
Fixed-price physical.................. $ (.09) $ (.15)
Derivatives........................... (.07) (.17)
Crude Oil Revenues
The Company added $168 million to first-quarter crude oil revenues on a
58,752 barrel per day (b/d) rise in production. Two areas contributing
production to the current quarter that were not included in the first quarter of
2003 were the North Sea properties acquired from BP in early April 2003 and
China, where production commenced in the third quarter of 2003. The North Sea's
production averaged 44,299 b/d for the quarter, while China added 7,440 b/d. A
portion of the revenue from the North Sea is tied to a separate crude oil
physical sales contract entered into in conjunction with the acquisition. See
Note 2 of this Form 10-Q for a discussion of the terms of this contract.
Production in the Gulf Coast region was up 8,883 b/d on drilling successes and
production from Gulf of Mexico properties acquired during 2003 from BP and
Shell. Egypt's production rose 3,387 b/d on exploration and development activity
on several concessions, while Australia's production was down 6,781 b/d as
natural decline, cyclone and downtime at Legendre, Stag and Simpson fields more
than offset successful drilling results.
Apache also manages its exposure to fluctuations in crude oil prices using
derivatives. In addition, the Company amortized unrealized gains and losses
related to derivative positions closed in October and November 2001. The
following table shows the impact on prices for these items.
FOR THE QUARTER ENDED MARCH 31,
-----------------------------------
2004 2003
-------------- --------------
(Per Bbl)
Derivatives........................... $ (.60) $ (1.61)
Amortization.......................... - .03
23
Operating Expenses
The table below presents a comparison of our expenses on an absolute
dollar basis and an equivalent unit of production (boe) basis. Our discussion
may reference either expenses on a boe basis or expenses on an absolute dollar
basis, or both, depending on their relevance. First quarter 2004 costs include
the full impact from our 2003 acquisitions, whereas the first quarter of 2003
only includes a partial month of costs associated with the BP Gulf of Mexico
acquisition.
FOR THE QUARTER ENDED MARCH 31, FOR THE QUARTER ENDED MARCH 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- ---------------
(In millions) (Per Boe)
Depreciation, depletion and amortization:
Oil and gas property and equipment........................ $ 268 $ 198 $ 6.85 $ 6.31
Other assets.............................................. 18 16 .46 .52
Asset retirement obligation accretion........................ 11 5 .27 .17
Lease operating expenses (LOE)............................... 206 134 5.26 4.28
Gathering and transportation costs........................... 20 12 .50 .38
Severance and other taxes.................................... 9 25 .23 .78
General and administrative expense (G&A)..................... 44 28 1.12 .89
Financing costs, net......................................... 27 26 .69 .83
-------------- -------------- ------------- ---------------
Total............................................. $ 603 $ 444 $ 15.38 $ 14.16
============== ============== ============= ===============
Depreciation, Depletion and Amortization
Apache's full-cost DD&A expense is driven by many factors including
certain costs incurred in the exploration, development, and acquisition of
producing reserves, production levels, estimates of proved reserve quantities
and future development and abandonment costs.
First-quarter 2004 full-cost DD&A expense of $268 million is $70 million
higher than 2003, with 78 percent ($55 million) of the increase attributable to
volume growth from our 2003 acquisitions. The 2004 expense is mainly comprised
of the U.S., $126 million; Canada, $43 million; Egypt, $40 million; Australia,
$25 million; the North Sea, $25 million and China, $9 million. First-quarter
2003 full-cost DD&A expense of $198 million is mainly comprised of the U.S., $97
million; Canada, $37 million; Egypt, $38 million and Australia, $25 million.
On a boe basis, our first-quarter 2004 full-cost DD&A rate of $6.85 is
$.54 higher than the first-quarter 2003 rate. The rate increase is incremental
over sequential quarters and only increased $.07 from the fourth quarter of
2003. Over half of the rate increase since the first quarter of 2003 occurred in
the U.S on higher finding, acquisition and future development costs. Canada
added $.16 to the rate on higher finding costs. China, which had higher finding
and development costs than other regions, added $.12 to the rate since initial
production in the third quarter of 2003. Australia added $.05 to the rate. Egypt
and the North Sea's rates reduced the worldwide rate $.05 and $.04,
respectively, as both regions added lower cost reserves.
Lease Operating Expenses
Apache's LOE per boe was $5.26 in first-quarter 2004, an increase of $.98
per boe from the first quarter of 2003. Approximately $.56 of the increase was a
result of our entrance into the North Sea ($.54) and first production in China
($.02). These areas primarily produce oil, which carries a higher LOE per boe
rate. The remaining increase was related to our other areas of operations as
follows: Egypt ($.17), Canada ($.11), Australia ($.07), and the U.S ($.06).
Egypt was impacted by the loss of a diesel fuel subsidy in the third quarter of
last year and higher variable costs with higher production (consumables,
trucking, chemicals and transportation). Approximately half of Canada's increase
was related to the weaker U.S. dollar, the remainder being generally higher
costs. The increase in Australia was a result of lower production, as absolute
costs decreased. In the U.S., approximately two-thirds of the increase was
related to higher repair and maintenance costs, the balance driven by additional
incentive compensation.
24
Gathering and Transportation Costs
Apache sells oil and natural gas under two types of transactions, both of
which include a transportation charge. One is a netback arrangement, under which
Apache sells oil or natural gas at the wellhead and collects a price, net of
transportation incurred by the purchaser. Under the other arrangement, Apache
sells oil or natural gas at a specific delivery point beyond the wellhead, pays
the cost of transportation to a third-party carrier and receives from the
purchaser a price with no deduction for transportation cost. In the U.S. and
Canada, Apache sells oil and natural gas under both types of arrangements. In
the North Sea, Apache pays transportation to a third-party carrier. In Egypt and
Australia, oil and natural gas are sold under the netback arrangement. Gathering
and transportation costs paid to third-party carriers and disclosed here vary
based on the volume, distance shipped, and the fee charged by the transporter,
which may be price sensitive.
For the first quarter of 2004, these costs are primarily related to the
transportation of natural gas in our North American operations and
transportation of oil in the North Sea. First quarter 2004 gathering and
transportation costs totaled $7 million in Canada, $7 million in the U.S. and $5
million in the North Sea. In the 2003 quarter, these costs totaled $7 million
and $5 million in Canada and the U.S., respectively. Apache did not enter the
North Sea until the second quarter of 2003. The $.12 increase in transportation
on a boe basis is primarily related to transportation of North Sea oil, which is
more expensive to transport.
Severance and Other Taxes
Severance and other taxes are comprised primarily of severance taxes on
properties onshore and in state or provincial waters in the U.S. and Australia,
the Australian Petroleum Resource Rent Tax (PRRT), the Canadian Large
Corporation Tax, Saskatchewan Capital Tax, Saskatchewan Resource Surtax and
Freehold Mineral Tax, and the North Sea Petroleum Revenue Tax (PRT). Egyptian
operations are not subject to these various taxes.
First quarter 2004 severance and other taxes totaled $9 million, $16
million less than the year-ago quarter. A detail of these taxes follows:
2004 2003
-------------- --------------
(In millions)
Severance taxes.............................................. $ 19.3 $ 21.0
North Sea PRT................................................ (16.7) -
Canadian taxes............................................... 5.0 3.1
Other........................................................ 1.3 .5
-------------- --------------
Total Severance and Other Taxes.............................. $ 8.9 $ 24.6
============== ==============
The $17 million North Sea PRT credit resulted from capital expenditures. Absent
this PRT credit in the North Sea, first-quarter 2004 severance and other taxes
would have been up $1 million. Severance taxes in the U.S. and Canada were
marginally lower than the 2003 quarter. Canada's taxes increased as a result of
the increase in the value of the Canadian dollar and a higher freehold mineral
tax.
General and Administrative Expense
G&A costs were $16 million higher compared to the first quarter of 2003.
Approximately 48 percent of the additional cost is related to the impact on
compensation programs of the rising price of Apache's common stock and
incremental 2003 incentive compensation paid in 2004. The higher stock related
compensation expense stems from Apache's decision, effective January 1, 2003, to
expense stock-based compensation plans. Another 17 percent of the increase is
related to our new North Sea operations. The balance of the increase is related
to the Company's decision to increase its charitable contributions, expansion of
the Company's new gas marketing group, higher comparative legal costs.
Provision for Income Taxes
First-quarter 2004 income tax expense was $9 million less than the
prior-year quarter, even though the March 31, 2004 quarter had higher taxable
income. The lower income tax expense was driven by a lower effective tax rate of
36.2 percent compared to 39.9 percent in the prior-year quarter, which was
impacted by a weaker U.S. dollar. The current quarter effective tax rate was
largely unaffected by foreign currency charges, unlike the prior-
25
year quarter. Additionally, the Canadian federal statutory income tax rates were
lowered in the fourth quarter of 2003.
OIL AND GAS CAPITAL EXPENDITURES
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2004 2003
-------------- --------------
(In thousands)
Exploration and development:
United States........................................... $ 155,807 $ 87,280
Canada.................................................. 194,716 165,047
Egypt................................................... 63,666 60,327
Australia............................................... 32,165 25,247
North Sea............................................... 67,005 -
China................................................... 794 4,012
Other International..................................... 444 363
-------------- --------------
$ 514,597 $ 342,276
============== ==============
Capitalized Interest......................................... $ 13,650 $ 11,232
============== ==============
Gas gathering, transmission and processing facilities........ $ 20,321 $ 3,061
============== ==============
Acquisitions:
Oil and gas properties.................................. $ 1,329 $ 544,371
Gas gathering, transmission and processing facilities... - 5,484
-------------- --------------
$ 1,329 $ 549,855
============== ==============
CAPITAL RESOURCES
Apache's primary cash needs are for exploration, development and
acquisition of oil and gas properties, operating expenses, repayment of
principal and interest on outstanding debt and payment of dividends. The Company
funds its exploration and development activities primarily through internally
generated cash flows. Apache budgets capital expenditures based upon projected
cash flows and routinely adjusts 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 for the first three
months of 2004 totaled $652 million, a 21 percent increase from $538 million in
the first three months of 2003 on a 23 percent increase in equivalent production
partially offset by lower gas prices.
LIQUIDITY
The Company had $61 million in cash and cash equivalents on March 31,
2004, up from $34 million on December 31, 2003. Apache's ratio of current assets
to current liabilities on March 31, 2004 was 1.08 compared to 1.10 on December
31, 2003.
Apache believes that cash on hand, net cash generated from operations,
short-term investments, and unused committed borrowing capacity under its $1.5
billion global credit facility will be adequate to satisfy future financial
obligations and liquidity needs. The global credit facility includes a $750
million 364-day U.S. credit facility which expires in May 2004. The Company is
currently negotiating a 5-year credit facility to replace the 364-day facility.
As of March 31, 2004, Apache's available borrowing capacity under its global
credit facility was $1.5 billion.
26
FUTURE TRENDS
Our objective is to build a company of lasting value by pursuing
profitable growth through a combination of drilling and acquisitions. Our
investment decisions are subjected to strict rate of return criteria and
generally fall in the categories identified below, depending on which phase of
the price and cost cycles we may be in. Those categories include:
- exploiting our existing property base;
- acquiring properties to which we can add value; and
- drilling high-potential exploration prospects.
Exploiting Existing Asset Base
We seek to maximize the value of our existing asset base by increasing
production and reserves while operating in the most cost efficient manner. In
order to achieve these objectives, we actively pursue production enhancement
opportunities such as workovers, recompletions and moderate risk drilling, while
divesting marginal and non-strategic properties and identifying other activities
to reduce costs. Given the significant acquisitions and discoveries over the
last few years, including the recent properties acquired from BP and Shell, we
have an abundant inventory of exploitation opportunities.
Acquiring Properties to Which We Can Add Value
We seek to purchase reserves at appropriate prices by generally avoiding
auction processes, where we are competing against other buyers and by targeting
properties to which we believe we can add value. Our aim is to follow each
acquisition with a cycle of reserve enhancement, property consolidation and cash
flow acceleration, facilitating asset growth and debt reduction.
Investing in High-Potential Exploration Prospects
We seek to concentrate our exploratory investments in a select number of
international areas and to become one of the dominant operators in those
regions. We believe that these investments, although higher-risk, offer
potential for attractive investment returns and significant reserve additions.
Our international investments and exploration activities are a significant
component of our long-term growth strategy. They complement our domestic
operations, which are more development oriented.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Major market risk exposure continues to be the pricing applicable to our
oil and gas production. Realized pricing is primarily driven by the prevailing
worldwide price for crude oil and spot prices applicable to our United States
and Canadian natural gas production. Historically, prices received for oil and
gas production have been volatile and unpredictable.
Apache sells all of its Egyptian crude oil and natural gas to the Egyptian
General Petroleum Corporation (EGPC) for U.S. dollars. Weak economic conditions
in Egypt continue to impact the timeliness of receipts from EGPC; however, the
situation has not deteriorated since year-end and Apache continues to receive
payments.
The information set forth under "Commodity Risk," "Interest Rate Risk" and
"Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2003, is incorporated herein by reference. Information
about market risks for the quarter ended March 31, 2004 does not differ
materially from our 2003 Form 10-K disclosure except as noted below.
Although Apache uses floating-rate debt on a short-term basis, all of the
Company's debt was at fixed-rates as of March 31, 2004. Apache's annual interest
costs in 2004 are not expected to fluctuate materially. Therefore, the Company
considers its interest rate risk exposure to be minimal.
27
On March 31, 2004, the Company had open natural gas derivative positions
with a fair value of $(80) million. A 10 percent increase in natural gas prices
would change the fair value by $(27) million. A 10 percent decrease in prices
would change the fair value by $25 million. The Company did not have any open
oil price swap positions on March 31, 2004. See Note 2 to the Company's
consolidated financial statements for notional volumes associated with the
Company's derivative contracts.
ITEM 4 - CONTROLS AND PROCEDURES
G. Steven Farris, the Company's President, Chief Executive Officer and
Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice
President and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2004, the end of the period
covered by this report. Based on that evaluation and as of the date of that
evaluation, these officers concluded that the Company's disclosure controls to
be effective, providing effective means to insure that information we are
required to disclose under applicable laws and regulations is recorded,
processed, summarized and reported in a timely manner. We also made no
significant changes in internal controls over financial reporting during the
quarter ending March 31, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
We periodically review the design and effectiveness of our disclosure
controls, including compliance with various laws and regulations that apply to
our operations both inside and outside the United States. We make modifications
to improve the design and effectiveness of our disclosure controls, and may take
other corrective action, if our reviews identify deficiencies or weaknesses in
our controls.
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.
28
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, 2003 (filed with the
SEC on March 12, 2004) is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 - Form of Certificate for Registrant's
Common Stock.
12.1 - Statement of computation of ratio of
earnings to fixed charges and combined
fixed charges and preferred stock
dividends.
31.1 - Certification of Chief Executive Officer.
31.2 - Certification of Chief Financial Officer.
32.1 - Certification of Chief Executive Officer
and Chief Financial Officer.
(b) Reports filed on Form 8-K
The following current reports on Form 8-K were filed
by Apache during the fiscal quarter ended March 31,
2004:
Item 5 - Other Events - dated December 16, 2003, filed
January 8, 2004
On December 16, 2003, Apache filed with the Delaware
Secretary of State a Certificate of Elimination with
respect to Apache's previously outstanding Series C
Preferred Stock. On December 17, 2003, Apache filed
with the Delaware Secretary of State an Agreement and
Plan of Merger under which Apache Clearwater
Operations, Inc., a Delaware corporation and a wholly
owned subsidiary of Apache, was merged with and into
Apache, effective as of December 31, 2003. On January
5, 2004, Apache filed with the Delaware Secretary of
State a Certificate of Amendment to Apache's Restated
Certificate of Incorporation providing for an increase
in the number of authorized shares of Apache's common
stock and reducing the par value thereof, all
effective as of January 13, 2004.
29
Item 5 - Other Events - dated and filed January 12,
2004
On January 12, 2004, Apache announced that its common
stock would be dually listed for trading on the NASDAQ
as well as the New York Stock Exchange, pending
application approval by NASDAQ. Apache will continue
to trade under its existing three-letter stock symbol
"APA" on both exchanges.
Item 5 - Other Events - dated January 29, 2004, filed
January 30, 2004
On January 29, 2004, Apache reported full-year 2003
earnings of $1.1 billion, or $3.43 per diluted common
share, on strong commodity prices and record
production, up 105 percent from $544 million, or $1.80
per share in 2002.
30
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: May 7, 2004 /s/ ROGER B. PLANK
--------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: May 7, 2004 /s/ THOMAS L. MITCHELL
--------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
4.1 - Form of Certificate for Registrant's Common Stock.
12.1 - Statement of computation of ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends.
31.1 - Certification of Chief Executive Officer.
31.2 - Certification of Chief Financial Officer.
32.1 - Certification of Chief Executive Officer and Chief Financial Officer.