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 June 30, 2005
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 June 30,
2005_______ 328,847,018
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues...................... $1,774,535 $1,247,412 $3,401,184 $2,400,166
Other................................................ (15,304) (6,679) 20,335 (9,494)
---------- ---------- ---------- ----------
1,759,231 1,240,733 3,421,519 2,390,672
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization............. 359,011 295,737 698,424 581,965
Asset retirement obligation accretion................ 13,330 10,891 26,489 21,652
Lease operating costs................................ 255,430 199,779 488,601 408,015
Gathering and transportation costs................... 26,178 20,162 49,958 39,796
Severance and other taxes............................ 86,593 21,595 158,779 30,543
General and administrative........................... 52,002 39,181 102,413 85,238
China litigation..................................... - 71,216 - 71,216
Financing costs:
Interest expense.................................. 44,807 40,193 90,073 80,742
Amortization of deferred loan costs............... 2,047 595 2,705 1,162
Capitalized interest.............................. (14,254) (12,708) (27,663) (26,358)
Interest income................................... (875) (513) (1,802) (833)
---------- ---------- ---------- ----------
824,269 686,128 1,587,977 1,293,138
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................... 934,962 554,605 1,833,542 1,097,534
Provision for income taxes........................... 346,932 171,079 685,029 367,683
---------- ---------- ---------- ----------
NET INCOME............................................... 588,030 383,526 1,148,513 729,851
Preferred stock dividends............................ 1,420 1,420 2,840 2,840
---------- ---------- ---------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK...................... $ 586,610 $ 382,106 $1,145,673 $ 727,011
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic................................................ $ 1.79 $ 1.17 $ 3.49 $ 2.23
========== ========== ========== ==========
Diluted.............................................. $ 1.76 $ 1.16 $ 3.44 $ 2.21
========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2005 2004
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 1,148,513 $ 729,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................................. 698,424 581,965
Asset retirement obligation accretion.................................... 26,489 21,652
Provision for deferred income taxes...................................... 227,417 103,675
Other.................................................................... 27,873 20,553
Changes in operating assets and liabilities:
(Increase) decrease in receivables....................................... (199,634) (174,184)
(Increase) decrease in drilling advances and other....................... (21,631) (20,548)
(Increase) decrease in inventories....................................... 9,020 4,426
(Increase) decrease in deferred charges and other........................ (13,368) (19,637)
Increase (decrease) in accounts payable.................................. 2,063 105,697
Increase (decrease) in accrued expenses.................................. (57,335) (21,467)
Increase (decrease) in advances from gas purchasers...................... (10,883) (9,072)
Increase (decrease) in deferred credits and noncurrent liabilities....... (7,767) (23,859)
----------- -----------
Net cash provided by operating activities............................ 1,829,181 1,299,052
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................ (1,760,690) (1,058,149)
Other, net..................................................................... 24,439 (19,188)
----------- -----------
Net cash used in investing activities................................ (1,736,251) (1,077,337)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................................................... 84,025 404
Payments on long-term debt..................................................... (193,530) (135,300)
Dividends paid................................................................. (55,307) (41,838)
Common stock activity.......................................................... 19,894 13,383
Treasury stock activity, net................................................... 8,409 7,663
Cost of debt and equity transactions........................................... (722) (2,050)
Other.......................................................................... 12,466 -
----------- -----------
Net cash provided by (used in) financing activities.................. (124,765) (157,738)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (31,835) 63,977
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 111,093 33,503
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 79,258 $ 97,480
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 79,258 $ 111,093
Receivables, net of allowance......................................... 1,138,781 939,736
Inventories........................................................... 186,946 157,293
Drilling advances..................................................... 91,377 82,889
Prepaid assets and other.............................................. 86,913 57,771
----------- ------------
1,583,275 1,348,782
----------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties.................................................. 21,442,652 19,933,041
Unproved properties and properties under
development, not being amortized................................ 881,377 777,690
Gas gathering, transmission and processing facilities................. 1,174,199 966,605
Other................................................................. 292,141 284,069
----------- ------------
23,790,369 21,961,405
Less: Accumulated depreciation, depletion and amortization........... (8,797,051) (8,101,046)
----------- ------------
14,993,318 13,860,359
----------- ------------
OTHER ASSETS:
Goodwill, net......................................................... 189,252 189,252
Deferred charges and other............................................ 114,735 104,087
----------- ------------
$16,880,580 $ 15,502,480
=========== ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 595,290 $ 542,074
Accrued operating expense............................................ 63,865 80,741
Accrued exploration and development.................................. 436,588 341,063
Accrued compensation and benefits.................................... 93,243 83,636
Accrued interest..................................................... 32,516 32,575
Accrued income taxes................................................. 9,930 78,042
Current debt......................................................... 287,274 -
Derivative instruments............................................... 122,280 21,273
Other................................................................ 178,241 103,487
----------- ------------
1,819,227 1,282,891
----------- ------------
LONG-TERM DEBT.......................................................... 2,191,611 2,588,390
----------- ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes......................................................... 2,267,881 2,146,637
Advances from gas purchasers......................................... 79,993 90,876
Asset retirement obligation.......................................... 958,431 932,004
Derivative instruments............................................... 149,199 31,417
Other................................................................ 217,610 225,844
----------- ------------
3,673,114 3,426,778
----------- ------------
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,
335,867,018 and 334,912,505 shares issued, respectively........... 209,917 209,320
Paid-in capital...................................................... 4,143,799 4,106,182
Retained earnings.................................................... 5,110,451 4,017,339
Treasury stock, at cost, 7,020,000 and 7,455,002 shares,
respectively...................................................... (91,647) (97,325)
Accumulated other comprehensive loss................................. (274,279) (129,482)
----------- ------------
9,196,628 8,204,421
----------- ------------
$16,880,580 $ 15,502,480
=========== ============
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)
ACCUMULATED
SERIES B OTHER
COMPREHENSIVE PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
(In thousands, except per share) INCOME STOCK STOCK CAPITAL EARNINGS STOCK INCOME (LOSS)
------------- ---------- -------- ---------- ---------- --------- --------------
BALANCE AT DECEMBER 31, 2003.............. $ 98,387 $207,818 $4,038,007 $2,445,698 $(105,169) $ (151,943)
Comprehensive income (loss):
Net income........................... $ 729,851 - - - 729,851 - -
Commodity hedges, net of income tax
benefit of $648.................... (1,061) - - - - - (1,061)
-------------
Comprehensive income................... $ 728,790
=============
Dividends:
Preferred............................ - - - (2,840) - -
Common ($.12 per share).............. - - - (39,067) - -
Common shares issued................... - 726 49,201 - - -
Treasury shares issued, net............ - - 4,738 - 5,067 -
Other.................................. - - 2,405 - -
---------- -------- ---------- ---------- --------- --------------
BALANCE AT JUNE 30, 2004.................. $ 98,387 $208,544 $4,094,351 $3,133,642 $(100,102) $ (153,004)
========== ======== ========== ========== ========= ==============
BALANCE AT DECEMBER 31, 2004.............. $ 98,387 $209,320 $4,106,182 $4,017,339 $ (97,325) $ (129,482)
Comprehensive income (loss):
Net income........................... $ 1,148,513 - - - 1,148,513 - -
Commodity hedges, net of income tax
benefit of $86,960................. (144,797) - - - - - (144,797)
-------------
Comprehensive income................... $ 1,003,716
=============
Dividends:
Preferred............................ - - - (2,840) - -
Common ($.16 per share).............. - - - (52,561) - -
Common shares issued................... - 597 35,475 - - -
Treasury shares issued, net............ - - 2,043 - 5,678 -
Other.................................. - - 99 - - -
---------- -------- ---------- ---------- --------- --------------
BALANCE AT JUNE 30, 2005.................. $ 98,387 $209,917 $4,143,799 $5,110,451 $ (91,647) $ (274,279)
========== ======== ========== ========== ========= ==============
TOTAL
SHAREHOLDERS'
(In thousands, except per share) EQUITY
-------------
BALANCE AT DECEMBER 31, 2003.............. $ 6,532,798
Comprehensive income (loss):
Net income........................... 729,851
Commodity hedges, net of income tax
benefit of $648.................... (1,061)
Comprehensive income...................
Dividends:
Preferred............................ (2,840)
Common ($.12 per share).............. (39,067)
Common shares issued................... 49,927
Treasury shares issued, net............ 9,805
Other.................................. 2,405
-------------
BALANCE AT JUNE 30, 2004.................. $ 7,281,818
=============
BALANCE AT DECEMBER 31, 2004.............. $ 8,204,421
Comprehensive income (loss):
Net income........................... 1,148,513
Commodity hedges, net of income tax
benefit of $86,960................. (144,797)
Comprehensive income...................
Dividends:
Preferred............................ (2,840)
Common ($.16 per share).............. (52,561)
Common shares issued................... 36,072
Treasury shares issued, net............ 7,721
Other.................................. 99
-------------
BALANCE AT JUNE 30, 2005.................. $ 9,196,628
=============
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 (SEC), 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 included in the Company's most recent
annual report on Form 10-K.
Reclassifications and Restatements
The financial statement amounts applicable to the three-month and
six-month periods ending June 30, 2004 presented in this Form 10-Q will not
agree to the amounts originally reported in the Company's Form 10-Q filed August
9, 2004, because they have been restated to reflect early adoption of Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment"
(SFAS No. 123-R) (see Note 6, Stock-Based Compensation). This restatement did
not materially impact our results of operations. Certain other prior period
amounts have also been reclassified to conform with current year presentations.
1. ACQUISITIONS
2005 ACQUISITIONS
There were no material acquisitions during the six-month period ending
June 30, 2005.
2004 ACQUISITIONS
ANADARKO
In August 2004, Apache signed a definitive agreement to acquire all of
Anadarko Petroleum Corporation's (Anadarko) Gulf of Mexico Outer Continental
Shelf properties (excluding certain deepwater properties) for $537 million,
subject to normal post-closing adjustments, including preferential rights. The
transaction was effective as of October 1, 2004, and included interests in 74
fields covering 232 offshore blocks (approximately 664,000 acres) and 104
platforms. Eighty-nine of the blocks were undeveloped at the time of the
acquisition. Apache operates 49 of the fields comprising approximately 70
percent of the production. Prior to Apache's purchase from Anadarko, Morgan
Stanley Capital Group, Inc. paid Anadarko $646 million to acquire an overriding
royalty interest in these properties. For a complete discussion of this
transaction, please refer to Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Results of Operations,
Acquisitions and Divestitures" and Note 2, Acquisitions and Divestitures of Item
15 in the Company's 2004 Form 10-K.
EXXONMOBIL
During the third quarter of 2004, Apache entered into separate
arrangements with Exxon Mobil Corporation and its affiliates (ExxonMobil) that
provided for property transfers and joint operating and exploration activity
across a broad range of prospective and mature properties in (1) Western Canada,
(2) West Texas and New Mexico, and (3) onshore Louisiana and the Gulf of
Mexico-Outer Continental Shelf. Apache's participation included cash payments of
approximately $347 million, subject to normal post-closing adjustments. For a
complete discussion of these transactions, please refer to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions
and Divestitures of Item 15 in the Company's 2004 Form 10-K.
6
2. HEDGING AND DERIVATIVE INSTRUMENTS
Apache uses a variety of strategies to manage its exposure to fluctuations
in crude oil and natural gas commodity prices. As established by the Company's
hedging policy, Apache occasionally enters into cash flow hedges in connection
with selected 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 over the long-term. These
hedges effectively reduce price risk on a portion of the production from the
acquisitions.
Apache entered into, and designated as cash flow hedges, various
fixed-price swaps, option collars and puts in conjunction with the ExxonMobil
and Anadarko property acquisitions completed in 2004. These positions were
entered into in accordance with the Company's hedging policy and involved
counterparties which are rated A+ or better. As of June 30, 2005, the
outstanding positions of our natural gas and crude oil cash flow hedges were as
follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY)
- ---------- -------------------- ------------- ---------------- -----------------
(In thousands)
2005 Gas Collars 12,880,000 $ 6.00 / 6.78 $ (9,343)
Gas Fixed-Price Swap 3,468,000 6.21 (3,729)
Oil Collars 1,803,200 33.51 / 41.72 (30,031)
Oil Fixed-Price Swap 171,000 41.13 (2,927)
Oil Put Option 772,800 28.00 -
2006 Gas Collars 32,850,000 5.50 / 6.66 (49,660)
Gas Fixed-Price Swap 4,404,000 5.87 (9,169)
Oil Collars 4,307,000 32.07 / 40.66 (78,100)
Oil Fixed-Price Swap 224,000 38.50 (4,399)
Oil Put Option 1,533,000 28.00 57
2007 Gas Collars 24,570,000 5.25 / 6.20 (41,577)
Gas Fixed-Price Swap 1,761,000 5.57 (3,698)
Oil Collars 1,911,000 33.00 / 39.25 (34,600)
Oil Fixed-Price Swap 78,000 36.89 (1,525)
The natural gas and crude oil prices shown in the above table are based on
the NYMEX index and have been valued using actively quoted prices and quotes
obtained from reputable third-party financial institutions. The above prices
represent a weighted average of several contracts entered into and are on a per
million British thermal units (MMBtu) or per barrel (Bbl) basis for gas and oil
derivatives, respectively.
In November 2004, Apache hedged a portion of its 2005 foreign currency
exchange risk associated with its forecasted Canadian, Australian and North Sea
lease operating expenditures by entering into forward purchase contracts. The
Company purchased a total of 144 million Canadian dollars at an average exchange
rate of .840, 22 million Australian dollars at an average exchange rate of .763
and 42 million British pounds at an average exchange rate of 1.853. The
remaining forward contracts mature from July 2005 through December 2005. The
fair market value of these contracts as of June 30, 2005 was a loss of $3
million ($2 million after tax). Future changes in market value are recorded in
other comprehensive income (loss) and the fair values of the foreign exchange
contracts are based on quotes from either third-party financial institutions or
published indices.
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's commodity and foreign currency derivative activities is presented in
the table below:
GROSS AFTER TAX
--------- ---------
(In thousands)
Unrealized loss on derivatives at December 31, 2004.... $ (33,113) $ (20,732)
Net losses realized into earnings...................... 26,131 16,357
Net change in derivative fair value.................... (257,888) (161,154)
--------- ---------
Unrealized loss on derivatives at June 30, 2005........ $(264,870) $(165,529)
========= =========
7
Based on current market prices as of June 30, 2005, the Company recorded
an unrealized loss in other comprehensive income (loss) of $265 million ($166
million after tax), primarily representing commodity derivative hedges. Gains
and losses on the commodity hedges will be realized in future earnings
contemporaneously with the related sales of natural gas and crude oil production
applicable to specific hedges. Gains and losses on the foreign exchange
contracts will be realized in future earnings as the forecasted lease operating
expenditures are incurred. Of the $265 million unrealized loss on derivatives at
June 30, 2005, approximately $117 million ($73 million after tax) applies to the
next 12 months; however, these amounts are likely to 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 Statement of
Financial Accounting Standards (SFAS) No. 133, as amended.
3. DEBT
On May 12, 2005, the Company entered into a new $450 million revolving
bank credit facility for the U.S., a $150 million revolving bank credit facility
for Australia and a $150 million revolving bank credit facility for Canada,
which replaced the Company's existing credit facilities in the same amounts
which were scheduled to mature in June 2007. The new facilities are scheduled to
mature on May 12, 2010. There were no changes to the Company's $750 million U.S.
credit facility which matures in May 2009. As of June 30, 2005, $287 million of
debt was reclassified to current debt because the Company now anticipates
repaying those funds within the year.
The financial covenants of the Company's revolving bank credit facilities
require the Company to maintain a debt-to-capitalization ratio of not greater
than 60 percent at the end of any fiscal quarter. The negative covenants include
restrictions on the Company's ability to create liens and security interests on
our assets, with exceptions for liens typically arising in the oil and gas
industry, purchase money liens and liens arising as a matter of law, such as tax
and mechanics liens. The Company may incur liens on assets located in the U.S.,
Canada and Australia of up to five percent of the Company's consolidated assets,
which would approximate $844 million as of June 30, 2005. There are no
restrictions on incurring liens in countries other than the U.S., Canada and
Australia. There are also restrictions on Apache's ability to merge with another
entity, unless the Company is the surviving entity, and a restriction on our
ability to guarantee debt of entities not within our consolidated group.
There are no clauses in the facilities that permit the lenders to
accelerate payments or refuse to lend based on unspecified material adverse
changes (MAC clauses). The credit facility agreements do not have drawdown
restrictions or prepayment obligations in the event of a decline in credit
ratings. However, the agreements allow the lenders to accelerate payments and
terminate lending commitments if Apache Corporation, or any of its U.S.,
Canadian or Australian subsidiaries, defaults on any direct payment obligation
in excess of $100 million or has any unpaid, non-appealable judgment against it
in excess of $100 million. The Company was in compliance with the terms of the
credit facilities as of June 30, 2005. The Company's debt-to-capitalization
ratio as of June 30, 2005 was 21.2 percent.
At the Company's option, the interest rate for the facilities is based on
(i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal
funds rate plus one-half of one percent or (ii) the London Interbank Offered
Rate (LIBOR) plus a margin determined by the Company's senior long-term debt
rating. The $750 million and the $450 million credit facilities (U.S. credit
facilities) also allow the Company to borrow under competitive auctions.
At June 30, 2005, the margin over LIBOR for committed loans under the new
facilities was .23 percent. If the total amount of the loans borrowed under all
three facilities equals or exceeds 50 percent of the total facility commitments,
then an additional .10 percent will be added to the margins over LIBOR. The
Company also pays quarterly facility fees of .07 percent on the total amount of
the three facilities. The facility fees vary based upon the Company's senior
long-term debt rating.
4. CAPITAL STOCK
During the second quarter of 2005 and 2004, Apache paid $26 million and
$19 million, respectively, in dividends on its Common Stock. The increase in the
second-quarter 2005 common stock dividends from the amount paid for the same
period last year, reflects both a higher common stock dividend rate and an
increase in common shares outstanding. On September 16, 2004, the Company
announced that its Board of Directors voted to increase the quarterly cash
dividend on its common stock to eight cents per share from six cents per share,
effective with the November 2004 payment. In addition, in both periods, Apache
paid a total of $1.4 million in dividends on its Series B Preferred Stock issued
in August 1998.
8
5. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED JUNE 30,
-----------------------------------------------------------
2005 2004
----------------------------- ----------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock. $ 586,610 328,578 $ 1.79 $382,106 325,668 $ 1.17
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ............. - 4,890 - 3,695
--------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions ...... $ 586,610 333,468 $ 1.76 $382,106 329,363 $ 1.16
========= ======= ========= ======== ======= =========
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2005 2004
----------------------------- ----------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock.. $1,145,673 328,309 $ 3.49 $727,011 325,335 $ 2.23
======== =========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other.............. - 4,958 - 3,718
---------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions....... $1,145,673 333,267 $ 3.44 $727,011 329,053 $ 2.21
========== ======= ======== ======== ======= =========
6. STOCK-BASED COMPENSATION
During the fourth quarter of 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123-R, which requires all companies to expense
stock-based compensation. While the pronouncement is effective for the first
fiscal year that begins after June 15, 2005, Apache elected to early adopt SFAS
No. 123-R under the "Modified Retrospective Approach." Under this approach, the
Company is required to expense all options and other stock-based compensation
that vest during the year based on the fair value determined at the date of
grant.
On May 5, 2005, the Company's stockholders approved a new stock option
plan and 1.7 million options were subsequently awarded to substantially all
employees. The estimated fair value per share determined on the date of grant
was $20.25. The terms and underlying valuation assumptions of the grant are
consistent with prior-year awards and are expensed on a straight-line basis over
the four-year vesting term.
Also in May 2005, the Company's stockholders approved a new targeted stock
plan that provides incentives for employees to double Apache's share price to
$108 by the end of 2008, with an interim goal of $81 to be achieved by the end
of 2007. To achieve the trigger price, the Company's stock price must close at
or above the stated threshold for 10 days out of any 30 consecutive trading days
by the end of the stated period. Under the plan, if the first threshold is
achieved, approximately 1.3 million shares would be awarded for an intrinsic
cost of $106 million. Achieving the second threshold would result in
approximately 2.0 million shares awarded for an intrinsic cost of $213 million.
Shares ultimately issued would be reduced for any minimum tax withholding
requirements. Under the terms of the new targeted stock plan, awards are payable
in four equal installments, beginning with the date the trigger stock price is
met and on each succeeding anniversary date.
Current accounting practices dictate that, regardless of whether these
thresholds are ultimately achieved, the Company will recognize the fair value
cost at the grant date based on numerous assumptions, including an estimate of
the likelihood that Apache's stock price will achieve these thresholds and the
expected forfeiture rate. As a result, the Company will recognize expense and
capitalized costs of approximately $68 million over the expected service
9
life of the plan. The weighted average fair value, based on the Monte Carlo
Simulation Model, was $23.67 per share.
Total stock-based compensation cost (net of amounts capitalized) is
presented in the table below. The related stock-based compensation cost
capitalized as part of oil and gas properties was $8 million and $18 million for
the three-month and six-month periods ended June 30, 2005, respectively, and $4
million and $8 million for the three-month and six-month periods ended June 30,
2004, respectively.
2005 2004
---------------- ----------------
GROSS AFTER TAX GROSS AFTER TAX
----- --------- ----- ---------
(In millions)
Stock-based compensation cost:
For the quarter ended June 30............ $ 19 $ 12 $ 9 $ 5
For the six months ended June 30......... 38 24 18 11
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2005 2004
---- ----
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)..... $ 56,649 $ 49,584
Income taxes (net of refunds)............. $ 546,341 $ 246,879
8. PENSION AND POSTRETIREMENT BENEFITS
Apache has a non-contributory defined benefit pension plan that provides
retirement benefits for certain North Sea employees meeting established age and
service requirements. The pension plan is closed to new employees. Apache also
has a postretirement benefit plan which provides benefits for substantially all
of its U.S. employees. The postretirement benefit plan provides medical benefits
up until the age of 65 and is contributory.
NET PERIODIC COST
The following table presents the plans' net periodic benefit cost for the
three and six month periods ended June 30, 2005 and 2004.
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------------------------- ----------------------------------
QUARTER ENDED SIX MONTHS ENDED QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
---------------- ---------------- ---------------- ----------------
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
Components of net periodic benefit cost:
Service cost........................... $ 1,600 $ 1,341 $ 3,238 $ 2,727 $ 424 $ 234 $ 699 $ 484
Interest cost.......................... 1,136 892 2,299 1,813 231 164 406 314
Expected return on plan assets......... (1,227) (882) (2,483) (1,793) - - - -
Amortization of transition obligation.. - - - - 9 22 22 22
Amortization of actuarial (gain)/loss.. - - - - 104 50 166 125
------- ------- ------- ------- ------- ------- ------- -------
Net periodic benefit cost........... $ 1,509 $ 1,351 $ 3,054 $ 2,747 $ 768 $ 470 $ 1,293 $ 945
======= ======= ======= ======= ======= ======= ======= =======
EMPLOYER CONTRIBUTIONS
As previously disclosed in our financial statements for the year ended
December 31, 2004, we expect to contribute $5 million to the pension plan and
$318,000 to the postretirement benefit plan in 2005. As of June 30, 2005,
approximately $2.6 million of contributions have been made to the plans.
10
9. BUSINESS SEGMENT INFORMATION
Apache has interests in seven countries: the United States, Canada, Egypt,
Australia, the United Kingdom, China and Argentina. Our reportable segments are
the United States, Canada, Egypt, Australia, North Sea, and Other International.
The Company evaluates segment performance based on oil and gas sales and
lease-level expenses. Apache's reportable segments are managed separately
because of their geographic locations. Financial information by reportable
segment is presented below:
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL
---------- ---------- ---------- ---------- ---------- ------------- -----------
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 2005
Oil and Gas Production Revenues..... $1,393,754 $ 586,878 $ 606,258 $ 177,585 $ 553,924 $ 82,785 $ 3,401,184
========== ========== ========== ========== ========== ========= ===========
Operating Income (1)................ $ 782,706 $ 331,573 $ 445,428 $ 90,570 $ 287,570 $ 41,086 $ 1,978,933
========== ========== ========== ========== ========== =========
Other Income (Expense):
Other............................ 20,335
General and administrative....... (102,413)
Financing costs, net............. (63,313)
-----------
Income Before Income Taxes.......... $ 1,833,542
===========
Total Assets........................ $7,661,550 $4,157,435 $2,240,374 $1,156,628 $1,501,898 $ 162,695 $16,880,580
========== ========== ========== ========== ========== ========= ===========
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Oil and Gas Production Revenues..... $1,100,335 $ 469,937 $ 412,662 $ 189,649 $ 186,129 $ 41,454 $ 2,400,166
========== ========== ========== ========== ========== ========= ===========
Operating Income (1)................ $ 600,293 $ 259,427 $ 277,795 $ 89,777 $ 74,714 $ 16,189 $ 1,318,195
========== ========== ========== ========== ========== =========
Other Income (Expense):
Other............................ (9,494)
General and administrative....... (85,238)
China litigation................. (71,216)
Financing costs, net............. (54,713)
-----------
Income Before Income Taxes.......... $ 1,097,534
===========
Total Assets........................ $5,868,356 $3,243,373 $1,890,102 $1,018,298 $1,041,801 $ 188,021 $13,249,951
========== ========== ========== ========== ========== ========= ===========
(1) Operating Income 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.
10. ASSET RETIREMENT OBLIGATIONS
The following table describes changes to the Company's asset retirement
obligation (ARO) liability for the six months ended June 30, 2005 (in
thousands):
Asset retirement obligation as of December 31, 2004....... $ 932,004
Liabilities incurred...................................... 37,289
Liabilities settled....................................... (37,351)
Accretion expense......................................... 26,489
---------
Asset retirement obligation as of June 30, 2005........... $ 958,431
=========
Liabilities incurred primarily relate to abandonment obligations assumed
in connection with current drilling activity and various small acquisitions
closed during the period. Liabilities settled during the period primarily relate
to individually immaterial properties plugged and abandoned or sold during the
period.
11. LITIGATION
TEXACO CHINA B.V.
Apache recorded a reserve in the second quarter of 2004 to fully reflect a
pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco
China). The arbitration award was subject to interest at nine percent until May
6, 2005, the date following the federal district court ruling discussed below.
On May 6, 2005, the interest rate dropped to 3.33 percent. Apache accrued $3.2
million of interest expense in 2004 and an additional $2.6 million of interest
expense in the first six months of 2005. In September 2001, Texaco China
initiated an
11
arbitration proceeding against Apache China Corporation LDC (Apache China),
later adding Apache Bohai Corporation LDC (Apache Bohai) to the arbitration. In
the arbitration Texaco China claimed damages, plus interest, arising from Apache
Bohai's alleged failure to drill three wells, prior to re-assignment of the
interest to Texaco China. Apache believes that the finding of the arbitrator is
unsupported by the facts and the law, and Apache filed an application to vacate
the award in federal court. Texaco China filed an application to confirm the
award in the same court. On May 5, 2005, the federal district court ruled in
favor of Texaco China. The Company has appealed that decision to the circuit
court of appeals. In January 2005, while awaiting the decision of the U.S.
federal courts, Texaco China also filed a proceeding against Apache China and
Apache Bohai in the People's Republic of China to recognize the award,
apparently seeking the same relief as sought in U.S. federal court. Apache China
has been served. Apache Bohai has not been served.
EGYPT TAX AUTHORITY
As of the end of 2004, the Egyptian Tax Authority (ETA) had issued claims
for back taxes against various Apache subsidiaries in Egypt totaling
approximately $106 million (at current exchange rates) relating to periods as
far back as 1994. At the beginning of July 2005, the ETA made a new claim for
approximately $85 million of additional taxes for the 1994-99 tax years. While
an adverse judgment against Apache is possible, Egyptian Concession agreements
clearly provide that the Egyptian General Petroleum Corporation is responsible
for the payment of all taxes related to the operation of the concessions. Apache
believes that the claims of the ETA are unsupported by either the facts or the
language of the concession agreements, which have the force of law in Egypt.
Apache's subsidiaries have, therefore, contested liability with respect to the
original claims by filing actions in Egyptian civil court, and will pursue all
appropriate appeals and actions to challenge the new tax claims as well. Apache
plans to vigorously pursue its remedies with respect to these claims. A civil
court ruling with respect to the initial tax claims is expected sometime in the
latter half of 2005.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2005, the FASB ratified the consensus in Emerging Issue Task Force
(EITF) Issue Number 04-5, "Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" (Issue 04-5). EITF Issue 04-5 states that
the general partner in a limited partnership is presumed to control the
partnership and must consolidate the entity on its financial statements. The
presumption of control and consolidation requirement may be overcome if the
limited partners have substantive participating rights or have the ability to
effectively liquidate the partnership. Apache participates in limited
partnerships where the Company is the sole general partner. Management is
currently determining the ultimate impact of applying this statement, but does
not believe application of Issue 04-5 will have a material impact on the
Company's consolidated financial statements. The effective date for applying the
guidance in Issue 04-5 to existing limited partnerships is for the first
reporting period in fiscal years beginning after December 15, 2005.
13. 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 have 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.
12
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2005
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues................. $ 720,379 $ - $ - $ - $ 1,138,796
Equity in net income (loss) of affiliates....... 365,752 2,639 5,642 59,600 (12,364)
Other........................................... 6,261 - - - (21,565)
----------- ------------- --------- -------- ------------
1,092,392 2,639 5,642 59,600 1,104,867
----------- ------------- --------- -------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 158,667 - - - 200,344
Asset retirement obligation accretion........... 7,873 - - - 5,457
Lease operating costs........................... 119,141 - - - 220,929
Gathering and transportation costs.............. 7,617 - - - 18,561
Severance and other taxes....................... 23,539 - - 1 63,053
General and administrative...................... 44,975 - - - 7,027
Financing costs, net............................ 20,309 - 4,513 14,110 (7,207)
----------- ------------- --------- -------- ------------
382,121 - 4,513 14,111 508,164
----------- ------------- --------- -------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. 710,271 2,639 1,129 45,489 596,703
Provision (benefit) for income taxes............ 122,241 - (1,510) (4,750) 230,951
----------- ------------- --------- -------- ------------
NET INCOME......................................... 588,030 2,639 2,639 50,239 365,752
Preferred stock dividends....................... 1,420 - - - -
----------- ------------- --------- -------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 586,610 $ 2,639 $ 2,639 $ 50,239 $ 365,752
=========== ============= ========= ======== ============
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues................. $ (84,640) $ 1,774,535
Equity in net income (loss) of affiliates....... (421,269) -
Other........................................... - (15,304)
------------ ------------
(505,909) 1,759,231
------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ - 359,011
Asset retirement obligation accretion........... - 13,330
Lease operating costs........................... (84,640) 255,430
Gathering and transportation costs.............. - 26,178
Severance and other taxes....................... - 86,593
General and administrative...................... - 52,002
Financing costs, net............................ - 31,725
------------ ------------
(84,640) 824,269
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (421,269) 934,962
Provision (benefit) for income taxes............ - 346,932
------------ ------------
NET INCOME......................................... (421,269) 588,030
Preferred stock dividends....................... - 1,420
------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ (421,269) $ 586,610
============ ============
13
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues................. $ 568,421 $ - $ - $ - $ 756,030
Equity in net income (loss) of affiliates....... 226,150 10,420 13,488 53,454 (9,724)
Other........................................... (1,148) - - - (5,531)
----------- ------------- --------- --------- ------------
793,423 10,420 13,488 53,454 740,775
----------- ------------- --------- --------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 137,844 - - - 157,893
Asset retirement obligation accretion........... 5,805 - - - 5,086
Lease operating costs........................... 87,303 - - - 189,515
Gathering and transportation costs.............. 7,891 - - - 12,271
Severance and other taxes....................... 15,416 - - - 6,179
General and administrative...................... 30,889 - - - 8,292
China litigation................................ - - - - 71,216
Financing costs, net............................ 20,253 - 4,510 9,936 (7,132)
----------- ------------- --------- --------- ------------
305,401 - 4,510 9,936 443,320
----------- ------------- --------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. 488,022 10,420 8,978 43,518 297,455
Provision (benefit) for income taxes............ 104,496 - (1,442) (3,280) 71,305
----------- ------------- --------- --------- ------------
NET INCOME......................................... 383,526 10,420 10,420 46,798 226,150
Preferred stock dividends....................... 1,420 - - - -
----------- ------------- --------- --------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 382,106 $ 10,420 $ 10,420 $ 46,798 $ 226,150
=========== ============= ========= ========= ============
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues................. $ (77,039) $ 1,247,412
Equity in net income (loss) of affiliates....... (293,788) -
Other........................................... - (6,679)
---------- ------------
(370,827) 1,240,733
---------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ - 295,737
Asset retirement obligation accretion........... - 10,891
Lease operating costs........................... (77,039) 199,779
Gathering and transportation costs.............. - 20,162
Severance and other taxes....................... - 21,595
General and administrative...................... - 39,181
China litigation................................ - 71,216
Financing costs, net............................ - 27,567
---------- ------------
(77,039) 686,128
---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (293,788) 554,605
Provision (benefit) for income taxes............ - 171,079
---------- ------------
NET INCOME......................................... (293,788) 383,526
Preferred stock dividends....................... - 1,420
---------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ (293,788) $ 382,106
========== ============
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues................. $ 1,371,285 $ - $ - $ - $ 2,185,410
Equity in net income (loss) of affiliates....... 710,831 12,124 18,104 109,860 (24,716)
Other........................................... 36,446 - - - (16,111)
----------- -------- -------- -------- ------------
2,118,562 12,124 18,104 109,860 2,144,583
----------- -------- -------- -------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 308,051 - - - 390,373
Asset retirement obligation accretion........... 15,707 - - - 10,782
Lease operating costs........................... 224,096 - - - 420,016
Gathering and transportation costs.............. 15,566 - - - 34,392
Severance and other taxes....................... 43,616 - - 1 115,162
General and administrative...................... 85,292 - - - 17,121
Financing costs, net............................ 40,228 - 9,025 28,220 (14,160)
----------- -------- -------- -------- ------------
732,556 - 9,025 28,221 973,686
----------- -------- -------- -------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. 1,386,006 12,124 9,079 81,639 1,170,897
Provision (benefit) for income taxes............ 237,493 - (3,045) (9,485) 460,066
----------- -------- -------- -------- ------------
NET INCOME......................................... 1,148,513 12,124 12,124 91,124 710,831
Preferred stock dividends....................... 2,840 - - - -
----------- -------- -------- -------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 1,145,673 $ 12,124 $ 12,124 $ 91,124 $ 710,831
=========== ======== ========= ======== ============
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues................. $ (155,511) $ 3,401,184
Equity in net income (loss) of affiliates....... (826,203) -
Other........................................... - 20,335
---------- ------------
(981,714) 3,421,519
---------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ - 698,424
Asset retirement obligation accretion........... - 26,489
Lease operating costs........................... (155,511) 488,601
Gathering and transportation costs.............. - 49,958
Severance and other taxes....................... - 158,779
General and administrative...................... - 102,413
Financing costs, net............................ - 63,313
---------- ------------
(155,511) 1,587,977
---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (826,203) 1,833,542
Provision (benefit) for income taxes............ - 685,029
---------- ------------
NET INCOME......................................... (826,203) 1,148,513
Preferred stock dividends....................... - 2,840
---------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ (826,203) $ 1,145,673
========== ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- -------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues................. $ 1,097,459 $ - $ - $ - $ 1,457,921
Equity in net income (loss) of affiliates....... 418,857 18,682 24,716 91,399 (19,310)
Other........................................... (1,911) - - - (7,583)
----------- ------- --------- -------- ------------
1,514,405 18,682 24,716 91,399 1,431,028
----------- ------- --------- -------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ 269,054 - - - 312,911
Asset retirement obligation accretion........... 11,600 - - - 10,052
Lease operating costs........................... 172,687 - - - 390,542
Gathering and transportation costs.............. 15,223 - - - 24,573
Severance and other taxes....................... 28,796 - - 18 1,729
General and administrative...................... 67,828 - - - 17,410
China litigation................................ - - - - 71,216
Financing costs, net............................ 42,016 - 9,022 20,043 (16,368)
----------- ------- --------- -------- ------------
607,204 - 9,022 20,061 812,065
----------- ------- --------- -------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. 907,201 18,682 15,694 71,338 618,963
Provision (benefit) for income taxes............ 177,350 - (2,988) (6,785) 200,106
----------- ------- --------- -------- ------------
NET INCOME......................................... 729,851 18,682 18,682 78,123 418,857
Preferred stock dividends....................... 2,840 - - - -
----------- ------- --------- -------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $ 727,011 $18,682 $ 18,682 $ 78,123 $ 418,857
=========== ======= ========= ======== ============
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
REVENUES AND OTHER:
Oil and gas production revenues................. $(155,214) $ 2,400,166
Equity in net income (loss) of affiliates....... (534,344) -
Other........................................... - (9,494)
--------- ------------
(689,558) 2,390,672
--------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization........ - 581,965
Asset retirement obligation accretion........... - 21,652
Lease operating costs........................... (155,214) 408,015
Gathering and transportation costs.............. - 39,796
Severance and other taxes....................... - 30,543
General and administrative...................... - 85,238
China litigation................................ - 71,216
Financing costs, net............................ - 54,713
--------- ------------
(155,214) 1,293,138
--------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (534,344) 1,097,534
Provision (benefit) for income taxes............ - 367,683
--------- ------------
NET INCOME......................................... (534,344) 729,851
Preferred stock dividends....................... - 2,840
--------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK................ $(534,344) $ 727,011
========= ============
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION
----------- ------------- --------- -------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 679,969 $ - $ (10,105) $(19,728) $ 1,179,045
----------- ------- --------- -------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (489,626) - - - (1,271,064)
Investment in subsidiaries, net.................. (108,782) (9,025) - - (29,705)
Other, net....................................... 65,358 - - - (40,919)
----------- ------- --------- -------- ------------
NET CASH USED IN INVESTING ACTIVITIES.............. (533,050) (9,025) - - (1,341,688)
----------- ------- --------- -------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 83,887 - 1,080 445 98,527
Payments on long-term debt....................... (192,700) - - - (830)
Dividends paid................................... (55,307) - - - -
Common stock activity............................ 19,894 9,025 9,025 19,281 10,267
Treasury stock activity, net..................... 8,409 - - - -
Cost of debt and equity transactions............. (722) - - - -
Other............................................ 12,466 - - - -
----------- ------- --------- -------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... (124,073) 9,025 10,105 19,726 107,964
----------- ------- --------- -------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 22,846 - - (2) (54,679)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 597 - 2 3 110,491
----------- ------- --------- -------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 23,443 $ - $ 2 $ 1 $ 55,812
=========== ======= ========= ======== ============
RECLASSIFICATIONS
& ELIMINATIONS CONSOLIDATED
----------------- ------------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ - $ 1,829,181
--------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. - (1,760,690)
Investment in subsidiaries, net.................. 147,512 -
Other, net....................................... - 24,439
--------- ------------
NET CASH USED IN INVESTING ACTIVITIES.............. 147,512 (1,736,251)
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. (99,914) 84,025
Payments on long-term debt....................... - (193,530)
Dividends paid................................... - (55,307)
Common stock activity............................ (47,598) 19,894
Treasury stock activity, net..................... - 8,409
Cost of debt and equity transactions............. - (722)
Other............................................ - 12,466
--------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... (147,512) (124,765)
--------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. - (31,835)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ - 111,093
--------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ - $ 79,258
========= ===========
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
APACHE
APACHE APACHE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA
----------- ------------- ---------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................... $ 678,621 $ - $ (8,219)
----------- ------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................ (311,910) - -
Investment in subsidiaries, net................................ (182,525) (9,025) -
Other, net..................................................... (8,957) - -
----------- ------------- ---------
NET CASH USED IN INVESTING ACTIVITIES............................. (503,392) (9,025) -
----------- ------------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................................... 274 - (806)
Payments on long-term debt..................................... (135,300) - -
Dividends paid................................................. (41,838) - -
Common stock activity.......................................... 13,383 9,025 9,025
Treasury stock activity, net................................... 7,663 - -
Cost of debt and equity transactions........................... (2,050) - -
----------- ------------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... (157,868) 9,025 8,219
----------- ------------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 17,361 - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... - - 2
----------- ------------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 17,361 $ - $ 2
=========== ============= =========
ALL OTHER
APACHE SUBSIDIARIES
FINANCE OF APACHE RECLASSIFICATIONS
CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
--------- ------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................... $ (19,521) $ 648,171 $ - $ 1,299,052
--------- ------------ ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................ - (746,239) - (1,058,149)
Investment in subsidiaries, net................................ - (26,792) 218,342 -
Other, net..................................................... - (10,231) - (19,188)
--------- ------------ ----------------- ------------
NET CASH USED IN INVESTING ACTIVITIES............................. - (783,262) 218,342 (1,077,337)
--------- ------------ ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................................... 242 165,023 (164,329) 404
Payments on long-term debt..................................... - - - (135,300)
Dividends paid................................................. - - - (41,838)
Common stock activity.......................................... 19,281 16,682 (54,013) 13,383
Treasury stock activity, net................................... - - - 7,663
Cost of debt and equity transactions........................... - - - (2,050)
--------- ------------ ----------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 19,523 181,705 (218,342) (157,738)
--------- ------------ ----------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 2 46,614 - 63,977
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 1 33,500 - 33,503
--------- ------------ ----------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 3 $ 80,114 $ - $ 97,480
========= ============ ================= ============
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2005
APACHE
APACHE APACHE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA
----------- ------------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 23,443 $ - $ 2
Receivables, net of allowance.................................. 407,617 - -
Inventories.................................................... 22,371 - -
Drilling advances and other.................................... 89,915 - -
----------- ------------- ---------
543,346 - 2
----------- ------------- ---------
PROPERTY AND EQUIPMENT, NET....................................... 6,889,673 - -
----------- ------------- ---------
OTHER ASSETS:
Intercompany receivable, net................................... 1,205,813 - (2,177)
Goodwill, net.................................................. - - -
Equity in affiliates........................................... 4,892,764 281,377 526,809
Deferred charges and other..................................... 43,306 - -
----------- ------------- ---------
13,574,902 281,377 524,634
=========== ============= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... 314,437 - -
Other accrued expenses......................................... 435,199 - (321)
Current debt................................................... 287,000 - -
----------- ------------- ---------
1,036,636 - (321)
----------- ------------- ---------
LONG-TERM DEBT.................................................... 1,271,231 - 269,300
----------- ------------- ---------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes................................................... 1,089,412 - (25,722)
Advances from gas purchasers................................... 79,993 - -
Asset retirement obligation.................................... 579,750 - -
Oil and gas derivative instruments............................. 149,199 - -
Other.......................................................... 172,053 - -
----------- ------------- ---------
2,070,407 - (25,722)
----------- ------------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................................. 9,196,628 281,377 281,377
----------- ------------- ---------
$13,574,902 $ 281,377 $ 524,634
=========== ============= =========
ALL OTHER
APACHE SUBSIDIARIES
FINANCE OF APACHE RECLASSIFICATIONS
CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
---------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 1 $ 55,812 $ - $ 79,258
Receivables, net of allowance.................................. - 731,164 - 1,138,781
Inventories.................................................... - 164,575 - 186,946
Drilling advances and other.................................... - 88,375 - 178,290
---------- ------------ ----------------- ------------
1 1,039,926 - 1,583,275
---------- ------------ ----------------- ------------
PROPERTY AND EQUIPMENT, NET....................................... - 8,103,645 - 14,993,318
---------- ------------ ----------------- ------------
OTHER ASSETS:
Intercompany receivable, net................................... (254,139) (949,497) - -
Goodwill, net.................................................. - 189,252 - 189,252
Equity in affiliates........................................... 1,376,500 (1,184,899) (5,892,551) -
Deferred charges and other..................................... 4,459 66,970 - 114,735
---------- ------------ ----------------- ------------
1,126,821 7,265,397 (5,892,551) 16,880,580
========== ============ ================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... - 280,853 - 595,290
Other accrued expenses......................................... 38,620 463,165 - 936,663
Current debt................................................... - 274 - 287,274
---------- ------------ ----------------- ------------
38,620 744,292 - 1,819,227
---------- ------------ ----------------- ------------
LONG-TERM DEBT.................................................... 646,828 4,252 - 2,191,611
---------- ------------ ----------------- ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes................................................... 4,340 1,199,851 - 2,267,881
Advances from gas purchasers................................... - - - 79,993
Asset retirement obligation.................................... - 378,681 - 958,431
Oil and gas derivative instruments............................. - - - 149,199
Other.......................................................... - 45,557 - 217,610
---------- ------------ ----------------- ------------
4,340 1,624,089 - 3,673,114
---------- ------------ ----------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................................. 437,033 4,892,764 (5,892,551) 9,196,628
---------- ------------ ----------------- ------------
$1,126,821 $ 7,265,397 $ (5,892,551) $ 16,880,580
========== ============ ================= ============
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
APACHE
APACHE APACHE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA
----------- ------------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 597 $ - $ 2
Receivables, net of allowance.................................. 367,359 - -
Inventories.................................................... 28,000 - -
Drilling advances and other.................................... 82,837 - -
----------- ------------- ---------
478,793 - 2
----------- ------------- ---------
PROPERTY AND EQUIPMENT, NET....................................... 6,683,499 - -
----------- ------------- ---------
OTHER ASSETS:
Intercompany receivable, net................................... 1,107,286 - (1,205)
Goodwill, net.................................................. - - -
Equity in affiliates........................................... 4,173,788 258,437 506,806
Deferred charges and other..................................... 43,460 - -
----------- ------------- ---------
$12,486,826 $ 258,437 $ 505,603
=========== ============= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 280,754 $ - $ -
Other accrued expenses......................................... 306,511 - 3,335
----------- ------------- ---------
587,265 - 3,335
----------- ------------- ---------
LONG-TERM DEBT.................................................... 1,667,044 - 269,192
----------- ------------- ---------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes................................................... 1,132,618 - (25,361)
Advances from gas purchasers................................... 90,876 - -
Asset retirement obligation.................................... 568,862 - -
Oil and gas derivative instruments............................. 31,417 - -
Other.......................................................... 204,323 - -
----------- ------------- ---------
2,028,096 - (25,361)
----------- ------------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................................. 8,204,421 258,437 258,437
----------- ------------- ---------
$12,486,826 $ 258,437 $ 505,603
=========== ============= =========
ALL OTHER
APACHE SUBSIDIARIES
FINANCE OF APACHE RECLASSIFICATIONS
CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
---------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 3 $ 110,491 $ - $ 111,093
Receivables, net of allowance.................................. - 572,377 - 939,736
Inventories.................................................... - 129,293 - 157,293
Drilling advances and other.................................... - 57,823 - 140,660
---------- ------------ ----------------- ------------
3 869,984 - 1,348,782
---------- ------------ ----------------- ------------
PROPERTY AND EQUIPMENT, NET....................................... - 7,176,860 - 13,860,359
---------- ------------ ----------------- ------------
OTHER ASSETS:
Intercompany receivable, net................................... (253,724) (852,357) - -
Goodwill, net.................................................. - 189,252 - 189,252
Equity in affiliates........................................... 1,250,590 (1,178,450) (5,011,171) -
Deferred charges and other..................................... 4,617 56,010 - 104,087
---------- ------------ ----------------- ------------
$1,001,486 $ 6,261,299 $ (5,011,171) $ 15,502,480
========== ============ ================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ - $ 261,320 $ - $ 542,074
Other accrued expenses......................................... 29,946 401,025 - 740,817
---------- ------------ ----------------- ------------
29,946 662,345 - 1,282,891
---------- ------------ ----------------- ------------
LONG-TERM DEBT.................................................... 646,798 5,356 - 2,588,390
---------- ------------ ----------------- ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes................................................... 4,233 1,035,147 - 2,146,637
Advances from gas purchasers................................... - - - 90,876
Asset retirement obligation.................................... - 363,142 - 932,004
Oil and gas derivative instruments............................. - - - 31,417
Other.......................................................... - 21,521 - 225,844
---------- ------------ ----------------- ------------
4,233 1,419,810 - 3,426,778
---------- ------------ ----------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................................. 320,509 4,173,788 (5,011,171) 8,204,421
---------- ------------ ----------------- ------------
$1,001,486 $ 6,261,299 $ (5,011,171) $ 15,502,480
========== ============ ================= ============
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache Corporation (Apache or the Company) reported record second-quarter
2005 earnings of $587 million, up 54 percent from the $382 million reported in
the second quarter of 2004. The improvement in earnings was driven by higher
crude oil and natural gas price realizations and record daily production.
Second-quarter crude oil price realizations of $48.55 per barrel were 47 percent
higher than the 2004 comparable period, while natural gas realizations were up
18 percent to $5.71 per thousand cubic feet (Mcf). Production rose to a record
469,617 barrels of oil equivalent per day (boe/d). Earnings and net cash
provided by operating activities for the six-month period totaled $1.1 billion
and $1.8 billion, respectively. While higher commodity prices and increased
demand continued to drive up operating costs, their impact on earnings was more
than offset by the additional revenues generated from higher crude oil and
natural gas prices, and production growth. These financial statements should be
read in conjunction with Management's Discussion and Analysis and financial
statements, and the summary of significant accounting policies and notes
included in the Company's 2004 Form 10-K.
Second-quarter and year-to-date operating results include:
- Record quarterly and year-to-date oil and gas production revenues of
$1.8 billion and $3.4 billion, respectively, with second-quarter
crude oil revenues exceeding $1 billion.
- Crude oil production increased eight percent to 242,189 barrels of
oil per day (b/d) in the second quarter compared to prior-year
quarter.
- Record natural gas production of 1,297 million cubic feet per day
(MMcf/d) in the second quarter compared to prior-year quarter.
- Australia's 2005 second-quarter daily oil production decreased 39
percent, or 8,713 b/d, compared to the second quarter of 2004.
- The North Sea's 2005 second-quarter daily equivalent production
increased 18,072 b/d (38 percent) compared to the second quarter of
2004.
Capital expenditures for exploration and production activity, including
gathering, marketing and processing facilities, totaled $1.8 billion for the
first six months of 2005, $727 million higher than the comparable period last
year, an increase of 67 percent. Eighty-nine percent of the world-wide spending
was directly related to exploration and development (E&D) activities. From a
reportable segment standpoint, nearly two-thirds of the Company's E&D capital
was spent in the U.S. and Canada, consistent with the prior year period and
North America's overall contribution to the Company.
Noteworthy recent discoveries and development wells include:
- On April 5, 2005, we announced two discoveries in Egypt. The Syrah
1X wildcat, on the Company's 100 percent-contractor-interest Khalda
Concession, tested 46.5 MMcf/d of natural gas. The Tanzanite 1X
located onshore on Apache's West Mediterranean Concession tested
5,296 b/d and 7.4 MMcf/d of gas. Additional wells are planned for
the Syrah structure, with initial production expected during the
third quarter of 2005, upon approval of a development plan by the
Egyptian General Petroleum Corporation (EGPC).
- On June 15, 2005, Apache announced the development of its Rose
gas/condensate field in Australia with the completion of the Rose 4
development well which is producing approximately 60 MMcf/d of
natural gas and 1,700 b/d of condensate.
- On July 5, 2005, the Company announced that the Tanzanite-2 well on
Egypt's West Mediterranean Onshore Concession tested 2,846 b/d and
640 thousand cubic feet per day (Mcf/d) of gas from the
Cretaceous-age Alamein Dolomite formation in the Tanzanite Field.
- On July 5, 2005, Apache also announced a new field oil discovery,
the El Diyur-2X, on the Apache-operated El Diyur Concession
southwest of Egypt's Western Desert. A test of the lower Bahariya
formation flowed at a rate of 1,177 b/d.
- On July 28, 2005, Apache announced that it initiated production from
the Mohave-1H discovery in the Carnarvon Basin offshore Western
Australia. The initial gross production rate was 10,690 b/d from the
Flag Sandstone zone, a prolific but traditionally often smaller
reservoir. Apache owns a 68.5 percent interest in the field.
21
On May 5, 2005, Apache signed a farm-in agreement with Exxon Mobil
Corporation (ExxonMobil) covering approximately 650,000 acres of undeveloped
properties in the Western Canadian province of Alberta. Under the agreement,
Apache is to drill and operate 145 new wells over a 36-month period with upside
potential for further drilling. ExxonMobil will retain a 37.5 percent royalty on
fee lands and 35 percent of its working interest on leasehold acreage. The
agreement also allows Apache to test additional horizons on approximately
140,000 acres of property covered in the 2004 farm-in agreement with ExxonMobil.
22
RESULTS OF OPERATIONS
REVENUES
The table below presents oil and gas production revenues, production and
average prices received from sales of oil, natural gas and natural gas liquids.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ------------------------------------
INCREASE INCREASE
2005 2004 (DECREASE) 2005 2004 (DECREASE)
----------- ---------- ---------- ----------- ----------- ----------
Revenues (in thousands):
Oil........................................... $ 1,069,913 $ 675,654 58% $ 2,066,910 $ 1,278,289 62%
Natural gas................................... 673,592 550,509 22% 1,274,542 1,077,363 18%
Natural gas liquids........................... 31,030 21,249 46% 59,732 44,514 34%
----------- ---------- ----------- -----------
Total..................................... $ 1,774,535 1,247,412 42% $ 3,401,184 $ 2,400,166 42%
=========== ========== =========== ===========
Oil Volume - Barrels per day:
United States................................. 77,140 69,080 12% 75,395 68,167 11%
Canada........................................ 21,442 26,226 (18%) 22,354 25,746 (13%)
Egypt......................................... 53,019 53,410 (1%) 53,795 51,254 5%
Australia..................................... 13,487 22,200 (39%) 14,725 22,928 (36%)
North Sea..................................... 65,251 47,179 38% 63,570 45,739 39%
China......................................... 10,677 5,966 79% 10,592 6,703 58%
Argentina..................................... 1,173 541 117% 940 547 72%
----------- ---------- ----------- -----------
Total..................................... 242,189 224,602 8% 241,371 221,084 9%
=========== ========== =========== ===========
Average Oil price - Per barrel:
United States................................. $ 46.02 $ 37.00 24% $ 45.04 $ 34.71 30%
Canada........................................ 48.61 35.91 35% 47.85 34.48 39%
Egypt......................................... 50.49 34.24 47% 49.62 32.85 51%
Australia..................................... 53.52 39.03 37% 53.24 36.88 44%
North Sea..................................... 49.65 21.70 129% 47.93 22.19 116%
China......................................... 45.35 31.73 43% 39.71 30.84 29%
Argentina..................................... 36.19 35.10 3% 35.36 34.26 3%
Total..................................... 48.55 33.06 47% 47.31 31.77 49%
Natural Gas Volume - Mcf per day:
United States................................. 653,805 665,167 (2%) 645,848 654,815 (1%)
Canada........................................ 380,564 327,537 16% 363,747 320,800 13%
Egypt......................................... 146,724 137,329 7% 151,002 132,997 14%
Australia..................................... 110,005 115,824 (5%) 111,859 117,323 (5%)
North Sea..................................... 2,297 1,661 38% 2,238 1,631 37%
China - - - - - -
Argentina..................................... 3,248 3,334 (3%) 3,360 4,247 (21%)
----------- ---------- ----------- -----------
Total..................................... 1,296,643 1,250,852 4% 1,278,054 1,231,813 4%
=========== ========== =========== ===========
Average Natural Gas price - Per Mcf:
United States................................. $ 6.43 $ 5.31 21% $ 6.24 $ 5.33 17%
Canada........................................ 6.03 5.11 18% 5.82 5.10 14%
Egypt......................................... 4.71 4.66 1% 4.50 4.39 3%
Australia..................................... 1.71 1.65 4% 1.76 1.67 5%
North Sea..................................... 6.74 5.05 33% 6.04 4.70 29%
China - - - - - -
Argentina..................................... 1.22 .67 82% 1.06 .55 93%
Total..................................... 5.71 4.84 18% 5.51 4.81 15%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States................................ 9,408 7,585 24% 9,257 7,856 18%
Canada....................................... 1,913 2,601 (26%) 2,165 2,600 (17%)
----------- ---------- ----------- -----------
Total..................................... 11,321 10,186 11% 11,422 10,456 9%
=========== ========== =========== ===========
Average NGL Price - Per barrel:
United States................................ $ 31.19 $ 22.48 39% $ 29.76 $ 23.92 24%
Canada....................................... 24.88 24.23 3% 25.20 21.78 16%
Total..................................... 30.12 22.92 31% 28.89 23.39 24%
23
The following table presents each reportable segment's oil revenues and
gas revenues as a percentage of total oil revenues and gas revenues,
respectively.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------- ----------------------------------
OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES
------------ ------------ ------------ -------------
2005 2004 2005 2004 2005 2004 2005 2004
---- ------ ---- ------ ---- ----- ---- ------
United States.................. 30% 34% 57% 58% 30% 34% 57% 59%
Canada......................... 9 13 31 28 9 13 30 28
Egypt.......................... 23 25 9 11 23 24 10 10
Australia...................... 6 12 3 3 7 12 3 3
North Sea...................... 28 14 - - 27 14 - -
Other International............ 4 2 - - 4 3 - -
--- --- --- --- --- --- --- ---
Total........................ 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
Crude Oil Contribution
Apache saw an appreciable change in the mix of its second-quarter and
six-month crude oil contributions in 2005 relative to 2004. While the U.S.
remains the largest contributor, its contribution fell four percent from the
2004 comparable quarter to 30 percent of second-quarter 2005 consolidated crude
oil revenues. The North Sea's contribution doubled to 28 percent on strong
production growth and significantly higher price realizations, as realizations
in the comparable 2004 quarter were impacted by a lower fixed-price physical
contract (discussed below) that expired December 31, 2004. The change in the
North Sea's revenue generators, price and volume, far outpaced those of other
regions on a comparative basis. Both Egypt and Canada saw their contributions
drop even though their second-quarter crude oil revenues were up from the second
quarter of 2004. Australia's contribution fell by half to six percent of
consolidated crude oil revenues and it was the lone region in which revenues
declined period over period. Similar changes in the mix were also evident for
the six-month period.
Crude Oil Revenues
Second-quarter crude oil revenues increased $394 million from the
comparable 2004 quarter with a $15.49 per barrel increase in oil price
generating an additional $317 million of revenue and an eight percent increase
in production adding another $77 million of revenues. All segments reported a
significant increase in realized oil price, with the North Sea, the U.S. and
China also benefiting from production growth quarter over quarter. For the 2005
six-month period, crude oil revenues increased $789 million from the comparable
2004 period with a $15.54 per barrel increase in oil price and a nine percent
increase in production.
The North Sea's second-quarter 2005 crude oil revenues were $202 million
higher than the second-quarter of 2004 on significantly higher price
realizations and a 38 percent increase in production. The higher price
realizations generated an additional $120 million of revenues when compared to
the same 2004 quarter. Second-quarter 2004 revenues were impacted by a lower
fixed-price physical contract entered into in conjunction with our 2003 property
acquisition from BP p.l.c. (BP). The 38 percent production growth reflects
successful drilling since second quarter 2004 and increased platform operating
efficiencies following completion of a number of major facility upgrades. An
unexpected temporary shutdown of the BP operated sales pipeline system in June
2005 cost the Company approximately 2,000 b/d of quarterly production.
U.S. oil revenues increased $90 million in the second quarter from the
same period last year resulting from a 12 percent increase in production and a
24 percent increase in price. Our average realized price includes an unfavorable
$1.56 per barrel hedge loss on a portion of production acquired from ExxonMobil
and Anadarko Petroleum Corporation (Anadarko). (See Note 2, Hedging and
Derivative Instruments of this Form 10-Q.) Production was up 8,060 b/d,
increasing revenues $34 million in the U.S. The ExxonMobil and Anadarko property
acquisitions executed during the latter part of 2004 and successful drilling and
recompletion efforts more than offset natural production declines and
approximately 2,500 b/d shut-in during the quarter because of Hurricane Ivan, a
2004 event. We plan to have the remaining 700 b/d still shut-in at quarter's end
online by the end of the third quarter of 2005.
Egypt added approximately $77 million of revenues from a 47 percent
increase in crude oil price realizations partially offset by a 391 b/d decrease
in production. Production increases at Khalda and East Bahariya were offset by
lower production at South Umbarka.
24
Canada's revenues increased $9 million. A 35 percent increase in price
from the comparable period was mostly offset by an 18 percent, or 4,784 b/d,
decrease in oil production. Canada production was impacted by increasing water
cut from wells in the Zama, Midale, Snipe Lake, House Mountain and Karr
Simonette areas. Also impacting production were pressure and gas/oil ratio
limitations imposed on the Virginia Hills development area.
China's second-quarter 2005 revenues were $27 million higher than the
second quarter of 2004 on a 4,711 b/d increase in production and a 43 percent
increase in price. Production was still ramping up during the second quarter of
2004.
Australia's crude oil revenues decreased $13 million or 17 percent from
second quarter 2004. This decrease reflects a 39 percent decline in production
partially offset by a 37 percent increase in price. The decline in daily oil
production resulted from natural decline, particularly the Legendre field,
cessation of production at East Spar, and other natural declines. These declines
were partially offset by the impact of new wells brought online during the
period.
Approximately six percent of our worldwide crude oil production was
subject to financial derivative hedging for the second quarter of 2005. None of
our oil production was subject to financial derivative hedging during the
second quarter of 2004. For the first six-months of 2005, approximately six
percent of our worldwide crude oil production was subject to financial
derivative hedging compared to four percent in the 2004 period. (See Note 2,
Hedging and Derivative Instruments of this Form 10-Q for a summary of the
current derivative positions and terms.) These derivative financial instruments
reduced our second-quarter 2005 realized price $.50 per barrel. Our average
realized prices for the first six-month periods of 2005 and 2004 were reduced
$.42 and $.29 per barrel, respectively, by hedges.
Natural Gas Contribution
Our North America operations continue to contribute a significant portion
of our consolidated natural gas revenues. In the second quarter of 2005, 88
percent of Apache's natural gas revenues came from North America, up slightly
from the comparable prior-year quarter. The U.S. contributed 57 percent of our
consolidated natural gas revenues, reflecting a 21 percent price increase
partially offset by two percent lower volumes. Canada's contribution to
second-quarter 2005 consolidated natural gas revenues increased three percent to
31 percent on an 18 percent increase in price and a 16 percent increase in
production. Egypt's contribution to second-quarter 2005 natural gas revenues
fell two percent to nine percent when compared to the prior-year quarter.
Egypt's production was up seven percent, while price increased one percent.
Australia's contribution to Apache's total gas revenues remained flat at three
percent. Contributions for the six-month period were similar, although Egypt's
contribution remained flat year over year at 10 percent, while Canada's
contribution increased two percent to 30 percent of consolidated natural gas
revenues.
Natural Gas Revenues
Our second-quarter 2005 natural gas revenues increased 22 percent or $123
million from the prior-year quarter as an $.87 per Mcf increase in our average
natural gas price realization generated an additional $99 million of revenues.
Higher production added the remaining $24 million. While all of our reportable
segments reported an increase in realized natural gas prices, $95 million or 96
percent of the additional revenues attributed to price came from the U.S. and
Canada. The revenue gains related to production were primarily attributed to
Canada, with smaller contributions from Egypt and the North Sea. Natural gas
revenues increased $197 million from the 2004 six-month period with $179 million
of the increase attributable to our North American regions. Worldwide realized
gas prices were up $.70 per Mcf while production was up four percent overall.
Higher second-quarter prices in the U.S. added $68 million to consolidated
natural gas revenues, while an 11.4 MMcf/d decline in U.S. production lowered
revenues $7 million. The lower U.S. production was focused in the Gulf Coast
region where natural decline in mature fields, downtime and the lingering impact
of Hurricane Ivan negatively impacted results. Offsetting these impacts were
production increases from drilling and our 2004 property acquisitions from
Anadarko and ExxonMobil. While Hurricane Ivan cost the Company approximately 11
MMcf/d during the second quarter of 2005, only 2 MMcf/d remained shut-in at the
end of the quarter.
Canada's second-quarter 2005 natural gas revenues increased $57 million,
with contributions from higher prices and production growth relatively equal.
Production increased 53 MMcf/d, as a result of successful drilling efforts at
25
Nevis, Zama, the Exxon Grant Lands and other areas, and royalty relief
associated with gas cost allowance wells. Natural decline in the Ladyfern,
Hawkeye and other areas partially offset the production gains.
Egypt added $5 million to second-quarter 2005 consolidated natural gas
revenues compared to the prior-year period on a 9.4 MMcf/d increase in
production and small improvement in natural gas price realizations. The increase
in production was attributable to a full quarter of production from the Khalda
concession Imhotep and Atoun wells and first sales from the North East Abu
Gharadig concession following the January 2005 completion of pipeline
facilities.
While Australia's second-quarter 2005 gas production declined five percent
compared to the second quarter of 2004, the impact on revenues was minimal given
Australia's relatively low natural gas price. The decline in production relates
to cessation of production at East Spar.
Although a majority of our worldwide gas sales contracts are indexed to
prevailing market prices, approximately nine percent of our second-quarter 2005
and 2004 U.S. natural gas production was subject to long-term, fixed-price
physical contracts. Approximately 10 percent of our U.S. natural gas production
for the first six months of 2005 was subject to long-term, fixed-price physical
contracts up from nine percent in the prior year. These fixed-price contracts
reduced second-quarter 2005 and 2004 worldwide realized prices $.13 and $.10 per
Mcf, respectively and 2005 and 2004 six-month worldwide realized prices $.12 and
$.09 per Mcf, respectively. Additionally, nearly all of our Australian natural
gas production is subject to long-term, fixed-price supply contracts that are
periodically adjusted for changes in Australia's consumer price index. Since
these contracts are denominated in Australian dollars, the resulting revenues
are impacted by changes in the value of the Australian dollar relative to the
U.S. dollar.
Approximately 11 percent of our worldwide natural gas production was
subject to financial derivative hedges for the second-quarter and six-month
periods of 2005, while approximately 15 percent of our worldwide natural gas
production was subject to hedges in the comparable 2004 periods. These
derivative financial instruments reduced our second-quarter and six-month 2005
realized prices $.07 and $.03 Mcf, respectively. The second-quarter and
six-month periods of 2004 realized prices were both reduced $.20 and $.13 per
Mcf, respectively, as a result of the derivative financial instruments. Hedges
covering 50 MMcf/d, or four percent, of our second-quarter gas production
expired June 30, 2005. (See Note 2, Hedging and Derivative Instruments, of this
Form 10-Q for a summary of our current derivative positions and terms.) Also
during the 2004 quarter, we amortized specific unrealized gains and losses
related to derivative positions closed in October and November 2001. This
amortization, which terminated in July 2004, had a negligible impact on
second-quarter 2004 average realized prices.
COSTS
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. Second-quarter and year-to-date
2005 costs reflect the impact of our ExxonMobil and Anadarko property
acquisitions closed in the latter half of 2004.
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------- -----------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
---- ------- ------ --------- ------ ------ ------- ----------
(In millions) (Per boe) (In millions) (Per boe)
Depreciation, depletion and amortization
(DD&A):
Oil and gas property and equipment.......... $338 $ 278 $ 7.92 $ 6.88 $ 658 $ 546 $ 7.81 $ 6.87
Other assets................................ 21 18 .48 .45 40 36 .48 .45
Asset retirement obligation accretion.......... 13 11 .31 .27 26 22 .31 .27
Lease operating costs (LOE).................... 255 200 5.98 4.95 489 408 5.80 5.13
Gathering and transportation costs............. 26 20 .61 .50 50 40 .59 .50
Severance and other taxes...................... 87 22 2.03 .54 159 30 1.88 .38
General and administrative expense (G&A)....... 52 39 1.22 .97 102 85 1.21 1.07
China litigation............................... - 71 - 1.77 - 71 - .90
Financing costs, net........................... 32 27 .74 .68 64 55 .75 .69
---- ------- ------ --------- ------ ------ ------- ----------
Total.................................... $824 $ 686 $19.29 $ 17.01 $1,588 $1,293 $ 18.83 $ 16.26
==== ======= ====== ========= ====== ====== ======= ==========
26
Depreciation, Depletion and Amortization
Full-cost DD&A expense of $338 million is $60 million higher in the second
quarter of 2005 than in the comparative quarter of 2004. On a year-to-date
basis, full-cost DD&A expense increased $112 million. The increase attributable
to volume growth was $19 million (31 percent) and $36 million (32 percent) for
the second quarter and six-month periods, respectively. The balance of the
additional expense was related to an increase in our full-cost rate period over
period. The Company's second-quarter full-cost DD&A rate of $7.92 per boe was
$1.04 per boe higher than the comparable 2004 quarter. For the 2005 six-month
period our full-cost DD&A averaged $.94 per boe more than the 2004 period. DD&A
expense has been trending upward and reflects rising industry-wide drilling and
acquisition costs, particularly in the U.S. and Canada. The higher commodity
prices seen over the past year led to increased demand for drilling services and
thus higher drilling costs and higher estimated future development costs. In
addition, the cost of properties acquired from ExxonMobil and Anadarko were
higher than our historical cost as the higher commodity prices have increased
the value and costs of properties available for acquisition.
Lease Operating Costs
Second-quarter 2005 LOE increased $56 million, 28 percent, over
second-quarter 2004. On a unit of production basis, second-quarter 2005 costs
were up $1.03 from 2004 to $5.98 per boe. For the first six months of 2005 LOE
totaled $489 million, $81 million higher than 2004. On a boe basis, 2005
six-month LOE averaged $5.80 per boe, $.67 per boe higher than 2004. Service
costs have been trending upward over the past year, reflecting higher commodity
prices and related demand.
Costs were up across the board and primarily reflect increased service
costs associated with higher commodity prices and demand. Regionally,
second-quarter costs in the U.S. were up $32 million. On a unit of production
basis, the U.S. added $.68 per boe to the consolidated rate. The rate increase
in the U.S. is attributable to higher contract labor costs, higher workover
activity and various other commodity-price driven service costs. Australia,
where absolute costs were up marginally, added $.17 per boe to the consolidated
rate on lower production. Canada's costs were up $9 million with over half
related to Canadian-U.S. dollar exchange rate movements. The balance related to
various other costs associated with an increase in activity and higher service
costs. Canada added $.18 per boe to the second-quarter 2005 consolidated rate
increase. Egypt's costs were up $10 million on additional workover activity and
higher cost of diesel fuel, which had previously been subsidized by the Egyptian
government. Egypt added $.23 per boe to the consolidated rate increase. The
North Sea reduced the consolidated rate $.19 per boe on a 38 percent increase in
production. While the North Sea had higher workover activity and repair costs in
the second quarter of 2005 compared to 2004, production increases more than
offset the impact.
Gathering and Transportation Costs
Gathering and transportation costs for the second quarter and first six
months of 2005 increased 30 percent and 26 percent, respectively, compared to
the same periods in 2004. The following table presents gathering and
transportation costs paid directly by Apache to third-party carriers for each of
the periods presented.
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
2005 2004 2005 2004
------ ------ ------ ------
(In millions)
U.S....................................... $ 8 $ 8 $ 16 $ 15
Canada.................................... 8 7 16 15
North Sea................................. 7 5 14 10
Egypt..................................... 3 - 4 -
------ ------ ------ ------
Total Gathering and Transportation........ $ 26 $ 20 $ 50 $ 40
====== ====== ====== ======
These costs are primarily related to the transportation of natural gas in
our North American operations and transportation of oil in the North Sea and
Egypt. The increase in costs for both the second-quarter and year-to-date
periods were driven by production growth in the North Sea, strengthening of the
Canadian dollar relative to the U.S. dollar and costs incurred to transport
cargoes of Egyptian crude in 2005. Apache began exporting Egyptian crude in the
second half of 2004 and first incurred third-party transportation charges in
early 2005.
27
Severance and Other Taxes
Second quarter 2005 severance and other taxes totaled $87 million, $65
million greater than the prior-year quarter. For the six-month period, severance
and other costs totaled $159 million compared to $31 million in year-earlier
period. A detail of these taxes follows:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
2005 2004 2005 2004
------ ------ ------ ------
(In millions)
Severance taxes....................... $ 29 $ 26 $ 59 $ 45
U.K. PRT.............................. 52 (12) 89 (29)
Canadian taxes........................ 4 5 9 10
Other................................. 2 3 2 5
------ ------ ------ ------
Total Severance and Other Taxes....... $ 87 $ 22 $ 159 $ 31
====== ====== ====== ======
Severance taxes are incurred in the U.S. and Australia. For the second
quarter and first six-months of 2005 severance taxes in the U.S. increased $10
million and $16 million, respectively, while Australia's decreased $6 million
and $1 million for the same comparative periods. U.S. severance taxes were
driven by higher prices and related revenues, while the Australian decrease
primarily reflects lower excise tax on Legendre, a result of declining
production. North Sea Petroleum Revenue Tax (PRT) is assessed on net profits
from subject fields in the United Kingdom (U.K.) North Sea. PRT increased $64
million quarter-over-quarter and $118 million year-to-date. As previously
discussed, the North Sea's 2004 second-quarter and six-month period revenues
were impacted by a lower fixed-price physical contract resulting in lower net
profits and comparative PRT expenses. The 2004 PRT credit reflected qualifying
capital spending and lifting costs that exceeded associated revenues.
General and Administrative Expense
Second-quarter and year-to-date G&A costs increased $13 million and $17
million, respectively, compared to the same periods in 2004. Nearly two-thirds
of the increase in second-quarter cost and three-fourths of the increase in
year-to-date cost were related to the impact of stock-based compensation
programs affected by the rising price of Apache's common stock. The balance of
the increase for both 2005 periods was primarily related to the increased cost
of insurance and higher health care costs and audit fees.
Provision for Income Taxes
Second-quarter 2005 income tax expense was $176 million higher than in the
second quarter of 2004. For the six-month period, 2005 income tax expense was
$317 million above 2004. The additional income tax expense in both periods was
driven by higher taxable income related to the increased revenues. Slightly
higher effective tax rates also contributed to the higher taxes. The Company's
effective tax rates in the 2005 three-month and six-month reporting periods were
largely unaffected by foreign currency exchange rate movements, unlike the 2004
periods.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL INDICATORS
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
Current ratio......................................... .87 1.05
Total debt (in millions).............................. $ 2,479 $ 2,588
Shareholders' equity (in millions).................... $ 9,197 $ 8,204
Percent of total debt to capitalization............... 21.2% 24.0%
Floating-rate debt/total debt......................... 12% 15%
OVERVIEW
Apache's primary uses of cash are for exploration, development and
acquisition of oil and gas properties, costs and expenses necessary to maintain
continued operations, repayment of principal and interest on outstanding debt
and payment of dividends.
28
The Company funds its exploration and development activities primarily
through net cash provided by operating activities (cash flow) and budgets
capital expenditures in light of projected cash flow. Our cash flow, both in the
short-term and long-term, is impacted by highly volatile oil and natural gas
prices, production levels, industry trends impacting operating expenses and
drilling costs and occasional acquisitions. For these reasons, we only forecast
cash flow on an annual basis. Longer term cash flow and capital spending
projections are not used by management to operate our business. The annual cash
flow forecasts are revised monthly in response to changing market conditions and
production projections. Apache routinely adjusts capital expenditure budgets in
response to the adjusted cash flow forecasts and market trends in drilling and
acquisitions costs.
The Company has historically utilized internally generated cash flow,
committed and uncommitted credit facilities and access to both debt and equity
capital markets for all other liquidity and capital resources needs. Apache's
ability to access the debt capital market is supported by its investment grade
credit ratings. Apache's senior unsecured debt is currently rated investment
grade by Moody's, Standard and Poor's and Fitch with ratings of A3, A- and A,
respectively. Because of the liquidity and capital resources alternatives
available to Apache, including internally generated cash flows, Apache's
management believes that its short-term and long-term liquidity will be adequate
to fund operations, including its capital spending program, repayment of debt
maturities and any amounts that may ultimately be paid in connection with
contingencies.
The Company's ratio of current assets to current liabilities was .87 on
June 30, 2005, compared to 1.05 on December 31, 2004. The decrease in the ratio
is the result of an increase in current liabilities of $536 million as of June
30, 2005 as compared to December 31, 2004, which exceeded an increase in current
assets of $234 million for the same period. The increase in current liabilities
was primarily attributable to current debt expected to be paid within the year,
higher accrued exploration and development costs from increased drilling
activity, and an increase in the accrued liability for derivative instruments.
The increase in current assets was driven by an increase in oil and gas revenue
receivables, resulting from higher commodity prices and higher joint owner
receivables.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Apache's net cash provided by operating activities for the first six
months of 2005 totaled $1.8 billion, up from $1.3 billion for the same period in
2004. The increase in 2005 cash flow is attributed primarily to the significant
increase in commodity prices, which generated additional oil and gas revenues.
The Company's average realized crude oil price increased 49 percent, a
reflection of higher worldwide prices. The Company also saw a 15 percent
increase in natural gas prices. Additional revenues generated from a nine
percent increase in crude oil production and a four percent increase in gas
production also contributed to the increased cash flows. These increases were
partially offset by higher LOE, severance taxes, U.K. PRT and higher income
taxes, all of which are generally up because of higher production and higher
commodity prices. The Company reviews production costs for each core area on a
monthly basis and strives to maintain efficient levels of costs. For a more
detailed discussion of commodity prices, production, costs and expenses, refer
to the "Results of Operations" of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Historically, fluctuations in commodity prices have been the primary
reason for the Company's short-term changes in cash flow from operating
activities. Sales volume changes have also impacted cash flow in the short-term,
but have not been as volatile as commodity prices have in the past. Apache's
long-term net cash provided by operating activities is dependent on commodity
prices, reserve replacement and the level of costs and expenses required for
continued operations.
DEBT
During the first six months of 2005, we continued to strengthen our
financial flexibility and build on our solid financial position. Our
debt-to-capitalization ratio on June 30, 2005, declined to 21.2 percent from
24.0 percent on December 31, 2004, as a result of slightly lower debt and
additional equity from earnings. On June 30, 2005, the Company had outstanding
debt of $2.5 billion, $110 million less than December 31, 2004. The Company's
outstanding debt consisted of $271 million under our commercial paper program,
$16 million under uncommitted lines of credit and a total of $2.2 billion of
other debt. This other debt included notes and debentures maturing in the years
2006 through 2096.
The Company has available a $1.2 billion commercial paper program which
enables Apache to borrow funds for up to 270 days at competitive interest rates.
The commercial paper balance of $271 million on June 30, 2005 is
29
classified as current debt in the accompanying consolidated balance sheet since
the Company now anticipates repaying those funds prior to year-end in light of
strong prices and cash flow. If the Company is unable to issue commercial paper
following a significant credit downgrade or dislocation in the market, the
Company's U.S. credit facilities are available as a 100 percent backstop. The
weighted-average interest rate for commercial paper was 2.97 percent and 1.08
percent for the second quarter of 2005 and 2004, respectively.
As of June 30, 2005, available borrowing capacity under our credit
facilities was $1.2 billion. We had $79 million in cash and cash equivalents on
hand on June 30, 2005, down $32 million from the $111 million available at the
end of 2004. The Company was in compliance with the terms of its credit
facilities as of June 30, 2005.
On May 12, 2005, the Company entered into a new $450 million revolving
bank credit facility for the U.S., a $150 million revolving bank credit facility
for Australia and a $150 million revolving bank credit facility for Canada,
which replaced the Company's existing credit facilities in the same amounts
which were scheduled to mature in June 2007. These new facilities are scheduled
to mature on May 12, 2010. There were no changes to the Company's $750 million
U.S. credit facility which matures in May 2009.
The financial covenants of the Company's revolving bank credit facilities
require the Company to maintain a debt-to-capitalization ratio of not greater
than 60 percent at the end of any fiscal quarter. The negative covenants include
restrictions on the Company's ability to create liens and security interests on
our assets, with exceptions for liens typically arising in the oil and gas
industry, purchase money liens and liens arising as a matter of law, such as tax
and mechanics liens. The Company may incur liens on assets located in the U.S.,
Canada and Australia of up to five percent of the Company's consolidated assets,
which approximated $844 million as of June 30, 2005. There are no restrictions
on incurring liens in countries other than the U.S., Canada and Australia. There
are also restrictions on Apache's ability to merge with another entity, unless
the Company is the surviving entity, and a restriction on our ability to
guarantee debt of entities not within our consolidated group.
There are no clauses in the facilities that permit the lenders to
accelerate payments or refuse to lend based on unspecified material adverse
changes (MAC clauses). The credit facility agreements do not have drawdown
restrictions or prepayment obligations in the event of a decline in credit
ratings. However, the agreements allow the lenders to accelerate payments and
terminate lending commitments if Apache Corporation, or any of its U.S.,
Canadian or Australian subsidiaries, defaults on any direct payment obligation
in excess of $100 million or has any unpaid, non-appealable judgment against it
in excess of $100 million. The Company's debt-to-capitalization ratio as of June
30, 2005 was 21.2 percent.
At the Company's option, the interest rate for the facilities is based on
(i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal
funds rate plus one-half of one percent or (ii) the London Interbank Offered
Rate (LIBOR) plus a margin determined by the Company's senior long-term debt
rating. The $750 million and the $450 million credit facilities (U.S. credit
facilities) also allow the Company to borrow under competitive auctions.
At June 30, 2005, the margin over LIBOR for committed loans under the new
facilities was .23 percent. If the total amount of the loans borrowed under all
three facilities equals or exceeds 50 percent of the total facility commitments,
then an additional .10 percent will be added to the margins over LIBOR. The
Company also pays quarterly facility fees of .07 percent on the total amount of
the three facilities. The facility fees vary based upon the Company's senior
long-term debt rating.
STOCK TRANSACTIONS
The Company has used access to equity capital markets to fund significant
acquisitions.
OIL AND GAS CAPITAL EXPENDITURES
The Company funded its exploration and production capital expenditures,
including gathering, transportation and marketing facilities, of $1.8 billion
and $1.1 billion in the first half of 2005 and 2004, respectively, with
internally generated net cash provided by operating activities of $1.8 billion
and $1.3 billion, respectively, and its lines of credit and commercial paper
program.
30
The following table presents a summary of the Company's capital
expenditures for each of our reportable segments for the six months ended June
30, 2005 and 2004.
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2005 2004
---------- ----------
(In thousands)
Exploration and development:
United States................................................ $ 532,190 $ 366,470
Canada....................................................... 508,016 336,348
Egypt........................................................ 163,734 140,183
Australia.................................................... 115,918 65,876
North Sea.................................................... 265,152 132,636
Other International.......................................... 20,854 5,002
---------- ----------
$1,605,864 $1,046,515
========== ==========
Capitalized Interest............................................. $ 27,663 $ 26,358
========== ==========
Gas gathering, transmission and processing facilities............ $ 207,594 $ 40,363
========== ==========
Acquisitions:
Oil and gas properties....................................... $ 25,654 $ (1,539)
========== ==========
CASH DIVIDEND PAYMENTS
The Company has paid cash dividends on its common stock for 40 consecutive
years through 2004. Future dividend payments will depend on the Company's level
of earnings, financial requirements and other relevant factors. Common dividends
paid during the second quarter of 2005 rose to $26 million, reflecting the
increase in common shares outstanding and the higher common stock dividend rate.
The Company increased its quarterly cash dividend 33 percent, to eight cents per
share from six cents per share, effective with the November 2004 dividend
payment. During the second quarter of 2005, Apache paid a total of $1.4 million
in dividends on its Series B Preferred Stock issued in August 1998.
CONTRACTUAL OBLIGATIONS
We are subject to various financial obligations and commitments in the
normal course of operations. These contractual obligations represent known
future cash payments that we are required to make and relate primarily to
long-term debt, operating leases, pipeline transportation commitments and
international commitments. The Company expects to fund these contractual
obligations with cash generated from operating activities.
Apache is also subject to various contingent obligations that become
payable only if certain events or rulings were to occur. The inherent
uncertainty surrounding the timing of and monetary impact associated with these
events or rulings prevents any meaningful accurate measurement, which is
necessary to assess any impact on future liquidity. Such obligations include
environmental contingencies and potential settlements resulting from litigation.
Apache's management believes that it has adequately reserved for its contingent
obligations. The Company has approximately $11 million reserved for
environmental remediation and approximately $12 million reserved for various
legal liabilities. In addition, the Company has an accrued reserve of $71
million, plus accrued interest of $5.8 million for the Texaco China B.V.
litigation.
The Company's future liquidity could be impacted by a significant
downgrade of its credit ratings by Moody's, Standard and Poor's, and Fitch;
however, we do not believe that such a sharp downgrade is reasonably likely. The
Company's credit facilities do not require the Company to maintain a minimum
credit rating. In addition, generally under our commodity hedge agreements,
Apache may be required to post margin or terminate outstanding positions if the
Company's credit ratings decline significantly. The negative covenants
associated with our debt are outlined in greater detail in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Capital Resources and Liquidity, Debt" in the Company's 2004 Form 10-K.
31
OFF-BALANCE SHEET ARRANGEMENTS
Apache does not currently utilize any off-balance sheet arrangements with
unconsolidated entities to enhance liquidity and capital resource positions.
Please refer to Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Off-Balance Sheet Arrangements" in the
Company's 2004 Form 10-K.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
The major market risk exposure is in 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. Prices received for oil and gas production have been and
remain volatile and unpredictable. Average monthly oil price realizations,
including the impact of fixed-price contracts and hedges, ranged from a low of
$42.63 per barrel to a high of $51.79 per barrel during the first six-months of
2005. Average monthly gas price realizations, including the impact of
fixed-price contracts and hedges, ranged from a monthly low of $5.16 per Mcf to
a monthly high of $5.95 per Mcf during the same period. Based on the Company's
worldwide oil production levels, a $1.00 per barrel change in the
weighted-average realized price of oil would increase or decrease revenues by
approximately $44 million. Based on the Company's worldwide gas production
levels, a $.10 per Mcf change in the weighted-average realized price of gas
would increase or decrease revenues by approximately $23 million.
We periodically enter into hedges in conjunction with selected
acquisitions to protect against commodity price volatility. These hedges
effectively reduce price risk on a portion of our projected oil and natural gas
production from acquisitions.
On June 30, 2005, the Company had open natural gas derivative positions
with a fair value of $(117) million. A 10 percent increase in natural gas prices
would reduce the fair value by approximately $35 million, while a 10 percent
decrease in prices would increase the fair value by approximately $33 million.
The Company also had open oil derivative positions with a fair value of $(152)
million on June 30, 2005. A 10 percent increase in crude oil prices would reduce
the fair value by approximately $39 million, while a 10 percent decrease in
prices would increase the fair value by approximately $38 million. See Note 2,
Hedging and Derivative Instruments of this Form 10-Q, for notional volumes
associated with the Company's derivative contracts.
INTEREST RATE RISK
The Company considers its interest rate risk exposure to be minimal as a
result of fixing interest rates on approximately 88 percent of the Company's
debt. At June 30, 2005, total debt included $287 million of floating-rate debt.
As a result, Apache's annual interest costs in 2005 will fluctuate based on
short-term interest rates on approximately 12 percent of its total debt
outstanding at June 30, 2005. The impact on cash flow of a 10 percent change in
the floating interest rate would be approximately $249,000 per quarter.
FOREIGN CURRENCY RISK
The Company's cash flow stream relating to certain international
operations is based on the U.S. dollar equivalent of cash flows measured in
foreign currencies. In Australia, oil production is sold under U.S. dollar
contracts and natural gas production is sold under fixed-price Australian dollar
contracts. Over half the costs incurred for Australian operations are paid in
Australian dollars. In Canada, the majority of oil and natural gas production is
sold under Canadian dollar contracts. The majority of the costs incurred are
paid in Canadian dollars. The North Sea oil production is sold under U.S. dollar
contracts and the majority of costs incurred are paid in British pounds. In
contrast, all oil and natural gas production in Egypt is sold for U.S. dollars
and the majority of the costs incurred are denominated in U.S. dollars. Revenue
and disbursement transactions denominated in Australian dollars, Canadian
dollars and British pounds are converted to U.S. dollar equivalents based on the
exchange rate as of the transaction date.
A 10 percent strengthening of the Australian and Canadian dollars and the
British pound as of June 30, 2005 would result in a foreign currency net loss of
approximately $104 million. This is primarily driven from foreign
32
currency effects on the Company's deferred tax liability positions in its
international operations. The Company hedged a portion of its foreign exchange
risk associated with lease operating expenditures for 2005. For information on
open derivative contracts, please see Note 2, Hedging and Derivative Instruments
of this Form 10-Q.
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, 2004, is incorporated herein by reference. Information
about market risks for the quarter and six months ended June 30, 2005, does not
differ materially from the disclosure in our 2004 Form 10-K, except as noted
above.
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 natural gas prices or a prolonged
continuation of low prices, may adversely affect the Company's financial
position, results of operations and cash flows.
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE 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 June 30, 2005, 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 were
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 June 30,
2005, 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management report called for by Item 308(a) of Regulation S-K is
incorporated herein by reference to Report of Management on Internal Control
Over Financial Reporting, included on Page F-1 in Item 15 of the Company's 2004
Form 10-K.
The independent auditors attestation report called for by Item 308(b) of
Regulation S-K is incorporated by reference to Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting, included on
Page F-3 in Item 15 of the Company's 2004 Form 10-K.
33
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal controls over financial reporting
during the period covered by this quarterly Report on Form 10-Q that materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10 to the Consolidated Financial
Statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 2004 (filed with the SEC on March 16,
2005) 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
The Company's annual meeting of stockholders was held in Houston,
Texas at 10:00 a.m. local time, on Thursday, May 5, 2005. Proxies
for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, as amended.
Out of a total of 328,158,822 shares of the Company's common stock
outstanding and entitled to vote, 285,636,896 shares were present at
the meeting in person or by proxy, representing 87.04 percent of the
shares entitled to vote. Matters voted upon at the meeting were as
follows:
(a) Election of four directors to serve on the Company's board of
directors. There was no solicitation in opposition to the
nominees for election as directors as listed in the proxy
statement, and all nominees were elected. Mr. Farris, Dr.
Ferlic, Mr. Frazier, and Mr. Kocur were elected to serve until
the annual meeting in 2008. The vote tabulation with respect
to each nominee was as follows:
AUTHORITY
NOMINEE FOR WITHHELD
- ------------------ ----------- ----------
G. Steven Farris 276,241,456 9,395,439
Randolph M. Ferlic 270,187,318 15,449,578
A. D. Frazier, Jr. 280,001,630 5,635,265
John A. Kocur 262,097,526 23,539,369
(b) The Company's 2005 Stock Option Plan was approved by a vote of
214,117,865 shares for and 27,469,395 shares against.
(c) The Company's 2005 Share Appreciation Plan was approved by a
vote of 233,151,356 shares for and 8,493,613 shares against.
(d) The stockholder proposal concerning director election majority
vote standard was not presented for a vote, as the
stockholder's representative did not appear at the meeting to
present the proposal.
(e) The stockholder proposal concerning auditor independence was
not presented for a vote, as the stockholder's representative
appeared at the meeting and withdrew the proposal.
35
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Form of Credit Agreement, dated as of May 12, 2005,
among Registrant, the Lenders named therein, JPMorgan
Chase Bank, N.A., as Global Administrative Agent,
J.P. Morgan Securities Inc. and Banc of America
Securities, LLC, as Co-Lead Arrangers and Joint
Bookrunners, Bank of America, N.A. and Citibank,
N.A., as U.S. Co-Syndication Agents, and Calyon New
York Branch and Societe Generale, as U.S.
Co-Documentation Agents (excluding exhibits and
schedules).
10.2 - Form of Credit Agreement, dated as of May 12, 2005,
among Apache Canada Ltd, a wholly-owned subsidiary of
Registrant, the Lenders named therein, JPMorgan Chase
Bank, N.A., as Global Administrative Agent, RBC
Capital Markets and BMO Nesbitt Burns, as Co-Lead
Arrangers and Joint Bookrunners, Royal Bank of
Canada, as Canadian Administrative Agent, Bank of
Montreal and Union Bank of California, N.A., Canada
Branch, as Canadian Co-Syndication Agents, and The
Toronto-Dominion Bank and BNP Paribas (Canada), as
Canadian Co-Documentation Agents (excluding exhibits
and schedules).
10.3 - Form of Credit Agreement, dated as of May 12, 2005,
among Apache Energy Limited, a wholly-owned
subsidiary of Registrant, the Lenders named therein,
JPMorgan Chase Bank, N.A., as Global Administrative
Agent, Citigroup Global Markets Inc. and Deutsche
Bank Securities Inc., as Co-Lead Arrangers and Joint
Bookrunners, Citisecurities Limited, as Australian
Administrative Agent, Deutsche Bank AG, Sydney
Branch, and JPMorgan Chase Bank, as Australian
Co-Syndication Agents, and Bank of America, N.A.,
Sydney Branch, and UBS AG, Australia Branch, as
Australian Co-Documentation Agents (excluding
exhibits and schedules).
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
None
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: August 8, 2005 /s/ ROGER B. PLANK
---------------------------------------------
Roger B. Plank
Executive Vice President and Chief Financial
Officer
Dated: August 8, 2005 /s/ THOMAS L. MITCHELL
---------------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibits Description of Exhibit
- -------- --------------------------------------------------------------------------------------
10.1 - Form of Credit Agreement, dated as of May 12, 2005, among Registrant, the Lenders
named therein, JPMorgan Chase Bank, N.A., as Global Administrative Agent, J.P. Morgan
Securities Inc. and Banc of America Securities, LLC, as Co-Lead Arrangers and Joint
Bookrunners, Bank of America, N.A. and Citibank, N.A., as U.S. Co-Syndication Agents,
and Calyon New York Branch and Societe Generale, as U.S. Co-Documentation Agents
(excluding exhibits and schedules).
10.2 - Form of Credit Agreement, dated as of May 12, 2005, among Apache Canada Ltd, a
wholly-owned subsidiary of Registrant, the Lenders named therein, JPMorgan Chase Bank,
N.A., as Global Administrative Agent, RBC Capital Markets and BMO Nesbitt Burns, as
Co-Lead Arrangers and Joint Bookrunners, Royal Bank of Canada, as Canadian
Administrative Agent, Bank of Montreal and Union Bank of California, N.A., Canada
Branch, as Canadian Co-Syndication Agents, and The Toronto-Dominion Bank and BNP
Paribas (Canada), as Canadian Co-Documentation Agents (excluding exhibits and
schedules).
10.3 - Form of Credit Agreement, dated as of May 12, 2005, among Apache Energy Limited, a
wholly-owned subsidiary of Registrant, the Lenders named therein, JPMorgan Chase Bank,
N.A., as Global Administrative Agent, Citigroup Global Markets Inc. and Deutsche Bank
Securities Inc., as Co-Lead Arrangers and Joint Bookrunners, Citisecurities Limited,
as Australian Administrative Agent, Deutsche Bank AG, Sydney Branch, and JPMorgan
Chase Bank, as Australian Co-Syndication Agents, and Bank of America, N.A., Sydney
Branch, and UBS AG, Australia Branch, as Australian Co-Documentation Agents (excluding
exhibits and schedules).
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.