1
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 1-4300
APACHE CORPORATION
---------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central
2000 Post Oak Boulevard, Houston, TX 77056-4400
- ---------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Registrant's common stock, outstanding as of June 30, 1998........................... 98,604,547
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)
FOR THE QUARTER FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands, except per common share data)
REVENUES:
Oil and gas production revenues $ 197,856 $ 218,733 $ 407,805 $ 481,128
Gathering, processing and marketing revenues 27,020 39,325 59,116 99,419
Equity in income (loss) of affiliates (685) (204) (1,558) (11)
Other revenues (4,059) 987 710 133
--------- --------- --------- ---------
220,132 258,841 466,073 580,669
--------- --------- --------- ---------
OPERATING EXPENSES:
Depreciation, depletion and amortization 97,414 93,481 195,786 182,799
Operating costs 52,616 57,739 109,167 117,711
Gathering, processing and marketing costs 26,417 38,910 57,620 98,264
Administrative, selling and other 10,200 8,941 20,166 18,083
Financing costs:
Interest expense 30,187 24,822 60,331 48,463
Amortization of deferred loan costs 1,046 1,251 2,308 2,578
Capitalized interest (12,538) (9,158) (23,388) (17,798)
Interest income (1,647) (774) (2,470) (1,142)
--------- --------- --------- ---------
203,695 215,212 419,520 448,958
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 16,437 43,629 46,553 131,711
Provision for income taxes 7,201 17,883 19,961 53,088
--------- --------- --------- ---------
NET INCOME $ 9,236 $ 25,746 $ 26,592 $ 78,623
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ .09 $ .29 $ .27 $ .87
========= ========= ========= =========
Diluted $ .09 $ .28 $ .27 $ .84
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
--------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,592 $ 78,623
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 195,786 182,799
Amortization of deferred loan costs 2,308 2,578
Provision for deferred income taxes 4,981 36,507
Cash distributions in excess of earnings of affiliates 1,523 138
Changes in operating assets and liabilities:
Decrease in receivables 43,631 33,134
Decrease (increase) in advances to oil and gas ventures and other 3,011 (9,574)
Decrease in deferred charges and other 15,905 1,610
Decrease in payables (39,429) (34,703)
Increase (decrease) in accrued expenses (14,364) 2,287
Decrease in advance from gas purchaser (9,203) (4,875)
Increase (decrease) in deferred credits and noncurrent liabilities 236 (6,590)
--------- ---------
Net cash provided by operating activities 230,977 281,934
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (359,012) (373,371)
Non-cash portion of net oil and gas property additions (21,182) (13,993)
Proceeds received from sales of property and equipment 105,216 3,174
Proceeds received from sale of assets held for resale 62,998 --
Other, net (9,907) (7,149)
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Net cash used in investing activities (221,887) (391,339)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 344,796 371,270
Payments on long-term debt (261,821) (252,377)
Dividends paid (13,433) (12,622)
Common stock activity, net 1,036 5,512
Treasury stock activity, net -- (387)
Cost of debt and equity transactions (440) (970)
--------- ---------
Net cash provided by financing activities 70,138 110,426
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 79,228 1,021
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,686 13,161
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88,914 $ 14,182
========= =========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 88,914 $ 9,686
Marketable securities 26,994 --
Receivables 204,972 224,025
Inventories 35,951 36,041
Advances to oil and gas ventures and other 12,538 15,579
Assets held for resale -- 62,998
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369,369 348,329
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PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 5,611,148 5,530,991
Unproved properties and properties under
development, not being amortized 546,109 453,556
International concession rights, not being amortized 79,000 79,000
Gas gathering, transmission and processing facilities 294,728 246,049
Other 80,161 71,067
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6,611,146 6,380,663
Less: Accumulated depreciation, depletion and amortization (2,835,717) (2,647,478)
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3,775,429 3,733,185
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OTHER ASSETS:
Deferred charges and other 33,161 57,119
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$ 4,177,959 $ 4,138,633
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 38,600 $ 17,200
Accounts payable 140,142 178,361
Accrued operating expense 15,698 20,153
Accrued exploration and development 61,065 82,392
Accrued compensation and benefits 10,150 17,600
Accrued interest 19,257 20,598
Other accrued expenses 7,000 7,479
----------- -----------
291,912 343,783
----------- -----------
LONG-TERM DEBT 1,407,377 1,501,380
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES:
Income taxes 358,994 355,619
Advances from gas purchaser 145,343 154,546
Other 75,676 54,128
----------- -----------
580,013 564,293
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SHAREHOLDERS' EQUITY:
Common stock, $1.25 par, 215,000,000 shares authorized,
99,778,078 and 94,478,788 shares issued, respectively 124,723 118,098
Paid-in capital 1,238,140 1,085,063
Retained earnings 574,769 561,981
Treasury stock, at cost, 1,173,531 and 1,174,247 shares,
respectively (15,497) (15,506)
Accumulated other comprehensive income (23,478) (20,459)
----------- -----------
1,898,657 1,729,177
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$ 4,177,959 $ 4,138,633
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS
(In thousands) INCOME STOCK CAPITAL EARNINGS STOCK INCOME EQUITY
------------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 $ 114,030 $ 1,002,540 $ 432,588 $ (15,152) $ (15,490) $ 1,518,516
Comprehensive income
Net income $ 78,623 -- -- 78,623 -- -- 78,623
Currency translation adjustments,
net of applicable income tax
benefit of $526 (976) -- -- -- -- (976) (976)
-----------
Comprehensive income $ 77,647
===========
Dividends ($.14 per common share) -- -- (12,640) -- -- (12,640)
Common shares issued 339 5,173 -- -- -- 5,512
Treasury shares purchased -- -- -- (387) -- (387)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1997 $ 114,369 $ 1,007,713 $ 498,571 $ (15,539) $ (16,466) $ 1,588,648
=========== =========== =========== =========== =========== ===========
BALANCE AT DECEMBER 31, 1997 $ 118,098 $ 1,085,063 $ 561,981 $ (15,506) $ (20,459) $ 1,729,177
Comprehensive income
Net income $ 26,592 -- -- 26,592 -- -- 26,592
Currency translation adjustments,
net of applicable income tax
benefit of $1,788 (3,321) -- -- -- -- (3,321) (3,321)
Unrealized gain on marketable
securities, net of applicable
income taxes of $181 302 -- -- -- -- 302 302
-----------
Comprehensive income $ 23,573
===========
Dividends ($.14 per common share) -- -- (13,804) -- -- (13,804)
Common shares issued 6,625 153,077 -- -- -- 159,702
Treasury shares issued -- -- -- 9 -- 9
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1998 $ 124,723 $ 1,238,140 $ 574,769 $ (15,497) $ (23,478) $ 1,898,657
=========== =========== =========== =========== =========== ===========
JUNE 30, DECEMBER 31,
1998 1997
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COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gain on marketable securities $ 302 $ --
Currency translation adjustments (23,780) (20,459)
-------- --------
$(23,478) $(20,459)
======== ========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation (Apache
or the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and the summary of significant
accounting policies and notes thereto included in the Company's most recent
annual report on Form 10-K.
1. DIVESTITURES
During the six months ended June 30, 1998, Apache sold 28.1 million
equivalent barrels of proved reserves from largely marginal North American
properties, collecting cash and other proceeds of $130.1 million. In addition,
the Company completed the sale of a 10 percent interest in the East Spar gas
field and related production facilities in Western Australia for a total sales
price of $63.0 million in cash.
2. STRATEGIC ALLIANCE WITH CINERGY
In June 1998, Apache formed a strategic alliance with Cinergy Corporation
(Cinergy) to market substantially all the Company's natural gas production from
North America and sold its 57 percent interest in Producers Energy Marketing LLC
(ProEnergy) for 771,258 shares of Cinergy common stock valued at $26.5 million,
subject to adjustment. ProEnergy will continue to market Apache's North American
natural gas production for 10 years, with an option to terminate after six
years, under an amended and restated gas purchase agreement effective July 1,
1998. During this period, Apache is generally obligated to deliver most of its
North American gas production to Cinergy and, under certain circumstances, may
have to make payments to Cinergy if certain production quotas are not met.
Accordingly, Apache recorded a deferred gain of $20.6 million on the sale of
ProEnergy that will be amortized over six years.
3. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing and financing activities is presented
below:
In June 1998, the Company sold its interest in ProEnergy to Cinergy in
exchange for 771,258 shares of Cinergy common stock.
In March 1998, Apache acquired certain oil and gas property interests for
approximately 177,000 shares of Apache common stock.
In January 1998, approximately 90 percent, or $155.6 million principal
amount, of the Company's 6-percent convertible subordinated debentures was
converted into approximately 5.1 million shares of Apache common stock at a
conversion price of $30.68 per share.
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The following table provides supplemental disclosure of cash flow
information:
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1998 1997
--------------- ----------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 38,284 $ 31,790
Income taxes (net of refunds) 14,980 16,576
4. DEBT
In February 1998, Apache issued $150 million principal amount, $148.2
million net of discount, of senior unsecured 7-percent notes maturing on
February 1, 2018. The notes are not redeemable prior to maturity.
In January 1998, approximately 90 percent, or $155.6 million principal
amount, of the Company's 6-percent convertible subordinated debentures was
converted into approximately 5.1 million shares of Apache common stock at a
conversion price of $30.68 per share. The remaining $16.9 million principal
amount of the 6-percent debentures was redeemed for $17.4 million in cash, plus
accrued and unpaid interest. The Company recorded a $.8 million loss on the
early extinguishment of debt in January 1998.
5. COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
requires companies to report the components of comprehensive income in a
financial statement with the same prominence as other financial statements. The
Company has chosen to disclose comprehensive income, which is comprised of net
income, foreign currency translation adjustments and unrealized gains on
available-for-sale securities, in the accompanying statement of consolidated
shareholders' equity. This information is shown for all periods presented.
6. MARKETABLE SECURITIES
At June 30, 1998, the fair value of the 771,258 shares of Cinergy common
stock held by Apache was $27.0 million which is reported as marketable
securities in the accompanying consolidated balance sheet. The unrealized gain
on these available-for-sale securities of $.5 million ($.3 million, net of
deferred income taxes) is reported as a separate component of other
comprehensive income in shareholders' equity.
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7. 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,
--------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ---------- ----------- ---------- ----------- ----------
(In thousands, except per share amounts)
BASIC:
Net income $ 9,236 98,599 $ .09 $ 25,746 90,288 $ .29
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans - 377 - 376
3.93% convertible notes - - 526 2,778
DILUTED:
--------- ------ --------- ---------- ------ ---------
Net income including assumed
conversions $ 9,236 98,976 $ .09 $ 26,272 93,442 $ .28
========= ====== ========= ========== ====== =========
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ---------- ----------- ----------- ----------- ----------
(In thousands, except per share amounts)
BASIC:
Net income $ 26,592 98,093 $ .27 $ 78,623 90,216 $ .87
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans - 384 - 432
3.93% convertible notes - - 1,046 2,778
6% convertible subordinated debentures - - 3,414 5,623
DILUTED:
---------- ---------- ----------- ----------
Net income including assumed
conversions $ 26,592 98,477 $ .27 $ 83,083 99,049 $ .84
========== ========== ========= ========== =========== ==========
The 6-percent convertible subordinated debentures were not included in the
computation of diluted net income per common share for the quarter ended June
30, 1997, or for the six months ended June 30, 1998, because to do so would have
been antidilutive.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache's results of operations and financial position for the first six
months of 1998 were significantly impacted by the following factors:
Commodity Prices - Apache's average realized price for natural gas
decreased $.28 per thousand cubic feet (Mcf) from $2.27 per Mcf in the first six
months of 1997 to $1.99 per Mcf in 1998, negatively impacting revenues by $30.3
million. The average realized oil price decreased $6.38 per barrel from $19.93
per barrel to $13.55 per barrel, reducing revenues by $73.3 million.
Operations - Oil production increased 20 percent for the first six months
of 1998 when compared to the same period last year. The increase favorably
impacted revenues by $31.3 million. Earnings for the first six months of 1998
were also positively impacted by an $8.5 million, or seven percent, decrease in
operating costs compared to the same period of 1997.
RESULTS OF OPERATIONS
Apache reported 1998 second quarter net income of $9.2 million versus $25.7
million in the prior year. Basic net income per common share of $.09 for the
second quarter of 1998 was significantly lower than in 1997. Higher oil
production and lower operating costs were offset by a sharp decline in oil
prices, higher depreciation, depletion and amortization (DD&A) expense and
higher financing costs.
For the first half of 1998, net income of $26.6 million, or $.27 per share,
decreased from $78.6 million, or $.87 per share, in the comparable 1997 period.
This decrease is primarily the result of a 32 percent decrease in oil prices, a
12 percent decrease in gas prices, higher DD&A expense and increased financing
costs, partially offset by a 20 percent increase in oil production, compared to
a year ago.
For the second quarter of 1998, revenues decreased 15 percent to $220.1
million compared to $258.8 million in 1997, driven by a ten percent decrease in
oil and gas production revenues. Crude oil, including natural gas liquids,
contributed 45 percent and natural gas contributed 55 percent of total oil and
gas production revenues.
For the first six months of 1998, total revenues decreased 20 percent to
$466.1 million as compared to $580.7 million for the same period in 1997.
Revenues from oil and gas production decreased 15 percent over the same period
in 1997, with crude oil, including natural gas liquids, contributing 47 percent
and natural gas contributing 53 percent of total oil and gas production
revenues.
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Volume and price information for the Company's oil and gas production is
summarized in the following table:
FOR THE QUARTER ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------------------
INCREASE INCREASE
1998 1997 (DECREASE) 1998 1997 (DECREASE)
------------ ------------ --------- ------------- ------------- ----------
Natural Gas Volume - Mcf per day:
United States 450,284 499,956 (10)% 458,657 492,500 (7)%
Canada 99,014 86,782 14% 97,774 82,839 18%
Egypt 446 441 1% 448 456 (2)%
Australia 47,387 21,783 118% 47,181 21,594 118%
----------- ----------- ------------ ------------
Total 597,131 608,962 (2)% 604,060 597,389 1%
=========== =========== ============ ============
Average Natural Gas price - Per Mcf:
United States $ 2.18 $ 2.11 3% $ 2.18 $ 2.43 (10)%
Canada 1.36 1.09 25% 1.30 1.38 (6)%
Egypt 2.21 2.59 (15)% 2.00 2.81 (29)%
Australia 1.55 1.86 (17)% 1.57 1.86 (16)%
Total 1.99 1.96 2% 1.99 2.27 (12)%
Oil Volume - Barrels per day:
United States 34,752 40,668 (15)% 37,181 40,622 (8)%
Canada 2,017 1,820 11% 2,046 1,901 8%
Egypt 29,275 18,677 57% 29,263 17,969 63%
Australia 8,201 2,779 195% 7,668 2,909 164%
----------- ----------- ------------ ------------
Total 74,245 63,944 16% 76,158 63,401 20%
=========== =========== ============ ============
Average Oil price - Per barrel:
United States $ 12.67 $ 18.65 (32)% $ 13.55 $ 20.20 (33)%
Canada 11.93 18.39 (35)% 13.85 20.01 (31)%
Egypt 13.17 17.64 (25)% 13.39 18.97 (29)%
Australia 14.04 20.72 (32)% 14.05 22.02 (36)%
Total 13.00 18.44 (30)% 13.55 19.93 (32)%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States 2,097 1,826 15% 2,004 1,844 9%
Canada 658 633 4% 631 638 (1)%
----------- ----------- ------------ ------------
Total 2,755 2,459 12% 2,635 2,482 6%
=========== =========== ============ ============
Average NGL Price - Per barrel:
United States $ 7.58 $ 14.72 (49)% $ 8.32 $ 16.55 (50)%
Canada 6.23 10.39 (40)% 6.72 14.85 (55)%
Total 7.25 13.61 (47)% 7.93 16.11 (51)%
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Natural gas sales for the second quarter of 1998 totaled $108.2 million,
slightly lower than those recorded in the second quarter of 1997. Natural gas
production decreased 11.8 million cubic feet per day (MMcf/d), or two percent,
on a worldwide basis, unfavorably impacting revenue by $2.1 million. U.S.
natural gas production decreased 10 percent due to sales of largely marginal
properties in the first half of 1998 and natural reservoir depletion. Increases
in natural gas production in Canada and Australia were principally due to
development activities and the impact of producing property acquisitions during
late 1997.
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Average realized natural gas prices increased two percent, positively
affecting revenue by $1.9 million. The weakening of the Australian currency
relative to the U.S. dollar contributed to the 17 percent decline in the
Australian average natural gas price. The Company periodically engages in
hedging activities, including fixed price physical and financial contracts. The
net result of these activities increased the Company's realized gas price by
$.05 per Mcf during the second quarter of 1998 and by $.09 per Mcf during the
second quarter of 1997.
The Company's crude oil sales for the second quarter of 1998 totaled $87.9
million, an 18 percent decrease from the second quarter of 1997, due to lower
average realized prices, which were partially offset by production increases.
Second quarter 1998 oil production increased 16 percent compared to the
prior year primarily as a result of increases in Egyptian and Australian
production. Egyptian oil production accounted for 39 percent of the Company's
worldwide oil production, compared to 29 percent in the second quarter of 1997,
resulting in an increase in revenues of $12.7 million. The increase in Egyptian
production was primarily a result of drilling and development activity and the
price-driven dynamics of certain production sharing contracts. In addition,
Australian oil production increased 195 percent in the second quarter of 1998
primarily due to initial production from the Stag field and the acquisition on
November 20, 1997, of all the capital stock of three companies (subsidiaries of
Mobil Exploration & Producing Australia Pty Ltd) owning interests in certain oil
and gas properties and production facilities offshore Western Australia. U.S.
oil production decreased 15 percent in the second quarter of 1998 primarily due
to sales of marginal properties in the first half of 1998 and natural reservoir
depletion.
The Company's realized price for sales of crude oil in the second quarter
of 1998 decreased $5.44 per barrel, or 30 percent, resulting in a decrease in
revenue of $31.6 million compared to the same period in 1997.
Revenue from the sale of natural gas liquids totaled $1.8 million for the
second quarter of 1998, as compared to $3.0 million for the same period in 1997.
A 47 percent decline in realized prices contributed to the decrease in revenues.
YEAR-TO-DATE 1998 COMPARED TO YEAR-TO-DATE 1997
Natural gas sales for the first six months of 1998 of $217.3 million
decreased $27.9 million, or 11 percent, from those recorded in the same period
of 1997 as a result of lower natural gas prices. Average realized natural gas
prices decreased 12 percent, negatively affecting revenue by $30.3 million. U.S.
natural gas production, which comprised 76 percent of the Company's worldwide
gas production, sold at an average price of $2.18 per Mcf, 10 percent lower than
in 1997, negatively impacting natural gas sales by $23.0 million. Natural gas
production increased 6.7 MMcf/d, or one percent, on a worldwide basis, favorably
impacting revenue by $2.4 million. While U.S. natural gas production declined
33.8 MMcf/d, development activities and the impact of producing property
acquisitions during late 1997 increased natural gas production in Canada and
Australia by 14.9 MMcf/d and 25.6 MMcf/d, respectively. The weakening of the
Australian currency relative to the U.S. dollar contributed to the 16 percent
decrease in the Australian average natural gas price. The Company periodically
engages in hedging activities, including fixed price physical and financial
contracts. The net result of these activities increased the Company's realized
gas price by $.06 per Mcf during the first six months of 1998 and by $.03 per
Mcf during the first six months of 1997.
For the first six months of 1998, oil revenues of $186.7 million decreased
$42.0 million, or 18 percent, from the same period in 1997 due to lower oil
prices, which were partially offset by production increases. On a worldwide
basis, average oil prices decreased $6.38 per barrel, or 32 percent, to $13.55
per barrel negatively impacting oil sales by $73.3 million. Oil production
increased 12,757 barrels per day, or 20 percent, for the first six months of
1998 primarily due to increases in Egypt and Australia. Egyptian oil production
increased by 11,294 barrels per day, or 63 percent, as a result of drilling and
development activity and the price-driven dynamics of certain production sharing
contracts. Australian oil production increased by 4,759 barrels per day, or 164
percent, primarily due to initial production from the Stag field and the
acquisition, on November 20, 1997, of all the capital stock of three companies
(subsidiaries of Mobil Exploration & Producing Australia Pty Ltd) owning
interests in certain oil and gas properties and production facilities offshore
Western Australia.
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Natural gas liquid revenues for the first six months of 1998 of $3.8
million decreased $3.5 million, or 48 percent, from the same period in 1997.
Natural gas liquid production increased 153 barrels per day, or six percent,
while natural gas liquid prices declined by $8.18 per barrel, or 51 percent.
OTHER REVENUES AND OPERATING EXPENSES
During the second quarter and first six months of 1998, Apache's gas
gathering, processing and marketing revenues decreased 31 percent and 41
percent, respectively, to $27.0 million and $59.1 million, as a result of lower
prices and volumes compared to the prior year periods. Although revenues
decreased with respect to these activities, there was a greater decrease in gas
gathering, processing and marketing costs, thus higher margins were realized for
both periods of 1998 compared to 1997.
Other revenues for the second quarter of 1998 was a loss of $4.1 million.
This amount includes $4.9 million in reported foreign currency losses on
Canadian dollars and $.5 million in reported foreign currency losses on
Australian dollars due to the weakening of Canadian and Australian currencies
relative to the U.S. dollar. For the first six months of 1998, other revenues
was $.7 million. This amount included $4.0 million in settlement proceeds from
the resolution of issues with a gas purchaser, offset by $4.7 million in
reported foreign currency losses.
The Company's DD&A expense for the second quarter and first six months of
1998 totaled $97.4 million and $195.8 million, respectively, compared to $93.5
million and $182.8 million for the comparable periods in 1997. On an equivalent
barrel basis, full cost DD&A expense decreased $.12 per barrel of oil equivalent
(boe), from $5.77 per boe to $5.65 per boe, in the second quarter of 1998
compared to the same period in 1997. For the six months ended June 30, 1998, the
full cost DD&A rate totaled $5.61 per boe compared to $5.75 per boe in 1997.
Production increases in Canada, Australia and Egypt, countries which have a
lower per boe DD&A rate than the U.S., accounted for the decrease in the overall
rate. The U.S. DD&A rate has stayed relatively constant at $6.06 per boe in the
first half of 1997 compared to $6.05 per boe in the first half of 1998. U.S.
production accounted for 64 percent of worldwide production in the first half of
1998 compared to 75 percent in the first half of 1997.
Operating costs, including lease operating expense and severance taxes,
decreased nine percent from $57.7 million in the second quarter of 1997 to $52.6
million for the same period in 1998. For the first half of 1998, operating costs
totaled $109.2 million, a decrease of $8.5 million, or seven percent, compared
to the same period in 1997. For the second quarter and first six months of 1998,
lease operating expense, excluding severance taxes, totaled $45.0 million and
$93.2 million, respectively, compared to $48.6 million and $97.8 million for the
comparable periods in 1997. On an equivalent barrel basis, lease operating
expense declined from $3.18 per boe in the second quarter of 1997 to $2.80 per
boe in the second quarter of 1998. For the first six months of 1998, lease
operating expense averaged $2.87 per boe, a 12 percent decrease from $3.27 per
boe, for the same period in 1997. Domestic per unit costs were significantly
reduced due to lower Gulf Coast region repairs, maintenance, power and fuel
costs resulting from the sale of marginal properties, and by lower Western and
Offshore region repairs and maintenance costs.
Administrative, selling and other costs (G&A) in the second quarter of 1998
and first six months of 1998 increased $1.3 million or 14 percent, and $2.1
million or 12 percent, respectively, from a year ago. On an equivalent barrel
basis, G&A expenses increased to $.62 per boe, for the first half of 1998 as
compared to $.60 per boe for the same period in 1997.
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Net financing costs for the second quarter of 1998 increased $.9 million,
or six percent, from the prior year due to higher gross interest expense,
mitigated by lower amortization of deferred loan costs and higher capitalized
interest. Gross interest expense increased $5.4 million due to a higher average
outstanding debt balance and a higher weighted average interest rate. Net
financing costs increased 15 percent from $32.1 million in the first half of
1997 to $36.8 million in the comparable 1998 period due to higher average debt
outstanding and a higher weighted average interest rate, partially offset by an
increase in capitalized interest and interest income. Additional capitalized
interest associated with Egyptian pipeline projects under construction
contributed to the increase. The increase in interest income was due to a higher
cash balances in the first half of 1998.
MARKET RISK
COMMODITY RISK
The Company's major market risk exposure continues to be the pricing
applicable to its oil and gas production. Realized pricing is primarily driven
by the prevailing worldwide price for crude oil and spot prices applicable to
its United States and Canadian natural gas production. Historically, prices
received for oil and gas production have been volatile and unpredictable. Price
volatility is expected to continue. See "Results of Operations" above.
The information set forth under "Market Risk - Interest Rate Risk" and -
Foreign Currency Risk" in Item 7 of the Company's annual report on Form 10-K for
the year ended December 31, 1997, is incorporated herein by reference.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
CAPITAL COMMITMENTS
Apache's primary cash needs are for exploration, development and
acquisition of oil and gas properties, repayment of principal and interest on
outstanding debt, and payment of dividends. From July 27, 1998 through August
10, 1998, the date of this report, the Company repurchased 430,300 shares of its
own common stock on the open market and may, from time to time, purchase
additional shares. The Company generally funds its exploration and development
activities through internally generated cash flow. Apache budgets capital
expenditures based upon projected cash flow and routinely adjusts its capital
expenditures in response to changes in oil and natural gas prices and
corresponding changes in cash flow. The Company is not in a position to predict
future product prices. Apache has increased its total capital expenditures
budget for the second half of 1998 by $130 million from earlier planned levels.
For the year 1998, capital expenditures are expected to exceed internally
generated cash flow.
Capital Expenditures - A summary of oil and gas capital expenditures during
the first six months of 1998 and 1997 is presented below (in millions):
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
1998 1997
----------- -----------
Exploration and development:
United States $ 114.3 $ 198.5
Canada 40.4 30.5
Egypt 59.2 56.9
Australia 39.0 24.2
Other international 20.9 8.2
----------- -----------
273.8 318.3
Capitalized Interest 23.4 17.8
----------- -----------
Total $ 297.2 $ 336.1
=========== ===========
Acquisition of oil and gas properties $ 19.3 $ 20.8
=========== ===========
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In North America, Apache completed 93 producing wells out of 129 wells
drilled during the first half of 1998, while internationally the Company
discovered 11 new producers out of 30 wells drilled. Worldwide, the Company was
drilling or completing an additional 110 wells as of June 30, 1998. In addition,
Apache completed 250 production enhancement projects, including 105
recompletions, during the first half of 1998.
Property acquisitions in the first six months of 1998, primarily
represented acquisitions of producing properties in the Company's existing focus
areas.
CAPITAL RESOURCES AND LIQUIDITY
Net Cash Provided by Operating Activities - Apache's net cash provided by
operating activities during the first half of 1998 totaled $231.0 million, a
decrease of 18 percent from $281.9 million in the first half of 1997. This
decrease was due primarily to lower product prices, partially offset by higher
production, as compared to last year.
Long-Term Borrowings - In January 1998, approximately 90 percent, or $155.6
million principal amount, of the Company's 6-percent convertible subordinated
debentures was converted into approximately 5.1 million shares of Apache common
stock at a conversion price of $30.68 per share. The remaining $16.9 million
principal amount of the 6-percent debentures was redeemed for $17.4 million in
cash, plus accrued and unpaid interest. The Company recorded a $.8 million loss
on the early extinguishment of debt in January 1998.
In February 1998, Apache issued $150 million principal amount, $148.2
million net of discount, of senior unsecured 7-percent notes maturing on
February 1, 2018. The notes are not redeemable prior to maturity.
Liquidity - The Company had $88.9 million in cash and cash equivalents on
hand at June 30, 1998, up from $9.7 million at December 31, 1997. Apache's ratio
of current assets to current liabilities at June 30, 1998 was 1.26:1 compared to
1.01:1 at December 31, 1997.
Apache believes that cash on hand, net cash generated from operations, and
unused committed borrowing capacity under its global credit facility will be
adequate to satisfy the Company's financial obligations to meet future liquidity
needs for at least the next two fiscal years. As of June 30, 1998, Apache's
available borrowing capacity under its global credit facility was $751 million.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue poses a serious threat of business disruption to any
organization that utilizes computer technology and computer chip technology in
their business systems or equipment. Apache Corporation has formed a Year 2000
Task Force with representation from major business units to inventory and assess
the risk of hardware, software, telecommunications systems, office equipment,
embedded chip controls and systems, process control systems, facility control
systems and dependencies on external trading partners. A program is in place to
minimize the risk of system failure and insure critical systems are Year 2000
compliant. The Company expects this program to be completed by mid-1999.
The Company is in the process of replacing existing software as it relates
to Apache's accounting and financial systems to more effectively and efficiently
meet its business needs. Replacement computer systems selected by the Company
will properly recognize dates beyond December 31, 1999. The Company presently
believes that with conversions to new software and completion of efforts planned
by the Year 2000 Task Force, the Year 2000 Issue will be eliminated. However, if
such conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company. The Company plans
to replace substantially all of its existing accounting and financial systems no
later than March 31, 1999.
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The date on which the Company plans to complete installation of its new
systems is based on management's best estimates, which were derived using
numerous assumptions of future events including the continued availability of
certain resources. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, and
similar uncertainties.
FUTURE TRENDS
Apache's strategy is to increase its oil and gas reserves, production, cash
flow and earnings by continuing to explore on and develop its inventory of
existing projects and making carefully targeted acquisitions of new assets.
Robust oil and gas prices early in 1997 gave way to weaker prices later in the
year and on into 1998. Crude oil prices have fallen near their lowest level of
the 1990's. While lower prices have negatively impacted Apache's first half 1998
earnings and cash from operations (see "Market Risk-Commodity Risk" above),
Apache anticipated lower prices and took steps early in 1998 to improve its
financial liquidity. As a result, Apache is positioned to take advantage of
opportunities that might fall out of today's industry adversity. Specific
actions that have been or may be taken which should impact the Company's
activities in 1998 and beyond, include:
1. Selling and trading non-strategic properties to upgrade the Company's
property portfolio and enhance financial flexibility.
2. Curtailing projected exploration and development expenditures early in the
year; expanding them in the second half of the year after drilling costs
declined.
3. Calling for redemption of $172.5 million principal amount of debentures of
which 90 percent or, $155.6 million, was converted to equity in January
1998. Common shares were issued at $30.68 each.
4. Apache may, from time to time, purchase additional shares of its own common
stock on the open market.
The above steps help strengthen Apache's financial position and generally
add liquidity. With property acquisition prices beginning to fall from the
premium prices commanded in 1997, Apache may seek to undertake a significant
acquisition. And with drilling costs having retreated from the levels to which
they rose in 1997, Apache has expanded its projected 1998 drilling activity by
$130 million to approximately $650 million. Apache will continue to review its
level of capital expenditures quarterly in light of financial results, product
prices, drilling costs, prevailing industry conditions and available
opportunities. Even at a reduced capital expenditure level, Apache expects to
remain an active operator in North America drilling moderate-risk wells.
Apache's international properties should continue to grow in importance
with respect to Apache's financial results and future growth prospects. Apache's
international efforts remain focused on development of its discoveries in Egypt,
offshore Western Australia, The People's Republic of China and the Ivory Coast,
and exploration efforts on the Company's concessions in Egypt and in Poland.
While international exploration is recognized as higher risk than Apache's North
American activities, the Company believes it offers potential for greater
rewards and significant reserve additions. Apache also believes that reserve
additions in these international areas may be made through higher risk
exploration and through improved production practices and recovery techniques.
Under the full cost accounting rules of the Securities and Exchange
Commission (SEC), the Company reviews the carrying value of its oil and gas
properties each quarter on a country-by-country basis. Under full cost
accounting rules, capitalized costs of oil and gas properties may not exceed the
present value of estimated future net revenues from proved reserves, discounted
at 10 percent, plus the lower of cost or fair market value of unproved
properties, as adjusted for related tax effects and deferred income taxes.
Application of these rules generally requires pricing future production at the
unescalated oil and gas prices in effect at the end of each fiscal quarter and
requires a write-down if the "ceiling" is exceeded, even if prices declined for
only a short period of time. The Company did not have a write-down due to
ceiling test limitations as of June 30, 1998. Under current pricing there is the
potential, while not a certainty, that a write-down may occur. If a write-down
is required, the one-time charge to earnings would not impact cash flow from
operating activities.
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CHANGES IN ACCOUNTING PRINCIPLES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value, and
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting treatment.
SFAS No. 133 is required to be adopted on January 1, 2000, although earlier
adoption is permitted. The Company is analyzing the effects of SFAS No. 133, but
has not yet quantified the potential financial statement impact, if any, or
determined the timing or method of adoption.
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 on 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, 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
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. Future oil and gas
prices also could affect results of operations and cash flows. Although Apache
makes use of futures contracts, swaps, options and fixed-price physical
contracts to mitigate risk, fluctuations in oil and gas prices may affect the
Company's financial position and results of operations.
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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, 1997 (filed with the Securities and
Exchange Commission on March 20, 1998) is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held in Houston,
Texas at 10:00 a.m. local time, on Thursday, April 30, 1998. Proxies
for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, as amended. There was no solicitation
in opposition to the nominees for election as directors as listed in
the proxy statement, and all nominees were elected.
Out of a total of 98,583,981 shares of the Company's common stock
outstanding and entitled to vote, 89,313,213 shares were present at
the meeting in person or by proxy, representing approximately 90.6
percent. Matters voted upon at the meeting were as follows:
a) Election of four directors to serve on the Company's board of
directors. Mr. Fiedorek, Ms. Lowe, Mr. Merelli and Mr. Plank were
elected to serve until the annual meeting in 2001. The vote
tabulation with respect to each nominee was as follows:
AUTHORITY
NOMINEE FOR WITHHELD
------------------------ ------------- --------------
Eugene C. Fiedorek 87,685,732 1,627,481
Mary Ralph Lowe 87,535,528 1,777,685
F. H. Merelli 87,536,193 1,777,020
Raymond Plank 87,431,058 1,882,155
b) The Company's 1998 Stock Option Plan was approved by a vote of
64,574,843 shares for, 24,347,019 shares against, 391,351
abstentions, and zero broker non-votes.
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ITEM 5. OTHER INFORMATION
STOCKHOLDER PROPOSALS AND BUSINESS
Stockholders of the Company are entitled to submit proposals on
matters appropriate for stockholder action consistent with regulations
of the Securities and Exchange Commission (SEC) and the Company's
bylaws. Should a stockholder wish to have a proposal considered for
inclusion in the proxy statement for the Company's 1999 annual
meeting, under the regulations of the SEC, such proposal must be
received by the Company on or before November 30, 1998.
Pursuant to Section 12 and/or 13 of Article IV of the Company's
bylaws, if a stockholder wishes to bring business before, or nominate
persons for election to the board of directors at, the Company's
annual meeting (whether or not the stockholder is seeking to include a
proposal in the Company's proxy statement), notice of such business or
nomination (the Stockholder's Notice) should be delivered or mailed to
and received by the Company not less than 60 days or more than 90 days
prior to the date of the annual meeting; provided, however, that in
the event that less than 70 days' notice or prior public disclosure of
the date of the annual meeting is given or made to the Company's
stockholders, the Stockholder's Notice must be received by the Company
not later than the close of business on the tenth day following the
day on which the notice of the date of the annual meeting was mailed
or public disclosure was made. The Stockholder's Notice should set
forth the information called for by Section 12 and/or 13 of Article IV
of the Company's bylaws, as applicable. In reference to the Company's
1999 annual meeting and per recently adopted SEC rules, if the
Stockholder's Notice is not received by the Company on or before
February 13, 1999, the Company (through management proxy holders) may
exercise discretionary voting authority when the proposal is raised at
the annual meeting without any reference to the matter in the proxy
statement.
The above summary, which sets forth only the procedures by which
business may be brought before and voted upon at the Company's annual
meeting, is qualified in its entirety by reference to Sections 12 and
13 of Article IV of the Company's bylaws, which do not in any way
grant additional rights to stockholders beyond those currently
afforded them by law.
All stockholder proposals and notices should be directed to the
Company's corporate secretary at 2000 Post Oak Boulevard, Suite 100,
Houston, Texas 77056-4400.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Apache's Bylaws, as amended July 17, 1997 (incorporated by
reference to Exhibit 4.4 to Apache's Registration Statement
on Form S-8, Registration No. 333-32557, filed July 31,
1997).
27.1 - Financial Data Table
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(b) Reports filed on Form 8-K
The following current report on Form 8-K was filed during the
fiscal quarter ended June 30, 1998:
June 18, 1998 - Item 5. Other Events
On June 18, 1998, Apache announced (i) the formation of a
strategic alliance with Cinergy Corporation (Cinergy) to market
Apache's natural gas production from North America, and (ii) that
Apache and Oryx Energy Company sold Producers Energy Marketing
LLC (ProEnergy) to Cinergy for $42.5 million (subject to
adjustments) of which 57 percent related to Apache's interest.
ProEnergy will continue to market Apache's North American natural
gas production for ten years, with an option to terminate after
six years, under an amended and restated gas purchase agreement
effective July 1, 1998.
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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 10, 1998 /s/ Roger B. Plank
------------------------------------------
Roger B. Plank
Vice President and Chief Financial Officer
Dated: August 10, 1998 /s/ Thomas L. Mitchell
------------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 - Apache's Bylaws, as amended July 17, 1997 (incorporated by reference to Exhibit 4.4
to Apache's Registration Statement on Form S-8, Registration No. 333-32557, filed
July 31, 1997).
27.1 - Financial Data Table