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 September 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
------------------- ---------------------
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
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 September 30,
1998......................97,757,070
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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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per common share data)
REVENUES:
Oil and gas production revenues $ 182,801 $ 233,068 $ 590,606 $ 714,196
Gathering, processing and marketing revenues 29,756 45,181 88,872 144,600
Equity in income (loss) of affiliates -- (1,412) (1,558) (1,423)
Other revenues (874) (89) (164) 44
---------- ---------- ---------- ----------
211,683 276,748 677,756 857,417
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization 94,818 98,170 290,604 280,969
Operating costs 49,344 54,866 158,511 172,577
Gathering, processing and marketing costs 28,970 44,542 86,590 142,806
Administrative, selling and other 13,860 8,707 34,026 26,790
Financing costs:
Interest expense 30,167 26,551 90,498 75,014
Amortization of deferred loan costs 1,107 1,919 3,415 4,497
Capitalized interest (12,883) (9,103) (36,271) (26,901)
Interest income (1,090) (420) (3,560) (1,562)
---------- ---------- ---------- ----------
204,293 225,232 623,813 674,190
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 7,390 51,516 53,943 183,227
Provision for income taxes 4,189 20,731 24,150 73,819
---------- ---------- ---------- ----------
NET INCOME 3,201 30,785 29,793 109,408
Preferred stock dividends 584 -- 584 --
---------- ---------- ---------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK $ 2,617 $ 30,785 $ 29,209 $ 109,408
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ .03 $ .34 $ .30 $ 1.21
========== ========== ========== ==========
Diluted $ .03 $ .33 $ .30 $ 1.17
========== ========== ========== ==========
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 NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,793 $ 109,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 290,604 280,969
Amortization of deferred loan costs 3,415 4,497
Provision for deferred income taxes 2,771 47,912
Loss on sale of stock held for investment and other 364 --
Cash distributions in excess of earnings of affiliates 1,523 1,565
Changes in operating assets and liabilities:
Decrease in receivables 54,338 13,660
Increase in advances to oil and gas ventures and other (3,510) (4,794)
Decrease in deferred charges and other 16,276 740
Decrease in payables (62,585) (26,710)
Increase (decrease) in accrued expenses (3,988) 13,609
Increase in advance from gas purchaser 56,891 107,144
Decrease in deferred credits and noncurrent liabilities (4,486) (8,344)
------------- -------------
Net cash provided by operating activities 381,406 539,656
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (512,515) (561,697)
Non-cash portion of net oil and gas property additions (29,130) (12,579)
Proceeds received from sales of property and equipment 130,753 5,789
Proceeds from sale of assets held for resale 62,998 --
Proceeds from sale of stock held for investment 26,147 1,183
Purchase of stock held for investment -- (1,170)
Other, net (15,418) (21,722)
------------- -------------
Net cash used in investing activities (337,165) (590,196)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 446,248 577,066
Payments on long-term debt (498,420) (501,177)
Dividends paid (20,335) (18,944)
Proceeds from issuance of preferred stock 98,630 --
Common stock activity, net 1,085 8,949
Treasury stock activity, net (21,430) (365)
Cost of debt and equity transactions (420) (2,554)
------------- -------------
Net cash provided by financing activities 5,358 62,975
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,599 12,435
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,686 13,161
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,285 $ 25,596
============= =============
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)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,285 $ 9,686
Receivables 168,974 224,025
Inventories 35,562 36,041
Advances to oil and gas ventures and other 19,032 15,579
Assets held for resale -- 62,998
------------ ------------
282,853 348,329
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 5,717,038 5,530,991
Unproved properties and properties under
development, not being amortized 553,535 453,556
International concession rights, not being amortized 79,000 79,000
Gas gathering, transmission and processing facilities 305,881 246,049
Other 85,476 71,067
------------ ------------
6,740,930 6,380,663
Less: Accumulated depreciation, depletion and amortization (2,922,640) (2,647,478)
------------ ------------
3,818,290 3,733,185
------------ ------------
OTHER ASSETS:
Deferred charges and other 43,151 57,119
------------ ------------
$ 4,144,294 $ 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)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,000 $ 17,200
Accounts payable 117,335 178,361
Accrued operating expense 20,823 20,153
Accrued exploration and development 53,077 82,392
Accrued compensation and benefits 12,290 17,600
Accrued interest 22,730 20,598
Other accrued expenses 6,638 7,479
------------ ------------
238,893 343,783
------------ ------------
LONG-TERM DEBT 1,304,830 1,501,380
------------ ------------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES:
Income taxes 355,697 355,619
Advances from gas purchaser 211,437 154,546
Other 70,776 54,128
------------ ------------
637,910 564,293
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized,
100,000 shares of 5.68% Cumulative Series B
issued and outstanding in 1998 98,515 --
Common stock, $1.25 par, 215,000,000 shares authorized,
99,778,978 and 94,478,788 shares issued, respectively 124,724 118,098
Paid-in capital 1,238,187 1,085,063
Retained earnings 570,543 561,981
Treasury stock, at cost, 2,021,908 and 1,174,247 shares,
respectively (36,936) (15,506)
Accumulated other comprehensive income (32,372) (20,459)
------------ ------------
1,962,661 1,729,177
------------ ------------
$ 4,144,294 $ 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 PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) INCOME STOCK 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 $ 109,408 -- -- -- 109,408 -- -- 109,408
Currency translation
adjustments, net of
applicable income tax
benefit of $795 (1,476) -- -- -- -- -- (1,476) (1,476)
-----------
Comprehensive income $ 107,932
===========
Dividends ($.21 per common
share) -- -- -- (18,971) -- -- (18,971)
Common shares issued -- 492 8,457 -- -- -- 8,949
Treasury shares purchased -- -- -- -- (365) -- (365)
-------- -------- ---------- -------- -------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 $ -- $114,522 $1,010,997 $523,025 $(15,517) $ (16,966) $ 1,616,061
======== ======== ========== ======== ======== =========== ===========
BALANCE AT DECEMBER 31, 1997 $ -- $118,098 $1,085,063 $561,981 $(15,506) $ (20,459) $ 1,729,177
Comprehensive income:
Net income $ 29,793 -- -- -- 29,793 -- -- 29,793
Currency translation
adjustments, net of
applicable income tax
benefit of $6,415 (11,913) -- -- -- -- -- (11,913) (11,913)
-----------
Comprehensive income $ 17,880
===========
Dividends:
Preferred -- -- -- (584) -- -- (584)
Common ($.21 per share) -- -- -- (20,647) -- -- (20,647)
Preferred shares issued 98,515 -- -- -- -- -- 98,515
Common shares issued -- 6,626 153,124 -- -- -- 159,750
Treasury shares purchased,
net -- -- -- -- (21,430) -- (21,430)
-------- -------- ---------- -------- -------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998 $ 98,515 $124,724 $1,238,187 $570,543 $(36,936) $ (32,372) $ 1,962,661
======== ======== ========== ======== ======== =========== ===========
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 nine months ended September 30, 1998, Apache sold largely
marginal North American properties containing 29.3 million equivalent barrels of
proved reserves for $129.2 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 $20.0 million on the sale of
ProEnergy that is being amortized over six years. In September 1998, Apache sold
its shares of Cinergy common stock for $26.1 million and recorded a loss of $.4
million.
3. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing and financing activities is presented
below:
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 52,095 $ 41,610
Income taxes (net of refunds) 21,379 25,902
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 an $.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 and foreign currency translation adjustments, in the accompanying
statement of consolidated shareholders' equity. This information is shown for
all periods presented.
6. PREFERRED STOCK
In August 1998, Apache issued $100 million of 5.68 percent Series B
Cumulative Preferred Stock (the Preferred Stock) in the form of one million
depositary shares each representing 1/10th of a share of Preferred Stock. The
Preferred Stock has no stated maturity and is not subject to a sinking fund or
mandatory redemption. The shares are not convertible into other securities of
the Company.
Apache has the option to redeem the shares at $100 per depositary share on
or after August 25, 2008. Holders of the shares are entitled to receive
cumulative cash dividends at an annual rate of $5.68 per depositary share when,
and if, declared by Apache's board of directors. The net proceeds of
approximately $98.5 million were used to repay debt outstanding under money
market lines of credit and to reduce outstanding borrowings under the Canadian
portion of the Company's global credit facility.
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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 SEPTEMBER 30,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- --------- --------- --------- --------- ---------
(In thousands, except per share amounts)
BASIC:
Net income $ 3,201 $ 30,785
Less: Preferred stock dividends (584) --
--------- ---------
Income attributable to common stock 2,617 98,205 $ .03 30,785 90,396 $ .34
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans -- 132 -- 585
3.93% convertible notes -- -- 535 2,778
6% convertible subordinated debentures -- -- 1,752 5,623
--------- --------- --------- ---------
DILUTED:
Income attributable to common stock
after assumed conversions $ 2,617 98,337 $ .03 $ 33,072 99,382 $ .33
========= ========= ========= ========= ========= =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- --------- --------- --------- --------- ---------
(In thousands, except per share amounts)
BASIC:
Net income $ 29,793 $ 109,408
Less: Preferred stock dividends (584) --
--------- ---------
Income attributable to common stock 29,209 98,131 $ .30 109,408 90,276 $ 1.21
========= =========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans -- 299 -- 484
3.93% convertible notes -- -- 1,581 2,778
6% convertible subordinated debentures -- -- 5,166 5,623
--------- --------- --------- ---------
DILUTED:
Income attributable to common stock
after assumed conversions $ 29,209 98,430 $ .30 $ 116,155 99,161 $ 1.17
========= ========= ========= ========= ========= =========
The 6-percent convertible subordinated debentures, which were converted
into shares of Apache common stock or redeemed in January 1998, are not included
in the computation of diluted earnings available per common share for the nine
months ended September 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 nine
months of 1998 were significantly impacted by the following factors:
Commodity Prices - Apache's average realized oil price decreased $6.22 per
barrel from $19.42 per barrel in the first nine months of 1997 to $13.20 per
barrel in the comparable 1998 period, reducing revenues by $109.7 million. The
average realized price for natural gas decreased $.24 per thousand cubic feet
(Mcf) from $2.19 per Mcf in the first nine months of 1997 to $1.95 per Mcf in
1998, negatively impacting revenues by $39.6 million.
Operations - Oil production increased 15 percent for the first nine months
of 1998 when compared to the same period last year, while gas production
decreased two percent for the same period. The increase in oil production
favorably impacted revenues by $35.8 million. Earnings for the first nine months
of 1998 were also positively impacted by a $14.1 million, or eight percent,
decrease in operating costs compared to the same period of 1997.
RESULTS OF OPERATIONS
Apache reported 1998 third quarter income attributable to common stock of
$2.6 million versus $30.8 million in the prior year. Basic net income per common
share of $.03 for the third quarter of 1998 was significantly lower than in
1997. Higher oil production and lower operating costs were offset by a sharp
decline in oil and gas prices, decreased gas production and higher
administrative, selling and other (G&A) expense. The increase in G&A expense was
primarily the result of employee separation payments associated with the sale of
largely marginal North American properties.
For the first nine months of 1998, income attributable to common stock of
$29.2 million, or $.30 per basic common share, decreased from $109.4 million, or
$1.21 per basic common share, in the comparable 1997 period. This decrease is
primarily the result of a 32 percent decrease in oil prices, an 11 percent
decrease in gas prices, a two percent decrease in gas production and higher
depreciation, depletion and amortization (DD&A) expense partially offset by a 15
percent increase in oil production and lower operating costs, compared to a year
ago.
For the third quarter of 1998, revenues decreased 24 percent to $211.7
million compared to $276.7 million in 1997, driven by a 22 percent decrease in
oil and gas production revenues. The decrease in oil and gas production revenues
is primarily the result of a 32 percent decrease in the average realized oil
price, a nine percent decrease in the average realized price for natural gas and
a seven percent decrease in gas production. Crude oil, including natural gas
liquids, contributed 46 percent and natural gas contributed 54 percent of oil
and gas production revenues.
For the first nine months of 1998, revenues decreased 21 percent to $677.8
million as compared to $857.4 million for the same period in 1997. Revenues from
oil and gas production decreased 17 percent from the same period in 1997, with
crude oil, including natural gas liquids, contributing 46 percent and natural
gas contributing 54 percent of 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 SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ------------------------------------------
INCREASE INCREASE
1998 1997 (DECREASE) 1998 1997 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
Natural Gas Volume - Mcf per day:
United States 413,818 505,981 (18%) 443,546 497,043 (11%)
Canada 107,651 93,310 15% 101,102 86,368 17%
Egypt 2,044 726 182% 986 547 80%
Australia 52,544 20,238 160% 48,988 21,137 132%
---------- ---------- ---------- ----------
Total 576,057 620,255 (7%) 594,622 605,095 (2%)
========== ========== ========== ==========
Average Natural Gas price - Per Mcf:
United States $ 2.07 $ 2.23 (7%) $ 2.14 $ 2.37 (10%)
Canada 1.28 1.12 14% 1.30 1.28 2%
Egypt 1.68 2.76 (39%) 1.78 2.79 (36%)
Australia 1.43 1.80 (21%) 1.52 1.84 (17%)
Total 1.86 2.05 (9%) 1.95 2.19 (11%)
Oil Volume - Barrels per day:
United States 31,691 40,746 (22%) 35,330 40,664 (13%)
Canada 2,107 2,289 (8%) 2,067 2,032 2%
Egypt 27,892 20,223 38% 28,801 18,728 54%
Australia 9,717 3,786 157% 8,359 3,205 161%
---------- ---------- ---------- ----------
Total 71,407 67,044 7% 74,557 64,629 15%
========== ========== ========== ==========
Average Oil price - Per barrel:
United States $ 12.19 $ 18.43 (34%) $ 13.14 $ 19.60 (33%)
Canada 11.70 18.36 (36%) 13.12 19.38 (32%)
Egypt 12.60 18.39 (31%) 13.13 18.76 (30%)
Australia 13.29 19.66 (32%) 13.75 21.08 (35%)
Total 12.49 18.48 (32%) 13.20 19.42 (32%)
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States 2,025 1,347 50% 2,010 1,677 20%
Canada 577 546 6% 613 607 1%
---------- ---------- ---------- ----------
Total 2,602 1,893 37% 2,623 2,284 15%
========== ========== ========== ==========
Average NGL Price - Per barrel:
United States $ 9.09 $ 11.66 (22%) $ 8.58 $ 15.23 (44%)
Canada 6.09 10.82 (44%) 6.52 13.63 (52%)
Total 8.43 11.42 (26%) 8.10 14.80 (45%)
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
Natural gas sales for the third quarter of 1998 totaled $98.8 million, 16
percent lower than the third quarter of 1997. Average realized natural gas
prices decreased nine percent, negatively affecting revenue by $10.8 million.
The weakening of the Australian currency relative to the U.S. dollar contributed
to the 21 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 $.06 per Mcf during the third quarter of
1998 and had no impact on the Company's realized price during the third quarter
of 1997.
Natural gas production decreased 44.2 million cubic feet per day (MMcf/d),
or seven percent, on a worldwide basis, unfavorably impacting revenue by $7.6
million. U.S. natural gas production decreased 18 percent due to sales of
largely marginal properties in the first half of 1998 and natural reservoir
depletion. Increases in natural gas production in Egypt, Canada and Australia
were principally due to development activities and the impact of producing
property acquisitions in Australia during late 1997.
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The Company's crude oil sales for the third quarter of 1998 totaled $82.0
million, a 28 percent decrease from the third quarter of 1997, due to lower
average realized prices, which were partially offset by production increases in
Egypt and Australia.
Third quarter 1998 oil production increased seven 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 30 percent in the third quarter of 1997,
resulting in an increase in revenues of $8.9 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 157 percent in the third 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 22 percent in the third quarter of 1998 primarily due
to sales of largely marginal properties in the first half of 1998 and natural
reservoir depletion.
The Company's realized price for sales of crude oil in the third quarter of
1998 decreased $5.99 per barrel, or 32 percent, resulting in a decrease in
revenue of $36.9 million compared to the same period in 1997.
Revenue from the sale of natural gas liquids totaled $2.0 million for the
third quarters of 1998 and 1997. A 37 percent increase in natural gas liquids
production was offset by a 26 percent decline in realized prices.
YEAR-TO-DATE 1998 COMPARED TO YEAR-TO-DATE 1997
Natural gas sales for the first nine months of 1998 of $316.1 million
decreased $46.2 million, or 13 percent, from those recorded in the same period
of 1997 as a result of lower natural gas prices and a decline in production.
Average realized natural gas prices decreased 11 percent, negatively affecting
revenue by $39.6 million. U.S. natural gas production, which comprised 75
percent of the Company's worldwide gas production, sold at an average price of
$2.14 per Mcf, 10 percent lower than in 1997. Natural gas production decreased
10.5 MMcf/d, or two percent, on a worldwide basis, negatively impacting revenue
by $5.6 million. Development activities and the impact of producing property
acquisitions in Australia during late 1997 increased natural gas production in
Australia and Canada by 27.9 MMcf/d and 14.7 MMcf/d, respectively. U.S. natural
gas production declined 53.5 MMcf/d due to sales of largely marginal properties
in the first half of 1998 and natural reservoir depletion. The weakening of the
Australian currency relative to the U.S. dollar contributed to the 17 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 nine months of 1998 and by $.02 per
Mcf during the first nine months of 1997.
For the first nine months of 1998, oil revenues of $268.7 million decreased
$73.9 million, or 22 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 32 percent to $13.20 per barrel negatively
impacting oil sales by $109.7 million. Oil production increased 9,928 barrels
per day, or 15 percent, for the first nine months of 1998 primarily due to
increases in Egypt and Australia. Egyptian oil production increased by 10,073
barrels per day, or 54 percent, as a result of drilling and development activity
and the price-driven dynamics of certain production sharing contracts.
Australian oil production increased by 5,154 barrels per day, or 161 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. U.S.
oil production decreased by 5,334 barrels per day, or 13 percent, primarily due
to sales of largely marginal properties in the first half of 1998 and natural
reservoir depletion.
Natural gas liquid revenues for the first nine months of 1998 of $5.8
million decreased 37 percent from the same period in 1997. Natural gas liquid
production increased 339 barrels per day, or 15 percent, while natural gas
liquid prices declined by $6.70 per barrel, or 45 percent.
11
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OTHER REVENUES AND OPERATING EXPENSES
During the third quarter and first nine months of 1998, Apache's gas
gathering, processing and marketing revenues decreased 34 percent and 39
percent, respectively, to $29.8 million and $88.9 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.
The Company's DD&A expense for the third quarter and first nine months of
1998 totaled $94.8 million and $290.6 million, respectively, compared to $98.2
million and $281.0 million for the same periods in 1997. On an equivalent barrel
basis, full cost DD&A expense decreased $.20 per barrel of oil equivalent (boe),
from $5.84 per boe in the third quarter of 1998 to $5.64 per boe in the same
period in 1997. For the nine months ended September 30, 1998, the full cost DD&A
rate was $5.62 per boe compared to $5.78 per boe in 1997. Production increases
in Canada, Australia and Egypt, countries which have a lower DD&A rate per boe
than the U.S., contributed to the decrease in the overall rate. The U.S. DD&A
rate has remained relatively constant at $6.11 per boe in the first nine months
of 1997 compared to $6.12 per boe in the first nine months of 1998. U.S.
production accounted for 63 percent of worldwide production in the first nine
months of 1998 compared to 75 percent in the same period of 1997.
Operating costs, including lease operating expense and severance taxes,
decreased 10 percent from $54.9 million in the third quarter of 1997 to $49.3
million for the same period in 1998. For the first nine months of 1998,
operating costs totaled $158.5 million, a decrease of $14.1 million, or eight
percent, compared to the same period in 1997. For the third quarter and first
nine months of 1998, lease operating expense, excluding severance taxes, totaled
$43.3 million and $136.5 million, respectively, compared to $45.2 million and
$143.1 million for the comparable periods in 1997. On an equivalent barrel
basis, lease operating expense declined from $2.85 per boe in the third quarter
of 1997 to $2.77 per boe in the third quarter of 1998. For the first nine months
of 1998, lease operating expense averaged $2.84 per boe, a nine percent decrease
from $3.12 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 largely marginal properties, and by
lower Western and Offshore region repairs and maintenance costs.
G&A expense in the third quarter of 1998 and first nine months of 1998
increased $5.2 million or 59 percent, and $7.2 million or 27 percent,
respectively, from a year ago. On an equivalent barrel basis, G&A expense for
the first nine months of 1998 increased to $.71 per boe compared to $.58 per boe
for the same period in 1997. The increase in G&A expense per boe in the first
nine months of 1998 was primarily the result of employee separation payments
associated with the sale of largely marginal North American properties.
Net financing costs for the third quarter of 1998 decreased $1.6 million,
or nine percent, from the prior year primarily due to higher capitalized
interest. Gross interest expense increased $3.6 million due to a higher average
outstanding debt balance and a higher weighted average interest rate. Net
financing costs increased six percent from $51.0 million in the first nine
months of 1997 to $54.1 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, interest income and lower
amortization of deferred loan costs. 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 balance in the first
nine months of 1998.
The provision for income taxes for the third quarter of 1998, as a
percentage of income before income taxes, increased to 57 percent compared to 40
percent in the same period last year. The increase is attributable to higher tax
rates associated with the Company's Egyptian operations which generated a larger
percentage of income during 1998.
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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. During the first nine months of
1998, the Company repurchased 850,000 shares of its own common stock on the open
market and may, from time to time, purchase additional shares. 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. Capital expenditures for 1998 are expected to exceed
internally generated cash flow.
Capital Expenditures - A summary of oil and gas capital expenditures during
the first nine months of 1998 and 1997 is presented below (in millions):
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
Exploration and development:
United States $ 173.4 $ 276.1
Canada 55.1 41.2
Egypt 80.3 93.9
Australia 60.3 41.7
Other international 35.1 16.9
---------- ----------
404.2 469.8
Capitalized Interest 36.3 26.9
---------- ----------
Total $ 440.5 $ 496.7
========== ==========
Acquisition of oil and gas properties $ 18.2 $ 32.8
========== ==========
In North America, Apache completed 157 producing wells out of 212 wells
drilled during the first nine months of 1998, while internationally the Company
discovered 32 new producers out of 60 wells drilled. Worldwide, the Company was
drilling or completing an additional 74 wells as of September 30, 1998. In
addition, Apache completed 402 production enhancement projects, including 157
recompletions, during the first nine months of 1998.
Property acquisitions in the first nine months of 1998, primarily
represented acquisitions of additional interests in producing properties in the
Company's existing focus areas.
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CAPITAL RESOURCES AND LIQUIDITY
Net Cash Provided by Operating Activities - Apache's net cash provided by
operating activities during the first nine months of 1998 totaled $381.4
million, a decrease of 29 percent from $539.7 million in the first nine months
of 1997. This decrease was primarily due to lower product prices, partially
offset by higher oil production, as compared to last year.
Preferred Stock Issuance - In August 1998, Apache issued $100 million of
5.68 percent Series B Cumulative Preferred Stock. The net proceeds of
approximately $98.5 million were used to repay debt outstanding under money
market lines of credit and to reduce outstanding borrowings under the Canadian
portion of the Company's global credit facility. The preferred stock has no
stated maturity and is not subject to a sinking fund or mandatory redemption.
The shares are not convertible into other securities of the Company.
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 an $.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 $59.3 million in cash and cash equivalents on
hand at September 30, 1998, up from $9.7 million at December 31, 1997. Apache's
ratio of current assets to current liabilities at September 30, 1998 was 1.18:1
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 September 30, 1998, Apache's
available borrowing capacity under its global credit facility was $851 million.
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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 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. The project phases, expected
completion dates and percentage complete are as follows:
PHASE COMPLETION DATE % COMPLETE
--------------------------------------- ------------------- ---------------
Organization July 1998 100%
Assessment November 1998 70%
Desktop Computers
Network Hardware
Software
Embedded Systems
External Trading Partners
Building/Infrastructure Systems
Telecommunications Systems
Implementation/Replacement July 1999 40%
Computer Hardware
Core Business Software
Desktop Software
Embedded Systems
Building Systems
Contact External Trading Partners February 1999 10%
Contingency Planning March 1999 20%
To date, the Company is not aware of any significant issues that would
cause problems in the area of safety, environmental or business interruption in
the Year 2000. The Company will assess the risk associated with hardware,
software, infrastructure, embedded chips and external trading partners that are
not Year 2000 compliant. While Apache is confident that Year 2000 remediation
efforts will succeed in minimizing exposure to business disruption, plans are
being developed which will allow continuation of business in all but the worst
case scenarios. All remediation and replacement efforts and contingency planning
are expected to be complete by July 1999. All critical external trading partners
will be contacted to determine Year 2000 readiness and contingency plans will be
developed where assurance of Year 2000 compliance is not received by February
28, 1999.
In 1997, the Company initiated a project to replace existing business
software as it relates to Apache's production, land, marketing, accounting and
financial systems to more effectively and efficiently meet its business needs.
Replacement computer systems selected by the Company from SAP America, Inc.,
PricewaterhouseCoopers LLP, Innovative Business Solutions and Landmark Graphics
will properly recognize dates beyond December 31, 1999. The Company plans to
implement the replacement software by March 31, 1999. The business system
replacement project is 60 percent complete and the Company believes that the
March 31, 1999 deadline is attainable.
The Company expects the cost to achieve Year 2000 compliance will not
exceed $4 million. The cost of implementing business replacement systems is not
included in these cost estimates.
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The Company presently believes that with conversions to new software and
completion of efforts planned by the Year 2000 Task Force, the risk associated
with Year 2000 will be significantly reduced. However, the Company is unable to
assure that the consequences of Year 2000 failures of systems maintained by the
Company or by third parties will not materially adversely impact the Company's
results of operations, liquidity or financial condition.
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 earnings and
cash from operations for the first nine months of 1998 (see "Market
Risk-Commodity Risk" above), Apache anticipated lower prices and took steps
early in 1998 to expand its financial capacity. As a result, Apache is
positioned to take advantage of opportunities that might result from 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. Repurchasing 850,000 shares of its own common stock at an average market
price of $25.25 per share. Apache may, from time to time, purchase
additional shares on the open market.
5. Issuing $100 million of 5.68 percent Series B Cumulative Preferred Stock.
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. 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 September 30, 1998. Given historical volatility
in oil and gas prices, 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 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.
17
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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 SEC on March 20,
1998) is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) On August 15, 1998, Apache issued 100,000 shares of its 5.68%
Cumulative Preferred Stock Series B, no par value per share
(the Series B Preferred Stock). The Series B Preferred Stock
ranks prior and superior to all of Apache common stock,
outstanding on August 15, 1998 or thereafter, and to the
Series A Junior Participating Preferred Stock of the Company,
as to payment of dividends and distribution of assets upon
dissolution, liquidation or winding up of the Company.
(c) None
(d) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Form of Certificate of Designations, Preferences
and Rights of 5.68% Cumulative Preferred Stock,
Series B (incorporated by reference to Exhibit 4.1 to
Amendment No. 2 on Form 8-K/A to Apache's Current
Report on Form 8-K, dated August 18, 1998, SEC File
No. 1-4300).
3.2 - Apache's Bylaws, as amended September 17, 1998.
27.1 - Financial Data Table
99.1 - Statement of computation of ratio of earnings to
combined fixed charges and preferred stock dividends
(b) Reports filed on Form 8-K
The following current report on Form 8-K was filed during the
fiscal quarter ended September 30, 1998:
August 18, 1998 - Item 5. Other Events
Offering to the public of one million Depositary Shares each
representing 1/10th of a share of Apache's Series B Preferred
Stock, no par value, registered pursuant to Apache's
Registration Statement on Form S-3 (Registration No.
333-57785).
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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: November 12, 1998 /s/ Roger B. Plank
------------------------------------------
Roger B. Plank
Vice President and Chief Financial Officer
Dated: November 12, 1998 /s/ Thomas L. Mitchell
------------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)