UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
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, 2001.............124,627,521
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(In thousands, except per common share data)
REVENUES:
Oil and gas production revenues $ 658,995 $ 623,543 $ 2,256,638 $ 1,557,866
Equity in income of affiliates -- (446) -- 1,084
Other revenues (losses) (6,571) (4,584) (8,628) (5,833)
------------ ------------ ------------ ------------
652,424 618,513 2,248,010 1,553,117
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization 217,021 153,905 598,203 422,392
International impairments -- -- 65,000 --
Lease operating costs 103,301 66,510 294,828 186,463
Severance and other taxes 16,656 16,021 58,197 36,104
Administrative, selling and other 22,794 18,089 66,363 49,331
Financing costs:
Interest expense 44,140 43,775 138,106 126,958
Amortization of deferred loan costs 1,089 487 2,123 2,219
Capitalized interest (15,520) (16,011) (44,388) (44,852)
Interest income (1,988) (551) (4,240) (1,655)
------------ ------------ ------------ ------------
387,493 282,225 1,174,192 776,960
------------ ------------ ------------ ------------
Minority interest 3,189 -- 3,189 --
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 261,742 336,288 1,070,629 776,157
Provision for income taxes 104,909 134,040 425,850 312,681
------------ ------------ ------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING
PRINCIPLE 156,833 202,248 644,779 463,476
Cumulative effect of change in accounting principle,
net of income tax -- -- -- (7,539)
------------ ------------ ------------ ------------
NET INCOME 156,833 202,248 644,779 455,937
Preferred stock dividends 4,908 4,908 14,693 15,080
------------ ------------ ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK $ 151,925 $ 197,340 $ 630,086 $ 440,857
============ ============ ============ ============
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle $ 1.22 $ 1.64 $ 5.05 $ 3.87
Cumulative effect of change in accounting principle -- -- -- (.07)
------------ ------------ ------------ ------------
$ 1.22 $ 1.64 $ 5.05 $ 3.80
============ ============ ============ ============
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle $ 1.19 $ 1.58 $ 4.88 $ 3.74
Cumulative effect of change in accounting principle -- -- -- (.06)
------------ ------------ ------------ ------------
$ 1.19 $ 1.58 $ 4.88 $ 3.68
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 644,779 $ 455,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 598,203 422,392
Provision for deferred income taxes 277,234 202,783
International impairments 65,000 --
Cumulative effect of change in accounting principle -- 7,539
Other (45,339) 6,562
Other non-cash items -- (1,087)
Changes in operating assets and liabilities:
(Increase) decrease in receivables 162,703 (157,081)
(Increase) decrease in advances to oil and gas ventures and other (40,789) (1,856)
(Increase) decrease in deferred charges and other (5,562) (5,139)
(Increase) decrease in product inventory 1,061 (17,290)
Increase (decrease) in payables (57,587) 55,842
Increase (decrease) in accrued expenses (4,671) 18,260
Increase (decrease) in advances from gas purchasers (9,336) (20,293)
Increase (decrease) in deferred credits and noncurrent liabilities (36,217) (5,448)
------------ ------------
Net cash provided by operating activities 1,549,479 961,121
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,175,892) (679,338)
Non-cash portion of net oil and gas property additions 40,053 10,586
Acquisition of Fletcher subsidiaries (465,018) --
Acquisition of Repsol properties (446,933) (119,278)
Acquisition of Collins & Ware properties -- (320,049)
Acquisition of Occidental properties (11,000) (332,020)
Proceeds from sales of oil and gas properties 233,281 20,124
Purchase of U.S. Government Agency Notes (116,737) --
Other, net (58,530) (10,834)
------------ ------------
Net cash used in investing activities (2,000,776) (1,430,809)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 2,278,414 619,849
Payments on long-term debt (2,185,160) (541,706)
Dividends paid (14,686) (30,741)
Payments to repurchase Series C Preferred Stock -- (2,613)
Common stock activity, net 7,404 457,475
Treasury stock activity, net (43,003) (17,727)
Cost of debt and equity transactions (1,648) (739)
Proceeds from minority interest, net of issuance cost 440,654 --
------------ ------------
Net cash provided by financing activities 481,975 483,798
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 30,678 14,110
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,173 13,171
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,851 $ 27,281
============ ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67,851 $ 37,173
Receivables 436,605 506,723
Inventories 86,596 54,764
Advances to oil and gas ventures and other 76,582 31,360
Oil and gas derivative instruments 37,045 --
------------- ------------
704,679 630,020
------------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 11,073,940 9,423,922
Unproved properties and properties under
development, not being amortized 929,576 977,491
Gas gathering, transmission and processing facilities 705,636 573,621
Other 161,638 119,590
------------- ------------
12,870,790 11,094,624
Less: Accumulated depreciation, depletion and amortization (4,919,679) (4,282,162)
------------- ------------
7,951,111 6,812,462
------------- ------------
OTHER ASSETS:
Goodwill, net 192,155 --
Long-term investments 116,312 --
Oil and gas derivative instruments 62,791 --
Deferred charges and other 39,687 39,468
------------- ------------
$ 9,066,735 $ 7,481,950
============= ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 25,000
Oil and gas derivative instruments 22,003 --
Accounts payable 289,843 259,120
Accrued operating expense 32,397 23,893
Accrued exploration and development 182,642 143,916
Accrued compensation and benefits 25,896 34,695
Accrued interest 39,164 25,947
Accrued income taxes 7,743 9,123
Other accrued expenses 16,777 31,653
------------- ------------
616,465 553,347
------------- ------------
LONG-TERM DEBT 2,311,512 2,193,258
------------- ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes 986,494 699,833
Advances from gas purchasers 143,770 153,106
Oil and gas derivative instruments 65,435 --
Other 104,192 127,766
------------- ------------
1,299,891 980,705
------------- ------------
MINORITY INTEREST 440,665 --
------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized -
Series B, 5.68% Cumulative Preferred Stock,
100,000 shares issued and outstanding 98,387 98,387
Series C, 6.5% Conversion Preferred Stock, 138,482 shares
issued and outstanding 208,207 208,207
Common stock, $1.25 par, 215,000,000 shares authorized,
128,328,059 and 126,500,776 shares issued, respectively 160,410 158,126
Paid-in capital 2,825,998 2,173,183
Retained earnings 1,276,673 1,226,531
Treasury stock, at cost, 3,700,538 and 2,866,028 shares,
respectively (111,938) (69,562)
Accumulated other comprehensive loss (59,535) (40,232)
------------- ------------
4,398,202 3,754,640
------------- ------------
$ 9,066,735 $ 7,481,950
============= ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B SERIES C
COMPREHENSIVE PREFERRED PREFERRED COMMON PAID-IN RETAINED
(In thousands) INCOME STOCK STOCK STOCK CAPITAL EARNINGS
------------- --------- --------- ---------- ------------ ----------
BALANCE AT DECEMBER 31, 1999 $ 98,387 $ 210,490 $ 145,504 $ 1,717,027 $ 558,721
Comprehensive income:
Net income $ 455,937 -- -- -- -- 455,937
Currency translation adjustments (35,344) -- -- -- -- --
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $174 (304) -- -- -- -- --
-------------
Comprehensive income $ 420,289
=============
Cash dividends:
Preferred -- -- -- -- (14,750)
Common ($.21 per share) -- -- -- -- (25,252)
Common shares issued -- -- 12,468 443,889 --
Series C Preferred Stock purchased -- (2,283) -- -- (330)
Treasury shares purchased, net -- -- -- 414 --
--------- --------- ---------- ------------ ----------
BALANCE AT SEPTEMBER 30, 2000 $ 98,387 $ 208,207 $ 157,972 $ 2,161,330 $ 974,326
========= ========= ========== ============ ==========
BALANCE AT DECEMBER 31, 2000 $ 98,387 $ 208,207 $ 158,126 $ 2,173,183 $1,226,531
Comprehensive income:
Net income $ 644,779 -- -- -- -- 644,779
Currency translation adjustments (60,681) -- -- -- -- --
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $278 (539) -- -- -- -- --
Unrealized gain on derivatives, net
of applicable income tax provision
of $30,115 41,917 -- -- -- -- --
-------------
Comprehensive income $ 625,476
=============
Cash dividends:
Preferred -- -- -- -- (14,693)
Common ($.28 per share) -- -- -- -- (34,894)
Ten percent common stock dividend -- -- -- 545,050 (545,050)
Common shares issued -- -- 2,284 106,554 --
Treasury shares purchased, net -- -- -- 1,211 --
--------- --------- ---------- ------------ ----------
BALANCE AT SEPTEMBER 30, 2001 $ 98,387 $ 208,207 $ 160,410 $ 2,825,998 $1,276,673
========= ========= ========== ============ ==========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) STOCK INCOME (LOSS) EQUITY
----------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 $ (52,256) $ (8,446) $ 2,669,427
Comprehensive income:
Net income -- -- 455,937
Currency translation adjustments -- (35,344) (35,344)
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $174 -- (304) (304)
Comprehensive income
Cash dividends:
Preferred -- -- (14,750)
Common ($.21 per share) -- -- (25,252)
Common shares issued -- -- 456,357
Series C Preferred Stock purchased -- -- (2,613)
Treasury shares purchased, net (17,309) -- (16,895)
----------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2000 $ (69,565) $ (44,094) $ 3,486,563
=========== ============= =============
BALANCE AT DECEMBER 31, 2000 $ (69,562) $ (40,232) $ 3,754,640
Comprehensive income:
Net income -- -- 644,779
Currency translation adjustments -- (60,681) (60,681)
Unrealized loss on marketable
securities, net of applicable income
tax benefit of $278 -- (539) (539)
Unrealized gain on derivatives, net
of applicable income tax provision
of $30,115 -- 41,917 41,917
Comprehensive income
Cash dividends:
Preferred -- -- (14,693)
Common ($.28 per share) -- -- (34,894)
Ten percent common stock dividend -- -- --
Common shares issued -- -- 108,838
Treasury shares purchased, net (42,376) -- (41,165)
----------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2001 $ (111,938) $ (59,535) $ 4,398,202
=========== ============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation (Apache
or the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC), and reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with 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.
Change in Accounting Principle - In December 2000, the staff of the SEC
announced that commodity inventories should be carried at cost, not market
value, despite longstanding industry practice. As a result, Apache changed its
accounting for crude oil inventories in the fourth quarter of 2000, retroactive
to the beginning of the year, and recognized a non-cash cumulative-effect charge
to earnings effective January 1, 2000. Quarterly results for 2000 have been
restated to reflect this change in accounting.
1. ACQUISITIONS AND DIVESTITURES
Acquisitions - In June 2000, Apache completed the acquisition of long-lived
producing properties in the Permian Basin and South Texas from Collins & Ware,
Inc. (Collins & Ware) for $320.7 million. The acquisition included estimated
proved reserves of 83.7 million barrels of oil equivalent (MMboe) as of the
acquisition date. One-third of the reserves are liquid hydrocarbons.
In August 2000, Apache completed the acquisition of a Delaware limited
liability company (LLC) owned by subsidiaries of Occidental Petroleum
Corporation (Occidental) and the related natural gas production for $321.2
million, plus future payments of approximately $44.0 million over four years.
The Occidental properties are located in 32 fields on 93 blocks on the Outer
Continental Shelf of the Gulf of Mexico. The acquisition included estimated
proved reserves of 53.1 MMboe as of the acquisition date.
In December 2000, Apache completed the acquisition of Canadian properties
from Canadian affiliates of Phillips Petroleum Company (Phillips) for $490.3
million. The acquisition included estimated proved reserves of approximately
70.0 MMboe as of the acquisition date. The properties comprise approximately
212,000 net developed acres and 275,000 net undeveloped acres, 786 square miles
of 3-D seismic and 4,155 miles of 2-D seismic located in the Zama area of
Northwest Alberta. The assets also include three sour gas plants with a total
capacity of 150 million cubic feet (MMcf) per day, 13 compressor stations and
150 miles of owned and operated gas gathering lines.
On March 22, 2001, Apache completed the acquisition of substantially all of
Repsol YPF's (Repsol) oil and gas concession interests in Egypt for
approximately $446.9 million in cash, subject to normal post closing
adjustments. The properties include interests in seven Western Desert
concessions and have estimated proved reserves of 66 MMboe as of the acquisition
date. The Company already holds interests in five of the seven concessions.
On March 27, 2001, Apache completed the acquisition of subsidiaries of
Fletcher Challenge Energy (Fletcher) for approximately $465.0 million in cash
and 1.64 million restricted shares of Apache common stock issued to Shell
Overseas Holdings (valued at $61.04 per share), subject to normal post closing
adjustments. The transaction included properties located in Canada's Western
Sedimentary Basin and in Argentina and estimated proved reserves of 120.8 MMboe
as of the acquisition date. Apache assumed a liability of $103.5 million
representing the fair value of derivative instruments and fixed-price commodity
contracts entered into by Fletcher.
6
The Fletcher and Repsol purchase prices were allocated to the assets
acquired and liabilities assumed based upon their fair values on the date of
acquisition, as follows:
FLETCHER REPSOL
---------- ---------
(In thousands)
Value of properties acquired, including gathering and
transportation facilities $ 571,718 $ 299,933
Goodwill 107,200 90,000
Derivative instruments and fixed-price contracts (103,486) --
Common stock issued (100,325) --
Working capital acquired, net (8,202) 57,000
Deferred income tax liability (1,887) --
---------- ---------
Cash paid, net of cash acquired $ 465,018 $ 446,933
========== =========
The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the Fletcher, Repsol, Collins
& Ware, Occidental and Phillips acquisitions occurred on January 1, 2000. The
pro forma information is based on numerous assumptions and is not necessarily
indicative of future results of operations.
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------
(In thousands, except per share data)
Revenues $ 2,248,010 $ 2,354,965 $ 1,553,117 $ 2,201,608
Net income 644,779 670,356 455,937 621,444
Preferred stock dividends 14,693 14,693 15,080 15,080
Income attributable to common stock 630,086 655,663 440,857 606,364
Net income per common share:
Basic $ 5.05 $ 5.24 $ 3.80 $ 4.86
Diluted 4.88 5.05 3.68 4.69
Average common shares outstanding 124,684 125,196 116,009 124,838
On August 23, 2001, Apache completed the acquisition of properties located
in Texas, Oklahoma and New Mexico with estimated proved reserves of 9.2 MMboe as
of the acquisition date for approximately $42.5 million in cash and the
assumption of certain liabilities, representing the fair value of derivative
instruments of $9.2 million, subject to normal post closing adjustments.
Divestitures - During the nine months ended September 30, 2001, Apache sold
66.4 MMboe of proved reserves from largely marginal United States and Canadian
properties, collecting cash of $233.3 million.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Apache periodically enters into commodity derivatives contracts to manage
its exposure to oil and gas price volatility. Commodity derivatives contracts,
which are usually placed with major financial institutions that the Company
believes are minimal credit risks, may take the form of futures contracts, swaps
or options. The oil and gas reference prices upon which these commodity
derivatives contracts are based, reflect various market indices that have a high
degree of historical correlation with actual prices received by the Company.
Realized gains and losses from the Company's price risk management activities
are recognized in oil and gas production revenues when the associated production
occurs and the resulting cash flows are reported as cash flows from operating
activities.
Effective January 1, 2001, Apache adopted 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 all derivative instruments (including derivative instruments
embedded in other contracts), as defined, be recorded in the balance sheet as
either an asset or liability measured at fair value and
7
requires that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Hedge accounting treatment allows
unrealized gains and losses to be deferred in other comprehensive income (for
the effective portion of the hedge) until such time as the forecasted
transaction occurs, and requires that a company formally document, designate,
and assess the effectiveness of derivative instruments that receive hedge
accounting treatment. Upon adoption, Apache formally documented and designated
all hedging relationships and verified that its hedging instruments are
effective in offsetting changes in actual prices received by the Company. Such
effectiveness is monitored at least quarterly and any ineffectiveness is
reported in other revenues (losses) in the statement of consolidated operations.
Apache's derivative positions break down into three general categories:
advances from gas purchasers, Apache hedging activity and derivatives inherited
as part of the Fletcher and August 23, 2001 acquisitions. The carrying values at
transition and September 30, 2001 are summarized below:
TRANSITION SEPTEMBER 30,
JANUARY 1, 2001 2001
--------------- -------------
(In thousands)
Advances from Gas Purchasers:
Derivatives - asset $ 121,453 $ 53,165
Embedded derivatives - liability (121,453) (53,165)
Apache Hedging Activity:
Fixed-price swaps $ (30,872) $ (11,548)
Zero-cost collars - time value (35,083) 23,884
Zero-cost collars - intrinsic value (50,274) 22,787
--------------- -------------
$ (116,229) $ 35,123
=============== =============
ACQUISITION
CLOSING DATE SEPTEMBER 30,
MARCH 27, 2001 2001
-------------- -------------
(In thousands)
Fletcher Acquisition:
Derivatives $ (89,401) $ (16,096)
Fixed-price physical contracts (14,085) (2,109)
-------------- -------------
$ (103,486) $ (18,205)
============== =============
ACQUISITION
CLOSING DATE SEPTEMBER 30,
AUGUST 23, 2001 2001
--------------- -------------
(In thousands)
August 23, 2001 Acquisition:
Derivatives $ (9,156) $ (4,520)
=============== =============
On the transition date, January 1, 2001, Apache recognized a derivative
asset of $121.5 million reflecting the fair value of gas price swaps entered
into in connection with certain advance payments received from gas purchasers in
1998 and 1997. Apache also recognized a derivative liability of $121.5 million
as an embedded derivative in the contracts under which the advance payments were
received. The liability reflects the obligation to deliver gas at market prices
in excess of the contractual prices determined at the inception of these
transactions.
The balance of Apache's derivative instruments relate to cash flow hedges
on forecasted oil and gas sales, primarily entered into as the result of
Apache's acquisition hedging strategy. On the transition date, the fair value of
these derivative instruments represented a net liability of $116.2 million. The
time value of zero-cost collars at September 30, 2001 was $23.9 million.
In connection with the Fletcher acquisition, Apache assumed liabilities for
derivative instruments (fixed-price swaps and put options) and fixed-price
physical contracts entered into by Fletcher. The $103.5 million fair value on
the closing date was recorded as a cost of the Fletcher acquisition (see Note
1).
8
In connection with the acquisition completed August 23, 2001, Apache
assumed liabilities for derivative instruments (fixed-price swaps and put
options) with a fair value of $9.2 million on the closing date, which was
recorded as a cost of the acquisition (see Note 1).
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:
GROSS AFTER-TAX
---------- ---------
(In thousands)
Cumulative effect of change in accounting principle $ (116,229) $ (71,286)
Reclassification of net realized losses into earnings 70,288 42,304
Net change in derivative fair value 117,973 70,899
----------- ---------
Accumulated other comprehensive income related
to derivatives at September 30, 2001 $ 72,032 $ 41,917
=========== =========
In early November 2001, due to credit issues surrounding the derivative
market, Apache began to close out substantially all of its hedging positions.
The Company does not expect to recognize a material gain or loss from the
expected proceeds received in connection with termination of these positions.
3. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2001 2000
--------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- --------- ----------- ---------- --------- -----------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock $ 151,925 124,719 $ 1.22 $ 197,340 120,197 $ 1.64
=========== ===========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other -- 721 --
1,221
Series C Preferred Stock 3,488 5,676 3,488 5,676
--------- --------- ---------- ---------
DILUTED:
Income attributable to common stock,
including assumed conversions $ 155,413 131,116 $ 1.19 $ 200,828 127,094 $ 1.58
========= ========= =========== ========== ========= ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2001 2000
--------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- --------- ----------- ---------- --------- -----------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock $ 630,086 124,684 $ 5.05 $ 440,857 116,009 $ 3.80
=========== ===========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other -- 981 -- 943
Series C Preferred Stock 10,464 5,676 10,820 5,676
--------- --------- ---------- ---------
DILUTED:
Income attributable to common stock,
including assumed conversions $ 640,550 131,341 $ 4.88 $ 451,677 122,628 $ 3.68
========= ========= =========== ========== ========= ==========
9
4. DEBT
The Company's 9.25 percent notes due June 2002 are classified as long-term
debt in the accompanying consolidated balance sheet as the Company has the
ability and intent to refinance such amount on a long-term basis through either
the issuance of commercial paper or borrowing under the U.S. portion of the
global credit facility and the 364-day revolving credit facility.
5. STOCK DIVIDEND
On September 13, 2001, the Company's Board of Directors declared a 10 percent
stock dividend payable on January 21, 2002 to shareholders of record on December
31, 2001. No fractional shares will be issued and payments will be made in lieu
of fractional shares. In connection with the dividend, a reclassification was
made to transfer $545 million from retained earnings to additional
paid-in-capital in the accompanying consolidated balance sheet as of September
30, 2001. The following pro forma information shows the effect on the Company's
consolidated results of operations as if the stock dividend were made on January
1, 2000.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
----------------------- ------------------------- ----------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(In thousands, except per share data)
Weighted
average
shares
outstanding:
Basic 124,719 137,190 124,684 137,152 120,197 132,217 116,009 127,610
Diluted 131,116 144,228 131,341 144,475 127,094 139,804 122,628 134,890
Net income per
common share:
Basic $ 1.22 $ 1.11 $ 5.05 $ 4.59 $ 1.64 $ 1.49 $ 3.80 $ 3.45
Diluted 1.19 1.08 4.88 4.43 1.58 1.44 3.68 3.35
6. MINORITY INTEREST
In August 2001, Apache entered into a series of financing transactions,
described below, to raise a total of $440.7 million for investments, to pay down
existing debt and increase financial flexibility.
Apache contributed interests in various fields valued at $923 million to
new subsidiaries in connection with the financing transactions. Additionally, on
August 7, 2001, Apache purchased $116.7 million in U.S. Government Agency Notes,
maturing in October 2002, which were contributed to the subsidiaries. Unrelated
institutional investors contributed $443 million ($440.7 million, net of
issuance costs) to the various subsidiaries in exchange for preferred stock of
the subsidiaries and a limited partner interest in one of the entities. The
third party investors are entitled to receive a weighted average return of 123
basis points above the prevailing LIBOR interest rate. The preferred and limited
partner interests are repayable from the assets of the subsidiaries with limited
recourse to Apache.
The assets, liabilities and operations of the subsidiaries are included in
Apache's consolidated financial statements at historical costs, with the
preferred and limited partner interests of the subsidiaries reflected as a
minority interest. The U.S. Government Agency Notes are accounted for as
"held-to-maturity" securities shown as long-term investments in the accompanying
balance sheet.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes
accounting and reporting standards discontinuing goodwill amortization and
requiring a periodic review for impairments. Apache's goodwill represents the
excess of the purchase price over the estimated fair value of the assets
acquired and liabilities assumed in the Fletcher and Repsol acquisitions (see
Note 1). The goodwill currently is being amortized on a straight-line basis over
20 years. Apache will continue to record amortization of approximately $2.5
million per quarter through December 31, 2001. The
10
Company will adopt SFAS No. 142 on January 1, 2002. No impairment of goodwill is
currently anticipated; however, the Company will continue to assess
recoverability of goodwill on an ongoing basis.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." The statement requires entities to record the fair value of legal
obligations associated with the retirement of tangible long-lived assets in the
period in which it is incurred. When the liability is initially recorded, the
entity increases the carrying amount of the related long-lived asset. Over time,
accretion of the liability is recognized each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, the entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, with earlier adoption encouraged. The
Company is currently assessing the impact of adopting SFAS No. 143 on its
financial condition and results of operations and has not determined the timing
of adoption.
8. SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING ACTIVITIES
In January 2000, the Company acquired producing properties formerly owned
by a subsidiary of Repsol for cash, plus assumed liabilities of $29.8 million.
In March 2001, the Company acquired substantially all of Repsol's oil and
gas concession interests in Egypt for cash and the assumption of certain
non-cash liabilities. The accompanying financial statements include the non-cash
amounts detailed in Note 1.
In March 2001, the Company acquired subsidiaries of Fletcher for cash, 1.64
million restricted shares of common stock and the assumption of certain non-cash
liabilities. The accompanying financial statements include the non-cash amounts
detailed in Note 1.
In August 2001, the Company acquired properties located in Texas, Oklahoma
and New Mexico for cash and the assumption of certain non-cash liabilities. The
accompanying financial statements include the non-cash amounts detailed in Note
1.
CASH PAID FOR INTEREST AND TAXES
The following table provides supplemental disclosure of cash flow
information:
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2001 2000
------------- -------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 80,501 $ 78,643
Income taxes (net of refunds) 149,996 95,358
11
9. BUSINESS SEGMENT INFORMATION
Apache has five reportable segments which are primarily in the business of
natural gas and crude oil exploration and production. The Company evaluates
performance based on profit or loss from oil and gas operations before income
and expense items incidental to oil and gas operations and income taxes.
Apache's reportable segments are managed separately because of their geographic
locations. Financial information by operating segment is presented below:
OTHER
UNITED STATES CANADA EGYPT AUSTRALIA INTERNATIONAL TOTAL
------------- --------- --------- --------- ------------- -----------
(In thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Oil and Gas Production Revenues .......... $ 1,211,714 $ 492,050 $ 357,786 $ 195,088 $ -- $ 2,256,638
============= ========== ========== ========= ============= ===========
Operating Income (Loss) (1) (2) .......... $ 689,412 $ 279,710 $ 230,351 $ 105,968 $ (65,031) $ 1,240,410
============= ========== ========== ========= =============
Other Income (Expense):
Other revenues (losses) ............... (8,628)
Administrative, selling and other ..... (66,363)
Minority interest ..................... (3,189)
Financing costs, net .................. (91,601)
-----------
Income Before Income Taxes ............... $ 1,070,629
===========
Total Assets ............................. $ 4,372,952 $2,183,618 $1,505,507 $ 878,381 $ 126,277 $ 9,066,735
============= ========== ========== ========= ============= ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Oil and Gas Production Revenues .......... $ 893,563 $ 217,611 $ 277,646 $ 169,046 $ -- $ 1,557,866
============= ========== ========== ========= ============= ===========
Operating Income (Loss) (1) .............. $ 490,044 $ 128,846 $ 195,042 $ 99,011 $ (36) $ 912,907
============= ========== ========== ========= =============
Other Income (Expense):
Equity in income of affiliates ........ 1,084
Other revenues (losses) ............... (5,833)
Administrative, selling and other ..... (49,331)
Financing costs, net .................. (82,670)
-----------
Income Before Income Taxes ............... $ 776,157
===========
Total Assets ............................. $ 3,848,036 $ 923,975 $ 956,424 $ 833,427 $ 170,697 $ 6,732,559
============= ========== ========== ========= ============= ===========
(1) Operating income consists of oil and gas production revenues less
depreciation, depletion and amortization (DD&A) expense, international
impairments, lease operating costs, and severance and other taxes.
(2) During the second quarter of 2001, the Company recorded a nonrecurring
$65 million impairment ($41 million after-tax) of unproved property
costs in Poland and China.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Record natural gas production and strong oil production both contributed to
solid third quarter and nine-month results, mitigating the impact of declining
commodity prices. On a barrel-of-oil-equivalent (Boe) basis, third quarter daily
production increased 89,483 barrels of oil equivalent per day (Boe/d) to a
record 359,979 Boe/d, 33 percent higher than the third quarter of last year.
Following are the 2001 third quarter and nine-month highlights:
o Natural gas production rose to a record 1.2 billion cubic feet per day
(Bcf/d) in the third quarter, slightly exceeding the record setting second
quarter of 2001 and 35 percent above the prior-year period. Third quarter
oil production increased 37,496 barrels of oil per day (Bbl/d) to 153,369
Bbl/d, 32 percent above the year-ago period. For the nine-month period,
production rates of 1.1 Bcf/d and 143,311 Bbl/d were 40 percent and 25
percent ahead of 2000, respectively.
o Year-to-date income attributable to common stock of $630.1 million ($5.05
per basic common share) exceeded the prior year by $189.2 million, or 43
percent, while third quarter earnings of $151.9 million declined 23 percent
from the comparable period. Record production mitigated the impact of a
$.90 per thousand cubic feet (Mcf) decline in gas price realizations and a
$4.96 per barrel decline in oil prices from third quarter 2000.
o Net cash provided by operating activities increased $588.4 million, or 61
percent, to $1.5 billion from the $1.0 billion generated during the first
nine months of 2000.
Commodity Prices - Apache's third quarter realized oil price declined $4.96
to $24.15 per barrel from $29.11 in the third quarter of 2000, decreasing
revenues by $52.9 million. Third quarter natural gas price realizations declined
$.90 to $2.80 per Mcf from $3.70 per Mcf in the year-ago period, negatively
impacting revenues by $72.6 million. For the nine-month period oil price
realizations decreased $1.85 to $25.01 per barrel from $26.86 in 2000,
decreasing revenues by $58 million. Year-to-date natural gas price realizations
of $4.05 per Mcf exceeded the prior year by $.92, positively impacting revenues
by $201.2 million.
Production - Oil production increased 25 percent during the first nine
months of 2001 when compared to the same period last year, which positively
impacted revenues by $195.2 million. The improvement was primarily the result of
production from acquisitions completed since the first half of 2000, completion
of the Gipsy/North Gipsy development in Australia and first production from the
Legendre field in Australia. Gas production increased 40 percent during the
first nine months of 2001 compared to the same period last year, positively
impacting revenues by $350.3 million. The increase was primarily attributable to
production from the acquisitions mentioned above and strong results from the
Ladyfern area in Canada.
RESULTS OF OPERATIONS
Apache reported 2001 third quarter income attributable to common stock of
$151.9 million compared to income of $197.3 million in the prior year. Basic net
income per common share of $1.22 for the third quarter of 2001, decreased 26
percent from the $1.64 reported in 2000. The variance to the prior-year quarter
was attributable to lower commodity prices, which offset higher volumes, and
higher DD&A expense and lease operating costs.
For the first nine months of 2001, income attributable to common stock of
$630.1 million, or $5.05 per basic common share, compared to $440.9 million, or
$3.80 per share, in the comparable year-earlier period. The increase resulted
primarily from increased oil and gas production revenues partially offset by
higher DD&A expense, lease operating costs, severance and other taxes and
impairments of unproved property costs in Poland and China.
For the third quarter of 2001, total revenues increased five percent to
$652.4 million compared to $618.5 million in 2000. The increase was the result
of a 35 percent increase in natural gas production, a 32 percent increase in oil
production, partially offset by a 24 percent decrease in the average realized
price for natural gas and a 17 percent decrease in the average realized price
for oil. Crude oil, including natural gas liquids, contributed 54 percent and
natural gas contributed 46 percent of oil and gas production revenues during the
third quarter of 2001.
13
For the first nine months of 2001, total revenues increased 45 percent to
$2.2 billion compared to $1.6 billion for the same period in 2000. Revenues from
oil and gas production increased 45 percent over the same period in 2000, with
crude oil, including natural gas liquids, contributing 45 percent and natural
gas contributing 55 percent of oil and gas production revenues. The increase in
oil and gas production revenues was the result of a 40 percent increase in gas
production, a 29 percent increase in the average realized gas price and a 25
percent increase in oil production.
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
2001 2000 (DECREASE) 2001 2000 (DECREASE)
---------- --------- ---------- ---------- --------- ----------
Natural Gas Volume - Mcf per day:
United States 618,729 571,728 8% 619,887 511,152 21%
Canada 341,951 134,363 154% 284,667 130,651 118%
Australia 122,450 121,833 1% 119,507 106,573 12%
Egypt 104,444 49,801 110% 91,008 47,281 92%
---------- --------- ---------- ---------
Total 1,187,574 877,725 35% 1,115,069 795,657 40%
========== ========= ========== =========
Average Natural Gas price - Per Mcf:
United States $ 2.73 $ 4.22 (35)% $ 4.61 $ 3.46 33%
Canada 3.21 3.28 (2)% 4.11 2.77 48%
Australia 1.20 1.32 (9)% 1.21 1.38 (12)%
Egypt 3.68 4.66 (21)% 3.80 4.56 (17)%
Total 2.80 3.70 (24)% 4.05 3.13 29%
Oil Volume - Barrels per day:
United States 56,831 57,820 (2)% 58,244 55,276 5%
Canada 26,568 16,108 65% 25,936 14,599 78%
Australia 27,162 16,854 61% 21,684 15,668 38%
Egypt 42,808 25,091 71% 37,447 28,758 30%
---------- --------- ---------- ---------
Total 153,369 115,873 32% 143,311 114,301 25%
========== ========= ========== =========
Average Oil price - Per barrel:
United States $ 25.49 $ 29.15 (13%) $ 26.13 $ 26.83 (3)%
Canada 19.92 22.91 (13%) 20.35 21.88 (7)%
Australia 24.77 33.32 (26%) 26.27 29.98 (12)%
Egypt 24.60 30.17 (18%) 25.75 27.74 (7)%
Total 24.15 29.11 (17%) 25.01 26.86 (7)%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States 7,335 7,014 5% 7,599 5,567 37%
Canada 1,346 1,321 2% 1,151 1,292 (11)%
---------- --------- ---------- ---------
Total 8,681 8,335 4% 8,750 6,859 28%
========== ========= ========== =========
Average NGL Price - Per barrel:
United States $ 15.79 $ 19.18 (18)% $ 18.18 $ 18.42 (1)%
Canada 15.97 19.88 (20)% 20.53 16.92 21%
Total 15.81 19.29 (18)% 18.49 18.14 2%
14
THIRD QUARTER 2001 REVENUES COMPARED TO 2000
Natural gas sales for the third quarter of 2001 totaled $305.6 million,
slightly more than the third quarter of 2000. Average realized natural gas
prices decreased 24 percent, negatively impacting revenues by $72.6 million. The
net result of derivative instruments increased the Company's realized gas price
by $.18 per Mcf during the third quarter of 2001 and $.06 per Mcf for the same
period in 2000.
Natural gas production increased 309.8 million cubic feet per day (MMcf/d),
or 35 percent, on a worldwide basis, favorably impacting revenues by $79.7
million. Production from properties acquired from Phillips in December 2000 and
Fletcher in March 2001, and strong results from the Ladyfern area were the
primary contributors to the 207.6 MMcf/d, or 154 percent, gas production
increase in Canada. The U.S. increased 47 MMcf/d primarily the result of
production from properties acquired from Occidental in August 2000. Egypt
increased 54.6 MMcf/d, or 110 percent, due to production from properties
acquired from Repsol in March 2001.
The Company's crude oil sales for the third quarter of 2001 totaled $340.7
million, a 10 percent increase from the third quarter of 2000, due to increased
production volumes. Average realized oil prices decreased $4.96 per barrel,
negatively impacting revenues by $52.9 million. Realized losses from hedging
positions negatively impacted the Company's realized oil price by $.47 per
barrel during the third quarter of 2001 and $1.88 per barrel in the third
quarter of 2000.
Oil production increased 32 percent compared to the prior year, favorably
impacting revenues by $83.3 million. Canada increased 10,460 Bbl/d and Egypt
increased 17,717 Bbl/d, primarily due to production from properties acquired
from Phillips, Fletcher and Repsol, as mentioned above. Completion of the
Gipsy/North Gipsy development and first production from the Legendre field were
the primary contributors to the 10,308 Bbl/d increase in Australia.
Revenue from the sale of natural gas liquids totaled $12.6 million for the
third quarter of 2001, compared to $14.8 million for the third quarter of 2000
in response to an 18 percent drop in realized prices.
YEAR-TO-DATE 2001 REVENUES COMPARED TO 2000
Natural gas sales for the first nine months of 2001 of $1.2 billion
increased $551.5 million, or 81 percent, from the same period of 2000. Average
realized natural gas prices increased 29 percent, positively affecting revenues
by $201.2 million. U.S. natural gas production, which comprised 56 percent of
the Company's worldwide gas production, sold at an average price of $4.61 per
Mcf, 33 percent higher than in 2000, positively impacting natural gas revenues
by $161.9 million. The net result of derivative instruments increased the
Company's realized gas price by a $.04 per Mcf during the first nine months of
2001 and 2000.
Production from properties acquired from Phillips and Fletcher and strong
results from the Ladyfern area were the primary contributors to the 154 MMcf/d
gas production increase in Canada. The U.S. increased 108.7 MMcf/d due to the
production from properties acquired from Collins & Ware and Occidental, and
Egypt increased 43.7 MMcf/d due to producing properties acquired from Repsol.
For the first nine months of 2001, oil revenues of $978.3 million,
increased $137.2 million, or 16 percent, from the same period in 2000 due to
higher production. On a worldwide basis, average oil prices decreased $1.85 per
barrel, or seven percent, to $25.01 per barrel negatively impacting oil revenues
by $58 million. Realized losses from hedging positions negatively impacted the
Company's realized oil price by $.57 per barrel during the first nine months of
2001 and $1.83 per barrel during the first nine months of 2000.
Oil production increased 11,337 Bbl/d in Canada, 2,968 Bbl/d in the U.S.
and 8,689 Bbl/d in Egypt, primarily driven by production from properties
acquired from Phillips, Fletcher, Repsol, Collins & Ware and Occidental as
mentioned above. Completion of the Gipsy/North Gipsy development and first
production from the Legendre field were the primary contributors to the 6,016
Bbl/d increase in Australia.
Natural gas liquids revenues for the first nine months of 2001 of $44.2
million increased $10.1 million, or 30 percent, from the same period in 2000.
Natural gas liquids prices increased by $.35 per barrel, or two percent, and
natural gas liquids production increased 1,891 barrels per day, or 28 percent.
15
EXPENSES
The Company's DD&A expense for the third quarter and first nine months of
2001 increased $63.1 million and $175.8 million, respectively, over the
comparable periods of 2000. Full cost DD&A expense increased $.23 per Boe, from
$5.82 per Boe in the third quarter of 2000 to $6.05 per Boe in 2001. For the
nine months ended September 30, 2001, the full cost DD&A rate increased $.31 per
Boe, from $5.70 per Boe to $6.01 per Boe. For the first nine months of 2001, the
full cost DD&A rate for the U.S. increased $.44 per Boe from $6.13 per Boe to
$6.57 per Boe, primarily the result of the acquisition of the Occidental
properties in August 2000 and rising U.S. drilling and finding costs. The
acquisition of the Phillips properties in December 2000 carry higher DD&A costs,
which helped push the full cost DD&A rate in Canada from $5.55 per Boe to $5.87
per Boe.
During the second quarter of 2001, the Company recorded a nonrecurring $65
million impairment ($41 million after-tax) of unproved property costs in Poland
and China.
Lease operating expense (LOE) for the third quarter and first nine months
of 2001 increased $36.8 million and $108.4 million, respectively, over the
comparable periods of 2000. On an equivalent barrel basis, LOE increased $.45
per Boe to $3.12 per Boe in the third quarter and $.52 per Boe to $3.20 per Boe
in the first nine months of 2001 compared to the same periods in the prior year.
The higher costs were partially attributable to the acquisition of Canadian and
offshore oil properties, which carried a higher LOE per Boe rate than the
Company's base production. Increased workover activities in the U.S. and Canada
and rising fuel cost for electric power also contributed to the increase. The
workovers accelerated production, allowing Apache to maximize the benefits of
high oil and gas prices. Severance and other taxes increased $.6 million in the
third quarter and $22.1 million in the first nine months of 2001 primarily due
to the impact of higher oil and gas prices on severance taxes, which generally
are based on a percentage of oil and gas production revenues. Also contributing
to the increase were higher effective production tax rates due to a loss of
incentives in Oklahoma and an increase in Canadian Large Corporation Tax due to
the added production from the Fletcher acquisition properties.
G&A expense in the third quarter and first nine months of 2001 increased
$4.7 million or 26 percent, and $17 million or 35 percent, respectively, from a
year ago. The Company's overall infrastructure was enlarged to properly handle
increased responsibilities associated with recent producing property
acquisitions. On an equivalent barrel basis, G&A expenses decreased $.04, to
$.69 per Boe, for the third quarter of 2001 as compared to $.73 per Boe for the
same period in 2000.
Net financing costs for the third quarter remained flat, while first nine
months of 2001 increased $8.9 million, or 11 percent, compared to a year ago.
This increase is primarily due to higher gross interest expense, the result of a
higher average outstanding debt balance related to acquisition activity in the
second half of 2000 and the first quarter of 2001.
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.
In early November 2001, due to credit issues surrounding the derivative
market, Apache began to close out substantially all of its hedging positions.
The Company does not expect to recognize a material gain or loss from the
expected proceeds received in connection with termination of these positions.
INTEREST RATE RISK
The Company considers its interest rate risk exposure to be minimal as a
result of fixed interest rates on approximately 67 percent of the Company's
debt. At September 30, 2001, total debt included $768 million of floating-rate
debt. As a result, Apache's annual interest cost in 2001 will fluctuate based on
short-term interest rates
16
on approximately 33 percent of it total debt outstanding at September 30, 2001.
The Company did not have any open derivative contracts relating to interest
rates at September 30, 2001.
Minority Interest - At September 30, 2001, the Company's minority interest
included $443 million in contributions by unrelated institutional investors. The
third party investors are entitled to receive a weighted average return of 123
basis points above the prevailing LIBOR interest rate. As a result, Apache's
annual minority interest cost will fluctuate based on short-term LIBOR interest
rates.
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, payment of dividends and capital obligations for affiliated
ventures. The Company may also elect to use cash flow to pay down debt. 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 cannot accurately
predict future oil and gas prices.
Capital Expenditures - A summary of oil and gas capital expenditures during
the first nine months of 2001 and 2000 is presented below:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
----------- ------------
(In thousands)
Exploration and development:
United States $ 567,865 $ 347,783
Canada 326,571 93,781
Egypt 86,846 66,518
Australia 67,167 42,902
Other international 7,861 14,289
----------- ------------
1,056,310 565,273
Capitalized Interest 44,388 44,852
----------- ------------
Total $ 1,100,698 $ 610,125
=========== ============
Acquisitions of oil and gas properties $ 817,849 $ 883,794
=========== ============
On March 22, 2001, Apache completed the acquisition of substantially all of
Repsol's oil and gas concession interests in Egypt for approximately $446.9
million in cash, subject to normal post-closing adjustments. The properties
include interests in seven Western Desert concessions and have estimated proved
reserves of 66 MMboe as of the acquisition date. The Company already holds
interests in five of the seven concessions. The transaction was funded through
the issuance of commercial paper.
On March 27, 2001, Apache completed the acquisition of subsidiaries of
Fletcher for approximately $465.0 million in cash and 1.64 million restricted
shares of Apache common stock (valued at $61.04 per share), subject to normal
post closing adjustments. The transaction included properties located in
Canada's Western Sedimentary Basin and in Argentina and have estimated proved
reserves of 120.8 MMboe as of the acquisition date. Apache assumed a liability
of $103.5 million representing the fair value of derivative instruments and
fixed-price commodity contracts entered into by Fletcher. The cash portion of
the acquisition was funded through the issuance of commercial paper, as well as
advances under the Canadian portion of the global credit facility.
CAPITAL RESOURCES AND LIQUIDITY
Net Cash Provided by Operating Activities - Apache's net cash provided by
operating activities during the first nine months of 2001 totaled $1.5 billion,
an increase of 61 percent from $961.1 million in the first nine months of
17
2000. This increase was primarily due to higher oil and gas revenues generated
from properties acquired since the first half of 2000 and higher realized gas
prices as compared to last year.
Liquidity - The Company had $67.9 million in cash and cash equivalents on
hand at September 30, 2001, up from $37.2 million at December 31, 2000. Apache's
ratio of current assets to current liabilities was 1.14 at September 30, 2001
and December 31, 2000.
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 the foreseeable future. As of September 30, 2001, Apache's available
borrowing capacity under its global credit facility and 364-day credit facility
was $771 million.
FUTURE TRENDS
Apache's strategy is to increase its oil and gas reserves, production, cash
flow and earnings through a balanced growth program that involves:
o Exploiting our existing asset base through workovers and development wells to
increase productive capacity.
o Drilling exploration wells to add new reserves.
o Acquiring properties to which we can add value.
EXPLOITING OUR EXISTING ASSET BASE THROUGH WORKOVERS AND DEVELOPMENT WELLS TO
INCREASE PRODUCTIVE CAPACITY
Apache seeks to maximize the value of our existing asset base by conducting
workovers and development drilling within known limits of previously recognized
reservoirs to increase productive capacity and/or the efficiency or rate of
existing fields.
DRILLING EXPLORATION WELLS TO ADD NEW RESERVES
Apache seeks to add new reserves through drilling exploratory wells in all
our regions. Higher risk, higher reward exploration is conducted in Canada and
select international core areas. Our international investments and exploration
activities are a significant component of our long-term growth strategy. They
complement our United States operations, which are more development oriented.
ACQUIRING PROPERTIES TO WHICH WE CAN ADD VALUE
Apache seeks to purchase reserves at reasonable prices by generally
avoiding auction processes where we are competing against other buyers. Our aim
is to follow each acquisition with a cycle of reserve enhancement, property
consolidation and cash flow acceleration, facilitating asset growth and debt
reduction.
A critical component in implementing our three-pronged growth strategy is
maintenance of significant financial flexibility. We are committed to preserving
a strong balance sheet and credit position that gives us the foundation required
to pursue our growth initiatives.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent upon certain events, risks and uncertainties that
may be outside the Company's control, and which could cause actual results to
differ materially from those anticipated. Some of these include, but are not
limited to, the market prices of oil and gas, economic and competitive
conditions, inflation rates, legislative and regulatory changes, financial
market conditions, political and economic uncertainties of foreign governments,
future business decisions, and other uncertainties, all of which are difficult
to predict.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and the
timing of development expenditures. The total amount or timing of
18
actual future production may vary significantly from reserves and production
estimates. The drilling of exploratory wells can involve significant risks,
including those related to timing, success rates and cost overruns. Lease and
rig availability, complex geology and other factors can affect these risks.
Although Apache makes use of futures contracts, swaps, options and fixed-price
physical contracts to mitigate risk, fluctuations in oil and gas prices, or a
prolonged continuation of low prices, may substantially adversely affect the
Company's financial position, results of operations and cash flows.
19
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, 2000 (filed with the SEC on March 23,
2001) is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.01 - Apache Corporation 1990 Stock Incentive Plan, as
amended and restated September 13, 2001.
10.02 - Apache Corporation 1995 Stock Option Plan, as
amended and restated September 13, 2001.
10.03 - Apache Corporation 1996 Performance Stock Option
Plan, as amended and restated September 13, 2001.
10.04 - Apache Corporation 1998 Stock Option Plan, as
amended and restated September 13, 2001.
10.05 - Apache Corporation 2000 Stock Option Plan, as
amended and restated September 13, 2001.
12.1 - Statement of Computation of Ratios of Earnings to
Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends
(b) Reports filed on Form 8-K
The following current reports on Form 8-K were filed by Apache
during the fiscal quarter ended September 30, 2001:
None.
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