UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ____________ to _______________
Commission File Number 1-4300
APACHE CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
------------------------------ ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central 77056-4400
2000 Post Oak Boulevard, Houston, TX -----------
------------------------------------ (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of March 31, 2005
...........328,188,619
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED MARCH 31,
------------------------------------------
2005 2004
--------------- ---------------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues...................................... $ 1,626,649 $ 1,152,754
Other................................................................ 35,639 (2,815)
--------------- ---------------
1,662,288 1,149,939
--------------- ---------------
OPERATING EXPENSES:
Depreciation, depletion and amortization............................. 339,413 286,228
Asset retirement obligation accretion................................ 13,159 10,761
Lease operating costs................................................ 233,171 208,236
Gathering and transportation costs................................... 23,780 19,634
Severance and other taxes............................................ 72,186 8,948
General and administrative........................................... 50,411 46,057
Financing costs:
Interest expense.................................................. 45,266 40,549
Amortization of deferred loan costs............................... 658 567
Capitalized interest.............................................. (13,409) (13,650)
Interest income................................................... (927) (320)
--------------- ---------------
763,708 607,010
--------------- ---------------
INCOME BEFORE INCOME TAXES.............................................. 898,580 542,929
Provision for income taxes........................................... 338,097 196,604
--------------- ---------------
NET INCOME.............................................................. 560,483 346,325
Preferred stock dividends............................................ 1,420 1,420
--------------- ---------------
INCOME ATTRIBUTABLE TO COMMON STOCK..................................... $ 559,063 $ 344,905
=============== ===============
NET INCOME PER COMMON SHARE:
Basic................................................................ $ 1.70 $ 1.06
=============== ===============
Diluted.............................................................. $ 1.67 $ 1.05
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED
MARCH 31,
-------------------------------
2005 2004
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 560,483 $ 346,325
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................................ 339,413 286,228
Asset retirement obligation accretion................................... 13,159 10,761
Provision for deferred income taxes..................................... 98,187 82,143
Other................................................................... 11,826 11,269
Changes in operating assets and liabilities:
(Increase) decrease in receivables...................................... (177,175) (63,969)
(Increase) decrease in advances to oil and gas ventures and other....... (17,410) (2,093)
(Increase) decrease in product inventory................................ 4,697 5,894
(Increase) decrease in deferred charges and other....................... (7,665) (7,775)
Increase (decrease) in payables......................................... 6,952 20,391
Increase (decrease) in accrued expenses................................. 19,908 (27,362)
Increase (decrease) in advances from gas purchasers..................... (5,692) (4,833)
Increase (decrease) in deferred credits and noncurrent liabilities...... (10,511) (4,647)
------------- -------------
Net cash provided by operating activities........................... 836,172 652,332
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................................... (790,350) (469,833)
Other, net.................................................................... 32,448 (9,509)
------------- -------------
Net cash used in investing activities............................... (757,902) (479,342)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................................................... 6,862 251
Payments on long-term debt.................................................... (63,530) (135,300)
Dividends paid................................................................ (27,631) (20,898)
Common stock activity......................................................... 7,771 7,534
Treasury stock activity, net.................................................. (2,085) 3,746
Cost of debt and equity transactions.......................................... (78) (673)
Other......................................................................... 10,679 -
------------- -------------
Net cash provided by/(used in) financing activities................. (68,012) (145,340)
------------- -------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............................. 10,258 27,650
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 111,093 33,503
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 121,351 $ 61,153
============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
--------------- ---------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 121,351 $ 111,093
Restricted cash for acquisition settlement........................... 21,052 -
Receivables, net of allowance........................................ 1,116,608 939,736
Inventories.......................................................... 172,537 157,293
Drilling advances.................................................... 156,418 82,889
Prepaid assets and other............................................. 1,041 57,771
--------------- ---------------
1,589,007 1,348,782
--------------- ---------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties................................................. 20,611,094 19,933,041
Unproved properties and properties under
development, not being amortized............................... 854,541 777,690
Gas gathering, transmission and processing facilities................ 1,059,240 966,605
Other................................................................ 283,291 284,069
--------------- ---------------
22,808,166 21,961,405
Less: Accumulated depreciation, depletion and amortization.......... (8,438,713) (8,101,046)
--------------- ---------------
14,369,453 13,860,359
--------------- ---------------
OTHER ASSETS:
Goodwill, net........................................................ 189,252 189,252
Deferred charges and other........................................... 109,356 104,087
--------------- ---------------
$ 16,257,068 $ 15,502,480
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
--------------- ---------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 567,571 $ 542,074
Accrued operating expense............................................ 68,390 80,741
Accrued exploration and development.................................. 453,754 341,063
Accrued compensation and benefits.................................... 72,242 83,636
Accrued interest..................................................... 45,707 32,575
Accrued income taxes................................................. 99,142 78,042
Derivative instruments............................................... 127,827 21,273
Other................................................................ 136,814 103,487
--------------- ---------------
1,571,447 1,282,891
--------------- ---------------
LONG-TERM DEBT.......................................................... 2,531,722 2,588,390
--------------- ---------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes......................................................... 2,151,966 2,146,637
Advances from gas purchasers......................................... 85,184 90,876
Asset retirement obligation.......................................... 943,348 932,004
Derivative instruments............................................... 134,209 31,417
Other................................................................ 215,243 225,844
--------------- ---------------
3,529,950 3,426,778
--------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized -
Series B, 5.68% Cumulative Preferred Stock,
100,000 shares issued and outstanding.......................... 98,387 98,387
Common stock, $0.625 par, 430,000,000 shares authorized,
335,378,171 and 334,912,505 shares issued, respectively........... 209,611 209,320
Paid-in capital...................................................... 4,126,127 4,106,182
Retained earnings.................................................... 4,550,164 4,017,339
Treasury stock, at cost, 7,189,552 and 7,455,002 shares,
respectively...................................................... (93,861) (97,325)
Accumulated other comprehensive loss................................. (266,479) (129,482)
--------------- ---------------
8,623,949 8,204,421
--------------- ---------------
$ 16,257,068 $ 15,502,480
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
SERIES B
COMPREHENSIVE PREFERRED COMMON PAID-IN RETAINED
INCOME STOCK STOCK CAPITAL EARNINGS
-------------- ---------- ---------- ------------ -----------
(In thousands)
BALANCE AT DECEMBER 31, 2003.............. $ 98,387 $ 207,818 $ 4,038,007 $ 2,445,698
Comprehensive income (loss):
Net income........................... $ 346,325 - - - 346,325
Commodity hedges, net of income tax
benefit of $3,850.................. (6,417) - - - -
--------------
Comprehensive income................... $ 339,908
==============
Dividends:
Preferred............................ - - - (1,420)
Common ($.06 per share).............. - - - (20,003)
Common shares issued................... - 359 12,287 -
Treasury shares issued, net............ - - 2,206 -
Other.................................. - - 913 -
---------- ---------- ------------ -----------
BALANCE AT MARCH 31, 2004................. $ 98,387 $ 208,177 $ 4,053,413 $ 2,770,600
========== ========== ============ ===========
BALANCE AT DECEMBER 31, 2004.............. $ 98,387 $ 209,320 $ 4,106,182 $ 4,017,339
Comprehensive income (loss):
Net income........................... $ 560,483 - - - 560,483
Commodity hedges, net of income tax
benefit of $82,210................. (136,997) - - - -
--------------
Comprehensive income................... $ 423,486
==============
Dividends:
Preferred............................ - - - (1,420)
Common ($.08 per share).............. - - - (26,238)
Common shares issued................... - 291 19,781 -
Treasury shares issued, net............ - - 98 -
Other.................................. - - 66 -
---------- ---------- ------------ -----------
BALANCE AT MARCH 31, 2005................. $ 98,387 $ 209,611 $ 4,126,127 $ 4,550,164
========== ========== ============ ===========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME (LOSS) EQUITY
---------- ------------- -------------
BALANCE AT DECEMBER 31, 2003.............. $ (105,169) $ (151,943) $ 6,532,798
Comprehensive income (loss):
Net income........................... - - 346,325
Commodity hedges, net of income tax
benefit of $3,850.................. - (6,417) (6,417)
Comprehensive income...................
Dividends:
Preferred............................ - - (1,420)
Common ($.06 per share).............. - - (20,003)
Common shares issued................... - - 12,646
Treasury shares issued, net............ 2,632 - 4,838
Other.................................. - - 913
---------- ------------- -------------
BALANCE AT MARCH 31, 2004................. $ (102,537) $ (158,360) $ 6,869,680
========== ============= =============
BALANCE AT DECEMBER 31, 2004.............. $ (97,325) $ (129,482) $ 8,204,421
Comprehensive income (loss):
Net income........................... - - 560,483
Commodity hedges, net of income tax
benefit of $82,210................. - (136,997) (136,997)
Comprehensive income...................
Dividends:
Preferred............................ - - (1,420)
Common ($.08 per share).............. - - (26,238)
Common shares issued................... - - 20,072
Treasury shares issued, net............ 3,464 - 3,562
Other.................................. - - 66
---------- ------------- -------------
BALANCE AT MARCH 31, 2005................. $ (93,861) $ (266,479) $ 8,623,949
========== ============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation
(Apache or the Company) without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC), and reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the summary of
significant accounting policies and notes included in the Company's most recent
annual report on Form 10-K.
Reclassifications
The financial statement amounts applicable to the March 31, 2004 period
presented in this Form 10-Q will not agree to the amounts originally reported in
the Company's Form 10-Q filed May 10, 2004, because they have been restated to
reflect early adoption of Statement of Financial Accounting Standards No. 123
(revised 2004) "Share-Based Payment" (SFAS No. 123-R) (see Note 6, Stock-Based
Compensation). This restatement did not materially impact our results of
operations. Certain other prior period amounts have also been reclassified to
conform with current year presentations.
1. ACQUISITIONS
2005 ACQUISITIONS
There were no material acquisitions in the three months ended March 31,
2005.
2004 ACQUISITIONS
ANADARKO
In August 2004, Apache signed a definitive agreement to acquire all of
Anadarko Petroleum Corporation's (Anadarko) Gulf of Mexico Outer Continental
Shelf properties (excluding certain deepwater properties) for $537 million,
subject to normal post-closing adjustments, including preferential rights. The
transaction was effective as of October 1, 2004, and included interests in 74
fields covering 232 offshore blocks (approximately 664,000 acres) and 104
platforms. Eighty-nine of the blocks were undeveloped at the time of the
acquisition. Apache operates 49 of the fields comprising approximately 70
percent of the production. Prior to Apache's purchase from Anadarko, Morgan
Stanley Capital Group, Inc. paid Anadarko $646 million to acquire an overriding
royalty interest in these properties. For a complete discussion of this
transaction, please refer to Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Results of Operations,
Acquisitions and Divestitures" and Note 2, Acquisitions and Divestitures of Item
15 in the Company's 2004 Form 10-K.
EXXONMOBIL
During the third quarter of 2004, Apache entered into separate
arrangements with Exxon Mobil Corporation and its affiliates (ExxonMobil) that
provided for property transfers and joint operating and exploration activity
across a broad range of prospective and mature properties in (1) Western Canada,
(2) West Texas and New Mexico, and (3) onshore Louisiana and the Gulf of
Mexico-Outer Continental Shelf. Apache's participation included cash payments of
approximately $347 million, subject to normal post-closing adjustments. For a
complete discussion of these transactions, please refer to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions
and Divestitures of Item 15 in the Company's 2004 Form 10-K.
6
2. HEDGING AND DERIVATIVE INSTRUMENTS
Apache uses a variety of strategies to manage its exposure to fluctuations
in crude oil and natural gas commodity prices. As established by the Company's
hedging policy, Apache enters into cash flow hedges in connection with selected
acquisitions to protect against commodity price volatility. The success of these
acquisitions is significantly influenced by Apache's ability to achieve targeted
production at forecasted prices over the long-term. These hedges effectively
reduce price risk on a portion of the production from the acquisitions.
Apache entered into, and designated as cash flow hedges, various
fixed-price swaps, option collars and puts in conjunction with the ExxonMobil
and Anadarko property acquisitions completed in 2004. The Company also entered
into and designated as cash flow hedges various option collars in conjunction
with a 2003 acquisition of certain South Louisiana properties. These positions
were entered into in accordance with the Company's hedging policy and involved
several counterparties, all of which are rated A+ or better. As of March 31,
2005, the outstanding positions of our natural gas and crude oil cash flow
hedges were as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBtu/Bbl) FLOOR/CEILING (LIABILITY)
---------- -------------------- ------------- ---------------- -----------------
(In thousands)
2005 Gas Collars 23,800,000 $ 5.47 / $ 6.47 $ (34,330)
Gas Fixed-Price Swap 5,682,000 6.22 (9,155)
Oil Collars 2,695,000 33.51 / 41.72 (40,454)
Oil Fixed-Price Swap 266,000 41.29 (4,021)
Oil Put Option 1,155,000 28.00 4
2006 Gas Collars 32,850,000 5.50 / 6.66 (42,312)
Gas Fixed-Price Swap 4,404,000 5.87 (7,917)
Oil Collars 4,307,000 32.07 / 40.66 (61,618)
Oil Fixed-Price Swap 224,000 38.50 (3,487)
Oil Put Option 1,533,000 28.00 103
2007 Gas Collars 24,570,000 5.25 / 6.20 (28,432)
Gas Fixed-Price Swap 1,761,000 5.57 (2,643)
Oil Collars 1,911,000 33.00 / 39.25 (25,270)
Oil Fixed-Price Swap 78,000 36.89 (1,127)
The natural gas and crude oil prices shown in the above table are based on
the NYMEX index and have been valued using actively quoted prices and quotes
obtained from reputable third-party financial institutions. The above prices
represent a weighted average of several contracts entered into and are on a per
million British thermal units (MMBtu) or per barrel (Bbl) basis for gas and oil
derivatives, respectively.
In November 2004, Apache began hedging a portion of its 2005 foreign
currency exchange risk associated with its forecasted Canadian, Australian and
North Sea lease operating expenditures by entering into forward purchase
contracts. The Company purchased a total of 144 million Canadian dollars at an
average exchange rate of .840, 22 million Australian dollars at an average
exchange rate of .763 and 42 million British pounds at an average exchange rate
of 1.853. The forward contracts mature from January through December 2005. The
fair market value of these contracts as of March 31, 2005 was a loss of $243,000
($181,000 after tax). Future changes in market value are recorded in other
comprehensive income (loss) and the fair values of the foreign exchange
contracts are based on quotes from either third-party financial institutions or
published indices.
A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's commodity and foreign currency derivative activities is presented in
the table below:
GROSS AFTER TAX
------------ ------------
(In thousands)
Unrealized loss on derivatives at December 31, 2004.................... $ (33,113) $ (20,732)
Net losses realized into earnings...................................... 6,204 3,892
Net change in derivative fair value.................................... (225,411) (140,889)
------------ ------------
Unrealized loss on derivatives at March 31, 2005....................... $ (252,320) $ (157,729)
============ ============
7
Based on current market prices as of March 31, 2005, the Company recorded
an unrealized loss in other comprehensive income (loss) of $252 million ($158
million after tax), primarily representing commodity derivative hedges. Losses
on the commodity hedges will be realized in future earnings contemporaneously
with the related sales of natural gas and crude oil production applicable to
specific hedges. Gains and losses on the foreign exchange contracts will be
realized in future earnings as the forecasted lease operating expenditures are
incurred. Of the $252 million unrealized loss on derivatives at March 31, 2005,
approximately $120 million ($75 million after tax) applies to the next 12
months; however, these amounts are likely to vary materially as a result of
changes in market conditions. The contracts designated as hedges qualified and
continue to qualify for hedge accounting in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, as amended.
3. DEBT
The Company is currently syndicating a new $450 million revolving bank
credit facility for the U.S., a $150 million revolving bank credit facility for
Australia and a $150 million revolving bank credit facility for Canada, which
will replace the Company's existing credit facilities in the same amounts which
are scheduled to mature in June 2007. The new facilities offer more favorable
pricing and will mature in May 2010. The terms will be substantially the same as
the existing credit facilities.
4. CAPITAL STOCK
On January 26, 2004, Apache was approved for listing on the Nasdaq
National Market (NASDAQ). Apache's common stock is now listed on the NASDAQ as
well as the New York Stock Exchange and the Chicago Stock Exchange.
During the first quarter of 2005 and 2004, Apache paid $26 million and $20
million, respectively, in dividends on its Common Stock. The increase in the
first-quarter 2005 common stock dividends from the amount paid for the same
period last year, reflects both a higher common stock dividend rate and an
increase in common shares outstanding. On September 16, 2004, the Company
announced that its Board of Directors voted to increase the quarterly cash
dividend on its common stock to eight cents per share from six cents per share,
effective with the November 2004 payment. In addition, in both periods, Apache
paid a total of $1.4 million in dividends on its Series B Preferred Stock issued
in August 1998.
5. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED MARCH 31,
--------------------------------------------------------------------
2005 2004
------------------------------- --------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock..... $559,063 328,037 $ 1.70 $344,905 325,003 $ 1.06
======== ========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other................. - 6,001 - 3,011
-------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions.......... $559,063 334,038 $ 1.67 $344,905 328,014 $ 1.05
======== ======= ======== ======== ======= ========
6. STOCK-BASED COMPENSATION
During the fourth quarter of 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123-R, which requires all companies to expense
stock-based compensation. The pronouncement is effective for the first fiscal
year that begins after June 15, 2005; however, during 2004 Apache elected to
early adopt SFAS No. 123-R under the "Modified Retrospective Approach." Under
this approach, the Company is required to expense all options
8
and other stock-based compensation that vest during the year based on the fair
value determined at the date of grant. For the three-month periods ended March
31, 2005 and 2004, total stock-based compensation cost reflected in income was
$19 million ($12 million after tax) and $10 ($6 million after tax),
respectively. The related stock-based compensation cost capitalized as part of
oil and gas properties was $10 million and $4 million for the three-month
periods ended March 31, 2005 and 2004, respectively.
On May 5, 2005, shareholders of the Company approved a new stock option
plan and 1.7 million options were subsequently awarded to substantially all
employees. The terms of the grant were consistent with prior-year awards and
will be expensed on a straight-line basis over the four-year vesting term.
The shareholders of the Company also approved a new targeted stock plan
that provides incentives for employees to double Apache's share price to $108 by
the end of 2008, with an interim goal of $81 to be achieved by the end of 2007.
To achieve the trigger price, the Company's stock price must close at or above
the stated threshold for 10 days out of any 30 consecutive trading days by the
end of the stated period. Under the plan, if the first threshold is achieved,
1.3 million shares would be issued at approximately $81 per share for an
intrinsic cost of $106 million. Achieving the second threshold would result in
2.0 million shares issued at approximately $108 per share for an intrinsic cost
of $213 million. Upon achieving each threshold, one-fourth of the shares would
be issued immediately and the remaining shares would be issued in equal
installments over the next three years as employee's meet the service
requirements of the plan. Over 90 percent of the benefit would accrue to
non-executives.
Accounting practices dictate that, regardless of whether these thresholds
are achieved, the Company will recognize the fair value cost at grant date based
on numerous assumptions, including an estimate of the likelihood that Apache's
stock price will achieve these thresholds. As a result, Apache's current
estimate of the expense and capitalized costs to be recognized over the expected
service life of the plan is approximately $70 million.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE QUARTER ENDED
MARCH 31,
-------------------------------
2005 2004
------------ ------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)...................................... $ 15,702 $ 11,308
Income taxes (net of refunds).............................................. 218,818 64,705
8. PENSION AND POST-RETIREMENT BENEFITS
Apache has a non-contributory defined benefit pension plan that provides
retirement benefits for certain North Sea employees meeting established age and
service requirements. The pension plan is closed to new employees. Apache also
has a postretirement benefit plan which provides benefits for substantially all
of its U.S. employees. The postretirement benefit plan provides medical benefits
up until the age of 65 and is contributory.
9
NET PERIODIC COST
The following table presents the plans' net periodic benefit cost for the
quarters ended March 31, 2005 and 2004.
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- -------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(In thousands)
Components of net periodic benefit cost:
Service cost........................................... $ 1,638 $ 1,386 $ 275 $ 250
Interest cost.......................................... 1,163 921 175 150
Expected return on plan assets......................... (1,256) (911) - -
Amortization of transition obligation.................. - - 13 -
Amortization of actuarial (gain)/loss.................. - - 62 75
--------- --------- --------- ---------
Net periodic benefit cost........................... $ 1,545 $ 1,396 $ 525 $ 475
========= ========= ========= =========
EMPLOYER CONTRIBUTIONS
As previously disclosed in our financial statements for the year ended
December 31, 2004, we expect to contribute $5 million to the pension plan and
$318,000 to the postretirement benefit plan in 2005. As of March 31, 2005,
approximately $1.3 million of contributions have been made to the plans.
9. BUSINESS SEGMENT INFORMATION
Apache has interests in seven countries: the United States, Canada, Egypt,
Australia, the United Kingdom, China and Argentina. Our reportable segments are
the United States, Canada, Egypt, Australia, North Sea, and Other International.
The Company evaluates segment performance based on oil and gas sales and
lease-level expenses. Apache's reportable segments are managed separately
because of their geographic locations. Financial information by reportable
segment is presented below:
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL
---------- ----------- ---------- ---------- ---------- ------------- -----------
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 2005
Oil and Gas Production Revenues..... $ 661,212 $ 278,721 $ 299,720 $ 94,780 $ 257,717 $ 34,499 $ 1,626,649
========== =========== ========== ========== ========== ============= ===========
Operating Income (1)................ $ 369,046 $ 153,644 $ 222,992 $ 49,928 $ 135,825 $ 13,505 $ 944,940
========== =========== ========== ========== ========== =============
Other Income (Expense):
Other............................ 35,639
General and administrative....... (50,411)
Financing costs, net............. (31,588)
-----------
Income Before Income Taxes.......... 898,580
===========
Total Assets........................ $7,467,839 $ 3,967,800 $2,103,270 $1,196,402 $1,363,273 $ 158,484 $16,257,068
========== =========== ========== ========== ========== ============= ===========
FOR THE QUARTER ENDED MARCH 31, 2004
Oil and Gas Production Revenues..... $ 530,756 $ 226,041 $ 188,007 $ 93,440 $ 92,216 $ 22,294 $ 1,152,754
========== =========== ========== ========== ========== ============= ===========
Operating Income (1)................ $ 285,854 $ 122,557 $ 117,613 $ 47,454 $ 37,436 $ 8,033 $ 618,947
========== =========== ========== ========== ========== =============
Other Income (Expense):
Other............................ (2,815)
General and administrative....... (46,057)
Financing costs, net............. (27,146)
-----------
Income Before Income Taxes.......... $ 542,929
===========
Total Assets........................ $5,695,986 $ 3,123,622 $1,799,449 $1,000,008 $ 990,647 $ 175,998 $12,785,710
========== =========== ========== ========== ========== ============= ===========
1) Operating Income consists of oil and gas production revenues less
depreciation, depletion and amortization, asset retirement obligation
accretion, lease operating costs, gathering and transportation costs, and
severance and other taxes.
10
10. ASSET RETIREMENT OBLIGATIONS
The following table describes changes to the Company's asset retirement
obligation (ARO) liability for the quarter ended March 31, 2005 (in thousands):
Asset retirement obligation as of December 31, 2004.................... $ 932,004
Liabilities incurred................................................... 10,513
Liabilities settled.................................................... (12,328)
Accretion expense...................................................... 13,159
---------------
Asset retirement obligation as of March 31, 2005....................... $ 943,348
===============
Liabilities incurred primarily relate to abandonment obligations assumed
in connection with current drilling activity and various small acquisitions
closed during the period. Liabilities settled during the period primarily relate
to individually immaterial properties plugged and abandoned or sold during the
period.
11. LITIGATION
TEXACO CHINA B.V.
Apache recorded a reserve in the second quarter of 2004 to fully reflect a
pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco
China). The arbitration specifies that the award is subject to interest at nine
percent. Apache also accrued $3.2 million and $1.6 million of interest expense
in 2004 and the first quarter of 2005, respectively. In September 2001, Texaco
China initiated an arbitration proceeding against Apache China Corporation LDC
(Apache China), latter adding Apache Bohai Corporation LDC (Apache Bohai) to the
arbitration. In the arbitration Texaco China claimed damages, plus interest,
arising from Apache Bohai's alleged failure to drill three wells, prior to
re-assignment of the interest to Texaco China. Apache believes that the finding
of the arbitrator is unsupported by the facts and the law, and Apache filed an
application to vacate the award in federal court. Texaco China filed an
application to confirm the award in the same court. On May 5, 2005, the federal
district court ruled in favor of Texaco China. The Company has appealed that
decision to the circuit court of appeals. In January 2005, while awaiting the
decision of the U.S. federal courts, Texaco China also filed a proceeding
against Apache China and Apache Bohai in the People's Republic of China to
recognize the award, apparently seeking the same relief as sought in U.S.
federal court. Apache China has been served. Apache Bohai has not been served.
PREDATOR
In December 2000, certain subsidiaries of the Company and Murphy Oil
Corporation (Murphy) filed a lawsuit in Canada charging The Predator Corporation
Ltd. (Predator) and others with misappropriation and misuse of confidential well
data to obtain acreage offsetting a significant natural gas discovery in the
Ladyfern area of northeast British Columbia made by Apache Canada Ltd. (Apache
Canada) and Murphy during 2000. In February 2001, Predator filed a counterclaim
seeking more than C$6 billion and later reduced this amount to no more than C$4
billion. In September 2004, the court in Canada that is hearing this
counterclaim granted Apache Canada's motion for summary judgment and dismissed
more than C$3 billion of Predator's claims against the Company and Murphy, and
dismissed all claims against both Murphy's president and Apache Canada's
president. Predator has appealed the dismissal. The trial court also granted
Apache Canada's request for costs and disbursements in the approximate amount of
C$700,000, which Predator has paid. The trial court has also granted Predator's
request to add some new mismanagement of operations claims to its counterclaim.
At this time, only Predator's claims against Murphy and Apache Canada for
mismanaging operations survive in the trial court. Those claims total
approximately C$365 million, plus interest and attorneys' fees. While management
believes Predator's claim against Apache Canada is without merit, an adverse
judgment is possible. Exposure related to this lawsuit is not currently
determinable. Apache and Murphy's claims against Predator, filed in December
2000, are still pending.
11
12. RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter 2005, the FASB issued Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations" (FIN No. 47). The
interpretation clarifies the requirement to record abandonment liabilities
stemming from legal obligations when the retirement depends on a conditional
future event. FIN No. 47 requires that the uncertainty about the timing or
method of settlement of a conditional retirement obligation be factored into the
measurement of the liability when sufficient information exists. FIN No. 47 is
effective for fiscal years ending after December 31, 2005, and the Company does
not believe this interpretation will have any impact on financial results.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
"Share-Based Payment" (SAB No. 107) to provide the staff's views and guidance in
applying the provisions of SFAS No. 123-R. SAB No. 107 was issued to assist
companies with the initial implementation of SFAS No. 123-R, express the SEC
staff's views on the interaction between SFAS No. 123-R and certain SEC rules
and regulations, and provide interpretations regarding the valuation of
share-based payment arrangements for public companies. Apache will apply the new
guidance provided in SAB No. 107 prospectively and the Company does not believe
that applying the new guidance will have any impact on financial results.
13. SUPPLEMENTAL GUARANTOR INFORMATION
Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada Corporation (Apache Finance Canada) are subsidiaries of Apache that have
issuances of publicly traded securities and require the following condensed
consolidating financial statements be provided as an alternative to filing
separate financial statements.
Each of the companies presented in the condensed consolidating financial
statements have been fully consolidated in Apache's consolidated financial
statements. As such, the condensed consolidating financial statements should be
read in conjunction with the financial statements of Apache Corporation and
Subsidiaries and notes.
12
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2005
ALL OTHER
APACHE APACHE SUBSIDIARIES
APACHE APACHE FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION NORTH AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- ------------- ---------- ---------- ------------- ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production
revenues.................... $ 650,906 $ - $ - $ - $ 1,046,614 $ (70,871) $ 1,626,649
Equity in net income (loss)
of affiliates................ 345,079 9,485 12,462 50,260 (12,352) (404,934) -
Other......................... 30,185 - - - 5,454 - 35,639
----------- ------------ ---------- ----------- ------------- -------------- -----------
1,026,170 9,485 12,462 50,260 1,039,716 (475,805) 1,662,288
----------- ------------ ---------- ----------- ------------- -------------- -----------
OPERATING EXPENSES:
Depreciation, depletion
and amortization............ 149,384 - - - 190,029 - 339,413
Asset retirement obligation
accretion................... 7,834 - - - 5,325 - 13,159
Lease operating costs......... 104,955 - - - 199,087 (70,871) 233,171
Gathering and transportation
costs....................... 7,949 - - - 15,831 - 23,780
Severance and other taxes..... 20,077 - - - 52,109 - 72,186
General and administrative.... 40,317 - - - 10,094 - 50,411
Financing costs, net.......... 19,919 - 4,512 14,110 (6,953) - 31,588
----------- ------------ ---------- ----------- ------------- -------------- -----------
350,435 - 4,512 14,110 465,522 (70,871) 763,708
----------- ------------ ---------- ----------- ------------- -------------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES.................. 675,735 9,485 7,950 36,150 574,194 (404,934) 898,580
Provision (benefit) for
income taxes................ 115,252 - (1,535) (4,735) 229,115 - 338,097
----------- ------------ ---------- ----------- ------------- -------------- -----------
NET INCOME..................... 560,483 9,485 9,485 40,885 345,079 (404,934) 560,483
Preferred stock dividends..... 1,420 - - - - - 1,420
----------- ------------ ---------- ----------- ------------- -------------- -----------
INCOME ATTRIBUTABLE TO
COMMON STOCK.................. $ 559,063 $ 9,485 $ 9,485 $ 40,885 $ 345,079 $ (404,934) $ 559,063
=========== ============ ========== =========== ============= ============== ===========
13
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2004
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- --------- ---------- --------- ------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production
revenues ................... $ 529,038 $ - $ - $ - $ 701,891 $ (78,175) $1,152,754
Equity in net income (loss)
of affiliates .............. 192,707 8,262 11,228 37,945 (9,586) (240,556) -
Other ........................ (763) - - - (2,052) - (2,815)
---------- --------- ---------- --------- ----------- ---------- ----------
720,982 8,262 11,228 37,945 690,253 (318,731) 1,149,939
---------- --------- ---------- --------- ----------- ---------- ----------
OPERATING EXPENSES:
Depreciation, depletion and
amortization ............... 131,210 - - - 155,018 - 286,228
Asset retirement obligation
accretion .................. 5,795 - - - 4,966 - 10,761
Lease operating costs ........ 85,384 - - - 201,027 (78,175) 208,236
Gathering and transportation
costs ...................... 7,332 - - - 12,302 - 19,634
Severance and other taxes .... 13,380 - - 18 (4,450) - 8,948
General and administrative ... 36,939 - - - 9,118 - 46,057
Financing costs, net ......... 21,763 - 4,512 10,107 (9,236) - 27,146
---------- --------- ---------- --------- ----------- ---------- ----------
301,803 - 4,512 10,125 368,745 (78,175) 607,010
---------- --------- ---------- --------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES ........................ 419,179 8,262 6,716 27,820 321,508 (240,556) 542,929
Provision (benefit) for
income taxes ............... 72,854 - (1,546) (3,505) 128,801 - 196,604
---------- --------- ---------- --------- ----------- ---------- ----------
NET INCOME ...................... 346,325 8,262 8,262 31,325 192,707 (240,556) 346,325
Preferred stock dividends .... 1,420 - - - - - 1,420
---------- --------- ---------- --------- ----------- ---------- ----------
INCOME ATTRIBUTABLE TO
COMMON STOCK ................. $ 344,905 $ 8,262 $ 8,262 $ 31,325 $ 192,707 $ (240,556) $ 344,905
========== ========= ========== ========= =========== ========== ==========
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2005
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- --------- ---------- --------- ------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............. $ 345,817 $ - $ (3,624) $ (77) $ 494,056 $ - $ 836,172
----------- --------- ---------- --------- ------------ ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property and
equipment...................... (220,438) - - - (569,912) - (790,350)
Investment in subsidiaries,
net............................ (103,628) (3,500) - - (3,689) 110,817 -
Other, net...................... 49,147 - - - (16,699) - 32,448
----------- --------- ---------- --------- ------------ ------------- ------------
NET CASH USED IN INVESTING
ACTIVITIES........................ (274,919) (3,500) - - (590,300) 110,817 (757,902)
----------- --------- ---------- --------- ------------ ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Long-term borrowings............ 6,793 - 124 77 98,943 (99,075) 6,862
Payments on long-term debt...... (62,700) - - - (830) - (63,530)
Dividends paid.................. (27,631) - - - - - (27,631)
Common stock activity........... 7,771 3,500 3,500 - 4,742 (11,742) 7,771
Treasury stock activity, net.... (2,085) - - - - - (2,085)
Cost of debt and equity
transactions................... (78) - - - - - (78)
Other........................... 10,679 - - - - - 10,679
----------- --------- ---------- --------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.............. (67,251) 3,500 3,624 77 102,855 (110,817) (68,012)
----------- --------- ---------- --------- ------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............. 3,647 - - - 6,611 - 10,258
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................. 597 - 2 3 110,491 - 111,093
----------- --------- ---------- --------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD..................... $ 4,244 $ - $ 2 $ 3 $ 117,102 $ - $ 121,351
=========== ========= ========== ========= ============ ============= ============
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
----------- --------- ---------- --------- ------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............. $ 315,934 $ - $ (3,704) $ 205 $ 339,897 $ - $ 652,332
----------- --------- ---------- --------- ------------ ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property and
equipment...................... (120,615) - - - (349,218) - (469,833)
Investment in subsidiaries,
net............................ (15,778) (3,500) - - (3,816) 23,094 -
Other, net...................... (8,109) - - - (1,400) - (9,509)
----------- --------- ---------- --------- ------------ ------------- ------------
NET CASH USED IN INVESTING
ACTIVITIES........................ (144,502) (3,500) - - (354,434) 23,094 (479,342)
----------- --------- ---------- --------- ------------ ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Long-term borrowings............ 187 - 204 (204) 12,658 (12,594) 251
Payments on long-term debt...... (135,300) - - - - - (135,300)
Dividends paid.................. (20,898) - - - - - (20,898)
Common stock activity........... 7,534 3,500 3,500 - 3,500 (10,500) 7,534
Treasury stock activity, net.... 3,746 - - - - - 3,746
Cost of debt and equity
transactions................... (673) - - - - - (673)
----------- --------- ---------- --------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.............. (145,404) 3,500 3,704 (204) 16,158 (23,094) (145,340)
----------- --------- ---------- --------- ------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............. 26,028 - - 1 1,621 - 27,650
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................ - - 2 1 33,500 - 33,503
----------- --------- ---------- --------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................... $ 26,028 $ - $ 2 $ 2 $ 35,121 $ - $ 61,153
=========== ========= ========== ========= ============ ============= ============
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------- ---------- ----------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 4,244 $ - $ 2 $ 3 $ 117,102 $ - $ 121,351
Restricted cash................. 21,052 - - - - - 21,052
Receivables, net of allowance... 429,910 - - - 686,698 - 1,116,608
Inventories..................... 28,056 - - - 144,481 - 172,537
Drilling advances and others.... 80,303 - - - 77,156 - 157,459
------------ --------- ---------- ----------- ------------ ------------- ------------
563,565 - 2 3 1,025,437 - 1,589,007
------------ --------- ---------- ----------- ------------ ------------- ------------
PROPERTY AND EQUIPMENT, NET........ 6,698,126 - - - 7,671,327 - 14,369,453
------------ --------- ---------- ----------- ------------ ------------- ------------
OTHER ASSETS:
Intercompany receivable, net.... 1,206,228 - (1,277) (253,786) (951,165) - -
Goodwill, net................... - - - - 189,252 - 189,252
Equity in affiliates............ 4,523,080 271,667 519,568 1,316,970 (1,192,430) (5,438,855) -
Deferred charges and other...... 43,672 - - 4,538 61,146 - 109,356
------------ --------- ---------- ----------- ------------ ------------- ------------
$ 13,034,671 $ 271,667 $ 518,293 $ 1,067,725 $ 6,803,567 $ (5,438,855) $ 16,257,068
============ ========= ========== =========== ============ ============= ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 301,148 $ - $ - $ - $ 266,423 $ - $ 567,571
Other accrued expenses.......... 457,110 - 2,922 44,086 499,758 - 1,003,876
------------ --------- ---------- ----------- ------------ ------------- ------------
758,258 - 2,922 44,086 766,181 - 1,571,447
------------ --------- ---------- ----------- ------------ ------------- ------------
LONG-TERM DEBT..................... 1,611,137 - 269,245 646,813 4,527 - 2,531,722
------------ --------- ---------- ----------- ------------ ------------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.................... 1,062,578 - (25,541) 4,385 1,110,544 - 2,151,966
Advances from gas purchasers.... 85,184 - - - - - 85,184
Asset retirement obligation..... 571,252 - - - 372,096 - 943,348
Derivative instruments.......... 134,209 - - - - - 134,209
Other........................... 188,104 - - - 27,139 - 215,243
------------ --------- ---------- ----------- ------------ ------------- ------------
2,041,327 - (25,541) 4,385 1,509,779 - 3,529,950
------------ --------- ---------- ----------- ------------ ------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY............... 8,623,949 271,667 271,667 372,441 4,523,080 (5,438,855) 8,623,949
------------ --------- ---------- ----------- ------------ ------------- ------------
$ 13,034,671 $ 271,667 $ 518,293 $ 1,067,725 $ 6,803,567 $ (5,438,855) $ 16,257,068
============ ========= ========== =========== ============ ============= ============
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
ALL OTHER
APACHE APACHE APACHE SUBSIDIARIES
APACHE NORTH FINANCE FINANCE OF APACHE RECLASSIFICATIONS
CORPORATION AMERICA AUSTRALIA CANADA CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------- ---------- ----------- ------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 597 $ - $ 2 $ 3 $ 110,491 $ - $ 111,093
Receivables, net of allowance... 367,359 - - - 572,377 - 939,736
Inventories..................... 28,000 - - - 129,293 - 157,293
Drilling advances and other..... 82,837 - - - 57,823 - 140,660
------------ --------- ---------- ----------- ------------ ------------- ------------
478,793 - 2 3 869,984 - 1,348,782
------------ --------- ---------- ----------- ------------ ------------- ------------
PROPERTY AND EQUIPMENT, NET........ 6,683,499 - - - 7,176,860 - 13,860,359
------------ --------- ---------- ----------- ------------ ------------- ------------
OTHER ASSETS:
Intercompany receivable, net.... 1,107,286 - (1,205) (253,724) (852,357) - -
Goodwill, net................... - - - - 189,252 - 189,252
Equity in affiliates............ 4,173,788 258,437 506,806 1,250,590 (1,178,450) (5,011,171) -
Deferred charges and other...... 43,460 - - 4,617 56,010 - 104,087
------------ --------- ---------- ----------- ------------ ------------- ------------
$ 12,486,826 $ 258,437 $ 505,603 $ 1,001,486 $ 6,261,299 $ (5,011,171) $ 15,502,480
============ ========= ========== =========== ============ ============= ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 280,754 $ - $ - $ - $ 261,320 $ - $ 542,074
Other accrued expenses.......... 306,511 - 3,335 29,946 401,025 - 740,817
------------ --------- ---------- ----------- ------------ ------------- ------------
587,265 - 3,335 29,946 662,345 - 1,282,891
------------ --------- ---------- ----------- ------------ ------------- ------------
LONG-TERM DEBT..................... 1,667,044 - 269,192 646,798 5,356 - 2,588,390
------------ --------- ---------- ----------- ------------ ------------- ------------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.................... 1,132,618 - (25,361) 4,233 1,035,147 - 2,146,637
Advances from gas purchasers.... 90,876 - - - - - 90,876
Asset retirement obligation..... 568,862 - - - 363,142 - 932,004
Oil and gas derivative
instruments.................... 31,417 - - - - - 31,417
Other........................... 204,323 - - - 21,521 - 225,844
------------ --------- ---------- ----------- ------------ ------------- ------------
2,028,096 - (25,361) 4,233 1,419,810 - 3,426,778
------------ --------- ---------- ----------- ------------ ------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY............... 8,204,421 258,437 258,437 320,509 4,173,788 (5,011,171) 8,204,421
------------ --------- ---------- ----------- ------------ ------------- ------------
$ 12,486,826 $ 258,437 $ 505,603 $ 1,001,486 $ 6,261,299 $ (5,011,171) $ 15,502,480
============ ========= ========== =========== ============ ============= ============
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache Corporation (Apache or the Company) reported record first-quarter
2005 earnings of $559 million, up 62 percent from the $345 million reported in
the first quarter of 2004. In addition, the Company reported net cash provided
by operating activities of $836 million, an increase of $184 million from the
prior-year period. The improved results not only reflect higher price
realizations for both crude oil and natural gas, but also production growth.
Crude oil price realizations were up 51 percent over the comparable 2004 quarter
to $46.05 per barrel, while gas realizations rose 11 percent to $5.30 per
thousand cubic feet (Mcf). The Company's first quarter 2005 crude oil production
increased 11 percent from the first quarter of 2004 to 240,543 barrels of oil
per day (b/d). Our first quarter 2005 natural gas production of 1,259 million
cubic feet of gas per day (MMcf/d) increased four percent from the year-earlier
period, with both Egypt and Canada experiencing double-digit growth. Together,
higher prices and production growth added $469 million to 2005 oil and gas
production revenues and offset the impact of higher operating costs (discussed
below). These financial statements should be read in conjunction with
Management's Discussion and Analysis and financial statements, and the summary
of significant accounting policies and notes included in the Company's 2004 Form
10-K.
Highlights of the quarter include:
- Record oil and gas production revenues of $1.6 billion, with nearly
$1 billion in crude oil production revenues.
- Following the expiration on December 31, 2004 of a $22.00 per barrel
fixed-price contract on 40,000 b/d of our North Sea production, we
began receiving market prices for all of our North Sea production
resulting in additional revenues of $94 million in the first quarter
of 2005, compared to the first quarter of 2004.
- Daily equivalent production in the North Sea increased approximately
40 percent in the first quarter of this year as compared to the
first quarter of 2004. Operating costs decreased 12 percent over the
same period.
- Oil production in Australia decreased 7,683 b/d compared to the
first quarter of last year. Our Flag sandstone drilling program is
now underway, which we believe will stabilize production until
several larger discoveries in the Exmouth Basin come on stream in
2008.
- First-quarter 2005 worldwide capital expenditures for exploration
and development activity were $792 million. There were no
significant acquisitions during the quarter.
- Quarter-end debt as a percent of capitalization was 22.7 percent,
down from 24.0 percent on December 31, 2004.
- We continue to see higher industry-wide service costs, particularly
in North America. The steady rise in commodity prices has driven up
fuel, power and ad valorem costs, while other service costs are
rising with greater demand resulting from increased activity.
- On April 5, 2005, we announced two discoveries in Egypt. The Syrah
1X wildcat, on the Company's 100 percent-contractor-interest Khalda
Concession, tested 46.5 MMcf/d of natural gas. The Tanzanite 1X
located onshore on Apache's West Mediterranean Concession tested
5,296 b/d and 7.4 MMcf/d. Additional wells are planned for the Syrah
structure, with initial production through the Company's Qasr field
production facilities expected during the third quarter of 2005.
Additional drilling is planned for the Tanzanite structure as well,
with production commencing through the Company's North Alamein field
and production facilities upon approval of a development plan by the
Egyptian General Petroleum Corporation (EGPC).
19
RESULTS OF OPERATIONS
REVENUES
The table below presents oil and gas production revenues, production and
average prices received from sales of natural gas, oil and natural gas liquids.
FOR THE QUARTER ENDED MARCH 31,
---------------------------------------------------
INCREASE
2005 2004 (DECREASE)
-------------- -------------- ----------
Revenues (in thousands):
Oil.................................................. $ 996,997 $ 602,635 65%
Natural gas.......................................... 600,950 526,854 14%
Natural gas liquids.................................. 28,702 23,265 23%
-------------- --------------
Total........................................... $ 1,626,649 $ 1,152,754 41%
============== ==============
Oil Volume - Barrels per day:
United States........................................ 73,630 67,255 9%
Canada............................................... 23,277 25,266 (8%)
Egypt................................................ 54,579 49,097 11%
Australia............................................ 15,976 23,658 (32%)
North Sea............................................ 61,870 44,299 40%
China................................................ 10,507 7,440 41%
Argentina............................................ 704 552 28%
-------------- --------------
Total........................................... 240,543 217,567 11%
============== ==============
Average Oil Price - Per barrel:
United States........................................ $ 44.00 $ 32.36 36%
Canada............................................... 47.14 33.00 43%
Egypt................................................ 48.77 31.34 56%
Australia............................................ 52.99 34.86 52%
North Sea............................................ 46.10 22.72 103%
China................................................ 33.91 30.12 13%
Argentina............................................ 33.97 33.44 2%
Total........................................... 46.05 30.44 51%
Natural Gas Volume - Mcf per day:
United States........................................ 637,803 644,462 (1%)
Canada............................................... 346,742 314,064 10%
Egypt................................................ 155,328 128,665 21%
Australia............................................ 113,734 118,822 (4%)
North Sea............................................ 2,178 1,602 36%
China................................................ - - -
Argentina............................................ 3,473 5,160 (33%)
-------------- --------------
Total........................................... 1,259,258 1,212,775 4%
============== ==============
Average Natural Gas Price - Per Mcf:
United States........................................ $ 6.04 $ 5.35 13%
Canada............................................... 5.59 5.09 10%
Egypt................................................ 4.30 4.10 5%
Australia............................................ 1.82 1.70 7%
North Sea............................................ 5.30 4.34 22%
China................................................ - - -
Argentina............................................ 0.91 0.47 94%
Total........................................... 5.30 4.77 11%
Natural Gas Liquids (NGL) - Barrels per day:
United States..................................... 9,104 8,128 12%
Canada............................................ 2,419 2,598 (7%)
-------------- --------------
Total........................................... 11,523 10,726 7%
============== ==============
Average NGL Price - Per barrel:
United States..................................... $ 28.26 $ 25.27 12%
Canada............................................ 25.46 19.34 32%
Total........................................... 27.68 23.83 16%
20
The following table presents each reportable segment's oil revenues and
gas revenues as a percentage of total oil revenues and gas revenues,
respectively.
OIL REVENUES GAS REVENUES
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
United States.......................................... 29% 33% 58% 59%
Canada................................................. 10% 13% 29% 28%
Egypt.................................................. 24% 23% 10% 9%
Australia.............................................. 8% 13% 3% 4%
North Sea.............................................. 26% 15% - -
Other International.................................... 3% 3% - -
--- --- --- ---
Total............................................ 100% 100% 100% 100%
=== === === ===
Crude Oil Contribution
The percentage of total crude oil revenues from outside the U.S. increased
to 71 percent in the first quarter of 2005 from 67 percent in the first quarter
of 2004. The increase in the contribution of our international operations to our
consolidated oil revenues was driven by the North Sea, which contributed 26
percent in the first quarter of 2005 compared to 15 percent in the first quarter
of 2004. Also, Egypt's share rose one percent to 24 percent.
Crude Oil Revenues
The Company added $394 million to first-quarter crude oil revenues with a
$15.61 per barrel increase in our crude oil price realization generating an
additional $309 million of revenues. An 11 percent increase in our production
added the remaining $85 million in revenues. Each of our core operating segments
reported a significant increase in realized oil price, with the North Sea, the
U.S., Egypt and China also benefiting from production growth.
The North Sea's price realization increased 103 percent generating $94
million of additional revenues when compared to the first quarter of 2004,
following expiration of the physical fixed-price contract entered into in
conjunction with our 2003 acquisition from BP p.l.c. (BP). North Sea production
increased 17,571 b/d, to 61,870 b/d, adding $71 million of crude oil revenues.
The production growth reflects the success of our drilling programs at Echo and
Bravo and results from our Delta platform workover program.
Egypt added approximately $78 million of revenues from a 56 percent
increase in crude oil price realizations and an additional $22 million of
revenues from an 11 percent, or 5,482 b/d, increase in production. The
production growth was primarily the result of successful drilling and
exploitation programs at our Khalda, East Bahariya and Northeast Abu Gharadig
(NEAG) concessions.
Oil revenues in the U.S. increased $93 million from the same period last
year from a nine percent increase in production and a 36 percent increase in
price. Higher realized prices, which were reduced $1.11 per barrel because of
hedges on a portion of production acquired from Exxon Mobil Corporation and its
affiliates (ExxonMobil) and Anadarko Petroleum Corporation (Anadarko), added $71
million to revenues. (See Note 2, Hedging and Derivative Instruments of this
Form 10-Q.) Production was up 6,375 b/d, increasing revenues $22 million in the
U.S., from the ExxonMobil and Anadarko acquisitions in the latter half of 2004,
successful drilling and recompletion programs, and exploitation activities
primarily on properties purchased from Shell Exploration and Production Company
and BP in 2003. These increases more than offset production declines and an
average of approximately 5,700 b/d shut-in because of Hurricane Ivan this
quarter. We still had approximately 3,400 b/d shut-in at quarter's end from
Hurricane Ivan, but we expect to have all of the shut-in production back on-line
by the end of the third quarter of 2005.
Canada's revenues increased $23 million, as the impact of a 43 percent
increase in price from the comparable period was partially offset by an eight
percent, or 1,989 b/d, decrease in oil production. Canada production was down on
declines at Midale and Snipe Lake and a turnaround at Karr Simonette, which is
non-operated.
21
China added $12 million to consolidated crude oil revenues primarily on
3,067 b/d increase in production. The production growth resulted from several
new successful wells drilled over the last 12 months and the fact that
production was still ramping up in the first quarter of 2004.
Australia's quarter-over-quarter crude oil revenues were essentially flat
as a 52 percent increase in realized prices was offset by a 32 percent decline
in production. The lower production is related to natural decline and increasing
water production from the Legendre and Stag fields and significant declines in
condensate production at East Spar. These declines more than offset the positive
impact of first production from several new wells that came on-line in 2004 and
first production from the Albert-1 well which came on-line in March of this
year. In April, we began a 15-well Flag sandstone program which we believe will
stabilize oil production until our larger Exmouth Basin discoveries come on-line
in 2008.
Approximately six percent and eight percent of our worldwide crude oil
production was subject to financial derivative hedging for first-quarter 2005
and 2004, respectively. (See Note 2, Hedging and Derivative Instruments of this
Form 10-Q for a summary of the current derivative positions and terms.) These
derivative financial instruments reduced our first-quarter 2005 and 2004
realized price $.34 per barrel and $.60 per barrel, respectively. Also, during
2004 we amortized specific unrealized gains and losses related to derivative
positions closed in October and November 2001. This amortization had a
negligible impact on first-quarter 2004 average realized prices.
Natural Gas Contribution
Our North America operations continue to contribute a significant portion
of our consolidated natural gas revenues. In the first quarter of 2005, 87
percent of Apache's natural gas revenues came from North America, unchanged from
the comparable prior-year quarter. The U.S. contributed 58 percent, down one
percent, while Canada contributed 29 percent up one percent. Egypt's
contribution to total gas revenues increased one percent to 10 percent on strong
production growth and higher prices. Australia's contribution decreased one
percent on lower production.
Natural Gas Revenues
Our first-quarter 2005 natural gas revenues increased $74 million from the
prior-year quarter as a $.53 per Mcf increase in our average natural gas price
realization generated an additional $58 million of revenues. Higher production
added the remaining $16 million. While all of our operating segments reported an
increase in realized natural gas prices, 93 percent of the additional revenues
attributable to price came from the U.S. and Canada. The additional revenues
attributable to production were generated in Egypt and Canada.
Higher prices in the U.S. added $40 million to consolidated natural gas
revenues, while a 6.7 MMcf/d decline in U.S. production lowered revenues $8
million. The lower U.S. production was focused in the Gulf Coast region where
increased production from the Anadarko acquisition was offset by natural decline
in mature fields and the lingering impact of Hurricane Ivan, which averaged 19.7
MMcf/d of shut-in production in the quarter.
Canada's revenues increased $29 million, balanced between higher prices
and production growth. Production increased 32.7 MMcf/d reflecting results of
our drilling program, with the largest gains coming from Nevis, Hatton, Consort,
Brownfield and the Exxon Grant Lands.
Egypt added $12 million to consolidated revenues on a 26.7 MMcf/d increase
in production and a five percent improvement in prices. The increase in
production was attributable to new discoveries on the Khalda Concession which
enabled higher utilization at the Salam and Tarek gas plants and first gas sales
at the Northeast Abu Gharadig Concession following completion of the three phase
pipeline and connection to the Badr el Din gas plant.
Although a majority of our worldwide sales contracts are indexed to
prevailing market prices, approximately 10 percent of our first-quarter
production was subject to long-term, fixed-price physical contracts up from nine
percent in the prior-year quarter. These contracts apply to a small portion of
our U.S. future natural gas production and provide a measure of protection to
the Company in the event of decreasing natural gas prices. These fixed-price
contracts reduced our first-quarter realized prices for 2005 and 2004 by $.11
and $.09 per Mcf, respectively. Additionally, nearly all of our Australian
natural gas production is subject to long-term, fixed-price supply contracts
that are periodically adjusted for changes in Australia's consumer price index.
They are also impacted by changes in the value of the Australian dollar relative
to the U.S. dollar.
22
Approximately 12 percent and 16 percent of our worldwide natural gas
production was subject to financial derivative hedges for first-quarter 2005 and
2004, respectively. These derivative financial instruments added $.02 per Mcf to
our first - quarter 2005 realized price and reduced our first-quarter 2004
realized price $.07 per Mcf. (See Note 2, Hedging and Derivative Instruments, of
this Form 10-Q for a summary of our current derivative positions and terms.)
Also during the 2004 quarter, we amortized specific unrealized gains and losses
related to derivative positions closed in October and November 2001. This
amortization had a negligible impact on first-quarter 2004 average realized
prices.
COSTS
The table below presents a comparison of our expenses on an absolute
dollar basis and an equivalent unit of production (boe) basis. Our discussion
may reference either expenses on a boe basis or expenses on an absolute dollar
basis, or both, depending on their relevance. First-quarter 2005 costs reflect
the impact of our ExxonMobil and Anadarko acquisitions closed in the latter half
of 2004, whereas the first quarter of 2004 does not.
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- --------
(In millions) (Per Boe)
Depreciation, depletion and amortization (DD&A):
Oil and gas property and equipment....................... $ 320 $ 268 $ 7.69 $ 6.85
Other assets............................................. 20 18 .47 .46
Asset retirement obligation accretion......................... 13 11 .32 .27
Lease operating costs (LOE)................................... 233 208 5.61 5.32
Gathering and transportation costs............................ 24 20 .57 .50
Severance and other taxes..................................... 72 9 1.74 .23
General and administrative expense (G&A)...................... 50 46 1.21 1.18
Financing costs, net.......................................... 32 27 .76 .69
-------- -------- -------- --------
Total......................................... $ 764 $ 607 $ 18.37 $ 15.50
======== ======== ======== ========
Depreciation, Depletion and Amortization
First-quarter 2005 full-cost DD&A expense of $320 million is $52 million
higher than 2004, one-third ($17 million) of which is attributable to volume
growth. The balance was primarily attributable to higher drilling costs, as our
first-quarter full-cost DD&A rate increased $.84 per boe, to $7.69, from the
same quarter last year reflecting an increase in the rate per boe in all
segments except for Egypt. The increase in costs impacted all segments, U.S. and
Canada most heavily, and is primarily attributable to high commodity prices over
the past year which have led to increased demand for drilling services and thus
higher drilling and estimated future development costs. In addition, the cost of
properties acquired from ExxonMobil and Anadarko were higher than our historical
cost as high commodity prices have increased the costs of properties available
for acquisition. Mitigating the impact of higher rates in all other segments was
a decrease in the rate in Egypt, where several larger discoveries more than
offset the impact of higher drilling costs in Egypt.
Lease Operating Costs
LOE increased $25 million from the first quarter of last year to $233
million in the first quarter of 2005. The increase was driven by acquisitions of
producing properties from ExxonMobil and Anadarko, more workover activity in
North America, primarily on the acquired properties, and higher service costs,
as indicated in the LOE per boe discussion that follows. These increases were
partially offset by a decrease in absolute costs in the North Sea, where
initiatives to manage costs and increase efficiencies have paid off, and on
lower workover activity in China.
First quarter 2005 LOE per boe increased $.29 to $5.61 per boe from the
same quarter last year with higher rates in North America and Australia
increasing the worldwide rate $.62 and $.12 per boe, respectively, and rate
decreases in the North Sea, Egypt and China lowering the worldwide rate $.34,
$.07 and $.05 per boe, respectively.
The increase in the North American per unit rate was primarily
attributable to higher industry-wide service costs, driven by a steady rise in
commodity prices since the first quarter of last year. Historically,
electricity, fuel and ad valorem costs have been directly impacted by rising
commodity prices. Other service costs have historically risen as a result of
increased activity, and hence demand, in high commodity price environments. Also
contributing to the higher rate was an increase in workover activity in North
America, primarily on properties acquired from
23
ExxonMobil and Anadarko in the second half of last year. This combination led to
higher absolute costs than the same period last year and more than offset the
positive impact of higher North American production on the rate. In addition,
lower production in Australia offset a slight decline in absolute costs,
resulting in a higher rate per boe.
Partially offsetting the impact of the higher rates in North America and
Australia, were decreases in the rates in the Company's other operating areas.
In the North Sea, the per unit rate declined as a result of the Company's
ongoing investments aimed at increasing production and lower operating costs.
Daily equivalent production in the North Sea increased approximately 40 percent
in the first quarter of this year as compared to the first quarter of 2004,
while absolute costs decreased 12 percent over the same period. In addition, our
worldwide rate was favorably impacted by lower rates in Egypt resulting from a
14 percent increase in production compared to a three percent increase in
absolute costs and in China where we had a 41 percent increase in production
coupled with an 18 percent decrease in absolute costs.
For more detailed discussion of production, refer to "Results of
Operations - Revenues" of this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Gathering and Transportation Costs
Gathering and transportation costs totaled $24 million in the first
quarter of 2005, up $4 million from the 2004 comparative quarter. The following
table presents gathering and transportation costs paid directly by Apache to
third-party carriers for each of the periods presented.
FOR THE QUARTER ENDED
MARCH 31,
---------------------
2005 2004
------- -------
(In millions)
U.S........................................ $ 8 $ 8
Canada..................................... 8 7
North Sea.................................. 7 5
Egypt...................................... 1 -
------- -------
Total Gathering and Transportation......... $ 24 $ 20
======= =======
For the first quarter of 2005 and 2004, these costs are primarily related
to the transportation of natural gas in our North American operations and
transportation of oil in the North Sea. The increase in costs from the first
quarter of 2004 was driven by production growth in the North Sea and Canada and
costs incurred to transport cargoes of Egyptian crude. These were the first
exported cargoes from Egypt for which Apache arranged the shipping and paid
transportation to a third-party, and received a price from our purchaser with no
transportation deducts.
Severance and Other Taxes
First quarter 2005 severance and other taxes totaled $72 million, $63
million greater than the prior-year quarter. A detail of these taxes follows:
2005 2004
------- --------
(In millions)
Severance taxes.......................... $ 30 $ 20
U.K. PRT................................. 37 (17)
Canadian taxes........................... 5 5
Other.................................... - 1
------- --------
Total Severance and Other Taxes.......... $ 72 $ 9
======= ========
Severance taxes are incurred in the U.S. and Australia and increased $6
million and $4 million, respectively. U.S. severance taxes are driven by higher
prices and thus revenues, while the Australian increase primarily reflects
excise tax on Legendre. North Sea Petroleum Revenue Tax (PRT) is assessed on net
profits from subject fields in the United Kingdom (U.K.) North Sea. PRT
increased $54 million quarter-over-quarter following expiration at
24
year-end 2004 of a $22 physical fixed-price contract on 40,000 b/d. The PRT
credit, in 2004, reflected qualifying capital spending and lifting costs that
exceeded associated revenues.
General and Administrative Expense
G&A costs were $4 million higher compared to the first quarter of 2004.
The additional cost is related to the impact Apache's rising common stock price
has on stock-based compensation expense.
Provision for Income Taxes
First-quarter 2005 income tax expense was $141 million greater than the
prior-year quarter. The additional income tax expense was driven by higher
taxable income related to the increased revenues. A slightly higher effective
tax rate also contributed to the higher taxes. The current quarter effective tax
rate was largely unaffected by foreign currency charges.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL INDICATORS
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Current ratio.................................... 1.01 1.05
Total debt (in millions)......................... $ 2,532 $ 2,588
Shareholders' equity (in millions)............... $ 8,624 $ 8,204
Percent of total debt to capitalization.......... 22.7% 24.0%
Floating-rate debt/total debt.................... 13% 15%
OVERVIEW
Apache's primary uses of cash are exploration, development and acquisition
of oil and gas properties, costs and expenses necessary to maintain continued
operations, repayment of principal and interest on outstanding debt and payment
of dividends.
The Company funds its exploration and development activities primarily
through net cash provided by operating activities (cash flow) and budgets
capital expenditures based on projected cash flow. Our cash flow, both in the
short-term and long-term, is impacted by highly volatile oil and natural gas
prices, production levels, industry trends impacting operating expenses and
drilling costs and our ability to continue to acquire or find high-margin
reserves at competitive prices. For these reasons, we only forecast, for
internal use by management, an annual cash flow. Longer term cash flow and
capital spending projections are not used by management to operate our business.
The annual cash flow forecasts are revised monthly in response to changing
market conditions and production projections. Apache routinely adjusts capital
expenditure budgets in response to the adjusted cash flow forecasts and market
trends in drilling and acquisitions costs.
The Company has historically utilized internally generated cash flow,
committed and uncommitted credit facilities and access to both debt and equity
capital markets for all other liquidity and capital resources needs. Apache's
ability to access the debt capital market is supported by its investment grade
credit ratings. Apache's senior unsecured debt is currently rated investment
grade by Moody's, Standard and Poor's and Fitch with ratings of A3, A- and A,
respectively. Because of the liquidity and capital resources alternatives
available to Apache, including internally generated cash flows, Apache's
management believes that its short-term and long-term liquidity will be adequate
to fund operations, including its capital spending program, repayment of debt
maturities and any amounts that may ultimately be paid in connection with
contingencies.
The Company's ratio of current assets to current liabilities was 1.01
at March 31, 2005, compared to 1.05 at December 31, 2004. The decrease in the
ratio is the result of an increase in current liabilities of $289 million at
March 31, 2005 as compared to December 31, 2004, which exceeded an increase in
current assets of $240 million for the same period. The increase in current
liabilities was primarily attributable to higher accrued exploration and
development costs, a result of increased drilling activity, and an increase in
the accrued liability for derivative instruments stemming from higher commodity
prices at March 31, 2005 than at December 31, 2004. The increase in current
assets was driven by an increase in receivables and drilling advances. The
increase in receivables was
25
primarily attributable to higher oil and gas revenue receivables, resulting from
higher commodity prices, and higher joint owner receivables. The increase in
joint owner receivables and drilling advances is associated with increased
drilling activities and higher production and drilling costs.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Apache's net cash provided by operating activities for the first quarter
of 2005 totaled $836 million, up from $652 million for the same period in 2004.
The increase in 2005 cash flow is attributed primarily to the significant
increase in commodity prices, which generated additional oil and gas revenues.
The Company's average realized crude oil price increased 51 percent, a
reflection of generally higher worldwide prices. The Company also saw an 11
percent increase in natural gas prices. Additional revenues generated from an 11
percent increase in crude oil production and a four percent increase in gas
production also contributed to the increased cash flows. These increases were
partially offset by higher LOE, severance taxes, U.K. PRT and higher income
taxes, all of which are generally up because of higher commodity prices. The
Company reviews production costs for each core area on a monthly basis and
pursues alternatives in maintaining efficient levels of costs and expenses. For
a more detailed discussion of commodity prices, production, costs and expenses,
refer to the "Results of Operations" of this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Historically, fluctuations in commodity prices have been the primary
reason for the Company's short-term changes in cash flow from operating
activities. Sales volume changes have also impacted cash flow in the short-term,
but have not been as volatile as commodity prices have in the past. Apache's
long-term cash flow from operating activities is dependent on commodity prices,
reserve replacement and the level of costs and expenses required for continued
operations.
DEBT
During the first quarter of 2005, we continued to strengthen our financial
flexibility and build on our solid financial position. Our
debt-to-capitalization ratio on March 31, 2005, declined to 22.7 percent from
24.0 percent on December 31, 2004, as a result of slightly lower debt and
additional equity from earnings. On March 31, 2005, the Company had long-term
debt of $2.5 billion, $57 million less than December 31, 2004. The Company's
outstanding debt consisted of $340 million under our commercial paper program
and a total of $2.19 billion of other debt. This other debt included notes and
debentures maturing in the years 2006 through 2096.
The Company has available a $1.2 billion commercial paper program which
enables Apache to borrow funds for up to 270 days at competitive interest rates.
The commercial paper balance of $340 million on March 31, 2005 was classified as
long-term debt in the accompanying consolidated balance sheet as the Company had
the ability and intent to refinance such amounts on a long-term basis through
either the rollover of commercial paper or available borrowing capacity under
its U.S. credit facilities. There was no commercial paper outstanding on March
31, 2004. If the Company is unable to issue commercial paper following a
significant credit downgrade or dislocation in the market, the Company's U.S.
credit facilities are available as a 100 percent backstop. The weighted-average
interest rate for commercial paper was 2.52 percent and 1.07 percent for the
first quarter of 2005 and 2004, respectively.
As of March 31, 2005, available borrowing capacity under our credit
facilities was $1.16 billion. We had $121 million in cash and cash equivalents
on hand at March 31, 2005, up $10 million from the $111 million available at the
end of 2004. The Company was in compliance with the terms of the credit
facilities as of March 31, 2005.
The Company is currently syndicating a new $450 million revolving bank
credit facility for the U.S., a $150 million revolving bank credit facility for
Australia and a $150 million revolving bank credit facility for Canada, which
will replace the Company's existing credit facilities in the same amounts which
are scheduled to mature in June 2007. The new facilities offer more favorable
pricing and will mature in May 2010. The terms will be substantially the same as
the existing credit facilities.
STOCK TRANSACTIONS
The Company has used access to equity capital markets to fund significant
acquisitions.
26
OIL AND GAS CAPITAL EXPENDITURES
The Company funded its exploration and production capital expenditures,
including gathering, transportation and marketing facilities, of $904 million
and $528 million in the first quarter of 2005 and 2004, respectively, primarily
with internally generated cash flow of $836 million and $652 million,
respectively, and its lines of credit and commercial paper program.
The following table presents a summary of the Company's capital
expenditures for each of our reportable segments for the three months ended
March 31, 2005 and 2004.
FOR THE QUARTER ENDED
MARCH 31,
---------------------
2005 2004
--------- ---------
(In thousands)
Exploration and development:
United States............................................. $ 213,285 $ 149,335
Canada.................................................... 316,149 193,029
Egypt..................................................... 78,104 63,666
Australia................................................. 57,441 32,165
North Sea................................................. 118,856 67,005
Other International....................................... 7,946 1,238
--------- ---------
$ 791,781 $ 506,438
========= =========
Capitalized Interest............................................. $ 13,409 $ 13,650
========= =========
Gas gathering, transmission and processing facilities............ $ 92,635 $ 20,321
========= =========
Acquisitions:
Oil and gas properties.................................... $ 19,949 $ 1,329
========= =========
CASH DIVIDEND PAYMENTS
The Company has paid cash dividends on its common stock for 40 consecutive
years through 2004. Future dividend payments will depend on the Company's level
of earnings, financial requirements and other relevant factors. Common dividends
paid during the first quarter of 2005 rose to $26 million, reflecting the
increase in common shares outstanding and the higher common stock dividend rate.
The Company increased its quarterly cash dividend 33 percent, to eight cents per
share from six cents per share, effective with the November 2004 dividend
payment. During the first quarter of 2005, Apache paid a total of $1.4 million
in dividends on its Series B Preferred Stock issued in August 1998.
CONTRACTUAL OBLIGATIONS
We are subject to various financial obligations and commitments in the
normal course of operations. These contractual obligations represent known
future cash payments that we are required to make and relate primarily to
long-term debt, operating leases, pipeline transportation commitments and
international commitments. The Company expects to fund these contractual
obligations with cash generated from operating activities.
Apache is also subject to various contingent obligations that become
payable only if certain events or rulings were to occur. The inherent
uncertainty surrounding the timing of and monetary impact associated with these
events or rulings prevents any meaningful accurate measurement, which is
necessary to assess any impact on future liquidity. Such obligations include
environmental contingencies and potential settlements resulting from litigation.
Apache's management believes that it has adequately reserved for its contingent
obligations. The Company has reserved approximately $11 million for
environmental remediation and approximately $11 million for various legal
liabilities. In addition, the Company recorded $71 million, plus accrued
interest of $4.8 million for the Texaco China B.V. litigation.
The Company's future liquidity could be impacted by a significant
downgrade of its credit ratings by Moody's, Standard and Poor's, and Fitch;
however, we do not believe that such a sharp downgrade is reasonably likely. The
Company's credit facilities do not require the Company to maintain a minimum
credit rating. In addition, generally under our commodity hedge agreements,
Apache may be required to post margin or terminate outstanding positions
27
if the Company's credit ratings decline significantly. The negative covenants
associated with our debt are outlined in greater detail in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Capital Resources and Liquidity, Debt" in the Company's 2004 Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
Apache does not currently utilize any off-balance sheet arrangements with
unconsolidated entities to enhance liquidity and capital resource positions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
The major market risk exposure is in the pricing applicable to our
oil and gas production. Realized pricing is primarily driven by the prevailing
worldwide price for crude oil and spot prices applicable to our United States
and Canadian natural gas production. Prices received for oil and gas production
have been and remain volatile and unpredictable. Average monthly oil price
realizations, including the impact of fixed-price contracts and hedges, ranged
from a low of $42.63 per barrel to a high of $51.16 per barrel during the first
quarter of 2005. Average monthly gas price realizations, including the impact of
fixed-price contracts and hedges, ranged from a monthly low of $5.16 per Mcf to
a monthly high of $5.44 per Mcf during the same period. Based on the Company's
worldwide oil production levels, a $1.00 per barrel change in the
weighted-average realized price of oil would increase or decrease revenues by
$22 million. Based on the Company's worldwide gas production levels, a $.10 per
Mcf change in the weighted-average realized price of gas would increase or
decrease revenues by $11 million.
We periodically enter into hedges in conjunction with selected
acquisitions to protect against commodity price volatility. These hedges
effectively reduce price risk on a portion of our projected oil and natural gas
production from acquisitions.
On March 31, 2005, the Company had open natural gas derivative positions
with a fair value of $(125) million. A 10 percent increase in natural gas prices
would change the fair value by $(44) million. A 10 percent decrease in prices
would change the fair value by $42 million. The Company also had open oil
derivative positions with a fair value of $(136) million on March 31, 2005. A 10
percent increase in crude oil prices would change the fair value by $(41)
million. A 10 percent decrease in prices would change the fair value by $40
million. See Note 2, Hedging and Derivative Instruments of this Form 10-Q, for
notional volumes associated with the Company's derivative contracts.
INTEREST RATE RISK
The Company considers its interest rate risk exposure to be minimal as a
result of fixing interest rates on approximately 87 percent of the Company's
debt. At March 31, 2005, total debt included $340 million of floating-rate debt.
As a result, Apache's annual interest costs in 2005 will fluctuate based on
short-term interest rates on approximately 13 percent of its total debt
outstanding at March 31, 2005. The impact on cash flow of a 10 percent change in
the floating interest rate would be approximately $250,000 per quarter.
FOREIGN CURRENCY RISK
The Company's cash flow stream relating to certain international
operations is based on the U.S. dollar equivalent of cash flows measured in
foreign currencies. In Australia, oil production is sold under U.S. dollar
contracts and natural gas production is sold under fixed-price Australian dollar
contracts. Over half the costs incurred for Australian operations are paid in
Australian dollars. In Canada, the majority of oil and natural gas production is
sold under Canadian dollar contracts. The majority of the costs incurred are
paid in Canadian dollars. The North Sea oil production is sold under U.S. dollar
contracts and the majority of costs incurred are paid in British pounds. In
contrast, all oil and natural gas production in Egypt is sold for U.S. dollars
and the majority of the costs incurred are denominated in U.S. dollars. Revenue
and disbursement transactions denominated in Australian dollars, Canadian
dollars and British pounds are converted to U.S. dollar equivalents based on the
exchange rate as of the transaction date.
28
A 10 percent strengthening of the Australian and Canadian dollars and the
British pound as of March 31, 2005 would result in a foreign currency net loss
of approximately $101 million. This is primarily driven from foreign currency
effects on the Company's deferred tax liability positions in its international
operations. The Company hedged a portion of its foreign exchange risk associated
with lease operating expenditures for 2005. For information on open derivative
contracts, please see Note 2, Hedging and Derivative Instruments of this Form
10-Q.
The information set forth under "Commodity Risk," "Interest Rate Risk" and
"Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2004, is incorporated herein by reference. Information
about market risks for the quarter ended March 31, 2005, does not differ
materially from the disclosure in our 2004 Form 10-K, except as noted above.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent upon certain events, risks and uncertainties that
may be outside the Company's control, and which could cause actual results to
differ materially from those anticipated. Some of these include, but are not
limited to, the market prices of oil and gas, economic and competitive
conditions, inflation rates, legislative and regulatory changes, financial
market conditions, political and economic uncertainties of foreign governments,
future business decisions, and other uncertainties, all of which are difficult
to predict.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and the
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks, including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Although Apache may
make use of futures contracts, swaps, options and fixed-price physical contracts
to mitigate risk, fluctuations in oil and natural gas prices or a prolonged
continuation of low prices, may adversely affect the Company's financial
position, results of operations and cash flows.
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
G. Steven Farris, the Company's President, Chief Executive Officer and
Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice
President and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2005, the end of the period
covered by this report. Based on that evaluation and as of the date of that
evaluation, these officers concluded that the Company's disclosure controls were
effective, providing effective means to insure that information we are required
to disclose under applicable laws and regulations is recorded, processed,
summarized and reported in a timely manner. We also made no significant changes
in internal controls over financial reporting during the quarter ending March
31, 2005, that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
We periodically review the design and effectiveness of our disclosure
controls, including compliance with various laws and regulations that apply to
our operations both inside and outside the United States. We make modifications
to improve the design and effectiveness of our disclosure controls, and may take
other corrective action, if our reviews identify deficiencies or weaknesses in
our controls.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management report called for by Item 308(a) of Regulation S-K is
incorporated herein by reference to Report of Management on Internal Control
Over Financial Reporting, included on Page F-1 in Item 15 of the Company's 2004
Form 10-K.
The independent auditors attestation report called for by Item 308(b) of
Regulation S-K is incorporated by reference to Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting, included on
Page F-3 in Item 15 of the Company's 2004 Form 10-K.
29
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal controls over financial reporting
during the period covered by this quarterly Report on Form 10-Q that materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10 to the Consolidated Financial
Statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 2004 (filed with the SEC on March 16, 2005)
is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 - Statement of computation of ratio of earnings to fixed
charges and combined fixed charges and preferred stock
dividends.
31.1 - Certification of Chief Executive Officer.
31.2 - Certification of Chief Financial Officer.
32.1 - Certification of Chief Executive Officer and Chief
Financial Officer.
(b) Reports filed on Form 8-K
None.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: May 9, 2005 /s/ ROGER B. PLANK
------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer
Dated: May 9, 2005 /s/ THOMAS L. MITCHELL
------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibits
12.1 - Statement of computation of ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends.
31.1 - Certification of Chief Executive Officer.
31.2 - Certification of Chief Financial Officer.
32.1 - Certification of Chief Executive Officer and Chief Financial Officer.