UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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
2000 Post Oak Boulevard, Houston, TX 77056-4400
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
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 September 30, 2005............. 329,293,598
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues ............ $2,051,744 $1,414,128 $5,452,928 $3,814,294
Other ...................................... 9,308 (7,126) 29,643 (16,620)
---------- ---------- ---------- ----------
2,061,052 1,407,002 5,482,571 3,797,674
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization ... 357,159 313,520 1,055,583 895,485
Asset retirement obligation accretion ...... 13,527 11,071 40,016 32,723
Lease operating costs ...................... 279,995 208,372 768,596 616,387
Gathering and transportation costs ......... 23,571 20,902 73,529 60,698
Severance and other taxes .................. 150,394 47,148 309,173 77,691
General and administrative ................. 50,047 38,583 152,460 123,821
China litigation ........................... -- -- -- 71,216
Financing costs:
Interest expense ........................ 43,517 41,753 133,590 122,495
Amortization of deferred loan costs ..... 521 652 3,226 1,814
Capitalized interest .................... (14,990) (12,593) (42,653) (38,951)
Interest income ......................... (2,201) (962) (4,003) (1,795)
---------- ---------- ---------- ----------
901,540 668,446 2,489,517 1,961,584
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES .................... 1,159,512 738,556 2,993,054 1,836,090
Provision for income taxes ................. 472,517 308,081 1,157,546 675,764
---------- ---------- ---------- ----------
NET INCOME .................................... 686,995 430,475 1,835,508 1,160,326
Preferred stock dividends .................. 1,420 1,420 4,260 4,260
---------- ---------- ---------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ........... $ 685,575 $ 429,055 $1,831,248 $1,156,066
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic ...................................... $ 2.08 $ 1.31 $ 5.57 $ 3.55
========== ========== ========== ==========
Diluted .................................... $ 2.05 $ 1.30 $ 5.49 $ 3.51
========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 1,835,508 $ 1,160,326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ............................. 1,055,583 895,485
Asset retirement obligation accretion ................................ 40,016 32,723
Provision for deferred income taxes .................................. 412,652 218,085
Other ................................................................ 48,518 33,981
Changes in operating assets and liabilities:
(Increase) decrease in receivables ................................... (317,394) (143,155)
(Increase) decrease in drilling advances and other ................... (96,259) (13,514)
(Increase) decrease in inventories ................................... 10,822 5,123
(Increase) decrease in deferred charges and other .................... (30,226) (44,880)
Increase (decrease) in accounts payable .............................. 121,003 114,512
Increase (decrease) in accrued expenses .............................. 137,501 80,698
Increase (decrease) in advances from gas purchasers .................. (15,935) (13,116)
Increase (decrease) in deferred credits and noncurrent liabilities ... (41,693) (5,730)
----------- -----------
Net cash provided by operating activities ......................... 3,160,096 2,320,538
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ........................................ (2,736,266) (1,682,037)
Acquisition of Anadarko properties ......................................... -- (92,699)
Acquisition of ExxonMobil properties ....................................... -- (347,352)
Restricted cash for acquisition settlement ................................. -- (444,734)
Other, net ................................................................. 5,236 (55,422)
----------- -----------
Net cash used in investing activities ............................. (2,731,030) (2,622,244)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ....................................................... 112,398 543,366
Payments on long-term debt ................................................. (508,729) (135,300)
Dividends paid ............................................................. (83,046) (62,825)
Common stock activity ...................................................... 18,646 19,324
Treasury stock activity, net ............................................... 5,802 11,412
Cost of debt and equity transactions ....................................... (838) (2,250)
Tax benefits of stock-based compensation and other ......................... 12,292 --
----------- -----------
Net cash provided by (used in) financing activities ............... (443,475) 373,727
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (14,409) 72,021
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 111,093 33,503
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 96,684 $ 105,524
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 96,684 $ 111,093
Receivables, net of allowance ................................ 1,258,387 939,736
Inventories .................................................. 198,436 157,293
Drilling advances ............................................ 101,232 82,889
Prepaid assets and other ..................................... 131,866 57,771
----------- -----------
1,786,605 1,348,782
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties ......................................... 22,507,140 19,933,041
Unproved properties and properties under
development, not being amortized ....................... 808,380 777,690
Gas gathering, transmission and processing facilities ........ 1,285,848 966,605
Other ........................................................ 297,832 284,069
----------- -----------
24,899,200 21,961,405
Less: Accumulated depreciation, depletion and amortization ... (9,153,715) (8,101,046)
----------- -----------
15,745,485 13,860,359
----------- -----------
OTHER ASSETS:
Goodwill, net ................................................ 189,252 189,252
Deferred charges and other ................................... 131,755 104,087
----------- -----------
$17,853,097 $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)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ 726,646 $ 542,074
Accrued operating expense ...................................... 77,976 80,741
Accrued exploration and development ............................ 524,774 341,063
Accrued compensation and benefits .............................. 122,018 83,636
Accrued interest ............................................... 45,672 32,575
Accrued income taxes ........................................... 73,390 78,042
Current debt ................................................... 274 --
Derivative instruments ......................................... 320,734 21,273
Other .......................................................... 251,780 103,487
----------- -----------
2,143,264 1,282,891
----------- -----------
LONG-TERM DEBT .................................................... 2,191,785 2,588,390
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes ................................................... 2,347,583 2,146,637
Advances from gas purchasers ................................... 74,941 90,876
Asset retirement obligation .................................... 984,353 932,004
Derivative instruments ......................................... 213,574 31,417
Other .......................................................... 184,746 225,844
----------- -----------
3,805,197 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,
336,185,275 and 334,912,505 shares issued, respectively ..... 210,116 209,320
Paid-in capital ................................................ 4,170,164 4,106,182
Retained earnings .............................................. 5,763,081 4,017,339
Treasury stock, at cost, 6,891,677 and 7,455,002 shares,
respectively ................................................ (89,971) (97,325)
Accumulated other comprehensive loss ........................... (438,926) (129,482)
----------- -----------
9,712,851 8,204,421
----------- -----------
$17,853,097 $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
(In thousands, except per share) INCOME STOCK STOCK CAPITAL
-------------------------------- ------------- --------- -------- ----------
BALANCE AT DECEMBER 31, 2003 ................ $98,387 $207,818 $4,038,007
Comprehensive income (loss):
Net income ............................ $1,160,326 -- -- --
Commodity hedges, net of income tax
benefit of $16,280 ................. (27,454) -- -- --
----------
Comprehensive income ..................... $1,132,872
==========
Dividends:
Preferred ............................. -- -- --
Common ($.20 per share) ............... -- -- --
Common shares issued ..................... -- 923 59,807
Treasury shares issued, net .............. -- -- 7,579
Other .................................... -- -- 4,418
------- -------- ----------
BALANCE AT SEPTEMBER 30, 2004 ............... $98,387 $208,741 $4,109,811
======= ======== ==========
BALANCE AT DECEMBER 31, 2004 ................ $98,387 $209,320 $4,106,182
Comprehensive income (loss):
Net income ............................ $1,835,508 -- -- --
Commodity hedges, net of income tax
benefit of $185,766 ................ (309,444) -- -- --
----------
Comprehensive income ..................... $1,526,064
==========
Dividends:
Preferred ............................. -- -- --
Common ($.26 per share) ............... -- -- --
Common shares issued ..................... -- 796 56,795
Treasury shares issued, net .............. -- -- 7,064
Other .................................... -- -- 123
------- -------- ----------
BALANCE AT SEPTEMBER 30, 2005 ............... $98,387 $210,116 $4,170,164
======= ======== ==========
ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands, except per share) EARNINGS STOCK INCOME (LOSS) EQUITY
-------------------------------- ---------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 2003 ................ $2,445,698 $(105,169) $(151,943) $6,532,798
Comprehensive income (loss):
Net income ............................ 1,160,326 -- -- 1,160,326
Commodity hedges, net of income tax
benefit of $16,280 ................. -- -- (27,454) (27,454)
Comprehensive income .....................
Dividends:
Preferred ............................. (4,260) -- -- (4,260)
Common ($.20 per share) ............... (65,211) -- -- (65,211)
Common shares issued ..................... -- -- -- 60,730
Treasury shares issued, net .............. -- 7,060 -- 14,639
Other .................................... -- -- -- 4,418
---------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 2004 ............... $3,536,553 $ (98,109) $(179,397) $7,675,986
========== ========= ========= ==========
BALANCE AT DECEMBER 31, 2004 ................ $4,017,339 $ (97,325) $(129,482) $8,204,421
Comprehensive income (loss):
Net income ............................ 1,835,508 -- -- 1,835,508
Commodity hedges, net of income tax
benefit of $185,766 ................ -- -- (309,444) (309,444)
Comprehensive income .....................
Dividends:
Preferred ............................. (4,260) -- -- (4,260)
Common ($.26 per share) ............... (85,506) -- -- (85,506)
Common shares issued ..................... -- -- -- 57,591
Treasury shares issued, net .............. -- 7,354 -- 14,418
Other .................................... -- -- -- 123
---------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 2005 ............... $5,763,081 $ (89,971) $(438,926) $9,712,851
========== ========= ========= ==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation (Apache
or the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC), and reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the summary of
significant accounting policies and notes included in the Company's most recent
annual report on Form 10-K.
Reclassifications and Restatements
The financial statement amounts applicable to the three-month and
nine-month periods ending September 30, 2004 presented in this Form 10-Q will
not agree to the amounts originally reported in the Company's Form 10-Q filed
November 9, 2004, because they have been restated to reflect early adoption of
Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based
Payment" (SFAS No. 123-R) (see Note 4, Capital Stock - 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
No material acquisitions were completed during the three-month or
nine-month periods ending September 30, 2005.
2004 ACQUISITIONS
ANADARKO
In August 2004, Apache signed a definitive agreement to acquire all of
Anadarko Petroleum Corporation's (Anadarko) Gulf of Mexico Outer Continental
Shelf properties (excluding certain deepwater properties) for $537 million,
subject to normal post-closing adjustments, including preferential rights. The
transaction was effective as of October 1, 2004, and included interests in 74
fields covering 232 offshore blocks (approximately 664,000 acres) and 104
platforms. Eighty-nine of the blocks were undeveloped at the time of the
acquisition. At the time of acquisition, Apache operated 49 of the fields
comprising approximately 70 percent of the production. Prior to Apache's
purchase from Anadarko, Morgan Stanley Capital Group, Inc. paid Anadarko $646
million to acquire an overriding royalty interest in these properties. For a
complete discussion of this transaction, please refer to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions
and Divestitures, of Item 15 in the Company's 2004 Form 10-K.
EXXONMOBIL
During the third quarter of 2004, Apache entered into separate arrangements
with Exxon Mobil Corporation and its affiliates (ExxonMobil) that provided for
property transfers and joint operating and exploration activity across a broad
range of prospective and mature properties in (1) Western Canada, (2) West Texas
and New Mexico, and (3) onshore Louisiana and the Gulf of Mexico-Outer
Continental Shelf. Apache's participation included cash payments of
approximately $347 million, subject to normal post-closing adjustments. For a
complete discussion of these transactions, please refer to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Results of Operations, Acquisitions and Divestitures" and Note 2, Acquisitions
and Divestitures, of Item 15 in the Company's 2004 Form 10-K.
6
2. HEDGING AND DERIVATIVE INSTRUMENTS
Apache uses a variety of strategies to manage its exposure to fluctuations
in crude oil and natural gas commodity prices. As established by the Company's
hedging policy, Apache occasionally enters into cash flow hedges in connection
with selected acquisitions to protect against commodity price volatility. The
success of these acquisitions is significantly influenced by Apache's ability to
achieve targeted production at forecasted prices over the long-term. These
hedges effectively reduce price risk on a portion of the production from the
acquisitions.
Apache entered into, and designated as cash flow hedges, various
fixed-price swaps, option collars and puts in conjunction with the ExxonMobil
and Anadarko property acquisitions completed in 2004. These positions were
entered into in accordance with the Company's hedging policy and involved
counterparties which are rated A+ or better. As of September 30, 2005, the
outstanding positions of our natural gas and crude oil cash flow hedges were as
follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY)
---------------- -------------------- ------------- ---------------- -----------------
(In thousands)
4th Quarter 2005 Gas Collars 6,440,000 $ 6.00 / 6.78 $ (46,930)
Gas Fixed-Price Swap 1,534,000 6.24 (11,992)
Oil Collars 901,600 33.51 / 41.72 (22,098)
Oil Fixed-Price Swap 86,000 40.95 (2,173)
Oil Put Option 386,400 28.00 --
2006 Gas Collars 32,850,000 5.50 / 6.66 (162,896)
Gas Fixed-Price Swap 4,404,000 5.87 (25,713)
Oil Collars 4,307,000 32.07 / 40.66 (110,579)
Oil Fixed-Price Swap 224,000 38.50 (6,140)
Oil Put Option 1,533,000 28.00 63
2007 Gas Collars 24,570,000 5.25 / 6.20 (88,596)
Gas Fixed-Price Swap 1,761,000 5.57 (7,363)
Oil Collars 1,911,000 33.00 / 39.25 (47,140)
Oil Fixed-Price Swap 78,000 36.89 (2,039)
The natural gas and crude oil prices shown in the above table are based on
the NYMEX index and have been valued using actively quoted prices and quotes
obtained from reputable third-party financial institutions. The above prices
represent a weighted average of several contracts entered into and are on a per
million British thermal units (MMBtu) or per barrel (Bbl) basis for gas and oil
derivatives, respectively.
In November 2004, Apache hedged a portion of its 2005 foreign currency
exchange risk associated with its forecasted Canadian, Australian and North Sea
lease operating expenditures by entering into forward purchase contracts. The
Company purchased a total of 144 million Canadian dollars at an average exchange
rate of .840, 22 million Australian dollars at an average exchange rate of .763
and 42 million British pounds at an average exchange rate of 1.853. The
remaining forward contracts mature through December 2005. The fair market value
of these contracts as of September 30, 2005 was a gain of $183,000 ($141,000
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 gain (loss) on derivatives at December 31, 2004.... $ (33,113) $ (20,732)
Net losses realized into earnings............................. 62,116 38,837
Net change in derivative fair value........................... (557,326) (348,281)
--------- ---------
Unrealized gain (loss) on derivatives at September 30, 2005... $(528,323) $(330,176)
========= =========
7
Based on current market prices as of September 30, 2005, the Company has an
unrealized loss in other comprehensive income (loss) of $528 million ($330
million after tax), primarily representing commodity derivative hedges. Gains
and losses on the commodity hedges will be realized in future earnings
contemporaneously with the related sales of natural gas and crude oil production
applicable to specific hedges. Gains and losses on the foreign exchange
contracts will be realized in future earnings as the forecasted lease operating
expenditures are incurred. Of the $528 million unrealized loss on commodity
derivatives as of September 30, 2005, approximately $316 million ($198 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. These contracts,
designated as hedges, qualified and continue to qualify for hedge accounting in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133, as
amended.
3. DEBT
On May 12, 2005, the Company entered into a new $450 million revolving bank
credit facility for the U.S., a $150 million revolving bank credit facility for
Australia and a $150 million revolving bank credit facility for Canada. These
new facilities replaced the Company's existing credit facilities in the same
amounts which were scheduled to mature in June 2007. These new facilities are
scheduled to mature on May 12, 2010. There were no changes to the Company's $750
million U.S. credit facility which matures in May 2009.
The financial covenants of the Company's revolving bank credit facilities
require the Company to maintain a debt-to-capitalization ratio of not greater
than 60 percent at the end of any fiscal quarter. The negative covenants include
restrictions on the Company's ability to create liens and security interests on
our assets, with exceptions for liens typically arising in the oil and gas
industry, purchase money liens and liens arising as a matter of law, such as tax
and mechanics' liens. The Company may incur liens on assets located in the U.S.,
Canada and Australia of up to five percent of the Company's consolidated assets,
which would approximate $893 million as of September 30, 2005. There are no
restrictions on incurring liens in countries other than the U.S., Canada and
Australia. There are also restrictions on Apache's ability to merge with another
entity, unless the Company is the surviving entity, and a restriction on our
ability to guarantee debt of entities not within our consolidated group.
There are no clauses in the facilities that permit the lenders to
accelerate payments or refuse to lend based on unspecified material adverse
changes (MAC clauses). The credit facility agreements do not have drawdown
restrictions or prepayment obligations in the event of a decline in credit
ratings. However, the agreements allow the lenders to accelerate payments and
terminate lending commitments if Apache Corporation, or any of its U.S.,
Canadian or Australian subsidiaries, defaults on any direct payment obligation
in excess of $100 million or has any unpaid, non-appealable judgment against it
in excess of $100 million. The Company was in compliance with the terms of the
credit facilities as of September 30, 2005. The Company's debt-to-capitalization
ratio as of September 30, 2005 was 18.4 percent.
At the Company's option, the interest rate for the facilities is based on
(i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal
funds rate plus one-half of one percent or (ii) the London Interbank Offered
Rate (LIBOR) plus a margin determined by the Company's senior long-term debt
rating. The $750 million and the $450 million credit facilities (U.S. credit
facilities) also allow the Company to borrow under competitive auctions.
At September 30, 2005, the margin over LIBOR for committed loans under the
new facilities was .23 percent. If the total amount of the loans borrowed under
all three facilities equals or exceeds 50 percent of the total facility
commitments, then an additional .10 percent will be added to the margins over
LIBOR. The Company also pays quarterly facility fees of .07 percent on the total
amount of the three facilities. The facility fees vary based upon the Company's
senior long-term debt rating.
8
4. CAPITAL STOCK
NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
FOR THE QUARTER ENDED SEPTEMBER 30,
---------------------------------------------------------------
2005 2004
------------------------------ ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ------- --------- -------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock .... $685,575 329,219 $2.08 $429,055 326,294 $1.31
===== =====
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ................ -- 4,945 -- 3,899
-------- ------- -------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions ....... $685,575 334,164 $2.05 $429,055 330,193 $1.30
======== ======= ===== ======== ======= =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2005 2004
-------------------------------- --------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ------- --------- ---------- ------- ---------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock .... $1,831,248 328,615 $5.57 $1,156,066 325,657 $3.55
===== =====
EFFECT OF DILUTIVE SECURITIES:
Stock options and other ................ -- 4,987 -- 3,801
---------- ------- ---------- -------
DILUTED:
Income attributable to common stock,
including assumed conversions ....... $1,831,248 333,602 $5.49 $1,156,066 329,458 $3.51
========== ======= ===== ========== ======= =====
STOCK-BASED COMPENSATION
In the fourth quarter 2004, Apache elected to early adopt Financial
Accounting Standards Board (FASB) SFAS No. 123-R under the "Modified
Retrospective Approach", effective January 1, 2004. Under this approach, the
Company is required to expense all options and other stock-based compensation
that vest during the year based on the fair value determined at the date of
grant.
Total stock-based compensation cost (net of amounts capitalized) is
presented in the table below. The related stock-based compensation cost
capitalized as part of oil and gas properties was $11 million and $29 million
for the three-month and nine-month periods ended September 30, 2005,
respectively, and $5 million and $14 million for the three-month and nine-month
periods ended September 30, 2004, respectively.
2005 2004
----------------- -----------------
GROSS AFTER TAX GROSS AFTER TAX
----- --------- ----- ---------
(In millions)
Stock-based compensation expense:
For the quarter ended September 30....... $21 $13 $12 $ 8
For the nine months ended September 30... 59 37 31 19
STOCK OPTION PLAN
On May 5, 2005, the Company's stockholders approved a new stock option plan
and 1.7 million options were subsequently awarded to substantially all
employees. The estimated fair value per share determined on the date of grant
was $20.25. The terms and underlying valuation assumptions of the grant are
consistent with prior-year awards and are expensed on a straight-line basis over
the four-year vesting term.
9
SHARE APPRECIATION PLAN
Also in May 2005, the Company's stockholders approved a new targeted stock
plan that provides incentives for employees to double Apache's share price to
$108 by the end of 2008, with an interim goal of $81 to be achieved by the end
of 2007. To achieve the trigger price, the Company's stock price must close at
or above the stated threshold for 10 days out of any 30 consecutive trading days
by the end of the stated period. Under the plan, if the first threshold is
achieved, approximately 1.3 million shares would be awarded for an intrinsic
cost of $106 million. Achieving the second threshold would result in
approximately 2.0 million shares awarded for an intrinsic cost of $213 million.
Shares ultimately issued would be reduced for any minimum tax withholding
requirements. Under the terms of the new targeted stock plan, awards are payable
in four equal installments, beginning with the date the trigger stock price is
met and on each succeeding anniversary date.
Current accounting practices dictate that, regardless of whether these
thresholds are ultimately achieved, the Company must recognize the fair value
cost at the grant date based on numerous assumptions, including an estimate of
the likelihood that Apache's stock price will achieve these thresholds and the
expected forfeiture rate. As a result, the Company will recognize expense and
capitalized costs of approximately $68 million over the expected service life of
the plan. The weighted average fair value at the date of grant, based on the
Monte Carlo Simulation Model, was $23.67 per share.
CASH DIVIDEND PAYMENTS
During the third quarters of 2005 and 2004, Apache paid dividends on its
Common Stock of $26 million and $20 million, respectively. 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, effective with the November 2004 payment. On September 15, 2005, the
Company announced that its Board of Directors voted to increase the quarterly
cash dividend on its common stock to ten cents per share, effective with the
November 2005 payment. During the second quarter 2005, Apache paid a total of
$1.4 million in dividends in both periods on its Series B Preferred Stock issued
in August 1998.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
-------- --------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) .. $ 69,173 $ 63,333
Income taxes (net of refunds) .......... 816,221 352,585
6. PENSION AND POSTRETIREMENT BENEFITS
Apache has a non-contributory defined benefit pension plan that provides
retirement benefits for certain North Sea employees meeting established age and
service requirements. The pension plan is closed to new employees. Apache also
has a postretirement benefit plan which provides benefits for substantially all
of its U.S. employees. The postretirement benefit plan provides medical benefits
up until the age of 65 and is contributory.
10
NET PERIODIC COST
The following table presents the plans' net periodic benefit cost for the
three and nine month periods ended September 30, 2005 and 2004.
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
------------------------------------- ----------------------------------
QUARTER ENDED NINE MONTHS ENDED QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------- -------------- -----------------
2005 2004 2005 2004 2005 2004 2005 2004
-------- ------ ------- ------- ---- ---- ------ ------
(In thousands)
Components of net periodic benefit cost:
Service cost ........................... $ 1,540 $1,364 $ 4,778 $ 4,091 $350 $243 $1,049 $ 727
Interest cost .......................... 1,093 905 3,392 2,718 204 157 610 471
Expected return on plan assets ......... (1,181) (896) (3,664) (2,689) -- -- -- --
Amortization of transition obligation .. -- -- -- -- 11 11 33 33
Amortization of actuarial (gain)/loss .. -- -- -- -- 82 62 248 187
------- ------ ------- ------- ---- ---- ------ ------
Net periodic benefit cost ........... $ 1,452 $1,373 $ 4,506 $ 4,120 $647 $473 $1,940 $1,418
======= ====== ======= ======= ==== ==== ====== ======
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 September 30, 2005,
approximately $3.8 million of contributions have been made to the plans for the
year.
11
7. 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 SEPTEMBER
30, 2005
Oil and Gas Production Revenues ...... $ 761,167 $ 375,310 $ 378,194 $ 122,423 $ 378,977 $ 35,673 $ 2,051,744
========== ========== ========== ========== ========== ======== ===========
Operating Income (1) ................. $ 439,330 $ 230,741 $ 293,410 $ 62,216 $ 182,520 $ 18,881 $ 1,227,098
========== ========== ========== ========== ========== ========
Other Income (Expense):
Other ............................. 9,308
General and administrative ........ (50,047)
Financing costs, net .............. (26,847)
-----------
Income Before Income Taxes ........... $ 1,159,512
===========
FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2005
Oil and Gas Production Revenues ...... $2,154,921 $ 962,188 $ 984,452 $ 300,008 $ 932,901 $118,458 $ 5,452,928
========== ========== ========== ========== ========== ======== ===========
Operating Income (1) ................. $1,222,036 $ 562,314 $ 738,838 $ 152,786 $ 470,090 $ 59,967 $ 3,206,031
========== ========== ========== ========== ========== ========
Other Income (Expense):
Other ............................. 29,643
General and administrative ........ (152,460)
Financing costs, net .............. (90,160)
-----------
Income Before Income Taxes ........... $ 2,993,054
===========
Total Assets ......................... $7,852,092 $4,567,754 $2,425,911 $1,212,946 $1,628,267 $166,127 $17,853,097
========== ========== ========== ========== ========== ======== ===========
FOR THE QUARTER ENDED SEPTEMBER
30, 2004
Oil and Gas Production Revenues ...... $ 582,846 $ 253,329 $ 258,684 $ 155,951 $ 135,224 $ 28,094 $ 1,414,128
========== ========== ========== ========== ========== ======== ===========
Operating Income (1) ................. $ 324,453 $ 140,122 $ 195,352 $ 79,337 $ 59,963 $ 13,888 813,115
========== ========== ========== ========== ========== ========
Other Income (Expense):
Other ............................. (7,126)
General and administrative ........ (38,583)
China litigation provision ........ --
Financing costs, net .............. (28,850)
-----------
Income Before Income Taxes ........... $ 738,556
===========
FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2004
Oil and Gas Production Revenues ...... $1,683,181 $ 723,266 $ 671,346 $ 345,600 $ 321,353 $ 69,548 $ 3,814,294
========== ========== ========== ========== ========== ======== ===========
Operating Income (1) ................. $ 924,746 $ 399,549 $ 473,147 $ 169,114 $ 134,677 $ 30,077 $ 2,131,310
========== ========== ========== ========== ========== ========
Other Income (Expense):
Other ............................. (16,620)
General and administrative ........ (123,821)
China litigation provision ........ (71,216)
Financing costs, net .............. (83,563)
-----------
Income Before Income Taxes ........... $ 1,836,090
===========
Total Assets ......................... $6,949,034 $3,364,170 $1,960,751 $1,036,576 $1,121,214 $190,970 $14,622,715
========== ========== ========== ========== ========== ======== ===========
(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.
12
8. ASSET RETIREMENT OBLIGATIONS
The following table describes changes to the Company's asset retirement
obligation (ARO) liability for the nine months ended September 30, 2005 (in
thousands):
Asset retirement obligation as of December 31, 2004 .... $932,004
Liabilities incurred ................................... 76,709
Liabilities settled .................................... (64,376)
Accretion expense ...................................... 40,016
--------
Asset retirement obligation as of September 30, 2005 ... $984,353
========
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.
During the third quarter, nine of the Company's offshore platforms in the
Gulf of Mexico were lost, two platforms were severely damaged and approximately
12 non-operated structures were destroyed as a result of Hurricane Katrina and
Hurricane Rita (refer to Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Impact of Hurricanes" in this
Form 10-Q). These platforms have abandonment obligations associated with them
that will be incurred in the near future and will likely require significantly
more cost because of underwater recovery efforts. The Company is continuing to
assess the expected timing and ultimate costs anticipated to abandon these
platforms. Any revisions to future cash outflow or changes in timing resulting
from the hurricanes will be reflected in oil and gas properties when those
estimates become reasonably determinable. Any new facilities built to recover
reserves previously serviced by the destroyed platforms will have separate
abandonment liabilities associated with them. Future cash payments made to
abandon properties impacted by the hurricanes and to build new facilities will
be offset to some degree by insurance proceeds. These proceeds will be reflected
as a separate receivable and not netted with the abandonment liability.
9. LITIGATION
TEXACO CHINA B.V.
Apache recorded a reserve in the second quarter of 2004 to fully reflect a
pre-tax $71 million international arbitration award to Texaco China B.V. (Texaco
China). The arbitration award was subject to interest at nine percent until May
6, 2005, the date following the federal district court ruling discussed below.
On May 6, 2005, the interest rate dropped to 3.33 percent. Apache accrued $3.2
million of interest expense in 2004 and an additional $3.2 million of interest
expense in the first nine months of 2005. In September 2001, Texaco China
initiated an arbitration proceeding against Apache China Corporation LDC (Apache
China), later adding Apache Bohai Corporation LDC (Apache Bohai) to the
arbitration. In the arbitration Texaco China claimed damages, plus interest,
arising from Apache Bohai's alleged failure to drill three wells, prior to
re-assignment of the interest to Texaco China. Apache believes that the finding
of the arbitrator is unsupported by the facts and the law, and Apache filed an
application to vacate the award in federal court. Texaco China filed an
application to confirm the award in the same court. On May 5, 2005, the federal
district court ruled in favor of Texaco China. The Company has appealed that
decision to the circuit court of appeals. In January 2005, while awaiting the
decision of the U.S. federal courts, Texaco China also filed a proceeding
against Apache China and Apache Bohai in the People's Republic of China to
recognize the award, apparently seeking the same relief as sought in U.S.
federal court. The parties subsequently agreed to stay enforcement of the
arbitration award in China and elsewhere pending the final, determinative
outcome of all possible appeals in the U.S. federal courts.
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 approximately
C$3.6 billion. In September 2004, the Canadian court granted Apache Canada's
motion for summary judgment on
13
the counterclaim, dismissing more than C$3 billion of Predator's claims against
the Company and Murphy, and dismissing 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 Canadian
court has also granted Predator's request to add some new mismanagement of
operations claims to its counterclaim. At this time, Predator's counterclaims
against Murphy and Apache Canada for mismanaging operations still survive in the
trial court. Those combined claims total approximately C$365 million, plus
interest and attorneys' fees. While management believes Predator's counterclaim
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.
GRYNBERG
In 1997, Jack J. Grynberg began filing lawsuits against other natural gas
producers, gatherers, and pipelines claiming that the defendants have under paid
royalty to the federal government and Indian tribes by mis-measurement of the
volume and heating content of natural gas and are responsible for acts of others
who mis-measured natural gas. In 2004, Grynberg filed suit against Apache making
the same claims he had made previously against others in the industry. With the
addition of Apache, there are more than 300 defendants to these actions. Other
plaintiffs have made or may be expected to make similar claims. The Grynberg
lawsuits have, for the most part, been consolidated through a federal
Multi-District Litigation (MDL) action located in Wyoming federal court for
discovery and pre-trial purposes. The defendants in the MDL, jointly and/or
separately, filed motions to dismiss based upon certain statutory requirements
Grynberg is required to prove to proceed with these qui tam lawsuits. These
motions were referred to a magistrate for recommendation for decision. The
magistrate has recommended some defendants be dismissed. Subsequent motions are
pending before the federal district court by both sides on these recommendations
for confirmation and/or denial of the recommendation. It is unclear from the
Magistrate's recommendation if there was a ruling on Apache's filing for
dismissal; however, at this time, Apache has not been dismissed. Apache has
filed additional pleadings to obtain rulings on its separate request for
dismissal. Although Grynberg purports to be acting on behalf of the government,
the federal government has declined to join in the cases. While an adverse
judgment against Apache is possible, Apache does not believe the plaintiff's
claims have merit and plans to vigorously pursue its defenses against these
claims. Exposure related to this lawsuit is not currently determinable.
EGYPT TAX AUTHORITY
As of the end of 2004, the Egyptian Tax Authority (ETA) had issued claims
for back taxes against various Apache subsidiaries in Egypt totaling
approximately $106 million (at current exchange rates) relating to periods as
far back as 1994. In July 2005, the ETA made a new claim for approximately $85
million of additional taxes for the 1994-99 tax years. While an adverse judgment
against Apache is possible, Egyptian concession agreements clearly provide that
the Egyptian General Petroleum Corporation is responsible for the payment of all
taxes related to the operation of the concessions. Apache believes that the
claims of the ETA are unsupported by either the facts or the language of the
concession agreements, which have the force of law in Egypt. Apache's
subsidiaries have, therefore, contested liability with respect to the original
claims by filing actions in Egyptian civil court, and will pursue all
appropriate appeals and actions to challenge the new tax claims as well. Apache
plans to vigorously pursue its remedies with respect to these claims. A civil
court ruling with respect to the initial tax claims is expected sometime in
2006.
LOUISIANA RESTORATION
Numerous surface owners have filed claims or sent demand letters to various
oil and gas companies, including Apache, claiming that, under either expressed
or implied lease terms or Louisiana law, they are liable for damage measured by
the cost of restoration of leased premises to their original condition. Many of
these lawsuits claim small amounts, while others assert claims in excess of a
million dollars. Also, some lawsuits or claims are being settled or resolved,
while others are still being filed. Any exposure, therefore, related to these
lawsuits and claims is not currently determinable. While an adverse judgment
against Apache is possible, Apache intends to actively defend the cases.
HURRICANE RELATED LITIGATION
A class action lawsuit has been filed styled Barasich, et al., individually
and as representatives of all those similarly situated vs. Columbia Gulf
Transmission Co., et al, No. 05-4161, United States District Court, Eastern
14
District of Louisiana, against all oil and gas and pipeline companies that
drilled or dredged in the marshes of South Louisiana. The lawsuit claims
defendants were negligent by constructing canals and conducting oil and gas
operations, which plaintiffs contend is the sole and/or almost the sole cause of
the alleged destruction of the marshes in South Louisiana, which plaintiffs
blame for all and/or substantially all loss of life and destruction of property
which was incurred from Hurricane Katrina. Apache was not named, but if a
defendant class is certified, would fall within the definition alleged. Apache
believes such claims are without merit, and if joined will undertake an active
defense to such claims.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2005, the FASB ratified the consensus in Emerging Issue Task Force
(EITF) Issue Number 04-5, "Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" (Issue 04-5). EITF Issue Number 04-5
states that the general partner in a limited partnership is presumed to control
the partnership and must consolidate the entity on its financial statements. The
presumption of control and consolidation requirement may be overcome if the
limited partners have substantive participating rights or have the ability to
effectively liquidate the partnership. The Company's only limited partnership
covered by the EITF is the Apache Offshore Investment Partnership. Management is
currently determining the ultimate impact of applying this statement, but does
not believe application of Issue Number 04-5 will have a material impact on the
Company's consolidated financial statements. The effective date for applying the
guidance in Issue Number 04-5 to existing limited partnerships is for the first
reporting period in fiscal years beginning after December 15, 2005.
In September 2005, the EITF reached a consensus on Issue No. 04-13,
"Accounting for Purchases and Sales of Inventory with the Same Counterparty,"
concluding that purchases and sales of inventory with the same party in the same
line of business should be accounted for as a single non-monetary exchange, if
entered into in contemplation of one another. Apache presents such purchase and
sale activities related to its marketing activities on a net basis in its
Statement of Consolidated Operations. The conclusion reached on EITF Issue No.
04-13 was that it did not have any impact on the Company's consolidated
financial statements.
11. SUBSEQUENT EVENT
On October 13, 2005, the Company announced that it had agreed to sell its
55 percent interest in the deepwater section of Egypt's West Mediterranean
Concession to Amerada Hess Corporation for $413 million. Apache also has agreed
to purchase Amerada Hess' interests in eight fields located in the Permian Basin
of West Texas and New Mexico, six of which are operated, for $404 million. The
Permian Basin transaction is subject to exercise of preferential rights to
purchase by third parties as well as to standard closing requirements.
12. 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.
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- --------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $ 757,281 $ -- $ -- $ --
Equity in net income (loss) of affiliates ... 410,091 10,979 13,952 62,111
Other ....................................... 4,413 -- -- --
---------- ------- ------- -------
1,171,785 10,979 13,952 62,111
---------- ------- ------- -------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 139,719 -- -- --
Asset retirement obligation accretion ....... 7,967 -- -- --
Lease operating costs ....................... 136,530 -- -- --
Gathering and transportation costs .......... 7,090 -- -- --
Severance and other taxes ................... 28,496 -- -- --
General and administrative .................. 42,658 -- -- --
Financing costs, net ........................ 17,912 -- 4,512 14,110
---------- ------- ------- -------
380,372 -- 4,512 14,110
---------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES .............. 791,413 10,979 9,440 48,001
Provision (benefit) for income taxes ........ 104,418 -- (1,539) (4,738)
---------- ------- ------- -------
NET INCOME ..................................... 686,995 10,979 10,979 52,739
Preferred stock dividends ................... 1,420 -- -- --
---------- ------- ------- -------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 685,575 $10,979 $10,979 $52,739
========== ======= ======= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $1,397,113 $(102,650) $2,051,744
Equity in net income (loss) of affiliates ... (12,345) (484,788) --
Other ....................................... 4,895 -- 9,308
---------- --------- ----------
1,389,663 (587,438) 2,061,052
---------- --------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 217,440 -- 357,159
Asset retirement obligation accretion ....... 5,560 -- 13,527
Lease operating costs ....................... 246,115 (102,650) 279,995
Gathering and transportation costs .......... 16,481 -- 23,571
Severance and other taxes ................... 121,898 -- 150,394
General and administrative .................. 7,389 -- 50,047
Financing costs, net ........................ (9,687) -- 26,847
---------- --------- ----------
605,196 (102,650) 901,540
---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 784,467 (484,788) 1,159,512
Provision (benefit) for income taxes ........ 374,376 -- 472,517
---------- --------- ----------
NET INCOME ..................................... 410,091 (484,788) 686,995
Preferred stock dividends ................... -- -- 1,420
---------- --------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 410,091 $(484,788) $ 685,575
========== ========= ==========
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- -------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $581,632 $ -- $ -- $ --
Equity in net income (loss) of affiliates ... 239,066 11,286 14,242 25,869
Other ....................................... (2,547) -- -- --
-------- ------- ------- -------
818,151 11,286 14,242 25,869
-------- ------- ------- -------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 136,169 -- -- --
Asset retirement obligation accretion ....... 5,897 -- -- --
Lease operating costs ....................... 90,391 -- -- --
Gathering and transportation costs .......... 7,154 -- -- --
Severance and other taxes ................... 17,527 -- -- --
General and administrative .................. 30,659 -- -- --
Financing costs, net ........................ 19,572 -- 4,512 9,936
-------- ------- ------- -------
307,369 -- 4,512 9,936
-------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES .............. 510,782 11,286 9,730 15,933
Provision (benefit) for income taxes ........ 80,307 -- (1,556) 1,470
-------- ------- ------- -------
NET INCOME ..................................... 430,475 11,286 11,286 14,463
Preferred stock dividends ................... 1,420 -- -- --
-------- ------- ------- -------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $429,055 $11,286 $11,286 $14,463
======== ======= ======= =======
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $909,350 $ (76,854) $1,414,128
Equity in net income (loss) of affiliates ... (14,362) (276,101) --
Other ....................................... (4,579) -- (7,126)
-------- --------- ----------
890,409 (352,955) 1,407,002
-------- --------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 177,351 -- 313,520
Asset retirement obligation accretion ....... 5,174 -- 11,071
Lease operating costs ....................... 194,835 (76,854) 208,372
Gathering and transportation costs .......... 13,748 -- 20,902
Severance and other taxes ................... 29,621 -- 47,148
General and administrative .................. 7,924 -- 38,583
Financing costs, net ........................ (5,170) -- 28,850
-------- --------- ----------
423,483 (76,854) 668,446
-------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 466,926 (276,101) 738,556
Provision (benefit) for income taxes ........ 227,860 -- 308,081
-------- --------- ----------
NET INCOME ..................................... 239,066 (276,101) 430,475
Preferred stock dividends ................... -- -- 1,420
-------- --------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $239,066 $(276,101) $ 429,055
======== ========= ==========
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- --------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $2,128,566 $ -- $ -- $ --
Equity in net income (loss) of affiliates ... 1,120,922 23,103 32,056 171,971
Other ....................................... 40,859 -- -- --
---------- ------- ------- --------
3,290,347 23,103 32,056 171,971
---------- ------- ------- --------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 447,770 -- -- --
Asset retirement obligation accretion ....... 23,674 -- -- --
Lease operating costs ....................... 360,626 -- -- --
Gathering and transportation costs .......... 22,656 -- -- --
Severance and other taxes ................... 72,112 -- -- 1
General and administrative .................. 127,950 -- -- --
Financing costs, net ........................ 58,140 -- 13,537 42,330
---------- ------- ------- --------
1,112,928 -- 13,537 42,331
---------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES .............. 2,177,419 23,103 18,519 129,640
Provision (benefit) for income taxes ........ 341,911 -- (4,584) (14,223)
---------- ------- ------- --------
NET INCOME ..................................... 1,835,508 23,103 23,103 143,863
Preferred stock dividends ................... 4,260 -- -- --
---------- ------- ------- --------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,831,248 $23,103 $23,103 $143,863
========== ======= ======= ========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $3,582,523 $ (258,161) $5,452,928
Equity in net income (loss) of affiliates ... (37,061) (1,310,991) --
Other ....................................... (11,216) -- 29,643
---------- ----------- ----------
3,534,246 (1,569,152) 5,482,571
---------- ----------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 607,813 -- 1,055,583
Asset retirement obligation accretion ....... 16,342 -- 40,016
Lease operating costs ....................... 666,131 (258,161) 768,596
Gathering and transportation costs .......... 50,873 -- 73,529
Severance and other taxes ................... 237,060 -- 309,173
General and administrative .................. 24,510 -- 152,460
Financing costs, net ........................ (23,847) -- 90,160
---------- ----------- ----------
1,578,882 (258,161) 2,489,517
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 1,955,364 (1,310,991) 2,993,054
Provision (benefit) for income taxes ........ 834,442 -- 1,157,546
---------- ----------- ----------
NET INCOME ..................................... 1,120,922 (1,310,991) 1,835,508
Preferred stock dividends ................... -- -- 4,260
---------- ----------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,120,922 $(1,310,991) $1,831,248
========== =========== ==========
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- --------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $1,679,091 $ -- $ -- $ --
Equity in net income (loss) of affiliates ... 657,923 29,968 38,958 117,268
Other ....................................... (4,458) -- -- --
---------- ------- -------- --------
2,332,556 29,968 38,958 117,268
---------- ------- -------- --------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 405,223 -- -- --
Asset retirement obligation accretion ....... 17,497 -- -- --
Lease operating costs ....................... 263,078 -- -- --
Gathering and transportation costs .......... 22,377 -- -- --
Severance and other taxes ................... 46,323 -- -- 18
General and administrative .................. 98,487 -- -- --
China litigation provision .................. -- -- -- --
Financing costs, net ........................ 61,588 -- 13,534 29,979
---------- ------- -------- --------
914,573 -- 13,534 29,997
---------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES .............. 1,417,983 29,968 25,424 87,271
Provision (benefit) for income taxes ........ 257,657 -- (4,544) (5,315)
---------- ------- -------- --------
NET INCOME ..................................... 1,160,326 29,968 29,968 92,586
Preferred stock dividends ................... 4,260 -- -- --
---------- ------- -------- --------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $1,156,066 $29,968 $ 29,968 $ 92,586
========== ======= ======== ========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues ............. $2,367,271 $ (232,068) $3,814,294
Equity in net income (loss) of affiliates ... (33,672) (810,445) --
Other ....................................... (12,162) -- (16,620)
---------- ----------- ----------
2,321,437 (1,042,513) 3,797,674
---------- ----------- ----------
OPERATING EXPENSES:
Depreciation, depletion and amortization .... 490,262 -- 895,485
Asset retirement obligation accretion ....... 15,226 -- 32,723
Lease operating costs ....................... 585,377 (232,068) 616,387
Gathering and transportation costs .......... 38,321 -- 60,698
Severance and other taxes ................... 31,350 -- 77,691
General and administrative .................. 25,334 -- 123,821
China litigation provision .................. 71,216 -- 71,216
Financing costs, net ........................ (21,538) -- 83,563
---------- ----------- ----------
1,235,548 (232,068) 1,961,584
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 1,085,889 (810,445) 1,836,090
Provision (benefit) for income taxes ........ 427,966 -- 675,764
---------- ----------- ----------
NET INCOME ..................................... 657,923 (810,445) 1,160,326
Preferred stock dividends ................... -- -- 4,260
---------- ----------- ----------
INCOME ATTRIBUTABLE TO COMMON STOCK ............ $ 657,923 $ (810,445) $1,156,066
========== =========== ==========
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- --------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ............................... $1,220,137 $ -- $(13,725) $(19,785)
---------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ...... (767,872) -- -- --
Investment in subsidiaries, net .......... (50,210) (12,525) -- --
Other, net ............................... 58,137 -- -- --
---------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ....... (759,945) (12,525) -- --
---------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ..................... 112,189 -- 1,200 502
Payments on long-term debt ............... (507,900) -- -- --
Dividends paid ........................... (83,046) -- -- --
Common stock activity .................... 18,646 12,525 12,525 19,281
Treasury stock activity, net ............. 5,802 -- -- --
Cost of debt and equity transactions ..... (838) -- -- --
Other .................................... 12,292 -- -- --
---------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ... (442,855) 12,525 13,725 19,783
---------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................... 17,337 -- -- (2)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ........................ 597 -- 2 3
---------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ............................ $ 17,934 $ -- $ 2 $ 1
========== ======== ======== ========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ............................... $ 1,973,469 $ -- $ 3,160,096
----------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ...... (1,968,394) -- (2,736,266)
Investment in subsidiaries, net .......... (33,312) 96,047 --
Other, net ............................... (52,901) -- 5,236
----------- -------- -----------
NET CASH USED IN INVESTING ACTIVITIES ....... (2,054,607) 96,047 (2,731,030)
----------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ..................... 36,124 (37,617) 112,398
Payments on long-term debt ............... (829) -- (508,729)
Dividends paid ........................... -- -- (83,046)
Common stock activity .................... 14,099 (58,430) 18,646
Treasury stock activity, net ............. -- -- 5,802
Cost of debt and equity transactions ..... -- -- (838)
Other .................................... -- -- 12,292
----------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ... 49,394 (96,047) (443,475)
----------- -------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................... (31,744) -- (14,409)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ........................ 110,491 -- 111,093
----------- -------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ............................ $ 78,747 $ -- $ 96,684
=========== ======== ===========
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- --------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................... $ 1,162,884 $ -- $(11,831) $(19,435)
----------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .......... (577,697) -- -- --
Acquisition of Anadarko properties ........... (92,699) -- -- --
Acquisition of ExxonMobil properties ......... (347,352) -- -- --
Restricted cash for acquisition settlement ... (444,734) -- -- --
Investment in subsidiaries, net .............. (45,720) (12,525) -- --
Other, net ................................... (17,430) -- -- --
----------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ........... (1,525,632) (12,525) -- --
----------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ......................... 543,170 -- (694) 156
Payments on long-term debt ................... (135,300) -- -- --
Dividends paid ............................... (62,825) -- -- --
Common stock activity ........................ 19,324 12,525 12,525 19,281
Treasury stock activity, net ................. 11,412 -- -- --
Cost of debt and equity transactions ......... (2,250) -- -- --
----------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....... 373,531 12,525 11,831 19,437
----------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 10,783 -- -- 2
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ............................ -- -- 2 1
----------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ................................ $ 10,783 $ -- $ 2 $ 3
=========== ======== ======== ========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................... $ 1,188,920 $ -- $ 2,320,538
----------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .......... (1,104,340) -- (1,682,037)
Acquisition of Anadarko properties ........... -- -- (92,699)
Acquisition of ExxonMobil properties ......... -- -- (347,352)
Restricted cash for acquisition settlement ... -- -- (444,734)
Investment in subsidiaries, net .............. (30,748) 88,993 --
Other, net ................................... (37,992) -- (55,422)
----------- -------- -----------
NET CASH USED IN INVESTING ACTIVITIES ........... (1,173,080) 88,993 (2,622,244)
----------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ......................... 19,507 (18,773) 543,366
Payments on long-term debt ................... -- -- (135,300)
Dividends paid ............................... -- -- (62,825)
Common stock activity ........................ 25,889 (70,220) 19,324
Treasury stock activity, net ................. -- -- 11,412
Cost of debt and equity transactions ......... -- -- (2,250)
----------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....... 45,396 (88,993) 373,727
----------- -------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 61,236 -- 72,021
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ............................ 33,500 -- 33,503
----------- -------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ................................ $ 94,736 $ -- $ 105,524
=========== ======== ===========
21
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2005
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- --------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 17,934 $ -- $ 2 $ 1
Receivables, net of allowance ................ 376,307 -- -- --
Inventories .................................. 28,131 -- -- --
Drilling advances and other .................. 132,941 -- -- --
----------- -------- -------- ----------
555,313 -- 2 1
----------- -------- -------- ----------
PROPERTY AND EQUIPMENT, NET ..................... 7,062,999 -- -- --
----------- -------- -------- ----------
OTHER ASSETS:
Intercompany receivable, net ................. 1,143,410 -- (2,242) (254,180)
Goodwill, net ................................ -- -- -- --
Equity in affiliates ......................... 5,308,510 295,877 540,839 1,506,387
Deferred charges and other ................... 44,934 -- -- 4,380
----------- -------- -------- ----------
14,115,166 295,877 538,599 1,256,588
=========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. 382,632 -- -- --
Other accrued expenses ....................... 701,765 -- (731) 53,086
Current debt ................................. -- -- -- --
----------- -------- -------- ----------
1,084,397 -- (731) 53,086
----------- -------- -------- ----------
LONG-TERM DEBT .................................. 1,271,334 -- 269,355 646,844
----------- -------- -------- ----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes .............................. 1,004,087 -- (25,902) 4,766
Advances from gas purchasers .............. 74,941 -- -- --
Asset retirement obligation ............... 594,084 -- -- --
Oil and gas derivative instruments ........ 213,574 -- -- --
Other ..................................... 159,898 -- -- --
----------- -------- -------- ----------
2,046,584 -- (25,902) 4,766
----------- -------- -------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ............................ 9,712,851 295,877 295,877 551,892
----------- -------- -------- ----------
$14,115,166 $295,877 $538,599 $1,256,588
=========== ======== ======== ==========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 78,747 $ -- $ 96,684
Receivables, net of allowance ................ 882,080 -- 1,258,387
Inventories .................................. 170,305 -- 198,436
Drilling advances and other .................. 100,157 -- 233,098
----------- ----------- -----------
1,231,289 -- 1,786,605
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET ..................... 8,682,486 -- 15,745,485
----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net ................. (886,988) -- --
Goodwill, net ................................ 189,252 -- 189,252
Equity in affiliates ......................... (1,199,457) (6,452,156) --
Deferred charges and other ................... 82,441 -- 131,755
----------- ----------- -----------
8,099,023 (6,452,156) 17,853,097
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. 344,014 -- 726,646
Other accrued expenses ....................... 662,224 -- 1,416,344
Current debt ................................. 274 -- 274
----------- ----------- -----------
1,006,512 -- 2,143,264
----------- ----------- -----------
LONG-TERM DEBT .................................. 4,252 -- 2,191,785
----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes .............................. 1,364,632 -- 2,347,583
Advances from gas purchasers .............. -- -- 74,941
Asset retirement obligation ............... 390,269 -- 984,353
Oil and gas derivative instruments ........ -- -- 213,574
Other ..................................... 24,848 -- 184,746
----------- ----------- -----------
1,779,749 -- 3,805,197
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ............................ 5,308,510 (6,452,156) 9,712,851
----------- ----------- -----------
$ 8,099,023 $(6,452,156) $17,853,097
=========== =========== ===========
22
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
APACHE
APACHE APACHE FINANCE APACHE
CORPORATION NORTH AMERICA AUSTRALIA FINANCE CANADA
----------- ------------- --------- --------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........... $ 597 $ -- $ 2 $ 3
Receivables, net of allowance ....... 367,359 -- -- --
Inventories ......................... 28,000 -- -- --
Drilling advances and other ......... 82,837 -- -- --
----------- -------- -------- ----------
478,793 -- 2 3
----------- -------- -------- ----------
PROPERTY AND EQUIPMENT, NET ............ 6,683,499 -- -- --
----------- -------- -------- ----------
OTHER ASSETS:
Intercompany receivable, net ........ 1,107,286 -- (1,205) (253,724)
Goodwill, net ....................... -- -- -- --
Equity in affiliates ................ 4,173,788 258,437 506,806 1,250,590
Deferred charges and other .......... 43,460 -- -- 4,617
----------- -------- -------- ----------
$12,486,826 $258,437 $505,603 $1,001,486
=========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................... $ 280,754 $ -- $ -- $ --
Other accrued expenses .............. 306,511 -- 3,335 29,946
----------- -------- -------- ----------
587,265 -- 3,335 29,946
----------- -------- -------- ----------
LONG-TERM DEBT ......................... 1,667,044 -- 269,192 646,798
----------- -------- -------- ----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ........................ 1,132,618 -- (25,361) 4,233
Advances from gas purchasers ........ 90,876 -- -- --
Asset retirement obligation ......... 568,862 -- -- --
Oil and gas derivative instruments .. 31,417 -- -- --
Other ............................... 204,323 -- -- --
----------- -------- -------- ----------
2,028,096 -- (25,361) 4,233
----------- -------- -------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ................... 8,204,421 258,437 258,437 320,509
----------- -------- -------- ----------
$12,486,826 $258,437 $505,603 $1,001,486
=========== ======== ======== ==========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ ----------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........... $ 110,491 $ -- $ 111,093
Receivables, net of allowance ....... 572,377 -- 939,736
Inventories ......................... 129,293 -- 157,293
Drilling advances and other ......... 57,823 -- 140,660
----------- ----------- -----------
869,984 -- 1,348,782
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET ............ 7,176,860 -- 13,860,359
----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net ........ (852,357) -- --
Goodwill, net ....................... 189,252 -- 189,252
Equity in affiliates ................ (1,178,450) (5,011,171) --
Deferred charges and other .......... 56,010 -- 104,087
----------- ----------- -----------
$ 6,261,299 $(5,011,171) $15,502,480
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................... $ 261,320 $ -- $ 542,074
Other accrued expenses .............. 401,025 -- 740,817
----------- ----------- -----------
662,345 -- 1,282,891
----------- ----------- -----------
LONG-TERM DEBT ......................... 5,356 -- 2,588,390
----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes ........................ 1,035,147 -- 2,146,637
Advances from gas purchasers ........ -- -- 90,876
Asset retirement obligation ......... 363,142 -- 932,004
Oil and gas derivative instruments .. -- -- 31,417
Other ............................... 21,521 -- 225,844
----------- ----------- -----------
1,419,810 -- 3,426,778
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY ................... 4,173,788 (5,011,171) 8,204,421
----------- ----------- -----------
$ 6,261,299 $(5,011,171) $15,502,480
=========== =========== ===========
23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Apache reported third-quarter 2005 earnings of $686 million, up 60 percent
from the $429 million reported in the third quarter of 2004. The higher earnings
were driven by higher crude oil and natural gas prices which more than offset
higher costs and the financial impact of Gulf of Mexico production shut in
during the third-quarter 2005 because of hurricane activity. Oil realizations
averaged $58.66 per barrel, up 54 percent from the prior-year quarter, and gas
realizations averaged $6.54 per thousand cubic feet (Mcf), up 37 percent from
the prior-year quarter. The Company was well positioned to benefit from higher
commodity prices with less than 10 percent of its production hedged in the
third-quarter 2005.
Production averaged 453,845 barrels of oil equivalent per day (boe/d) down
4,567 boe/d (one percent) from third quarter 2004 levels, reflecting the impact
of production shut in for hurricanes, the most significant being Hurricanes
Katrina and Rita. Shut-in production resulting from the hurricanes was an
estimated 26,700 boe/d. (See the Impact of Hurricanes section below for
additional discussion.)
Year-to-date earnings of $1.8 billion and net cash provided by operating
activities of $3.2 billion increased 58 percent and 36 percent, respectively,
from the same period of 2004. These increases were driven by significantly
higher commodity prices and a four percent increase in daily equivalent
production, which was up 17,687 boe/d despite the impact of the hurricanes
mentioned above. Average oil realizations increased 50 percent, to $51.05 per
barrel, while average gas realizations were up 22 percent, at $5.86 per Mcf,
when compared to average realized prices for first nine months of 2004.
Third-quarter and year-to-date operating results include:
- Record quarterly and year-to-date oil and natural gas production
revenues of $2.1 billion and $5.5 billion, respectively.
- Third-quarter natural gas production increased 31 million cubic feet
per day (MMcf/d) to 1,265 MMcf/d compared to the third quarter of
2004, despite the impact of the hurricanes.
- Third-quarter crude oil production was 233,692 barrels of oil per day
(b/d), three percent lower than the prior-year quarter, reflecting the
effect of the hurricanes.
- Hurricane related production shut in averaged an estimated 88 MMcf/d
of gas and 12,000 b/d of oil resulting in lost revenue of
approximately $148 million.
- Australia's third-quarter daily oil production decreased 49 percent,
or 15,700 b/d from the third quarter of 2004 on natural decline,
particularly at the Legendre and Monet fields and loss of natural gas
liquids from East Spar which ceased production earlier in 2005.
- The North Sea's third-quarter daily production increased 9,682 b/d, or
17 percent, compared to the third quarter of 2004 driven by drilling
activity and reduced downtime.
- Daily gas production increased 15 percent in Canada when compared to
the third quarter of 2004, driven by new wells drilled at Nevis, Zama
and on the ExxonMobil farm-in acreage and the completion of four gas
plants. The Company expects additional production as seven new gas
plants enabling over 200 wells waiting on these facilities to come
on-line in the first half of 2006.
- Initial production from the Qasr field in Egypt's Khalda Concession
drove a 15 percent increase in third-quarter gas production compared
to the same quarter in 2004.
- The Company's Central region increased third quarter oil production 34
percent and gas production 14 percent when compared to the third
quarter of last year. Increases were driven by the ExxonMobil
acquisition in the third quarter of last year and an active drilling
and recompletion program.
Capital expenditures totaled $2.9 billion for the first nine months of
2005, 70 percent, or $1.2 billion higher than the comparable period last year.
Expenditures for exploration and production activity accounted for 89 percent,
or $2.5 billion, of the capital spending, a $915 million increase over last
year's first nine months. The remaining balance of capital spending was
primarily for gathering, marketing and processing facilities which totaled $319
million, up $260 million from the first nine months of last year. This increase
was driven by construction of 11 new gas processing plants in Canada (four of
which were completed during the third quarter of 2005) and development of the
Qasr facilities in Egypt. Refer to Oil and Gas Capital Expenditures discussion
in the Capital Resources and Liquidity section of this Management Discussion and
Analysis.
24
Noteworthy operational developments include:
- On July 5, 2005, the Company announced that the Tanzanite-2 well on
Egypt's West Mediterranean Onshore Concession tested 2,846 b/d and 640
thousand cubic feet per day (Mcf/d) of gas from the Cretaceous-age
Alamein Dolomite formation in the Tanzanite Field.
- On July 5, 2005, Apache also announced a new field oil discovery, the
El Diyur-2X, on the Apache-operated El Diyur Concession in Egypt's
Western Desert. A test of the lower Bahariya formation flowed at a
rate of 1,177 b/d.
- On July 28, 2005, Apache announced that it initiated production from
the Mohave-1H discovery in the Carnarvon Basin offshore Western
Australia. The initial gross production rate was 10,690 b/d from the
Flag Sandstone zone, a prolific but traditionally often smaller
reservoir. Apache owns a 68.5 percent interest in the field.
- On August 24, 2005, the Company announced it signed a new 15-year term
contract to supply gas to a major power station to be built in
Kwinana, Western Australia. The terms call for delivery of
approximately 215 billion cubic feet (bcf) gross (118 bcf net to
Apache) at a daily gross rate of 39 MMcf. The Company expects to
source the gas for the contract from its John Brookes field beginning
in late 2008. The term can be extended an additional 10 years by
mutual agreement.
- On October 13, 2005, the Company announced it had agreed to sell its
55 percent interest in the deepwater section of Egypt's West
Mediterranean Concession to Amerada Hess Corporation for $413 million.
Apache has not previously recorded any oil and gas reserves for these
properties. The Company also announced that it agreed to purchase
Amerada Hess's interest in eight fields located in the Permian Basin
of West Texas and New Mexico for $404 million. The Permian Basin
properties are subject to exercise of preferential rights to purchase
by third parties, as well as standard closing requirements. Both
transactions are expected to close before January 3, 2006.
Impact of Hurricanes
During the third-quarter of 2005, four hurricanes struck the Gulf of
Mexico, impacting the Company's U.S. gulf coast operations, both onshore and
offshore Louisiana and Texas. During each of these hurricanes, personnel were
evacuated and production was shut-in. Two of these storms, Hurricanes Dennis and
Emily, required only temporary curtailment of production and caused minor damage
to the Company's production platforms. The other storms, Hurricanes Katrina and
Rita, caused extensive damage to both onshore and offshore production and
transportation facilities. In addition to Apache's property damage, third-party
pipelines and processing facilities, which the Company relies upon to transport
and process the crude oil and natural gas it produces, were damaged. Restoration
of full production is dependent on numerous factors, many of which are beyond
the Company's control. The impact on operations and results follows:
Production - Production shut-in during the third quarter of 2005 because of
the hurricanes averaged approximately 88 MMcf/d of natural gas and 12,000 b/d of
crude oil. The bulk of the shut-in production was associated with Hurricanes
Katrina and Rita, which struck in late August and late September 2005,
respectively. As of early November 2005, approximately 161 MMcf/d of net natural
gas production and 27,000 b/d of net crude oil production remained shut-in. A
portion of the production may remain shut-in up to a year. We expect to see a
decline in 2005 fourth-quarter production compared to 2005 third-quarter levels.
The shut-in production also resulted in volumes that could not be delivered
to the owners of volumetric production payments ("VPP") burdening some of the
Company's Gulf of Mexico properties. As discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
Company's 2004 Form 10-K, Apache assumed obligations for pre-existing VPPs in
the 2004 acquisition of properties from Anadarko and the 2003 acquisition of
properties from Shell. VPP owners own the first production from those same
properties and if their scheduled volumes are not delivered in a given month,
they are supplied from the burdened properties as production is restored. As a
consequence, the make-up VPP volumes of approximately 437 thousand barrels of
oil equivalent (Mboe) as of September 30, 2005, are expected to be delivered
during the fourth quarter from the burdened properties and will reduce Apache's
net volumes during the period.
Financial Results -- The impact on the Company's third-quarter 2005
financial results included $148 million of lower crude oil and natural gas
revenues and approximately $18 million of additional lease operating expenses,
including an insurance deductible, additional premiums assessed by Oil Insurance
Limited (OIL) and an accrual for an insurance contingency assessed by OIL should
Apache withdraw from the insurance pool.
25
Assessment of Damage - The Company is continuing its assessment of damage
caused by the hurricanes, but is unable to estimate the ultimate costs of
abandonment and repair at this time. Nine operated production platforms were
lost and two were severely damaged during the storms. Production platforms lost
or severely damaged during Hurricane Katrina were: Main Pass 312-JA; South
Timbalier 161-A; 161-B; 161-D; South Pass (SP) 62-A; SP 62-B; West Delta (WD)
103-A; WD 103-B; WD104-C; and WD133-B. The production platform lost during
Hurricane Rita was Ship Shoal 193-B. Prior to the hurricanes, aggregate
production from the lost and damaged platforms was approximately 10,000 b/d of
oil and 21 MMcf/d of gas. Initial inspections also indicate some damage to other
operated offshore production platforms and onshore facilities. Additionally,
twelve non-operated structures have been reported as destroyed or severely
damaged: 10 located at Grand Isle 43; 1 platform at South Marsh Island 108; and
1 platform at Eugene Island 330.
Insurance Coverage - The Company carries casualty insurance to cover
property damage and business interruption insurance to cover deferred and lost
oil and gas production revenues. In the aggregate, these policies provide the
Company with potential coverage for Hurricane Katrina and Hurricane Rita
totaling $750 million.
The Company carries property damage insurance of $250 million subject to a
$7.5 million deductible, per event, and another $100 million in aggregate for
the policy year. The $250 million in coverage is provided through OIL and will
be prorated down if total claims received by the insurer for a single event
exceed $1 billion.
The Company's business interruption insurance begins 60 days after
occurrence of an event and has an aggregate limit of $150 million with a daily
limit of $750,000 per event. Coverage is based on current market prices and
begins on October 28, 2005, for shut-in production caused by Hurricane Katrina
and November 22, 2005, for Hurricane Rita. The Company estimates that it will
accrue claims in the fourth quarter of 2005 totaling approximately $79 million,
with the remainder of the aggregate $150 million limit available for 2006.
26
RESULTS OF OPERATIONS
REVENUES
The table below presents oil and gas production revenues, production and
average prices received from sales of oil, natural gas and natural gas liquids.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ---------------------------------------
INCREASE INCREASE
2005 2004 (DECREASE) 2005 2004 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
Revenues (in thousands):
Oil ................................ $1,261,192 $ 843,572 50% $3,328,102 $2,121,861 57%
Natural gas ........................ 761,399 541,489 41% 2,035,941 1,618,852 26%
Natural gas liquids ................ 29,153 29,067 -- 88,885 73,581 21%
---------- ---------- ---------- ----------
Total ........................ $2,051,744 $1,414,128 45% $5,452,928 $3,814,294 43%
========== ========== ========== ==========
Oil Volume - Barrels per day:
United States ...................... 64,906 65,017 -- 71,860 67,110 7%
Canada ............................. 21,974 24,743 (11%) 22,226 25,409 (13%)
Egypt .............................. 54,728 52,602 4% 54,110 51,706 5%
Australia .......................... 16,499 32,199 (49%) 15,323 26,041 (41%)
North Sea .......................... 67,713 58,031 17% 64,966 49,866 30%
China .............................. 6,533 7,948 (18%) 9,224 7,121 30%
Argentina .......................... 1,339 532 152% 1,074 542 98%
---------- ---------- ---------- ----------
Total ........................ 233,692 241,072 (3%) 238,783 227,795 5%
========== ========== ========== ==========
Average Oil price - Per barrel:
United States ...................... $ 53.85 $ 41.45 30% $ 47.72 $ 36.90 29%
Canada ............................. 60.66 41.34 47% 52.12 36.72 42%
Egypt .............................. 60.38 41.51 45% 53.29 35.81 49%
Australia .......................... 66.52 46.72 42% 58.06 40.96 42%
North Sea .......................... 60.46 25.18 140% 52.33 23.36 124%
China .............................. 50.76 35.99 41% 42.35 32.77 29%
Argentina .......................... 39.18 31.28 25% 36.96 33.28 11%
Total ........................ 58.66 38.04 54% 51.05 34.00 50%
Natural Gas Volume - Mcf per day:
United States ...................... 586,111 640,467 (8%) 625,716 649,997 (4%)
Canada ............................. 373,079 325,535 15% 366,892 322,390 14%
Egypt .............................. 162,386 141,072 15% 154,839 135,709 14%
Australia .......................... 138,267 121,088 14% 120,759 118,587 2%
North Sea .......................... 2,384 2,043 17% 2,287 1,769 29%
Argentina .......................... 2,715 3,467 (22%) 3,142 3,985 (21%)
---------- ---------- ---------- ----------
Total ........................ 1,264,942 1,233,672 3% 1,273,635 1,232,437 3%
========== ========== ========== ==========
Average Natural Gas price - Per Mcf:
United States ...................... $ 7.73 $ 5.30 46% $ 6.71 $ 5.32 26%
Canada ............................. 7.17 5.10 41% 6.28 5.10 23%
Egypt .............................. 4.97 4.45 12% 4.67 4.41 6%
Australia .......................... 1.69 1.58 7% 1.73 1.64 5%
North Sea .......................... 10.57 4.36 142% 7.63 4.57 67%
Argentina .......................... 1.35 .78 73% 1.14 .62 84%
Total ........................ 6.54 4.77 37% 5.86 4.79 22%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States ................... 7,097 8,934 (21%) 8,529 8,218 4%
Canada .......................... 2,232 2,794 (20%) 2,187 2,665 (18%)
---------- ---------- ---------- ----------
Total ........................ 9,329 11,728 (20%) 10,716 10,883 (2%)
========== ========== ========== ==========
Average NGL Price - Per barrel:
United States ................... $ 34.54 $ 27.56 25% $ 31.10 $ 25.25 23%
Canada .......................... 32.13 24.94 29% 27.59 22.90 20%
Total ........................ 33.97 26.94 26% 30.38 24.67 23%
27
The following table presents each reportable segment's oil revenues and gas
revenues as a percentage of total oil revenues and gas revenues, respectively.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ---------------------------------------
OIL REVENUES GAS REVENUES OIL REVENUES GAS REVENUES
------------ ------------ ------------ ------------
2005 2004 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ---- ---- ----
United States ......... 25% 30% 55% 58% 28% 32% 56% 58%
Canada ................ 10 11 32 28 10 12 31 28
Egypt ................. 24 24 10 11 24 24 10 10
Australia ............. 8 16 3 3 7 14 3 4
North Sea ............. 30 16 -- -- 28 15 -- --
Other International ... 3 3 -- -- 3 3 -- --
--- --- --- --- --- --- --- ---
Total .............. 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
Crude Oil Contribution
Total oil revenues rose 50 percent in the third quarter of 2005 relative to
2004. Revenue contributions from outside the U.S., which comprise 75 percent
($940 million) of our total crude revenue for the 2005 three-month period, rose
five percent. U.S. oil revenues increased $74 million quarter-over-quarter on
higher price realizations as production was flat, reflecting the impact of the
hurricanes discussed previously. The North Sea's oil contribution increased to
30 percent on production growth and significantly higher price realizations,
leading all segments in crude oil contributions. The comparable 2004 quarter for
the North Sea was impacted by a lower fixed-price physical contract (discussed
below) that expired December 31, 2004. Australia's contribution to third-quarter
consolidated oil revenues fell to eight percent from 16 percent on a 49 percent
decrease in production compared to the third quarter of 2004. Contributions to
third-quarter 2005 consolidated oil revenues from Egypt and our Other
International segment remained flat, while Canada's contribution was down one
percent. Nine-month 2005 revenues rose 57 percent relative to the 2004 period.
Each segment's contribution to consolidated oil revenues for the 2005 nine-month
period was similar to those discussed above.
Crude Oil Revenues
Third-quarter crude oil revenues increased $418 million from the comparable
2004 quarter on a $20.62 per barrel increase in average realized oil price,
which more than offset a three percent decline in daily production. All segments
reported a significant increase in realized crude oil price, with the North Sea
and Egypt also benefiting from production growth compared to third-quarter 2004.
For the nine-month period, crude oil revenues increased $1.2 billion from the
comparable 2004 period reflecting a $17.05 per barrel increase in average
realized oil price and a five percent increase in daily production.
The North Sea's third-quarter 2005 crude oil revenues were $242 million
higher than the comparable quarter of 2004, reflecting significantly higher
price realizations and a 17 percent increase in production. The higher price
realizations generated additional revenues of $188 million when compared to the
same quarter in 2004, while the higher production added $54 million.
Third-quarter 2004 revenues were impacted by a lower fixed-price physical
contract entered into in conjunction with our 2003 property acquisition from BP
p.l.c. (BP). The production growth reflects the benefits of the North Sea's
drilling, workover and repair programs, particularly on the Alpha and Echo
platforms. Similarly, the North Sea's crude oil revenues for the 2005 nine-month
period were $609 million higher than the 2004 period on a $28.97 improvement in
price realizations and a 30 percent increase in daily production.
U.S. third-quarter 2005 crude oil revenues increased $74 million compared
to the same quarter of 2004. This increase was the result of a 30 percent
increase in crude oil price, as quarter-over-quarter production was flat. The
third-quarter 2005 average realized price includes an unfavorable $3.55 per
barrel hedge loss. (See Note 2, Hedging and Derivative Instruments, of this Form
10-Q.) The ExxonMobil and Anadarko property acquisitions in 2004 and successful
drilling and re-completion efforts partially offset production declines and
approximately 12,000 b/d downtime resulting from hurricanes experienced during
the third quarter of 2005. Revenues for the nine-month period increased $258
million on a seven percent increase in daily production and a 29 percent
increase in crude oil price realization. The 2005 year-to-date average realized
price includes an unfavorable $2.01 per barrel hedge loss. The seven percent
increase in daily production for the 2005 nine-month period, relative to 2004,
was for the reasons previously discussed.
Egypt contributed additional revenues of $103 million to the third quarter
of 2005 compared to the same quarter in 2004. This increase in revenue was
primarily attributable to a 45 percent increase in crude oil price, with a 2,126
28
b/d increase in production generating $12 million of the increase in revenues.
The production increase was related to drilling and recompletion activity on
Egypt's Western Mediterranean Concession, particularly completion of the
Tanzanite-2 well and re-completion of the Tanzanite-1 well. Egypt's 2005
nine-month revenues were up $280 million on a 49 percent increase in price over
the same period in 2004 and a five percent rise in daily production.
Canada's third-quarter 2005 revenues increased $29 million over
third-quarter 2004 on a 47 percent increase in price, which more than offset an
11 percent, or 2,769 b/d, decrease in oil production. Canada production was
impacted by natural decline in the Zama, Midale, Virginia Hills and Consort
operated areas, as well as natural decline on non-operated Karr Simonette and
Nevis areas. Canadian oil revenues for the 2005 nine-month period increased $61
million on a 42 percent increase in price, which more than offset the impact of
a 13 percent decline in daily production. Production for the 2005 nine-month
period was down for the reasons discussed above.
China's third-quarter 2005 revenues were $4 million higher than the third
quarter of 2004 with $11 million of additional revenues related to a 41 percent
increase in crude oil price, partially offset by an 18 percent decrease in net
volumes. Apache's net volumes were down despite flat gross production because
the higher crude prices have enabled Apache to fully recover partner advances,
thereby reducing Apache's net volumes. Revenues for the 2005 nine-month period
were $43 million higher than the comparable 2004 period on a 30 percent increase
in daily production and a 29 percent increase in price. The production increase
is commensurate with a 37 percent increase in year-to-date gross production from
new wells.
Australia's third-quarter 2005 crude oil revenues decreased $37 million
compared to the third-quarter 2004. This decrease reflects a 49 percent decline
in production partially offset by a 42 percent increase in price. The decrease
in daily oil production resulted from natural decline, particularly in the
Legendre and Monet fields and loss of liquids from East Spar, which ceased
production earlier in 2005. Crude oil revenues for the nine-month period were
down $49 million for the same reasons. The impact on Australia's 2005
year-to-date oil revenues from a 41 percent decline in daily production was
partially offset by a 42 percent increase in price realization, when compared to
the 2004 period.
Approximately six percent of our worldwide crude oil production was subject
to financial derivative hedging for the third quarter of 2005 compared to three
percent in 2004. For the first nine-months of 2005, approximately six percent of
our worldwide crude oil production was subject to financial derivative hedging
compared to four percent in the 2004 period. (See Note 2, Hedging and Derivative
Instruments, of this Form 10-Q for a summary of the current derivative positions
and terms.) These financial derivative instruments reduced our third-quarter
2005 and 2004 realized price $.99 and $.07 per barrel, respectively. For the
first nine-month periods of 2005 and 2004, these hedges reduced our average
realized prices $.61 and $.21 per barrel, respectively.
Natural Gas Contribution
Total gas revenues rose 41 percent in the third quarter of 2005 relative to
the comparative quarter in 2004. Our North America operations contributed 87
percent of third-quarter 2005 consolidated natural gas revenues. The U.S.
contributed $105 million of additional revenues to the 2005 third quarter
compared to the comparable quarter in 2004 on a 46 percent increase in price,
partially offset by an eight percent decrease in production. Canada's gas
contribution increased to 32 percent resulting from $93 million more revenues in
the third-quarter of 2005 than the comparable quarter of 2004. Driving the
Canadian revenues was a 41 percent increase in the realized natural gas price
and a 15 percent increase in production. While Egypt's gas production increased
15 percent, its contribution to the third-quarter 2005 gas revenues decreased
slightly to 10 percent as the additional revenues generated from a 12 percent
increase in Egypt's natural gas price realizations were less than the increase
in North America. Australia's contribution to our total gas revenues was
unchanged at three percent. Contributions for the 2005 nine-month period were
similar to the 2005 third quarter.
Natural Gas Revenues
Our third-quarter 2005 natural gas revenues increased $220 million from the
prior-year quarter as a 37 percent increase in our realized natural gas price
generated an additional $201 million in gas revenues for the quarter. A three
percent increase in natural gas production added $19 million to third-quarter
2005 revenues, relative to the comparable prior-year quarter. While all of our
reportable segments realized an increase in natural gas price, the increase in
the U.S. and Canada had the most significant impact on third-quarter revenues.
Canada, Egypt and Australia also contributed increased gas revenues from higher
production, while the additional price-driven revenues generated in the U.S.
were partially offset by an eight percent decline in production.
29
U.S. third-quarter 2005 natural gas revenues were $105 million higher than
the same quarter of 2004. U.S. third-quarter natural gas prices, which were up
46 percent, contributed $143 million of additional revenues, while an eight
percent production decline, lowered revenues $38 million, when compared to the
comparable prior-year quarter. While U.S. production was down
quarter-over-quarter because of the hurricanes, production gains in other areas,
including a 13 percent gain in the Central region, offset some of the hurricane
impact. The Central region was up on active drilling and recompletion programs
and acquisitions. For the 2005 nine-month period, the U.S. contributed an
additional $199 million of gas revenues when compared to 2004. This increase
reflects a 26 percent upswing in natural gas prices, partially offset by a four
percent decrease in daily production year-over-year.
Canada's third-quarter 2005 natural gas revenues increased $93 million over
the comparable quarter of 2004. Two-thirds of the increase related to a 41
percent increase in price, with the balance generated by a 15 percent increase
in production. Production increased 47,544 Mcf/d, as a result of successful
drilling efforts at the Nevis, Zama, Hatton and Consort areas and the ExxonMobil
lands, which more than offset natural declines in the Ladyfern and other
Northeast British Columbia areas. For the 2005 nine-month period, Canada's gas
revenues increased $179 million compared to 2004 resulting from a 23 percent
increase in natural gas price and a 14 percent increase in daily production, as
discussed above.
Egypt contributed an additional $16 million to third-quarter 2005
consolidated natural gas revenues compared to the same quarter of 2004. This
increase is attributable to a favorable 12 percent price movement and a 15
percent increase in production. Egypt's production growth was associated with
initial production from the Khalda Concession's Qasr field. On a year-to-date
basis, Egypt contributed an additional $33 million of revenues on a six percent
increase in gas price and a 14 percent rise in daily production. The
year-over-year production growth came from development of the Khalda Concession
Imhoptep and Atoun wells, development of the Qasr field, and first sales from
the Northeast Abu Gharadig concession, which commenced in January 2005.
Australia 2005 third-quarter and nine-month natural gas revenues were both
$4 million higher than the respective prior-year periods. While Australia's 2005
third-quarter natural gas production and price were up 14 percent and seven
percent, respectively, over the 2004 quarter, the impact on revenues was
minimal, given the relatively low natural gas price. For the year-to-date,
Australia's natural gas price was up five percent, while daily production
increased two percent. Production increases in both periods reflect higher takes
by contractual customers.
Although a majority of our worldwide gas sales contracts are indexed to
prevailing market prices, approximately nine percent and eight percent of our
third-quarter 2005 and 2004 U.S. natural gas production, respectively, was
subject to long-term, fixed-price physical contracts. For the nine months of
2005 and 2004, approximately nine percent of our U.S. natural gas production was
subject to long-term, fixed-price physical contracts. These fixed-price
contracts reduced third-quarter 2005 and 2004 worldwide realized prices $.16 and
$.09 per Mcf, respectively and 2005 and 2004 nine-month worldwide realized
prices $.13 and $.09 per Mcf, respectively. Additionally, nearly all of our
Australian natural gas production is subject to long-term, fixed-price supply
contracts that are periodically adjusted for changes in Australia's consumer
price index. Since these contracts are denominated in Australian dollars, the
resulting revenues are impacted by changes in the value of the Australian dollar
relative to the U.S. dollar.
Approximately seven percent and 10 percent of our worldwide natural gas
production was subject to financial derivative hedges for the third-quarter and
nine-month periods of 2005, respectively, while approximately 15 percent of our
worldwide natural gas production was subject to hedges in the comparable 2004
periods. Currently, all of our natural gas derivative positions have been
designated against Gulf of Mexico production. These derivative financial
instruments reduced our third-quarter and nine-month 2005 consolidated realized
prices $.12 and $.06 Mcf, respectively. The third-quarter and nine-month periods
of 2004 realized prices were both reduced $.18 and $.15 per Mcf, respectively,
as a result of the financial derivative instruments. (See Note 2, Hedging and
Derivative Instruments, of this Form 10-Q for a summary of our current
derivative positions and terms.) Also during the 2004 quarter, we amortized
specific unrealized gains and losses related to derivative positions closed in
October and November 2001. This amortization, which terminated in July 2004, had
a negligible impact on third-quarter 2004 average realized prices.
30
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. Third-quarter and year-to-date
2005 costs reflect the impact of our ExxonMobil and Anadarko property
acquisitions closed in the latter half of 2004.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
---- ---- ------ ------ ------ ------ ------ ------
(In millions) (Per boe) (In millions) (Per boe)
Depreciation, depletion and amortization
(DD&A):
Oil and gas property and equipment ..... $333 $295 $ 7.97 $ 7.00 $ 991 $ 841 $ 7.86 $ 6.91
Other assets ........................... 24 18 .58 .43 65 54 .51 .44
Asset retirement obligation accretion ..... 14 11 .32 .26 40 33 .32 .27
Lease operating costs (LOE) ............... 280 208 6.71 4.94 769 616 6.10 5.07
Gathering and transportation costs ........ 24 21 .56 .51 74 61 .58 .50
Severance and other taxes ................. 150 47 3.60 1.12 309 78 2.45 .64
General and administrative expense (G&A) .. 50 39 1.20 .91 152 124 1.21 1.02
China litigation .......................... -- -- -- -- -- 71 -- .59
Financing costs, net ...................... 27 29 .65 .68 90 84 .72 .68
---- ---- ------ ------ ------ ------ ------ ------
Total ............................... $902 $668 $21.59 $15.85 $2,490 $1,962 $19.75 $16.12
==== ==== ====== ====== ====== ====== ====== ======
Depreciation, Depletion and Amortization
Third quarter 2005 full-cost DD&A expense of $333 million was $38 million
higher than the comparative 2004 period. The increase in absolute costs was
concentrated in the North Sea, Canada and Egypt, all of which saw increases in
production and rates. The Company's third-quarter 2005 full-cost DD&A rate of
$7.97 per boe was $.97 per boe higher than the comparable 2004 quarter.
Year-to-date 2005, full-cost DD&A expense increased $150 million, spread
among the North Sea, the U.S., Canada and Egypt. Approximately $31 million (20
percent) of the nine-month period increase was attributable to volume growth and
the remainder to rising costs. The 2005 nine-month period full-cost DD&A was
$.95 per boe more than the comparable 2004 period.
The Company's DD&A expense per boe increased from the third quarter and
first nine months of 2004 driven by increasing rates in the U.S., Canada and the
North Sea. The increases in U.S. and Canada reflect rising industry-wide
drilling and acquisition costs. The higher commodity prices experienced over the
past year led to increased demand for drilling services and thus higher drilling
costs and higher estimated future development costs. In addition, the cost of
properties acquired from ExxonMobil and Anadarko were higher than our historical
cost. Rising commodity prices have increased the value and costs of properties
available for acquisition. The increase in North Sea's rates per boe reflect the
continuation of facility upgrades to increase the overall efficiency of the
platforms.
Lease Operating Costs
Third-quarter 2005 LOE increased $72 million, 34 percent, over the
third-quarter of 2004. Absolute costs were up in all core areas when compared to
the prior-year quarter, while the overall rate was up in all core areas except
the North Sea. On a unit of production basis, third-quarter 2005 costs were up
$1.77 from 2004 to $6.71 per boe. Production shut-ins ($.38 per boe) and the
additional insurance costs ($.42 per boe) from the hurricanes added $.80 to the
third-quarter 2005 rate. The remaining increase of $.97 per boe reflects higher
service costs associated with rising commodity prices and the associated
increase in demand for services, the hurricane related costs, costs associated
with properties acquired in 2004 from ExxonMobil and Anadarko, and higher
stock-based compensation costs.
For the first nine months of 2005 LOE totaled $769 million, $152 million
higher than 2004. On a boe basis, 2005 nine-month LOE averaged $6.10 per boe,
$1.03 per boe higher than 2004, with $.14 of the rate increase coming from the
impact of the hurricanes. The remaining increase was for the reasons itemized in
the quarter discussion above.
31
Regionally, 2005 costs were up as follows:
U.S. - Third-quarter 2005 costs were $46 million higher than the equivalent
2004 quarter, with approximately $12 million directly related to the hurricanes.
On a unit of production basis, the U.S. added $1.26 per boe to the third-quarter
2005 consolidated rate. Over half ($.65 per boe) of the impact the U.S. had on
the consolidated rate was attributable to the additional insurance costs and
production shut-ins caused by the hurricanes. Higher stock-based compensation
costs, contract labor costs, workover activity and various other commodity-price
driven service costs accounted for the remaining $.61 per boe impact. The
Company expects operating expenses in the Gulf Coast region will continue at a
higher level because of storm related factors. For the year, the U.S. added $97
million of costs and $.79 per boe to the consolidated rate, with all of the
increase in the rate attributable to higher costs, as discussed above.
Australia - Australia added $.28 per boe to the third-quarter 2005
consolidated rate on $4 million of additional costs and a 25 percent drop in
equivalent production. Approximately 53 percent of the additional costs were
related to the additional insurance costs. The balance of the increase in costs
was from higher service costs, higher stock-based compensation costs and the
impact of a stronger Australian dollar (relative to the U.S. dollar) had on
costs. The additional costs added $.09 per boe to the third-quarter 2005
consolidated rate, while the lower production added $.19 per boe. Australia's
nine-month 2005 costs were up $5 million compared to 2004, while production was
down 23 percent on an equivalent barrel basis. The combination of higher costs
and lower production added $.19 per boe to the 2005 nine-month consolidated
rate, relative to the 2004 period.
Canada - Third-quarter 2005 costs were up $12 million from the same 2004
quarter, with nearly half related to the impact the strengthening Canadian
dollar had on cost. The balance related to various other costs associated with
an increase in activity, higher service costs, higher stock-based compensation
costs and additional insurance costs. Canada added $.22 per boe to the
third-quarter 2005 consolidated rate increase, with costs adding $.29 and
volumes reducing the rate $.07 per boe.
Egypt - Egypt's third-quarter 2005 costs were $7 million higher than the
comparable 2004 quarter on increased workover activity, higher diesel fuel and
supply costs, higher service costs, and the stock-based compensation and
insurance costs previously mentioned. The diesel fuel costs were previously
subsidized by the Egyptian government. Egypt added $.08 per boe to the
consolidated rate increase, with higher costs adding $.17 and volumes lowering
the rate $.09 per boe. For the year, Egypt added $.07 to the consolidated rate.
As with the quarter, the impact of higher production partially offset the impact
of higher costs, which were up $18 million year-over-year.
North Sea - Third-quarter 2005 costs were up four percent from the year-ago
quarter, as the impact of additional repair and maintenance costs, higher
stock-based compensation and insurance costs were mostly offset by lower
operating costs resulting from operating efficiency improvements. The impact of
North Sea's 17 percent increase in third-quarter 2005 production, when combined
with the impact of the slightly higher costs, reduced the consolidated rate $.11
per boe. On a year-to-date basis, the combination of a 30 percent increase in
North Sea production and slightly lower costs reduced the 2005 consolidated rate
$.21 per boe.
Gathering and Transportation Costs
Gathering and transportation costs for the third quarter and first nine
months of 2005 increased 13 percent and 21 percent, respectively, compared to
the same periods in 2004. The following table presents gathering and
transportation costs paid directly by Apache to third-party carriers for each of
the periods presented.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
(In millions)
U.S. ................................ $ 7 $ 7 $23 $22
Canada .............................. 8 8 24 22
North Sea ........................... 8 6 21 16
Egypt ............................... 1 -- 5 --
China ............................... -- -- 1 1
--- --- --- ---
Total Gathering and Transportation .. $24 $21 $74 $61
=== === === ===
These costs are primarily related to the transportation of natural gas in
our North American operations, North Sea crude oil sales and Egyptian exports.
The increase in costs for both the third-quarter and year-to-date 2005 periods
were driven by production growth in the North Sea, strengthening of the Canadian
dollar relative to the U.S.
32
dollar and additional exports of Egyptian crude in 2005. Apache began exporting
Egyptian crude in the second half of 2004 and first incurred third-party
transportation charges in early 2005.
Severance and Other Taxes
Third-quarter 2005 severance and other taxes totaled $150 million, $103
million greater than the prior-year quarter. For the nine-month period,
severance and other taxes totaled $309 million compared to $78 million in the
year-earlier period. A detail of these taxes follows:
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
(In millions)
Severance taxes:
U.S ........................... $ 27 $17 $ 70 $ 44
Australia ..................... 16 30 33 48
U.K. PRT ......................... 99 (5) 188 (35)
Canadian taxes ................... 6 5 15 15
Other ............................ 2 -- 3 6
---- --- ---- ----
Total Severance and Other Taxes .. $150 $47 $309 $ 78
==== === ==== ====
For the third quarter and first nine months of 2005 severance taxes in the
U.S. increased $10 million and $26 million, respectively, driven by higher
prices and increased production from our Central Region. Australia decreased $14
million and $15 million for the same comparative periods, primarily reflecting
lower excise tax on production from Legendre, a result of declining production.
North Sea Petroleum Revenue Tax (PRT) is assessed on net receipts from subject
fields in the United Kingdom (U.K.) North Sea. North Sea PRT increased $104
million quarter-over-quarter and $223 million on a year-to-date comparative
basis on higher production and significantly higher oil price realizations.
Also, as previously discussed, the North Sea's 2004 third-quarter and nine-month
period revenues were impacted by a lower fixed-price physical contract resulting
in lower net receipts and comparative PRT expenses. The 2004 PRT credit
reflected qualifying capital spending and lifting costs that exceeded associated
revenues.
General and Administrative Expense
Third-quarter and year-to-date G&A costs increased $11 million and $29
million, respectively, compared to the same periods in 2004. Over half of the
increase in 2005 third-quarter costs, and nearly three-fourths of the increase
in year-to-date costs, were related to the impact of stock-based compensation
programs. Stock-based compensation costs increased, relative to the prior-year
periods, because of new grants issued in 2005, the targeted stock plan approved
by stockholders in May 2005, and the impact Apache's rising common stock price
had on stock-based compensation programs. The balance of the G&A increase for
both 2005 periods was primarily attributed to the increased cost of insurance,
higher employee benefit costs, especially health care costs, and higher audit
fees driven by Sarbanes-Oxley compliance.
Provision for Income Taxes
Third-quarter 2005 income tax expense was $164 million higher than in the
third quarter of 2004. For the nine-month period, 2005 income tax expense was
$482 million above 2004. The additional income tax expense in both periods was
driven by higher taxable income related to the increased revenues. The effective
tax rates for both the 2005 and 2004 three-month and nine-month periods were
comparable. Additional deferred tax expenses related to foreign currency
exchange rate movements added three percentage points to both the third-quarter
2005 and third-quarter 2004 effective rates. The year-to-date effective tax
rates were largely unaffected by foreign exchange movements.
33
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL INDICATORS
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Current ratio ............................ .83 1.05
Total debt (in millions) ................. $2,192 $2,588
Shareholders' equity (in millions) ....... $9,713 $8,204
Percent of total debt to capitalization .. 18.4% 24.0%
Floating-rate debt/total debt ............ -- 15%
Apache's primary uses of cash are for exploration, development and
acquisition of oil and gas properties, costs and expenses necessary to maintain
continued operations, repayment of principal and interest on outstanding debt,
and payment of dividends. With all commercial paper paid off at the end of the
third quarter of 2005, Apache's cash balances are expected to rise. Unlike some
companies in the oil and gas industry, Apache has not repurchased shares or paid
special dividends, choosing instead to maintain its strategy of pursuing growth
and possible acquisitions, despite a comparatively high-priced market.
The Company's ratio of current assets to current liabilities was .83 on
September 30, 2005, compared to 1.05 on December 31, 2004. The decrease in the
ratio is the result of an increase in current liabilities of $860 million as of
September 30, 2005 as compared to December 31, 2004, which exceeded an increase
in current assets of $438 million for the same period. The increase in current
liabilities was primarily attributable to higher accrued exploration and
development costs from increased drilling activity, an increase in the accrued
liability for derivative instruments from higher commodity prices and higher
accrued PRT in the North Sea. The increase in current assets was driven by an
increase in oil and gas revenue receivables, resulting from higher commodity
prices and higher joint owner receivables.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Apache's net cash provided by operating activities for the first nine
months of 2005 totaled $3.2 billion, up from $2.3 billion for the same period in
2004. The increase in 2005 cash flow is attributed primarily to the significant
increase in commodity prices, which generated additional oil and gas revenues.
The Company's average realized crude oil price increased 50 percent, a
reflection of higher worldwide prices. The Company also saw a 22 percent
increase in natural gas prices. Additional revenues generated from a five
percent increase in daily crude oil production and a three percent increase in
daily gas production also contributed to the increased cash flows. These
increases were partially offset by higher LOE, severance taxes, U.K. PRT and
higher income taxes, all of which are generally up because of higher production
and higher commodity prices. The Company reviews oil and gas sales and
production costs and expenses for each reportable segment on a monthly basis.
For a more detailed discussion of commodity prices, production, costs and
expenses, refer to the "Results of Operations" in this Management's Discussion
and Analysis of Financial Condition and Results of Operations.
DEBT
During the first nine months of 2005, we continued to strengthen our
financial flexibility and build on our solid financial position. Our
debt-to-capitalization ratio on September 30, 2005, declined to 18.4 percent
from 24.0 percent on December 31, 2004, as a result of lower debt and additional
equity from earnings. On September 30, 2005, the Company had outstanding debt of
$2.2 billion, $396 million less than December 31, 2004. The Company's
outstanding debt consisted of 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.
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. There was no commercial
paper outstanding as of September 30, 2005. The weighted-average interest rate
for commercial paper was 3.46 percent and 1.70 percent for the third quarter of
2005 and 2004, respectively.
As of September 30, 2005, available borrowing capacity under our credit
facilities was $1.5 billion. We had $97 million in cash and cash equivalents on
hand on September 30, 2005, down $14 million from the $111 million
34
available at the end of 2004. The Company was in compliance with the terms of
its credit facilities as of September 30, 2005.
On May 12, 2005, the Company entered into a new $450 million revolving bank
credit facility for the U.S., a $150 million revolving bank credit facility for
Australia and a $150 million revolving bank credit facility for Canada. These
new facilities replaced the Company's existing credit facilities in the same
amounts which were scheduled to mature in June 2007. These new facilities are
scheduled to mature on May 12, 2010. There were no changes to the Company's $750
million U.S. credit facility which matures in May 2009.
The financial covenants of the Company's revolving bank credit facilities
require the Company to maintain a debt-to-capitalization ratio of not greater
than 60 percent at the end of any fiscal quarter. The Company's
debt-to-capitalization ratio as of September 30, 2005 was 18.4 percent. The
negative covenants include restrictions on the Company's ability to create liens
and security interests on our assets, with exceptions for liens typically
arising in the oil and gas industry, purchase money liens and liens arising as a
matter of law, such as tax and mechanics' liens. The Company may incur liens on
assets located in the U.S., Canada and Australia of up to five percent of the
Company's consolidated assets, which approximated $893 million as of September
30, 2005. There are no restrictions on incurring liens in countries other than
the U.S., Canada and Australia. There are also restrictions on Apache's ability
to merge with another entity, unless the Company is the surviving entity, and a
restriction on our ability to guarantee debt of entities not within our
consolidated group.
There are no clauses in the facilities that permit the lenders to
accelerate payments or refuse to lend based on unspecified material adverse
changes (MAC clauses). The credit facility agreements do not have drawdown
restrictions or prepayment obligations in the event of a decline in credit
ratings. However, the agreements allow the lenders to accelerate payments and
terminate lending commitments if Apache Corporation, or any of its U.S.,
Canadian or Australian subsidiaries, defaults on any direct payment obligation
in excess of $100 million or has any unpaid, non-appealable judgment against it
in excess of $100 million.
At the Company's option, the interest rate for the facilities is based on
(i) the greater of (a) The JP Morgan Chase Bank prime rate or (b) the federal
funds rate plus one-half of one percent or (ii) the London Interbank Offered
Rate (LIBOR) plus a margin determined by the Company's senior long-term debt
rating. The $750 million and the $450 million credit facilities (U.S. credit
facilities) also allow the Company to borrow under competitive auctions.
At September 30, 2005, the margin over LIBOR for committed loans under the
new facilities was .23 percent. If the total amount of the loans borrowed under
all three facilities equals or exceeds 50 percent of the total facility
commitments, then an additional .10 percent will be added to the margins over
LIBOR. The Company also pays quarterly facility fees of .07 percent on the total
amount of the three facilities. The facility fees vary based upon the Company's
senior long-term debt rating.
OIL AND GAS CAPITAL EXPENDITURES
The Company funded its year-to-date 2005 oil and gas exploration and
production capital expenditures with internally generated net cash provided by
operating activities of $3.2 billion and its lines of credit and commercial
paper program.
Capital expenditures totaled $2.9 billion for the first nine months of
2005, 70 percent, or $1.2 billion higher than the comparable period last year.
Expenditures for exploration and production activity accounted for 89 percent,
or $2.5 billion, of the capital spending; a $915 million increase over last
year's first nine months. The remaining balance of capital spending was
primarily for gathering, marketing and processing facilities which totaled $319
million, up $260 million from the first nine months of last year. This increase
was driven by construction of 11 new gas processing plants in Canada (four of
which were completed during the third quarter of 2005) and development of the
Qasr facilities in Egypt.
35
The following table presents a summary of the Company's capital
expenditures for each reportable segment for the nine months ended September 30,
2005 and 2004.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
---------- ----------
(In thousands)
Exploration and development:
United States ..................................... $ 803,297 $ 573,871
Canada ............................................ 854,032 491,001
Egypt ............................................. 262,315 219,333
Australia ......................................... 174,809 97,445
North Sea ......................................... 399,836 220,644
Other International ............................... 37,205 13,872
---------- ----------
$2,531,494 $1,616,166
========== ==========
Capitalized Interest ................................. $ 42,653 $ 38,951
========== ==========
Gas gathering, transmission and processing facilities:
Canada ............................................ $ 134,306 $ 13,564
Egypt ............................................. 156,081 29,137
Australia ......................................... 28,856 16,862
---------- ----------
$ 319,243 $ 59,563
========== ==========
Acquisitions:
Oil and gas properties ............................ $ 35,826 $ 490,832
========== ==========
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 third quarter of 2005 rose to $26 million from $20 million in
the same period of 2004, reflecting the increase in common shares outstanding
and the higher common stock dividend rate. The Company increased its quarterly
cash dividend to eight cents per share from six cents, effective with the
November 2004 dividend payment. On September 15, 2005, the Company announced
that its Board of Directors voted to increase the quarterly cash dividend on its
common stock to ten cents per share, effective with the November 2005 payment.
During the third quarter of 2005, Apache paid a total of $1.4 million in
dividends on its Series B Preferred Stock issued in August 1998.
CONTRACTUAL OBLIGATIONS
We are subject to various financial obligations and commitments in the
normal course of operations. These contractual obligations represent known
future cash payments that we are required to make and relate primarily to
long-term debt, operating leases, pipeline transportation commitments and
international commitments. The Company expects to fund these contractual
obligations with cash generated from operating activities.
Apache is also subject to various contingent obligations that become
payable only if certain events or rulings were to occur. The inherent
uncertainty surrounding the timing of and monetary impact associated with these
events or rulings prevents any meaningful accurate measurement, which is
necessary to assess any impact on future liquidity. Such obligations include
environmental contingencies and potential settlements resulting from litigation.
Apache's management believes that it has adequately reserved for its contingent
obligations. The Company has approximately $11 million reserved for
environmental remediation and approximately $11 million reserved for various
legal liabilities. In addition, the Company has an accrued reserve of $71
million, plus accrued interest of $6.4 million for the Texaco China B.V.
litigation.
The Company's future liquidity could be impacted by a significant downgrade
of its credit ratings by Moody's, Standard and Poor's, and Fitch; however, we do
not believe that such a sharp downgrade is reasonably likely. The Company's
credit facilities do not require the Company to maintain a minimum credit
rating. In addition, generally under our commodity hedge agreements, Apache may
be required to post margin or terminate outstanding positions if the Company's
credit ratings decline significantly. The negative covenants associated with our
debt are outlined
36
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.
Please refer to Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Off-Balance Sheet Arrangements", in the
Company's 2004 Form 10-K.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
The major market risk exposure is in the pricing applicable to our oil and
gas production. Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot prices applicable to our U.S. 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 $61.31 per barrel during the first nine-months of 2005.
Average monthly gas price realizations, including the impact of fixed-price
contracts and hedges, ranged from a monthly low of $5.16 per Mcf to a monthly
high of $7.40 per Mcf during the same period. Based on the Company's worldwide
oil production levels, a $1.00 per barrel change in the weighted-average
realized price of oil would increase or decrease revenues by approximately $65
million. Based on the Company's worldwide gas production levels, a $.10 per Mcf
change in the weighted-average realized price of gas would increase or decrease
revenues by approximately $35 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 September 30, 2005, the Company had open natural gas derivative
positions with a fair value of $(343) million. A 10 percent increase in natural
gas prices would reduce the fair value by approximately $88 million, while a 10
percent decrease in prices would increase the fair value by approximately $86
million. The Company also had open oil derivative positions with a fair value of
$(190) million on September 30, 2005. A 10 percent increase in crude oil prices
would reduce the fair value by approximately $47 million, while a 10 percent
decrease in prices would increase the fair value by approximately $46 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
As of September 30, 2005, the Company had no interest rate risk exposure
since the Company did not have any floating-rate debt.
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. 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.
37
A 10 percent strengthening of the Australian and Canadian dollars and the
British pound as of September 30, 2005, would have a negative $121 million
impact on expenses. This is primarily driven from foreign currency effects on
the Company's deferred tax liability positions in its international operations.
The information set forth under "Commodity Risk," "Interest Rate Risk" and
"Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2004, is incorporated herein by reference. Information
about market risks for the quarter and nine months ended September 30, 2005,
does not differ materially from the disclosure in our 2004 Form 10-K, except as
noted above.
DOMESTIC GOVERNMENTAL RISK
Apache's U.S. operations have been, and at times in the future may be,
affected by political developments and by federal, state and local laws and
regulations impacting production levels, taxes, environmental requirements and
other assessments including a potential Windfall Profits Tax.
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 September 30, 2005, the end of the
period covered by this report. Based on that evaluation and as of the date of
that evaluation, these officers concluded that the Company's disclosure controls
were effective, providing effective means to insure that information we are
required to disclose under applicable laws and regulations is recorded,
processed, summarized and reported in a timely manner. We also made no
significant changes in internal controls over financial reporting during the
quarter ending September 30, 2005, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
We periodically review the design and effectiveness of our disclosure
controls, including compliance with various laws and regulations that apply to
our operations both inside and outside the United States. We make modifications
to improve the design and effectiveness of our disclosure controls, and may take
other corrective action, if our reviews identify deficiencies or weaknesses in
our controls.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management report called for by Item 308(a) of Regulation S-K is
incorporated herein by reference to Report of Management on Internal Control
Over Financial Reporting, included on Page F-1 in Item 15 of the Company's 2004
Form 10-K.
38
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.
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.
39
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
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Apache Corporation 1995 Stock Option Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.2 - Apache Corporation 1998 Stock Option Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.3 - Apache Corporation 2000 Stock Option Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.4 - Apache Corporation 2000 Share Appreciation Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.5 - Apache Corporation Deferred Delivery Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.6 - Amended and Restated Conditional Grant Agreement, dated
September 15, 2005, effective as of January 1, 2005, between
Registrant and G. Steven Farris.
10.7 - Apache Corporation Non-Employee Directors' Compensation Plan,
as amended and restated September 15, 2005, effective as of
January 1, 2005.
10.8 - Apache Corporation Outside Directors' Retirement Plan, as
amended and restated September 15, 2005, effective as of
January 1, 2005.
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
The following current reports on Form 8-K were filed by Apache during
the fiscal quarter ended September 30, 2005:
Item 8.01 - Other Events - dated and filed September 15, 2005
On September 15, 2005, Apache issued an update on its recovery efforts
after Hurricane Katrina. Also on September 15, 2005, Apache announced
an increase in the quarterly cash dividend on its common stock to ten
cents per share from eight cents per share.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
APACHE CORPORATION
Dated: November 9, 2005 /s/ ROGER B. PLANK
---------------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer
Dated: November 9, 2005 /s/ THOMAS L. MITCHELL
---------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Apache Corporation 1995 Stock Option Plan, as amended and restated
September 15, 2005, effective as of January 1, 2005.
10.2 Apache Corporation 1998 Stock Option Plan, as amended and restated
September 15, 2005, effective as of January 1, 2005.
10.3 Apache Corporation 2000 Stock Option Plan, as amended and restated
September 15, 2005, effective as of January 1, 2005.
10.4 Apache Corporation 2000 Share Appreciation Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
10.5 Apache Corporation Deferred Delivery Plan, as amended and restated
September 15, 2005, effective as of January 1, 2005.
10.6 Amended and Restated Conditional Grant Agreement, dated September 15,
2005, effective as of January 1, 2005, between Registrant and G.
Steven Farris.
10.7 Apache Corporation Non-Employee Directors' Compensation Plan, as
amended and restated September 15, 2005, effective as of January 1,
2005.
10.8 Apache Corporation Outside Directors' Retirement Plan, as amended and
restated September 15, 2005, effective as of January 1, 2005.
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.