<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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 0-8933
APCO ARGENTINA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS
(STATE OR OTHER JURISDICTION OF EIN 98-0199453
INCORPORATION OR ORGANIZATION)
POST OFFICE BOX 2400
TULSA, OKLAHOMA 74102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (918) 573-2164
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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT APRIL 30, 1999
ORDINARY SHARES, $.01 PAR VALUE 7,360,311 SHARES
<PAGE> 2
APCO ARGENTINA INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- March 31, 1999 and
December 31, 1998
3
Consolidated Statements of Operations -- Three
Months Ended March 31, 1999 and 1998
4
Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1999 and 1998
5
Notes to Consolidated Financial Statements
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS 12
PART II. OTHER INFORMATION 13
</TABLE>
Portions of this document may constitute "forward-looking statements" as defined
by federal law. Although Apco Argentina Inc. believes any such statements are
based on reasonable assumptions, there is no assurance that actual outcomes will
not be materially different. Additional information about issues that could lead
to material changes in performance is contained in Apco Argentina Inc's annual
report on Form 10-K
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in Thousands) March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 11,138 $ 13,596
Accounts receivable 5,788 5,653
Inventory 683 865
Other current assets 449 472
-------- --------
Total Current Assets 18,058 20,586
-------- --------
Property and Equipment:
Cost 80,296 79,596
Accumulated depreciation (39,375) (38,458)
-------- --------
40,921 41,138
Other assets 865 550
-------- --------
$ 59,844 $ 62,274
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,567 $ 5,415
Accrued liabilities 2,321 2,092
Dividends payable 1,196 1,196
-------- --------
Total Current Liabilities 6,084 8,703
-------- --------
Other Liabilities 3,179 3,170
-------- --------
Stockholders' Equity, per accompanying statements:
Ordinary shares, par value $.01 per share;
15,000,000 shares authorized;
7,360,311 shares outstanding 74 74
Additional paid-in capital 9,326 9,326
Retained earnings 41,181 41,001
-------- --------
Total Stockholders' Equity 50,581 50,401
-------- --------
$ 59,844 $ 62,274
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-3-
<PAGE> 4
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands Except Per Share) Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Operating revenue $ 7,659 $ 8,384
Other revenues 101 237
-------- --------
7,760 8,621
-------- --------
COSTS AND EXPENSES:
Operating expense 2,554 2,838
Provincial royalties 691 890
Transportation & storage 472 425
Selling and administrative 579 481
Depreciation, depletion and amortization 1,028 1,022
Exploration expense 2 78
Argentine taxes 717 868
Other expense, net 341 209
-------- --------
6,384 6,811
-------- --------
NET INCOME $ 1,376 $ 1,810
======== ========
INCOME PER ORDINARY SHARE, Basic and Diluted $ .19 $ .25
======== ========
AVERAGE ORDINARY SHARES
OUTSTANDING, Basic and Diluted 7,360 7,360
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE> 5
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in Thousands) Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,376 $ 1,810
Adjustments to reconcile to cash
(used) provided by operating activities:
Depreciation, depletion and amortization 1,028 1,022
Retirement of property 17 --
Changes in accounts receivable (135) 1,818
Changes in inventory 182 1,323
Changes in other current assets 23 (267)
Changes in accounts payable (2,848) (491)
Changes in accrued liabilities 229 (2,442)
Changes in other assets and liabilities
including Acambuco investments (306) 327
-------- --------
Net cash (used) provided by operating activities (434) 3,100
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (828) (3,086)
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid (1,196) (1,196)
-------- --------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (2,458) (1,182)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 13,596 21,183
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 11,138 $ 20,001
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for Argentine income taxes $ 361 $ 1,549
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-5-
<PAGE> 6
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The unaudited, consolidated financial statements of Apco Argentina Inc.
and subsidiary (the "Company"), included herein, do not include all
footnote disclosures normally included in annual financial statements
and, therefore, should be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Form 10-K.
In the opinion of the Company, all adjustments have been made to
present fairly the results of the three months ended March 31, 1999 and
1998. The results for the periods presented are not necessarily
indicative of the results for the respective complete years.
(2) INCOME TAXES
As described in Note 6 of Notes to Consolidated Financial Statements
included in the Company's 1998 Form 10-K, the Company believes its
earnings are not subject to U.S. income taxes, nor Cayman Islands
income or corporation taxes.
Income derived by the Company from its Argentine operations is subject
to Argentine income tax at a rate of thirty five percent (thirty three
percent for 1998) which tax is included in the Consolidated Statements
of Operations as Argentine taxes.
In 1988, the Argentine government amended the Obligatory Savings Law
requiring that all taxpayers deposit with the government, both in 1988
and 1989, amounts computed on the basis of prior year taxable incomes.
It was the opinion of the Entre Lomas joint venture and its legal and
tax counsels that it was exempted from these deposits due to the tax
exemption granted in the original Entre Lomas contract number 12,507.
As a result the deposits were not made.
In August 1993, the Direccion General Impositiva ("DGI"), the Argentine
taxing authority, made a claim against Petrolera for the delinquent
deposits pertaining to the Entre Lomas operation, which including
interest and indexation for inflation, amounted to $9.2 million. An
appeal was filed by Petrolera in Argentine Federal Tax Court which
ruled in favor of the DGI in April 1997. Petrolera appealed the ruling
before Federal Appeals Court which in November 1998, ruled in favor of
Petrolera. The DGI has now filed an appeal before the Supreme Court. As
of the date of these Consolidated Financial Statements the Supreme
Court had not yet rendered its decision. Although the DGI can require
that the amount in question be deposited, it has not done so pending
the Supreme Court's final ruling. In the opinion of Petrolera's
management and its legal and tax counsel, the possibility that this
claim will result in an unfavorable outcome for the joint venture is
remote. The Company has no reason to believe otherwise, and
accordingly, has not recorded a liability for its share of the asserted
claim.
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<PAGE> 7
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement. Companies
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999; however, beginning June 16, 1998, companies may implement the
statement as the beginning of any fiscal quarter. SFAS No. 133 cannot
be applied retroactively and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1,
1998). SFAS No. 133 has no impact on the Company's financial statements
as it currently is not using derivative instruments.
-7-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion explains the significant factors which have affected
the Company's financial condition and results of operations during the periods
covered by this report.
FINANCIAL CONDITION
OIL PRICES
Commodity prices, including crude oil, are subject to economic cycles and demand
and supply imbalances. The price of crude oil can also be affected by political
decisions made by governments of countries that are members of the Organization
of Petroleum Exporting Countries ("OPEC"). The above factors are evidenced by
the dramatic swings in world oil prices during 1997, 1998, and during the first
four months of 1999. The Company's sales price per barrel of oil for 1997
averaged $19.52. Oil prices began to decline during the latter part of 1997 and
continued declining throughout 1998. The Company's sales price per barrel of oil
for 1998 averaged $12.71. During December 1998 and the first two months of 1999
the Company sold its oil for as low as $10 per barrel.
The March 1999 decision by OPEC member nations to cut production quotas
significantly, combined with the recent improvement in the condition of Far East
Asian economies, has served to propel oil prices upward during April and May. By
early May, the price of West Texas Intermediate was approaching the $19 level.
Adjusting for the discount from WTI used to calculate the sales price of
Medanito crude oil, the Company's sales price at these levels is about $17.50
per barrel. There is no way to predict whether this recent dramatic increase in
crude oil prices can be sustained. Adherence by OPEC member nations to the new
production quotas is crucial. If the market sees evidence of non-compliance, the
most recent trend could reverse.
The fall in oil prices described above had a significant negative impact on the
Company's net income and cash flow during 1998. The first quarter 1999 was
similarly affected. Since oil production levels are successfully being
maintained, income and cash flow for the remainder of the year will be dependent
on oil prices.
CAPITAL SPENDING
The Company is strategically committed to the long-term development of its
properties. In the Entre Lomas concession, in spite of declining oil prices, the
joint venture partners did not curtail capital spending in 1998. The Entre Lomas
initial capital plan for 1999 estimated investments of $26 million, or $12.5
million net to the Company. However, as Entre Lomas crude oil sale prices
reached $10 per barrel in December 1998, the joint venture was forced to
reevaluate its capital program, cutting proposed investments by fifty percent,
to just over $12 million, or $5.8 million net. Not including the Company's share
of Acambuco cash calls, capital expenditures for the three months ended March
31, 1999 totaled $828 thousand, compared with $3.1 million for the same period
in the previous year.
The Entre Lomas partners will be reviewing their capital program for 1999
periodically in the light of fluctuating oil prices. If possible, the joint
venture will restore development drilling
-8-
<PAGE> 9
deleted when the 1999 capital plan was revised. Drilling in the concession
scheduled for 1999 commenced in March, and is continuing into April and May.
ENTRE LOMAS EXPLORATION
In March 1999, the joint venture partners began their interpretation of the 370
square kilometers of 3D seismic shot over Entre Lomas concession in 1998. It is
expected that the interpretation will be completed by the third quarter of this
year. This just acquired seismic will enable the partners to integrate it and
the previous 1995 3D seismic program into one continuous block. It is the
intention of the partners to identify the most attractive exploration prospects,
and thereafter, if oil prices cooperate, undertake exploration drilling in the
concession.
ACAMBUCO
Two wells are currently being drilled in the concession. The first well, the San
Pedrito x-2, commenced drilling in September 1998. Its intended objective is to
confirm the 1996 Huamampampa discovery made by the San Pedrito x-1 well. This
well is currently drilling at 14,000 feet. The second well, the Cerro Tuyunti
x-1, commenced drilling in January. It will explore the second of the four
principal structures currently identified in the concession. This well is
currently drilling at 11,000 feet. These wells require approximately eleven
months to reach total depth. Both wells will be drilled to about 18,000 feet and
will test the deeper Santa Rosa formation that is also gas prospective in the
region. A recent long-term production test of the San Pedrito x-1 well proved
successful. During the first quarter of 1999, the Company's 1.5 percent share of
expenditures in Acambuco have totaled almost $400 thousand.
DIVIDENDS
The Company currently pays its shareholders a quarterly dividend of 16.25 cents
per share. Future dividends are necessarily dependent upon numerous factors,
including among others, earnings levels, capital spending needs, changes in
governmental regulations and changes in crude oil and natural gas prices. The
Company reserves the right to change the level of dividend payments or to
discontinue or suspend such payments at the discretion of the directors.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Company generated net income of
$1.4 million. This compares with $1.8 million for the same period in 1998. The
decrease in net income is primarily due to reduced oil sales. Although, in the
quarter to quarter comparison, oil sales volumes increased by twelve percent,
this favorable outcome was more than offset by lower prices. During the current
quarter, the Company's per barrel sales price of oil averaged $11.48, compared
with $14.87 for the same period in 1998. The reduction in oil sales was
partially offset by lower provincial royalties, income taxes, and operating
expense. The decrease in operating expense was the result of curtailment in well
workovers, which occurred as part of the overall reduction in investments in the
Entre Lomas concession during the months of low oil prices.
-9-
<PAGE> 10
The following table shows total sales of crude oil, condensate, natural gas and
gas liquids and average sales prices, and production costs for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Total Sales Volumes-Net to Company
Crude Oil and Condensate (bbls) 453,899 402,455
Gas (mcf) 1,772,515 1,760,457
LPG (tons) 1,482 1,325
Average Sales Prices (in U.S. Dollars)
Oil (per bbl) $ 11.48 $ 14.87
Gas (per mcf) $ 1.26 $ 1.24
LPG (per ton) $ 151.40 $ 162.53
Average Production Costs (in U.S. Dollars)
Oil (per bbl) $ 7.77 $ 7.67
Gas (per mcf) $ .18 $ .31
LPG (per ton) $ 63.00 $ 77.13
</TABLE>
Volumes presented in the above table represent those sold to customers and do
not consider provincial royalties, which are paid separately and are accounted
for as an expense by the Company. In calculating provincial royalties to be
paid, Argentine producers are entitled to deduct gathering, storage, treating
and compression costs.
Average production cost is calculated by taking into consideration all costs of
operation, including costs of remedial workovers and depreciation of property
and equipment.
Gas production cost for 1998 included some catch-up depreciation charges booked
in the first quarter of the year.
-10-
<PAGE> 11
YEAR 2000 COMPLIANCE
During 1999, most companies will face a potentially serious information systems
problem because many software applications and the operational programs written
in the past may not properly recognize calendar dates beginning in the year
2000. This problem could force computers to shut down or provide incorrect data
or information. Petrolera, the operator of the Entre Lomas concession, from
which the Company derives one-hundred percent of its operating revenue, has
initiated the process of identifying changes required to computer programs that
impact the critical aspects of the joint venture's business and guarantee
continuation of its production and sales operations, including major interfaces
with customers and suppliers such as pipelines that carry products to market and
companies that provide power to the concession.
Petrolera has completed an inventory of all equipment and software that may be
affected by the change of the century, and is evaluating modifications required
to become Year 2000 compatible. At this time, new financial, accounting and
administrative systems have been implemented which are fully compatible.
Petrolera, and the Company, believe that systems over which they have direct
control will be fully compliant. It is estimated that by the end of June 1999,
Petrolera will have achieved the fundamental objective of full Year 2000
compliance of the systems over which it has direct control at a cost which is
not material to the joint venture's business, financial condition, or results of
operation.
Although Petrolera is monitoring compliance efforts by major third party
companies upon which the Entre lomas concession depends, there does exist the
possibility of operation disruptions in the event of non-compliance by third
parties. Sales disruption would be the worst case manifestation of this
possibility exposing the Company to a loss of sales revenue of approximately $60
thousand per day. Based on Petrolera's discussions with third parties, the
Company expects them to also be fully compliant by mid 1999 thereby minimizing
the chance of a disruption of operations.
Petrolera is currently in the process of developing contingency plans in the
event that disruptions occur as a result of third party non-compliance or any
failure of its systems.
-11-
<PAGE> 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's operations are exposed to market risks as a result of changes in
commodity prices and foreign currency exchange rates.
COMMODITY PRICE RISK
The Company produces and sells crude oil and natural gas. As a result, the
Company's financial results can be significantly impacted by fluctuations in
commodity prices due to changing market forces.
FOREIGN CURRENCY AND OPERATIONS RISK
The Company's operations are located in Argentina. Therefore, the Company's
financial results may be affected by factors such as changes in foreign currency
exchange risks, weak economic conditions, or changes in Argentina's political
climate.
ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT
Since 1989, the government of President Menem has pursued free market policies,
including the privatization of state-owned companies, deregulation of the oil
and gas industry, which included the successful sale of YPF shares in public
markets, tax reform to equalize income tax rates for domestic and foreign
investors, liberalization of import and export laws, and the lifting of exchange
controls.
The cornerstone of the country's economic reforms since 1989 has been its change
in monetary policy. In April 1991, the convertibility law was implemented
establishing an exchange rate of one Argentine peso to one U.S. dollar. The
convertibility plan requires that the country's monetary base be backed by an
equivalent amount of international reserves, including U.S. dollars and gold.
Essentially, the policy guarantees an exchange rate of 1:1. The Argentine
government has not strayed from this policy since implementation of the plan.
These policies have been successful as evidenced, first, by a reduction in
annual inflation from the 1989 rate of 5,000 percent to less than one percent in
1998 and, second, an influx of foreign investment capital into the country. In
July 1996, Domingo Cavallo, Economy Minister and author of the convertibility
plan, was replaced by Roque Fernandez, formerly president of the Central Bank.
The country's economy showed no adverse reactions to this replacement.
The Far East Asian and Russian financial crises of 1997 and 1998 have impacted
the economies of many emerging market countries. Argentina was not affected
significantly but did experience a slow down in economic growth. In 1998, the
country's Gross Domestic Product grew at a rate of 4 percent compared with 8.6
percent in 1997.
Argentina is a part of "Mercosur" a common market established by customs
agreements between Argentina, Brazil, Uruguay, and Paraguay. The "Mercosur"
market comprises a population of approximately 200 million with a total gross
domestic product of $1.1 trillion. The devaluation of Brazil's currency in early
1999 is having an adverse impact on Argentine economic growth. Brazil is
Argentina's largest trading partner.
-12-
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
-13-
<PAGE> 14
SIGNATURE
Pursuant to the requirements 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.
APCO ARGENTINA INC.
-------------------------
(Registrant)
By: /s/ Thomas Bueno
------------------------------------
Controller, (Duly Authorized Officer
of the Registrant) and
Chief Accounting Officer
May 12, 1999
-14-
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits No. Description
------------ -----------
<S> <C>
Exhibit 27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000311471
<NAME> APCOARGENTINA INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,138
<SECURITIES> 0
<RECEIVABLES> 5,788
<ALLOWANCES> 0
<INVENTORY> 683
<CURRENT-ASSETS> 18,058
<PP&E> 80,296
<DEPRECIATION> 39,375
<TOTAL-ASSETS> 59,844
<CURRENT-LIABILITIES> 6,084
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 50,507
<TOTAL-LIABILITY-AND-EQUITY> 59,844
<SALES> 7,659
<TOTAL-REVENUES> 7,760
<CGS> 0
<TOTAL-COSTS> 5,324
<OTHER-EXPENSES> 455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,981
<INCOME-TAX> 605
<INCOME-CONTINUING> 1,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,376
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
