<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 1-4300
APACHE CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 41-0747868
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Suite 100, One Post Oak Central
2000 Post Oak Boulevard, Houston, TX 77056-4400
---------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Registrant's common stock, outstanding as of September 30,
1999.....................114,083,242
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per common share data)
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas production revenues $ 338,633 $ 182,801 $ 744,012 $ 590,606
Gathering, processing and marketing revenues 44,961 29,756 105,456 88,872
Other revenues 1,797 (874) 5,274 (1,722)
--------- --------- --------- ---------
385,391 211,683 854,742 677,756
--------- --------- --------- ---------
OPERATING EXPENSES:
Depreciation, depletion and amortization 119,189 94,818 313,010 290,604
Operating costs 60,646 49,344 158,771 158,511
Gathering, processing and marketing costs 44,429 28,970 103,626 86,590
Administrative, selling and other 15,221 13,860 37,685 34,026
Financing costs:
Interest expense 33,479 30,167 97,586 90,498
Amortization of deferred loan costs 1,101 1,107 3,316 3,415
Capitalized interest (13,694) (12,883) (39,663) (36,271)
Interest income (572) (1,090) (1,396) (3,560)
--------- --------- --------- ---------
259,799 204,293 672,935 623,813
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 125,592 7,390 181,807 53,943
Provision for income taxes 52,814 4,189 78,429 24,150
--------- --------- --------- ---------
NET INCOME 72,778 3,201 103,378 29,793
Preferred stock dividends 4,947 584 9,503 584
--------- --------- --------- ---------
INCOME ATTRIBUTABLE TO COMMON STOCK $ 67,831 $ 2,617 $ 93,875 $ 29,209
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ .59 $ .03 $ .89 $ .30
========= ========= ========= =========
Diluted $ .59 $ .03 $ .88 $ .30
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
1
<PAGE> 3
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 103,378 $ 29,793
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 313,010 290,604
Amortization of deferred loan costs 3,316 3,415
Provision for deferred income taxes 41,912 2,771
Other (623) 364
Cash distributions in excess of earnings of affiliates -- 1,523
Changes in operating assets and liabilities:
(Increase) decrease in receivables (116,188) 54,338
Increase in advances to oil and gas ventures and other (8,388) (3,510)
(Increase) decrease in deferred charges and other (3,132) 16,276
Increase (decrease) in payables 51,100 (62,585)
Increase (decrease) in accrued expenses 14,798 (3,988)
Increase (decrease) in advances from gas purchaser (17,808) 56,891
Increase (decrease) in deferred credits and noncurrent liabilities 8,006 (4,486)
----------- -----------
Net cash provided by operating activities 389,381 381,406
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (425,698) (512,515)
Acquisition of Shell properties (687,632) --
Acquisition of British-Borneo interests, net of cash acquired (83,590) --
Non-cash portion of net oil and gas property additions (42,015) (29,130)
Proceeds received from sales of property and equipment 149,737 130,753
Proceeds from sale of assets held for resale -- 62,998
Proceeds from sale of stock held for investment -- 26,147
Other, net (9,983) (15,418)
----------- -----------
Net cash used in investing activities (1,099,181) (337,165)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 733,758 446,248
Payments on long-term debt (645,872) (498,420)
Dividends paid (29,331) (20,335)
Proceeds from issuance of preferred stock 210,490 98,630
Common stock activity, net 456,459 1,085
Treasury stock activity, net (12,072) (21,430)
Cost of debt and equity transactions (1,495) (420)
----------- -----------
Net cash provided by financing activities 711,937 5,358
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,137 49,599
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,537 9,686
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,674 $ 59,285
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
<PAGE> 4
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,674 $ 14,537
Receivables 272,977 159,806
Inventories 44,935 40,948
Advances to oil and gas ventures and other 20,585 11,679
------------- ------------
355,171 226,970
------------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties 6,786,938 5,901,863
Unproved properties and properties under
development, not being amortized 808,758 637,854
Gas gathering, transmission and processing facilities 414,544 354,506
Other 97,718 88,422
------------- ------------
8,107,958 6,982,645
Less: Accumulated depreciation, depletion and amortization (3,576,608) (3,255,104)
------------- ------------
4,531,350 3,727,541
------------- ------------
OTHER ASSETS:
Deferred charges and other 41,015 41,551
------------- ------------
$ 4,927,536 $ 3,996,062
============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
<PAGE> 5
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 24,307 $ 15,500
Accounts payable 169,908 115,111
Accrued operating expense 21,759 18,990
Accrued exploration and development 79,013 120,855
Accrued compensation and benefits 16,161 10,692
Accrued interest 25,489 19,054
Other accrued expenses 5,977 5,572
----------- -----------
342,614 305,774
----------- -----------
LONG-TERM DEBT 1,422,337 1,343,258
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES:
Income taxes 332,596 270,493
Advances from gas purchaser 187,660 205,468
Other 76,439 69,236
----------- -----------
596,695 545,197
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized -
Series B, 5.68% Cumulative Preferred Stock,
100,000 shares issued and outstanding 98,387 98,387
Series C, 6.5% Conversion Preferred Stock,
140,000 shares issued and outstanding 210,490 --
Common stock, $1.25 par, 215,000,000 shares authorized,
116,390,278 and 99,790,337 shares issued, respectively 145,488 124,738
Paid-in capital 1,708,876 1,245,738
Retained earnings 474,169 403,098
Treasury stock, at cost, 2,307,036 and 2,021,215 shares,
respectively (48,736) (36,924)
Accumulated other comprehensive income (22,784) (33,204)
----------- -----------
2,565,890 1,801,833
----------- -----------
$ 4,927,536 $ 3,996,062
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
<PAGE> 6
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED PREFERRED
COMPREHENSIVE STOCK STOCK COMMON PAID-IN
(In thousands) INCOME SERIES B SERIES C STOCK CAPITAL
--------------- ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ -- $ -- $ 118,098 $ 1,085,063
Comprehensive income:
Net income $ 29,793 -- -- -- --
Currency translation adjustments (11,913) -- -- -- --
---------------
Comprehensive income $ 17,880
===============
Dividends:
Preferred -- -- -- --
Common ($.21 per share) -- -- -- --
Preferred shares issued 98,515 -- -- --
Common shares issued -- -- 6,626 153,124
Treasury shares purchased, net -- -- -- --
------------ ------------ ----------- --------------
BALANCE AT SEPTEMBER 30, 1998 $ 98,515 $ -- $ 124,724 $ 1,238,187
============ ============ =========== ==============
BALANCE AT DECEMBER 31, 1998 $ 98,387 $ -- $ 124,738 $ 1,245,738
Comprehensive income:
Net income $ 103,378 -- -- -- --
Currency translation adjustments 9,932 -- -- -- --
Unrealized gain on marketable
securities, net of applicable
income taxes of $293 488 -- -- -- --
---------------
Comprehensive income $ 113,798
===============
Dividends:
Preferred -- -- -- --
Common ($.21 per share) -- -- -- --
Preferred shares issued -- 210,490 -- --
Common shares issued -- -- 20,750 463,138
Treasury shares purchased, net -- -- -- --
------------ ------------ ----------- --------------
BALANCE AT SEPTEMBER 30, 1999 $ 98,387 $ 210,490 $ 145,488 $ 1,708,876
============ ============ =========== ==============
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) EARNINGS STOCK INCOME EQUITY
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 561,981 $ (15,506) $ (20,459) $ 1,729,177
Comprehensive income:
Net income 29,793 -- -- 29,793
Currency translation adjustments -- -- (11,913) (11,913)
Comprehensive income
Dividends:
Preferred (584) -- -- (584)
Common ($.21 per share) (20,647) -- -- (20,647)
Preferred shares issued -- -- -- 98,515
Common shares issued -- -- -- 159,750
Treasury shares purchased, net -- (21,430) -- (21,430)
------------ ------------ --------------- ---------------
BALANCE AT SEPTEMBER 30, 1998 $ 570,543 $ (36,936) $ (32,372) $ 1,962,661
============ ============ =============== ===============
BALANCE AT DECEMBER 31, 1998 $ 403,098 $ (36,924) $ (33,204) $ 1,801,833
Comprehensive income:
Net income 103,378 -- -- 103,378
Currency translation adjustments -- -- 9,932 9,932
Unrealized gain on marketable
securities, net of applicable
income taxes of $293 -- -- 488 488
Comprehensive income
Dividends:
Preferred (9,503) -- -- (9,503)
Common ($.21 per share) (22,804) -- -- (22,804)
Preferred shares issued -- -- -- 210,490
Common shares issued -- -- -- 483,888
Treasury shares purchased, net -- (11,812) -- (11,812)
------------ ------------ --------------- ---------------
BALANCE AT SEPTEMBER 30, 1999 $ 474,169 $ (48,736) $ (22,784) $ 2,565,890
============ ============ =============== ===============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
<PAGE> 7
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Apache Corporation (Apache
or the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and the summary of significant
accounting policies and notes thereto included in the Company's most recent
annual report on Form 10-K.
1. ACQUISITIONS AND DIVESTITURES
Acquisitions - On February 1, 1999, the Company acquired oil and gas
properties located in the Gulf of Mexico from Petsec Energy Inc. (Petsec) for an
adjusted purchase price of approximately $66.7 million. The Petsec transaction
included estimated proved reserves of approximately 10.2 million barrels of oil
equivalent (MMboe) as of the effective date.
On May 18, 1999, Apache acquired from Shell Offshore Inc. and affiliated
Shell entities (Shell) its interest in 22 producing fields and 16 undeveloped
blocks located in the Gulf of Mexico. The Shell transaction also included
certain production-related assets and proprietary 3D seismic data covering
approximately 1,000 blocks in the Gulf of Mexico. The purchase price, subject to
post closing adjustments, was $687.6 million in cash and one million shares of
Apache common stock (valued at $28.125 per share). The Shell transaction
included estimated proved reserves of approximately 123.2 MMboe as of the
effective date.
The Shell transaction has been accounted for using the purchase method of
accounting and is included in the Company's financial statements from mid-May of
1999, the date the transaction was completed. The unaudited pro forma disclosure
below presents results as if the Company had owned the properties for the entire
nine months. The pro forma information is based on numerous assumptions and is
not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------------------------
AS REPORTED PRO FORMA
---------------- ---------------
(In thousands, except per common share data)
<S> <C> <C>
Revenues $ 854,742 $ 929,679
Net income 103,378 118,656
Preferred stock dividends 9,503 14,792
Income attributable to common stock 93,875 103,864
Net income per common share:
Basic $ .89 $ .91
Diluted .88 .91
Average common shares outstanding 105,874 113,878
</TABLE>
On June 18, 1999, the Company acquired a 10 percent interest in the East
Spar Joint Venture and an 8.4 percent interest in the Harriet Joint Venture,
both located in the Carnarvon Basin (offshore Western Australia), from
British-Borneo Oil and Gas Plc (British-Borneo) in exchange for $83.6 million
cash and working interests in 11 leases in the Gulf of Mexico. The
British-Borneo transaction included estimated proved reserves of approximately
15.9 MMboe as of the effective date.
6
<PAGE> 8
The purchase price was allocated to the assets purchased and the
liabilities assumed based upon the fair values on the date of acquisition, as
follows (in thousands):
<TABLE>
<S> <C>
Value of properties acquired, including gathering and transportation facilities $ 98,582
Value of Gulf of Mexico leases (3,209)
Working capital acquired, net 4,123
Deferred income tax liability (15,906)
---------------
Cash paid, net of cash acquired $ 83,590
===============
</TABLE>
On October 5, 1999, Apache entered into an agreement with Shell Canada
Limited (Shell Canada) to acquire producing properties and other assets for
C$770 million (US$523.6 million at September 30, 1999). The producing properties
consist of 150,400 net acres and comprise 20 fields with an average working
interest of 55 percent and proved reserves of 87.5 MMboe. Apache will also
acquire 294,294 net acres of undeveloped leaseholdings, 100 percent interest in
a gas processing plant with a potential throughput capacity of 160 million cubic
feet (MMcf) per day, and 52,700 square miles of 2-D seismic and 884 square miles
of 3-D seismic. The Shell Canada transaction will be effective November 1, 1999,
and is expected to close no later than November 30, 1999. Apache plans to fund
the purchase with cash on hand and borrowings under its global credit facility
or commercial paper program.
Divestitures - On September 3, 1999, Apache sold its holdings in the Ivory
Coast by selling its wholly owned subsidiary, Apache Cote d'Ivoire Petroleum
LDC, for a total sales price of $46.1 million to a consortium consisting of
Mondoil Cote d'Ivoire LLC and Saur Energie Cote d'Ivoire. The sale consisted of
13.7 MMboe of proved reserves and the gain was recorded to Other Revenues.
Additionally, during the nine months ended September 30, 1999, Apache sold
27.8 MMboe of proved reserves in several transactions from largely marginal
North American properties, collecting cash of $103.6 million.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing or financing activities is presented below:
In May 1999, the Company issued one million shares of Apache common stock
valued at $28.1 million to Shell in connection with the transaction discussed in
Note 1.
In June 1999, the Company acquired certain oil and gas interests from
British-Borneo for cash and the assumption of certain liabilities. The
accompanying financial statements include the amounts detailed in Note 1.
The following table provides supplemental disclosure of cash flow
information:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Cash paid during the period for:
Interest (net of amounts capitalized) $ 51,488 $ 52,095
Income taxes (net of refunds) 36,517 21,379
</TABLE>
3. DEBT
In March 1999, Apache Finance Pty Ltd (Apache Finance) issued $100 million
principal amount, $99.3 million net of discount, of senior unsecured 7-percent
notes due March 15, 2009. The notes are irrevocably and unconditionally
guaranteed by Apache. Apache Finance has the right to redeem the notes prior to
maturity, under certain conditions related to changes in relevant tax laws.
Also, upon certain changes in control, these notes are subject to mandatory
repurchase. The proceeds were used to reduce outstanding indebtedness under the
Australian portion of the global credit facility.
7
<PAGE> 9
In June 1999, the Company issued $150 million principal amount, $149.1
million net of discount, of senior unsecured 7.625-percent notes due July 1,
2019. The Company does not have the right to redeem the notes prior to maturity.
Upon certain changes in control, these notes are subject to mandatory
repurchase. The proceeds were used to reduce the Company's outstanding amounts
of commercial paper.
On November 2, 1999, Apache filed a shelf registration for $400 million of
debt securities. Proceeds from the debt securities, being offered by Apache
Finance Canada Corporation (Apache Finance Canada), may be used to finance and
invest in Apache's Canadian operations, to repay outstanding debt, for working
capital, capital expenditures and acquisitions.
4. 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:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ----------- ----------- ----------- ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC:
Income attributable to common stock $ 67,831 114,088 $ .59 $ 2,617 98,205 $ .03
=========== ==========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans -- 735 -- 132
---------- ----------- ----------- ----------
DILUTED:
Income attributable to common stock
after assumed conversions $ 67,831 114,823 $ .59 $ 2,617 98,337 $ .03
========== =========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ----------- ----------- ----------- ---------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC:
Income attributable to common stock $ 93,875 105,874 $ .89 $ 29,209 98,131 $ .30
=========== ===========
EFFECT OF DILUTIVE SECURITIES:
Stock option plans -- 408 -- 299
---------- ----------- ----------- ----------
DILUTED:
Income attributable to common stock
after assumed conversions $ 93,875 106,282 $ .88 $ 29,209 98,430 $ .30
========== =========== =========== =========== ========== ===========
</TABLE>
The 6-percent convertible subordinated debentures were not included in the
computation of diluted net income per common share for the nine months ended
September 30, 1998, because to do so would have been antidilutive. Such
debentures were converted into shares of Apache common stock or redeemed in
January 1998.
The Conversion Preferred Stock, Series C, was not included in the
computation of diluted net income per common share during 1999, because to do so
would have been antidilutive.
5. CAPITAL STOCK
In May 1999, Apache issued 14,950,000 shares ($463.5 million) of Apache
common stock and 140,000 shares ($217 million) of Automatically Convertible
Equity Securities, Conversion Preferred Stock, Series C (the Preferred Stock) in
the form of seven million depositary shares each representing 1/50th of a share
of Preferred Stock (Depositary Shares). The Preferred Stock is not subject to a
sinking fund or mandatory redemption. On May 15, 2002, each Depositary Share
will automatically convert, subject to adjustments, into not more than one share
and not
8
<PAGE> 10
less than 0.8197 of a share of Apache common stock, depending on the market
price of Apache common stock at that time.
At any time prior to May 15, 2002, holders of the Depositary Shares may
elect to convert each of their shares, subject to adjustments, into not less
than 0.8197 of a share of Apache Common Stock (5,737,900 common shares). Holders
of the shares are entitled to receive cumulative cash dividends at an annual
rate of $2.015 per Depositary Share when, and if, declared by Apache's board of
directors. The net proceeds from both offerings of approximately $654.8 million
were used for general corporate purposes, including funding of a portion of the
purchase price for the Shell transaction.
6. BUSINESS SEGMENT INFORMATION
Apache has five reportable segments which are primarily in the business of
natural gas and crude oil exploration and production. The Company evaluates
performance based on profit or loss from oil and gas operations before income
and expense items incidental to oil and gas operations and income taxes.
Apache's reportable segments are managed separately because of their geographic
locations. Financial information by operating segment is presented below:
<TABLE>
<CAPTION>
OTHER
UNITED STATES CANADA EGYPT AUSTRALIA INTERNATIONAL TOTAL
------------- ------------ ------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Oil and Gas Production Revenues...... $ 466,517 $ 54,791 $ 143,618 $ 77,149 $ 1,937 $ 744,012
============= ============ ============ ============ ============= ===========
Operating Income (1)................. $ 151,775 $ 18,472 $ 73,103 $ 30,279 $ 432 $ 274,061
============= ============ ============ ============ =============
Other Income (Expense):
Other revenues.................... 5,274
Administrative, selling and other. (37,685)
Financing costs, net.............. (59,843)
-----------
Income Before Income Taxes........... $ 181,807
===========
Total Assets......................... $ 2,785,853 $ 332,301 $ 897,328 $ 766,164 $ 145,890 $ 4,927,536
============= ============ ============ ============ ============= ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Oil and Gas Production Revenues...... $ 390,946 $ 44,233 $ 103,726 $ 51,701 $ -- $ 590,606
============= ============ ============ ============ ============= ===========
Operating Income (1)................. $ 77,821 $ 9,117 $ 43,437 $ 13,398 $ -- $ 143,773
============= ============ ============ ============ =============
Other Income (Expense):
Other revenues.................... (1,722)
Administrative, selling and other. (34,026)
Financing costs, net.............. (54,082)
-----------
Income Before Income Taxes........... $ 53,943
===========
Total Assets......................... $ 2,338,751 $ 297,362 $ 815,541 $ 563,628 $ 129,012 $ 4,144,294
============= ============ ============ ============ ============= ===========
</TABLE>
(1) Operating income consists of oil and gas production revenues and net
gathering, processing and marketing activity, less depreciation, depletion
and amortization (DD&A) expense and operating costs.
9
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Early in 1998, when the cost of drilling for and acquiring oil and gas
reserves was rising rapidly, Apache implemented a two-phase strategy designed to
reduce debt and pursue larger acquisitions after the prices of oil and gas
properties had turned down. By the end of 1998, Apache had paid down
approximately $160 million in debt and added approximately $73 million to
shareholders' equity as compared to year-end 1997 levels. These results were
achieved in part by selling and trading non-strategic properties, curtailing
capital expenditures, and converting debentures into common stock.
Apache's strengthened balance sheet put the company in a better position to
endure the impact of low oil and gas prices in 1998 and the first quarter of
1999, and to negotiate an agreement with Shell to acquire a package of
properties located offshore in the Gulf of Mexico. That acquisition constituted
the largest transaction in the Company's history in terms of purchase price and
quantity of proved reserves acquired. Production from the acquired properties
was first recorded in the second quarter of 1999. On October 5, 1999, Apache
entered into an agreement with Shell Canada to acquire 20 fields with an average
working interest of 55 percent and proved reserves of 87.5 MMboe and other
assets.
Apache's results of operations and financial position for the first nine
months of 1999, were significantly impacted by the following factors:
Commodity Prices - Apache's average realized oil price increased $3.27 per
barrel from $13.20 per barrel in the first nine months of 1998 to $16.47 per
barrel in the comparable 1999 period, increasing revenues by $66.4 million. The
average realized price for natural gas increased $.10 per thousand cubic feet
(Mcf) from $1.95 per Mcf in the first nine months of 1998 to $2.05 per Mcf in
1999, positively impacting revenues by $17.0 million.
Operations - Oil production increased 14 percent during the first nine
months of 1999 when compared to the same period last year. The increase was
primarily due to the acquisition from Shell in the U.S., included since mid-May
of 1999, the acquisition of certain oil and gas interests in the Carnarvon
Basin, offshore Western Australia, from subsidiaries of Novus Petroleum Limited
(Novus) in November 1998 and the full-period impact of production from
Australia's Stag field which began in May 1998. The increase in oil production
positively impacted revenues by $47.4 million. Gas production increased six
percent which positively impacted revenues by $20.2 million.
RESULTS OF OPERATIONS
Apache reported 1999 third quarter income attributable to common stock of
$67.8 million versus income of $2.6 million in the prior year. Basic net income
per common share of $.59 for the third quarter of 1999 was significantly higher
than the $.03 reported in 1998. A significant increase in oil and gas production
revenues was partially offset by higher DD&A expense, operating costs, preferred
stock dividends, net financing costs and administrative, selling and other (G&A)
expense.
For the first nine months of 1999, net income of $93.9 million, or $.89 per
share, compared to $29.2 million, or $.30 per share, in the comparable 1998
period. The increase resulted primarily from higher oil and gas production
revenues partially offset by higher DD&A expense (although DD&A per boe is
lower), preferred stock dividends, net financing costs and G&A expense.
For the third quarter of 1999, revenues increased 82 percent to $385.4
million compared to $211.7 million in 1998, driven by an 85 percent increase in
oil and gas production revenues. The increase in oil and gas production revenues
was the result of a 64 percent increase in the average realized oil price, a 36
percent increase in oil production, a 20 percent increase in natural gas
production and a 27 percent increase in the average realized price for natural
gas. Crude oil, including natural gas liquids, contributed 55 percent and
natural gas contributed 45 percent of oil and gas production revenues.
For the first nine months of 1999, total revenues increased 26 percent to
$854.7 million as compared to $677.8 million for the same period in 1998.
Revenues from oil and gas production increased 26 percent over the same period
in 1998, with crude oil, including natural gas liquids, contributing 53 percent
and natural gas contributing 47 percent of total oil and gas production
revenues.
10
<PAGE> 12
Volume and price information for the Company's oil and gas production is
summarized in the following table:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
INCREASE INCREASE
1999 1998 (DECREASE) 1999 1998 (DECREASE)
------------- ------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Volume - Mcf per day:
United States 495,226 413,818 20% 447,010 443,546 1%
Canada 92,885 107,651 (14)% 100,115 101,102 (1)%
Egypt 16,615 2,044 713% 8,155 986 727%
Australia 85,603 52,544 63% 71,786 48,988 47%
Ivory Coast 3,470 -- -- 3,674 -- --
------------- ------------- ------------ ------------
Total 693,799 576,057 20% 630,740 594,622 6%
============= ============= ============ ============
Average Natural Gas price - Per Mcf:
United States $ 2.58 $ 2.07 25% $ 2.22 $ 2.14 4%
Canada 1.89 1.28 48% 1.64 1.30 26%
Egypt 3.45 1.68 105% 3.10 1.78 74%
Australia 1.52 1.43 6% 1.51 1.52 (1)%
Ivory Coast 1.71 -- -- 1.72 -- --
Total 2.37 1.86 27% 2.05 1.95 5%
Oil Volume - Barrels per day:
United States 51,994 31,691 64% 42,611 35,330 21%
Canada 2,082 2,107 (1)% 2,110 2,067 2%
Egypt 33,163 27,892 19% 30,415 28,801 6%
Australia 9,936 9,717 2% 9,905 8,359 18%
Ivory Coast 51 -- -- 49 -- --
------------- ------------- ------------ ------------
Total 97,226 71,407 36% 85,090 74,557 14%
============= ============= ============ ============
Average Oil price - Per barrel:
United States $ 19.80 $ 12.19 62% $ 16.29 $ 13.14 24%
Canada 19.31 11.70 65% 14.98 13.12 14%
Egypt 20.90 12.60 66% 16.47 13.13 25%
Australia 23.33 13.29 76% 17.57 13.75 28%
Ivory Coast 18.11 -- -- 15.68 -- --
Total 20.52 12.49 64% 16.47 13.20 25%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States 3,583 2,025 77% 2,887 2,010 44%
Canada 583 577 1% 605 613 (1)%
------------- ------------- ------------ ------------
Total 4,166 2,602 60% 3,492 2,623 33%
============= ============= ============ ============
Average NGL Price - Per barrel:
United States $ 9.08 $ 9.09 -- $ 8.52 $ 8.58 (1)%
Canada 12.80 6.09 110% 8.59 6.52 32%
Total 9.60 8.43 14% 8.53 8.10 5%
</TABLE>
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
Natural gas sales for the third quarter of 1999 totaled $151.4 million, 53
percent higher than the third quarter of 1998. Average realized natural gas
prices increased 27 percent, positively affecting revenue by $26.9 million. The
Company periodically engages in hedging activities, including fixed price
physical and financial contracts. The net result of these activities decreased
the Company's realized gas price by $.02 per Mcf during the third quarter of
1999 and increased the realized gas price by $.06 for the same period in 1998.
Natural gas production increased 118 million cubic feet per day (MMcf/d),
or 20 percent, on a worldwide basis, positively impacting revenue by $25.7
million. Increases were driven by the Shell transaction in the United States and
Australian acquisition activity. To a lesser extent, initial production from the
Western Desert Pipeline from the Khalda concession contributed to the overall
increase.
11
<PAGE> 13
The Company's crude oil sales for the third quarter of 1999 totaled $183.6
million, a 124 percent increase from the third quarter of 1998, due to increased
average realized prices and production volumes.
Third quarter 1999 oil production increased 36 percent compared to the
prior year primarily the result of a 64 percent increase in the United States
attributable to production from the Shell properties acquired in the second
quarter of 1999. Egyptian oil production increased 19 percent in the third
quarter of 1999 as a result of the price-driven dynamics of certain production
sharing contracts and to a lesser extent, drilling and development activity.
The Company's realized price for sales of crude oil in the third quarter of
1999 increased $8.03 per barrel, or 64 percent, resulting in an increase in
revenue of $52.8 million compared to the same period in 1998. The Company
periodically engages in hedging activities, including fixed price physical and
financial contracts. The net result of these activities decreased the Company's
realized oil price by $.11 per barrel during the third quarter of 1999, and had
no impact on the Company's realized price during the third quarter of 1998.
Revenue from the sale of natural gas liquids totaled $3.7 million for the
third quarter of 1999, compared to $2.0 million for the third quarter of 1998 in
response to a 60 percent increase in natural gas liquids production and a 14
percent improvement in realized prices.
Apache initiated production offshore the Ivory Coast in the first quarter
of 1999. First sales of natural gas were delivered in March 1999. On September
3, 1999, Apache sold its Ivory Coast subsidiary for $46.1 million.
YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998
Natural gas sales for the first nine months of 1999 of $353.3 million
increased $37.3 million, or 12 percent, from those recorded in the same period
of 1998 primarily as a result of increased production volumes and realized
prices. Average realized natural gas prices increased five percent, positively
affecting revenue by $17.0 million. U.S. natural gas production, which comprised
71 percent of the Company's worldwide gas production, sold at an average price
of $2.22 per Mcf, four percent higher than in 1998, positively impacting natural
gas sales by $8.7 million. Natural gas production increased 36 MMcf/d, or six
percent, on a worldwide basis, favorably impacting revenue by $20.2 million.
Development activities and the impact of producing property acquisitions during
late 1998 increased natural gas production in Australia by 23 MMcf/d. The
Company periodically engages in hedging activities, including fixed price
physical and financial contracts. The net result of these activities increased
the Company's realized gas price by $.02 per Mcf during the first nine months of
1999 and by $.06 per Mcf during the same period of 1998.
For the first nine months of 1999, oil revenues of $382.6 million increased
$113.8 million, or 42 percent, from the same period in 1998 due to improved
production and higher oil prices. On a worldwide basis, average oil prices
increased $3.27 per barrel, or 25 percent, to $16.47 per barrel positively
impacting oil sales by $66.4 million. Oil production increased 10,533 barrels
per day, or 14 percent, for the first nine months of 1999 primarily due to
increases in the United States. Domestic oil production increased 7,281 barrels
per day, or 21 percent, primarily due to the Shell acquisition. The Company
periodically engages in hedging activities, including fixed price physical and
financial contracts. The net result of these activities decreased the Company's
realized oil price by $.04 per barrel during the first nine months of 1999, and
had no impact on the Company's realized price during the first nine months of
1998.
Natural gas liquids revenues for the first nine months of 1999 of $8.1
million increased $2.3 million, or 40 percent, from the same period in 1998.
Natural gas liquids production increased 869 barrels per day, or 33 percent and
natural gas liquids prices increased by $.43 per barrel, or five percent.
OTHER REVENUES AND OPERATING EXPENSES
During the third quarter and first nine months of 1999, Apache's gas
gathering, processing and marketing revenues increased 51 percent and 19
percent, respectively, to $45.0 million and $105.5 million, as a result of
increases in volumes and prices in both periods. While revenues increased with
respect to these activities, there was a greater increase in gas gathering,
processing and marketing costs for the first nine months of 1999, thus lower
margins were realized for this period as compared to 1998.
12
<PAGE> 14
Other revenues for the third quarter of 1999 and the first nine months of
1999 were $1.8 million and $5.3 million, respectively, primarily consisting of
the gain on the sale of the Company's Ivory Coast subsidiary.
The Company's DD&A expense for the third quarter and first nine months of
1999 totaled $119.2 million and $313.0 million, respectively, compared to $94.8
million and $290.6 million for the comparable periods in 1998. On an equivalent
barrel basis, full cost DD&A expense decreased $.02 per barrel of oil equivalent
(boe), from $5.64 per boe in the third quarter of 1998 to $5.62 per boe for the
same period in 1999. For the nine months ended September 30, 1999, the full cost
DD&A rate totaled $5.56 per boe compared to $5.62 per boe in 1998. United States
production accounted for 62 percent of worldwide production in the first nine
months of 1999, and 63 percent in the first nine months of 1998. An eight
percent increase in United States production and a $.01 decrease in the DD&A
rate for the first nine months of 1999 as compared to 1998, accounted for the
decrease in the overall rate.
Operating costs, including lease operating expense and severance taxes,
increased 23 percent from $49.3 million in the third quarter of 1998 to $60.6
million for the same period in 1999. For the first nine months of 1999,
operating costs totaled $158.8 million, slightly higher than the $158.5 million
for the same period in 1998. For the third quarter and first nine months of
1999, lease operating expense, excluding severance taxes, totaled $51.1 million
and $136.7 million, respectively, compared to $43.3 million and $136.5 million
for the comparable periods in 1998. On an equivalent barrel basis, lease
operating expense decreased from $2.77 per boe in the third quarter of 1998 to
$2.56 per boe in the third quarter of 1999. For the first nine months of 1999,
lease operating expense averaged $2.59 per boe, a nine percent decrease from
$2.84 per boe, for the same period in 1998. Domestic per unit costs were
significantly reduced due to lower Gulf Coast region repairs, maintenance, power
and fuel costs resulting from the sale of marginal properties, and by lower
Western region repairs and maintenance costs.
G&A expense in the third quarter and first nine months of 1999 increased
$1.4 million or ten percent, and $3.7 million or 11 percent, respectively, from
a year ago. These increases were the result of planned spending increases. On an
equivalent barrel basis, G&A expense remained constant at $.71 per boe, for the
first nine months of 1999 and 1998.
Net financing costs for the third quarter of 1999 increased $3.0 million,
or 17 percent, from the prior year due to higher gross interest expense and
reduced interest income, mitigated by higher capitalized interest. Gross
interest expense increased $3.3 million due to a higher average outstanding debt
balance. Net financing costs increased 11 percent from $54.1 million in the
first nine months of 1998 to $59.8 million in the comparable 1999 period due to
higher average debt outstanding and reduced interest income, partially offset by
an increase in capitalized interest. Additional capitalized interest associated
with the construction of Egyptian pipeline projects contributed to the increase.
The decrease in interest income was due to a lower cash balance in the first
nine months of 1999.
MARKET RISK
COMMODITY RISK
The Company's major market risk exposure continues to be the pricing
applicable to its oil and gas production. Realized pricing is primarily driven
by the prevailing worldwide price for crude oil and spot prices applicable to
its United States and Canadian natural gas production. Historically, prices
received for oil and gas production have been volatile and unpredictable. Price
volatility is expected to continue. See "Results of Operations" above.
The information set forth under "Market Risk - Interest Rate Risk and -
Foreign Currency Risk" in Item 7 of the Company's annual report on Form 10-K for
the year ended December 31, 1998, is incorporated herein by reference.
13
<PAGE> 15
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
CAPITAL COMMITMENTS
Apache's primary cash needs are for exploration, development and
acquisition of oil and gas properties, repayment of principal and interest on
outstanding debt, payment of dividends and capital obligations for affiliated
ventures. Apache budgets capital expenditures based upon projected cash flow and
routinely adjusts its capital expenditures in response to changes in oil and
natural gas prices and corresponding changes in cash flow. The Company is not in
a position to predict future product prices. Capital expenditures, including
acquisitions, for 1999 are expected to exceed internally generated cash flow.
Capital Expenditures - A summary of oil and gas capital expenditures during
the first nine months of 1999 and 1998 is presented below (in millions):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Exploration and development:
United States $ 127.4 $ 173.4
Canada 24.1 55.1
Egypt 42.5 80.3
Australia 41.1 60.3
Other international 17.4 35.1
------------ ------------
252.5 404.2
Capitalized Interest 39.7 36.3
------------ ------------
Total $ 292.2 $ 440.5
============ ============
Acquisition of oil and gas properties $ 893.8 $ 18.2
============ ============
</TABLE>
In North America, Apache completed 81 producing wells out of 97 wells
drilled during the first nine months of 1999, while internationally the Company
discovered 38 new producers out of 51 wells drilled. Worldwide, the Company was
drilling or completing an additional 69 wells as of September 30, 1999. In
addition, Apache completed 288 production enhancement projects, including 128
recompletions, during the first nine months of 1999.
Property acquisitions in the first nine months of 1999, primarily
represented acquisitions of producing properties in the Company's existing focus
areas.
On February 1, 1999, the Company acquired oil and gas properties located in
the Gulf of Mexico from Petsec for an adjusted purchase price of approximately
$66.7 million. The Petsec transaction included estimated proved reserves of
approximately 10.2 MMboe as of the effective date.
On May 18, 1999, Apache acquired from Shell its interest in 22 producing
fields and 16 undeveloped blocks located in the Gulf of Mexico. The Shell
transaction also included certain production-related assets and proprietary 3D
seismic data covering approximately 1,000 blocks in the Gulf of Mexico. The
purchase price, subject to post closing adjustments, was $687.6 million in cash
and one million shares of Apache common stock (valued at $28.125 per share). The
Shell transaction included estimated proved reserves of approximately 123.2
MMboe as of the effective date.
On June 18, 1999, the Company acquired a 10 percent interest in the East
Spar Joint Venture and an 8.4 percent interest in the Harriet Joint Venture,
both located in the Carnarvon Basin (offshore Western Australia), from
British-Borneo in exchange for $83.6 million cash and working interests in 11
leases in the Gulf of Mexico. The British-Borneo transaction included estimated
proved reserves of approximately 15.9 MMboe as of the effective date.
14
<PAGE> 16
CAPITAL RESOURCES AND LIQUIDITY
Net Cash Provided by Operating Activities - Apache's net cash provided by
operating activities during the first nine months of 1999 totaled $389.4
million, an increase of two percent from $381.4 million in the first nine months
of 1998. This increase was primarily due to an increase in oil and gas prices
and production.
Stock Transactions - In May 1999, Apache issued 14,950,000 shares ($463.5
million) of Apache common stock and 140,000 shares ($217 million) of the
Preferred Stock in the form of seven million Depositary Shares each representing
1/50th of a share of the Preferred Stock. The Preferred Stock is not subject to
a sinking fund or mandatory redemption. On May 15, 2002, each Depositary Share
will automatically convert, subject to adjustments, into not more than one share
and not less than 0.8197 of a share of Apache common stock, depending on the
market price of Apache common stock at that time.
In the third quarter, the Company purchased 300,000 Treasury Shares at an
average price of $40.20 per share.
Long-Term Borrowings - In March 1999, Apache Finance issued $100 million
principal amount, $99.3 million net of discount, of senior unsecured 7-percent
notes due March 15, 2009. The notes are irrevocably and unconditionally
guaranteed by Apache. Apache Finance has the right to redeem the notes prior to
maturity, under certain conditions related to changes in relevant tax laws.
Also, upon certain changes in control, these notes are subject to mandatory
repurchase. The proceeds were used to reduce outstanding indebtedness under the
Australian portion of the global credit facility.
In June 1999, the Company issued $150 million principal amount, $149.1
million net of discount, of senior unsecured 7.625-percent notes due July 1,
2019. The Company does not have the right to redeem the notes prior to maturity.
Upon certain changes in control, these notes are subject to mandatory
repurchase. The proceeds were used to reduce the Company's outstanding amounts
of commercial paper.
Liquidity - The Company had $16.7 million in cash and cash equivalents on
hand at September 30, 1999, up from $14.5 million at December 31, 1998. Apache's
ratio of current assets to current liabilities at September 30, 1999 was 1.04
compared to .74:1 at December 31, 1998.
On November 2, 1999, Apache filed a shelf registration for $400 million of
debt securities. The proceeds from the debt securities, being offered by Apache
Finance Canada, may be used to finance and invest in Apache's Canadian
operations, to repay outstanding debt, for working capital, capital expenditures
and acquisitions.
Apache believes that cash on hand, net cash generated from operations, and
unused committed borrowing capacity under its global credit facility will be
adequate to satisfy the Company's financial obligations to meet future liquidity
needs for at least the next two fiscal years. As of September 30, 1999, Apache's
available borrowing capacity under its global credit facility was $947 million.
Capital Commitment - On October 5, 1999, Apache entered into an agreement
with Shell Canada to acquire producing properties and other assets for C$770
million (US$523.6 million at September 30, 1999). Apache plans to fund the
purchase with cash on hand and borrowings under its global credit facility or
commercial paper program.
15
<PAGE> 17
IMPACT OF THE YEAR 2000 ISSUE
The inability of some computer programs and embedded computer chips to
distinguish between the year 1900 and the year 2000 (the Year 2000 issue) poses
a serious threat of business disruption to any organization that utilizes
computer technology and computer chip technology in their business systems or
equipment. Apache has formed a Year 2000 Task Force with representation from
major business units to inventory and assess the risk associated with hardware,
software, telecommunications systems, office equipment, embedded chip controls
and systems, process control systems, facility control systems and dependencies
on external trading partners. The project phases, expected completion dates and
percentage complete as of September 1999 are as follows:
<TABLE>
<CAPTION>
PERCENT
PHASE COMPLETION DATE COMPLETE
--------------------------------------- -------------------- --------------
<S> <C> <C>
Organization July 1998 100%
Assessment November 1998 100%
Desktop Computers
Network Hardware
Software
Embedded Systems
External Trading Partners
Building/Infrastructure Systems
Telecommunications Systems
Implementation/Replacement November 1999 90%
Computer Hardware
Core Business Software
Desktop Software
Embedded Systems
Building Systems
Contact External Trading Partners March 1999 100%
Contingency Planning November 1999 90%
</TABLE>
To date, the Company is not aware of any significant Year 2000 issues that
would cause problems in the area of safety, environmental or business
interruption. The Company has assessed the risks associated with hardware,
software, infrastructure, embedded chips and external trading partners that are
not Year 2000 compliant. While Apache is confident that Year 2000 remediation
efforts will succeed in minimizing exposure to business disruption, plans are
being developed that will allow continuation of business in all but the worst
case scenarios. All remediation and replacement efforts and contingency planning
are expected to be complete by November 1999. All critical external trading
partners have been contacted to determine Year 2000 readiness. Such responses
indicate they will be compliant by year-end.
In 1997, the Company initiated a project to replace existing business
software as it relates to Apache's production, land, marketing, accounting and
financial systems to more effectively and efficiently meet its business needs.
Replacement computer systems selected by the Company from SAP America, Inc.,
PricewaterhouseCoopers LLP, Innovative Business Solutions and Landmark Graphics
will properly recognize dates beyond December 31, 1999. The implementation of
the business software project was completed and operational effective with
January 1999 production.
The Company expects the cost to achieve Year 2000 compliance will not
exceed $4 million, excluding the cost of implementing business replacement
systems.
The Company presently believes that with conversions to new software and
completion of efforts planned by the Year 2000 Task Force, the risk associated
with Year 2000 will be significantly reduced. However, the Company is unable to
assure that the consequences of Year 2000 failures of systems maintained by the
Company or by third parties will not materially adversely impact the Company's
results of operations, liquidity or financial condition.
16
<PAGE> 18
FUTURE TRENDS
Apache's strategy is to increase its oil and gas reserves, production, cash
flow and earnings through a balanced growth program that involves:
1. exploiting our existing asset base;
2. acquiring properties to which we can add incremental value; and
3. investing in high-potential exploration prospects.
EXPLOITING EXISTING ASSET BASE
We seek to maximize the value of our existing asset base by reducing
operating costs per unit and increasing the amount of recoverable reserves. In
order to achieve these objectives, we rigorously pursue operations to cut costs,
identify production enhancement initiatives such as workovers and recompletions,
and divest marginal and non-strategic properties.
ACQUIRING PROPERTIES TO WHICH WE CAN ADD INCREMENTAL VALUE
We seek to purchase reserves at appropriate prices by generally avoiding
auction processes where we are competing against other buyers. Our aim is to
follow each acquisition with a cycle of reserve enhancement, property
consolidation and cash flow acceleration, facilitating asset growth and debt
reduction.
INVESTING IN HIGH-POTENTIAL EXPLORATION PROSPECTS
We seek to concentrate our exploratory investments in a select number of
international areas and to become the dominant operator in those regions. We
believe that these investments, although higher-risk, offer the potential for
significant reserve additions. Our international investments and exploration
activities are a significant component of our long-term growth strategy. They
complement our North American operations, which are more development oriented.
A critical component in implementing our three-pronged growth strategy is
maintenance of significant financial flexibility. We are committed to preserving
a strong balance sheet and credit position that gives us the foundation required
to pursue our growth initiatives.
CHANGES IN ACCOUNTING PRINCIPLES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value, and
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of consolidated operations, and
requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting treatment.
SFAS No. 133, as amended, is required to be adopted on January 1, 2001,
although earlier adoption is permitted. The Company is analyzing the effects of
SFAS No. 133, but has not yet quantified the potential financial statement
impact, if any, or determined the timing or method of adoption. Management does
not believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial condition or results of operations.
17
<PAGE> 19
CHINA
On May 28, 1999, Apache China Corporation LDC (Apache China), (an indirect
wholly owned subsidiary of the Company) sent a notice of default to XCL-China,
Ltd. (XCL-China), a participant with Apache China in the Zhao Dong Block
offshore the People's Republic of China, and its parent company, XCL, Ltd., for
the failure to pay approximately $10 million of costs pursuant to the agreements
governing the project. Prior to the expiration of the cure period, XCL-China and
XCL, Ltd. filed petitions initiating arbitration proceedings against Apache
China. The actions seek to disallow approximately $17 million in costs expended
by Apache China related to developing the Zhao Dong Block, including $10 million
in costs billed by Apache China to XCL-China that have not been paid. In
addition, XCL-China has advised Apache China of XCL-China's intent to seek the
removal of Apache China as operator of the Block. Apache China has denied the
allegations made by XCL-China in its petition and is vigorously contesting them.
On June 25, 1999, Apache China filed a petition in U.S. Bankruptcy Court in
Opelousas, Louisiana, to place XCL-China into involuntary bankruptcy on account
of XCL-China's failure to pay its share of costs related to development of the
Zhao Dong Block. XCL-China has denied the allegations contained in Apache
China's petition and has filed a motion to dismiss the petition. Hearings were
held in the U.S. Bankruptcy Court in August 1999.
FORWARD-LOOKING STATEMENTS AND RISK
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are based on our current expectations,
estimates and projections. Therefore, they could ultimately prove to be
inaccurate. Our plans for capital and exploratory spending and for cost and
expense reduction may change if business conditions, such as energy prices and
world economic conditions, change. Factors that could affect our ability to be
Year 2000 compliant by the end of 1999 include: the failure of our customers and
suppliers, government entities and others to achieve compliance and the
inaccuracy of any certifications received from them; our inability to identify
and remediate every possible problem; and a shortage of necessary programmers,
hardware and software. Other factors that may have a direct bearing on our
results of operations and financial condition are:
o competitive practices in the industries in which we compete;
o fluctuations in oil and gas prices that have not been properly hedged
or that are inconsistent with our open position in our marketing
activities;
o operational and systems risks;
o environmental liabilities that are not covered by indemnity or
insurance;
o general economic and capital market conditions, including fluctuations
in interest rates; and
o the impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry
in general and Apache's operations in particular.
In light of these risks, uncertainties and assumptions, the events
anticipated by our forward-looking statements might not occur. We undertake no
obligation to update or revise our forward-looking statements, whether as a
result of new information, future events or otherwise.
18
<PAGE> 20
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, 1998 (filed with the SEC on March 25,
1999) is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
19
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 - Statement of computation of ratios of earnings to
fixed charges and combined fixed charges and
preferred stock dividends.
27.1 - Financial Data Table
(b) Reports filed on Form 8-K
The following current report on Form 8-K was filed during the
fiscal quarter ended September 30, 1999:
Amendment No. 1 on Form 8-K/A to Form 8-K dated May 18, 1999
On July 30, 1999, under Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits, Apache filed the required
financial statement, pro forma financial information and exhibits
in connection with Apache's purchase from Shell of (i) Shell's
interest in 22 producing fields and 16 undeveloped blocks located
in the Gulf of Mexico, (ii) certain production-related assets,
and (iii) proprietary seismic data covering over 1,000 blocks in
the Gulf of Mexico, which transaction closed on May 18, 1999.
20
<PAGE> 22
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 11, 1999 /s/ Roger B. Plank
-------------------------------------------
Roger B. Plank
Vice President and Chief Financial Officer
Dated: November 11, 1999 /s/ Thomas L. Mitchell
-------------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
12.1 - Statement of computation of ratios of earnings to fixed
charges and combined fixed charges and preferred stock
dividends.
27.1 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12.1
APACHE CORPORATION
STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS
Pretax income (loss) from continuing operations (1) $ 181,807 $ 53,943 $(187,563) $ 258,640 $200,195 $ 33,143 $ 66,234
Add: Fixed charges excluding capitalized interest 65,438 60,430 78,728 78,531 68,091 77,220 39,008
--------- --------- --------- --------- -------- -------- --------
Adjusted Earnings $ 247,245 $ 114,373 $(108,835) $ 337,171 $268,286 $110,363 $105,242
========= ========= ========= ========= ======== ======== ========
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Interest expense including capitalized interest (2) $ 97,586 $ 90,498 $ 119,703 $ 105,148 $ 89,829 $ 88,057 $ 37,838
Amortization of debt expense 3,316 3,415 4,496 6,438 5,118 4,665 3,987
Interest component of lease rental expenditures (3) 4,199 2,788 3,808 3,438 3,856 3,539 3,217
--------- --------- --------- --------- -------- -------- --------
Fixed charges 105,101 96,701 128,007 115,024 98,803 96,261 45,042
--------- --------- --------- --------- -------- -------- --------
Preferred stock requirements (4) 16,713 1,057 2,905 -- -- -- --
--------- --------- --------- --------- -------- -------- --------
Combined fixed charges and preferred stock dividends $ 121,814 $ 97,758 $ 130,912 $ 115,024 $ 98,803 $ 96,261 $ 45,042
========= ========= ========= ========= ======== ======== ========
Ratio of earnings to fixed charges 2.35 1.18 --(5) 2.93 2.72 1.15 2.34
========= ========= ========= ========= ======== ======== ========
Ratio of earnings to combined fixed charges and
preferred stock dividends 2.03 1.17 --(5) 2.93 2.72 1.15 2.34
========= ========= ========= ========= ======== ======== ========
</TABLE>
- ------------------------
(1) Undistributed income of less-than-50%-owned affiliates is excluded.
(2) Apache has guaranteed and is contingently liable for certain debt. Fixed
charges, relating to the debt for which Apache is contingently liable, have
not been included in the fixed charges for any of the periods shown above.
(3) Represents the portion of rental expense assumed to be attributable to
interest factors of related rental obligations determined at interest rates
appropriate for the period during which the rental obligations were
incurred. Approximately 32% to 34% applies for all periods presented.
(4) Represents the amount of pre-tax earnings that would be required to cover
preferred stock dividends.
(5) Earnings were inadequate to cover fixed charges and combined fixed charges
and preferred stock dividends by $236.8 million and $239.7 million,
respectively, due to the $243.2 million write-down of the carrying value of
United States oil and gas properties.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,674
<SECURITIES> 0
<RECEIVABLES> 272,977
<ALLOWANCES> 0
<INVENTORY> 44,935
<CURRENT-ASSETS> 355,171
<PP&E> 8,107,958
<DEPRECIATION> (3,576,608)
<TOTAL-ASSETS> 4,927,536
<CURRENT-LIABILITIES> 342,614
<BONDS> 1,422,337
210,490
98,387
<COMMON> 145,488
<OTHER-SE> 2,111,525
<TOTAL-LIABILITY-AND-EQUITY> 4,927,536
<SALES> 849,468
<TOTAL-REVENUES> 854,742
<CGS> 575,407
<TOTAL-COSTS> 575,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,843
<INCOME-PRETAX> 181,807
<INCOME-TAX> 78,429
<INCOME-CONTINUING> 93,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,875
<EPS-BASIC> .89
<EPS-DILUTED> .88
</TABLE>
