Form 10-Q

 

 

UNITED STATES

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 quarterly period ended March 31, 2012

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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400

(Address of principal executive offices)

(713) 296-6000

Registrant’s Telephone Number, Including Area Code:

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨     No  x

 

Number of shares of registrant’s common stock outstanding as of April 30, 2012

     390,833,091   

 

 

 


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED OPERATIONS

(Unaudited)

 

     For the Quarter Ended March 31,  
     2012      2011  
     (In millions, except per common share data)  

REVENUES AND OTHER:

     

Oil and gas production revenues

   $ 4,457       $ 3,878   

Other

     79         47   
  

 

 

    

 

 

 
     4,536         3,925   
  

 

 

    

 

 

 

OPERATING EXPENSES:

     

Depreciation, depletion and amortization

     

Recurring

     1,219         936   

Additional

     521         —     

Asset retirement obligation accretion

     55         37   

Lease operating expenses

     673         623   

Gathering and transportation

     77         76   

Taxes other than income

     257         164   

General and administrative

     128         112   

Merger, acquisitions & transition

     6         5   

Financing costs, net

     40         45   
  

 

 

    

 

 

 
     2,976         1,998   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     1,560         1,927   

Current income tax provision

     725         643   

Deferred income tax provision

     38         150   
  

 

 

    

 

 

 

NET INCOME

     797         1,134   

Preferred stock dividends

     19         19   
  

 

 

    

 

 

 

INCOME ATTRIBUTABLE TO COMMON STOCK

   $ 778       $ 1,115   
  

 

 

    

 

 

 

NET INCOME PER COMMON SHARE:

     

Basic

   $ 2.02       $ 2.91   

Diluted

   $ 2.00       $ 2.86   

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

     

Basic

     385         383   

Diluted

     399         397   

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.17       $ 0.15   

The accompanying notes to consolidated financial statements are an integral part of this statement.

 

1


APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

 

$xxxxx.xx $xxxxx.xx
     For the Quarter Ended March 31,  
     2012     2011  
     (In millions)  

NET INCOME

   $ 797      $ 1,134   

OTHER COMPREHENSIVE INCOME:

    

Commodity cash flow hedge activity, net of tax:

    

Reclassification of (gain) loss on settled derivative instruments

     (34     (4

Change in fair value of derivative instruments

     1        (302

Derivative hedge ineffectiveness reclassified into earnings

     —          2   
  

 

 

   

 

 

 
     (33     (304
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     764        830   

Preferred stock dividends

     19        19   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK

   $ 745      $ 811   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of this statement.

 

2


APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

     For the Quarter Ended March 31,  
     2012     2011  
     (In millions)  

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net income

   $ 797      $ 1,134   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion and amortization

     1,740        936   

Asset retirement obligation accretion

     55        37   

Provision for deferred income taxes

     38        150   

Other

     18        (14

Changes in operating assets and liabilities:

    

Receivables

     (82     (357

Inventories

     67        (26

Drilling advances

     (136     (18

Deferred charges and other

     (11     104   

Accounts payable

     (67     95   

Accrued expenses

     (426     (65

Deferred credits and noncurrent liabilities

     14        3   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     2,007        1,979   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to oil and gas property

     (1,705     (1,571

Additions to gas gathering, transmission and processing facilities

     (262     (125

Equity investment in Burrup Holdings Limited

     (439     —     

Deposit related to acquisition of Cordillera Energy Partners III, LLC

     (200     —     

Other

     (36     (53
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (2,642     (1,749
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Commercial paper, credit facility and bank notes, net

     657        19   

Dividends paid

     (77     (76

Common stock activity

     2        26   

Other

     3        23   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     585        (8
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (50     222   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     295        134   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 245      $ 356   
  

 

 

   

 

 

 

SUPPLEMENTARY CASH FLOW DATA:

    

Interest paid, net of capitalized interest

   $ 88      $ 73   

Income taxes paid, net of refunds

     809        448   

The accompanying notes to consolidated financial statements are an integral part of this statement.

 

3


APACHE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

     March 31,
2012
    December 31,
2011
 
     (In millions)  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 245      $ 295   

Receivables, net of allowance

     3,163        3,079   

Inventories

     607        655   

Drilling advances

     368        229   

Derivative instruments

     284        304   

Prepaid assets and other

     287        241   
  

 

 

   

 

 

 
     4,954        4,803   
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT:

    

Oil and gas, on the basis of full-cost accounting:

    

Proved properties

     69,438        67,805   

Unproved properties and properties under development, not being amortized

     5,731        5,530   

Gathering, transmission and processing facilities

     5,438        5,175   

Other

     733        709   
  

 

 

   

 

 

 
     81,340        79,219   

Less: Accumulated depreciation, depletion and amortization

     (35,511     (33,771
  

 

 

   

 

 

 
     45,829        45,448   
  

 

 

   

 

 

 

OTHER ASSETS:

    

Goodwill

     1,114        1,114   

Deferred charges and other

     1,340        686   
  

 

 

   

 

 

 
   $ 53,237      $ 52,051   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 1,059      $ 1,048   

Current debt

     429        431   

Current asset retirement obligation

     448        447   

Derivative instruments

     150        113   

Other current liabilities

     2,612        2,924   
  

 

 

   

 

 

 
     4,698        4,963   
  

 

 

   

 

 

 

LONG-TERM DEBT

     7,444        6,785   
  

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:

    

Income taxes

     7,217        7,197   

Asset retirement obligation

     3,482        3,440   

Other

     681        673   
  

 

 

   

 

 

 
     11,380        11,310   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 8)

    

SHAREHOLDERS’ EQUITY:

    

Preferred stock, no par value, 10,000,000 shares authorized, 6% Cumulative Mandatory Convertible, Series D, $1,000 per share liquidation preference, 1,265,000 shares issued and outstanding

     1,227        1,227   

Common stock, $0.625 par, 860,000,000 shares authorized, 385,587,864 and 385,249,885 shares issued, respectively

     241        241   

Paid-in capital

     9,107        9,066   

Retained earnings

     19,213        18,500   

Treasury stock, at cost, 1,103,196 and 1,132,242 shares, respectively

     (31     (32

Accumulated other comprehensive loss

     (42     (9
  

 

 

   

 

 

 
     29,715        28,993   
  

 

 

   

 

 

 
   $ 53,237      $ 52,051   
  

 

 

   

 

 

 

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 D
Preferred
Stock
     Common
Stock
     Paid-In
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Total
Shareholders’
Equity
 
     (In millions)  

BALANCE AT DECEMBER 31, 2010

   $ 1,227       $ 240       $ 8,864      $ 14,223      $ (36   $ (141   $ 24,377   

Net income

     —           —           —          1,134        —          —          1,134   

Commodity hedges, net of tax

     —           —           —          —          —          (304     (304

Cash dividends:

                

Preferred

     —           —           —          (19     —          —          (19

Common ($.15 per share)

     —           —           —          (58     —          —          (58

Common stock activity, net

     —           —           16        —          —          —          16   

Treasury stock activity, net

     —           —           3        —          3        —          6   

Compensation expense

     —           —           45        —          —          —          45   

Other

     —           —           —          1        —          —          1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2011

   $ 1,227       $ 240       $ 8,928      $ 15,281      $ (33   $ (445   $ 25,198   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2011

   $ 1,227       $ 241       $ 9,066      $ 18,500      $ (32   $ (9   $ 28,993   

Net income

     —           —           —          797        —          —          797   

Commodity hedges, net of tax

     —           —           —          —          —          (33     (33

Cash dividends:

                

Preferred

     —           —           —          (19     —          —          (19

Common ($.17 per share)

     —           —           —          (65     —          —          (65

Common stock activity, net

     —           —           (5     —          —          —          (5

Treasury stock activity, net

     —           —           —          —          1        —          1   

Compensation expense

     —           —           46        —          —          —          46   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2012

   $ 1,227       $ 241       $ 9,107      $ 19,213      $ (31   $ (42   $ 29,715   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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). They reflect all adjustments that 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 (GAAP) 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. This Quarterly Report on Form 10-Q should be read along with Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which contains a summary of the Company’s significant accounting policies and other disclosures. Additionally, the Company’s financial statements for prior periods include reclassifications that were made to conform to the current-period presentation.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As of March 31, 2012, Apache’s significant accounting policies are consistent with those discussed in Note 1 of its consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom, assessing asset retirement obligations, and the estimate of income taxes. Actual results could differ from those estimates.

Oil and Gas Property

The Company follows the full-cost method of accounting for its oil and gas property. Under this method of accounting, all costs incurred for both successful and unsuccessful exploration and development activities, including salaries, benefits and other internal costs directly identified with these activities, and oil and gas property acquisitions are capitalized. The net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum and adjusted for cash flow hedges. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements.

Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as “Additional depreciation, depletion and amortization” (DD&A) in the accompanying statement of consolidated operations. Such limitations are imposed separately on a country-by-country basis and are tested quarterly. For a discussion of the calculation of estimated future net cash flows, please refer to Note 14—Supplemental Oil and Gas Disclosures in Apache’s Annual Report on Form 10-K for its 2011 fiscal year. At March 31, 2012, the Company recorded a $521 million ($390 million net of tax) non-cash write-down of the carrying value of the Company’s Canadian proved oil and gas properties. Excluding the effects of cash flow hedges in calculating the ceiling limitation, the write-down as of March 31, 2012, would have been $656 million ($491 million net of tax).

Recently Issued Accounting Standards Not Yet Adopted

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, which increases disclosures about offsetting assets and liabilities. New disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under GAAP and International Financial Reporting Standards (IFRS) related to the offsetting of financial instruments. The existing GAAP guidance allowing balance sheet offsetting, including industry-specific guidance, remains unchanged. The guidance in ASU No. 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures should be applied retrospectively for all prior periods presented. The Company does not expect the adoption of this amendment to impact its consolidated financial statements.

 

6


2. ACQUISITIONS AND DIVESTITURES

2012 Activity

Cordillera Energy Partners

On April 30, 2012, Apache completed the acquisition of Cordillera Energy Partners III, LLC (Cordillera), a privately-held exploration and production company, in a stock and cash transaction. Cordillera’s properties include approximately 312,000 net acres in the Granite Wash, Tonkawa, Cleveland, and Marmaton plays in western Oklahoma and the Texas Panhandle. The effective date of the transaction is September 1, 2011.

Apache issued 6,272,667 shares of common stock and paid approximately $2.5 billion of cash to the sellers as consideration for the transaction, subject to normal post-closing adjustments. Approximately $200 million was paid in January 2012 as a cash deposit, and the balance was paid upon closing with a portion of the proceeds from the Company’s April 2012 public note offering. For further discussion of this equity issuance, please see Note 9—Capital Stock of this Form 10-Q. For further discussion of the note offering, please see Note 6—Debt of this Form 10-Q.

Burrup Holdings Limited

On January 31, 2012, a subsidiary of Apache Energy Limited completed the acquisition of a 49-percent interest in Burrup Holdings Limited (BHL) for $439 million, including working capital adjustments. The transaction was funded with debt. BHL is the owner of an ammonia fertilizer plant on the Burrup Peninsula of Western Australia. Apache has supplied gas to the plant since operations commenced in 2006. Yara Australia Pty Ltd (Yara) owns the remaining 51 percent of BHL and will operate the plant. In addition, Apache also acquired an interest in a planned technical ammonia nitrate plant to be developed with Yara. The investment in BHL is accounted for under the equity method of accounting, with the balance recorded as a component of “Deferred charges and other” in Apache’s consolidated balance sheet and results of operations recorded as a component of “Other” under “Revenues and Other” in the Company’s statement of consolidated operations.

2011 Activity

Mobil North Sea Limited Acquisition

On December 30, 2011, Apache completed the acquisition of Mobil North Sea Limited (Mobil North Sea). The assets acquired include: operated interests in the Beryl, Nevis, Nevis South, Skene and Buckland fields; operated interest in the Beryl/Brae gas pipeline and the SAGE gas plant; non-operated interests in the Maclure, Scott and Telford fields; and Benbecula (west of Shetlands) exploration acreage. This acquisition was funded with existing cash on hand.

The transaction was accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary estimates of the assets acquired and liabilities assumed in the acquisition. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained. These amounts will be finalized as soon as possible, but no later than one year from the acquisition date.

 

     (In millions)  

Current assets

   $ 208   

Oil and gas properties

     2,817   

Gathering, transmission and processing facilities

     338   

Goodwill (1)

     82   
  

 

 

 

Total assets acquired

   $ 3,445   
  

 

 

 

Current liabilities

     148   

Asset retirement obligation

     517   

Deferred income tax liabilities

     1,533   

Other long-term obligations

     1   
  

 

 

 

Total liabilities assumed

   $ 2,199   
  

 

 

 

Net assets acquired

   $ 1,246   
  

 

 

 

 

(1) 

Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. Goodwill is not deductible for tax purposes.

 

7


3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Management believes it is prudent to manage the variability in cash flows by occasionally entering into derivative instruments on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and options, to manage fluctuations in cash flows resulting from changes in commodity prices. Derivatives entered into are typically designated as cash flow hedges.

Counterparty Risk

The use of derivative instruments exposes the Company to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of March 31, 2012, Apache had derivative positions with 18 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.

The Company executes commodity derivative transactions under master agreements that have netting provisions that provide for offsetting payables against receivables. In general, if a party to a derivative transaction incurs a material deterioration in its credit ratings, as defined in the applicable agreement, the other party has the right to demand the posting of collateral, demand a transfer, or terminate the arrangement.

Derivative Instruments

As of March 31, 2012, Apache had the following open crude oil derivative positions:

 

     Fixed-Price Swaps    Collars

Production

Period

   Mbbls    Weighted
Average
Fixed Price(1)
   Mbbls    Weighted
Average
Floor Price(1)
   Weighted
Average
Ceiling Price(1)

2012

   2,996    $73.73    9,122    $76.80    $101.68

2013

   1,972    74.29    5,701    82.84    111.63

2014

   76    74.50    —      —      —  

 

(1) 

Crude oil prices represent a weighted average of several contracts entered into on a per barrel basis. Crude oil contracts are primarily settled against NYMEX WTI Cushing Index. Approximately 29 percent of 2012 collars and 58 percent of 2013 collars are settled against Dated Brent.

As of March 31, 2012, Apache had the following open natural gas derivative positions:

 

     Fixed-Price Swaps      Collars  

Production

Period

   MMBtu
(in  000’s)
     GJ
(in 000’s)
     Weighted
Average
Fixed Price(1)
     MMBtu
(in  000’s)
     GJ
(in 000’s)
     Weighted
Average
Floor Price(1)
     Weighted
Average
Ceiling Price (1)
 

2012

     35,508         —         $ 6.22         16,500         —         $ 5.54       $ 7.30   

2012

     —           33,000       C$ 6.61         —           5,500       C$ 6.50       C$ 7.27   

2013

     10,095         —         $ 6.74         6,825         —         $ 5.35       $ 6.67   

2014

     1,295         —         $ 6.72         —           —         $ —         $ —     

 

(1) 

U.S. natural gas prices represent a weighted average of several contracts entered into on a per million British thermal units (MMBtu) basis and are settled primarily against NYMEX Henry Hub and various Inside FERC indices. The Canadian gas contracts are entered into on a per gigajoule (GJ) basis and are settled against AECO Index. The Canadian natural gas prices represent a weighted average of AECO Index prices and are shown in Canadian dollars.

 

8


Fair Value Measurements

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps and options. The Company uses a market approach to estimate the fair values of its derivative instruments. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s derivatives are not actively quoted in the open market but are valued utilizing commodity futures price strips for the underlying commodities, which are provided by a reputable third party.

The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:

 

$xxxxx.xx $xxxxx.xx $xxxxx.xx $xxxxx.xx $xxxxx.xx $xxxxx.xx
     Fair Value Measurements Using                      
      Quoted
Price in
Active
Markets
(Level 1)
     Significant
Other
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Fair
Value
     Netting (1)     Carrying
Amount
 
     (In millions)  

March 31, 2012

                

Assets:

                

Commodity Derivative Instruments

   $  —         $ 410       $  —         $ 410       $ (103   $ 307   

Liabilities:

                

Commodity Derivative Instruments

     —           308         —           308         (103     205   

December 31, 2011

                

Assets:

                

Commodity Derivative Instruments

   $ —         $ 428       $ —         $ 428       $ (96   $ 332   

Liabilities:

                

Commodity Derivative Instruments

     —           250         —           250         (96     154   

 

  (1)

The derivative fair values above are based on analysis of each contract on a gross basis, even where the legal right of offset exists.

Derivative Assets and Liabilities Recorded in the Consolidated Balance Sheet

All derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:

 

      March 31,
2012
     December 31,
2011
 
     (In millions)  

Current Assets: Derivative instruments

   $ 284       $ 304   

Other Assets: Deferred charges and other

     23         28   
  

 

 

    

 

 

 

Total Assets

   $ 307       $ 332   
  

 

 

    

 

 

 

Current Liabilities: Derivative instruments

   $ 150       $ 113   

Noncurrent Liabilities: Other

     55         41   
  

 

 

    

 

 

 

Total Liabilities

   $ 205       $ 154   
  

 

 

    

 

 

 

 

9


Derivative Activity Recorded in the Statement of Consolidated Operations

The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:

 

     Gain (Loss) on  Derivatives
Recognized In Income
   For the Quarter Ended
March 31,
 
        2012     2011  
          (In millions)  

Gain (loss) reclassified from accumulated other comprehensive income (loss) into operations (effective portion)

   Oil and Gas Production Revenues    $ 41      $ 6   

Gain (loss) on derivatives recognized in operations (ineffective portion and basis)

   Revenues and Other: Other    $ (1   $ (3

Derivative Activity in Accumulated Other Comprehensive Income (Loss)

A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders’ equity related to Apache’s cash flow hedges is presented in the table below:

 

     For the Quarter Ended March 31,  
     2012     2011  
      Before
tax
    After
tax
    Before
tax
    After
tax
 
     (In millions)  

Unrealized gain (loss) on derivatives at beginning of period

   $ 145      $ 114      $ (54   $ (19

Realized amounts reclassified into earnings

     (41     (34     (6     (4

Net change in derivative fair value

     (29     1        (432     (302

Ineffectiveness reclassified into earnings

     1        —          3        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain (loss) on derivatives at end of period

   $ 76      $ 81      $ (489   $ (323
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains and losses on existing hedges will be realized in future earnings through mid-2014, in the same period as the related sales of natural gas and crude oil production occur. Included in accumulated other comprehensive loss as of March 31, 2012, is a net gain of approximately $112 million ($100 million after tax) that applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions.

4. OTHER CURRENT LIABILITIES

The following table provides detail of our other current liabilities at March 31, 2012 and December 31, 2011:

 

      March 31,
2012
     December 31,
2011
 
     (In millions)  

Accrued operating expenses

   $ 206       $ 221   

Accrued exploration and development

     1,421         1,430   

Accrued compensation and benefits

     98         180   

Accrued income taxes

     474         533   

Accrued United Kingdom Petroleum Revenue Tax

     171         284   

Other

     242         276   
  

 

 

    

 

 

 

Total Other current liabilities

   $ 2,612       $ 2,924   
  

 

 

    

 

 

 

 

10


5. ASSET RETIREMENT OBLIGATION

The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the quarter ended March 31, 2012:

 

     (In millions)  

Asset retirement obligation at December 31, 2011

   $ 3,887   

Liabilities incurred

     109   

Liabilities settled

     (121

Accretion expense

     55   
  

 

 

 

Asset retirement obligation at March 31, 2012

     3,930   

Less current portion

     (448
  

 

 

 

Asset retirement obligation, long-term

   $ 3,482   
  

 

 

 

6. DEBT AND FINANCING COSTS

The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt at March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
      Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (In millions)  

Money market lines of credit

   $ 29       $ 29       $ 31       $ 31   

Commercial paper

     659         659         —           —     

Notes and debentures

     7,185         8,312         7,185         8,673   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt

   $ 7,873       $ 9,000       $ 7,216       $ 8,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s debt is recorded at the carrying amount, net of unamortized discount, on its consolidated balance sheet. The carrying amount of the Company’s money market lines of credit and commercial paper approximates fair value because the interest rates are variable and reflective of market rates. Apache uses a market approach to determine the fair value of its notes and debentures using estimates provided by an independent investment financial data services firm (a Level 2 fair value measurement).

As of March 31, 2012, the Company had unsecured committed revolving syndicated bank credit facilities totaling $3.3 billion, of which $2.3 billion matures in May 2013 and $1.0 billion matures in August 2016. The facilities consist of a $1.5 billion facility, a $1.0 billion facility, and a $450 million facility in the U.S., a $200 million facility in Australia and a $150 million facility in Canada. As of March 31, 2012, available borrowing capacity under the Company’s credit facilities was $2.6 billion. The U.S. credit facilities are used to support Apache’s commercial paper program.

The Company has available a $2.95 billion commercial paper program, which generally enables Apache to borrow funds for up to 270 days at competitive interest rates. The commercial paper program is fully supported by available borrowing capacity under U.S. committed credit facilities, which expire in 2013 and 2016. As of March 31, 2012, the Company had $659 million in commercial paper outstanding, compared with no outstanding commercial paper as of December 31, 2011.

As of March 31, 2012, current debt included $29 million borrowed on uncommitted overdraft lines in Canada and Argentina and $400 million 6.25-percent notes due on April 15, 2012, which were repaid with April 2012 debt issuance proceeds. As of December 31, 2011, there was $31 million drawn on uncommitted overdraft lines in Argentina.

In April 2012 the Company issued $400 million principal amount of senior unsecured 1.75-percent notes maturing April 15, 2017, $1.1 billion principal amount of senior unsecured 3.25-percent notes maturing April 15, 2022, and $1.5 billion principal amount of senior unsecured 4.75-percent notes maturing April 15, 2043. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The Company used the proceeds to fund the cash portion of the purchase price paid to acquire Cordillera, repay the $400 million 6.25-percent notes which matured on April 15, 2012, and for general corporate purposes.

 

11


Financing Costs

Financing costs incurred during the periods noted are composed of the following:

 

     For the Quarter  Ended
March 31,
 
     2012     2011  
     (In millions)  

Interest expense

   $ 108      $ 108   

Amortization of deferred loan costs

     1        1   

Capitalized interest

     (66     (60

Interest income

     (3     (4
  

 

 

   

 

 

 

Financing costs, net

   $ 40      $ 45   
  

 

 

   

 

 

 

7. INCOME TAXES

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. Accordingly, the Company recorded the income tax impact of a $521 million non-cash write-down of its Canadian proved oil and gas properties as a discrete item in the first quarter of 2012.

Apache and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is in Administrative Appeals with the United States Internal Revenue Service (IRS) regarding the 2004 through 2008 tax years and under audit for the 2009 and 2010 tax year. The Company is also under audit in various states and in most of the Company’s foreign jurisdictions as part of its normal course of business.

8. COMMITMENTS AND CONTINGENCIES

Legal Matters

Apache is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. The Company has an accrued liability of approximately $22 million for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. Apache’s estimates are based on information known about the matters and its experience in contesting, litigating, and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to Apache’s financial position or results of operations after consideration of recorded accruals. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position or results of operations.

Argentine Environmental Claims

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, in 2006 the Company acquired a subsidiary of Pioneer Natural Resources in Argentina (PNRA) that is involved in various administrative proceedings with environmental authorities in the Neuquén Province relating to permits for and discharges from operations in that province. In addition, PNRA was named in a suit initiated against oil companies operating in the Neuquén basin entitled Asociación de Superficiarios de la Patagonia v. YPF S.A., et. al., originally filed on August 21, 2003, in the Argentine National Supreme Court of Justice relating to various environmental and remediation claims. No material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

U.S. Royalty Litigation

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, two potential class action lawsuits are pending in respect of oil and gas royalties paid by the Company: Foster v. Apache Corporation, Civil Action No. CIV-10-0573-HE, in the United States District Court for the Western District of Oklahoma, and Joyce Holder Trust v. Apache Corporation, Civil Action No. 4:11-cv-03872, in the United States District Court for the Southern District of Texas, Houston Division. No material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

 

12


Louisiana Restoration

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, 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 as well as damages for contamination and cleanup. In the lawsuit filed on May 4, 2010, against Phoenix Exploration Company LP (Phoenix) captioned Belle Isle, L.L.C. v. Anadarko Petroleum Corporation et al., Docket No. 121742, in the District Court of St. Mary Parish, Louisiana, plaintiff’s experts have estimated the cost of remediation to be approximately $87 million, and plaintiffs claim additional damages for canal restoration, among other things, all of which is disputed by the Company. No other material change in the status of these matters has occurred since the filing of Apache’s most recent Annual Report on Form 10-K for its 2011 fiscal year.

Hurricane-Related Litigation

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, on May 27, 2011, in the case styled Comer et al. v. Murphy Oil USA, Inc. et al., Case No. 1:11-cv-220 HS0-JMR, in the United States District Court for the Southern District of Mississippi, the District Court has granted defendants’ motion to dismiss plaintiffs’ claims, and plaintiffs have appealed the decision to the United States Court of Appeals for the Fifth Circuit. No other material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

Australia Gas Pipeline Force Majeure

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, in 2008 Company subsidiaries reported a pipeline explosion that interrupted deliveries of natural gas in Australia to customers under various long-term contracts. No material change in the status of these matters has occurred since the filing of Apache’s most recent Annual Report on Form 10-K for its 2011 fiscal year except as follows:

 

   

The prosecution notice that was filed on May 28, 2009, by the Department of Mines and Petroleum against Apache Northwest Pty Ltd and its co-licensees was dismissed by the Magistrates Court of Western Australia on March 29, 2012.

 

   

The report prepared by the inspectors appointed by the government of Western Australia under the Petroleum Pipelines Act to coordinate the final stages of the investigation into the Varanus Island gas explosion, as described in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, has been provided by the government to Apache Northwest Pty Ltd for review prior to its publication.

Breton Lawsuit

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, on October 4, 2011, plaintiffs filed suit in Breton Energy, L.L.C. et al. v. Mariner Energy Resources, Inc., et al., Case 4:11-cv-03561, in the United States District Court for the Southern District of Texas, Houston Division, seeking compensation from defendants for allegedly depriving plaintiffs, either negligently or intentionally, of rights to hydrocarbons in a reservoir described by plaintiffs as a common reservoir in West Cameron Blocks 171 and 172 offshore Louisiana in the Gulf of Mexico. No material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

Escheat Audits

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, the State of Delaware, Department of Finance, Division of Revenue (Unclaimed Property), has notified numerous companies, including Apache Corporation, that the State intends to examine its books and records and those of its subsidiaries and related entities to determine compliance with the Delaware Escheat Laws. No material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

Burrup-Related Gas Supply Lawsuits

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, on May 19, 2011, a lawsuit captioned Oswal v. Apache Corporation, Cause No. 2011-30302, in the District Court

 

13


of Harris County, Texas, was filed in which plaintiff Pankaj Oswal, in his personal capacity and as trustee for the Burrup Trust, asserts claims against the Company under the Australian Trade Practices Act. No material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

Also as more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, this lawsuit is one of a number of legal actions involving the Burrup Fertilisers Pty Ltd ammonia plant in Western Australia. In one of these legal actions—a case captioned Radhika Oswal v. Australia and New Zealand Banking Group Limited (ANZ) et al., No. SCI 2011 4653, in the Supreme Court of Victoria—Oswal’s wife, Radhika Oswal, was granted leave on April 20, 2012, to join Apache Fertilisers Pty Ltd as a defendant.

Environmental Matters

As of March 31, 2012, the Company had an undiscounted reserve for environmental remediation of approximately $104 million. The Company is not aware of any environmental claims existing as of March 31, 2012, that have not been provided for or would otherwise have a material impact on its financial position or results of operations. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, Apache Canada Ltd. has asserted a claim against BP Canada arising out of the acquisition of certain Canadian properties under the parties’ Partnership Interest and Share Purchase and Sale Agreement dated July 20, 2010. No material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

As more fully described in Note 8 of the financial statements in Apache’s Annual Report on Form 10-K for its 2011 fiscal year, on May 25, 2011, a panel of the Bureau of Ocean Energy Management (BOEM) published a report dated May 23, 2011, and titled “OCS G-2580, Vermilion Block 380 Platform A, Incidents of Noncompliance.” The report concerned the BOEM’s investigation of a fire on the Vermillion 380 A platform located in the Gulf of Mexico. At the time of the incident, Mariner operated the platform. A small amount of hydrocarbons spilled from the platform into the surrounding water as a result of the incident, and 13 workers were rescued and evacuated to safety after jumping into the water. The BOEM concluded in its investigation that the fire was caused by Mariner’s failure to adequately maintain or operate the platform’s heater-treater in a safe condition. The BOEM also identified other safety deficiencies on the platform. On December 27, 2011, the BOEM issued several Incidents of Non-Compliance, which may provide the basis for the assessment of civil penalties against Mariner. The Company has decided to contest several of the Incidents of Non-Compliance and filed a Notice of Appeal with the BOEM on April 24, 2012. Effective November 10, 2010, Mariner was acquired by Apache. No material change in the status of this matter has occurred since the filing of Apache’s Annual Report on Form 10-K for its 2011 fiscal year.

9. CAPITAL STOCK

Net Income per Common Share

A reconciliation of the components of basic and diluted net income per common share for the quarters ended March 31, 2012 and 2011 is presented in the table below.

 

     For the Quarter Ended March 31,  
     2012      2011  
     Income      Shares      Per Share      Income      Shares      Per Share  
     (In millions, except per share amounts)  

Basic:

                 

Income attributable to common stock

   $ 778         385       $ 2.02       $ 1,115         383       $ 2.91   
        

 

 

          

 

 

 

Effect of Dilutive Securities:

                 

Mandatory Convertible Preferred Stock

     19         12            19         12      

Stock options and other

     —           2            —           2      
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted:

                 

Income attributable to common stock, including assumed conversions

   $ 797         399       $ 2.00       $ 1,134         397       $ 2.86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 2.9 million and 1.6 million for the quarters ending March 31, 2012 and 2011, respectively.

 

14


Issuance of Common and Preferred Shares

On April 30, 2012, in conjunction with Apache’s acquisition of Cordillera, the Company issued 6,272,667 shares of common stock to the sellers.

Common and Preferred Stock Dividends

During the first quarters of 2012 and 2011, Apache paid $58 million and $57 million, respectively, in dividends on its common stock. In the first quarters of 2012 and 2011, the Company also paid $19 million in dividends on its Series D Preferred Stock.

Conditional Restricted Stock Units

To provide long-term incentives for Apache employees to deliver competitive returns to the Company’s stockholders, the Company’s Board of Directors approved the 2012 Performance Program, pursuant to the 2011 Omnibus Equity Compensation Plan. In January 2012 eligible employees received initial conditional restricted stock unit awards totaling 851,985 units. A total of 840,525 units were outstanding at March 31, 2012, from which a minimum of zero and a maximum of 2,101,313 units could be awarded. The ultimate number of shares awarded is based upon measurement of total shareholder return of Apache common stock as compared to a designated peer group during a three-year performance period. Should any restricted stock units be awarded at the end of the three-year performance period, 50 percent of restricted stock units awarded will immediately vest, and an additional 25 percent will vest on succeeding anniversaries of the end of the performance period.

10. BUSINESS SEGMENT INFORMATION

Apache is engaged in a single line of business. Both domestically and internationally, the Company explores for, develops, and produces natural gas, crude oil, and natural gas liquids. At March 31, 2012, the Company had production in six countries: the United States, Canada, Egypt, Australia, offshore the United Kingdom (U.K.) in the North Sea, and Argentina. Apache also pursues exploration interests in other countries that may over time result in reportable discoveries and development opportunities. Financial information for each country is presented below:

 

     United
States
     Canada     Egypt      Australia      U.K.
North Sea
     Argentina      Other
International
     Total  
     (In millions)  

For the Quarter Ended March 31, 2012

                      

Oil and Gas Production Revenues

   $ 1,550       $ 353      $ 1,249       $ 426       $ 742       $ 137       $  —         $ 4,457   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income (Loss) (1)

   $ 672       $ (487   $ 928       $ 250       $ 264       $ 28       $ —         $ 1,655   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Other Income (Expense):

                      

Other

                         79   

General and administrative

                         (128

Merger, acquisitions & transition

                         (6

Financing costs, net

                         (40
                      

 

 

 

Income Before Income Taxes

                       $ 1,560   
                      

 

 

 

Total Assets

   $ 24,209       $ 8,372      $ 6,870       $ 5,334       $ 6,591       $ 1,773       $ 88       $ 53,237   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Quarter Ended March 31, 2011

                      

Oil and Gas Production Revenues

   $ 1,377       $ 402      $ 1,199       $ 372       $ 430       $ 98       $ —         $ 3,878   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income (1)

   $ 629       $ 78      $ 893       $ 226       $ 206       $ 10       $ —         $ 2,042   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Other Income (Expense):

                      

Other

                         47   

General and administrative

                         (112

Merger, acquisitions & transition

                         (5

Financing costs, net

                         (45
                      

 

 

 

Income Before Income Taxes

                       $ 1,927   
                      

 

 

 

Total Assets

   $ 21,683       $ 8,635      $ 6,266       $ 4,016       $ 2,609       $ 1,598       $ 59       $ 44,866   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Operating Income (Loss) consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, lease operating expenses, gathering and transportation costs, and taxes other than income. Canada’s operating loss for the first quarter of 2012 includes additional depletion of $521 million to write-down the carrying value of oil and gas properties.

 

15


11. SUPPLEMENTAL GUARANTOR INFORMATION

Apache Finance Canada Corporation (Apache Finance Canada) issued approximately $300 million of publicly-traded notes due in 2029 and an additional $350 million of publicly-traded notes due in 2015 that are fully and unconditionally guaranteed by Apache. The following condensed consolidating financial statements are provided as an alternative to filing separate financial statements.

Apache Finance Canada has been fully consolidated in Apache’s consolidated financial statements. As such, these condensed consolidating financial statements should be read in conjunction with the financial statements of Apache Corporation and subsidiaries and notes thereto, of which this note is an integral part.

 

16


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended March 31, 2012

 

     Apache
Corporation
    Apache
Finance
Canada
    All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

REVENUES AND OTHER:

          

Oil and gas production revenues

   $ 1,058      $ —        $ 3,399      $ —        $ 4,457   

Equity in net income (loss) of affiliates

     555        (174     46        (427     —     

Other

     (1     17        64        (1     79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,612        (157     3,509        (428     4,536   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

          

Depreciation, depletion and amortization

     292        —          1,448        —          1,740   

Asset retirement obligation accretion

     19        —          36        —          55   

Lease operating expenses

     215        —          458        —          673   

Gathering and transportation

     12        —          65        —          77   

Taxes other than income

     50        —          207        —          257   

General and administrative

     99        —          30        (1     128   

Merger, acquisitions & transition

     6        —          —          —          6   

Financing costs, net

     44        14        (18     —          40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     737        14        2,226        (1     2,976   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     875        (171     1,283        (427     1,560   

Provision (benefit) for income taxes

     78        (43     728        —          763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     797        (128     555        (427     797   

Preferred stock dividends

     19        —          —          —          19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 778      $ (128   $ 555      $ (427   $ 778   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 745      $ (128   $ 555      $ (427   $ 745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


APACHE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended March 31, 2011

 

     Apache
Corporation
     Apache
Finance
Canada
    All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

REVENUES AND OTHER:

           

Oil and gas production revenues

   $ 1,006       $  —        $ 2,872      $ —        $ 3,878   

Equity in net income (loss) of affiliates

     894         (14     (28     (852     —     

Other

     1         (20     67        (1     47   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     1,901         (34     2,911        (853     3,925   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

           

Depreciation, depletion and amortization

     300         —          636        —          936   

Asset retirement obligation accretion

     17         —          20        —          37   

Lease operating expenses

     191         —          432        —          623   

Gathering and transportation

     12         —          64        —          76   

Taxes other than income

     41         —          123        —          164   

General and administrative

     89         —          24        (1     112   

Merger, acquisitions & transition

     5         —          —          —          5   

Financing costs, net

     37         14        (6     —          45   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     692         14        1,293        (1     1,998   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     1,209         (48     1,618        (852     1,927   

Provision (benefit) for income taxes

     75         (6     724        —          793   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     1,134         (42     894        (852     1,134   

Preferred stock dividends

     19         —          —          —          19   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 1,115       $ (42   $ 894      $ (852   $ 1,115   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK

   $ 811       $ 280      $ 3,590      $ (3,870   $ 811   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

18


APACHE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Quarter Ended March 31, 2012

 

     Apache
Corporation
    Apache
Finance
Canada
    All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 230      $ (7   $ 1,784      $ —        $ 2,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Additions to oil and gas property

     (417     —          (1,288     —          (1,705

Additions to gas gathering, transmission and processing facilities

     —          —          (262     —          (262

Equity investment in BHL

     —          —          (439     —          (439

Deposit related to Cordillera acquisition

     (200     —          —          —          (200

Investment in subsidiaries, net

     (210     —          —          210        —     

Other

     (23     —          (13     —          (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (850     —          (2,002     210        (2,642
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Commercial paper, credit facility and bank notes, net

     657        —          —          —          657   

Intercompany borrowings

     —          —          225        (225     —     

Dividends paid

     (77     —          —          —          (77

Common stock activity

     2        4        (19     15        2   

Other

     8        —          (5     —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     590        4        201        (210     585   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (30     (3     (17     —          (50

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     41        5        249        —          295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 11      $ 2      $ 232      $ —        $ 245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


APACHE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Quarter Ended March 31, 2011

 

     Apache
Corporation
    Apache
Finance
Canada
    All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 392      $ (5   $ 1,592      $
 

  
 
  
  $ 1,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Additions to oil and gas property

     (469     —          (1,102     —          (1,571

Additions to gas gathering, transmission and processing facilities

     —          —          (125     —          (125

Investment in subsidiaries, net

     95        —          —          (95     —     

Other

     (17     —          (36     —          (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (391     —          (1,263     (95     (1,749
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Commercial paper, credit facility and bank notes, net

     19        —          —          —          19   

Intercompany borrowings

     —          1        (96     95        —     

Dividends paid

     (76     —          —          —          (76

Common stock activity

     26        4        (4     —          26   

Other

     31        —          (8     —          23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     —          5        (108     95        (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     1        —          221        —          222   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     6        —          128        —          134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 7      $ —        $ 349      $ —        $ 356   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


APACHE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2012

 

     Apache
Corporation
     Apache
Finance
Canada
     All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 11       $ 2       $ 232      $ —        $ 245   

Receivables, net of allowance

     777         —           2,386        —          3,163   

Inventories

     55         —           552        —          607   

Drilling advances

     12         —           356        —          368   

Derivative instruments

     106         —           178        —          284   

Prepaid assets and other

     4,082         —           (3,795     —          287   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     5,043         2         (91     —          4,954   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, NET

     12,570         —           33,259        —          45,829   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

OTHER ASSETS:

            

Intercompany receivable, net

     4,156         —           (1,754     (2,402     —     

Equity in affiliates

     20,736         1,186         90        (22,012     —     

Goodwill, net

     —           —           1,114        —          1,114   

Deferred charges and other

     371         1,003         966        (1,000     1,340   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 42,876       $ 2,191       $ 33,584      $ (25,414   $ 53,237   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 580       $ 1       $ 2,880      $ (2,402   $ 1,059   

Current debt

     400         —           29        —          429   

Asset retirement obligation

     434         —           14        —          448   

Derivative instruments

     71         —           79        —          150   

Other current liabilities

     593         12         2,007        —          2,612   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,078         13         5,009        (2,402     4,698   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LONG-TERM DEBT

     6,796         647         1        —          7,444   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER

            

NONCURRENT LIABILITIES:

            

Income taxes

     2,723         5         4,489        —          7,217   

Asset retirement obligation

     956         —           2,526        —          3,482   

Other

     608         250         823        (1,000     681   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,287         255         7,838        (1,000     11,380   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY

     29,715         1,276         20,736        (22,012     29,715   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 42,876       $ 2,191       $ 33,584      $ (25,414   $ 53,237   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

21


APACHE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

 

     Apache
Corporation
     Apache
Finance
Canada
     All Other
Subsidiaries
of Apache
Corporation
    Reclassifications
& Eliminations
    Consolidated  
     (In millions)  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 41       $ 5       $ 249      $ —        $ 295   

Receivables, net of allowance

     773         —           2,306        —          3,079   

Inventories

     51         —           604        —          655   

Drilling advances

     11         —           218        —          229   

Derivative instruments

     113         —           191        —          304   

Prepaid assets and other

     3,859         —           (3,618     —          241   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,848         5         (50     —          4,803   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, NET

     12,262         —           33,186        —          45,448   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

OTHER ASSETS:

            

Intercompany receivable, net

     3,931         —           (1,908     (2,023     —     

Equity in affiliates

     20,214         1,372         99        (21,685     —     

Goodwill, net

     —           —           1,114        —          1,114   

Deferred charges and other

     158         1,002         526        (1,000     686   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 41,413       $ 2,379       $ 32,967      $ (24,708   $ 52,051   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 609       $ 1       $ 2,461      $ (2,023   $ 1,048   

Current debt

     400         —           31        —          431   

Asset retirement obligation

     434         —           13        —          447   

Derivative instruments

     76         —           37        —          113   

Other current liabilities

     614         5         2,305        —          2,924   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,133         6         4,847        (2,023     4,963   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LONG-TERM DEBT

     6,137         647         1        —          6,785   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER

            

NONCURRENT LIABILITIES:

            

Income taxes

     2,622         5         4,570        —          7,197   

Asset retirement obligation

     936         —           2,504        —          3,440   

Other

     592         250         831        (1,000     673   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,150         255         7,905        (1,000     11,310   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY

     28,993         1,471         20,214        (21,685     28,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 41,413       $ 2,379       $ 32,967      $ (24,708   $ 52,051   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Apache Corporation, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops and produces natural gas, crude oil, and natural gas liquids. We currently have exploration and production interests in six countries: the U.S., Canada, Egypt, Australia, offshore the United Kingdom in the North Sea, and Argentina. Apache also pursues exploration interests in other countries that may over time result in reportable discoveries and development opportunities.

This discussion relates to Apache Corporation and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for our 2011 fiscal year.

Financial Overview

A cornerstone of our strategy is balancing our portfolio through diversity of geologic risk, geographic risk, hydrocarbon mix (crude oil versus natural gas), and reserve life in order to achieve consistency in results. Continued volatility in the commodity price environment reinforces the importance of our balanced portfolio approach. Our first-quarter 2012 results reflected the benefit of our product balance, as crude oil and liquids combined represented 50 percent of our production but provided 82 percent of our $4.5 billion of oil and gas revenues. Crude oil drove 91 percent of this combined crude and liquids production and 96 percent of the related revenues. International Dated Brent crudes and sweet crude from the Gulf Coast continue to be priced at a significant premium to West Texas Intermediate (WTI)-based prices. As a result of our geographic balance, we are receiving these premium prices on approximately 75 percent of our crude oil production.

While crude oil prices remain strong, natural gas prices in North America have weakened considerably since the first quarter of 2011. Our first-quarter 2012 results were negatively impacted by a $390 million non-cash after-tax write-down of the carrying value of our Canadian proved oil and gas properties as a result of declining average natural gas prices for the 12 months ending March 31, 2012. For additional discussion on this write-down, refer to “Operating Highlights—Depreciation, Depletion and Amortization” in this Item 2. We believe weak natural gas prices in North America will continue to put pressure on gas revenues for the remainder of the year.

Balancing the 22-percent decline in North American natural gas prices from the year-ago period are our realizations on natural gas production outside of North America, where first-quarter 2012 prices averaged 17 percent higher than the comparative 2011 quarter. Over one-third of our natural gas is produced outside of North America.

Key measures of our performance for the first quarter of 2012 compared to the prior-year period are summarized below:

 

   

Daily production of oil, natural gas, and natural gas liquids averaged a record 769 thousand barrels of oil equivalent per day (Mboe/d) in the first quarter of 2012, up five percent compared with the first quarter of 2011.

 

   

Oil and gas production revenues increased 15 percent to $4.5 billion from the prior-year quarter despite falling natural gas prices, highlighting the importance of our balanced portfolio.

 

   

First-quarter 2012 earnings totaled $778 million, or $2.00 per diluted common share, compared with $1.1 billion, or $2.86 per share, in the first quarter of 2011.

 

   

Apache’s adjusted earnings, which exclude certain items impacting the comparability of results, were $1.2 billion in the first quarter, up slightly from $1.1 billion in the prior-year quarter. Adjusted earnings per common diluted share were $3.00, up from $2.90 in the prior-year quarter. Adjusted earnings is not a financial measure prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). For a description of adjusted earnings and a reconciliation of adjusted earnings to income attributable to common stock, the most directly comparable GAAP financial measure, please see “Non-GAAP Measures” in this Item 2.

 

   

Net cash provided by operating activities (operating cash flows or cash flows) totaled $2.0 billion, unchanged from the prior-year period despite the volatile commodity price environment.

 

23


Operating Highlights

Apache has a significant producing asset base as well as large undeveloped acreage positions, which provide capacity for continued growth through sustainable lower-risk drilling opportunities, balanced by higher-risk, higher-reward exploration. We also continue to advance several multi-year development projects. Our cash flows enable us to optimize both endeavors. Notable operating highlights for the first quarter of 2012 include:

Egypt

 

   

On March 26, 2012, Apache reported the approval of seven new development leases in the Faghur Basin supporting the continued active drilling program in Egypt’s Western Desert. Recent discoveries in the Faghur Basin include the Neilos-2, West Kalabsha South-1X, and the West Kalabsha North-1X, testing at a combined rate of nearly 14 thousand barrels of oil per day (Mb/d) and 13.2 million cubic feet of natural gas per day (MMcf/d).

Australia

 

   

On January 31, 2012, a subsidiary of Apache Energy Limited completed the acquisition of a 49-percent interest in Burrup Holdings Limited (BHL) for $439 million, including working capital adjustments. The transaction was funded with debt. BHL is the owner of an ammonia fertilizer plant on the Burrup Peninsula of Western Australia. Apache has been supplying natural gas to the plant since operations commenced in 2006. Yara Australia Pty Ltd (Yara) owns the remaining 51 percent of BHL and will operate the plant, which has been rebranded Yara Pilbara. Apache also acquired an interest in a planned technical ammonia nitrate plant to be developed with Yara.

 

   

In April 2012, Apache announced that an Australian subsidiary and its partners signed a heads of agreement with Chubu Electric Power Company Incorporated (Chubu) to supply liquefied natural gas (LNG) from the Chevron-operated Wheatstone project in Western Australia. The Wheatstone partners agreed to ultimately supply 1 million metric tons per annum (MTpa) of LNG for up to 20 years. Through its 13-percent share in Wheatstone, Apache’s subsidiary will supply Chubu with 0.13 MTpa, or approximately 19 MMcf/d.

United States

 

   

On April 30, 2012, Apache completed the acquisition of Cordillera Energy Partners III, LLC (Cordillera), a privately-held exploration and production company, in a stock and cash transaction. Cordillera’s properties include approximately 312,000 net acres in the Granite Wash, Tonkawa, Cleveland, and Marmaton plays in western Oklahoma and the Texas Panhandle. Upon completion of the acquisition on April 30, 2012, the sellers received approximately 6.3 million shares of Apache common stock and $2.5 billion in cash. The effective date of the transaction is September 1, 2011.

 

   

In February 2012, Apache reported that five of six initial vertical tests in the emerging Whittenburg Basin play were completed as oil producers in the Canyon Wash interval. These exploratory drilling program results further encourage the use of horizontal drilling and multi-stage fracture stimulations in the Texas Panhandle formations.

 

   

Also in February 2012, we commenced operations from the Deadwood Gas Plant, a 50-percent owned joint venture facility constructed and managed by Crosstex Energy, L.P. that provides processing for Apache’s Deadwood development. The facility immediately reached initial phase capacity of 19 MMcf/d upon startup. The second phase of the plant is expected to come online in the second quarter, enabling us to reach 50 MMcf/d capacity during the third quarter.

 

   

During the first quarter of 2012, Apache reported successful results of the Heidelberg-2 appraisal well, located in Green Canyon block 903 in the deepwater Gulf of Mexico. The well encountered approximately 250 net feet of oil pay in high-quality Miocene sands.

Notable Events

 

   

On April 12, 2012, the Apache-operated Grand Isle 43AA complex in our Gulf of Mexico Shelf region was shut-in as a result of an internal inspection that revealed erosion and corrosion. Approximately 5,500 barrels of oil per day (b/d) and 11,500 MMcf/d of gross production is shut-in for approximately three months pending evaluation and repairs. Apache holds a 75-percent working interest in this field.

 

24


Results of Operations

Oil and Gas Revenues

 

     For the Quarter Ended March 31,  
     2012     2011  
     $ Value      % Contribution     $ Value      % Contribution  
     (In millions)            (In millions)         

Oil Revenues:

          

United States

   $ 1,170         33   $ 918         32

Canada

     131         4     115         4
  

 

 

    

 

 

   

 

 

    

 

 

 

North America

     1,301         37     1,033         36
  

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     1,119         32     1,050         36

Australia

     340         10     331         11

North Sea

     679         19     426         15

Argentina

     73         2     52         2
  

 

 

    

 

 

   

 

 

    

 

 

 

International

     2,211         63     1,859         64
  

 

 

    

 

 

   

 

 

    

 

 

 

Total (1)

   $ 3,512         100   $ 2,892         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Natural Gas Revenues:

          

United States

   $ 292         36   $ 381         44

Canada

     198         24     263         30
  

 

 

    

 

 

   

 

 

    

 

 

 

North America

     490         60     644         74
  

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     130         16     148         17

Australia

     86         11     41         5

North Sea

     48         6     4         0

Argentina

     57         7     37         4
  

 

 

    

 

 

   

 

 

    

 

 

 

International

     321         40     230         26
  

 

 

    

 

 

   

 

 

    

 

 

 

Total (2)

   $ 811         100   $ 874         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Natural Gas Liquids (NGL)

          

Revenues:

          

United States

   $ 88         66   $ 78         70

Canada

     24         18     24         21
  

 

 

    

 

 

   

 

 

    

 

 

 

North America

     112         84     102         91
  

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     —           —          1         1

North Sea

     15         11     —           —     

Argentina

     7         5     9         8
  

 

 

    

 

 

   

 

 

    

 

 

 

International

     22         16     10         9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 134         100   $ 112         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Oil and Gas Revenues:

          

United States

   $ 1,550         35   $ 1,377         36

Canada

     353         8     402         10
  

 

 

    

 

 

   

 

 

    

 

 

 

North America

     1,903         43     1,779         46
  

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     1,249         28     1,199         31

Australia

     426         9     372         10

North Sea

     742         17     430         11

Argentina

     137         3     98         2
  

 

 

    

 

 

   

 

 

    

 

 

 

International

     2,554         57     2,099         54
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,457         100   $ 3,878         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Financial derivative hedging activities decreased oil revenues for the quarters ending March 31, 2012 and 2011 by $64 million and $71 million, respectively.

 

(2) 

Financial derivative hedging activities increased natural gas revenues for the quarters ending March 31, 2012 and 2011 by $104 million and $64 million, respectively.

 

25


Production

 

     For the Quarter Ended March 31,  
     2012      Increase
(Decrease)
    2011  

Oil Volume—b/d:

       

United States

     125,928         +11     113,723   

Canada

     15,582         +6     14,704   
  

 

 

      

 

 

 

North America

     141,510         +10     128,427   
  

 

 

      

 

 

 

Egypt

     99,490         -9     108,876   

Australia

     30,398         -12     34,720   

North Sea

     65,946         +40     46,968   

Argentina

     9,632         0     9,617   
  

 

 

      

 

 

 

International

     205,466         +3     200,181   
  

 

 

      

 

 

 

Total (1)

     346,976         +6     328,608   
  

 

 

      

 

 

 

Natural Gas Volume—Mcf/d:

       

United States

     817,493         -5     858,146   

Canada

     636,227         -1     642,729   
  

 

 

      

 

 

 

North America

     1,453,720         -3     1,500,875   
  

 

 

      

 

 

 

Egypt

     376,067         +1     371,514   

Australia

     224,337         +23     182,922   

North Sea

     67,066         NM        1,901   

Argentina

     211,193         +12     188,092   
  

 

 

      

 

 

 

International

     878,663         +18     744,429   
  

 

 

      

 

 

 

Total (2)

     2,332,383         +4     2,245,304   
  

 

 

      

 

 

 

NGL Volume—b/d:

       

United States

     22,317         +16     19,252   

Canada

     6,312         -4     6,545   
  

 

 

      

 

 

 

North America

     28,629         +11     25,797   
  

 

 

      

 

 

 

Egypt

     —           —          228   

North Sea

     1,966         NM        —     

Argentina

     2,994         -2     3,055   
  

 

 

      

 

 

 

International

     4,960         +51     3,283   
  

 

 

      

 

 

 

Total

     33,589         +16     29,080   
  

 

 

      

 

 

 

BOE per day (3)

       

United States

     284,493         +3     275,999   

Canada

     127,932         0     128,370   
  

 

 

      

 

 

 

North America

     412,425         +2     404,369   
  

 

 

      

 

 

 

Egypt

     162,168         -5     171,023   

Australia

     67,788         +4     65,207   

North Sea

     79,090         +67     47,285   

Argentina

     47,825         +9     44,021   
  

 

 

      

 

 

 

International

     356,871         +9     327,536   
  

 

 

      

 

 

 

Total

     769,296         +5     731,905   
  

 

 

      

 

 

 

 

(1) 

Approximately 15 percent of first-quarter 2012 oil production was subject to financial derivative hedges, compared to 30 percent in 2011.

(2) 

Approximately 13 percent of first-quarter 2012 gas production was subject to financial derivative hedges, compared to 16 percent in 2011.

(3) 

The table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a 6:1 energy equivalent ratio. This ratio is not reflective of the current price ratio between the two products.

 

26


Pricing

 

     For the Quarter Ended March 31,  
     2012      Increase
(Decrease)
    2011  

Average Oil price—Per barrel:

       

United States

   $ 102.08         +14   $ 89.72   

Canada

     92.47         +6     87.21   

North America

     101.02         +13     89.43   

Egypt

     123.55         +15     107.14   

Australia

     122.95         +16     105.89   

North Sea

     113.19         +12     100.89   

Argentina

     83.03         +38     60.36   

International

     118.24         +15     103.21   

Total (1)

     111.22         +14     97.83   

Average Natural Gas price—Per Mcf:

       

United States

   $ 3.93         -20   $ 4.94   

Canada

     3.41         -25     4.54   

North America

     3.70         -22     4.77   

Egypt

     3.79         -15     4.44   

Australia

     4.18         +67     2.50   

North Sea

     7.97         -61     20.34   

Argentina

     2.98         +37     2.18   

International

     4.02         +17     3.43   

Total (2)

     3.82         -12     4.32   

Average NGL Price—Per barrel:

       

United States

   $ 43.51         -3   $ 44.99   

Canada

     41.63         +4     40.12   

North America

     43.09         -2     43.76   

Egypt

     —           —          63.35   

North Sea

     84.11         NM        —     

Argentina

     26.20         -14     30.51   

International

     49.16         +50     32.79   

Total

     43.99         +3     42.52   

 

(1) 

Reflects per-barrel decrease of $2.03 in first-quarter 2012 and $2.41 in 2011 from financial derivative hedging activities.

(2) 

Reflects per-Mcf increase of $.49 in first-quarter 2012 and $.32 in 2011 from financial derivative hedging activities.

Crude Oil Revenues

Crude oil revenues for the first quarter of 2012 totaled $3.5 billion, $620 million higher than the comparative 2011 quarter, the result of a 14-percent increase in average realized prices and a six-percent increase in worldwide production. Crude oil accounted for 79 percent of oil and gas production revenues and 45 percent of worldwide production in the first quarter of 2012, compared with 75 percent and 45 percent, respectively, in the first quarter of 2011. Higher realized prices added $397 million to the increase in first-quarter 2012 revenues compared to the prior-year quarter, while higher production volumes contributed an additional $223 million.

Crude oil prices realized in the first quarter of 2012 averaged $111.22 per barrel, compared with $97.83 in the comparative prior-year quarter. International Dated Brent crudes and Heavy and Light Louisiana Sweet crudes from the Gulf Coast continue to be priced at a significant premium to WTI-based prices. We are realizing these premium prices on approximately 75 percent of our crude oil production. Our Egypt, Australia and North Sea regions, which comprise approximately 56 percent of our worldwide oil production, receive International Dated Brent pricing with first-quarter 2012 oil realizations averaging $119.97 compared with first-quarter 2011 realizations of $105.37. Our Gulf Coast regions, which comprise 19 percent of our worldwide oil production, had price realizations averaging $113.63 per barrel, an increase of 15 percent over 2011 realizations of $98.58 per barrel.

Worldwide production increased 18.4 Mb/d from the first quarter of 2011 to 347.0 Mb/d in the first quarter of 2012, primarily driven by increased production in the North Sea and the U.S. Our North Sea production increased 19.0 Mb/d on acquisitions and drilling activity. The 12.2 Mb/d increase in U.S. oil production is primarily a result of an 8.2 Mb/d increase in the Permian region on increased drilling activity. The Gulf of Mexico (GOM) onshore and offshore regions added 2.6 Mb/d on drilling and recompletion activity, largely offset by natural decline. Egypt’s gross oil production decreased one percent, while net production was down nine percent, or 9.4 Mb/d, as higher oil prices impacted our allocated volumes. Australia saw production decrease 4.3 Mb/d primarily from natural decline on the Pyrenees and Van Gogh oil fields.

 

27


Natural Gas Revenues

Gas revenues for the first quarter of 2012 totaled $811 million, down seven percent from the first quarter of 2011. A 12-percent drop in average realized prices reduced natural gas revenues $102 million as compared to the prior-year quarter, while a four-percent increase in average production added $39 million between the periods. Natural gas accounted for 18 percent of our oil and gas production revenues and 50 percent of our equivalent production during the first quarter of 2012, compared to 23 and 50 percent, respectively, for the first quarter of 2011. As a whole our international regions, which contribute approximately one-third of our worldwide gas production, benefitted from higher realized prices as compared to the prior-year quarter.

Worldwide production grew 87 MMcf/d between the periods on production increases in each of our international regions. North Sea’s daily production increased 65 MMcf/d on the Mobil North Sea acquisition. Australia’s daily gas production rose 41 MMcf/d on the fourth-quarter 2011 start-up of the Reindeer field and higher customer takes under new and existing contractual arrangements. Argentina’s production increased 23 MMcf/d on new drilling and recompletions. Egypt’s gross production grew eight percent on a continued drilling and completion program, with net production growth of one percent as gas prices impacted our allocated volumes. Total U.S. daily production decreased 41 MMcf/d, primarily on the Central region’s 49 MMcf/d decrease resulting from a property divestiture in December 2011 and natural decline. The GOM onshore and offshore regions decreased 13 MMcf/d from natural decline. The Permian region increased 13 percent, or 21.2 MMcf/d, as a result of drilling and recompletion activity on liquids-rich plays.

Operating Expenses

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 expenses on a boe basis, on an absolute dollar basis or both, depending on relevance.

 

     For the Quarter  Ended
March 31,
     For the Quarter  Ended
March 31,
 
     2012      2011      2012      2011  
     (In millions)      (Per boe)  

Depreciation, depletion and amortization:

           

Oil and gas property and equipment

           

Recurring

   $ 1,135       $ 869       $ 16.21       $ 13.19   

Additional

     521         —           7.45         —     

Other assets

     84         67         1.20         1.02   

Asset retirement obligation accretion

     55         37         .79         .56   

Lease operating expenses

     673         623         9.61         9.46   

Gathering and transportation

     77         76         1.10         1.16   

Taxes other than income

     257         164         3.67         2.49   

General and administrative expenses

     128         112         1.82         1.70   

Merger, acquisitions & transition

     6         5         .09         .08   

Financing costs, net

     40         45         .57         .68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,976       $ 1,998       $ 42.51       $ 30.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation, depletion and amortization (DD&A) The following table details the changes in recurring DD&A of oil and gas properties between the first quarter of 2012 and 2011:

 

     Recurring
DD&A
 
     (In millions)  

First-Quarter 2011 DD&A

   $ 869   

Volume change

     69   

Rate change

     197   
  

 

 

 

First-Quarter 2012 DD&A

   $ 1,135   
  

 

 

 

Full-cost DD&A expense of $1.1 billion increased $266 million on an absolute dollar basis: $197 million on rate and $69 million from higher volumes. The Company’s full-cost DD&A rate increased $3.02 to $16.21 per boe as costs to acquire, find and develop reserves exceeded our historical cost basis.

 

28


In addition, we recorded a $521 million ($390 million net of tax) non-cash write-down of the carrying value of our March 31, 2012, proved oil and gas property balances in Canada. Under the full-cost method of accounting, the Company is required to review the carrying value of its proved oil and gas properties each quarter on a country-by-country basis. Under these rules, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and gas reserves, discounted 10 percent, net of related tax effects. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements. If natural gas prices remain depressed, additional write-downs in Canada will occur.

Lease operating expenses (LOE) Our first-quarter 2012 LOE increased $50 million from first-quarter 2011. LOE per boe was up two percent, as increased production largely offset the impact of higher costs. The rate was impacted between the first quarter of 2012 and 2011 by the items below:

 

      Per boe  

First-quarter 2011 LOE

   $ 9.46   

Non-operated costs

     .46   

Labor and overhead

     .16   

Repairs and maintenance

     (.19

Other

     .32   

Increased production

     (.60
  

 

 

 

First-quarter 2012 LOE

   $ 9.61   
  

 

 

 

Gathering and transportation Gathering and transportation costs totaled $77 million in the first quarter of 2012, up $1 million from the first quarter of 2011. On a per-unit basis, gathering and transportation costs of $1.10 per boe were down five percent from the prior-year quarter. The following table presents gathering and transportation costs paid by Apache directly to third-party carriers for each of the periods presented.

 

     For the Quarter  Ended
March 31,
 
     2012      2011  
     (In millions)  

Canada

   $ 44       $ 45   

United States

     15         14   

Egypt

     10         10   

North Sea

     6         5   

Argentina

     2         2   
  

 

 

    

 

 

 

Total Gathering and transportation

   $ 77       $ 76   
  

 

 

    

 

 

 

Taxes other than income Taxes other than income totaled $257 million in the first quarter of 2012, an increase of $93 million from the prior-year period. The following table presents a comparison of these expenses:

 

     For the Quarter Ended
March 31,
 
     2012      2011  
     (In millions)  

U.K. PRT

   $ 158       $ 82   

Severance taxes

     55         47   

Ad valorem taxes

     28         27   

Other

     16         8   
  

 

 

    

 

 

 

Total Taxes other than income

   $ 257       $ 164   
  

 

 

    

 

 

 

The North Sea Petroleum Revenue Tax (PRT) is assessed on net receipts (revenues less qualifying operating costs and capital spending) from our fields in the United Kingdom (U.K.) North Sea. U.K. PRT was $76 million higher than the 2011 period based on a 107-percent increase in net receipts, primarily driven by the Mobil North Sea acquisition and the Nelson field purchase. Higher realized oil prices resulted in an increase of severance tax expense of $8 million when compared to the prior-year period. Severance taxes are incurred primarily on onshore properties in the U.S. and certain properties in Australia and Argentina.

 

29


General and administrative expenses General and administrative expenses (G&A) increased $16 million, or 14 percent, over the year-ago period. G&A increased seven percent on a per-unit basis as the impact of higher costs was partially offset by higher production.

Financing costs, net Financing costs incurred during the periods noted comprised the following:

 

     For the Quarter  Ended
March 31,
 
     2012     2011  
     (In millions)  

Interest expense

   $ 108      $ 108   

Amortization of deferred loan costs

     1        1   

Capitalized interest

     (66     (60

Interest income

     (3     (4
  

 

 

   

 

 

 

Financing costs, net

   $ 40      $ 45   
  

 

 

   

 

 

 

Net financing costs were down $5 million in first-quarter 2012 compared to first-quarter 2011. The decrease is primarily related to a $6 million increase in capitalized interest, the result of additional unproved balances from the Mobil North Sea acquisition.

Provision for income taxes The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. Accordingly, the Company recorded the income tax impact of a $521 million non-cash write-down of its Canadian proved oil and gas properties as a discrete item in the first quarter of 2012.

The 2012 first-quarter provision for income taxes decreased $30 million to $763 million, primarily the result of a 19-percent decrease in income before income taxes from first quarter 2011 to first quarter 2012. The effective income tax rate in the first quarter of 2012 was 49 percent, reflecting the impact of the $521 million Canadian non-cash write-down discussed above. Absent the write-down, the first-quarter 2012 effective rate would have been 43 percent, an increase from 41 percent in the first quarter of 2011. This difference was driven primarily by an increase in the U.K. corporate income tax rate on North Sea oil and gas profits from 50 percent to 62 percent, which was enacted in the third quarter of 2011.

 

30


Capital Resources and Liquidity

Operating cash flows are the Company’s primary source of liquidity. Apache’s cash flows, both in the short-term and the long-term, are impacted by highly volatile oil and natural gas prices. Significant deterioration in commodity prices negatively impacts our revenues, earnings and cash flows, capital spending, and potentially our liquidity if spending does not trend downward as well. Sales volumes and costs also impact cash flows; however, these historically have not been as volatile or as impactive as commodity prices in the short-term.

Apache’s long-term operating cash flows are dependent on reserve replacement and the level of costs required for ongoing operations. Cash investments are required continuously to fund exploration and development projects and acquisitions, which are necessary to offset the inherent declines in production and proven reserves. Future success in maintaining and growing reserves and production is highly dependent on the success of our exploration and development activities or our ability to acquire additional reserves at reasonable costs.

We may also elect to utilize available committed borrowing capacity, access to both debt and equity capital markets, or proceeds from the occasional sale of nonstra