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 September 30, 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

 

 

 

LOGO

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)

Registrant’s Telephone Number, Including Area Code: (713) 296-6000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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 October 31, 2012             391,283,519

 

 

 


PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED OPERATIONS

(Unaudited)

 

     For the Quarter
Ended September 30,
     For the Nine Months
Ended September 30,
 
     2012      2011      2012      2011  
     (In millions, except per common share data)  

REVENUES AND OTHER:

           

Oil and gas production revenues

   $ 4,141      $ 4,282      $ 12,554      $ 12,515  

Other

     38        46        133        76  
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,179        4,328        12,687        12,591  
  

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING EXPENSES:

           

Depreciation, depletion and amortization

           

Recurring

     1,300        1,045        3,803        2,984  

Additional

     729        20        1,898        46  

Asset retirement obligation accretion

     60        39        172        114  

Lease operating expenses

     801        661        2,178        1,946  

Gathering and transportation

     86        72        235        221  

Taxes other than income

     167        244        627        663  

General and administrative

     124        112        384        327  

Merger, acquisitions & transition

     7        4        29        15  

Financing costs, net

     40        37        125        123  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,314        2,234        9,451        6,439  
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     865        2,094        3,236        6,152  

Current income tax provision

     544        473        1,729        1,692  

Deferred income tax provision

     141        619        174        1,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     180        1,002        1,333        3,395  

Preferred stock dividends

     19        19        57        57  
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME ATTRIBUTABLE TO COMMON STOCK

   $ 161      $ 983      $ 1,276      $ 3,338  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME PER COMMON SHARE:

           

Basic

   $ 0.41      $ 2.56      $ 3.29      $ 8.70  

Diluted

   $ 0.41      $ 2.50      $ 3.27      $ 8.49  

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

           

Basic

     391        384        388        384  

Diluted

     393        400        390        400  

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.17      $ 0.15      $ 0.51      $ 0.45  

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)

 

     For the Quarter
Ended  September 30,
    For the Nine  Months
Ended September 30,
 
     2012     2011     2012     2011  
     (In millions)  

NET INCOME

   $ 180     $ 1,002     $ 1,333     $ 3,395  

OTHER COMPREHENSIVE INCOME (LOSS):

        

Commodity cash flow hedge activity, net of tax:

        

Reclassification of (gain) loss on settled derivative instruments

     (59     (4     (151     32  

Change in fair value of derivative instruments

     (41     275       71       181  

Derivative hedge ineffectiveness reclassified into earnings

     —          (9     —          (10
  

 

 

   

 

 

   

 

 

   

 

 

 
     (100     262       (80     203  
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

     80       1,264       1,253       3,598  

Preferred stock dividends

     19       19       57       57  
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK

   $ 61     $ 1,245     $ 1,196     $ 3,541  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months  Ended
September 30,
 
     2012     2011  
     (In millions)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 1,333     $ 3,395  

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

    

Depreciation, depletion and amortization

     5,701       3,030  

Asset retirement obligation accretion

     172       114  

Provision for deferred income taxes

     174       1,065  

Other

     62       (34

Changes in operating assets and liabilities:

    

Receivables

     128       (417

Inventories

     29       (35

Drilling advances

     (334     (23

Deferred charges and other

     (200     (54

Accounts payable

     168       119  

Accrued expenses

     (814     (38

Deferred credits and noncurrent liabilities

     3       49  
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     6,422       7,171  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to oil and gas property

     (6,387     (4,758

Additions to gas gathering, transmission and processing facilities

     (586     (472

Acquisition of Cordillera Energy Partners III, LLC

     (2,666     —     

Equity investment in Yara Pilbara Holdings Pty Limited

     (439     —     

Acquisitions, other

     (122     (509

Proceeds from sale of oil and gas properties

     26       202  

Other, net

     (386     (89
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (10,560     (5,626
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Commercial paper, credit facility and bank notes, net

     1,827       (940

Fixed rate debt borrowings

     2,991       —     

Payments on fixed rate debt

     (400     —     

Dividends paid

     (246     (230

Other

     (11     77  
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     4,161       (1,093
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     23       452  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     295       134  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 318     $ 586  
  

 

 

   

 

 

 

SUPPLEMENTARY CASH FLOW DATA:

    

Interest paid, net of capitalized interest

   $ 130     $ 165  

Income taxes paid, net of refunds

     1,876       1,335  

The accompanying notes to consolidated financial statements

are an integral part of this statement.

 

3


APACHE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

     September 30,
2012
    December 31,
2011
 
     (In millions)  
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 318     $ 295  

Receivables, net of allowance

     2,976       3,079  

Inventories

     774       655  

Drilling advances

     573       229  

Derivative instruments

     104       304  

Prepaid assets and other

     299       241  
  

 

 

   

 

 

 
     5,044       4,803  
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT:

    

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

    

Proved properties

     74,743       67,805  

Unproved properties and properties under development, not being amortized

     9,196       5,530  

Gathering, transmission and processing facilities

     5,758       5,175  

Other

     930       709  
  

 

 

   

 

 

 
     90,627       79,219  

Less: Accumulated depreciation, depletion and amortization

     (39,463     (33,771
  

 

 

   

 

 

 
     51,164       45,448  
  

 

 

   

 

 

 

OTHER ASSETS:

    

Goodwill

     1,114       1,114  

Deferred charges and other

     1,488       686  
  

 

 

   

 

 

 
   $ 58,810     $ 52,051  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 1,137     $ 1,048  

Current debt

     964       431  

Current asset retirement obligation

     434       447  

Derivative instruments

     56       113  

Other current liabilities

     2,799       2,924  
  

 

 

   

 

 

 
     5,390       4,963  
  

 

 

   

 

 

 

LONG-TERM DEBT

     10,670       6,785  
  

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:

    

Income taxes

     7,602       7,197  

Asset retirement obligation

     3,794       3,440  

Other

     640       673  
  

 

 

   

 

 

 
     12,036       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, 392,345,358 and 385,249,885 shares issued, respectively

     245       241  

Paid-in capital

     9,783       9,066  

Retained earnings

     19,578       18,500  

Treasury stock, at cost, 1,072,757 and 1,132,242 shares, respectively

     (30     (32

Accumulated other comprehensive loss

     (89     (9
  

 

 

   

 

 

 
     30,714       28,993  
  

 

 

   

 

 

 
   $ 58,810     $ 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
Income (Loss)
    Total
Shareholders’
Equity
 
    (In millions)  

BALANCE AT DECEMBER 31, 2010

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

Net income

    —          —          —          3,395       —          —          3,395  

Commodity hedges, net of tax

    —          —          —          —          —          203       203  

Dividends:

             

Preferred

    —          —          —          (57     —          —          (57

Common ($0.45 per share)

    —          —          —          (173     —          —          (173

Common stock activity, net

    —          1       28       —          —          —          29  

Treasury stock activity, net

    —          —          2       —          4       —          6  

Compensation expense

    —          —          125       —          —          —          125  

Other

    —          —          (2     —          —          —          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2011

  $ 1,227     $ 241     $ 9,017     $ 17,388     $ (32   $ 62     $ 27,903  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2011

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

Net income

    —          —          —          1,333       —          —          1,333  

Commodity hedges, net of tax

    —          —          —          —          —          (80     (80

Dividends:

             

Preferred

    —          —          —          (57     —          —          (57

Common ($0.51 per share)

    —          —          —          (198     —          —          (198

Common shares issued

    —          3       598       —          —          —          601  

Common stock activity, net

    —          1       (12     —          —          —          (11

Treasury stock activity, net

    —          —          1       —          2       —          3  

Compensation expense

    —          —          130       —          —          —          130  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2012

  $ 1,227     $ 245     $ 9,783     $ 19,578     $ (30   $ (89   $ 30,714  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 (U.S. 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 September 30, 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 properties. 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 associated 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. 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.

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” in the accompanying statement of consolidated operations. Such limitations are imposed separately on a country-by-country basis and are tested quarterly. At March 31, 2012, and June 30, 2012, the Company recorded a $521 million ($390 million net of tax) and $641 million ($480 million net of tax) non-cash write-down of the carrying value of the Company’s Canadian proved oil and gas properties, respectively. At September 30, 2012, the Company recorded an additional $721 million ($539 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, June 30, 2012, and September 30, 2012, would have been $656 million ($491 million net of tax), $744 million ($557 million net of tax), and $779 million ($583 million net of tax), respectively.

New Pronouncements Issued But 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 U.S. GAAP and International Financial Reporting Standards (IFRS) related to the offsetting of financial instruments. The existing U.S. 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 III, LLC

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 was September 1, 2011.

Apache issued 6,272,667 shares of common stock and paid approximately $2.7 billion of cash to the sellers as consideration for the transaction. The cash paid at closing was funded 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 and Financing Costs of this Form 10-Q.

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, but no later than one year from the acquisition date.

 

     (In millions)  

Current assets

   $ 56  

Proved properties

     1,040  

Unproved properties

     2,288  

Gathering, transmission and processing facilities

     1  
  

 

 

 

Total assets acquired

   $ 3,385  
  

 

 

 

Current liabilities

     86  

Non-current obligations

     5  
  

 

 

 

Total liabilities assumed

   $ 91  
  

 

 

 

Net assets acquired

   $ 3,294  
  

 

 

 

Yara Pilbara Holdings Pty Limited

On January 31, 2012, a subsidiary of Apache Energy Limited completed the acquisition of a 49-percent interest in Yara Pilbara Holdings Pty Limited (YPHPL, formerly Burrup Holdings Limited) for $439 million, including working capital adjustments. The transaction was funded with debt. YPHPL is the owner of an ammonia 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 YPHPL and operates the plant. In addition, Apache also acquired an interest in a planned technical ammonia nitrate plant to be developed with Yara. The investment in YPHPL 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. 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, but no later than one year from the acquisition date.

 

7


      (In millions)  

Current assets

   $ 208  

Proved properties

     2,341  

Unproved properties

     476  

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.

 

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. Apache manages the variability in its 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 September 30, 2012, Apache had derivative positions with 17 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 September 30, 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

     941      $ 74.32        2,808      $ 77.66      $ 103.08  

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 31 percent of 2012 collars and 58 percent of 2013 collars are settled against Dated Brent.

 

8


As of September 30, 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      11,386        —         $ 6.24        5,520        —         $ 5.54      $ 7.30  
2012      —           11,040      C$ 6.61        —           1,840      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.

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. For additional information regarding fair value measurements, please see Note 11—Fair Value Measurements of our Annual Report on Form 10-K for the year ended December 31, 2011.

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

 

     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)  

September 30, 2012

                

Assets:

                

Commodity Derivative Instruments

   $ —         $ 138      $ —         $ 138      $ (28   $ 110  

Liabilities:

                

Commodity Derivative Instruments

     —           87        —           87        (28     59  

December 31, 2011

                

Assets:

                

Commodity Derivative Instruments

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

Liabilities:

                

Commodity Derivative Instruments

     —           250        —           250        (96     154  

 

(1)

The derivative fair values 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:

 

     September 30,
2012
     December 31,
2011
 
     (In millions)  

Current Assets: Derivative instruments

   $ 104      $ 304  

Other Assets: Deferred charges and other

     6        28  
  

 

 

    

 

 

 

Total Assets

   $ 110      $ 332  
  

 

 

    

 

 

 

Current Liabilities: Derivative instruments

   $ 56      $ 113  

Noncurrent Liabilities: Other

     3        41  
  

 

 

    

 

 

 

Total Liabilities

   $ 59      $ 154  
  

 

 

    

 

 

 

 

9


Derivative Activity Recorded in 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
September 30,
     For the Nine Months
Ended
September 30,
 
      2012      2011      2012      2011  
          (In millions)  

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

   Oil and Gas Production Revenues    $ 83      $ 11      $ 202      $ (36

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

   Revenues and Other: Other    $ 1      $ 15      $ 1      $ 16  

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 Nine Months Ended September 30,  
     2012     2011  
     Before
tax
    After
tax
    Before
tax
    After
tax
 
     (In millions)  

Unrealized gain (loss) on derivatives at beginning of period

   $ 145     $ 113     $ (54   $ (19

Realized amounts reclassified into earnings

     (202     (151     36       32  

Net change in derivative fair value

     97       71       304       181  

Ineffectiveness reclassified into earnings

     (1     —          (16     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain on derivatives at end of period

   $ 39     $ 33     $ 270     $ 184  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 income as of September 30, 2012, is a net gain of approximately $37 million ($31 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.

 

10


4. OTHER CURRENT LIABILITIES

The following table provides detail of our other current liabilities:

 

     September 30,
2012
     December 31,
2011
 
     (In millions)  

Accrued operating expenses

   $ 201      $ 221  

Accrued exploration and development

     1,668        1,430  

Accrued compensation and benefits

     167        180  

Accrued interest

     132        143  

Accrued income taxes

     399        533  

Accrued United Kingdom Petroleum Revenue Tax

     46        284  

Other

     186        133  
  

 

 

    

 

 

 

Total Other current liabilities

   $ 2,799      $ 2,924  
  

 

 

    

 

 

 

 

5. ASSET RETIREMENT OBLIGATION

The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the nine-month period ended September 30, 2012:

 

     (In millions)  

Asset retirement obligation at December 31, 2011

   $ 3,887  

Liabilities incurred

     383  

Liabilities acquired

     33  

Liabilities settled

     (418

Accretion expense

     172  

Revisions in estimated liabilities

     171  
  

 

 

 

Asset retirement obligation at September 30, 2012

     4,228  

Less current portion

     (434
  

 

 

 

Asset retirement obligation, long-term

   $ 3,794  
  

 

 

 

 

6. DEBT AND FINANCING COSTS

The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt:

 

     September 30, 2012      December 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (In millions)  

Money market lines of credit

   $ 64      $ 64      $ 31      $ 31  

Commercial paper

     1,792        1,792        —           —     

Notes and debentures

     9,778        11,705        7,185        8,673  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt

   $ 11,634      $ 13,561      $ 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 September 30, 2012, current debt included $500 million 5.25-percent notes and $400 million 6.00-percent notes due within the next 12 months and $64 million borrowed on uncommitted overdraft lines in Argentina. As of December 31, 2011, there was $31 million drawn on uncommitted overdraft lines in Argentina and $400 million 6.25-percent notes outstanding that were subsequently repaid in April 2012.

 

11


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 that matured on April 15, 2012, and for general corporate purposes.

On June 4, 2012, the Company entered into a new Global Credit Facility consisting of a $1.7 billion revolving syndicated bank credit facility for the U.S., a $300 million revolving syndicated bank credit facility for Australia, and a $300 million revolving syndicated bank credit facility for Canada, which replaced the Company’s existing syndicated bank credit facilities that were scheduled to mature in May 2013. The new facilities are scheduled to mature on June 4, 2017. There were no changes to the Company’s $1.0 billion U.S. credit facility that matures on August 12, 2016.

The terms of the new credit facilities are substantially similar to those in Apache’s $1.0 billion revolving credit facility dated August 12, 2011. The facilities will be used for general corporate purposes.

In June 2012, the Company increased the size of its commercial paper program to $3.0 billion. The commercial paper program is fully supported by available borrowing capacity under committed credit facilities, which expire in 2016 and 2017. As of September 30, 2012, the Company had $1.8 billion in commercial paper outstanding, compared with no outstanding commercial paper as of December 31, 2011.

Financing Costs

Financing costs incurred during the periods comprised the following:

 

     For the Quarter  Ended
September 30,
    For the Nine Months  Ended
September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Interest expense

   $ 132     $ 109     $ 371     $ 326  

Amortization of deferred loan costs

     2       1       5       4  

Capitalized interest

     (90     (69     (241     (193

Interest income

     (4     (4     (10     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing costs, net

   $ 40     $ 37     $ 125     $ 123  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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, $641 million, and $721 million non-cash write-down of its Canadian proved oil and gas properties as a discrete item in the first, second, and third quarters of 2012, respectively.

As a part of the increase in the corporate income tax rate on North Sea oil and gas profits from 50 percent to 62 percent announced in March 2011, the U.K. government also proposed that the corporation income tax relief attributable to decommissioning expenditures in the North Sea remain at 50 percent. The related legislation concerning decommissioning expenditures was then introduced in Finance Bill 2012 and was enacted on July 17, 2012, upon receiving Royal Assent. As a result of this enacted legislation, the Company recorded a discrete non-recurring tax charge of $118 million in the third 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 years. 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.

 

12


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 $20 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, results of operations, or liquidity after consideration of recorded accruals. For material matters that Apache believes an unfavorable outcome is reasonably possible, the Company has disclosed the nature of the matter and a range of potential exposure, unless an estimate cannot be made at this time. 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, results of operations, or liquidity.

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. The plaintiff in that case, known as ASSUPA, has recently asserted similar lawsuits and claims against numerous oil and gas producers relating to other geographic areas of Argentina, including claims against a Company subsidiary relating to the Austral Basin. While it is possible that the Company subsidiary may incur liabilities related to these claims, no reasonable prediction can be made as the Company subsidiary’s overall exposure related to these claims is not currently determinable. No other 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. In the Foster case, on August 20, 2012, the United States District Court for the Western District of Oklahoma denied plaintiff’s motion for class certification. The plaintiff has filed a motion for reconsideration, which is pending. In the Holder case, following a class certification hearing in the United States District Court for the Southern District of Texas, the parties resolved the matter with no material impact on the Company’s financial position, results of operations, or liquidity, and with the settlement providing for denial of class certification and dismissal of the case.

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 captioned Ardoin Limited Partnership et al. v. Meridian Resources & Exploration et al., Case No. 10-18692, in the District Court of Cameron Parish, Louisiana, prior to trial the court granted Apache’s motions to dismiss the plaintiffs’ claims against Apache. Plaintiffs then settled with the other defendant in the case, BP America, Inc. (BP). BP has demanded that Apache indemnify it for the amount of its settlement with plaintiffs, which is not material to Apache. Apache has rejected BP’s indemnity claim and, further, Apache has demanded that Wagner Oil Company (which purchased Apache’s interest in the subject property) indemnify Apache from and against BP’s claim.

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.

 

13


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 June 2009 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, was published by the State government on May 24, 2012. Company subsidiaries disagree with the inspectors’ June 2009 conclusions. Two other government reports were not published by the State and are not referenced by the inspectors. The Magistrates Court of Western Australia subsequently ordered that both such reports could be released on the basis that the inspectors’ June 2009 report “came with some limitations” and the two other government reports “together were part and parcel if not the main reason or the only reason…certainly a significant contribution to the reason for the matter not proceeding to prosecution and trial.” In the first such report, the State’s senior investigator said in February 2009 that the prospects of a successful prosecution of Apache for failing to maintain the pipeline “would be slight.” In the second such report, the State’s lead corrosion expert concluded in July 2011 that Apache “had reasonable grounds to believe that the pipeline was in good repair” prior to the explosion.

 

   

In the case captioned Alcoa of Australia Limited v. Apache Energy Limited, Apache Northwest Pty Ltd, Tap (Harriet) Pty Ltd, and Kufpec Australia Pty Ltd, Civ. 1481 of 2011, in the Supreme Court of Western Australia, on June 20, 2012, the Supreme Court struck out Alcoa’s claim that the liquidated damages provisions under two long-term contracts are unenforceable as a penalty and also struck out Alcoa’s claim for damages for breach of statutory duty. The Company subsidiaries have filed an appeal in the Supreme Court of Western Australia Court of Appeal asking that Alcoa’s remaining tort claim for economic loss be dismissed or, alternatively, struck out. The appeal is pending.

 

   

In the case captioned Burrup Fertilisers Pty Ltd v. Apache Corporation, Apache Energy Limited, and Apache Northwest Pty Ltd, Cause No. 2009-79834, in the District Court of Harris County, Texas, Apache Corporation has filed a motion to dismiss on the ground of forum non conveniens, which is pending.

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. On September 27, 2012, the court dismissed plaintiffs’ claims on various grounds, including for failure to state a claim upon which relief may be granted, while granting plaintiffs leave to amend their complaint within 30 days. On October 29, 2012, the plaintiffs filed an amended complaint. 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.

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.

 

14


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 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. Apache Corporation has filed a motion to dismiss on the ground of forum non conveniens, which is pending. 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.

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 add Apache Fertilisers Pty Ltd as a defendant.

Concerning the action filed by Tap (Harriet) Pty Ltd (Tap) against Burrup Fertilisers Pty Ltd et al., Civ. 2329 of 2009, in the Supreme Court of Western Australia, 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, a Company subsidiary purchased Tap, which then modified its agreement to supply gas to the ammonia plant and resolved both Tap’s claims against Burrup Fertilisers and Burrup Fertilisers’ counterclaims against Tap in the Tap action.

Environmental Matters

As of September 30, 2012, the Company had an undiscounted reserve for environmental remediation of approximately $102 million. The Company is not aware of any environmental claims existing as of September 30, 2012, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity. 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. 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. The parties have resolved the matter on commercial terms with no material impact on the Company’s financial position, results of operations, or liquidity.

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 after evacuating the platform. 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, which acquired Mariner, effective November 10, 2010, filed an appeal on August 31, 2012, contesting several of the Incidents of Non-Compliance. 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.

 

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 and nine-month periods ended September 30, 2012 and 2011 is presented in the table below.

 

15


     For the Quarter Ended September 30,  
     2012      2011  
     Income      Shares      Per Share      Income      Shares      Per Share  
     (In millions, except per share amounts)  

Basic:

                 

Income attributable to common stock

   $ 161        391      $ 0.41      $ 983        384      $ 2.56  
        

 

 

          

 

 

 

Effect of Dilutive Securities:

                 

Mandatory Convertible Preferred Stock

     —           —              19        14     

Stock options and other

     —           2           —           2     
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted:

                 

Income attributable to common stock, including assumed conversions

   $ 161        393      $ 0.41      $ 1,002        400      $ 2.50  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30,  
     2012      2011  
     Income      Shares      Per Share      Income      Shares      Per Share  
     (In millions, except per share amounts)  

Basic:

                 

Income attributable to common stock

   $ 1,276        388      $ 3.29      $ 3,338        384      $ 8.70  
        

 

 

          

 

 

 

Effect of Dilutive Securities:

                 

Mandatory Convertible Preferred Stock

     —           —              57        14     

Stock options and other

     —           2           —           2     
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted:

                 

Income attributable to common stock, including assumed conversions

   $ 1,276        390      $ 3.27      $ 3,395        400      $ 8.49  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 5.1 million and 3.3 million for the quarters ending September 30, 2012 and 2011, and 4.1 million and 2.4 million for the nine months ended September 30, 2012 and 2011, respectively. For the quarter and nine months ended September 30, 2012, 14.3 million shares related to the assumed conversion of the Mandatory Convertible Preferred Stock were also anti-dilutive.

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

For the quarter and nine months ended September 30, 2012, Apache paid $67 million and $189 million, respectively, in dividends on its common stock. For the quarter and nine months ended September 30, 2011, Apache paid $58 million and $173 million, respectively, in dividends on its common stock.

For the quarter and nine months ended September 30, 2012, Apache paid $19 million and $57 million, respectively, in dividends on its Series D Preferred Stock. For the quarter and nine months ended September 30, 2011, Apache paid $19 million and $57 million, respectively, in dividends on its Series D Preferred Stock.

 

16


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 September 30, 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      North Sea      Argentina      Other
International
    Total  
     (In millions)  

For the Quarter Ended
September 30, 2012

                     

Oil and Gas Production Revenues

   $ 1,533      $ 318     $ 1,143      $ 397      $ 624      $ 126      $ —        $ 4,141  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating Income (Loss) (1)

   $ 495      $ (744   $ 781      $ 231      $ 236      $ 6      $ (7   $ 998  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Other Income (Expense):

                     

Other

                        38  

General and administrative

                        (124

Merger, acquisitions & transition

                        (7

Financing costs, net

                        (40
                     

 

 

 

Income Before Income Taxes

                      $ 865  
                     

 

 

 

For the Nine Months Ended
September 30, 2012

                     

Oil and Gas Production Revenues

   $ 4,525      $ 966     $ 3,403      $ 1,211      $ 2,060      $ 389      $ —        $ 12,554  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating Income (Loss) (1)

   $ 1,692      $ (1,903   $ 2,380      $ 683      $ 752      $ 51      $ (14   $ 3,641  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Other Income (Expense):

                     

Other

                        133  

General and administrative

                        (384

Merger, acquisitions & transition

                        (29

Financing costs, net

                        (125
                     

 

 

 

Income Before Income Taxes

                      $ 3,236  
                     

 

 

 

Total Assets

   $ 29,786      $ 7,349     $ 7,208      $ 5,876      $ 6,581      $ 1,823      $ 187     $ 58,810  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

For the Quarter Ended
September 30, 2011

                     

Oil and Gas Production Revenues

   $ 1,548      $ 388     $ 1,214      $ 461      $ 547      $ 124      $ —        $ 4,282  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating Income (Loss)(1)

   $ 718      $ 81     $ 893      $ 288      $ 222      $ 19      $ (20   $ 2,201  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Other Income (Expense):

                     

Other

                        46  

General and administrative

                        (112

Merger, acquisitions & transition

                        (4

Financing costs, net

                        (37
                     

 

 

 

Income Before Income Taxes

                      $ 2,094  
                     

 

 

 

For the Nine Months Ended
September 30, 2011

                     

Oil and Gas Production Revenues

   $ 4,485      $ 1,223     $ 3,615      $ 1,303      $ 1,549      $ 340      $ —        $ 12,515  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating Income (Loss) (1)

   $ 2,086      $ 264     $ 2,679      $ 823      $ 685      $ 50      $ (46   $ 6,541  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Other Income (Expense):

                     

Other

                        76  

General and administrative

                        (327

Merger, acquisitions & transition

                        (15

Financing costs, net

                        (123
                     

 

 

 

Income Before Income Taxes

                      $ 6,152  
                     

 

 

 

Total Assets

   $ 23,039      $ 8,443     $ 6,574      $ 4,446      $ 3,166      $ 1,732      $ 82     $ 47,482  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 three and nine months ended September 30, 2012, includes additional depletion of $721 million and $1.9 billion, respectively, to write-down the carrying value of oil and gas properties.

 

17


11. SUPPLEMENTAL GUARANTOR INFORMATION

In December 1999, Apache Finance Canada Corporation (Apache Finance Canada) issued approximately $300 million of publicly-traded notes due in 2029. In May 2003, Apache Finance Canada issued an additional $350 million of publicly-traded notes due in 2015. Both 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.

 

18


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended September 30, 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

   $ 1,030      $ —        $ 3,111      $ —        $ 4,141  

Equity in net income (loss) of affiliates

     41        (271     71        159       —     

Other

     —           18       21        (1     38  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     1,071        (253     3,203        158       4,179  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING EXPENSES:

            

Depreciation, depletion and amortization

     349        —          1,680        —          2,029  

Asset retirement obligation accretion

     20        —          40        —          60  

Lease operating expenses

     277        —          524        —          801  

Gathering and transportation

     15        —          71        —          86  

Taxes other than income

     52        —          115        —          167  

General and administrative

     97        —          28        (1     124  

Merger, acquisitions & transition

     7        —          —           —          7  

Financing costs, net

     20        14       6        —          40  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     837        14       2,464        (1     3,314  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     234        (267     739        159       865  

Provision (benefit) for income taxes

     54        (67     698        —          685  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS)

     180        (200     41        159       180  

Preferred stock dividends

     19        —          —           —          19  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 161      $ (200   $ 41      $ 159     $ 161  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 61      $ (200   $ 41      $ 159     $ 61  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

19


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended September 30, 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

   $ 1,097      $ —         $ 3,185     $ —        $ 4,282  

Equity in net income (loss) of affiliates

     821        188        65       (1,074     —     

Other

     18        148        (119     (1     46  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     1,936        336        3,131       (1,075     4,328  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

            

Depreciation, depletion and amortization

     323        —           742       —          1,065  

Asset retirement obligation accretion

     18        —           21       —          39  

Lease operating expenses

     199        —           462       —          661  

Gathering and transportation

     13        —           59       —          72  

Taxes other than income

     49        —           195       —          244  

General and administrative

     86        —           27       (1     112  

Merger, acquisitions & transition

     3        —           1       —          4  

Financing costs, net

     33        14        (10     —          37  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     724        14        1,497       (1     2,234  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     1,212        322        1,634       (1,074     2,094  

Provision (benefit) for income taxes

     210        69        813       —          1,092  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     1,002        253        821       (1,074     1,002  

Preferred stock dividends

     19        —           —          —          19  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 983      $ 253      $ 821     $ (1,074   $ 983  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 1,245      $ 253      $ 821     $ (1,074   $ 1,245  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

20


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 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

   $ 3,070     $ —        $ 9,484      $ —        $ 12,554  

Equity in net income (loss) of affiliates

     813       (672     176        (317     —     

Other

     (1     52       85        (3     133  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     3,882       (620     9,745        (320     12,687  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING EXPENSES:

           

Depreciation, depletion and amortization

     997       —          4,704        —          5,701  

Asset retirement obligation accretion

     57       —          115        —          172  

Lease operating expenses

     708       —          1,470        —          2,178  

Gathering and transportation

     38       —          197        —          235  

Taxes other than income

     146       —          481        —          627  

General and administrative

     302       —          85        (3     384  

Merger, acquisitions & transition

     23       —          6        —          29  

Financing costs, net

     71       42       12        —          125  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     2,342       42       7,070        (3     9,451  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     1,540       (662     2,675        (317     3,236  

Provision (benefit) for income taxes

     207       (166     1,862        —          1,903  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS)

     1,333       (496     813        (317     1,333  

Preferred stock dividends

     57       —          —           —          57  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 1,276     $ (496   $ 813      $ (317   $ 1,276  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 1,196     $ (496   $ 813      $ (317   $ 1,196  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

21


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2011

 

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

REVENUES AND OTHER:

            

Oil and gas production revenues

   $ 3,230      $ —         $ 9,285     $ —        $ 12,515  

Equity in net income (loss) of affiliates

     2,687        163        17       (2,867     —     

Other

     23        109        (53     (3     76  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     5,940        272        9,249       (2,870     12,591  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

            

Depreciation, depletion and amortization

     938        —           2,092       —          3,030  

Asset retirement obligation accretion

     52        —           62       —          114  

Lease operating expenses

     603        —           1,343       —          1,946  

Gathering and transportation

     37        —           184       —          221  

Taxes other than income

     140        —           523       —          663  

General and administrative

     262        —           68       (3     327  

Merger, acquisitions & transition

     10        —           5       —          15  

Financing costs, net

     104        42        (23     —          123  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,146        42        4,254       (3     6,439  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     3,794        230        4,995       (2,867     6,152  

Provision (benefit) for income taxes

     399        50        2,308       —          2,757  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     3,395        180        2,687       (2,867     3,395  

Preferred stock dividends

     57        —           —          —          57  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 3,338      $ 180      $ 2,687     $ (2,867   $ 3,338  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK

   $ 3,541      $ 180      $ 2,687     $ (2,867   $ 3,541  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

22


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2012

 

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

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 1,755     $ (86   $ 4,753     $ —        $ 6,422  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Additions to oil and gas property

     (2,330     —          (4,057     —          (6,387

Additions to gas gathering, transmission and processing facilities

     (28     —          (558     —          (586

Acquisition of Cordillera

     (2,666     —          —          —          (2,666

Equity investment in Yara Pilbara Holdings Pty Limited

     —          —          (439     —          (439

Acquisitions, other

     (56     —          (66     —          (122

Proceeds from sale of oil and gas properties

     20       —          6       —          26  

Investment in subsidiaries, net

     (541     —          —          541       —     

Other

     (340     —          (46     —          (386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (5,941     —          (5,160     541       (10,560
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Commercial paper, credit facility and bank notes, net

     1,792       —          35       —          1,827  

Intercompany borrowings

     —          —          572       (572     —     

Fixed rate debt borrowings

     2,991       —          —          —          2,991  

Payments on fixed rate debt

     (400     —          —          —          (400

Dividends paid

     (246     —          —          —          (246

Other

     40       82       (164     31       (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     4,177       82       443       (541     4,161  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (9     (4     36       —          23  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     41       5       249       —          295  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 32     $ 1     $ 285     $ —        $ 318  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2011

 

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

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 1,573     $ (34   $ 5,632     $ —        $ 7,171  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Additions to oil and gas property

     (1,280     —          (3,478     —          (4,758

Additions to gas gathering, transmission and processing facilities

     —          —          (472     —          (472

Acquisitions, other

     (416     —          (93     —          (509

Proceeds from sales of oil and gas properties

     6       —          196       —          202  

Investment in subsidiaries, net

     1,256       —          —          (1,256     —     

Other

     (65     —          (24     —          (89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (499     —          (3,871     (1,256     (5,626
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Commercial paper, credit facility and bank notes, net

     (928     —          (12     —          (940

Intercompany borrowings

     —          (1     (1,248     1,249       —     

Dividends paid

     (230     —          —          —          (230

Other

     97        35        (62     7        77   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (1,061     34       (1,322     1,256       (1,093
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     13       —          439       —          452  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     6       —          128       —          134  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 19     $ —        $ 567     $ —        $ 586  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2012

 

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

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 31      $ 1      $ 286     $ —        $ 318  

Receivables, net of allowance

     799        —           2,177       —          2,976  

Inventories

     73        —           701       —          774  

Drilling advances

     17        1        555       —          573  

Derivative instruments

     54        —           50       —          104  

Prepaid assets and other

     3,904        —           (3,605     —          299  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,878        2        164       —          5,044  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, NET

     17,720        —           33,444       —          51,164  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

OTHER ASSETS:

            

Intercompany receivable, net

     4,504        —           (2,361     (2,143     —     

Equity in affiliates

     20,761        741        89       (21,591     —     

Goodwill, net

     —           —           1,114       —          1,114  

Deferred charges and other

     179        1,002        1,307       (1,000     1,488  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 48,042      $ 1,745      $ 33,757     $ (24,734   $ 58,810  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY             

CURRENT LIABILITIES:

            

Accounts payable

   $ 670      $ 1      $ 2,609     $ (2,143   $ 1,137  

Current debt

     899        —           65       —          964  

Asset retirement obligation

     434        —           —          —          434  

Derivative instruments

     20        —           36       —          56  

Other current liabilities

     793        12        1,994       —          2,799  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,816        13        4,704       (2,143     5,390  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LONG-TERM DEBT

     10,022        647        1       —          10,670  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:

            

Income taxes

     2,878        5        4,719       —          7,602  

Asset retirement obligation

     1,006        —           2,788       —          3,794  

Other

     606        250        784       (1,000     640  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,490        255        8,291       (1,000     12,036  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY

     30,714        830        20,761       (21,591     30,714  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 48,042      $ 1,745      $ 33,757     $ (24,734   $ 58,810  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

25


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  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

26


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 (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.

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

Throughout 2012, Apache’s results have been impacted by the significant fall in North American natural gas prices compared to the prior year. However, our overall results continue to be supported by our strategy to maintain a portfolio balanced across crude oil and natural gas in North American and international markets. Our projects balance the spectrum of geologic types and risks in a variety of geographies. This allows us to redeploy capital dollars to parts of our portfolio that offer higher investment returns while reducing capital projects better deferred in today’s environment. We have invested $2.9 billion and $7.8 billion for exploration and development activities in the third quarter and first nine months of 2012, respectively, and will continue to review our capital program and spending levels in order to maintain our rate of return focus and manage our balance sheet.

Earnings totaled $161 million, or $0.41 per diluted common share, in the third quarter of 2012, compared with $983 million, or $2.50 per diluted share, in the third quarter of 2011. Earnings for the first nine months of 2012 totaled $1.3 billion, or $3.27 per diluted share. These earnings reflect the impact of non-cash after-tax write-downs of the carrying value of our Canadian proved oil and gas properties totaling $390 million, $480 million, and $539 million in the first, second, and third quarters of 2012, respectively. For additional discussion on these write-downs, refer to “Results of Operations—Depreciation, Depletion and Amortization” in this Item 2.

Apache’s adjusted earnings, which exclude certain items impacting the comparability of results, were $861 million in the third quarter of 2012, down from $1.2 billion in the prior-year quarter, and $2.9 billion for the first nine months of 2012, down from $3.5 billion in the prior-year comparative period. 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.

Total daily production of oil, natural gas, and natural gas liquids averaged 771 thousand barrels of oil equivalent per day (Mboe/d) in the third quarter of 2012, up two percent compared with the third quarter of 2011. Increased production in the quarter was tempered by downtime resulting from Hurricane Isaac in the Gulf of Mexico and planned turnaround activities and downhole pump issues in the North Sea, which reduced third quarter production approximately 25 Mboe/d. Although production was higher than the prior-year quarter, oil and gas production revenues decreased three percent from the prior-year quarter to $4.1 billion on a 15-percent decline in natural gas realizations, partially offset by a one-percent rise in crude oil realizations.

Natural gas price realizations in North America have fallen 27 percent since the third quarter of 2011, and we believe weak natural gas prices in North America will continue to pressure gas revenues for the remainder of the year. Our natural gas production outside of North America, where third-quarter 2012 prices averaged 13 percent higher than the comparative 2011 quarter, boosted worldwide natural gas realizations. Over one-third of our natural gas is produced outside of North America, which emphasizes the benefit of having a balanced geographic base.

Third-quarter 2012 worldwide crude oil prices rose one percent from the prior-year quarter. Crude oil and liquids combined represented 51 percent of our production but provided 81 percent of our $4.1 billion of oil and gas revenues. Crude oil drove 87 percent of our combined crude and liquids production and 96 percent of the related revenues.

Operational Developments

Apache has a significant producing asset base as well as large undeveloped acreage positions that provide a platform for organic growth through sustainable lower-risk drilling opportunities, balanced by higher-risk, higher-reward exploration. With an inventory of more than 67,000 future drilling locations identified in the onshore United States alone, we are well positioned to grow through an

 

27


active drilling program in the coming years as we shift our drilling and exploration focus to targeting oil and liquids-rich gas plays. We are also continuing to advance several longer-term, individually significant development projects. Notable operational developments include:

United States

 

   

For the third quarter of 2012, our Permian region’s active drilling program continues to set new highs for net production, reaching 112 Mboe/d, up 18 percent from the prior-year quarter. Over 70 percent of this production was from crude oil and natural gas liquids (NGL).

 

   

The Central region also saw record production in the third quarter as we ramp up activity across our nearly two million gross acres. Production was up 55 percent relative to the prior-year quarter as we realized the benefits of our active oil and liquids-rich drilling program and a full quarter of Cordillera production. During the quarter we operated an average of 24 drilling rigs, drilling 40 wells with 100 percent success.

 

   

On October 3, 2012, Apache announced that our Gulf of Mexico (GOM) production facilities were back online following suspended operations due to Hurricane Isaac. GOM production was deferred for six weeks in August and September, impacting third-quarter volumes from our Deepwater, Shelf, and Gulf Coast Onshore regions by an estimated 13 Mboe/d for the full quarter.

North Sea

 

   

In September 2012, Apache announced that a Beryl field development well test-flowed at 8,161 barrels of oil per day (b/d) and 5.9 million cubic feet of natural gas per day (MMcf/d). The well contained 71 feet of net oil pay and began producing at the end of August. The well also encountered 245 feet of net pay in three additional zones that will be produced at a later date. A 3-D seismic survey of the Beryl field commenced in early August and, when completed, will further refine our drilling plans for these recently acquired assets. Apache has a 50-percent interest in the field.

 

   

Apache announced that the jacket for the Forties Alpha Satellite Platform was installed in September 2012, with a fully commissioned topside and bridge scheduled to be delivered during the second quarter of 2013. Once complete, the platform will provide Apache with full-fluid processing and contain 18 new production well slots that will facilitate additional drilling in the field beginning in the third quarter of 2013. With this platform, we will continue to develop the Forties field that was forecasted by the previous operator to cease production this year.

 

   

On October 3, 2012, Apache announced that North Sea production has recovered following platform maintenance activities completed during the third quarter. These planned turnarounds and continued downhole pump issues deferred nearly 12 Mboe/d during the period.

 

   

On November 1, 2012, Apache announced that the U.K. Department of Energy & Climate Change awarded 11 new North Sea licenses to Apache. The Company was also awarded an interest in another non-operated license. These awards cover 19 full or partial blocks (approximately 613,000 gross acres). Included in these blocks is all of the available acreage around our Beryl field plus two key licenses near the Forties field.

Australia

 

   

In October 2012, an Apache subsidiary announced that three major contracts with a total value of AUD$325 million net to Apache have been awarded for the development of the Julimar subsea facilities. Gas from the Julimar Development Project (JDP) will feed into the Wheatstone LNG project. Apache has a 65-percent interest in the JDP and is the operator. Apache has a 13-percent interest in the Chevron-operated Wheatstone project. The value of the contracts were within budgetary expectations and represented the final significant subsea contracts to be awarded for the JDP.

 

   

Also in October 2012, a planned three-week maintenance turnaround at the Yara Australia Pty Ltd (Yara) operated ammonia plant on the Burrup Peninsula of Western Australia was extended to nine weeks, the result of an unforeseen equipment problem. Yara expects production at the Burrup plant to resume in the second half of November 2012.

Egypt

 

   

During the quarter, the Company’s operations continued unabated with an average of 26 rigs in Egypt, drilling 68 wells during the period, including 11 exploratory wells. In addition, during the quarter we experienced faster government approvals of development leases as compared to the prior year, where we experienced delays of nine months or more. Our exploration efforts made several discoveries, continuing recent successes identifying opportunities in deeper drilling horizons.

 

28


   

In October 2012, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, announced that it is providing reinsurance for the Overseas Private Investment Corporation’s (OPIC) political risk insurance policy to Apache Corporation and its subsidiaries for oil and gas sector investments in Egypt. This provision of long-term reinsurance to OPIC will allow Apache to maintain the level of insurance coverage that has been in place since 2004. MIGA is providing $150 million to OPIC for its $300 million coverage to Apache. The reinsurance will be provided for an additional 13 years against the risks of expropriation and breach of contract.

New Ventures

 

   

In September 2012, Apache announced that the Mbawa 1 offshore exploration well in Kenya encountered natural gas. The well encountered 170 feet of natural gas pay in three zones; however, no oil was encountered. Apache and its partners in the Kenya L8 Joint Venture are analyzing the well data to determine the potential for future exploration activities. Apache has a 50-percent interest in the Mbawa well and Block L8 and is the operator.

 

   

On October 18, 2012, Apache signed a production sharing contract with Staatsolie Maatschappij Suriname NV (Staatsolie) for block 53 off the northwest coast of Suriname. The contract offers Staatsolie the opportunity to purchase a stake in the development phase of up to 20 percent. Under the agreement, if a commercial find is made and brought into production, Apache will receive reimbursement for exploration phase costs. The two-phase exploration period under the contract includes an investment by Apache of approximately $230 million and drilling at least two wells.

 

29


Results of Operations

Oil and Gas Revenues

 

     For the Quarter Ended September 30,     For the Nine Months Ended September 30,  
     2012     2011     2012     2011  
     $      %     $      %     $      %     $      %  
     Value      Contribution     Value      Contribution     Value      Contribution     Value      Contribution  
     ($ in millions)  

Total Oil Revenues:

                    

United States

   $ 1,143        35   $ 1,040        33   $ 3,409        35   $ 3,008        32

Canada

     115        4     105        3     361        3     355        4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

North America

     1,258        39     1,145        36     3,770        38     3,363        36
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     1,021        32     1,054        33     3,028        31     3,149        34

Australia

     303        9     411        12     947        10     1,167        12

North Sea

     571        18     542        17     1,876        19     1,535        16

Argentina

     67        2     60        2     203        2     170        2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

     1,962        61     2,067        64     6,054        62     6,021        64
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total(1)

   $ 3,220        100   $ 3,212        100   $ 9,824        100   $ 9,384        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Gas Revenues:

                    

United States

   $ 288        36   $ 399        43   $ 837        36   $ 1,185        43

Canada

     186        24     256        28     547        23     792        29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

North America

     474        60     655        71     1,384        59     1,977        72
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     122        15     159        17     375        16     464        17

Australia

     94        12     50        5     264        11     136        5

North Sea

     44        6     5        1     148        7     14        1

Argentina

     54        7     57        6     168        7     147        5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

     314        40     271        29     955        41     761        28
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total(2)

   $ 788        100   $ 926        100   $ 2,339        100   $ 2,738        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Natural Gas Liquids (NGL)

                    

Revenues:

                    

United States

   $ 102        76   $ 109        75   $ 279        71   $ 292        74

Canada

     17        13     27        19     58        15     76        19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

North America

     119        89     136        94     337        86     368        93
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     —           —          1        1     —           0     2        1

North Sea

     9        7     —           —          36        9     —           —     

Argentina

     5        4     7        5     18        5     23        6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

     14        11     8        6     54        14     25        7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 133        100   $ 144        100   $ 391        100   $ 393        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Oil and Gas Revenues:

                    

United States

   $ 1,533        37   $ 1,548        36   $ 4,525        36   $ 4,485        36

Canada

     318        8     388        9     966        8     1,223        10
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

North America

     1,851        45     1,936        45     5,491        44     5,708        46
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Egypt

     1,143        28     1,214        28     3,403        27     3,615        29

Australia

     397        9     461        11     1,211        10     1,303        10

North Sea

     624        15     547        13     2,060        16     1,549        12

Argentina

     126        3     124        3     389        3     340        3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

     2,290        55     2,346        55     7,063        56     6,807        54
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,141        100   $ 4,282        100   $ 12,554        100   $ 12,515        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Financial derivative hedging activities decreased oil revenues $22 million and $126 million for the 2012 third quarter and nine-month period, respectively, and $82 million and $301 million for the 2011 third quarter and nine-month period, respectively.

(2) 

Financial derivative hedging activities increased natural gas revenues $105 million and $328 million for the 2012 third quarter and nine-month period, respectively, and $65 million and $190 million for the 2011 third quarter and nine-month period, respectively.

 

30


Production

 

     For the Quarter Ended September 30,     For the Nine Months Ended September 30,  
                  Increase                   Increase  
     2012      2011     (Decrease)     2012      2011      (Decrease)  

Oil Volume – b/d:

               

United States

     133,001        120,353       11     128,884        117,135        10

Canada

     15,075        13,027       16     15,311        14,040        9
  

 

 

    

 

 

     

 

 

    

 

 

    

North America

     148,076        133,380       11     144,195        131,175        10
  

 

 

    

 

 

     

 

 

    

 

 

    

Egypt

     97,546        103,289       (6 %)      98,648        103,913        (5 %) 

Australia

     28,191        39,400       (28 %)      29,690        38,248        (22 %) 

North Sea

     57,296        57,838       (1 %)      63,058        54,097        17

Argentina

     9,885        9,461       4     9,701        9,577        1
  

 

 

    

 

 

     

 

 

    

 

 

    

International

     192,918        209,988       (8 %)      201,097        205,835        (2 %) 
  

 

 

    

 

 

     

 

 

    

 

 

    

Total(1)

     340,994        343,368       (1 %)      345,292        337,010        2
  

 

 

    

 

 

     

 

 

    

 

 

    

Natural Gas Volume – Mcf/d:

               

United States

     863,433        857,993       1     841,859        865,474        (3 %) 

Canada

     604,442        619,897       (2 %)      617,530        633,031        (2 %) 
  

 

 

    

 

 

     

 

 

    

 

 

    

North America

     1,467,875        1,477,890       (1 %)      1,459,389        1,498,505        (3 %) 
  

 

 

    

 

 

     

 

 

    

 

 

    

Egypt

     329,793        376,259       (12 %)      354,856        368,898        (4 %) 

Australia

     215,317        187,852       15     217,053        183,470        18

North Sea

     54,478        2,497       NM        62,061        2,257        NM   

Argentina

     213,745        223,929       (5 %)      216,399        209,206        3
  

 

 

    

 

 

     

 

 

    

 

 

    

International

     813,333        790,537       3     850,369        763,831        11
  

 

 

    

 

 

     

 

 

    

 

 

    

Total(2)

     2,281,208        2,268,427       1     2,309,758        2,262,336        2
  

 

 

    

 

 

     

 

 

    

 

 

    

Natural Gas Liquids (NGL)

               

Volume – b/d:

               

United States

     39,076        21,919       78     30,385        21,001        45

Canada

     6,036        6,120       (1 %)      6,063        6,220        (3 %) 
  

 

 

    

 

 

     

 

 

    

 

 

    

North America

     45,112        28,039       61     36,448        27,221        34
  

 

 

    

 

 

     

 

 

    

 

 

    

Egypt

     —           (4     NM        —           66        NM   

North Sea

     1,470        14       NM        1,797        5        NM   

Argentina

     3,006        3,008       0     3,022        3,024        0
  

 

 

    

 

 

     

 

 

    

 

 

    

International

     4,476        3,018       48     4,819        3,095        56
  

 

 

    

 

 

     

 

 

    

 

 

    

Total

     49,588        31,057       60     41,267        30,316        36
  

 

 

    

 

 

     

 

 

    

 

 

    

BOE per day(3)

               

United States

     315,982        285,271       11     299,578        282,381        6

Canada

     121,851        122,463       0     124,296        125,765        (1 %) 
  

 

 

    

 

 

     

 

 

    

 

 

    

North America

     437,833        407,734       7     423,874        408,146        4
  

 

 

    

 

 

     

 

 

    

 

 

    

Egypt

     152,512        165,995       (8 %)      157,791        165,461        (5 %) 

Australia

     64,078        70,708       (9 %)      65,866        68,826        (4 %) 

North Sea

     67,845        58,269       16     75,198        54,478        38

Argentina

     48,515        49,790       (3 %)      48,790        47,471        3
  

 

 

    

 

 

     

 

 

    

 

 

    

International

     332,950        344,762       (3 %)      347,645        336,236        3
  

 

 

    

 

 

     

 

 

    

 

 

    

Total

     770,783        752,496       2     771,519        744,382        4
  

 

 

    

 

 

     

 

 

    

 

 

    

 

(1) 

Approximately 12 and 14 percent of worldwide oil production was subject to financial derivative hedges for the third quarter and nine-month period of 2012, respectively, and 28 and 29 percent for the comparative 2011 third quarter and nine-month periods, respectively.

(2) 

Approximately 13 percent of worldwide natural gas production was subject to financial derivative hedges for the third quarter and nine-month period of 2012, and 15 and 16 percent for the comparative 2011 third quarter and nine-month periods, respectively.

(3) 

The table shows production on a barrel of oil equivalent basis (boe) 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 price ratio between the two products.

NM – Not meaningful

 

31


Pricing

 

     For the Quarter Ended September 30,     For the Nine Months Ended September 30,  
     2012      2011      Increase
(Decrease)
    2012      2011      Increase
(Decrease)
 

Average Oil Price - Per barrel:

                

United States

   $ 93.38      $ 93.86        (1 %)    $ 96.53      $ 94.05        3

Canada

     82.92        88.34        (6 %)      85.96        92.77        (7 %) 

North America

     92.32        93.32        (1 %)      95.41        93.91        2

Egypt

     113.72        110.96        2     112.02        111.02        1

Australia

     116.79        113.40        3     116.39        111.78        4

North Sea

     108.44        101.85        6     108.60        103.90        5

Argentina

     73.44        69.27        6     76.36        65.08        17

International

     110.54        107.03        3     109.87        107.15        3

Total(1)

     102.62        101.71        1     103.83        102.00        2

Average Natural Gas Price - Per Mcf:

                

United States

   $ 3.63      $ 5.06        (28 %)    $ 3.63      $ 5.02        (28 %) 

Canada

     3.33        4.49        (26 %)      3.23        4.58        (29 %) 

North America

     3.51        4.82        (27 %)      3.46        4.83        (28 %) 

Egypt

     4.04        4.60        (12 %)      3.86        4.61        (16 %) 

Australia

     4.76        2.88        65     4.45        2.71        64

North Sea

     8.65        21.43        (60 %)      8.67        22.87        (62 %) 

Argentina

     2.78        2.74        1     2.84        2.57        11

International

     4.21        3.71        13     4.10        3.65        12

Total(2)

     3.76        4.44        (15 %)      3.70        4.43        (16 %) 

Average NGL Price - Per barrel:

                

United States

   $ 28.25      $ 54.36        (48 %)    $ 33.51      $ 51.03        (34 %) 

Canada

     31.01        46.93        (34 %)      35.02        44.47        (21 %) 

North America

     28.62        52.74        (46 %)      33.76        49.53        (32 %) 

Egypt

     —           —           NM        —           66.37        NM   

North Sea

     65.45        65.45        0     73.60        65.45        12

Argentina

     16.25        26.45        (39 %)      21.15        28.20        (25 %) 

International

     32.41        26.62        22     40.71        29.06        40

Total

     28.96        50.20        (42 %)      34.57        47.44        (27 %) 

 

(1) 

Reflects a per-barrel decrease of $0.71 and $1.33 from derivative activities for the 2012 third quarter and nine-month period, respectively, and a decrease of $2.58 and $3.27 from derivative activities for the comparative 2011 third quarter and nine-month period, respectively.

(2) 

Reflects a per-Mcf increase of $0.50 and $0.52 from derivative activities for the 2012 third quarter and nine-month period, respectively, and an increase of $0.31 from derivative activities for each of the comparative 2011 third quarter and nine-month period.

NM – Not meaningful

Third-Quarter 2012 compared to Third-Quarter 2011

Crude Oil Revenues Crude oil revenues for the third quarter of 2012 totaled $3.2 billion, an $8 million increase from the comparative 2011 quarter, primarily the result of a one-percent increase in average realized prices. Crude oil accounted for 78 percent of oil and gas production revenues and 44 percent of worldwide production in the third quarter of 2012. Higher realized prices increased third-quarter 2012 revenues by $30 million compared to the prior-year quarter, while lower production volumes reduced revenues by $22 million.

Crude oil prices realized in the third quarter of 2012 averaged $102.62 per barrel, compared with $101.71 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 premium to WTI-based prices. We are realizing these premium prices on approximately 70 percent of our crude oil production. Our Egypt, Australia and North Sea regions, which comprise approximately 54 percent of our worldwide oil production, receive International Dated Brent pricing with third-quarter 2012 oil realizations averaging $112.54 compared with third-quarter 2011 realizations of $108.81. Our Gulf Coast regions, which comprise 16 percent of our worldwide oil production, had price realizations averaging $104.49 per barrel, as compared to 2011 realizations of $105.74 per barrel.

Worldwide production decreased two thousand barrels of oil per day (Mb/d) from the third quarter of 2011 to 341 Mb/d in the third quarter of 2012, driven by decreased international production and partially offset by increased U.S. production. Australia production decreased 11 Mb/d as a result of natural decline from our Pyrenees and Van Gogh fields. Egypt gross production decreased four percent from the year-ago period on natural decline while net production was down six percent. North Sea production decreased 1 Mb/d, as volumes from the newly-acquired Beryl assets largely offset the impact of third-quarter maintenance and turnaround activities. In the U.S., production increased 11 percent on new drilling and recompletion activity as well as acquisitions. The Permian region was up 10 Mb/d on increased drilling activity, primarily in the Deadwood, Spraberry, and Wolfcamp plays. The Central region was up 9 Mb/d on production from properties added in the Cordillera acquisition. The GOM onshore and offshore regions were down 6 Mb/d on Hurricane Isaac downtime and natural decline.

 

32


Natural Gas Revenues Gas revenues for the third quarter of 2012 totaled $788 million, down 15 percent from the third quarter of 2011. A one-percent increase in average production added $4 million to natural gas revenues as compared to the prior-year quarter, while a 15-percent decline in average realized prices decreased revenues by $142 million. Natural gas accounted for 19 percent of our oil and gas production revenues and 49 percent of our equivalent production.

Worldwide production grew 13 MMcf/d between the periods on production increases in the North Sea and Australia. North Sea production grew 52 MMcf/d on production from the recently-acquired Beryl assets. Daily production in Australia increased 27 MMcf/d on new contracts associated with the completion of facilities at Devil Creek. Production in the U.S. rose 5 MMcf/d on volumes from newly-acquired properties and increased drilling and recompletion activity. Volume gains were offset by production associated with divested properties, downtime associated with Hurricane Isaac, and natural decline resulting from our shift away from gas-focused drilling. Egypt gross production increased two percent while net production decreased 12 percent, a product of the terms of our production sharing contracts. Daily production in Canada was down 15 MMcf/d reflecting the impact of natural decline, plant maintenance, and lower gas-focused drilling and recompletion activity.

Year-to-Date 2012 compared to Year-to-Date 2011

Crude Oil Revenues Crude oil revenues for the first nine months of 2012 totaled $9.8 billion, $440 million higher than the comparative 2011 period, the result of a two-percent increase in average realized prices and a two-percent increase in worldwide production. Crude oil accounted for 78 percent of oil and gas production revenues and 45 percent of worldwide production, compared with 75 percent and 45 percent, respectively, in the 2011 period. Higher production volumes added $271 million to the increase in revenues compared to the first nine months of 2011, while higher realized prices contributed an additional $169 million.

Crude oil prices realized in the first nine months of 2012 averaged $103.83 per barrel, compared with $102.00 in the comparative prior-year period. Our Egypt, Australia, North Sea, and GOM regions, which comprise approximately 72 percent of our worldwide oil production averaged oil realizations of $111.00 compared with realizations of $108.42 in the 2011 period.

Worldwide production increased 8 Mb/d to 345 Mb/d in the first nine months of 2012, driven by increased production in the U.S. and the North Sea. In the U.S., production increased 10 percent on new drilling and recompletion activity as well as from acquisitions. The Permian region was up 9 Mb/d on increased drilling activity, primarily in the Deadwood, Spraberry, and Wolfcamp plays. The Central region was up 5 Mb/d on production from properties added in the Cordillera acquisition. Production in the GOM onshore and offshore regions was down 2 Mb/d on Hurricane Isaac downtime. North Sea production increased 9 Mb/d, as volumes from the newly-acquired Beryl assets more than offset the impact of third-quarter maintenance activities. Australia production decreased 9 Mb/d as a result of natural decline from our Pyrenees and Van Gogh fields. Egypt gross production was down two percent over the year-ago period while net production was down five percent, a product of the terms of our production sharing contracts.

Natural Gas Revenues Gas revenues for the first nine months of 2012 totaled $2.3 billion, down 15 percent from the comparative 2011 period. A two-percent increase in average production added $56 million to natural gas revenues, while a 16-percent decrease in average realized prices reduced revenues by $455 million. Natural gas accounted for 19 percent of our oil and gas production revenues and 50 percent of our equivalent production, compared to 22 and 51 percent, respectively, for the 2011 period. 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 first nine months of 2011.

Worldwide production grew 47 MMcf/d between the periods on production increases in the North Sea, Australia, and Argentina. North Sea production grew 60 MMcf/d on production from the recently-acquired Beryl assets. Daily production in Australia increased 34 MMcf/d on new contracts associated with the recently completed facilities at Devil Creek. Argentina’s production was up 7 MMcf/d from recompletions and new drilling, primarily associated with the country’s Gas Plus program. Daily production in the U.S. and Canada decreased 24 MMcf/d and 16 MMcf/d, respectively, as drilling and recompletion activity shifted from gas to liquids-rich properties. The production decrease in the U.S. was partially offset by volumes associated with properties acquired from Cordillera.

 

33


Operating Expenses

The table below presents a comparison of our expenses on an absolute dollar basis and a boe basis. Our discussion may reference expenses on a boe basis, on an absolute dollar basis or both, depending on their relevance.

 

     For the Quarter Ended September 30,      For the Nine Months Ended September 30,  
     2012      2011      2012      2011      2012      2011      2012      2011  
     (In millions)      (Per boe)      (In millions)      (Per boe)  

Depreciation, depletion and amortization:

                       

Oil and gas property and equipment

                       

Recurring

   $ 1,206      $ 973      $ 17.00      $ 14.07      $ 3,535      $ 2,777      $ 16.72      $ 13.67  

Additional

     729        20        10.27        0.29        1,898        46        8.98        0.23  

Other assets

     94        72        1.33        1.04        268        207        1.27        1.02  

Asset retirement obligation accretion

     60        39        0.84        0.57        172        114        0.81        0.56  

Lease operating costs

     801        661        11.30        9.54        2,178        1,946        10.30        9.57  

Gathering and transportation costs

     86        72        1.22        1.02        235        221        1.11        1.09  

Taxes other than income

     167        244        2.36        3.53        627        663        2.97        3.26  

General and administrative expense

     124        112        1.76        1.61        384        327        1.82        1.61  

Merger, acquisitions & transition

     7        4        0.10        0.05        29        15        0.14        0.07  

Financing costs, net

     40        37        0.56        0.54        125        123        0.59        0.60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,314      $ 2,234      $ 46.74      $ 32.26      $ 9,451      $ 6,439      $ 44.71      $ 31.68  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation, Depletion and Amortization (DD&A) The following table details the changes in DD&A of oil and gas properties between the third quarters and nine-month periods of 2012 and 2011:

 

     For the  Quarter
Ended
September 30,
     For the Nine  Months
Ended
September 30,
 
     (In millions)      (In millions)  

2011 DD&A

   $ 973      $ 2,777  

Volume change

     36        154  

DD&A Rate change

     197        604  
  

 

 

    

 

 

 

2012 DD&A

   $ 1,206      $ 3,535  
  

 

 

    

 

 

 

Oil and gas property recurring DD&A expense of $1.2 billion in the third quarter of 2012 increased $233 million compared to the prior-year quarter on an absolute dollar basis: $197 million on rate, $36 million from higher volumes. The Company’s oil and gas property recurring DD&A rate increased $2.93 to $17.00 per boe compared to the prior-year period, reflecting acquisition and drilling costs that exceed our historical basis and lower proved reserve estimates on a decline in natural gas prices.

Oil and gas property recurring DD&A expense of $3.5 billion in the first nine months of 2012 increased $758 million compared to the prior-year period on an absolute dollar basis: $604 million on rate and $154 million from higher volumes. The Company’s oil and gas property recurring DD&A rate increased $3.05 to $16.72 per boe compared to the prior-year period, reflecting acquisition and drilling costs that exceed our historical basis and lower proved reserve estimates on a decline in natural gas prices.

In addition, we recorded non-cash write-downs on the carrying value of our proved oil and gas property balances in Canada of $521 million ($390 million net of tax), $641 million ($480 million net of tax), and $721 million ($539 million net of tax) as of March 31, 2012, June 30, 2012, and September 30, 2012, respectively. 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, net of related tax effects and discounted 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. If average natural gas prices in the fourth quarter of 2012 are lower than average prices in the fourth quarter of 2011, we will likely record an additional write-down in Canada. The Company also recorded $8 million and $20 million of additional DD&A in the third quarter of 2012 and 2011, respectively, associated with impairments of new venture seismic activity in countries where Apache is pursuing exploration opportunities but has not yet established a presence. For the nine months ended September 30, 2012 and 2011, the Company recorded $15 million and $46 million of additional DD&A, respectively.

 

34


Lease Operating Expenses (LOE) LOE increased $140 million, or 21 percent, and $232 million, or 12 percent, on an absolute dollar basis, for the quarter and nine-month period ended September 30, 2012, relative to the comparable periods of 2011. On a per unit basis, LOE increased 18 percent to $11.30 per boe for the third quarter of 2012, as compared to the same prior-year period, and eight percent to $10.30 per boe for the first nine months of 2012, as compared to the prior-year nine-month period. LOE per boe for the third quarter of 2012 was significantly impacted by production downtime and higher costs associated with repairs at our Grand Isle 43 complex and major facility turnarounds in the North Sea and Canada. The following table identifies changes in Apache’s LOE rate between the third quarters and nine-month periods of 2012 and 2011.

 

For the Quarter Ended September 30,

        

For the Nine Months Ended September 30,

      
     Per boe          Per boe  

2011 LOE

   $ 9.54     2011 LOE    $ 9.57  

Repairs and maintenance

     0.74    

Labor and pumper costs

     0.33  

Labor and pumper costs

     0.52    

Repairs and maintenance

     0.23  

Workovers

     0.33    

Non-operated costs

     0.16  

Other

     0.10    

Workovers

     0.11  

Acquisitions(1)

     (0.37  

Other

     (0.01

Other decreased production

     0.44    

Acquisitions(1)

     (0.19
    

Other decreased production

     0.10  
  

 

 

      

 

 

 

2012 LOE

   $ 11.30     2012 LOE    $ 10.30  
  

 

 

      

 

 

 

 

(1) 

Per-unit impact of acquisitions is shown net of associated production.

Gathering and Transportation Gathering and transportation costs totaled $86 million and $235 million in the third quarter and first nine months of 2012, respectively, up $14 million from both the third quarter and first nine months of 2011. On a per-unit basis, gathering and transportation costs of $1.22 and $1.11 for the third quarter and first nine months of 2012, respectively, were up 20 percent and two percent, respectively. 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
September 30,
     For the Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (In millions)  

Canada

   $ 38      $ 39      $ 121      $ 125  

U.S.

     20        17        52        47  

Egypt

     9        7        29        25  

North Sea

     18        7        28        19  

Argentina

     1        2        5        5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gathering and transportation

   $ 86      $ 72      $ 235      $ 221  
  

 

 

    

 

 

    

 

 

    

 

 

 

North Sea costs for the quarter and first nine months of 2012 increased $11 million and $9 million, respectively, as compared to prior-year periods, on the acquisition of Mobil North Sea at the end of 2011. The U.S. costs for the third quarter and first nine months of 2012 increased $3 million and $5 million, respectively, as compared to the same prior-year periods primarily as a result of increased production in the Central region from our acquisition of Cordillera. Canada’s costs for the third quarter and first nine months of 2012 decreased $1 million and $4 million, respectively, as compared to the same prior-year periods primarily from decreased activity in the region.

 

35


Taxes other than Income Taxes other than income totaled $167 million and $627 million for the third quarter and first nine months of 2012, a decrease of $77 million and $36 million, respectively, from the comparative prior-year periods. The following table presents a comparison of these expenses:

 

     For the Quarter Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (In millions)  

U.K. PRT

   $ 62      $ 149      $ 332      $ 386  

Severance taxes

     56        54        162        159  

Ad valorem taxes

     26        25        75        78  

Other

     23        16        58        40  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Taxes other than income

   $ 167      $ 244      $ 627      $ 663  
  

 

 

    

 

 

    

 

 

    

 

 

 

The North Sea Petroleum Revenue Tax (PRT) is assessed on qualifying fields in the U.K. North Sea. For the third quarter of 2012, U.K. PRT was $87 million lower than the 2011 period based on a decrease in net receipts, primarily driven by lower revenues as a result of lower production on qualifying fields during the third quarter. Severance and ad valorem tax expense remained relatively flat, consistent with revenue.

U.K. PRT for the first nine months of 2012 was $54 million lower when compared to the 2011 period based on a decrease in net receipts, primarily driven by lower revenues during the period. For the first nine months of 2012, property acquisitions increased severance taxes by $3 million as compared to the first nine months of 2011. Ad valorem taxes for the first nine months of 2012 decreased $3 million on lower realized oil and gas prices in Canada as compared to the prior-year period.

General and Administrative Expenses General and administrative expenses (G&A) for the third quarter and first nine months of 2012 increased $12 million and $57 million, respectively, from the comparable 2011 periods on additional expenses relating to personnel, office, and information technology costs in support of our major development projects, increased exploration activities, and acquisitions.

Financing Costs, Net Financing costs incurred during the period comprised the following:

 

     For the Quarter Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Interest expense

   $ 132     $ 109     $ 371     $ 326  

Amortization of deferred loan costs

     2       1       5       4  

Capitalized interest

     (90     (69     (241     (193

Interest income

     (4     (4     (10     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing costs, net

   $ 40     $ 37     $ 125     $ 123  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net financing costs were up $3 million and $2 million in the third quarter and first nine months of 2012, respectively, compared to the same 2011 periods. The $23 million and $45 million increases in interest expense in the third quarter and first nine months of 2012 are associated with $3.0 billion of debt issued in April 2012. The $21 million and $48 million increases in capitalized interest in the third quarter of 2012 and the first nine months of 2012, respectively, are a direct result of higher unproved property balances from the Mobil North Sea and Cordillera acquisitions.

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, $641 million, and $721 million non-cash write-down of its Canadian proved oil and gas properties as a discrete item in the first, second, and third quarters of 2012, respectively.

As a part of the increase in the corporate income tax rate on North Sea oil and gas profits from 50 percent to 62 percent announced in March 2011, the U.K. government also proposed that the corporation income tax relief attributable to decommissioning expenditures in the North Sea remain at 50 percent. The related legislation concerning decommissioning expenditures was then introduced in Finance Bill 2012 and was enacted on July 17, 2012, upon receiving Royal Assent. As a result of this enacted legislation, the Company recorded a discrete non-recurring tax charge of $118 million in the third quarter of 2012.

The 2012 third-quarter provision for income taxes was $685 million, representing an effective income tax rate of 79 percent for the quarter. This effective rate reflects the impact of the $721 million Canadian non-cash write-down discussed above, the North Sea decommissioning tax rate adjustment charge, and foreign currency fluctuations on deferred taxes. Excluding these items, the third-quarter 2012 effective rate would have been 45 percent, an increase from 44 percent in the third quarter of 2011.

 

36


The 2012 first nine-months provision for income taxes was $1.9 billion, representing an effective income tax rate of 59 percent for the period. This effective rate reflects the impact of three quarterly Canadian non-cash write-downs discussed above, the North Sea decommissioning tax rate adjustment charge, and foreign currency fluctuations on deferred taxes. Excluding these items, the effective rate for the first nine months of 2012 would have been 43 percent, an increase from 42 percent in the comparative 2011 period. 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.

Capital Resources and Liquidity

Operating cash flows are the Company’s primary source of liquidity. 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 nonstrategic assets for all other liquidity and capital resource needs.

Apache’s operating 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, 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 and have less impact than 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 to fund activity 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 and/or our ability to acquire additional reserves at reasonable costs.

We believe the liquidity and capital resource alternatives available to Apache, combined with internally-generated cash flows, will be adequate to fund short-term and long-term operations, including our capital spending program, repayment of debt maturities, and any amount that may ultimately be paid in connection with contingencies.

For additional information, please see Part II, Item 1A, “Risk Factors” of this Form 10-Q and Part I, Items 1 and 2, “Business and Properties,” and Item 1A, “Risk Factors Related to Our Business and Operations,” in our Annual Report on Form 10-K for our 2011 fiscal year.

Sources and Uses of Cash

The following table presents the sources and uses of our cash and cash equivalents for the periods presented.

 

37


     For the Nine Months  Ended
September 30,
 
     2012      2011  
     (In millions)  

Sources of Cash and Cash Equivalents:

     

Net cash provided by operating activities

   $ 6,422      $ 7,171  

Sale of oil and gas properties

     26        202  

Fixed rate debt borrowings

     2,991        —     

Net commercial paper and bank loan borrowings

     1,827        —     

Other

     —           77  
  

 

 

    

 

 

 
     11,266        7,450  
  

 

 

    

 

 

 

Uses of Cash and Cash Equivalents:

     

Capital expenditures(1)

   $ 6,973      $ 5,230  

Acquisitions

     2,788        509  

Equity investment in Yara Pilbara Holdings Pty Limited (YPHPL)

     439        —     

Payments of fixed rate debt

     400        —     

Net commercial paper and bank loan repayments

     —           940  

Dividends

     246        230  

Other

     397        89  
  

 

 

    

 

 

 
     11,243        6,998  
  

 

 

    

 

 

 

Increase in cash and cash equivalents

   $ 23      $ 452  
  

 

 

    

 

 

 

 

(1)

The table presents capital expenditures on a cash basis; therefore, the amounts differ from those discussed elsewhere in this document, which include accruals.

Net Cash Provided by Operating Activities Cash flows are our primary source of capital and liquidity and are impacted, both in the short-term and the long-term, by volatile oil and natural gas prices. The factors in determining operating cash flow are largely the same as those that affect net earnings, with the exception of non-cash expenses such as DD&A, asset retirement obligation (ARO) accretion and deferred income tax expense, which affect earnings but do not affect cash flows.

Net cash provided by operating activities for the first nine months of 2012 totaled $6.4 billion, down $749 million from the first nine months of 2011. The decrease reflects the impact of a change in working capital during the first nine months of 2012.

For a detailed discussion of commodity prices, production, costs and expenses, refer to the “Results of Operations” of this Item 2. For additional detail of changes in operating assets and liabilities, see the statement of consolidated cash flows in Item 1, Financial Statements of this Form 10-Q.

Sale of Oil and Gas Properties During the first nine months of 2012, Apache completed the sale of certain properties in the U.S. and Canada for $26 million. In June 2011 Apache completed the sale of certain properties in Canada and the U.S. for $202 million.

Fixed Rate Debt Borrowings In April 2012 Apache issued $3 billion principal amount of senior unsecured notes. For further discussion of the note offering, please see Note 6—Debt of this Form 10-Q.

Capital Expenditures We fund exploration and development (E&D) activities primarily through operating cash flows and budget capital expenditures based on projected cash flows. We routinely adjust our capital budget on a quarterly basis in response to changing market conditions and operating cash flow forecasts.

Historically, we have used a combination of operating cash flows, borrowings under lines of credit and the commercial paper program and, from time to time, issues of public debt or common stock to fund significant acquisitions.

 

38


The following table details capital expenditures for each country in which we do business:

 

     For the Nine Months Ended
September 30,
 
     2012      2011  
     (In millions)  

E&D Costs:

     

United States

   $ 3,608      $ 1,976  

Canada

     459        609  
  

 

 

    

 

 

 

North America

     4,067        2,585  
  

 

 

    

 

 

 

Egypt

     809        674  

Australia

     518        445  

North Sea

     703        618  

Argentina

     222        245  

Other International

     84        49  
  

 

 

    

 

 

 

International

     2,336        2,031  
  

 

 

    

 

 

 

Worldwide E&D Costs

     6,403        4,616  
  

 

 

    

 

 

 

Gathering Transmission and Processing Facilities (GTP):

     

United States

     57        9  

Canada

     138        113  

Egypt

     15        74  

Australia

     338        255  

Argentina

     12        7  
  

 

 

    

 

 

 

Total GTP Costs

     560        458  
  

 

 

    

 

 

 

Asset Retirement Costs

     556        288  

Capitalized Interest

     241        193  
  

 

 

    

 

 

 

Capital Expenditures, excluding acquisitions

     7,760        5,555  
  

 

 

    

 

 

 

Acquisitions, including GTP

     3,421        493  

Asset Retirement Costs - Acquired

     33        75  
  

 

 

    

 

 

 

Total Capital Expenditures

   $ 11,214      $ 6,123  
  

 

 

    

 

 

 

Worldwide E&D expenditures for the first nine months of 2012 totaled $6.4 billion, or 39 percent above the first nine months of 2011. E&D spending in North America, which was up 57 percent, totaled 64 percent of worldwide E&D spending. Expenditures in the U.S. increased 83 percent primarily on increased drilling activity in the Permian region, particularly in the Deadwood area, and in our Central region where our active horizontal drilling program in the Granite Wash and Cherokee plays continued to expand. U.S. expenditures also reflect an increase in leasehold acquisition efforts where we have spent over $600 million to gain new acreage positions in several prospects, including the Mississippian Lime play in Kansas and Nebraska, the Williston Basin play in Montana and multiple offshore blocks in the GOM Deepwater and Shelf regions. E&D spending in Canada decreased 25 percent from the prior year period as our drilling program has been re-focused to oil and liquids-rich plays given current North American gas prices.

E&D expenditures outside of North America increased 15 percent when compared to the first nine-months of 2011. E&D spending in Egypt was up $135 million on continued drilling activity across all its major basins. North Sea expenditures were up $85 million driven by Beryl field development activity. Australian expenditures were up $73 million, or 16 percent, as development activities ramped up in the third quarter of 2012.

We invested $560 million in GTP in the first nine months of 2012 compared to $458 million in the first nine months of 2011. The increase is primarily related to Australia, driven by the purchase of the Ningaloo Vision floating production storage and offloading vessel (FPSO) and expenditures for the Wheatstone LNG project.

We acquired $3.4 billion of oil and gas properties in the first nine months of 2012 compared to $493 million in the prior-year period. Acquisitions occur as attractive opportunities arise and, therefore, vary from year to year. For information regarding our acquisitions, please see Note 2 – Acquisitions and Divestitures in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q.

Equity Investment in YPHPL On January 31, 2012, a subsidiary of Apache Energy Limited completed the acquisition of a 49-percent interest in YPHPL (formerly Burrup Holdings Limited) for $439 million, including working capital adjustments. The transaction was funded with debt. The investment in YPHPL 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.

 

39


Payments of Fixed Rate Debt During the second quarter of 2012 Apache repaid the $400 million in aggregate principal amount of 6.25-percent notes that matured on April 15, 2012.

Dividends For the nine-month periods ended September 30, 2012 and 2011, the Company paid $189 million and $173 million, respectively, in dividends on its common stock. In each of the first nine months of 2012 and 2011, the Company also paid $57 million in dividends on its Series D Preferred Stock.

Liquidity

The following table presents a summary of our key financial indicators at the dates presented:

 

     September 30,
2012
    December 31,
2011
 
     (In millions of dollars, except as indicated)  

Cash and cash equivalents

   $ 318     $ 295  

Total debt

     11,634       7,216  

Shareholders’ equity

     30,714       28,993  

Available committed borrowing capacity

     1,508       3,300  

Floating-rate debt/total debt

     16     0.4

Percent of total debt-to-capitalization

     27     20

Cash and cash equivalents We had $318 million in cash and cash equivalents as of September 30, 2012, compared to $295 million at December 31, 2011. Approximately $276 million of the cash was held by foreign subsidiaries, with the remaining $42 million held by Apache Corporation and U.S. subsidiaries. The cash held by foreign subsidiaries is subject to additional U.S. income taxes if repatriated. Almost all of the cash is denominated in U.S. dollars and, at times, is invested in highly-liquid investment grade securities with maturities of three months or less at the time of purchase.

Debt As of September 30, 2012, outstanding debt, which consisted of notes, debentures, commercial paper, and uncommitted bank lines, totaled $11.6 billion. Current debt includes $500 million 5.25-percent notes and $400 million 6.00-percent notes due within the next 12 months and $64 million borrowed under 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. We used the proceeds to fund the cash portion of the purchase price to acquire Cordillera, repay the $400 million in aggregate principal amount of 6.25-percent notes that matured on April 15, 2012, and for general corporate purposes.

Available committed borrowing capacity As of September 30, 2012, the Company had unsecured committed revolving syndicated bank credit facilities totaling $3.3 billion, of which $1.0 billion matures in August 2016 and $2.3 billion matures in June 2017. The facilities consist of a $1.7 billion facility and a $1.0 billion facility in the U.S., a $300 million facility in Australia, and a $300 million facility in Canada. As of September 30, 2012, available borrowing capacity under the Company’s credit facilities was $1.5 billion.

The Company has available a $3.0 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 committed credit facilities, which expire in 2016 and 2017. As of September 30, 2012, the Company had $1.8 billion in commercial paper outstanding, compared with no outstanding commercial paper as of December 31, 2011.

The Company was in compliance with the terms of all credit facilities as of September 30, 2012.

Percent of total debt–to-capitalization The Company’s September 30, 2012 debt-to-capitalization ratio was 27 percent, up from 20 percent at December 31, 2011.

Non-GAAP Measures

The Company makes reference to some measures in discussion of its financial and operating highlights that are not required by or presented in accordance with GAAP. Management uses these measures in assessing operating results and believes the presentation of these measures provides information useful in assessing the Company’s financial condition and results of operations. These non-GAAP measures should not be considered as alternatives to GAAP measures and may be calculated differently from, and therefore may not be comparable to, similarly-titled measures used at other companies.

 

40


Adjusted Earnings

To assess the Company’s operating trends and performance, management uses Adjusted Earnings, which is net income excluding certain items that management believes affect the comparability of operating results. Management believes this presentation may be useful to investors who follow the practice of some industry analysts who adjust reported company earnings for items that may obscure underlying fundamentals and trends. The reconciling items below are the types of items management excludes and believes are frequently excluded by analysts when evaluating the operating trends and comparability of the Company’s results.

 

     For the Quarter
Ended September 30,
    For the Nine  Months
Ended September 30,
 
     2012      2011     2012      2011  
     (In millions, except per share data)  

Income Attributable to Common Stock (GAAP)

   $ 161      $ 983     $ 1,276      $ 3,338  

Adjustments:

          

Canada proved property write-down, net of tax(1)

     539        —          1,409        —     

North Sea decommissioning tax rate adjustment

     118        —          118        —     

Unrealized foreign currency fluctuation impact on deferred tax expense

     39        (99     40        (68

Merger, acquisitions & transition, net of tax(2)

     4        2       17        9  

North Sea income tax rate increase

     —           274       —           218  
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted Earnings (Non-GAAP)

   $ 861      $ 1,160     $ 2,860      $ 3,497  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Income per Common Share – Diluted (GAAP)

   $ 0.41      $ 2.50     $ 3.27      $ 8.49  

Adjustments:

          

Canada proved property write-down, net of tax(1)

     1.33        —          3.49        —     

North Sea decommissioning tax rate adjustment

     0.30        —          0.30        —     

Unrealized foreign currency fluctuation impact on deferred tax expense

     0.10        (0.25     0.11        (0.17

Merger, acquisitions & transition, net of tax(2)

     0.02        0.01       0.05        0.02  

North Sea income tax rate increase

     —           0.69       —           0.55  
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted Earnings Per Share – Diluted (Non-GAAP)

   $ 2.16      $ 2.95     $ 7.22      $ 8.89  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

A write-down of our Canadian proved property balances of $521 million, $641 million, and $721 million pre-tax was recorded in the first, second, and third quarters of 2012, for which a tax benefit of $131 million, $161 million, and $182 million was recognized, respectively. The tax effect was calculated utilizing the Canadian statutory rate currently in effect.

(2) 

Merger, acquisitions & transition costs recorded in the third quarter of 2012 and 2011 totaled $7 million and $4 million pre-tax, respectively, for which a tax benefit of $3 million and $2 million was recognized, respectively. For the first nine months of 2012 and 2011, merger, acquisitions & transition costs totaled $29 million and $15 million, respectively, for which a tax benefit of $12 million and $6 million was recognized, respectively. The tax effect was calculated utilizing the statutory rates in effect in each country where costs were incurred.

 

41


ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Risk

The Company’s revenues, earnings, cash flow, capital investments and, ultimately, future rate of growth are highly dependent on the prices we receive for our crude oil, natural gas and NGLs, which have historically been very volatile because of unpredictable events such as economic growth or retraction, weather and political climate. Our average crude oil realizations have increased one percent to $102.62 per barrel in the third quarter of 2012 from $101.71 per barrel in the comparable period of 2011. Our average natural gas price realizations have fallen, decreasing 15 percent to $3.76 per Mcf from $4.44 per Mcf in the comparable period of 2011.

We periodically enter into hedging activities on a portion of our projected oil and natural gas production through a variety of financial and physical arrangements intended to manage fluctuations in cash flows resulting from changes in commodity prices. For the third quarter and first nine months of 2012, approximately 13 percent of our natural gas production in both periods, and approximately 12 and 14 percent, respectively, of our crude oil production was subject to financial derivative hedges.

Apache may use futures contracts, swaps and options to hedge commodity price risk. Realized gains or losses from the Company’s price-risk management activities are recognized in oil and gas production revenues when the associated production occurs. Apache does not hold or issue derivative instruments for trading purposes.

On September 30, 2012, the Company had open natural gas derivative hedges in an asset position with a fair value of $138 million. A 10-percent increase in natural gas prices would reduce the fair value by approximately $13 million, while a 10-percent decrease in prices would increase the fair value by approximately $13 million. The Company also had open oil derivatives in a liability position with a fair value of $87 million. A 10-percent increase in oil prices would increase the liability by approximately $82 million, while a 10-percent decrease in prices would decrease the liability by approximately $67 million. These fair value changes assume volatility based on prevailing market parameters at September 30, 2012. See Note 3 – Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for notional volumes and terms associated with the Company’s derivative contracts.

Interest Rate Risk

The Company considers its interest rate risk exposure to be minimal as a result of fixing interest rates on approximately 84 percent of the Company’s debt. At September 30, 2012, total debt included $1.9 billion of floating-rate debt. As a result, Apache’s annual interest costs will fluctuate based on short-term interest rates on approximately 16 percent of our total debt outstanding at September 30, 2012. The impact on cash flow of a 10-percent change in the floating interest rate based on debt balances at September 30, 2012, would be approximately $461,000 per quarter.

Foreign Currency Risk

The Company’s cash flow stream relating to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign currencies. In Australia, oil production is sold under U.S. dollar contracts, and gas production is sold largely under fixed-price Australian dollar contracts. Approximately half the costs incurred for Australian operations are paid in U.S. dollars. In Canada, oil and gas prices and costs, such as equipment rentals and services, are generally denominated in Canadian dollars but heavily influenced by U.S. markets. Our North Sea production is sold under U.S. dollar contracts, and the majority of costs incurred are paid in British pounds. In Egypt, all oil and gas production is sold under U.S. dollar contracts, and the majority of the costs incurred are denominated in U.S. dollars. Argentine revenues and expenditures are largely denominated in U.S. dollars but are converted into Argentine pesos at the time of payment. Revenue and disbursement transactions denominated in Australian dollars, Canadian dollars, British pounds, and Argentine pesos are converted to U.S. dollar equivalents based on average exchange rates during the period.

Foreign currency gains and losses also arise when monetary assets and monetary liabilities denominated in foreign currencies are translated at the end of each month. Currency gains and losses are included as either a component of “Other” under “Revenues and Other” or, as is the case when we re-measure our foreign tax liabilities, as a component of the Company’s provision for income tax expense on the statement of consolidated operations. A 10-percent strengthening or weakening of the Australian dollar, Canadian dollar, British pound, and Argentine peso as of September 30, 2012, would result in a foreign currency net loss or gain, respectively, of approximately $190 million.

 

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Forward-Looking Statements and Risk

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information that was used to prepare our estimate of proved reserves as of December 31, 2011, and other data in our possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

 

   

the market prices of oil, natural gas, NGLs and other products or services;

 

   

our commodity hedging arrangements;

 

   

the integration of acquisitions;

 

   

the supply and demand for oil, natural gas, NGLs and other products or services;

 

   

production and reserve levels;

 

   

drilling risks;

 

   

economic and competitive conditions;

 

   

the availability of capital resources;

 

   

capital expenditure and other contractual obligations;

 

   

currency exchange rates;

 

   

weather conditions;

 

   

inflation rates;

 

   

the availability of goods and services;

 

   

legislative or regulatory changes;

 

   

the impact on our operations due to the change in government in Egypt;

 

   

terrorism or cyber attacks;

 

   

occurrence of property acquisitions or divestitures;

 

   

the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks; and

 

   

other factors disclosed under Items 1 and 2—Business and Properties—Estimated Proved Reserves and Future Net Cash Flows, Item 1A—Risk Factors, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A—Quantitative and Qualitative Disclosures About Market Risk and elsewhere in our most recently filed Form 10-K, other risks and uncertainties in our third-quarter 2012 earnings release, other factors disclosed under Part II, Item 1A—Risk Factors of this Form 10-Q and the Form 10-Q for the quarter ended June 30, 2012, and other filings that we make with the Securities and Exchange Commission.

All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

 

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ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

G. Steven Farris, the Company’s Chairman and Chief Executive Officer, in his capacity as principal executive officer, and Thomas P. Chambers, the Company’s Executive Vice President and Chief Financial Officer, in his capacity as principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012, the end of the period covered by this report. Based on that evaluation and as of the date of that evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective, providing effective means to ensure that information we are required to disclose under applicable laws and regulations is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

We periodically review the design and effectiveness of our disclosure controls, including compliance with various laws and regulations that apply to our operations both inside and outside the United States. We make modifications to improve the design and effectiveness of our disclosure controls, and may take other corrective action, if our reviews identify deficiencies or weaknesses in our controls.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Please refer to both Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (filed with the SEC on February 29, 2012) and Part I, Item 1 of this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2012 for a description of material legal proceedings.

 

ITEM 1A. RISK FACTORS

Please refer to the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and as noted above in Part I, Item 3 of this Form 10-Q. For the nine months ending September 30, 2012, Apache notes the following updated risk factors:

Our operations involve a high degree of operational risk, particularly risk of personal injury, damage, or loss of equipment, and environmental accidents.

Our operations are subject to hazards and risks inherent in the drilling, production, and transportation of crude oil and natural gas, including:

 

   

well blowouts, explosions, and cratering;

 

   

pipeline ruptures and spills;

 

   

fires;

 

   

formations with abnormal pressures;

 

   

equipment malfunctions;

 

   

hurricanes and/or cyclones, which could affect our operations in areas such as on- and offshore the Gulf Coast and Australia, and other natural disasters; and

 

   

surface spillage and surface or ground water contamination from petroleum constituents or hydraulic fracturing chemical additives.

Failure or loss of equipment, as the result of equipment malfunctions, cyber attacks, or natural disasters such as hurricanes, could result in property damages, personal injury, environmental pollution, and other damages for which we could be liable. Litigation arising from a catastrophic occurrence, such as a well blowout, explosion, or fire at a location where our

 

44


equipment and services are used, or ground water contamination from hydraulic fracturing chemical additives may result in substantial claims for damages. Ineffective containment of a drilling well blowout, pipeline rupture, or surface spillage and surface or ground water contamination from petroleum constituents or hydraulic fracturing chemical additives could result in extensive environmental pollution and substantial remediation expenses.

If a significant amount of our production is interrupted, our containment efforts prove to be ineffective or litigation arises as the result of a catastrophic occurrence, our cash flows and, in turn, our results of operations could be materially and adversely affected.

Cyber attacks targeting systems and infrastructure used by the oil and gas industry may adversely impact our operations.

Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil and gas reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our employees and third party partners. Unauthorized access to our seismic data, reserves information or other proprietary information could lead to data corruption, communication interruption, or other operational disruptions in our exploration or production operations. Also, computers control nearly all of the oil and gas distribution systems in the United States and abroad, which are necessary to transport our production to market. A cyber attack directed at oil and gas distribution systems could damage critical distribution and storage assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for production and settle transactions.

While we have experienced cyber attacks, we have not suffered any material losses relating to such attacks; however, there is no assurance that we will not suffer such losses in the future. Further, as cyber attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cyber attacks.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

None

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

*31.1 –

 

Certification (pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act) by Principal Executive Officer.

*31.2 –

 

Certification (pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act) by Principal Financial Officer.

*32.1 –

 

Section 1350 Certification (pursuant to Sarbanes-Oxley Section 906) by Principal Executive Officer and Principal Financial Officer.

*101.INS –

 

XBRL Instance Document.

*101.SCH –

 

XBRL Taxonomy Schema Document.

*101.CAL –

 

XBRL Calculation Linkbase Document.

*101.LAB –

 

XBRL Label Linkbase Document.

*101.PRE –

 

XBRL Presentation Linkbase Document.

*101.DEF –

 

XBRL Definition Linkbase Document.

*

 

Filed herewith

 

45


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

      APACHE CORPORATION
Dated: November 7, 2012      

/s/ THOMAS P. CHAMBERS

      Thomas P. Chambers
      Executive Vice President and Chief Financial Officer
      (Principal Financial Officer)
Dated: November 7, 2012      

/s/ REBECCA A. HOYT

      Rebecca A. Hoyt
      Vice President, Chief Accounting Officer and Controller
      (Principal Accounting Officer)

 

46