Summary of APACHE CORP - Yahoo! Finance

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Apache Corporation, a Delaware corporation formed in 1954, together with its subsidiaries (collectively, Apache) is one of the world's largest independent oil and gas companies with exploration and production interests in the United States, Canada, Egypt, offshore Western Australia, offshore the United Kingdom (U.K.) in the North Sea (North Sea) and Argentina. We also have exploration interests on the Chilean side of the island of Tierra del Fuego.
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, of this Quarter Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes, Management's Discussion and Analysis of Financial Condition, and Results of Operations included in our Annual Report on Form 10-K. Overview
The continued deterioration of the global economy has created a difficult operating environment for exploration and production companies. Faced with ongoing uncertainty in the credit markets, falling demand for crude oil and natural gas and a challenging and uncertain world economy, the Company took several strategic steps during the fourth quarter of 2008 and the first quarter of 2009 designed to maintain our financial liquidity. After securing additional financing in the fourth quarter of 2008, we substantially reduced 2009 capital budgets and implemented initiatives to actively pursue cost reductions, including the cost of drilling, operating supplies and services and overhead. In the second quarter of 2009, we announced a six percent reduction in our worldwide headcount, which, while difficult, was necessary to right size the organization for today's much lower commodity price environment. We also deferred salary increases company-wide and reduced salaries of the four members of the Office of the Chief Executive by 10 percent.
As the entire world faces challenging times, our focus on financial discipline and long-term growth remain unchanged. We believe we are well-positioned to take advantage of opportunities that will inevitably present themselves in the current environment, which should enable Apache to emerge from the current downturn a stronger company. We exited the first quarter with nearly $1.4 billion in cash and short-term investments, $2.5 billion of available committed borrowing capacity, a debt-to-capitalization ratio of 25 percent and an A- credit rating.
Earnings and Cash Flow
Our first-quarter results, relative to the first quarter of 2008, were negatively impacted by significantly lower crude oil and natural gas price realizations and a non-cash write-down of the carrying value of our U.S. and Canadian proved oil and gas properties. The $1.98 billion non-cash after-tax write-down resulted in a first-quarter loss of $5.25 per common share, with the write-down representing a loss of $5.91 per share. Earnings were $3.03 per share for the first quarter of 2008. Cash provided by operating activities, which was unaffected by the write-down, totaled $543 million compared to $1.8 billion in the comparable prior-year quarter.
While we have seen some strengthening of crude oil prices from the lows of December 2008, natural gas prices in North America have weakened considerably since that time. This quarter's full-cost ceiling test write-down in the U.S. and Canada was the result of lower natural gas prices on March 31, 2009, than on December 31, 2008. For additional discussion on prices, refer to "Pricing Trends" under this Item 2. We believe weak commodity prices are likely to be a challenge for the remainder of this year.
First-quarter 2009 oil and gas revenues were 50 percent, or $1.6 billion, lower than the first quarter of 2008, driven by a 52 percent drop in average crude oil realizations and a 40 percent drop in natural gas realizations. On a barrel of oil equivalent (boe) basis, daily production was just two percent below the year-ago period, with gains in Egypt, the North Sea and Argentina offsetting natural decline and production remaining shut-in awaiting infrastructure repairs following the Varanus Island pipeline explosion in Australia and the 2008 U.S. hurricanes. Total operating expenses, excluding the impact of the non-cash write-down, declined 16 percent from the first quarter of 2008. Reductions in costs continue to lag behind the sharp decline in commodity prices and are not presently at levels we feel are in line with today's lower commodity prices. We continue to monitor cost trends very closely and make appropriate adjustments to drilling and development schedules while actively pursuing further cost reductions.

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Operating Highlights
During the first quarter, we reduced exploration and development drilling across all our regions while still advancing several large projects. Significant progress was made on two new gas processing trains in Egypt's Western Desert, our Geauxpher development in the Gulf of Mexico and restoration of full production in the Gulf of Mexico following Hurricane Ike and in Australia following the June 2008 explosion at the Varanus Island processing facilities. We continued development of the Van Gogh oil field in Australia; however, initial production, which was originally scheduled for mid-year, has been delayed until around year-end because of a recent fire onboard the floating production, storage and offloading (FPSO) vessel. The FPSO is owned and operated by a third party and will be leased by Apache when it is delivered to Van Gogh.
Notable highlights include:
Egypt
• The two new processing trains in Egypt are currently ramping up to full capacity and we expect to reach our targeted net production of 100 million cubic feet of gas per day (MMcf/d) and 5,000 barrels of condensate per day during the second quarter of 2009.

• On January 14, 2009, we formally announced three new field discoveries in Egypt's Western Desert that tested an aggregate 80 MMcf/d and 5,909 barrels of oil per day (b/d). The Sultan-3X located on the Khalda Offset Concession test-flowed 5,021 b/d and 11 MMcf/d from three commingled intervals in the Safa formation. The two other discoveries, the Adam-1X and the Maggie-1X, discovered new gas-condensate fields on the Matruh development lease north of the Sultan discovery. Apache has a 100-percent contractor interest in both concessions. Oil production from Sultan-3X began in the first quarter of 2009.

• On April 30, 2009, we formally announced two additional new field discoveries in the Western Desert and the first discovery in the North Tarek Concession along the Mediterranean coast. The Phiops-1X well in the South Umbarka Concession test-flowed 2,278 b/d and 5 MMcf/d from the Safa formation. The WKAL-A-1X well, located five miles west of Phiops-1X in the West Kalabsha Concession, tested at 770 b/d and 4 MMcf/d from the Jurassic Zahra formation and 2,906 b/d and 16 MMcf/d from the Cretaceous AEB-3 formation. The NTRK-C-1X well in the North Tarek Concession logged a total of 48 feet of AEB-6 pay and tested at 3,489 b/d and 5 MMcf/d. We plan to continue an exploration, appraisal and development program in 2009 to capitalize on these successes, with two new three-dimensional seismic surveys to commence later this year.

Australia
• On January 6, 2009, Apache announced that it had signed a contract to supply natural gas from the Reindeer Field to CITIC Pacific's Sino Iron project in Western Australia. The terms require Apache and its joint venture partner to supply 154 billion cubic feet of gas over seven years beginning in the second half of 2011. Apache owns a 55-percent interest in the field. The gas will be supplied through a new, 65-mile offshore pipeline and an onshore sales-gas processing facility currently under construction at Devil Creek.

• Apache subsidiaries continued repairs to the Varanus Island gas processing and transportation hub offshore Western Australia, which sustained damage from a gas pipeline explosion in June 2008. Production is projected to be fully restored by the end of the second quarter of 2009.

United States
• Production from our previously announced discovery at the Geauxpher field at Garden Banks 462 in deepwater Gulf of Mexico is planned for May 2009, with an estimated net production rate of approximately 45 MMcf/d. Apache generated the prospect and owns a 40-percent working interest.

• We made considerable progress restoring Gulf Coast region production previously shut-in because of hurricane damage to third-party pipelines and processing facilities. The region restored an average of 3,728 b/d and 24 MMcf/d and now has an estimated 4,250 b/d and 63 MMcf/d remaining offline. While we plan to restore almost all of the production by mid-year 2009, the timing in many instances is beyond our control since we are awaiting repairs to third-party pipelines and facilities.

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• On April 20, 2009, Apache reported that the Ewing Banks 998 #1 discovery test-flowed 4,254 b/d and 5.4 MMcf/d. The well will be connected to existing facilities, with first production projected for the first quarter of 2010. Apache owns a 50 percent interest in the property.

• On April 30, 2009, we announced an agreement to acquire nine Permian Basin oil and gas fields with current net production of 3,500 barrels of oil equivalent per day from Marathon Oil Corporation for $187.4 million. These long-lived oil fields fit well with Apache's existing properties in the Permian Basin, particularly in Lea County, N.M., and will provide us drilling opportunities for many years. The transaction is scheduled to close early in the second quarter of 2009. The effective date is January 1, 2009.

Argentina
• On March 30, 2009, Apache announced that the Argentine province of Neuquén has agreed to extend the term of eight federal oil and gas concessions for 10 additional years. The concessions, which were originally scheduled to expire between 2015 and 2017, encompass approximately 590,000 acres (2,384 square kilometers (km2), including exploratory areas totaling 514,000 acres (2,082 km2). In exchange for production that would have reverted to the province beginning in six years and the right to explore for 10 additional years, Apache will pay a bonus of approximately $23 million, increase the provincial royalty to 15 percent from 12 percent and spend up to $320 million in future work programs over a 19-year period.

North Sea
•   During the quarter, we completed four successful oil development wells, which
    are currently producing 8,470 b/d. Included is the FA4-5 well, which
    encountered 26 meters of pay and is producing about 5,000 b/d. We are
    currently completing two additional oil development wells and anticipate those
    to be producing in May 2009.


Results of Operations
Revenues

                                                                 For the Quarter Ended March 31,
                                               Crude Oil           Natural Gas           NGL's             Total
                                                                          (In thousands)
2007 Revenues                                 $  1,159,929        $     826,761        $  36,377        $  2,023,067

Volume increase (decrease)                         292,759              (20,574 )          1,317             273,502
Price increase (decrease)                          779,880              197,116           22,881             999,877
Impact of hedges increase (decrease)              (112,848 )             (5,649 )              -            (118,497 )

Increase (decrease) in 2008                   $    959,791        $     170,893        $  24,198        $  1,154,882

2008 Revenues                                 $  2,119,720        $     997,654        $  60,575        $  3,177,949

Contribution to total revenues                        66.7 %               31.4 %            1.9 %             100.0 %

Volume increase (decrease)                          20,026              (32,362 )         (4,160 )           (16,496 )
Price increase (decrease)                       (1,252,690 )           (416,539 )        (36,948 )        (1,706,177 )
Impact of hedges increase (decrease)               135,577               12,761                -             148,338

Increase (decrease) in 2009                   $ (1,097,087 )      $    (436,140 )      $ (41,108 )      $ (1,574,335 )

2009 Revenues                                 $  1,022,633        $     561,514        $  19,467        $  1,603,614

Contribution to total revenues                        63.8 %               35.0 %            1.2 %             100.0 %

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Production and Pricing

                                                                   For the Quarter Ended March 31,
                                                                                                   Increase
                                                            2009                 2008             (Decrease)
Oil Volume - Barrels per day:
United States                                                  86,745             100,679                 (14 )%
Canada                                                         16,349              17,347                  (6 )%
Egypt                                                          83,525              62,551                  34 %
Australia                                                       7,836               9,420                 (17 )%
North Sea                                                      60,494              58,771                   3 %
Argentina                                                      12,438              12,225                   2 %


Total (1)                                                     267,387             260,993                   2 %

Average Oil Price - Per barrel:
United States                                           $       42.67         $     83.58                 (49 )%
Canada                                                          37.98               93.21                 (59 )%
Egypt                                                           42.21               97.85                 (57 )%
Australia                                                       31.81              101.67                 (69 )%
North Sea                                                       44.26               95.83                 (54 )%
Argentina                                                       47.26               45.13                   5 %
Total (2)                                                       42.49               89.25                 (52 )%

Natural Gas Volume - Mcf per day:
United States                                                 612,678             744,014                 (18 )%
Canada                                                        357,215             360,750                  (1 )%
Egypt                                                         317,823             242,977                  31 %
Australia                                                     142,039             191,180                 (26 )%
North Sea                                                       2,681               2,605                   3 %
Argentina                                                     191,955             165,133                  16 %


Total (3)                                                   1,624,391           1,706,659                  (5 )%

Average Natural Gas Price - Per Mcf:
United States                                           $        4.57         $      8.36                 (45 )%
Canada                                                           4.67                7.56                 (38 )%
Egypt                                                            3.60                5.20                 (31 )%
Australia                                                        1.60                2.12                 (25 )%
North Sea                                                        7.40               16.31                 (55 )%
Argentina                                                        1.98                1.84                   8 %
Total (4)                                                        3.84                6.42                 (40 )%

Natural Gas Liquids (NGL) - Barrels per day:
United States                                                   4,910               7,240                 (32 )%
Canada                                                          2,112               2,235                  (6 )%
Argentina                                                       3,138               2,720                  15 %


Total                                                          10,160              12,195                 (17 )%

Average NGL Price - Per barrel:
United States                                           $       24.26         $     57.37                 (58 )%
Canada                                                          20.60               53.35                 (61 )%
Argentina                                                       17.11               48.18                 (64 )%
Total                                                           21.29               54.58                 (61 )%

(1) Approximately eight percent of first-quarter 2009 production was subject to financial derivative hedges, 17 percent in 2008.

(2) Reflects per barrel increase of $1.60 in first-quarter 2009 and a $4.09 reduction in 2008 from financial derivative hedging activities.

(3) Approximately seven percent of first-quarter 2009 production was subject to financial derivative hedges, 18 percent in 2008.

(4) Reflects per Mcf increase of $.12 in first-quarter 2009 and $.03 in 2008 from financial derivative hedging activities.

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First Quarter 2009 Compared to First Quarter 2008 Crude Oil Revenues First-quarter crude oil revenues were $1.1 billion lower than the 2008 period, with a 52 percent decrease in average realized price. Daily production increased two percent to 267,387 b/d.
U.S. oil revenues declined $433 million on a 49 percent decrease in realized crude oil prices and a 14 percent decrease in daily production. The impact from price and production was $375 million and $58 million, respectively. Prices in the U.S. averaged $42.67 per barrel compared to $83.58 in the year-ago period. Gulf Coast region production was down 21 percent primarily from natural decline and downtime from hurricane damaged properties, while Central region production decreased three percent on pipeline and gas plant shut-ins.
Egypt's oil revenues fell $240 million from the prior year period, with the impact of a 57 percent decline in prices partially offset by a 34 percent increase in net production. Oil price realizations averaged $42.21 per barrel, down from $97.85 in the first quarter of last year. Daily net production averaged 83,525 b/d, an increase of 20,974 b/d. Production gains came primarily from the favorable impact of lower prices on cost recovery volumes but also included production from new wells at Khalda, East Bahariya, South Umbarka and West Kalabsha.
Australia's oil revenues fell $65 million on a 69 percent drop in price and a 17 percent production decrease. Production averaged 7,836 b/d and continues to be negatively impacted by infrastructure damage following the June 2008 Varanus Island pipeline explosion and fire, which initially shut-in all production from the John Brookes field and Harriet Joint Venture. Production has since been partially restored at both locations, with complete restoration anticipated in the second quarter of 2009. The impact of the shut-in production was partially offset by less weather related downtime.
North Sea crude oil revenues dropped $272 million because of a 54 percent drop in price realizations. Oil realizations averaged $44.26, $51.57 per barrel less than the year-ago period. Production rose three percent on new production from our drilling program.
Canada's revenues decreased $91 million, with most of the decline attributed to lower price realizations. Canada's oil prices averaged $37.98 per barrel, down from $93.21 in the comparative quarter. Daily production declined six percent on third party facility downtime and property sales.
Argentina's oil revenues rose five percent, or $3 million, on increases in both price realizations and daily production. Crude averaged $47.26 per barrel, or $2.13 more than a year ago, on favorable quality adjustments and increased production in Tierra del Fuego, a tax-favored area where producers retain the 21 percent value-added tax collected from buyers. Production averaged 12,438 b/d, up 213 b/d from last year. Most of the increase came in Tierra del Fuego on new wells, workovers and recompletions, which collectively more than offset natural decline.
Natural Gas Revenues First-quarter natural gas revenues declined $436 million on a 40 percent decrease in realized natural gas prices and a five percent decline in production.
U.S. natural gas revenues decreased $314 million on 45 percent lower realized prices and an 18 percent decrease in production. Natural gas prices averaged $4.57 per Mcf, down $3.79 per Mcf from the comparable year-ago period. Central region daily production was up two percent on drilling and recompletion activities, while Gulf Coast daily production was 30 percent lower on natural decline and lingering shut-ins from the 2008 hurricanes, primarily where we are waiting on repairs to damaged third party pipelines upon which we are dependent and the timing of which we cannot control.
Egypt's natural gas revenues were $12 million lower, with 31 percent lower price realizations slightly outweighing the impact of a 31 percent increase in production. Gas prices in the region fell $1.60 to $3.60 per Mcf. Production benefited from the favorable impact of lower prices on cost recovery volumes, as well as production from new wells and recompletion and workover activities.
Canada's natural gas revenues fell $98 million, with a 38 percent decrease in realized natural gas prices accounting for nearly all of the decrease. Gas price realizations fell $2.89 to $4.67 per Mcf. Natural gas production decreased one percent on property sales.
Australia's natural gas revenues dropped $17 million in the first quarter on 26 percent lower production and a 25 percent drop in price realizations. Realized prices fell to $1.60 per Mcf as the majority of our gas contracts, denominated in Australian dollars and set at fixed rates, were negatively impacted by a stronger U.S. dollar. Production in the region was negatively impacted by production shut-in awaiting infrastructure repairs after the June

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2008 Varanus Island pipeline explosion and fire, as discussed above. Production was further impacted by downtime for drilling operations at the John Brookes facility.
Argentina's gas revenues rose $7 million, or 24 percent, from the year-ago period on increases in both price realizations and daily production. Production gains from deep gas wells brought online at Neuquén and a reduction in reinjections at Tierra del Fuego drove production up 16 percent to 192 MMcf/d. Natural gas realizations rose eight percent to $1.98 per Mcf on seasonal demand. Costs
The table below presents a comparison of our expenses on an absolute dollar basis and an equivalent unit of production (boe) basis. Our discussion may reference expenses either on a boe basis, on an absolute dollar basis or both, depending on their relevance.

                                                         For the Quarter Ended March 31,                   For the Quarter Ended March 31,
                                                          2009                      2008                    2009                      2008
                                                                  (In millions)                                       (Per Boe)
Depreciation, depletion and amortization:
Oil and gas property and equipment
Recurring                                           $            536          $            583        $          10.86          $          11.50
Additional                                                     2,818                         -                   57.11                         -
Other assets                                                      45                        37                     .91                       .73
Asset retirement obligation accretion                             27                        27                     .54                       .52
Lease operating expenses                                         397                       455                    8.06                      8.96
Gathering and transportation                                      33                        41                     .67                       .81
Taxes other than income                                           87                       243                    1.77                      4.78
General and administrative expenses                               85                        82                    1.72                      1.62
Financing costs, net                                              59                        44                    1.19                       .87


Total                                               $          4,087          $          1,512        $          82.83          $          29.79

Depreciation, Depletion and Amortization (DD&A) The following table details the changes in recurring DD&A of oil and gas properties between the first quarter of 2009 and 2008:

                                          Recurring DD&A
                                          (In millions)
                         2008 DD&A       $            583
                         Volume change                (35 )
                         Rate change                  (12 )


                         2009 DD&A       $            536

Recurring full-cost DD&A expense of $536 million decreased $47 million on an absolute dollar basis: $12 million on rate and $35 million from lower volumes. The Company's full-cost DD&A rate decreased $.64 to $10.86 per boe. The decrease in rate reflects the impact of a $5.3 billion non-cash write-down of the carrying value of our December 31, 2008 proved property balances in the U.S., U.K. North Sea, Canada and Argentina.
In addition, we recorded a $2.82 billion ($1.98 billion net of tax) non-cash write-down of the carrying value of our March 31, 2009, proved oil and gas property balances in the U.S. and Canada. Under the full-cost method of accounting, the Company is required to review the carrying value of its proved oil and gas properties each quarter on a country-by-country basis. Under these rules, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and gas reserves, discounted 10 percent, net of related tax effects. These rules generally require pricing future oil and gas production at the unescalated oil and gas prices and using costs in effect at the end of each fiscal quarter and require a write-down if the "ceiling" is exceeded, even if prices declined for only a short period of time. Write-downs required by these rules do not impact cash flow from operating activities. If oil and gas prices deteriorate from the Company's quarter-end levels, additional write-downs may occur.

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