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. We have exploration and production interests in the United States, Canada, Egypt, offshore 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 Quarterly 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 most recent Annual Report on Form 10-K.
OVERVIEW
Apache's performance during the quarter reflects the benefts of our geological and geographical diversity as well as our balanced product mix. Initial development from projects in the Gulf of Mexico and the Western Desert of Egypt contributed to record second-quarter 2009 production, which increased six percent from the second quarter of 2008 and seven percent from the first quarter of 2009. Both increases reflect production growth in four of the six countries in which we operate.
Our balanced product mix served us well during the year, as the benefit from the rebound in oil prices more than offset continuing deterioration of North American natural gas prices. Oil production contributed 48 percent of Apache's worldwide second-quarter production, but 72 percent of oil and gas revenues. Prices for both oil and gas were substantially below year-earlier quarter and six-month levels, which were at historically high levels.
We continue to make progress reducing per unit operating costs. Lease operating costs are down nine percent from the second quarter and 11 percent from the first half of 2008. Absent nonrecurring costs related to staff reductions and the retirement of our founder and former chairman, our general and administrative costs for the first six months of 2009 would have been $23 million lower than the first half of 2008. Apache employees united in cost-reduction efforts and, in addition to other cost-cutting initiatives, company-wide salary increases were deferred for a six-month period, and the four members of the Office of the Chief Executive reduced their salaries by 10 percent. We continue to push for even greater efficiencies.
We remain steadfast to the business principles that have guided Apache's progress since our inception. We set the objective of continuing to live within our means and are on target to keep 2009 exploration and development capital spending within cash flow. We also remain strategically positioned to take advantage of potential acquisition opportunities that may materialize. We ended the quarter with $772 million in cash, $2.4 billion of available committed borrowing capacity, a debt-to-capitalization ratio of 25 percent and single-A credit ratings. In the current economic and political climate, it is imperative that we keep a long-term perspective and continue to demand operational excellence.
EARNINGS AND CASH FLOW
Our second-quarter earnings of $1.31 per diluted common share were negatively impacted by significantly lower crude oil and natural gas price realizations relative to the second quarter of 2008, which saw record earnings of $4.28 per share. Our six-month period earnings in 2009, relative to 2008, were also negatively impacted by lower crude oil and natural gas price realizations and our $1.98 billion non-cash after-tax write-down of the carrying value of our U.S. and Canadian proved oil and gas properties in the first quarter of 2009. This write-down contributed to a

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loss of $3.92 per share for the 2009 six-month period compared to earnings of $7.32 per share in the year-ago period. Cash provided by operating activities for the 2009 six-month period totaled $1.4 billion compared to $3.7 billion in the comparable prior-year period. 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 2009.
Second-quarter 2009 oil and gas revenues were 47 percent, or $1.8 billion, lower than the second quarter of 2008, driven by a 47 percent drop in average crude oil realizations and a 57 percent drop in natural gas realizations. On a unit basis, daily production was six percent above the year-ago period, with gains in Egypt, Australia and the North Sea offsetting the continuing impact of the 2008 U.S. hurricanes. Total operating expenses were 16 percent lower than the second quarter of 2008. Reductions in service costs continue to lag behind the sharp decline in commodity prices and are not presently at levels we believe are in line with today's lower commodity prices. We continue to monitor service cost trends very closely and make appropriate adjustments to drilling and development schedules while actively pursuing further cost reductions.
OPERATING HIGHLIGHTS
Egypt
Exploration Activity
• On July 30, 2009, we announced that the Falcon 1-X wildcat in the Matruh Concession, drilled in May 2009, tested 4,400 barrels of oil per day (b/d) from the Alam El Buieb (AEB-3D) formation. The well will be initially completed in the AEB-3D oil zone, and first production from the well should commence in the third quarter of 2009. The well also encountered hydrocarbon pay zones in the AEB-6 and Jurassic Safa formation that will not be produced until additional processing and transportation capacity is developed. The Jurassic Safa tested at a rate of 11 million cubic feet of natural gas per day (MMcf/d) and 415 b/d. The AEB-6 tested at 35 MMcf/d and 1,953 b/d. An appraisal well is planned before year-end.

• On July 30, 2009, we also announced that the Hydra-5X appraisal well in the Shushan Concession tested 21 MMcf/d and 3,744 barrels of condensate per day from the Jurassic Upper Safa formation. This well follows Apache's Hydra-1X discovery drilled in 2008. The field will be developed upon completion of a gas sales agreement with the Egyptian General Petroleum Corporation.

• On April 30, 2009, Apache announced discovery of the Phiops field, the largest of five fields discovered since 2006 by Apache through its joint venture partner, Khalda Petroleum Company, in the Faghur Basin of the Western Desert. The Phiops-1X well in the South Umbarka Concession was completed earlier this year as an oil producer and test-flowed 2,278 b/d and 5 MMcf/d from the Safa formation. The Phiops field was subsequently appraised by the Phiops-5 well discussed below.

• On April 30, we also announced that 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. Apache plans to apply for a development lease on this discovery.

• On April 30, we also announced the NTRK-C-1X well, our first new field discovery in the North Tarek Concession along the Mediterranean coast, tested at a rate of 3,489 b/d and 5 MMcf/d. Additional drilling is planned for this new concession.

Development and Appraisal Activity
• On June 9, 2009, we announced that the Phiops-5 appraisal well in the Faghur Basin in Egypt's Western Desert test-flowed 8,279 b/d and 0.4 MMcf/d. A new pipeline from Phiops to the Khepri-Sethos facilities is expected to be completed during the third quarter of 2009. The new pipeline and additional storage capacity at Kalabsha and Khepri-Sethos are estimated to increase gross production capacity in the Kalabsha area from 4,000 b/d to 20,000 b/d in early 2010. We plan to continue an exploration, appraisal and development program in the second half of 2009 to capitalize on these successes, including the acquisition of 740 square kilometers of three-dimensional seismic data in the area.

• During the second quarter, we completed performance tests at the new Salam Gas Plant Trains 3 and 4, and the Northern Pipeline Compression project is now fully operational. These two new trains add 200 MMcf/d and 10,000 b/d of gross processing capacity and are currently operating at design capacity throughput.

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• Amendments to extend our Siwa, Sallum, and West Ghazalat exploration concessions for an additional three years (to July 27, 2013) were approved by the Egyptian Parliament in June 2009. These concessions encompass 3.8 million gross acres, which Apache operates with a 50-percent contractor interest. Apache's first well in West Ghazalat should spud in October 2009.

Australia
Varanus Island
• Early in the third quarter, Apache subsidiaries completed final repairs to the Varanus Island gas processing and transportation hub offshore Western Australia, which sustained damage from a gas pipeline explosion in June 2008. The subsidiaries are also installing a compressor at Varanus Island to expand gross compression capacity to 460 terajoules per day (TJ/d). Installation is expected to be completed during the third quarter of this year.

Exploration Activity
• We drilled two new wells in the Julimar-Brunello complex during the second quarter. We are presently evaluating all options to commercialize this large gas resource, and the process is expected to be completed by year-end.

Development Activity
• At our Van Gogh oil project, the Van Gogh-6H development well and Van Gogh-12 water injector were completed. Repairs of the floating production, storage and offloading (FPSO) vessel, a result of April's control room fire, are well underway, and we estimate first production at Van Gogh around year-end. The fire delayed first production, initially scheduled for the second quarter of this year. The FPSO is owned and operated by a third party and will be leased by Apache when it is delivered to the Van Gogh field.

North Sea
Development Activity
• Apache completed four successful oil development wells during the quarter, bringing the 2009 total to seven. Of note is the Forties Charlie 6-3 well, which encountered 34 meters of pay and was brought on production in mid-June at 10,500 b/d, the highest initial rate in the field since 1994. Apache owns a 97.14-percent interest in the Forties field.

• The Forties Field is currently producing at sustained rates in excess of 70,000 gross b/d. We are in the process of drilling one development well and completing an additional successful oil development well, which is scheduled to be on production in August 2009.

U.S. Central Region
Development Activity
• Region rig activity was deliberately slowed in the first two quarters of 2009 in an effort to better align service costs with the current lower oil and gas price environment. With the reduced activity levels, the region concentrated on building their inventory of drillable prospects and proceeded with lower cost projects, such as water-flood expansions to target oil.

• We also began a rigorous evaluation of our emerging horizontal tight-gas play in the Anadarko Basin. We are presently drilling our first operated horizontal granite wash well following recent industry successes. Apache has identified a number of horizontal oil and gas plays on our acreage and will be testing these over the remainder of 2009 and into 2010.

• We believe we can drill and complete a well today for roughly two-thirds of 2008 costs as service costs continue to fall. With costs down and over 60 percent of the region's annual budget unspent at the end of the second quarter, we plan to accelerate our drilling and workover programs in the second half of 2009.

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Acquisitions
• On June 3, 2009, we completed the acquisition of nine Permian Basin oil and gas fields from Marathon Oil Corporation. Apache has indentified numerous attractive oil drilling targets, especially in southeastern New Mexico, where we recently sanctioned a 10-well program for the second half of 2009.

U.S. Gulf Coast Region
Development Activity
• Our much anticipated, 40-percent owned, Geauxpher (Garden Banks 462) development came on line May 15, 2009. Through July 31, 2009, the two-well field had already produced 7.5 billion cubic feet (Bcf) and was continuing to flow at 105 MMcf/d.

• We also made considerable progress restoring Gulf Coast region production previously shut-in because of hurricane damage. The region restored an average of 5,100 barrels of oil equivalent per day (boe/d) in the second quarter. The last 8,800 boe/d is projected to be restored in the third quarter of 2009. The timing of the remaining restoration in many instances is beyond our control since we are awaiting repairs to third-party pipelines and facilities.

• On April 20, 2009, Apache reported that its 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.

• The Gulf Coast Region continues to see further reductions in rig rates. For example, jack-up rig activity has fallen to fewer than 20 rigs, down from the more traditional 100-rig level. As a result, quotes are now below 2008 rates. We are also seeing significant cost reductions for support vessels.

Canada
Development Activity
• Continued weak gas prices and a high-cost environment slowed our development drilling activity in Canada. Although we drilled 118 development wells during the first half of 2009, very little activity occurred after the winter drilling campaign concluded in the first quarter. We plan to drill another 53 wells in the second half of the year, predominately for oil targets. The province of Alberta implemented a royalty incentive limiting royalties to five percent for the first year if the well is completed before April 1, 2011, as well as a $200-per-meter drilled royalty credit. We continue to evaluate our substantial prospect inventory with these incentives in mind but will generally need more cost relief and/or higher gas prices to increase activity substantially.

• Activity at our Horn River (Ootla) shale play remained high during the quarter. We currently have six horizontal Muskwa wells from the 2008 drilling program producing an aggregate gross 14 MMcf/d after more than a year, on average. Also, the first three wells from the Encana-operated 2009 program are on production and together produced a gross 26 MMcf/d after three weeks, on average. A fourth well is expected to be on production in early August 2009. Encana will finish drilling another 11 wells while Apache completes its 16-well program on the 70-K pad by the end of the third quarter of 2009. Completion operations for these wells will commence late this year, and we anticipate first production by the end of the first quarter of 2010. We are quite pleased with the improved efficiencies that we have been able to achieve, as drilling times have improved to as little as 16 days from our original estimation of 30 days.

In the second quarter, the partners commissioned a new dehydration and compressor facility and a new 42-mile, 24-inch sales line, with capacity of over 700 MMcf/d, that will allow us to flow gas to a third-party's interconnect point.

Given soft gas prices, the partners will need to continue to look for ways to reduce costs. We believe combining our results to date with our acreage position will enable us to drill up to 3,000 gross wells in the Ootla shale play over the next several decades.

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RESULTS OF OPERATIONS
Revenues

                               Changes in Oil and Gas Production Revenues - Quarter
                                               Crude Oil          Natural Gas           NGL's             Total
                                                                         (In thousands)
Revenues for the quarter ended June 30,
2007                                          $  1,473,621        $    922,736        $  47,674        $  2,444,031

Volume increase (decrease)                          89,708            (119,798 )         (5,056 )           (35,146 )
Price increase                                   1,243,800             444,557           18,948           1,707,305
Impact of hedges decrease                         (200,225 )           (11,847 )              -            (212,072 )

Increase in 2008                              $  1,133,283        $    312,912        $  13,892        $  1,460,087

Revenues for the quarter ended June 30,
2008                                          $  2,606,904        $  1,235,648        $  61,566        $  3,904,118


Contribution to total year-to-date 2008
revenues                                                67 %                31 %              2 %               100 %

Volume increase (decrease)                         118,948              31,342           (2,936 )           147,354
Price decrease                                  (1,453,720 )          (760,451 )        (35,981 )        (2,250,152 )
Impact of hedges increase                          219,264              53,760                -             273,024

Decrease in 2009                              $ (1,115,508 )      $   (675,349 )      $ (38,917 )      $ (1,829,774 )

Revenues for the quarter ended June 30,
2009                                          $  1,491,396        $    560,299        $  22,649        $  2,074,344

Contribution to total year-to-date 2009
revenues                                                72 %                27 %              1 %               100 %



                              Changes in Oil and Gas Production Revenues - Six Months
                                               Crude Oil          Natural Gas           NGL's             Total
                                                                         (In thousands)
Revenues for the six months ended
June 30, 2007                                 $  2,633,550        $  1,749,497        $  84,051        $  4,467,098

Volume increase (decrease)                         416,323            (129,932 )         (3,637 )           282,754
Price increase                                   1,989,824             631,233           41,727           2,662,784
Impact of hedges decrease                         (313,073 )           (17,496 )              -            (330,569 )

Increase in 2008                              $  2,093,074        $    483,805        $  38,090        $  2,614,969

Revenues for the six months ended
June 30, 2008                                 $  4,726,624        $  2,233,302        $ 122,141        $  7,082,067


Contribution to total year-to-date 2008
revenues                                                67 %                31 %              2 %               100 %
Volume increase (decrease)                         125,669               2,387           (7,180 )           120,876
Price decrease                                  (2,693,106 )        (1,180,396 )        (72,845 )        (3,946,347 )
Impact of hedges increase                          354,842              66,520                -             421,362

Decrease in 2009                              $ (2,212,595 )      $ (1,111,489 )      $ (80,025 )      $ (3,404,109 )

Revenues for the six months ended
June 30, 2009                                 $  2,514,029        $  1,121,813        $  42,116        $  3,677,958

Contribution to total 2009 year-to-date
revenues                                                68 %                31 %              1 %               100 %

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Production and Pricing

                                           For the Quarter Ended June 30,                              For the Six Months Ended June 30,
                                                                          Increase                                                       Increase
                                    2009                2008             (Decrease)               2009                 2008             (Decrease)
Oil Volume - b/d:
United States                          88,530            100,049                 (12 )%              87,642             100,364                 (13 )%
Canada                                 15,833             17,746                 (11 )%              16,090              17,547                  (8 )%

North America                         104,363            117,795                 (11 )%             103,732             117,911                 (12 )%

Egypt                                  95,359             64,886                  47 %               89,475              63,718                  40 %
Australia                              10,478              8,367                  25 %                9,164               8,894                   3 %
North Sea                              59,688             56,570                   6 %               60,089              57,670                   4 %
Argentina                              11,948             12,067                  (1 )%              12,192              12,146                   -

International                         177,473            141,890                  25 %              170,920             142,428                  20 %


Total (1)                             281,836            259,685                   9 %              274,652             260,339                   6 %


Average Oil price - Per
barrel:
United States                   $       57.00        $     97.64                 (42 )%      $        49.95         $     90.59                 (45 )%
Canada                                  55.17             119.16                 (54 )%               46.49              106.33                 (56 )%
North America                           56.72             100.88                 (44 )%               49.41               92.93                 (47 )%
Egypt                                   60.30             126.20                 (52 )%               51.90              112.28                 (54 )%
Australia                               63.01             133.79                 (53 )%               49.74              116.78                 (57 )%
North Sea                               58.77             121.10                 (51 )%               51.51              108.23                 (52 )%
Argentina                               46.17              50.12                  (8 )%               46.73               47.61                  (2 )%
International                           58.99             118.14                 (50 )%               51.28              105.41                 (51 )%
Total (2)                               58.15             110.32                 (47 )%               50.57               99.76                 (49 )%

Natural Gas Volume -
Mcf/d:
United States                         662,834            758,524                 (13 )%             637,894             751,269                 (15 )%
Canada                                373,796            357,828                   4 %              365,551             359,289                   2 %

North America                       1,036,630          1,116,352                  (7 )%           1,003,445           1,110,558                 (10 )%

Egypt                                 376,737            233,793                  61 %              347,443             238,385                  46 %
Australia                             161,069            129,531                  24 %              151,607             160,355                  (5 )%
North Sea                               2,645              2,507                   6 %                2,663               2,556                   4 %
Argentina                             192,542            197,284                  (2 )%             192,250             181,209                   6 %

International                         732,993            563,115                  30 %              693,963             582,505                  19 %


Total (3)                           1,769,623          1,679,467                   5 %            1,697,408           1,693,063                   -


Average Natural Gas price
- Per Mcf:
United States                   $        3.88        $     10.62                 (63 )%      $         4.21         $      9.50                 (56 )%
Canada                                   3.86               9.63                 (60 )%                4.26                8.59                 (50 )%
North America                            3.88              10.30                 (62 )%                4.23                9.21                 (54 )%
Egypt                                    3.85               6.26                 (39 )%                3.73                5.72                 (35 )%
Australia                                1.82               2.17                 (16 )%                1.71                2.14                 (20 )%
North Sea                               12.24              21.90                 (44 )%                9.82               19.05                 (48 )%
Argentina                                1.89               1.39                  36 %                 1.94                1.60                  21 %
International                            2.92               3.69                 (21 )%                2.82                3.51                 (20 )%
Total (4)                                3.48               8.09                 (57 )%                3.65                7.25                 (50 )%

Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States                           5,483              7,231                 (24 )%               5,198               7,236                 (28 )%
Canada                                  2,052              1,868                  10 %                2,082               2,052                   1 %

North America                           7,535              9,099                 (17 )%               7,280               9,288                 (22 )%
Argentina                               3,091              2,905                   6 %                3,114               2,812                  11 %

Total                                  10,626             12,004                 (11 )%              10,394              12,100                 (14 )%


Average NGL Price - Per
barrel:
United States                   $       27.36        $     65.27                 (58 )%      $        25.90         $     61.32                 (58 )%
Canada                                  24.23              59.26                 (59 )%               22.40               56.05                 (60 )%
North America                           26.50              64.04                 (59 )%               24.90               60.15                 (59 )%
Argentina                               15.91              32.31                 (51 )%               16.51               39.98                 (59 )%
Total                                   23.42              56.36                 (58 )%               22.39               55.46                 (60 )%

(1) Approximately eight percent of oil production was subject to financial derivative hedges for the second quarter and six-month period of 2009; 18 percent for the 2008 second quarter and six-month period.

(2) Reflects a per barrel increase of $.51 and $1.04 from financial derivative hedging activities for the 2009 second quarter and six-month period, respectively, and a decrease of $8.72 and $6.40 from financial derivative hedging activities for the 2008 second quarter and six-month . . .