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APA > SEC Filings for APA > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for APACHE CORP


7-Nov-2012

Quarterly Report


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


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.



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.


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.


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


Pricing



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