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APA > SEC Filings for APA > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for APACHE CORP


8-Nov-2013

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. The Company has exploration and production interests in six countries: the United States (U.S.), Canada, Egypt, Australia, the United Kingdom (U.K.) 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 2012 fiscal year.

Financial Overview

For the third quarter of 2013, Apache reported earnings of $300 million, or $0.75 per common share, up from $161 million, or $0.41 per share, in the third quarter of 2012. Earnings for the first nine months of 2013 totaled $2.0 billion, or $5.06 per diluted share, compared with $1.3 billion, or $3.27 per share, in the prior-year period. Apache's adjusted earnings for the third quarter of 2013, which exclude certain items impacting the comparability of results, were $932 million, or $2.32 per diluted common share, up from $861 million, or $2.16 per share, in the third quarter of 2012. Adjusted earnings for the first nine months of 2013 totaled $2.5 billion, or $6.35 per diluted share, down from $2.9 billion or $7.22 per share in the comparable prior-year 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.

Underpinning earnings was a 35 percent increase in onshore North America liquids production over the prior-year quarter, driving a 2 percent increase in worldwide production to 784 thousand barrels of oil equivalent per day (Mboe/d). Worldwide liquids production for the quarter was 9 percent higher than the comparative 2012 quarter averaging 425 Mboe/d, of which 84 percent was crude oil. Record liquids revenues of $3.7 billion contributed to a 6 percent increase in production revenues to $4.4 billion.

The strength of our crude oil portfolio helped drive net cash provided by operating activities (operating cash flows or cash flows) which totaled $2.0 billion for the third quarter of 2013, up from $1.6 billion in the third quarter of 2012. Operating cash flows is a key measure for our business, as it provides liquidity for our active drilling program and large-scale development projects currently in progress. We routinely adjust our capital budget on a quarterly basis in response to changing market conditions and operating cash flow forecasts.

Although 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 sale of assets for all other liquidity needs. Earlier this year, the Company announced plans to divest approximately $4 billion of assets by year-end 2013 to enhance financial flexibility and rebalance our portfolio to an asset mix we believe will continue to generate strong returns, drive more predictable growth, and deliver value to our shareholders. As of the date of this filing, we have completed or announced more than $7 billion in asset sales this year, as discussed in "Operational Developments" in this Item 2. The Company has used the proceeds from these divestitures to reduce debt and to repurchase Apache common shares under a 30-million share repurchase program authorized by the Company's Board of Directors. For additional information on this share repurchase program, please see Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" of this Form 10-Q.


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. We are also continuing to advance several longer-term, individually significant development projects, as more fully discussed in our 2012 Annual Report on Form 10-K. Notable operational developments include:

North America

In the third quarter, the Central region saw production increases for the sixth consecutive quarter as we continue to deploy capital across our nearly two million gross acres in the Anadarko basin. Production was up 31 percent relative to the prior-year quarter as the result of our active oil and liquids-rich drilling program. During the quarter we operated an average of 31 drilling rigs, drilling 91 gross wells with 98 percent success.

Apache operated an average of 45 rigs in the Permian Basin during the third quarter of 2013 resulting in a production increase of 18 percent relative to the third quarter of 2012. Over half of the region's production is crude oil and 20 percent is natural gas liquids (NGL). Combined, this represents almost a quarter of Apache's total liquids production for the third quarter of 2013.

Third-quarter 2013 U.S. production represents 46 percent of Apache's total worldwide production, compared to the U.S. share of 41 percent in the third quarter of 2012. Focused drilling programs in the Permian Basin and Anadarko basin continue to provide momentum for Apache's U.S. production growth.

On September 30, 2013, Apache completed the sale of its Gulf of Mexico Shelf operations and properties to Fieldwood Energy LLC (Fieldwood), an affiliate of Riverstone Holdings. Under the terms of the agreement, Apache received consideration of $3.6 billion in cash proceeds and $1.5 billion of discounted asset abandonment liabilities assumed by Fieldwood. Additionally, Apache will receive approximately $200 million associated with pending preferential right settlements expected to close in the fourth quarter. Apache has retained a 50 percent ownership interest in all exploration blocks and in horizons below existing production in developed blocks. The effective date of the agreement is July 1, 2013.

On September 30, Apache completed the sale of certain Alberta oil and gas assets to Ember Resources, Inc. for $199 million, subject to final closing adjustments. The assets comprise 621,000 gross acres (530,000 net acres) and more than 2,700 wells. The assets had net production of 69 million cubic feet of gas and 247 barrels of liquid hydrocarbons per day in the third quarter of 2013. The effective date of the transaction is April 1, 2013.

In October 2013, Apache completed two additional sales of oil and gas production properties in Canada for $112 million. The assets are located primarily in Saskatchewan and Alberta, comprising approximately 4,000 operated and 1,300 non-operated wells with third-quarter 2013 average daily production of 39 million cubic feet of natural gas and 679 barrels of oil, condensate, and natural gas liquids. The effective date of both transactions is April 1, 2013.

International

On August 29, 2013, Apache announced a global strategic partnership with Sinopec International Petroleum Exploration and Production Corporation (Sinopec) to pursue joint upstream oil and gas projects. As the first step in this partnership, Apache will receive $3.1 billion in cash, subject to customary closing adjustments, in exchange for Sinopec gaining a 33 percent minority participation in Apache's Egypt oil and gas business. Apache will continue to operate its Egypt upstream oil and gas business. The Egypt partnership is subject to customary governmental approvals and is expected to close during the fourth quarter, with an effective date of January 1, 2013.

During the third quarter of 2013, Apache, along with operator and co-venturer BHP Billiton, officially commenced operations of the $1.5 billion Macedon natural gas facility, of which, Apache owns a 28.57 percent interest. Macedon, Western Australia's fourth domestic gas hub, has a production capacity of 200 terajoules of natural gas per day.

On October 1, 2013, Apache and its Australian partners finalized agreements to sell LNG to Tohoku Electric Power Company, Inc. from the Chevron-operated Wheatstone Project in Western Australia. The Wheatstone partners have agreed to supply 0.9 million metric tons per annum of LNG for up to 20 years, which brings the total LNG supplies contracted to approximately 85 percent. Apache owns a 13 percent share in the Wheatstone Project through a subsidiary.


Notable Events

Egypt Political Unrest

In February 2011, former Egyptian president Hosni Mubarak stepped down, and the Egyptian Supreme Council of the Armed Forces took power, announcing that it would remain in power until presidential and parliamentary elections could be held. In June 2012, President Mohamed Morsi of the Muslim Brotherhood's Freedom and Justice Party was elected as Egypt's new president, and in December 2012, the people of Egypt ratified a new constitution.

In July 2013, the Egyptian military removed President Morsi from power and installed Egypt's Chief Justice, Adly Mansour, as acting president of a temporary government, which has announced it is seeking to schedule new parliamentary and presidential elections in early to mid-2014.

Apache's operations, located in remote locations in the Western Desert, have not experienced production interruptions, and we have continued to receive development lease approvals for our drilling program. However, a further deterioration in the political, economic, and social conditions or other relevant policies of the Egyptian government, such as changes in laws or regulations, export restrictions, expropriation of our assets or resource nationalization, and/or forced renegotiation or modification of our existing contracts with the Egyptian General Petroleum Corporation (EGPC) could materially and adversely affect our business, financial condition, and results of operations.

As of December 31, 2012, Apache had 2,995,771 net undeveloped acres in Egypt set to expire by year-end 2013, and 285,325 and 954,553 net undeveloped acres set to expire in 2014 and 2015, respectively. During the first nine months of 2013, EGPC granted six-month extensions for each of our concessions expiring during this year, with no material relinquishments expected prior to year-end. We continue to seek longer term extensions but cannot assure that such extensions can be achieved on an economic basis or otherwise on terms agreeable to both the Company and EGPC. There are currently no reserves recorded on this undeveloped acreage and Apache will not make future investments in these areas unless the present concessions are extended.

Apache purchases multi-year political risk insurance from the Overseas Private Investment Corporation (OPIC) and other highly rated international insurers covering a portion of its investments in Egypt. In the aggregate, these insurance policies, subject to the policy terms and conditions, provide approximately $856 million of coverage to Apache for losses arising from confiscation, nationalization, and expropriation risks, with a $149 million sub-limit for currency inconvertibility.

In addition, Apache has a separate policy with OPIC, which provides $300 million of coverage for losses arising from (1) non-payment by EGPC of arbitral awards covering amounts owed Apache on past due invoices and (2) expropriation of exportable petroleum in the event that actions taken by the government of Egypt prevent Apache from exporting our share of production. In October 2012, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, announced that it was providing $150 million in reinsurance to OPIC for the remainder of the policy term. This provision of long-term reinsurance to OPIC will allow Apache to maintain the $300 million of insurance coverage through 2024.


Results of Operations

Oil and Gas Revenues

Oil and gas production revenues for the third quarter and first nine months of
2013 totaled $4.4 billion and $12.7 billion, respectively, a $268 million and
$120 million increase from the comparative 2012 periods. The table below
presents revenues by region and each region's percent contribution to revenues
for 2013 and 2012.



                                                For the Quarter Ended September 30,                                         For the Nine Months Ended September 30,
                                              2013                                  2012                                   2013                                    2012
                                    $                   %                   $                %                   $                    %                   $                 %
                                  Value            Contribution           Value        Contribution            Value             Contribution           Value         Contribution
                                                                                                  ($ in millions)
Total Oil Revenues:
United States                   $    1,594                    45 %       $ 1,143                  35 %      $      4,253                    43 %       $  3,409                  35 %
Canada                                 166                     5 %           115                   4 %               441                     4 %            361                   3 %

North America                        1,760                    50 %         1,258                  39 %             4,694                    47 %          3,770                  38 %

Egypt                                  925                    26 %         1,021                  32 %             2,633                    26 %          3,028                  31 %
Australia                              201                     6 %           303                   9 %               603                     6 %            947                  10 %
North Sea                              581                    16 %           571                  18 %             1,859                    19 %          1,876                  19 %
Argentina                               71                     2 %            67                   2 %               200                     2 %            203                   2 %

International                        1,778                    50 %         1,962                  61 %             5,295                    53 %          6,054                  62 %

Total(1)                        $    3,538                   100 %       $ 3,220                 100 %      $      9,989                   100 %       $  9,824                 100 %

Total Gas Revenues:
United States                   $      287                    42 %       $   288                  36 %      $        894                    41 %       $    837                  36 %
Canada                                 139                    20 %           186                  24 %               457                    21 %            547                  23 %

North America                          426                    62 %           474                  60 %             1,351                    62 %          1,384                  59 %

Egypt                                   96                    14 %           122                  15 %               291                    13 %            375                  16 %
Australia                               78                    11 %            94                  12 %               264                    12 %            264                  11 %
North Sea                               45                     6 %            44                   6 %               142                     6 %            148                   7 %
Argentina                               47                     7 %            54                   7 %               148                     7 %            168                   7 %

International                          266                    38 %           314                  40 %               845                    38 %            955                  41 %

Total(2)                        $      692                   100 %       $   788                 100 %      $      2,196                   100 %       $  2,339                 100 %

Natural Gas Liquids (NGL)
Revenues:
United States                   $      149                    83 %       $   102                  76 %      $        396                    81 %       $    279                  71 %
Canada                                  19                    11 %            17                  13 %                53                    11 %             58                  15 %

North America                          168                    94 %           119                  89 %               449                    92 %            337                  86 %

North Sea                                7                     4 %             9                   7 %                24                     5 %             36                   9 %
Argentina                                4                     2 %             5                   4 %                16                     3 %             18                   5 %

International                           11                     6 %            14                  11 %                40                     8 %             54                  14 %

Total                           $      179                   100 %       $   133                 100 %      $        489                   100 %       $    391                 100 %

Total Oil and Gas Revenues:
United States                   $    2,030                    46 %       $ 1,533                  37 %      $      5,543                    44 %       $  4,525                  36 %
Canada                                 324                     7 %           318                   8 %               951                     7 %            966                   8 %

North America                        2,354                    53 %         1,851                  45 %             6,494                    51 %          5,491                  44 %

Egypt                                1,021                    23 %         1,143                  28 %             2,924                    23 %          3,403                  27 %
Australia                              279                     6 %           397                   9 %               867                     7 %          1,211                  10 %
North Sea                              633                    15 %           624                  15 %             2,025                    16 %          2,060                  16 %
Argentina                              122                     3 %           126                   3 %               364                     3 %            389                   3 %

International                        2,055                    47 %         2,290                  55 %             6,180                    49 %          7,063                  56 %

Total                           $    4,409                   100 %       $ 4,141                 100 %      $     12,674                   100 %       $ 12,554                 100 %

(1) Financial derivative hedging activities decreased oil revenues $7 million and $44 million for the 2013 third quarter and nine-month period, respectively, and $22 million and $126 million for the 2012 third quarter and nine-month period, respectively.

(2) Financial derivative hedging activities increased natural gas revenues $9 million and $26 million for the 2013 third quarter and nine-month period, respectively, and $105 million and $328 million for the 2012 third quarter and nine-month period, respectively.


Production

The table below presents the third-quarter and year-to-date 2013 and 2012
production and the relative increase or decrease from the prior period.



                                                              For the Quarter Ended September 30,                       For the Nine Months Ended September 30,
                                                                                               Increase                                                       Increase
                                                           2013                 2012          (Decrease)              2013                   2012            (Decrease)
Oil Volume - b/d
United States                                                 163,690            133,001               23 %              156,803                128,884               22 %
Canada                                                         18,573             15,075               23 %               18,112                 15,311               18 %

North America                                                 182,263            148,076               23 %              174,915                144,195               21 %

Egypt(1)                                                       89,294             97,546               (8 %)              89,530                 98,648               (9 %)
Australia                                                      18,787             28,191              (33 %)              20,195                 29,690              (32 %)
North Sea                                                      57,861             57,296                1 %               63,291                 63,058                0 %
Argentina                                                       9,560              9,885               (3 %)               9,408                  9,701               (3 %)

International                                                 175,502            192,918               (9 %)             182,424                201,097               (9 %)

Total                                                         357,765            340,994                5 %              357,339                345,292                3 %

Natural Gas Volume - Mcf/d
United States                                                 830,423            863,433               (4 %)             848,173                841,859                1 %
Canada                                                        529,402            604,442              (12 %)             523,163                617,530              (15 %)

North America                                               1,359,825          1,467,875               (7 %)           1,371,336              1,459,389               (6 %)

Egypt(1)                                                      350,504            329,793                6 %              357,747                354,856                1 %
Australia                                                     212,141            215,317               (1 %)             212,845                217,053               (2 %)
North Sea                                                      46,971             54,478              (14 %)              50,108                 62,061              (19 %)
Argentina                                                     185,962            213,745              (13 %)             186,241                216,399              (14 %)

International                                                 795,578            813,333               (2 %)             806,941                850,369               (5 %)

Total                                                       2,155,403          2,281,208               (6 %)           2,178,277              2,309,758               (6 %)

NGL Volume - b/d
United States                                                  57,510             39,076               47 %               54,639                 30,385               80 %
Canada                                                          7,012              6,036               16 %                6,788                  6,063               12 %

North America                                                  64,522             45,112               43 %               61,427                 36,448               69 %

North Sea                                                       1,097              1,470              (25 %)               1,263                  1,797              (30 %)
Argentina                                                       1,713              3,006              (43 %)               2,254                  3,022              (25 %)

International                                                   2,810              4,476              (37 %)               3,517                  4,819              (27 %)

Total                                                          67,332             49,588               36 %               64,944                 41,267               57 %

BOE per day(2)
United States                                                 359,604            315,982               14 %              352,804                299,578               18 %
Canada                                                        113,819            121,851               (7 %)             112,095                124,296              (10 %)

North America                                                 473,423            437,833                8 %              464,899                423,874               10 %

Egypt                                                         147,711            152,512               (3 %)             149,154                157,791               (5 %)
Australia                                                      54,144             64,078              (16 %)              55,669                 65,866              (15 %)
North Sea                                                      66,787             67,845               (2 %)              72,905                 75,198               (3 %)
Argentina                                                      42,266             48,515              (13 %)              42,702                 48,790              (12 %)

International                                                 310,908            332,950               (7 %)             320,430                347,645               (8 %)

Total                                                         784,331            770,783                2 %              785,329                771,519                2 %

(1) Gross oil production in Egypt for the third quarter and nine-month period of 2013 was 193,869 b/d and 195,442 b/d, respectively. For the comparative 2012 periods gross oil production in Egypt was 210,848 b/d and 213,342 b/d, respectively. Gross natural gas production in Egypt for the third quarter and nine-month period of 2013 was 915,965 Mcf/d and 910,599 Mcf/d, respectively. For the comparative 2012 periods gross natural gas production in Egypt was 901,181 Mcf/d and 904,129 Mcf/d, respectively.

(2) 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.


Pricing

The table below presents third-quarter and year-to-date 2013 and 2012 pricing
and the relative increase or decrease from the prior periods.



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