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APA > SEC Filings for APA > Form 10-K on 28-Feb-2014All Recent SEC Filings

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Form 10-K for APACHE CORP


28-Feb-2014

Annual Report


ITEM 7. 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, the 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.

The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements set forth in Part IV, Item 15, and the risk factors and related information set forth in

Part I, Item 1A, and Part II, Item 7A of this Form 10-K.

Executive Overview

Strategy

Apache's mission is to grow a profitable global exploration and production company in a safe and environmentally responsible manner for the long-term benefit of our shareholders. Our growth strategy focuses on economic growth through exploration and development drilling, supplemented by occasional strategic acquisitions and portfolio high-grading through asset divestitures.

The Company's foundation for future growth is driven by our significant producing asset base and large undeveloped acreage positions. This allows for growth through sustainable lower-risk drilling opportunities, balanced by higher-risk, higher-reward exploration. We closely monitor drilling and acquisition cost trends in each of our core areas relative to product prices and, when appropriate, adjust our capital budgets accordingly and allocate funds to projects based on expected value. We do this through a disciplined and focused process that includes analyzing current economic conditions, projected rate of return on internally generated drilling inventories, and opportunities for tactical acquisitions or leasehold purchases that add substantial drilling prospects or, occasionally, provide access to new core areas that could enhance our portfolio.

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. In May 2013, 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. By year-end, Apache completed more than $7 billion in asset sales, as discussed in "Operational Developments" below. The Company used the proceeds to pay down nearly $2.6 billion of debt and to repurchase $1 billion of Apache common shares under a 30-million share repurchase program authorized by the Company's Board of Directors, and we exited the year with nearly $2 billion in cash.

We remain steadfast to the business principles that have guided Apache's progress since our inception. Throughout the cycles of our industry, our strategic focus on growing a diverse portfolio has underpinned our ability to deliver production and reserve growth and competitive returns on invested capital for the benefit of our shareholders. Delivering successful results under this strategy is bolstered by Apache's unique culture. A strong sense of urgency, empowerment of our employees, effective incentive systems, and an independent mindset are at the heart of how we build value.

Financial and Operating Results

Continued volatility in the commodity price environment reinforces the importance of our asset portfolio. Our 2013 results reflected the benefit of our product balance, as combined crude oil and liquids represented 54 percent of our production but provided 83 percent of our $16.4 billion of oil and gas production revenues. In


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addition, approximately 65 percent of our 2013 crude oil production is priced relative to Dated Brent crudes and sweet crude from the Gulf Coast, which continue to be priced at a significant premium to WTI-based prices. After the sale of our Gulf of Mexico Shelf assets, less of our U.S. crude oil production is receiving these premium prices, which reduces our overall price realizations.

Results for the year ended December 31, 2013 include:

• Apache reported annual daily production of oil, natural gas, and natural gas liquids averaging 761 Mboe/d. Excluding the impact of the divested Gulf of Mexico Shelf and Canadian assets, production for the year would have increased 2 percent from 2012.

• Liquids production for the year averaged a record 411 Mboe/d, an increase of 4 percent from 396 Mboe/d in 2012. Crude oil accounted for 84 percent of liquids production. North American onshore liquids production increased 34 percent, averaging 179 Mboe/d in 2013 compared to 133 Mboe/d in 2012.

• Oil and gas production revenues totaled $16.4 billion, down $545 million from a record $16.9 billion in 2012, reflecting asset sales and lower realized prices compared to the prior year.

• Net cash provided by operating activities totaled $9.8 billion, an increase of 16 percent compared to 2012.

• Apache reported $2.2 billion in income attributable to common stock, or $5.50 per diluted common share, up from $1.9 billion, or $4.92 per share, in 2012. Earnings for 2013 and 2012 reflect the after-tax impact of oil and gas property write-downs totaling $659 million and $1.4 billion, respectively. For additional discussion regarding these write-downs, please refer to Note 1-Summary of Significant Accounting Policies-"Property and Equipment" in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Form 10-K.

• Apache's adjusted earnings, which exclude certain items impacting the comparability of results, were $3.2 billion, or $7.92 per diluted common share, down from $3.8 billion, or $9.48 per share, in 2012. 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 7.

2014 Outlook

As we head into 2014, we remain committed to the Company's mission. At the end of 2012 and the beginning of 2013, Apache undertook a strategic review of our portfolio with the ultimate goal of focusing our company around the right mix of assets that can consistently generate strong returns, drive more predictable production growth, and create shareholder value. After completing more than $7 billion of divestitures in 2013 and announcing the agreed sale of our Argentine operations in 2014, our growth portfolio is centered on (i) increasing onshore North American liquids production that provides for predictable and attractive rates of return (ii) generating excess free cash flow from our international operations, and (iii) continuing longer-term growth initiatives which include our Wheatstone and Kitimat LNG projects.

We believe our core inventory of exploration and development projects offers numerous growth opportunities. Recent drilling successes and acquisitions of acreage positions across North America have built a robust drilling inventory for our Permian and Central regions that we intend to aggressively target because they are oil-prone and produce liquids-rich gas. Our plan for 2014 also includes further development of our major oil and gas discoveries and LNG projects in Australia and Canada, which, if completed, would enable us to monetize significant gas resources at prices more closely linked to crude oil.

Our initial 2014 capital budget is approximately $11.6 billion, or $11.1 billion excluding expenditures attributable to a one-third noncontrolling interest in Egypt. Approximately $7.1 billion is expected to be spent on


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projects in North America, with the remaining amount allocated across our international regions. While funds have been committed for certain 2014 exploration wells, long-lead development projects, and front-end engineering and design (FEED) studies, the majority of our drilling and development projects are discretionary and subject to acceleration, deferral, or cancellation as conditions warrant. Approximately $2.4 billion of our 2014 capital will be invested in our Kitimat and Wheatstone LNG projects, reflecting our current project interests. Apache is actively evaluating ways to right-size its level of participation in the Kitimat LNG project.

We closely monitor commodity prices, service cost levels, regulatory impacts, and numerous other industry factors, and we typically review and revise our exploration and development budgets quarterly based on changes to actual and predicted operating cash flows.

Apache's current capital budget is estimated to deliver an increase in 2014 production between 5 percent and 8 percent from full-year 2013 production levels when excluding the divested assets.

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.

Exploration, Exploitation, and Development Activities

Our internally generated exploration and drilling opportunities and multi-year development projects provide the foundation for our growth. Highlights of our 2013 drilling successes, exploration discoveries, LNG project milestones, and other opportunities for continued growth include:

North American Activities

Record Drilling Activity in U.S. Onshore Regions During 2013 Apache increased production in the Permian Basin 17 percent relative to 2012 through an active drilling program utilizing an average of 42 rigs. Over half of the region's production is crude oil and 18 percent is natural gas liquids (NGL). Combined, this represents almost a quarter of Apache's total liquids production for 2013.

The Central region increased production almost 50 percent relative to 2012 as a result of our active oil and liquids-rich drilling program across our nearly two million gross acres in the Anadarko basin. During the year we operated an average of 27 drilling rigs, and we drilled or participated in drilling 322 gross wells with 98 percent success.

In 2013, U.S. production represented 44 percent of Apache's total worldwide production, an increase from 40 percent in 2012. Focused drilling programs in the Permian Basin and Anadarko basin continue to provide momentum for Apache's U.S. production growth.

International Activities

North Sea Development Apache's North Sea drilling success was highlighted with discoveries in the Tonto field. The Tonto-1 well, completed in April, had initial production of 10.3 Mb/d, and the Tonto-2 well, completed in September, had initial production of 8.3 Mb/d. Apache has a 100 percent working interest in the wells. The Tonto discovery follows Maule and Bacchus as the third new field brought online by Apache in the Forties area over the last three years. All three fields qualify for the U.K.'s small field allowance, which provides economic incentives for operators to bring discoveries from small fields on production.


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Egypt Discoveries In August, Apache announced seven oil and gas discoveries in four different geologic basins in Egypt's Western Desert. In particular, the Riviera SW-1X discovery in the Abu Gharadig basin test-flowed 5,800 b/d and 2.8 Mcf/d from a Lower Bahariya sand with 24 feet of net pay. All seven discoveries have been tested and six are already producing.

Egypt Horizontal Drilling In 2013, the Company drilled its first well of a multi-well horizontal drilling program in the Abu Gharadig field. During December, this well produced an average of 1,681 b/d and 3 MMcf/d from a 1,970 foot lateral. The well was one of eight wells initiated during 2013 to test horizontal technology to increase recoveries in a variety of conventional and unconventional reservoirs. Additional horizontal drilling is planned in the Abu Gharadig and surrounding fields in 2014.

Australia Discoveries In July, Apache announced its Bianchi-1 natural gas discovery located 4 miles northeast of the 2011 Zola gas discovery offshore Western Australia in the Carnarvon Basin. The well logged 367 feet of net pay in eight reservoir zones between 15,577 and 17,530 feet subsea. Apache is in the early stages of evaluating the discovery and assessing potential commercial opportunities. Apache operates and owns a 30.25 percent working interest in the well.

Australia Macedon 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 approximately 200 MMcf of natural gas per day.

Australia Wheatstone LNG Project 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.

Acquisition and Divestiture Activity

2014 Activity

Argentina Divestiture On February 12, 2014, Apache subsidiaries announced an agreement to sell all of its operations in Argentina to Sociedad Anónima (YPF) for cash consideration of $800 million plus the assumption of $52 million of bank debt as of June 30, 2013. The transaction is expected to close in the first quarter of 2014.

2013 Activity

Egypt Sinopec Partnership On November 14, 2013, Apache announced the completion of the sale of a one-third minority participation in its Egypt oil and gas business to Sinopec for cash consideration of $2.95 billion after customary closing adjustments. Apache will continue to operate the Egypt upstream oil and gas business. This noncontrolling interest is recorded separately in the Company's financial statements.

Gulf of Mexico Shelf Divestiture On September 30, 2013, Apache completed the sale of its Gulf of Mexico Shelf operations and properties to Fieldwood, an affiliate of Riverstone Holdings. Under the terms of the agreement, Apache received cash consideration of $3.7 billion, and Fieldwood assumed $1.5 billion of discounted asset abandonment liabilities. Additionally, Apache retained 50 percent of its ownership interest in all exploration blocks and in horizons below production in developed blocks. Total region production in 2013 was 71 Mboe/d, reflecting nine months of Shelf production prior to the divestiture.

Canadian Divestitures In September, Apache completed the sale of primarily dry gas assets in Alberta for $214 million. The sale includes 621,000 gross acres (530,000 net acres) and more than 2,700 wells. Additionally in October of 2013, Apache completed two additional sales of Canadian oil and gas production properties for $112 million. The assets comprise approximately 4,000 operated and 1,300 non-operated wells. Combined, our 2013 divestitures totaled 13 percent of the region's production.


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Kitimat LNG Project In February 2013, Apache completed a transaction with Chevron Canada Limited (Chevron Canada) under which each company became a 50 percent owner of the Kitimat LNG plant, the Pacific Trail Pipelines Limited Partnership (PTP), and 644,000 gross undeveloped acres in the Horn River and Liard basins. Chevron Canada will operate the LNG plant and pipeline while Apache Canada will continue to operate the upstream assets. Apache's net proceeds from the transaction were $396 million after post-closing adjustments.

For detailed information regarding our recent divestitures, please refer to Note 2-Acquisitions and Divestitures in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Form 10-K.

2012 Activity

Cordillera Energy Partners III, LLC Acquisition On April 30, 2012, Apache completed the acquisition of Cordillera, a privately held exploration and production company, in a stock and cash transaction. Cordillera's properties include approximately 312,000 net acres in the Granite Wash, Tonkawa, Cleveland, and Marmaton plays in western Oklahoma and the Texas Panhandle. Apache issued 6,272,667 shares of common stock and paid approximately $2.7 billion of cash to the sellers as consideration for the transaction.

Yara Pilbara Holdings Pty Acquisition On January 31, 2012, a subsidiary of Apache Energy Limited completed the acquisition of a 49 percent interest in Yara Pilbara Holdings Pty Limited (YPHPL, formerly Burrup Holdings Limited) for $439 million, including working capital adjustments. Yara Australia Pty Ltd (Yara) owns the remaining 51 percent of YPHPL and operates the plant.


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Results of Operations

Oil and Gas Revenues

Apache's oil and gas revenues by regions are as follows:



                                                                       For the Year Ended December 31,
                                             2013                                   2012                                   2011
                                $ Value         % Contribution         $ Value         % Contribution         $ Value         % Contribution
                                                                               ($ in millions)
Total Oil Revenues:
United States                   $  5,262                     41 %      $  4,662                     35 %      $  4,163                     33 %
Canada                               563                      4 %           492                      4 %           485                      4 %

North America                      5,825                     45 %         5,154                     39 %         4,648                     37 %

Egypt(3)                           3,528                     27 %         4,050                     31 %         4,169                     33 %
Australia                            779                      6 %         1,218                      9 %         1,552                     12 %
North Sea                          2,500                     20 %         2,517                     19 %         2,072                     16 %
Argentina                            271                      2 %           271                      2 %           238                      2 %

International(3)                   7,078                     55 %         8,056                     61 %         8,031                     63 %

Total(1)(3)                     $ 12,903                    100 %      $ 13,210                    100 %      $ 12,679                    100 %

Total Gas Revenues:
United States                   $  1,096                     38 %      $  1,169                     37 %      $  1,550                     43 %
Canada                               587                     21 %           751                     23 %         1,033                     29 %

North America                      1,683                     59 %         1,920                     60 %         2,583                     72 %

Egypt(3)                             389                     14 %           504                     16 %           621                     17 %
Australia                            361                     13 %           357                     11 %           182                      5 %
North Sea                            194                      7 %           188                      6 %            19                      0 %
Argentina                            202                      7 %           224                      7 %           204                      6 %

International(3)                   1,146                     41 %         1,273                     40 %         1,026                     28 %

Total(2)(3)                     $  2,829                    100 %      $  3,193                    100 %      $  3,609                    100 %

NGL Revenues:
United States                   $    544                     81 %      $    395                     73 %      $    391                     75 %
Canada                                74                     11 %            79                     14 %            99                     19 %

North America                        618                     92 %           474                     87 %           490                     94 %

Egypt(3)                              -                      -               -                       0 %             1                      0 %
North Sea                             34                      5 %            46                      8 %            -                      -
Argentina                             18                      3 %            24                      5 %            31                      6 %

International(3)                      52                      8 %            70                     13 %            32                      6 %

Total(3)                        $    670                    100 %      $    544                    100 %      $    522                    100 %

Total Oil and Gas Revenues:
United States                   $  6,902                     42 %      $  6,226                     37 %      $  6,104                     36 %
Canada                             1,224                      8 %         1,322                      8 %         1,617                     10 %

North America                      8,126                     50 %         7,548                     45 %         7,721                     46 %

Egypt(3)                           3,917                     24 %         4,554                     27 %         4,791                     29 %
Australia                          1,140                      7 %         1,575                      9 %         1,734                     10 %
North Sea                          2,728                     16 %         2,751                     16 %         2,091                     12 %
Argentina                            491                      3 %           519                      3 %           473                      3 %

International(3)                   8,276                     50 %         9,399                     55 %         9,089                     54 %

Total(3)                        $ 16,402                    100 %      $ 16,947                    100 %      $ 16,810                    100 %

(1) Financial derivative hedging activities decreased 2013, 2012, and 2011 oil revenues $47 million, $146 million, and $379 million, respectively.

(2) Financial derivative hedging activities increased 2013, 2012, and 2011 natural gas revenues $31 million, $414 million, and $272 million, respectively.

(3) 2013 includes revenues attributable to a noncontrolling interest in Egypt.


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Production

The following table presents production volumes by region:



                                                             For the Year Ended December 31,
                                                     Increase                             Increase
                                     2013           (Decrease)            2012           (Decrease)            2011
Oil Volume-b/d:
United States                         146,907                10 %          134,123                12 %          119,415
Canada                                 17,724                12 %           15,830                11 %           14,252

North America                         164,631                10 %          149,953                12 %          133,667

Egypt(1)(2)                            89,561               (10 %)          99,756                (4 %)         103,912
Australia                              19,329               (33 %)          28,884               (24 %)          38,228
North Sea                              63,721                 0 %           63,692                17 %           54,541
Argentina                               9,375                (4 %)           9,741                 2 %            9,597

International                         181,986               (10 %)         202,073                (2 %)         206,278

Total                                 346,617                (2 %)         352,026                 4 %          339,945

Natural Gas Volume-Mcf/d:
United States                         781,335                (9 %)         854,099                (1 %)         864,742
Canada                                497,515               (17 %)         600,680                (5 %)         632,550

North America                       1,278,850               (12 %)       1,454,779                (3 %)       1,497,292

Egypt(1)(2)                           356,454                 1 %          353,738                (3 %)         365,418
Australia                             223,433                 4 %          214,013                16 %          185,079
North Sea                              50,961               (11 %)          57,457                NM              2,284
Argentina                             187,390               (12 %)         213,464                 1 %          212,311

International                         818,238                (2 %)         838,672                10 %          765,092

Total                               2,097,088                (9 %)       2,293,451                 1 %        2,262,384

NGL Volume-b/d:
United States                          54,580                63 %           33,527                52 %           22,111
Canada                                  6,689                 7 %            6,258                 5 %            5,958

North America                          61,269                54 %           39,785                42 %           28,069

Egypt                                      -                  0 %               -                 NM                 49
North Sea                               1,272               (21 %)           1,618                NM                  4
Argentina                               2,102               (30 %)           3,008                 0 %            3,018

International                           3,374               (27 %)           4,626                51 %            3,071

Total                                  64,643                46 %           44,411                43 %           31,140

BOE per day(3)
United States                         331,709                 7 %          310,000                 9 %          285,650
Canada                                107,332               (12 %)         122,201                (3 %)         125,636

North America                         439,041                 2 %          432,201                 5 %          411,286

. . .
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