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APA > SEC Filings for APA > Form 10-Q on 9-May-2014All Recent SEC Filings

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Form 10-Q for APACHE CORP


9-May-2014

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 five countries: the United States (U.S.), Canada, Egypt, Australia, and the United Kingdom (U.K.) North Sea. 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 2013 fiscal year.

Financial Overview

Throughout the prior year, Apache undertook a strategic review of our asset portfolio with the ultimate goal of keeping the right mix of assets that generate strong returns and excess cash flow and drive more predictable production growth to create shareholder value. As part of this effort we made several key divestitures including the sale of our Gulf of Mexico Shelf assets and the sale of primarily dry gas assets in Canada. In addition we entered into a strategic partnership with a subsidiary of Sinopec International Petroleum Exploration and Production Corporation (Sinopec) to sell a one-third minority participation in our Egypt oil and gas business in November of last year. Our divestment activities continued into the first quarter of 2014 when we exited operations in Argentina. Combined, we have divested over $8 billion of assets during this initiative and have now aligned our portfolio to provide a larger focus on our more predictable North American onshore assets that is supplemented by our international exploration and development efforts.

For the first quarter of 2014, Apache reported earnings of $236 million, or $0.60 per diluted common share, compared with $698 million, or $1.76 per share, in the first quarter of 2013. Earnings for first quarter of 2014 reflect an after-tax loss of $517 million on discontinued operations in Argentina during the quarter. This loss on disposal, as well as results of operations in Argentina for all periods presented, are reflected as discontinued operations in Apache's consolidated financial statements. Apache's adjusted earnings, which exclude discontinued operations and certain other items impacting the comparability of results, were $707 million, or $1.78 per diluted common share, for the first quarter of 2014, compared with $797 million, or $2.00 per share, in the first quarter of 2013. 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.

Average daily production in the first quarter of 2014 totaled 640 million barrels of oil equivalent (MMboe), a decrease of 99 MMboe from the comparative 2013 quarter, reflecting the sale of our Gulf of Mexico Shelf and certain Western Canadian assets in the second half of 2013. Excluding production from these divestitures, Apache's worldwide equivalent daily production increased nearly 2 percent. Organic growth between the periods was driven by a 21 percent increase in the Company's onshore North American liquids production.

The strength of our North American liquids portfolio also helped drive net cash provided by operating activities (operating cash flows or cash flows), which totaled $2.3 billion for the first quarter of 2014, compared with $2.6 billion in the first quarter of 2013. 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.

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, supplemented 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 2013 Annual Report on Form 10-K for our 2013 fiscal year. Notable operational developments include:

North America

• Apache's active drilling program in the Permian Basin continued into the first quarter of 2014, where we operated an average of 39 rigs, resulting in a production increase of 25 percent relative to the first quarter of 2013. The Permian represents almost a third of Apache's total liquids production for the first quarter of 2014.



• In the first quarter, Central region production was up 4 percent relative to the prior-year quarter as the result of our active oil and liquids-rich drilling program across our nearly two million gross acres in the Anadarko basin. During the quarter we operated an average of 26 rigs, drilling 69 gross wells with 100 percent success.

• North America Onshore production represents 56 percent of Apache's total worldwide production for the first quarter of 2014.

• On April 30, 2014, Apache completed the sale of producing oil and gas assets in the Deep Basin area of western Alberta and British Columbia, Canada for $374 million, subject to final closing adjustments. The assets comprise 622,600 gross acres (328,400 net acres). The assets had average production of 101 million cubic feet of natural gas per day (MMcf/d) and 1,500 barrels of liquid hydrocarbons per day during 2013. The effective date of the transaction is January 1, 2014.

• On May 8, 2014, Apache announced the sale of its Lucius and Heidelberg development projects and 11 primary term deepwater exploration blocks in the Gulf of Mexico to a subsidiary of Freeport-McMoRan Oil & Gas for $1.4 billion. The effective date of the transaction is May 1, 2014. The sale is subject to customary closing conditions and is expected to close by June 30, 2014.

International

• On March 12, 2014, Apache completed the sale of its Argentina operations and properties to YPF Sociedad Anónima for cash consideration of $800 million plus the assumption of $52 million of bank debt as of June 30, 2013. The results of operations related to Argentina have been classified as discontinued operations in all periods presented in this Quarterly Report on Form 10-Q.

• During the quarter, Apache announced two new field discoveries in Egypt and applied for two additional development leases that were approved by the Minister of Petroleum. This follows an active 2013 year where Apache had 20 development leases approved. The North Tarek 1 exploration well in the Matruh Basin tested 20 MMcf/d and 250 barrels of condensate per day and targeted the Jurassic Lower Safa pay. The Apries-1X well in the Shushan Basin tested 4,389 barrels of oil and 14.2 MMcf/d targeting the Paleozoic Basur sand.


Results of Operations

Oil and Gas Revenues

Oil and gas production revenues for the first quarter of 2014 totaled $3.6
billion, a $374 million decrease from the comparative 2013 quarter. The table
below presents revenues by region and each region's percent contribution to
revenues for 2014 and 2013.



                                                          For the Quarter Ended March 31,
                                                    2014                                    2013
                                      $ Value           % Contribution         $ Value         % Contribution
                                                                  ($ in millions)
Total Oil Revenues:
United States                         $   1,092                      39 %      $  1,269                     40 %
Canada                                      140                       5 %           127                      4 %

North America                             1,232                      44 %         1,396                     44 %

Egypt (3)                                   846                      30 %           912                     29 %
Australia                                   170                       6 %           203                      6 %
North Sea                                   567                      20 %           681                     21 %

International (3)                         1,583                      56 %         1,796                     56 %

Total(1)(3)                           $   2,815                     100 %      $  3,192                    100 %

Total Gas Revenues:
United States                         $     266                      41 %      $    288                     42 %
Canada                                      148                      23 %           151                     22 %

North America                               414                      64 %           439                     64 %

Egypt (3)                                   103                      16 %            97                     14 %
Australia                                    86                      13 %            95                     14 %
North Sea                                    43                       7 %            50                      8 %

International (3)                           232                      36 %           242                     36 %

Total(2)(3)                           $     646                     100 %      $    681                    100 %

Total Natural Gas Liquids (NGL)
Revenues:
United States                         $     147                      79 %      $    120                     81 %
Canada                                       30                      16 %            19                     13 %

North America                               177                      95 %           139                     94 %

Egypt (3)                                     1                       1 %            -                      -
North Sea                                     8                       4 %             9                      6 %

International (3)                             9                       5 %             9                      6 %

Total (3)                             $     186                     100 %      $    148                    100 %

Total Oil and Gas Revenues:
United States                         $   1,505                      41 %      $  1,677                     42 %
Canada                                      318                       9 %           297                      7 %

North America                             1,823                      50 %         1,974                     49 %

Egypt (3)                                   950                      26 %         1,009                     25 %
Australia                                   256                       7 %           298                      8 %
North Sea                                   618                      17 %           740                     18 %

International (3)                         1,824                      50 %         2,047                     51 %

Total (3)                             $   3,647                     100 %      $  4,021                    100 %

Discontinued Operations -
Argentina
Oil Revenue                                  45                                      63
Gas Revenue                                  39                                      54
NGL Revenue                                   3                                       8

Total                                 $      87                                $    125

(1) Financial derivative hedging activities decreased oil revenues by $1 million and $19 million for the quarters ending March 31, 2014 and 2013, respectively.

(2) Financial derivative hedging activities increased natural gas revenues by $1 million and $10 million for the quarters ending March 31, 2014 and 2013, respectively.

(3) Includes revenues attributable to a noncontrolling interest in Egypt for the quarter ended March 31, 2014.


Production

The table below presents first-quarter 2014 and 2013 production and the relative
increase or decrease from the prior period.



                                                For the Quarter Ended March 31,
                                                           Increase
                                            2014          (Decrease)           2013
  Oil Volume - b/d
  United States                              127,951              (14 %)        149,263
  Canada                                      17,589                2 %          17,176

  North America                              145,540              (13 %)        166,439

  Egypt(1)(2)                                 88,093               (4 %)         91,315
  Australia                                   16,825              (16 %)         20,001
  North Sea                                   59,092              (14 %)         68,462

  International                              164,010               (9 %)        179,778

  Total                                      309,550              (11 %)        346,217

  Natural Gas Volume - Mcf/d
  United States                              592,685              (31 %)        853,691
  Canada                                     377,712              (27 %)        519,175

  North America                              970,397              (29 %)      1,372,866

  Egypt(1)(2)                                377,357                3 %         365,612
  Australia                                  215,792                1 %         214,395
  North Sea                                   45,071              (18 %)         55,032

  International                              638,220                1 %         635,039

  Total                                    1,608,617              (20 %)      2,007,905

  NGL Volume - b/d
  United States                               53,058                8 %          49,299
  Canada                                       7,769               17 %           6,663

  North America                               60,827                9 %          55,962

  Egypt(1)(2)                                    233               NM                -
  North Sea                                    1,091              (27 %)          1,494

  International                                1,324              (11 %)          1,494

  Total                                       62,151                8 %          57,456

  BOE per day(3)
  United States                              279,790              (18 %)        340,844
  Canada                                      88,310              (20 %)        110,368

  North America                              368,100              (18 %)        451,212

  Egypt(2)                                   151,219               (1 %)        152,250
  Australia                                   52,790               (5 %)         55,734
  North Sea                                   67,695              (14 %)         79,128

  International                              271,704               (5 %)        287,112

  Total                                      639,804              (13 %)        738,324

  Discontinued Operations - Argentina
  Oil (b/d)                                    6,885              (26 %)          9,297
  Gas (Mcf/d)                                141,352              (25 %)        188,259
  NGL (b/d)                                    1,287              (54 %)          2,822
  BOE/d                                       31,731              (27 %)         43,495

(1) Gross oil, natural gas, and NGL production in Egypt for the first quarter of 2014 and 2013 were as follows:

                                        2014          2013
                        Oil (b/d)       198,619       199,174
                        Gas (Mcf/d)     921,440       914,635
                        NGL (b/d)           649            -

(2) Includes production volumes per day attributable to a noncontrolling interest in Egypt for the first quarter of 2014 of:

                                             2014
                             Oil (b/d)        29,066
                             Gas (Mcf/d)     124,799
                             NGL (b/d)            78

(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

The table below presents first-quarter 2014 and 2013 pricing and the relative
increase or decrease from the prior periods.



                                                For the Quarter Ended March 31,
                                                             Increase
                                            2014            (Decrease)          2013
   Average Oil Price - Per barrel
   United States                         $     94.84                  0 %     $  94.45
   Canada                                      88.19                  7 %        82.33
   North America                               94.03                  1 %        93.20
   Egypt                                      106.70                 (4 %)      110.99
   Australia                                  112.26                  0 %       112.35
   North Sea                                  106.60                 (4 %)      110.53
   International                              107.24                 (3 %)      110.97
   Total(1)                                   101.03                 (1 %)      102.42
   Average Natural Gas Price - Per Mcf
   United States                         $      4.98                 33 %     $   3.75
   Canada                                       4.38                 36 %         3.23
   North America                                4.75                 33 %         3.56
   Egypt                                        3.02                  2 %         2.95
   Australia                                    4.42                (11 %)        4.94
   North Sea                                   10.69                  7 %        10.00
   International                                4.03                 (5 %)        4.23
   Total(2)                                     4.46                 18 %         3.77
   Average NGL Price - Per barrel
   United States                         $     30.81                 14 %     $  26.96
   Canada                                      42.09                 31 %        32.15
   North America                               32.25                 17 %        27.58
   Egypt                                       64.34                 NM             -
   North Sea                                   79.84                 12 %        71.16
   International                               77.11                  8 %        71.16
   Total                                       33.20                 16 %        28.71
   Discontinued Operations - Argentina
   Oil price ($/Bbl)                     $     72.70                 (4 %)    $  75.36
   Gas price ($/Mcf)                            3.04                 (4 %)        3.18
   NGL price ($/Bbl)                           24.57                (19 %)       30.28

(1) Reflects a per-barrel decrease of $0.04 and $0.61 from derivative hedging activities for the first quarter of 2014 and 2013, respectively.

(2) Reflects a per-Mcf increase of $0.01 and $0.05 from derivative hedging activities for the first quarter of 2014 and 2013, respectively.

NM - Not meaningful

Crude Oil Revenues

Crude oil revenues for the first quarter of 2014 totaled $2.8 billion, a $377 million decrease from the comparative 2013 quarter. Crude oil accounted for 77 percent of oil and gas production revenues and 48 percent of worldwide production in the first quarter of 2014. Lower production volumes decreased revenues by $333 million compared to the prior-year quarter while lower realized prices reduced first-quarter 2014 revenues a further $44 million.

Worldwide production decreased 37 thousand barrels of oil per day (Mb/d) from the first quarter of 2013 to 310 Mb/d in the first quarter of 2014, primarily as a result of the divestitures of our Gulf of Mexico Shelf assets and certain Western Canadian assets in the second half of 2013. Exclusive of production from these divested assets, oil production increased 7.3 Mb/d, primarily on drilling and recompletion activity in the U.S. Permian region.

Natural Gas Revenues

Natural gas revenues for the first quarter of 2014 totaled $646 million, down $35 million from the first quarter of 2013. A 20 percent decrease in average production reduced natural gas revenues by $160 million as compared to the prior-year quarter, partially offset by an 18 percent increase in average realized prices, which increased revenues by $125 million. Natural gas accounted for 18 percent of our oil and gas production revenues and 42 percent of our equivalent production during the first quarter of 2014.

Worldwide production for the first quarter of 2014 decreased 399 MMcf/d from the comparative 2013 quarter, primarily a result of the divestitures of our Gulf of Mexico Shelf assets and certain Western Canadian assets in the second half of 2013. Exclusive of production from these divested assets, our worldwide natural gas production declined only 39 MMcf/d, or 2 percent.


NGL Revenues

NGL revenues for the first quarter of 2014 totaled $186 million, up $38 million from the first quarter of 2013. An 8 percent increase in average production increased NGL revenues by $14 million as compared to the prior-year quarter, while a 16 percent increase in average realized prices increased revenues by $24 million. NGL accounted for 5 percent of our oil and gas production revenues and 10 percent of our equivalent production during the first quarter of 2014.

Worldwide production of NGLs increased 4.7 Mb/d to 62.1 Mb/d in the first quarter of 2014, primarily from drilling and recompletion activity in the Central and Permian regions.

Operating Expenses

The table below presents a comparison of our expenses on an absolute dollar
basis and a boe basis. Our discussion may reference expenses on a boe basis, on
an absolute dollar basis or both, depending on their relevance. Operating
expenses include costs attributable to a noncontrolling interest in Egypt but
exclude discontinued operations in Argentina.



                                                     For the Quarter Ended March 31,
                                                 2014        2013        2014        2013
                                                  (In millions)              (Per boe)
   Depreciation, depletion and amortization:
   Oil and gas property and equipment          $  1,109     $ 1,210     $ 19.26     $ 18.21
   Other assets                                      97         102        1.68        1.54
   Asset retirement obligation accretion             44          63        0.77        0.95
   Lease operating costs                            597         722       10.37       10.86
   Gathering and transportation costs                70          73        1.19        1.10
   Taxes other than income                          181         229        3.15        3.44
   General and administrative expense               119         112        2.06        1.69
   Merger, acquisitions & transition                  2          -         0.04          -
   Financing costs, net                              27          55        0.48        0.82

   Total                                       $  2,246     $ 2,566     $ 39.00     $ 38.61

Depreciation, Depletion and Amortization (DD&A) The following table details the changes in DD&A of oil and gas properties between the first quarters of 2014 and 2013:

                                          For the Quarter
                                               Ended
                                             March 31,
                                           (In millions)
                      2013 DD&A          $           1,210
                      Volume change                   (164 )
                      DD&A Rate change                  63

                      2014 DD&A          $           1,109

Oil and gas property DD&A expense of $1.1 billion in the first quarter of 2014 decreased $101 million compared to the prior-year quarter on an absolute dollar basis: $164 million from lower volumes, partially offset by $63 million on depletion rate. Our full-cost depletion rate increased $1.05 to $19.26 per boe reflecting drilling costs primarily in our international regions that exceeded our historical average.


Lease Operating Expenses (LOE) LOE decreased $125 million, or 17 percent, on an absolute dollar basis, for the quarter ended March 31, 2014, relative to the comparable period of 2013. On a per unit basis, LOE decreased 5 percent to $10.37 per boe for the first quarter of 2014, as compared to the same prior-year period. The following table identifies changes in Apache's LOE rate between the first quarter of 2014 and 2013.

                                                   Per boe
                      First-Quarter 2013 LOE       $  10.86
                      Power and fuel                   0.28
                      Labor and overhead costs         0.21
                      Transportation                   0.10
                      Repairs and maintenance          0.09
                      Chemicals                        0.08
                      Divestitures(1)                 (1.47 )
                      Other                            0.37
                      Other increased production      (0.15 )

                      First-Quarter 2014 LOE       $  10.37

(1) Per-unit impact of divestitures is shown net of associated production.

Gathering and Transportation Gathering and transportation costs totaled $70 million in the first quarter of 2014, down $3 million from the first quarter of 2013. On a per-unit basis, gathering and transportation costs of $1.19 for the first quarter of 2014 were up 8 percent from the prior-year quarter. The following table presents gathering and transportation costs paid by Apache directly to third-party carriers for each of the periods presented:

                                                   For the Quarter Ended
                                                         March 31,
                                                  2014               2013
. . .
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