APACHE CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________________ to _____________________

Commission File Number 1-4300

APACHE CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 41-0747868
------------------------------ ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

Suite 100, One Post Oak Central
2000 Post Oak Boulevard, Houston, TX 77056-4400
- ----------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 296-6000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
----- ----

Number of shares of Registrant's common stock, outstanding as of June 30, 2003..........................161,797,486

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)

The accompanying notes to consolidated financial statements are an
integral part of this statement.

1

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)

The accompanying notes to consolidated financial statements are an
integral part of this statement.

2

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

The accompanying notes to consolidated financial statements are an
integral part of this statement.

3

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

The accompanying notes to consolidated financial statements are an
integral part of this statement.

4

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)

The accompanying notes to consolidated financial statements are an
integral part of this statement.

5

APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

These financial statements have been prepared by Apache Corporation (Apache
or the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the summary of
significant accounting policies and notes thereto included in the Company's most
recent annual report on Form 10-K.

On December 18, 2002, the Company declared a five percent stock dividend
payable on April 2, 2003, to shareholders of record on March 12, 2003. Quarterly
share and per share information for 2002 have been restated to reflect this
stock dividend.

Reclassifications

Certain prior period amounts have been reclassified to conform with current
year presentations.

1. ACQUISITIONS

On January 13, 2003, Apache announced that it had entered into agreements
to purchase producing properties in the North Sea and Gulf of Mexico from
subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion,
with $670 million allocated to the Gulf of Mexico properties and $630 million
allocated to properties in the North Sea. The properties included estimated
proved reserves of 233.2 million barrels of oil equivalent (MMboe), 147.6 MMboe
located in the North Sea with the balance in the Gulf of Mexico. Both purchase
agreements were effective as of January 1, 2003. As is customary, Apache assumed
BP's abandonment obligation for the properties, which was considered in
determining the purchase price. Both the Gulf of Mexico and North Sea assets
acquired from BP were funded with available cash on hand, the issuance of 9.9
million shares of Apache common stock and borrowings under the Company's lines
of credit and commercial paper program. The offering of Apache's common stock
provided net proceeds of approximately $554 million, with the proceeds from
additional debt approximating $604 million.

Apache and BP closed the above referenced acquisition of the Gulf of Mexico
properties on March 13, 2003, which included BP's interest in 56 producing
fields, and 104 blocks. At closing, the $670 million purchase price was adjusted
for normal closing items and preferential rights exercised by third parties. The
exercise of preferential rights by third parties reduced the purchase price by
$73 million and estimated reserves by 9.6 MMboe. The purchase price was further
adjusted for various normal closing items, including revenues and expenditures
related to the properties for the period between the effective and closing
dates. As a result, cash consideration of $509 million was paid by Apache upon
closing. In a separate transaction closed February 21, 2003, Apache purchased
BP's interest in several other Gulf of Mexico properties with estimated proved
reserves of 2.1 MMboe for an adjusted purchase price of $15 million. Including
$4 million of transaction costs, total cash consideration for the two
acquisitions of Gulf of Mexico properties from BP totaled $528 million.

The acquisition of the U.K. North Sea properties closed on April 2, 2003,
at which time Apache paid a purchase price, adjusted for normal closing and
working capital adjustments, of $630 million. The acquisition of the North Sea
properties includes a 96 percent interest in the Forties Field and establishes a
new core area for the Company. In conjunction with the Forties acquisition,
Apache may be required to issue a letter of credit to BP to cover the present
value of related asset retirement obligations if the rating of the Company's
senior unsecured debt is lowered by both Moody's and Standard and Poor's from
its current ratings of A3 and A-, respectively. Should this occur, the initial
letter of credit amount would be 175 million British pounds. Apache has agreed
to sell all of the North Sea production from those properties over the next two
years to BP at a combination of fixed and market sensitive prices pursuant to a
contract entered into in connection with the North Sea purchase agreement.

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The BP purchase prices were allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as of the date of
acquisition, as follows:

* Property balance includes $12 million of transaction costs (U.S. - $4
million; North Sea - $8 million).

The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the acquisitions from BP
occurred on January 1 of each period presented. The pro forma information is
based in part on data provided by BP and on numerous assumptions and is not
necessarily indicative of future results of operations.

(1) Pro forma shares assume the issuance of 9.9 million common shares as of the
beginning of each period presented.

On July 3, 2003, Apache announced that it had completed the acquisition of
producing properties on the Outer Continental Shelf of the Gulf of Mexico from
Shell Exploration and Production Company (Shell) for $200 million, subject to
normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced over the next four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over the four-year term. The
VPP reserves and production will not be recorded by Apache.

Apache will record estimated proved reserves of 124.6 billion cubic feet
(Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60 million
liability for the future cost to produce and deliver volumes subject to the VPP
will be recorded by the Company because the overriding royalties are not
burdened by production costs. This liability will be amortized as the volumes
are produced and delivered to Morgan Stanley. The purchase agreement was
effective as of July 1, 2003. The acquisition included interests in 26 fields
covering 50 blocks (approximately 209,000 acres) and interests in two onshore
gas plants. Apache will operate 15 of the fields with 91 percent of the
production. The purchase price was funded by borrowings under the Company's
lines of credit and commercial paper program.

2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Apache uses a variety of strategies to manage its exposure to fluctuations
in commodity prices. As established by the Company's hedging policy, Apache
primarily enters into cash flow hedges in connection with selected acquisitions
to protect against commodity price volatility. The success of these acquisitions
is significantly influenced by Apache's ability to achieve targeted production
at forecasted prices. These hedges effectively reduce price risk on a portion of
the production from the acquisitions.

7

During the first quarter of 2003, in conjunction with the acquisitions from
BP and during the fourth quarter of 2002, in conjunction with the South
Louisiana properties acquisition, Apache entered into, and designated as cash
flow hedges, natural gas and crude oil fixed-price swaps and natural gas option
collars. These positions were entered into in accordance with the Company's
hedging policy and involved several counterparties which are rated A+ or better.
As of June 30, 2003, the outstanding positions of our cash flow hedges were as
follows:

In addition to the fixed-price swaps and option collars, Apache entered
into a separate crude oil physical sales contract with BP. The sales contract is
a normal purchase and sale under Statement of Financial Accounting Standards
(SFAS) No. 133 and, therefore, the Company has designated and accounted for the
contract under the accrual method. As of June 30, 2003, the outstanding terms of
the contract were as follows:

A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:

Based on current market prices, the Company recorded an unrealized loss in
other comprehensive income of $89.9 million ($56.1 million after tax). This loss
will be realized in future earnings contemporaneously with the related sales of
natural gas and crude oil production applicable to specific hedges. A loss of
$63.6 million ($46.2 million after tax) will be realized over the next 12
months. However, these amounts could vary materially as a result of changes in
market conditions. There was no material ineffectiveness associated with the
hedges during the period.

3. DEBT

On May 15, 2003, Apache Finance Canada Corporation (Apache Finance Canada)
issued $350 million of 4.375 percent, 12-year, senior unsecured notes in a
private placement. The notes are irrevocably and unconditionally guaranteed by
Apache. Interest is payable semi-annually on May 15 and November 15 of each year
commencing on November 15, 2003. The notes were sold pursuant to Rule 144A and
Regulation S, and may not be offered or sold

8

in the United States absent registration or an applicable exemption from the
registration requirements of the Securities Act of 1933, as amended.

If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.

4. CAPITAL STOCK

On January 22, 2003, the Company completed a public offering of 9.9 million
shares of Apache common stock, adjusted for the five percent common stock
dividend, including underwriters' over-allotment option, for net proceeds of
approximately $554 million. The proceeds were used to purchase producing
properties in the North Sea and the Gulf of Mexico from BP.

5. FOREIGN CURRENCY TRANSLATION

The Company records foreign currency translation gains and losses related
to deferred taxes as a component of its provision for income taxes, while all
other foreign currency gains and losses are reflected in other revenues. For the
first six months of 2003, the Company recorded additional deferred tax expense
of $56 million as a result of the weaker U.S. dollar. Net gains and losses
reflected in other revenues totaled $.5 million for the six-month period.

6. NET INCOME PER COMMON SHARE

A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:

9

7. STOCK-BASED COMPENSATION

On June 30, 2003, the Company had several stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price of those options is equal to or greater than the
market price of the Company's common stock on the date of grant, unless the
awards are subsequently modified. The following table illustrates the effect on
income attributable to common stock and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, to stock-based employee compensation for
the Company's option and performance plans.

The effects of applying SFAS No. 123, as amended, in this pro forma
disclosure should not be interpreted as being indicative of future effects. SFAS
No. 123, as amended, does not apply to awards prior to 1995, and the extent and
timing of additional future awards cannot be predicted.

During the second quarter of 2003, the Company issued a total of 901,105
stock appreciation rights (SARs) to non-executive employees in lieu of stock
options. The Company issued 60,500 shares of restricted common stock to
executives in May of 2003. The SARs will be settled in cash upon exercise, if
the price on the date of exercise is equal to or greater than the closing price
of the Company's stock on the date of grant. The vesting period is over four
years and the Company will record compensation expense on the vested SARs
outstanding as the price of the Company's common stock fluctuates. The related
second-quarter expense was $.3 million after tax.

8. SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides supplemental disclosure of cash flow
information:

10

9. BUSINESS SEGMENT INFORMATION

Apache has five reportable segments which are primarily in the business of
natural gas and crude oil exploration and production. The Company evaluates
segment performance based on results from oil and gas sales and lease-level
expenses. Apache's reportable segments are managed separately because of their
geographic locations. Financial information by operating segment is presented
below:

(1) Operating Income (Loss) consists of oil and gas production revenues less
depreciation, depletion and amortization, asset retirement obligation
accretion, international impairments, lease operating costs, gathering and
transportation costs, and severance and other taxes.

10. LITIGATION

In June 2003, Apache and Cinergy Marketing and Trading, LLC (Cinergy)
agreed to terminate their agreement concerning marketing of Apache's U.S.
natural gas production and to dismiss the arbitration between them. The parties
reached an amicable settlement, the amounts of which were immaterial to Apache's
financial position and results of operations. Consequently, the Company began
marketing its U.S. natural gas production previously marketed by Cinergy
beginning with July 2003 production.

11. NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," which resulted in an increase to net oil and
gas properties of $410 million and additional liabilities related to asset
retirement obligations of $369 million. These entries reflect the asset
retirement obligation of Apache had the provisions of SFAS No. 143 been applied
since inception and resulted in a non-cash cumulative-effect increase to
earnings of $27 million ($41 million pretax). Prior to adoption of SFAS No. 143,
abandonment obligations were accrued over the productive lives of the assets
through depreciation, depletion and amortization of oil and gas properties
without recording a separate liability for such amounts.

11

The following table describes all changes to the Company's asset retirement
obligation liability since adoption (in thousands):

Asset retirement obligation upon adoption on January 1, 2003 ....... $ 368,537
Liabilities incurred ............................................... 331,692
Liabilities settled ................................................ (4,583)
Accretion expense .................................................. 15,758
---------
Asset retirement obligation at June 30, 2003 ....................... $ 711,404
=========

Liabilities incurred during the period primarily relate to obligations
assumed in connection with the Gulf of Mexico and North Sea properties acquired
from BP. Liabilities settled during the period relate to individual properties
plugged and abandoned or sold during the period. The pro forma asset retirement
obligation would have been approximately $334 million at January 1, 2002 had the
Company adopted SFAS No. 143 on January 1, 2002. For the three and six month
periods ended June 30, 2002, the pro forma effect on Income Attributable to
Common Stock and Net Income per Common Share would not have been materially
different than reported amounts had SFAS No. 143 been adopted by the Company on
January 1, 2002.

In January 2003, the FASB issued Interpretation No., 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51." Interpretation No. 46 requires a company to consolidate a variable
interest entity (VIE) if the company has a variable interest (or combination of
variable interests) that is exposed to a majority of the entity's expected
losses if they occur, receive a majority of the entity's expected residual
returns if they occur, or both. In addition, more extensive disclosure
requirements apply to the primary and other significant variable interest owners
of the VIE. This interpretation applies immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. It is also effective for the first fiscal year or interim period
beginning after June 15, 2003, to VIEs in which a company holds a variable
interest that is acquired before February 1, 2003. The guidance regarding this
interpretation is extremely complex and, although we do not believe we have an
interest in a VIE, the Company continues to assess the impact, if any, this
interpretation will have on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards on how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. The statement
requires that the Company classify as liabilities the fair value of all
mandatorily redeemable financial instruments that had previously been recorded
as equity or elsewhere in the consolidated financial statements. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise effective for all existing financial instruments beginning
in the third quarter of 2003. Apache is continuing to assess the impact of
adopting this statement, which may require a significant portion, if not all, of
its Preferred Interests of Subsidiaries to be reclassified as a component of
debt. In any event, the Company has in the past provided pro forma information
about how viewing the Company's Preferred Interests of Subsidiaries as debt
would impact its debt-as-a-percentage-of-capitalization calculation (see page 2
of Annual Report on Form 10-K for the year ended December 31, 2002). Preferred
Interests related to any portion reclassified would prospectively be reflected
as interest expense instead of Preferred Interests of Subsidiaries in the
Consolidated Statement of Operations.

12. SUPPLEMENTAL GUARANTOR INFORMATION

Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada are subsidiaries of Apache, that have issuances of publicly traded
securities and require the following condensed consolidating financial
statements be provided as an alternative to filing separate financial
statements.

Each of the companies presented in the condensed consolidating financial
statements has been fully consolidated in Apache's consolidated financial
statements. As such, the condensed consolidating financial statements should be
read in conjunction with the financial statements of Apache and subsidiaries and
notes thereto of which this note is an integral part.

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APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2003

13

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2002

14

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

15

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

16

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

17

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

18

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003