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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[MARK ONE]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996,
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
A DELAWARE CORPORATION IRS EMPLOYER NO. 41-0747868
ONE POST OAK CENTRAL
2000 POST OAK BOULEVARD, SUITE 100
HOUSTON, TEXAS 77056-4400
TELEPHONE NUMBER (713) 296-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $1.25 Par Value New York Stock Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
9.25% Notes due 2002 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by
non-affiliates of registrant as of February 28, 1997...... $2,920,499,216
Number of shares of registrant's common stock outstanding as
of February 28, 1997...................................... 90,208,470
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to registrant's 1997
annual meeting of shareholders have been incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
DESCRIPTION
ITEM PAGE
---- ----
PART I
1. BUSINESS.................................................... 1
2. PROPERTIES.................................................. 10
3. LEGAL PROCEEDINGS........................................... 14
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 14
6. SELECTED FINANCIAL DATA..................................... 15
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 16
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 24
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 24
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 25
11. EXECUTIVE COMPENSATION...................................... 25
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 25
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 25
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 25
All defined terms under Rule 4-10(a) of Regulation S-X shall have their
statutorily prescribed meanings when used in this report. Quantities of natural
gas are expressed in this report in terms of thousand cubic feet (Mcf), million
cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in terms of
barrels (bbls), thousands of barrels (Mbbls) and millions of barrels (MMbbls).
Natural gas is compared to oil in terms of barrels of oil equivalent (boe) or
million barrels of oil equivalent (MMboe). Oil and natural gas liquids are
compared with natural gas in terms of million cubic feet equivalent (MMcfe) and
billion cubic feet equivalent (Bcfe). One barrel of oil is the energy equivalent
of six Mcf of natural gas. Daily oil and gas production is expressed in terms of
barrels of oil per day (b/d) and thousands of cubic feet of gas per day (Mcf/d)
or millions of British thermal units per day (MMBtu/d), respectively. Gas sales
volumes may be expressed in terms of one million British thermal units (MMBtu),
which is approximately equal to one Mcf. With respect to information relating to
the Company's working interest in wells or acreage, "net" oil and gas wells or
acreage is determined by multiplying gross wells or acreage by the Company's
working interest therein. Unless otherwise specified, all references to wells
and acres are gross.
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PART I
ITEM 1. BUSINESS
GENERAL
Apache Corporation (Apache or the Company), 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. In North America,
Apache's exploration and production interests are focused on the Gulf of Mexico,
the Anadarko Basin, the Permian Basin, the Gulf Coast and the Western
Sedimentary Basin of Canada. Outside of North America, Apache has exploration
and production interests offshore Western Australia and in Egypt, and
exploration interests in Indonesia, offshore The People's Republic of China and
offshore the Ivory Coast. Apache common stock, par value $1.25 per share, has
been listed on the New York Stock Exchange since 1969, and on the Chicago Stock
Exchange since 1960.
Apache holds interests in many of its U.S., Canadian and international
properties through operating subsidiaries, such as MW Petroleum Corporation
(MW), Apache Canada Ltd., DEK Energy Company (DEKALB, formerly known as DEKALB
Energy Company), Apache Energy Limited (AEL, formerly known as Hadson Energy
Limited), Apache International, Inc., Apache Overseas, Inc. and The Phoenix
Resource Companies, Inc. Properties referred to in this document may be held by
those subsidiaries. Apache treats all operations as one segment of business.
1996 RESULTS
In 1996, Apache had net income of $121.4 million, or $1.42 per share, on
total revenues of $977.2 million. Net cash provided by operating activities
during 1996 was $490.5 million.
The year 1996 was Apache's 19th consecutive year of production growth and
ninth consecutive year of oil and gas reserves growth. Apache's average daily
production was 53.2 Mbbls of oil and 561 MMcf of natural gas for the year.
Giving effect to 1996 acquisitions, dispositions and drilling activity, the
Company's estimated proved reserves increased by 85.6 MMboe in 1996 over the
prior year to 506.2 MMboe, of which approximately 54 percent of total reserves
was natural gas. Based on 420.6 MMboe reported at year-end 1995, Apache's
reserve growth during the year reflects replacement of 257 percent of the
Company's 1996 production, including approximately 179 percent through drilling,
revisions, recompletions, workovers and other production enhancement projects.
Apache's active drilling and production-enhancement program yielded 279 new
producing U.S. and Canadian wells out of 370 attempts and involved 344 major
North American workover and recompletion projects during the year.
At December 31, 1996, Apache had interests in approximately 4,564 net oil
and gas wells and 1,523,405 net developed acres of oil and gas properties. In
addition, the Company had approximately 791,627 net undeveloped acres under U.S.
and Canadian leases and 6,881,900 net undeveloped acres under international
exploration and production rights.
APACHE'S GROWTH STRATEGY
Apache's growth strategy is to increase oil and gas reserves, production,
and cash flow through a combination of exploratory drilling, development of its
inventory of existing projects and, principally in North America, tactical
acquisitions meeting defined financial parameters. The Company's drilling
program emphasizes reserve additions through exploratory drilling primarily on
its international interests, and moderate-risk drilling primarily on its North
American interests. The Company also emphasizes reducing operating costs per
unit produced and selling marginal and non-strategic properties in order to
increase its profit margins.
Apache's international investments and exploration activities are an
important component of its long-term growth strategy. Although international
exploration is recognized as higher-risk than most of Apache's U.S. and Canadian
activities, it offers potential for greater rewards and significant reserve
additions. Apache directed its international efforts in 1996 toward development
of certain discoveries offshore Western Australia
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and in Egypt, and toward further exploration efforts on its concessions in
Egypt, offshore The People's Republic of China, in Indonesia, and offshore the
Ivory Coast of western Africa. Apache believes that reserve additions in these
international areas may be made through higher-risk exploration and through
improved production practices and recovery techniques.
For Apache, property acquisition is only one phase in a continuing cycle of
business growth. Apache's aim is to follow each acquisition with a cycle of
reserve enhancement, property consolidation and cash flow acceleration,
facilitating asset growth and debt reduction. This approach requires a
well-planned and carefully executed property development program and, where
appropriate, a selective program of property dispositions. It motivates Apache
to target acquisitions that have ascertainable additional reserve potential and
to apply an active drilling, workover and recompletion program to realize the
potential of the acquired undeveloped and partially developed properties. Apache
prefers to operate its properties so that it can best influence their
development; as a result, the Company operates properties accounting for over 75
percent of its production.
1996 ACQUISITIONS AND DISPOSITIONS
The Company entered into the Agreement and Plan of Merger dated March 27,
1996 (the Merger Agreement) with The Phoenix Resource Companies, Inc. (Phoenix),
providing for a merger in which Phoenix would become a wholly owned subsidiary
of the Company (the Merger). On May 20, 1996, the transaction was approved by
the Phoenix shareholders and the Merger was consummated. Pursuant to the Merger
Agreement, each of the 16.2 million shares of Phoenix common stock then
outstanding was converted into the right to receive .75 shares of Apache common
stock, with any fractional shares paid in cash, without interest, and $4.00 in
cash, resulting in a total of 12.2 million shares of Apache common stock being
issued and approximately $65 million being paid in respect of the Phoenix common
stock.
Phoenix's principal assets are its interest in the Khalda and Qarun oil and
gas concessions located in the Western Desert of Egypt, which in the aggregate
contain 18 oil fields and six gas fields. Phoenix's oil and gas operations are
currently conducted through Egyptian operating companies owned jointly by the
Egyptian General Petroleum Corporation (EGPC), Phoenix and certain other
participants, including the Company in the Qarun concession. In conjunction with
the Merger, George D. Lawrence Jr., former president and chief executive officer
of Phoenix, joined Apache's board of directors.
During 1996, Apache also acquired oil and gas properties and seismic data
in North America and Egypt in transactions whose purchase prices totaled
approximately $115 million, the most significant of which was the purchase of
interests in offshore blocks in the Gulf of Mexico from Hall-Houston Oil Company
(Hall-Houston) and related entities in August for approximately $46 million. In
1996, Apache also disposed of oil and gas properties and gas plants in
transactions whose sales proceeds totaled approximately $30.1 million. In
addition, Apache monetized certain gas properties entitled to Internal Revenue
Code Section 29 Tax Credits in two transactions with the Apache Series 1996-A
Trust, whose managing trustee is Apache and whose non-managing trustee is FC
Energy Finance I, Inc. Total net proceeds from these two transactions were
approximately $23 million.
EXPLORATION AND PRODUCTION
The Company's North American exploration and production activities are
divided into five operating regions Offshore, Midcontinent, Western, Gulf Coast
and Canadian regions. Approximately 82 percent of the Company's proved reserves
are located in the five North American regions. Following the Phoenix Merger,
Egypt became an important region for Apache. The Company's Egyptian operations
are headquartered in Cairo. Apache conducts its Australian exploration and
production and its Indonesian exploration through its Australian region.
Information concerning the amount of revenue, operating income and identifiable
assets attributable to U.S., Canadian and international operations,
respectively, is set forth in the Supplemental Oil and Gas Disclosures under
Item 8 below.
Offshore. The Offshore region (referred to as the Gulf of Mexico region in
1995) includes all of Apache's interests in properties offshore Texas, Louisiana
and Alabama. In 1996, Offshore produced approximately 11.8 MMboe and $181
million in production revenue for the year. At December 31, 1996, the
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Offshore region held 346,806 net acres, located in both state and federal
waters, and accounted for 45.8 MMboe, or nine percent, of the Company's year-end
1996 total estimated proved reserves. Apache's operations in the Offshore region
focused on workovers and recompletions, which totaled 33 in the region for 1996.
Apache participated in 19 wells which were drilled in the region during the
year, 10 of which were completed as producers. For 1996, Apache's gas production
from the Offshore region was approximately 61,554 MMcf.
Midcontinent. Apache's Midcontinent region operates in Oklahoma, eastern
Texas and northern Louisiana. The region has focused operations on its sizable
position in the Anadarko Basin of western Oklahoma. Apache has drilled and
operated in the Anadarko Basin for nearly four decades, developing an extensive
database of geologic information and a substantial acreage position. The
Midcontinent region produced approximately 12 MMboe for the year, creating $167
million in production revenue for the Company.
At December 31, 1996 Apache held an interest in 409,033 net acres in the
region, which accounted for approximately 106.5 MMboe, or 21 percent, of
Apache's total estimated proved reserves. Apache participated in drilling 103
wells in the Midcontinent region during the year, 85 of which were completed as
producing wells. The Company performed 26 major workover and recompletion
operations in the region during 1996.
Western. The Western region includes assets in the Permian Basin of western
Texas and New Mexico, the Green River Basin of Colorado and Wyoming and the San
Juan Basin of New Mexico. The Western region was Apache's leading region for oil
and gas sales for 1996, producing approximately 10.4 MMboe and $185 million in
oil and gas revenue, 22 percent of the Company's production revenues during
1996. At December 31, 1996, the Company held 649,820 net acres in the region,
which accounted for 137.4 MMboe, or 27 percent, of the Company's total estimated
proved reserves. Apache participated in drilling 128 wells in the Western
region, 103 of which were productive wells. Apache performed 30 major workovers
and recompletions in the Western region during the year.
Gulf Coast. The Gulf Coast region encompasses the Texas and Louisiana
coasts, central Texas and Mississippi. In 1996, the Gulf Coast region
contributed approximately $182 million in revenues from production of 9.9 MMboe
for the year. The region was one of the most active in the Company in the number
of workover and recompletion projects completed and the number of wells drilled.
The Company performed 226 major workover and recompletion operations during 1996
in the Gulf Coast region and participated in drilling 43 wells, 31 of which were
completed as producers. As of December 31, 1996, the region encompassed 273,568
net acres, and accounted for 69.5 MMboe, or 14 percent, of the Company's
year-end 1996 total estimated proved reserves.
Canada. Exploration and development activity in the Canadian region is
concentrated in the Provinces of Alberta and British Columbia. The region
produced approximately 5.5 MMboe, 83 percent of which was natural gas, and
generated $48 million in oil, gas and natural gas liquids sales, six percent of
the Company's production revenues in 1996. Apache participated in drilling 77
wells in this region during the year, 50 of which were completed as producers.
The Company performed 29 workovers and recompletions on operated wells during
1996. At December 31, 1996, the region encompassed approximately 409,120 net
acres, and accounted for 57.1 MMboe, or 11 percent, of the Company's year-end
1996 total estimated proved reserves.
Egypt. At year end, Apache held 6,051,867 net acres in Egypt, accounting
for 58.6 MMboe of estimated proved reserves or 12 percent of Apache's total
estimated proved reserves. As a result of the acquisition of Phoenix in May 1996
(see "1996 Acquisitions and Dispositions"), Apache owns a 75 percent interest in
the Qarun Block and a 40 percent interest in the Khalda Block, both in the
Western Desert of Egypt. At year end, the Qarun Block, which Apache operates,
consisted of approximately 1,927,000 acres, of which approximately 46,500 were
classified as developed. Currently, the Qarun Block is producing approximately
27,000 b/d from 13 wells, which is being sold to EGPC. The Khalda Block consists
of approximately 2,416,000 acres, of which approximately 318,500 were classified
as developed as of year end. The Khalda Block is currently producing
approximately 33,000 b/d from 78 wells, which is transported to market by
pipeline to a point west of Alexandria, Egypt. Future production of gas from
Khalda is expected to be delivered for sale to EGPC at a point west of
Alexandria, Egypt, via a 34-inch gas pipeline, construction of which is
scheduled to commence in
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1997 and to be completed by 1999. The costs of building the pipeline will be
borne by Apache, the other Khalda participants and the owners of a neighboring
block. Construction costs paid by Apache and the other Khalda participants will
be recoverable from oil and gas production from the Khalda Block.
Both the Khalda and Qarun Concession Agreements provide that Apache and its
partners in the concessions will pay all of the operating and capital costs for
developing the concessions, while the production will be split between EGPC and
the partners. Up to 40 percent of the oil and gas produced from each of the
concessions is available to the Company and its partners to recover operating
and capital costs for the applicable concession. To the extent eligible costs
exceed 40 percent of the oil and gas produced and sold from a concession in any
given quarter, such excess costs may be carried into future quarters without
limit. The remaining 60 percent of all oil and gas produced from the concessions
is divided between EGPC and Apache and its partners, with the percentage
received by Apache and its partners reducing as the gross daily average of oil
and gas produced on a quarterly basis increases. Under the Khalda Agreement,
capital costs are amortized over four years, while the Qarun agreement provides
for a five year amortization.
In addition to the Qarun and Khalda Blocks, Apache holds a 50 percent
interest in 459,600 acres in the Darag Block in the northern Gulf of Suez, and a
50 percent interest in the 6,820,000 acre East Beni Suef Block immediately to
the south of the Qarun Block. Both the Darag and East Beni Suef Blocks are in
the early stages of evaluation, and exploratory drilling is expected to begin in
the latter part of 1997. In January 1997, Apache completed the purchase from
Mobil Exploration Egypt, Inc. of interests in three blocks in the Western Desert
of Egypt; a 24 percent interest in the 3,212,000-acre North East Abu Gharadig
Block, a 50 percent interest in the 1,384,000-acre East Bahariya Block, and a
one-third interest in the 3,100,000-acre West Mediterranean Block No. 1 (partly
onshore and partly offshore).
Australia. Western Australia became an important region for Apache after
the 1993 acquisition of Hadson Energy Resources Corporation (subsequently known
as Apache Energy Resources Corporation or AERC). In 1996, the region generated
three percent of the Company's revenues for the year. Natural gas production in
the region increased by 45 percent from the prior year to approximately 13.9
MMcf/d in 1996. Average daily oil production decreased by 26 percent to
approximately 2,318 b/d in 1996, primarily as a result of natural depletion. As
of December 31, 1996, Apache held 64,410 net developed acres and 607,878 net
undeveloped acres in Western Australia. Apache acts as operator for most of its
properties in Western Australia through a wholly owned subsidiary, AEL.
During 1996, Apache's estimated proved reserves in Australia increased by
60 percent to 31.3 MMboe, six percent of the Company's total estimated proved
reserves at year end. The increase in Australia reserves was primarily
attributable to natural gas reserves booked at the East Spar discovery which
were recorded only after the Company had entered into agreements for the sale
and delivery of such gas. Through AEL and its subsidiaries, Apache operates the
Harriet Gas Gathering Project, a gas processing and compression facility with a
throughput capacity of 100 MMcf/d, and a 60-mile, 12-inch offshore pipeline with
a throughput capacity of 175 MMcf/d. See "Oil and Natural Gas Marketing."
Other International Operations. Outside of Canada, Egypt and Australia,
Apache currently has exploration interests in Indonesia, offshore The People's
Republic of China and offshore the Ivory Coast.
In Indonesia, Apache holds a 39 percent interest in and operates the Bentu
Segat Block on Central Sumatra, on which an undeveloped gas field is located.
Negotiations with potential buyers for the gas are continuing.
Apache is also the operator, with a 50 percent interest, of the Zhao Dong
Block in the Bohai Bay, offshore The People's Republic of China. In 1994 and
1995, discovery wells tested at rates between 1,300 and 4,000 b/d of oil. The
Company elected to proceed with the second exploration phase, commencing in May
1996, which involves a commitment to drill two additional exploratory wells. In
early 1997, a new well tested at rates up to 11,571 b/d of oil, and the Company
is currently evaluating the discovery areas for commercial potential. In March
1997, Apache gave XCL-China Ltd., which is the owner of the remaining 50 percent
interest in the Zhao Dong Block, default notices of nonpayment totaling
approximately $7.8 million (not including interest) owed on its share of joint
account expenses.
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In the Ivory Coast, Apache drilled an exploratory well in 1996 on the CI-27
offshore Block, confirming the existence of substantial reserves of gas in the
Foxtrot field and the produceability of some oil from the field's lower
horizons. Apache is the operator of the block, holding a 40 percent interest.
Discussions with potential gas buyers are taking place.
OIL AND NATURAL GAS MARKETING
On October 27, 1995, wholly owned affiliates of each of Apache, Oryx Energy
Company and Parker & Parsley Petroleum Company formed Producers Energy
Marketing, LLC, a Delaware limited liability company (ProEnergy). ProEnergy
became fully operational on April 1, 1996, and markets substantially all of its
members' domestic natural gas pursuant to member gas purchase agreements having
an initial term of 10 years, subject to early termination following specified
events. The price of gas purchased by ProEnergy from its members is based upon
agreed to published indexes. ProEnergy also provides its members with certain
contract administration and other services.
ProEnergy's limited liability company agreement provides that capital
funding obligations, allocations of profit and loss and voting rights are
calculated based upon the members' respective throughputs of natural gas sold to
ProEnergy. Each member's liability with respect to future capital funding
obligations is subject to certain limitations. Natural gas throughputs are
calculated, profit distributed, and/or capital called on a quarterly basis. As
of December 31, 1996, the Company held an approximate 44 percent interest in
ProEnergy.
Apache is delivering natural gas under several long-term supply agreements
with terms greater than one-year. In connection with the acquisition of
substantially all of the oil and natural gas assets (the Aquila Assets) of
Aquila Energy Resources Corporation (Aquila) in September 1995, the Company
entered into a five-year, four-month premium-price gas contract under which
Aquila Energy Marketing Corporation agreed to purchase 20 to 25 MMcf of gas per
day from Apache at a price of $2.80 per Mcf in 1997, escalating to $3.20 per Mcf
in the year 2000. In December 1994, the Company signed a long-term gas contract
under which Apache received an advance payment of $67.4 million. Apache will
supply the purchaser with approximately 43 Bcf of gas over a six-year period
which began in January 1995, with volumes averaging 20 MMcf/d.
Apache is also delivering natural gas under several such contracts with
various cogeneration facilities. One such agreement provides that Apache will
supply a minimum of 51.1 Bcf over 10 years for use in electric power generation
from a cogeneration facility located in northeast Texas. Under the agreement,
deliveries of approximately 20 MMcf/d began in early 1997. Another such
agreement, which expires at the end of September 2005, requires Apache to
deliver 20 MMcf/d to a cogeneration facility at a price escalating yearly. In
1996, the price under this agreement was $3.08 per MMcf. Apache is also a party
to an agreement that provides for delivery of up to 9.6 MMcf/d to a cogeneration
facility at a price that escalates yearly. As of the end of 1996, the price
under this agreement was $3.10 per MMcf. The final agreement, which will
terminate at the end of 2001, calls for Apache to supply up to 12 MMcf/d.
Apache assumed its own U.S. crude oil marketing operations in 1992. Most of
Apache's crude oil production is sold through lease-level marketing to refiners,
traders and transporters, generally under 30-day contracts that renew
automatically until canceled.
Oil produced from Canadian properties is sold to crude oil purchasers or
refiners at market prices which depend on world-wide crude prices adjusted for
transportation and crude quality. Natural gas produced from Canadian properties
is sold to major aggregators of natural gas, gas marketers and direct users
under long and short-term contracts. The oil and gas contracts provide for sales
at specified prices, or at prices which are subject to change due to market
conditions.
The Company diversifies the markets for its Canadian gas production by
selling directly or indirectly to customers through aggregators and brokers in
the United States and Canada. Apache transports natural gas via the Company's
firm transportation contracts to California (12 MMcf/d) and to the Province of
Ontario, Canada (four MMcf/d) through end-users' firm transportation contracts.
Pursuant to an agreement entered into in 1994, the Company is also selling five
MMcf/d of natural gas to the Hermiston Cogeneration Project,
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located in the Pacific Northwest of the United States. In 1996, the Company
entered into an agreement with Westcoast Gas Services, Inc. for the sale of
5,000 MMBtu/d for delivery in the United States for a 10 year term. Sales under
the contract are contingent on regulatory approval of the required pipeline
expansion, and are expected to begin in 1998.
In Australia, the Company has two contracts to deliver 32 Bcf of gas from
the East Spar field for industrial uses, including mining operations, a power
station and a nickel refinery. The contracts provide for an average daily rate
of 15 MMcf/d net to the Company. To provide deliveries under the contracts while
the East Spar development is under construction, the Harriet and East Spar joint
ventures, in both of which a subsidiary of the Company is a participant, entered
into a gas sales agreement under which the Harriet Joint Venture is supplying 42
MMcf of gas per day to East Spar's industrial customers. Apache operates the
Harriet Joint Venture and acts as contractor for the East Spar Joint Venture,
holding a 22.5 percent interest in Harriet and a 20 percent interest in East
Spar.
In 1995, the Harriet Joint Venture entered into a take-or-pay contract to
supply natural gas under which AEL has committed 14 Bcf of reserves for delivery
over a 10-year period. Approximately 20 Bcf of AEL's proved gas reserves are
dedicated to the Gas Corporation of Western Australia, a corporation owned by
the government of Western Australia doing business as AlintaGas, under a
long-term contract which will expire in 2001. The agreement contains take-or-pay
provisions that require AlintaGas to purchase a minimum of 35 MMcf/d
(approximately eight MMcf/d net to AEL) through the remainder of the contract
term. Payments received under this contract are in Australian dollars.
AEL marketed all oil and natural gas liquids produced from its interests in
the Harriet field during 1996 through a contract with Marubeni International
Petroleum (Singapore) Pte Limited (Marubeni). Pricing under the contract in 1996
represented a fixed premium to the quoted market prices of Tapis crude oil, with
payment made in U.S. dollars. In 1996, production sold under this contract
realized an average price of $22.33 per barrel (exclusive of the impact of
hedging activities). At the beginning of January 1997, the Marubeni contract was
terminated and replaced by a similar contract with Glencore International AG,
which includes East Spar liquids production.
In Egypt, oil from the Qarun Block is delivered by pipeline to tanks owned
by the Company and its partners in the Qarun Concession at the Dashour pumping
station northeast of the Qarun Block or by truck to the Tebbin refinery south of
Alexandria, Egypt. At the discretion of the operator of the pipelines, oil from
the Qarun Block is put into the two 42-inch diameter SUMED pipelines, which
transport significant quantities of Egyptian and other crude oil from the Gulf
of Suez to Sidi Kherir, west of Alexandria, Egypt, on the Mediterranean Coast.
All Qarun and Khalda crude oil is currently sold to EGPC. In 1996, the Company
and its partners in the Khalda Block entered into a take or pay contract with
EGPC, which obligates EGPC to pay for 75 percent of 200 MMcf/d of future
production of gas from the Khalda Block. Sales of gas under the contract are
expected to begin in 1999 upon completion of the gas pipeline from the Khalda
Block.
OIL AND NATURAL GAS PRICES
Natural gas prices remained volatile during 1996 with New York Mercantile
Exchange (NYMEX) spot-market prices at the Henry Hub ranging from $1.89 per
MMbtu in October to $3.61 per MMbtu in December. Fluctuations are largely due to
natural gas supply and demand perceptions. Apache's average realized gas price
of $2.02 per Mcf for 1996 increased 29 percent from the prior-year average of
$1.57 per Mcf. Apache's 1995 average realized natural gas price was 12 percent
lower than the 1994 average price of $1.78 per Mcf.
Due to minimum price contracts which escalate at an average of 80 percent
of the Australian consumer price index, AEL's natural gas production in Western
Australia is not subject to the same degree of price volatility as Apache's U.S.
and Canadian gas production; however, natural gas sales under such Australian
minimum price contracts represent less than two percent of the Company's total
natural gas sales at the end of 1996. Total Australian gas sales in 1996,
including long-term contracts and spot sales averaged $1.96 per Mcf, a five
percent increase over the 1995 average of $1.86 per Mcf.
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In Egypt, all oil production from the Khalda and Qarun Blocks is currently
sold to EGPC on a spot basis at a "Western Desert" price which is applied to
virtually all production from the Western Desert and is announced from time to
time by EGPC. On December 31, 1996, that price was $23.74 per barrel.
Discussions with EGPC regarding the possibility of exporting Qarun oil
production are continuing. Once gas sales from the Khalda Block commence, the
gas is expected to be sold for a price which on a Btu basis is equivalent to 85
percent of the price of Suez Blend crude oil, FOB Mediterranean. Based on this
pricing formula, the price of Khalda gas per Mcf (at 1000 Btu per Mcf) would
have been roughly $3.80 at the end of 1996.
Oil prices remained vulnerable to unpredictable political and economic
forces during 1996, but did not experience the wide fluctuations seen in natural
gas prices during the year. Apache believes that oil prices will continue to
fluctuate in response to changes in the policies of the Organization of
Petroleum Exporting Countries (OPEC), events in the Middle East and other
factors associated with the world political environment. As a result of the many
uncertainties associated with levels of production maintained by OPEC and other
oil producing countries, the availabilities of world-wide energy supplies and
the competitive relationships and consumer perceptions of various energy
sources, the Company is unable to predict what changes will occur in crude oil
and natural gas prices.
Apache's worldwide crude oil price averaged $20.84 per barrel in 1996, up
22 percent from the average price of $17.09 per barrel in 1995, and 33 percent
higher than the average price of $15.65 per barrel in 1994. The Company's
average crude oil price for its Australian production, including production sold
under the Marubeni contract, was $22.33 per barrel in 1996, 20 percent higher
than the average price in 1995.
Terms of the acquisition of MW from Amoco Production Company (Amoco)
included an oil and gas price sharing provision under which certain price
sharing payments may be payable to Amoco. Under this provision, to the extent
that oil prices exceed specified reference prices that rise to $33.12 per barrel
over the eight-year period ending June 30, 1999, and to the extent that gas
prices exceeded specified reference prices that rose to $2.68 per Mcf over the
five-year period ended June 30, 1996, Apache will share the excess price
realization with Amoco on a portion of the MW production. Apache was not
required to make any price sharing payments to Amoco in 1996.
From time to time, Apache buys or sells contracts to hedge a limited
portion of its future oil and gas production against exposure to spot market
price changes. See Note 9 to the Company's consolidated financial statements
under Item 8 below.
The Company's business has been and will continue to be affected by future
worldwide changes in oil and gas prices and the relationship between the prices
of oil and gas. No assurance can be given as to the trend in, or level of,
future oil and gas prices.
RESERVE VALUE CEILING TEST
Under the full cost accounting rules of the Securities and Exchange
Commission (SEC), the Company reviews the carrying value of its oil and gas
properties each quarter on a country-by-country basis. Under full cost
accounting rules, capitalized costs of oil and gas properties may not exceed the
present value of estimated future net revenues from proved reserves, discounted
at 10 percent, plus the lower of cost or fair market value of unproved
properties, as adjusted for related tax effects and deferred income taxes.
Application of these rules generally requires pricing future production at the
unescalated oil and gas prices in effect at the end of each fiscal quarter and
requires a write-down if the "ceiling" is exceeded, even if prices declined for
only a short period of time. If a write-down is required, the one-time charge to
earnings would not impact cash flow from operating activities. The Company had
no write-downs due to ceiling test limitations during 1996.
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY
The Company's exploration, production and marketing operations are
regulated extensively at the federal, state and local levels, as well as by
other countries in which the Company does business. Oil and gas exploration,
development and production activities are subject to various laws and
regulations governing a wide variety of matters. For example,
hydrocarbon-producing states have statutes or regulations addressing
7
10
conservation practices and the protection of correlative rights, and such
regulations may affect Apache's operations and limit the quantity of
hydrocarbons Apache may produce and sell. Other regulated matters include
marketing, pricing, transportation, and valuation of royalty payments.
At the U.S. federal level, the Federal Energy Regulatory Commission (FERC)
regulates interstate transportation of natural gas under the Natural Gas Act.
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated
natural gas prices for all "first sales" of natural gas, which includes all
sales by Apache of its own production. As a result, all sales of the Company's
natural gas produced in the U.S. may be sold at market prices, unless otherwise
committed by contract.
Apache's gas sales are affected by regulation of intrastate and interstate
gas transportation. In an attempt to promote competition, the FERC has issued a
series of orders which have altered significantly the marketing and
transportation of natural gas. The effect of these orders has been to enable the
Company to market its natural gas production to purchasers other than the
interstate pipelines located in the vicinity of its producing properties. The
Company believes that these changes have generally improved the Company's access
to transportation. To date, Apache has not experienced any material adverse
effect on its gas marketing activities as a result of these FERC orders;
however, the Company cannot predict what new regulations may be adopted by the
FERC and other regulatory authorities, or what effect subsequent regulations may
have on its future gas marketing activities.
ENVIRONMENTAL MATTERS
Apache, as an owner or lessee and operator of oil and gas properties, is
subject to various federal, provincial, state, local and foreign country laws
and regulations relating to discharge of materials into, and protection of, the
environment. These laws and regulations may, among other things, impose
liability on the lessee under an oil and gas lease for the cost of pollution
clean-up resulting from operations, subject the lessee to liability for
pollution damages, and require suspension or cessation of operations in affected
areas.
Apache maintains insurance coverage which it believes is customary in the
industry, although it is not fully insured against all environmental risks. The
Company is not aware of any environmental claims existing as of December 31,
1996, which would have a material impact upon the Company's financial position
or results of operations.
Apache has made and will continue to make expenditures in its efforts to
comply with these requirements, which it believes are necessary business costs
in the oil and gas industry. The Company has established policies for continuing
compliance with environmental laws and regulations, including regulations
applicable to its operations in Canada, Australia and other countries. Apache
also has established operational procedures and training programs designed to
minimize the environmental impact of its field facilities. The costs incurred by
these policies and procedures are inextricably connected to normal operating
expenses such that the Company is unable to separate the expenses related to
environmental matters; however, the Company does not believe any such additional
expenses are material to its financial position or results of operations.
Although environmental requirements have a substantial impact upon the
energy industry, generally these requirements do not appear to affect Apache any
differently, or to any greater or lesser extent, than other companies in the
industry. Apache does not believe that compliance with federal, state, local or
foreign country provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, will
have a material adverse effect upon the capital expenditures, earnings or
competitive position of the Company or its subsidiaries; however, there is no
assurance that changes in or additions to laws or regulations regarding the
protection of the environment will not have such an impact.
COMPETITION
The oil and gas industry is highly competitive. Because oil and gas are
fungible commodities, the principal form of competition with respect to product
sales is price competition. Apache strives to maintain the lowest finding and
production costs possible to maximize profits.
8
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As an independent oil and gas company, Apache frequently competes for
reserve acquisitions, exploration leases, licenses, concessions and marketing
agreements against companies with substantially larger financial and other
resources than Apache possesses. Moreover, many competitors have established
strategic long-term positions and maintain strong governmental relationships in
countries in which the Company may seek new entry. Apache expects this high
degree of competition to continue.
INSURANCE
Exploration for and production of oil and natural gas can be hazardous,
involving unforeseen occurrences such as blowouts, cratering, fires and loss of
well control, which can result in damage to or destruction of wells or
production facilities, injury to persons, loss of life or damage to property or
the environment. The Company maintains insurance against certain losses or
liabilities arising from its operations in accordance with customary industry
practices and in amounts that management believes to be prudent; however,
insurance is not available to the Company against all operational risks.
EMPLOYEES
On December 31, 1996, Apache had 1,256 employees.
OFFICES
Apache's principal executive offices are located at One Post Oak Central,
2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400. At year-end 1996,
the Company maintained regional exploration and production offices in Tulsa,
Oklahoma; Houston, Texas; Calgary, Alberta; Cairo, Egypt; and Perth, Western
Australia.
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ITEM 2. PROPERTIES
OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES AND RESERVES
ACREAGE
The undeveloped and developed acreage including both domestic leases and
international production and exploration rights that Apache held as of December
31, 1996, are as follows:
UNDEVELOPED ACREAGE DEVELOPED ACREAGE
------------------------ -----------------------
GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
---------- --------- --------- ---------
OFFSHORE
Alabama........................... -- -- 34,560 9,457
Louisiana......................... 135,049 67,230 250,437 117,076
Texas............................. 92,775 53,638 224,514 99,405
---------- --------- --------- ---------
TOTAL........................ 227,824 120,868 509,511 225,938
---------- --------- --------- ---------
MIDCONTINENT
Arkansas.......................... 1,581 1,051 4,530 4,015
Kansas............................ 280 136 -- --
Louisiana......................... 7,607 6,024 46,559 34,366
Oklahoma.......................... 138,074 57,678 508,984 208,986
Pennsylvania...................... -- -- 796 38
Texas............................. 41,204 25,029 127,325 71,710
---------- --------- --------- ---------
TOTAL........................ 188,746 89,918 688,194 319,115
---------- --------- --------- ---------
WESTERN
Colorado.......................... 58,054 48,017 14,859 14,484
Illinois.......................... 140 56 -- --
Michigan.......................... 120 16 -- --
New Mexico........................ 94,290 52,152 91,306 51,416
Ohio.............................. 21 11 -- --
Texas............................. 112,834 49,360 257,400 196,851
Utah.............................. 1,400 867 6,647 6,220
Wyoming........................... 392,205 218,218 25,589 12,152
---------- --------- --------- ---------
TOTAL........................ 659,064 368,697 395,801 281,123
---------- --------- --------- ---------
GULF COAST
Alabama........................... 7,656 1,136 -- --
Florida........................... 162 23 -- --
Louisiana......................... 20,618 15,047 93,085 74,244
Mississippi....................... 8,349 4,361 5,832 3,293
Texas............................. 85,700 43,639 207,700 131,825
---------- --------- --------- ---------
TOTAL........................ 122,485 64,206 306,617 209,362
---------- --------- --------- ---------
TOTAL UNITED STATES............... 1,198,119 643,689 1,900,123 1,035,538
---------- --------- --------- ---------
INTERNATIONAL
Canada............................ 225,559 147,938 391,108 261,182
Egypt............................. 11,258,320 5,889,592 365,000 162,275
Australia......................... 2,796,480 607,878 339,770 64,410
China............................. 48,680 24,340 -- --
Indonesia......................... 722,290 280,890 -- --
Ivory Coast....................... 198,000 79,200 -- --
---------- --------- --------- ---------
TOTAL INTERNATIONAL.......... 15,249,329 7,029,838 1,095,878 487,867
---------- --------- --------- ---------
TOTAL COMPANY..................... 16,447,448 7,673,527 2,996,001 1,523,405
========== ========= ========= =========
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PRODUCTIVE OIL AND GAS WELLS
The number of productive oil and gas wells, operated and non-operated, in
which Apache had an interest as of December 31, 1996, is set forth below.
GAS OIL
--------------- ---------------
GROSS NET GROSS NET
----- ----- ----- -----
Offshore........................................ 255 90 70 30
Midcontinent.................................... 1,810 696 550 169
Western......................................... 355 116 3,340 1,760
Gulf Coast...................................... 385 301 1,130 927
Canada.......................................... 470 333 660 89
Egypt........................................... 10 4 94 43
Australia....................................... 10 2 21 4
Other International............................. -- -- -- --
----- ----- ----- -----
Total.................................... 3,295 1,542 5,865 3,022
===== ===== ===== =====
GROSS WELLS DRILLED
The following table sets forth the number of gross exploratory and gross
development wells drilled in the last three fiscal years in which the Company
participated. The number of wells drilled refers to the number of wells
commenced at any time during the respective fiscal year. "Productive" wells are
either producing wells or wells capable of commercial production. At December
31, 1996, the Company was participating in 52 wells in the U.S., nine Canadian
wells, seven Egyptian wells, two wells in China and one Australian well in the
process of drilling.
EXPLORATORY DEVELOPMENTAL
-------------------------- --------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
1996
United States........................ 28 33 61 201 31 232
Canada............................... 23 25 48 27 2 29
Egypt................................ 7 4 11 12 -- 12
Australia............................ 4 6 10 1 1 2
Other International.................. -- 1 1 -- -- --
-- -- --- --- -- ---
Total...................... 62 69 131 241 34 275
== == === === == ===
1995
United States........................ 9 15 24 129 21 150
Canada............................... 16 13 29 14 5 19
Egypt................................ 4 2 6 3 -- 3
Australia............................ 4 6 10 1 1 2
Other International.................. -- 4 4 -- 1 1
-- -- --- --- -- ---
Total...................... 33 40 73 147 28 175
== == === === == ===
1994
United States........................ 20 17 37 223 39 262
Canada............................... 18 12 30 35 3 38
Egypt................................ -- -- -- -- -- --
Australia............................ 1 5 6 2 -- 2
Other International.................. 6 3 9 -- -- --
-- -- --- --- -- ---
Total...................... 45 37 82 260 42 302
== == === === == ===
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NET WELLS DRILLED
The following table sets forth, for each of the last three fiscal years,
the number of net exploratory and net developmental wells drilled by Apache.
EXPLORATORY DEVELOPMENTAL
--------------------------- ---------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- ---- ----- ---------- ---- -----
1996
United States..................... 17.2 22.8 40.0 77.9 19.1 97.0
Canada............................ 18.8 21.5 40.3 24.1 1.4 25.5
Egypt............................. 3.2 3.0 6.2 9.0 -- 9.0
Australia......................... 1.1 1.5 2.6 0.2 0.1 0.3
Other International............... -- 0.4 0.4 -- -- --
---- ---- ---- ----- ---- -----
Total................... 40.3 49.2 89.5 111.2 20.6 131.8
==== ==== ==== ===== ==== =====
1995
United States..................... 3.7 6.2 9.9 57.3 14.0 71.3
Canada............................ 14.0 9.4 23.4 13.4 3.4 16.8
Egypt............................. 1.0 0.5 1.5 0.6 -- 0.6
Australia......................... 1.4 1.8 3.2 0.2 0.7 0.9
Other International............... -- 0.7 0.7 -- 0.7 0.7
---- ---- ---- ----- ---- -----
Total................... 20.1 18.6 38.7 71.5 18.8 90.3
==== ==== ==== ===== ==== =====
1994
United States..................... 10.7 10.4 21.1 100.1 27.0 127.1
Canada............................ 13.0 7.0 20.0 28.0 2.0 30.0
Egypt............................. -- -- -- -- -- --
Australia......................... 0.3 1.9 2.2 0.4 -- 0.4
Other International............... 2.0 0.5 2.5 -- -- --
---- ---- ---- ----- ---- -----
Total................... 26.0 19.8 45.8 128.5 29.0 157.5
==== ==== ==== ===== ==== =====
PRODUCTION AND PRICING DATA
The following table describes, for each of the last three fiscal years,
oil, natural gas liquids (NGLs) and gas production for the Company, average
production costs (excluding severance taxes) and average sales prices.
PRODUCTION AVERAGE SALES PRICE
--------------------------- AVERAGE ---------------------------------
YEAR ENDED OIL NGLS GAS PRODUCTION OIL NGLS GAS
DECEMBER 31, (MBBLS) (MBBLS) (MMCF) COST PER BOE (PER BBL) (PER BBL) (PER MCF)
------------ ------- ------- ------ ------------ --------- --------- ---------
1996............... 19,465 713 205,305 $3.43 $20.84 $16.41 $2.02
1995............... 18,324 763 210,632 3.34 17.09 12.05 1.57
1994............... 13,815 724 176,396 2.85 15.65 11.28 1.78
ESTIMATED RESERVES AND RESERVE VALUE INFORMATION
The following information relating to estimated reserve quantities, reserve
values and discounted future net revenues is derived from, and qualified in its
entirety by reference to, the more complete reserve and revenue information and
assumptions included in the Company's supplemental oil and gas disclosures under
Item 8 below. The Company's estimates of proved reserve quantities of its U.S.,
Canadian and certain international properties have been subject to review by
Ryder Scott Company Petroleum Engineers, while the proved reserve quantities of
the Company's Egyptian properties are reviewed by Netherland, Sewell &
Associates, Inc. There are numerous uncertainties inherent in estimating
quantities of proved reserves and projecting future rates of production and
timing of development expenditures. The following reserve
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information represents estimates only and should not be construed as being
exact. See the Supplemental Oil and Gas Disclosures under Item 8 below.
The following table sets forth the Company's estimated proved developed and
undeveloped reserves as of December 31, 1996, 1995 and 1994:
OIL, NGLS
NATURAL AND
GAS CONDENSATE
(BCF) (MMBBLS)
------- ----------
1996
Developed........................................... 1,435.3 183.2
Undeveloped......................................... 190.0 52.1
------- -----
Total........................................ 1,625.3 235.3
======= =====
1995
Developed........................................... 1,298.5 137.5
Undeveloped......................................... 203.4 32.8
------- -----
Total........................................ 1,501.9 170.3
======= =====
1994
Developed........................................... 1,184.9 100.0
Undeveloped......................................... 131.3 10.6
------- -----
Total........................................ 1,316.2 110.6
======= =====
The following table sets forth the estimated future value of all the
Company's proved reserves, and proved developed reserves, as of December 31,
1996, 1995 and 1994. Future reserve values are based on year-end prices except
in those instances where the sale of gas and oil is covered by contract terms
providing for determinable escalations. Operating costs, production and ad
valorem taxes, and future development costs are based on current costs with no
escalations.
PRESENT VALUE OF ESTIMATED
FUTURE NET REVENUES
ESTIMATED FUTURE BEFORE INCOME TAXES
NET REVENUES (DISCOUNTED AT 10 PERCENT)
------------------------ --------------------------
PROVED PROVED
DECEMBER 31, PROVED DEVELOPED PROVED DEVELOPED
------------ ---------- ---------- ----------- -----------
(IN THOUSANDS)
1996.................... $7,936,924 $6,713,252 $4,568,475 $4,041,065
1995.................... 4,043,024 3,390,103 2,344,357 2,056,558
1994.................... 2,581,459 2,390,126 1,600,927 1,512,305
At December 31, 1996, estimated future net revenues expected to be received
from all the Company's proved reserves and proved developed reserves were as
follows:
PROVED
DECEMBER 31, PROVED DEVELOPED
------------ ---------- ----------
(IN THOUSANDS)
1997............................................. $ 860,323 $ 943,576
1998............................................. 913,919 873,976
1999............................................. 823,479 715,934
Thereafter....................................... 5,339,203 4,179,766
---------- ----------
Total.................................. $7,936,924 $6,713,252
========== ==========
The Company believes that no major discovery or other favorable or adverse
event has occurred since December 31, 1996, which would cause a significant
change in the estimated proved reserves reported herein.
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The estimates above are based on year-end pricing in accordance with the SEC
guidelines and do not reflect current prices. Since January 1, 1996, no oil or
gas reserve information has been filed with, or included in any report to, any
U.S. authority or agency other than the SEC and the Energy Information
Administration (EIA). The basis of reporting reserves to the EIA for the
Company's reserves is identical to that set forth in the foregoing table.
TITLE TO INTERESTS
The Company believes that its title to the various interests set forth
above is satisfactory and consistent with the standards generally accepted in
the oil and gas industry, subject only to immaterial exceptions which do not
detract substantially from the value of the interests or materially interfere
with their use in the Company's operations. The interests owned by the Company
may be subject to one or more royalty, overriding royalty and other outstanding
interests customary in the industry. The interests may additionally be subject
to obligations or duties under applicable laws, ordinances, rules, regulations
and orders of arbitral or governmental authorities. In addition, the interests
may be subject to burdens such as net profits interests, liens incident to
operating agreements and current taxes, development obligations under oil and
gas leases and other encumbrances, easements and restrictions, none of which
detract substantially from the value of the interests or materially interfere
with their use in the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under the caption "Litigation" in Note 10 to the
Company's financial statements under Item 8 below is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Apache's common stock, par value $1.25 per share, is traded on the New York
Stock Exchange and the Chicago Stock Exchange under the symbol APA. The table
below provides certain information regarding Apache common stock for 1996 and
1995. Prices shown are from the New York Stock Exchange Composite Transactions
Reporting System.
1996 1995
------------------------- -------------------------
PRICE RANGE PRICE RANGE
------------- DIVIDENDS ------------- DIVIDENDS
HIGH LOW PER SHARE HIGH LOW PER SHARE
----- ----- --------- ----- ----- ---------
First Quarter........................ $29 1/2 $24 3/8 $.07 $27 3/8 $22 1/4 $.07
Second Quarter....................... 33 1/2 26 3/8 .07 31 25 3/8 .07
Third Quarter........................ 34 5/8 27 3/4 .07 30 1/4 25 3/4 .07
Fourth Quarter....................... 37 7/8 29 1/2 .07 29 5/8 23 1/8 .07
The closing price per share of Apache common stock, as reported on the New
York Stock Exchange Composite Transactions Reporting System for February 28,
1997, was $32.375. At December 31, 1996, there were 90,058,797 shares of Apache
common stock outstanding, held by approximately 11,000 shareholders of record
and 38,000 beneficial owners.
Each share of Apache common stock also represents one preferred share
purchase right which, when exercisable, would entitle the holder to purchase one
ten-thousandth of a share of Series A Junior Participating Preferred Stock for a
purchase price of $100 and, under certain circumstances, would entitle the
holder to acquire additional shares of Apache common stock. See Note 7 to the
Company's financial statements under Item 8 below.
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The Company has paid cash dividends on its common stock for 120 consecutive
quarters through December 31, 1996, and expects to continue the payment of
dividends at current levels, although future dividend payments will depend upon
the Company's level of earnings, financial requirements and other relevant
factors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and
its consolidated subsidiaries for each of the years in the five-year period
ended December 31, 1996, which information has been derived from the Company's
audited financial statements. Apache's previously reported data for 1994, 1993
and 1992 has been restated to reflect the merger with DEKALB in May 1995 under
the pooling of interests method of accounting. This information should be read
in connection with and is qualified in its entirety by the more detailed
information in the Company's financial statements under Item 8 below.
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996(1) 1995(2) 1994 1993(3) 1992(4)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Total revenues....................... $ 977,151 $ 750,702 $ 592,626 $ 512,632 $ 517,403
Income (loss) from continuing
operations......................... 121,427 20,207 45,583 41,421 (14,632)
Income (loss) per common share --
continuing operations.............. 1.42 .28 .65 .67 (.26)
Cash dividends per common share(5)... .28 .28 .28 .28 .28
BALANCE SHEET DATA
Working capital (deficit)............ $ (41,501) $ (22,013) $ (3,203) $ (55,538) $ (32,775)
Total assets......................... 3,432,430 2,681,450 2,036,627 1,759,203 1,774,767
Long-term debt....................... 1,235,706 1,072,076 719,033 504,334 524,098
Shareholders' equity................. 1,518,516 1,091,805 891,087 868,596 554,524
Common shares outstanding at end of
year............................... 90,059 77,379 69,666 69,504 55,361
- - ---------------
(1) Includes financial data for Phoenix after May 20, 1996.
(2) Includes the results of the acquisitions of certain oil and gas properties
from Texaco Exploration and Production, Inc. (Texaco) and Aquila after March
1, 1995 and September 1995, respectively, and the sale of a substantial
portion of the Company's Rocky Mountain properties in September 1995.
(3) Includes financial data for AERC after June 30, 1993, and the results of the
acquisition of certain oil and gas properties from Hall-Houston after July
31, 1993.
(4) The net loss in 1992 resulted from the sale of substantially all of DEKALB's
United States assets for a loss of $25.6 million after-tax. DEKALB also
reported Canadian ceiling test write-downs of $15.9 million after-tax and
United States ceiling test write-downs of $24.7 million after-tax.
(5) No cash dividends were paid on outstanding DEKALB common stock in 1995,
1994, 1993 and 1992.
Reference is made to Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," for a discussion of significant
acquisitions and to Note 2 to the Company's consolidated financial statements
under Item 8 below.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Apache's results of operations and financial position during 1996 were
significantly impacted by the following factors:
Commodity Prices -- Higher oil and natural gas prices contributed to record
earnings and cash flow in 1996. Apache's average realized natural gas price for
1996 was up 29 percent over 1995, favorably impacting revenues by $93.4 million.
The Company's average realized oil price for 1996 increased 22 percent from
1995, contributing $73.0 million to the increase in revenues.
Phoenix Acquisition -- On May 20, 1996, Apache acquired Phoenix, through a
merger which resulted in Phoenix becoming a wholly owned subsidiary of Apache.
The assets acquired in the Phoenix acquisition contributed 6,260 b/d of oil
production during 1996.
Debt Refinancing -- During 1996, Apache offered three issues of senior
unsecured notes and debentures with principal amounts of $100 million in
February, $180 million in April and $150 million in November. In October 1996,
Apache replaced its existing $1 billion revolving bank credit facility with a
global credit arrangement (global credit facility) that provides Apache with
greater borrowing availability, increased tax efficiency and a lower cost of
bank debt. Additionally, in September and October 1996, Apache received rating
upgrades on its long-term debt from Moody's Investors Service and Duff and
Phelps.
RESULTS OF OPERATIONS
NET INCOME AND REVENUE
Apache reported 1996 net income of $121.4 million, up from $20.2 million in
1995. Net income per common share rose to $1.42, a five-fold increase from $.28
a year earlier, despite additional shares outstanding. Higher oil and gas prices
and increased oil production drove the increase in earnings but were partially
offset by lower natural gas production and higher lease operating expenses.
Additionally, 1995 results were negatively impacted by a one-time after-tax
charge of $8.7 million, or $.12 per share, associated with merger costs.
Revenues increased 30 percent in 1996 to $977.2 million as compared to
$750.7 million for the same period in 1995. Crude oil and natural gas production
revenue increased 28 percent compared to 1995 with crude oil contributing 49
percent and natural gas contributing 50 percent of total oil and gas production
revenue.
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Volume and price information concerning the Company's oil and gas
production is summarized below:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Natural Gas Volume -- Mcf per day:
United States.................................... 472,171 500,441 419,161
Canada........................................... 74,598 67,083 56,142
Egypt............................................ 302 -- --
Australia........................................ 13,869 9,551 7,975
-------- -------- --------
Total....................................... 560,940 577,075 483,278
======== ======== ========
Average Natural Gas Price -- Per Mcf:
United States.................................... $ 2.17 $ 1.64 $ 1.81
Canada........................................... 1.09 1.00 1.54
Egypt............................................ 3.21 -- --
Australia........................................ 1.96 1.86 1.90
Total....................................... 2.02 1.57 1.78
Oil Volume -- Barrels per day:
United States.................................... 40,600 45,084 32,669
Canada........................................... 1,969 1,999 2,003
Egypt............................................ 8,295 -- --
Australia........................................ 2,318 3,120 3,177
-------- -------- --------
Total....................................... 53,182 50,203 37,849
======== ======== ========
Average Oil Price -- Per barrel:
United States.................................... $ 20.67 $ 17.00 $ 15.44
Canada........................................... 20.84 16.90 15.51
Egypt............................................ 21.29 -- --
Australia........................................ 22.33 18.56 17.95
Total....................................... 20.84 17.09 15.65
Natural Gas Liquids (NGL) -- Barrels per day:
United States.................................... 1,308 1,521 1,352
Canada........................................... 641 569 633
-------- -------- --------
Total....................................... 1,949 2,090 1,985
======== ======== ========
Average NGL Price -- Per barrel:
United States.................................... $ 17.23 $ 12.83 $ 12.39
Canada........................................... 14.73 9.96 8.88
Total....................................... 16.41 12.05 11.28
Natural gas sales for 1996 of $415.7 million increased $85.0 million, or 26
percent, when compared to 1995, as the impact of favorable natural gas prices
more than offset production declines. A $.53 per Mcf increase in realized price
attributable to United States natural gas production, which comprised 84 percent
of the Company's worldwide gas production, contributed $92.0 million to the
increase in sales. Offsetting this increase was a $16.2 million reduction in
sales due to a decline in United States production compared to the same period
in 1995, due primarily to the natural decline of older properties in the
Company's Offshore and Gulf Coast regions and the sale of producing properties
in late 1995. Canadian and Australian gas sales contributed $5.3 million and
$3.5 million, respectively, to the increase in revenue as a result of higher
realized prices and increased production in both countries. The Company's net
hedging activity, including fixed-price physical contracts and financial
contracts, reduced realized prices by $.09 per Mcf during the year ended
December 31, 1996, compared to a $.07 per Mcf gain during 1995. The 1995 gain
was driven substantially by higher margins on the Company's premium-price gas
contracts, given low spot market prices during 1995.
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For the year ended December 31, 1996, oil sales increased 30 percent to
$405.7 million due primarily to the assets acquired in the Phoenix Merger.
Egyptian oil sales contributed $64.6 million, or 70 percent, of the increase in
oil sales compared to 1995, and comprised 16 percent of total oil production.
United States oil sales were favorably impacted by a 22 percent increase in
realized prices, which contributed $54.5 million to the increase in revenue
compared to 1995. Partially offsetting the impact due to higher realized
domestic prices was a 10 percent decline in domestic oil production resulting
from property sales in late 1995, which reduced revenues by $27.1 million.
Canadian oil sales contributed $2.7 million of the increase in oil sales
compared to 1995 due primarily to higher realized prices. Australian oil sales
were impacted by a 26 percent decline in production compared to 1995, partially
offset by higher realized prices, resulting in a net decrease in revenue of $2.2
million.
For 1996, natural gas liquid revenues increased 27 percent to $11.7
million. Compared to the prior year, realized prices increased 36 percent,
contributing $3.1 million to the increase in revenues, while production declined
seven percent, decreasing revenues $.6 million.
OTHER REVENUES AND OPERATING EXPENSES
During 1996, Apache's gas gathering, processing and marketing revenues
increased 47 percent to $142.9 million driven primarily by increased product
prices. Although revenues have increased with respect to these activities, lower
margins were realized for the year ended December 31, 1996 compared to the same
period in 1995.
For 1996, other revenue of $1.4 million included a gain on the sale of
stock held for investment of $.8 million and Canadian royalty credits of $1.2
million. Offsetting these revenues was the impact of $.9 million of currency
transaction loss related to Canadian exchange rate fluctuations. Prior year
other revenue was $1 million lower than 1996 and included $4.3 million in
proceeds received from settlements, $2.2 million in gains from the sales of
non-oil and gas assets, $1.1 million of Canadian royalty credits and $2.1
million of other income, offset by $9.3 million in losses from the decoupling of
NYMEX and wellhead prices.
The Company's depreciation, depletion and amortization (DD&A) expense for
1996 totaled $315.1 million up from $297.5 million in 1995. On an equivalent
barrel basis, full cost DD&A expense increased $.12 per boe, from $5.32 per boe
in 1995 to $5.44 per boe in 1996.
Operating costs totaled $225.5 million in 1996, an increase of $13.8
million, or seven percent, from 1995. Lease operating expense (LOE), excluding
severance taxes, totaled $186.4 million, a 2.9 percent increase from 1995. On an
equivalent barrel basis, LOE for the year ended December 31, 1996, averaged
$3.43 per boe, a three percent increase from $3.34 per boe in 1995. The increase
was driven by a flat cost structure with declining production in the Gulf Coast
region and the impact of the Phoenix acquisition, partially offset by decreasing
LOE per boe in the Midcontinent region resulting from incremental production
added through the drillbit.
Administrative, selling and other costs in 1996 decreased $.6 million, or
two percent. The decline is a result of the Company's continuing efforts to
control costs and its ability to integrate the assets and operations acquired in
1995 and 1996 with a minimal increase in administrative staff. On an equivalent
barrel basis, general and administrative expense declined two percent from 1995
to $.66 per boe in 1996.
Net financing costs for 1996 decreased $9.0 million, or 13 percent, from
the prior year due to higher amounts of capitalized interest, partially offset
by higher gross interest costs. Capitalized interest, which is based on the
carrying value of unproved properties, increased $11.7 million for 1996 due to
the acquisitions made in 1995 and 1996 and the resulting increase in the
unproved property base. Gross interest incurred increased $1.8 million for 1996
as compared to 1995. Average corporate debt increased $78.8 million compared to
1995, increasing interest expense by $6.1 million. Offsetting this increase was
a decline of .36 percent in Apache's weighted average interest rate, resulting
in a decrease in interest expense of $4.3 million.
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HEDGING ACTIVITY
The Company periodically enters into hedging activities with respect to a
portion of its projected oil and natural gas production through a variety of
financial and physical arrangements intended to support oil and natural gas
prices at targeted levels and to manage its exposure to oil and gas price
fluctuations. Apache uses futures contracts, swaps, options and fixed-price
physical contracts to hedge its commodity prices. Realized gains or losses from
the Company's price risk management activities are recognized in oil and gas
production revenues when the associated production occurs.
In 1996, Apache recognized net losses from hedging activities, including
both financial and fixed price physical gas contracts, which decreased oil and
gas production revenues by approximately $5.1 million and $18.7 million,
respectively. These losses decreased the Company's average realized oil and
natural gas prices in 1996 by $.26 per barrel and $.09 per Mcf, respectively.
PRIOR-YEAR COMPARATIVE INFORMATION
Apache reported net income for 1995 of $20.2 million, or $.28 per share,
compared with $45.6 million, or $.65 per share in 1994. The decline was due to
lower natural gas realizations and non-recurring charges. Absent one-time
after-tax charges for merger costs of $8.7 million and losses recognized in
connection with the decoupling of NYMEX and wellhead prices of $5.9 million
($9.3 million before tax), 1995 earnings would have totaled $.48 per share.
Revenues increased 27 percent in 1995 to $750.7 million as compared to
$592.6 million in 1994. Crude oil and natural gas production revenue increased
21 percent compared to 1994, with crude oil contributing 48 percent and natural
gas contributing 51 percent of total oil and gas production revenues.
Natural gas sales for 1995 of $330.7 million increased five percent from
1994 as production gains from acquisitions and drilling more than offset the
impact of a $.21 per Mcf decline in the Company's average realized gas price.
Acquisitions boosted Apache's 1995 gas production by 92 MMcf/d, while drilling
additions outpaced the impact of property divestitures and natural depletion.
Apache realized production gains in each of its three operating areas: the
United States, Canada and Australia. In addition to production gains from
drilling, the Australian sales benefited from new markets for its natural gas.
The Company's average realized natural gas price declined 12 percent from 1994,
decreasing sales by approximately $44 million.
Reflecting an increase in both production and prices, oil sales increased
45 percent in 1995 to $313.2 million. Apache's oil production rose 12.4 Mb/d, or
33 percent, from 1994 as property divestitures and natural depletion partially
offset the 17 Mb/d of production added through acquisitions. The Company's
average realized oil price increased nine percent in 1995 to $17.09 per barrel.
Revenues from the sale of natural gas liquids totaled $9.2 million in 1995,
up 13 percent from 1994 due to higher prices and a slight increase in volumes.
During 1995, Apache's gas gathering, processing and marketing revenues more
than doubled from 1994 to $97.2 million. Revenues increased in 1995 with respect
to these activities due to increased volumes; however, margins were lower due to
the sale of the Company's interest in the Little Knife gas plant as part of
Apache's divestiture of Rocky Mountain properties in September 1995.
Other revenues in 1995 of $.4 million reflects $4.3 million of settlement
income, $2.2 million in gains from the sale of non-oil and gas assets, $1.1
million of Canadian royalty credits and $2.1 million of other income, offset by
a $9.3 million loss from the decoupling of NYMEX futures and wellhead prices.
The Company's DD&A expense for 1995 totaled $297.5 million compared to
$257.8 million in 1994. On an equivalent barrel basis, full cost DD&A declined
six percent to $5.32 per boe, due to the favorable impact of reserve additions
and revisions.
Operating costs totaled $211.7 million in 1995, an increase of $62.3
million or 42 percent from 1994. LOE, excluding severance taxes, totaled $181.1
million, an increase of $55.8 million from 1994. On an equivalent unit of
production basis, LOE for the year ended December 31, 1995, averaged $3.34 per
boe, a
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17 percent increase from $2.85 per boe in 1994. The increase in unit cost
reflects the high percentage of oil properties comprising the Texaco
acquisition, as oil properties typically have a higher per-unit cost than gas
properties.
Administrative, selling and other costs in 1995 decreased $2.2 million, or
six percent, due primarily to the elimination of duplicate administrative
functions following the merger of DEKALB into Apache. On an equivalent unit of
production basis, general and administrative expenses declined 24 percent from
1994 to $.67 per boe.
Net financing costs of $70.6 million were more than double the 1994 amount
due to increased debt levels from acquisitions and higher interest rates.
Apache's average interest rate increased from 6.3 percent in 1994 to 7.4 percent
in 1995 due to higher market rates and Apache's higher debt to total
capitalization rate following the acquisition of properties from Texaco.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
CAPITAL COMMITMENTS
Apache's primary needs for cash are for exploration, development and
acquisition of oil and gas properties, repayment of principal and interest on
outstanding debt, payment of dividends, and capital obligations for affiliated
ventures. The Company generally funds its exploration and development activities
through internally generated cash flows. Apache budgets its capital expenditures
based upon projected cash flows and routinely adjusts its capital expenditures
in response to changes in oil and natural gas prices and corresponding changes
in cash flow. The Company is not in a position to predict future product prices.
Capital Expenditures -- A summary of oil and gas capital expenditures over
the last three years is presented below:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Exploration and Development:
United States.......................... $302,494 $216,430 $270,588
Canada................................. 58,768 27,788 41,595
Egypt.................................. 63,597 11,852 1,226
Australia.............................. 46,838 32,373 16,493
Other International.................... 21,998 23,725 14,223
-------- -------- --------
Total............................. $493,695 $312,168 $344,125
======== ======== ========
Acquisitions of Oil and Gas Properties... $446,205 $820,918 $180,742
======== ======== ========
Expenditures for exploration and development totaled $493.7 million in 1996
compared to $312.2 million in 1995. Apache's drilling program in 1996 added 98
MMboe of reserves (including revisions), replacing 179 percent of production. In
the United States, Apache completed 229 gross wells as producers out of 293
gross wells drilled during the year, compared with 138 gross producers out of
174 gross wells drilled in 1995. In Canada, Apache completed 50 gross wells as
producers out of 77 gross wells drilled during the year, compared with 30 gross
producers out of 48 gross wells drilled in 1995.
Internationally, the Company completed 24 gross producers of 36 gross wells
drilled in 1996, compared to 12 gross producers out of 26 gross wells in 1995.
The international wells drilled in 1996 included 19 successful wells in Egypt
and five successful wells in Australia.
United States and Canadian expenditures for exploration and development in
1997 operations, are expected to exceed the 1996 expenditures by approximately
$60 million. The Company expects its other international exploration and
development expenditures in 1997, exclusive of facilities, to total
approximately $220 million.
Acquisition costs of oil and gas properties, including the value assigned
to shares issued and issuable and liabilities assumed in the Phoenix merger,
totaled $446.2 million in 1996 compared to $820.9 million in 1995.
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Property acquired in the Phoenix merger totaled $386.2 million of which $331.2
million related to oil and gas properties and $55.0 million to facilities.
Apache also acquired $115.0 million of other oil and gas properties during 1996,
primarily representing tactical acquisitions of properties in the Company's
existing focus areas, including the purchase of certain oil and gas properties
from Hall-Houston for $46 million in cash. Funds for the acquisitions were
obtained principally from borrowings under the Company's revolving bank credit
facilities.
Cash expenditures for acquisitions of oil and gas properties during 1995
totaled $820.9 million as the Company added 156 MMboe of oil and gas reserves
through purchases. The most significant of the 59 transactions Apache completed
during 1995 were the Company's acquisitions of properties from Texaco and
Aquila.
On March 1, 1995, Apache purchased certain United States oil and gas
properties from Texaco for approximately $567 million in cash, subject to
adjustment. Funds for the Texaco transaction were obtained from several sources,
including increased borrowing capacity under the Company's revolving bank credit
facility and proceeds of Apache's $172.5 million 6 percent Convertible
Subordinated Debentures due 2002 (6 percent debentures), which were issued on
January 4, 1995.
In September 1995, Apache acquired the Aquila Assets for approximately $210
million. The oil and gas properties included approximately 107,000 developed and
49,000 undeveloped net acres located primarily in Apache's Anadarko Basin and
Gulf of Mexico core areas. Also included in the transaction was the purchase of
a five-year, four-month premium-price gas contract and interests in four gas
processing plants.
Cash expenditures for 1994 acquisitions, excluding AERC, totaled $180.7
million. The most significant acquisition that Apache closed during 1994 was the
purchase of substantially all of the United States oil and gas properties of
Crystal Oil Company for $95.8 million. Apache also acquired approximately $84.9
million of other oil and gas properties through a number of separate
transactions during 1994. Funds for the 1994 acquisitions were obtained
principally from borrowings under the Company's revolving bank credit facility.
Debt and Interest Commitments -- At December 31, 1996, Apache had
outstanding debt of $376.5 million under its global credit facility and an
aggregate of $861.2 million of other debt, comprised principally of notes and
debentures maturing in the years 1997 through 2096. Debt outstanding at December
31, 1996 of $1.2 billion was up 15 percent over the $1.1 billion outstanding at
December 31, 1995. The increase reflects the Phoenix Merger and other 1996
property acquisitions. Although debt increased, the Company's debt-to-
capitalization ratio decreased from 49.6 percent at December 31, 1995 to 44.9
percent at December 31, 1996.
During 1996, the Company significantly extended maturity dates of its
long-term debt with long-term offerings and reduced outstanding balances of its
shorter-term, variable-rate debt. In February, Apache issued $100 million
principal amount of 7.7 percent notes due 2026. In April, $180 million principal
amount of 7.95 percent notes due 2026 was issued and, in November, Apache
completed the issuance of 7.625 percent debentures due 2096 for a principal
amount of $150 million. Interest payments on the Company's outstanding debt
obligations during 1997 are projected (using weighted average balances for
floating rate obligations) to be approximately $99.5 million, while scheduled
principal payments for 1997 total $77 million. However, the $75 million
principal amount of 3.93 percent convertible notes due in November 1997 is not
reflected as current maturities in the Company's consolidated balance sheet, as
such notes are expected to be refinanced with long-term debt if not converted
into Apache common stock.
Dividend Payments -- Dividends paid during 1996 totaled $23.4 million, up
24 percent from 1995, primarily due to the issuance of 12.2 million shares of
Apache common stock in connection with the May 1996 acquisition of Phoenix. The
Company has paid cash dividends on its common stock for 120 consecutive quarters
through December 31, 1996, and expects to continue payment of dividends at
current levels, although future dividend payments will depend on the Company's
level of earnings, financial requirements and other relevant factors.
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CAPITAL RESOURCES AND LIQUIDITY
The Company's primary capital resources are net cash provided by operating
activities, proceeds from financing activities and proceeds from sales of
non-strategic assets.
Net Cash Provided by Operating Activities -- Apache's net cash provided by
operating activities during 1996 totaled $490.5 million, an increase of 48
percent from the $332.1 million provided in 1995. This increase was due
primarily to higher product prices during 1996. Net cash provided by operating
activities in 1995 was down $25.6 million from 1994 primarily due to the
prior-year amounts including a $67.4 million advance of future gas deliveries.
Long-Term Borrowings -- During February 1996, Apache completed the issuance
of $100 million principal amount, $99.6 million after discount, of senior
unsecured 7.7 percent notes due March 15, 2026. In April 1996, the Company
issued $180 million principal amount, $178.5 million net of discount, of senior
unsecured 7.95 percent notes due on April 15, 2026. In November 1996, Apache
completed the issuance of $150 million, $149.2 million after discount, of senior
unsecured 7.625 percent debentures due November 1, 2096. The proceeds from these
issuances were used to repay a portion of the Company's revolving bank credit
facility and for general corporate purposes.
The offerings of the two 30-year notes and the 100-year debentures were
placed during periods when 30-year interest rates on Treasury bonds were near
historic 20-year lows. Further, the 100-year debentures were issued following
recent upgrades of the Company's long-term debt ratings which resulted in a
significant narrowing in the spread over the Treasury bond yields. In addition
to the benefits of securing longer-term financing at favorable interest rates
and reducing Apache's exposure to future adverse interest rate fluctuations, the
issuance of the 30-year notes improved the Company's liquidity as the borrowing
base under the Company's global credit facility was reduced by an amount less
than the net proceeds received from issuing the notes.
On October 31, 1996, Apache replaced its existing $1 billion revolving bank
credit facility with a global credit facility that provides Apache with greater
borrowing availability, increased tax efficiency and a lower cost of bank debt.
Consisting of three separate bank facilities tied together by an intercreditor
agreement, the new global credit facility adds Apache's oil and gas reserve
values in Australia and Canada to those in the United States in determining the
Company's borrowing capacity. The facilities consist of $125 million of credit
commitments each in Australia and Canada, and a $750 million credit commitment
in the United States. In connection with securing the global credit facility,
the Company repaid certain of its subsidiary debt, including DEKALB's 10 percent
notes, the Apache Canada Ltd. facility (the Bank of Montreal facility) and the
AEL acceptance facility, all of which had higher interest rates than those under
the global credit facility. As of December 31, 1996, Apache's borrowing base
under the global credit facility was $947 million, of which defined borrowing
base debt was $733 million, leaving $214 million available for additional
borrowings.
During September 1996, Moody's Investor's Service upgraded the Company's
senior long-term debt rating from Baa3 to Baa1. Historically, such a two-notch
rating improvement for an existing investment grade company is uncommon. In
addition, Apache's subordinated debt rating was raised three levels, to Baa2
from Ba2. According to Moody's, the upgrade was the result of several recent
developments, including the Company's lower debt-to-equity ratio, higher
earnings and cash flow, lower interest expense, successful expansion in Egypt
and Western Australia, and a shift in the Company's strategy toward growing
reserves and production primarily through drilling. Also in September 1996,
Standard & Poor's revised its outlook to "positive" from "stable" on Apache's
long-term debt. Standard & Poor's subsequently upgraded the Company's senior
long-term debt from BBB to BBB+ and subordinated debt from BBB- to BBB in
January 1997.
In October 1996, Duff & Phelps Credit Rating Co. upgraded the Company's
senior long-term debt from BBB+ to A-, its 6 percent subordinated debentures
from BBB to BBB+, and its commercial paper from D-2 to D-1-(D-One-Minus).
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In January 1997, the Company established a $300 million commercial paper
program. The program allows Apache to borrow funds for up to 270 days at
attractive interest rates. The commercial paper program is supported by
availability under the $750 million United States portion of the global credit
facility.
Stock Transactions -- On May 20, 1996, Apache acquired Phoenix. Pursuant to
the Merger Agreement, each share of Phoenix common stock then outstanding, and
outstanding Phoenix stock options (which were assumed by Apache) were converted
into the right to receive (a) .75 shares of Apache common stock with any
fractional shares paid in cash, without interest, and (b) $4.00 in cash. As a
result, 12.2 million shares of Apache common stock, valued at $26.00 per share,
were issued in exchange for outstanding Phoenix stock with an additional .8
million shares issuable under options assumed.
On September 27, 1995, Apache closed an equity offering of 7.45 million
shares of Apache common stock. Net proceeds of approximately $195.5 million were
used to repay existing indebtedness under the Company's revolving bank credit
facility, to finance the Aquila transaction and for general corporate purposes.
Asset Sales -- During 1996, Apache received $30.1 million from the sale of
non-strategic oil and gas properties in a number of separate transactions. In
early 1995, Apache announced plans to accelerate the disposition of lower-margin
and non-strategic properties, including the sale of a substantial portion of its
Rocky Mountain properties. During 1995, Apache received $271.9 million from the
sale of such properties, utilizing the proceeds to reduce bank debt. Apache
received $19.5 million from the sale of non-strategic oil and gas properties
during 1994.
Liquidity -- The Company had $13.2 million in cash and cash equivalents on
hand at December 31, 1996, down slightly from the $13.6 million at December 31,
1995. Apache's ratio of current assets to current liabilities decreased slightly
from .90:1 at December 31, 1995, to .87:1 at December 31, 1996.
Management believes that cash on hand, net cash generated from operations
and unused committed borrowing capacity under its global credit facility will be
adequate to satisfy the Company's financial obligations to meet future liquidity
needs for at least the next two fiscal years.
FUTURE TRENDS
Apache's growth strategy is to increase oil and gas reserves, production,
and cash flow through a combination of exploratory drilling, development of its
inventory of existing projects and, principally in North America, tactical
acquisitions meeting defined financial parameters. The Company's drilling
program emphasizes reserve additions through exploratory drilling primarily on
its international interests, and moderate-risk drilling primarily on its North
American interests. The Company also emphasizes reducing operating costs per
unit produced and selling marginal and non-strategic properties in order to
increase its profit margins.
Apache's international investments and exploration activities are an
important component of its long-term growth strategy. Although international
exploration is recognized as higher-risk than most of Apache's U.S. and Canadian
activities, it offers potential for greater rewards and significant reserve
additions. Apache directed its international efforts in 1996 toward development
of certain discoveries offshore Western Australia and in Egypt, and toward
further exploration efforts on its concessions in Egypt, offshore The People's
Republic of China, in Indonesia and offshore the Ivory Coast of western Africa.
Apache believes that reserve additions in these international areas may be made
through higher-risk exploration and through improved production practices and
recovery techniques.
For Apache, property acquisition is only one phase in a continuing cycle of
business growth. Apache's aim is to follow each acquisition with a cycle of
reserve enhancement, property consolidation and cash flow acceleration,
facilitating asset growth and debt reduction. This approach requires a
well-planned and carefully executed property development program and, where
appropriate, a selective program of property dispositions. It motivates Apache
to target acquisitions that have ascertainable additional reserve potential and
to apply an active drilling, workover and recompletion program to realize the
potential of the acquired undeveloped and partially developed properties. Apache
prefers to operate its properties so that it can best influence their
development; as a result, the Company operates properties accounting for over 75
percent of its production.
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In 1997, Apache expects North American exploration and development outlays
to increase from 1996 levels as the Company focuses on increasing reserves,
production and cash flow through exploratory drilling and development of its
existing inventory. Internationally, the Company projects capital expenditures
to nearly double from 1996 as Apache continues to exploit its concessions in
Egypt, Western Australia, China and Indonesia. Proposed exploration and
development expenditures in 1997 will be reviewed at least every quarter in
light of fluctuating product prices and Apache's objective to fund operations
through internally generated cash flow.
On October 31, 1996, subject to shareholder approval, Apache's Board of
Directors adopted the 1996 Share Price Appreciation Plan for officers and
certain key employees. The plan provides for awards denominated in shares of
Apache common stock to become payable upon attainment of share price goals of
$50 and $60 per share, respectively, before January 1, 2000. Between 30 and 50
percent of the number of shares awarded will be paid in cash at the market value
of the stock on the date of payments, and the balance (up to a total of
2,000,000 shares in the aggregate) will be issued in Apache common stock.
Generally, any payments will be made in three installments over 36 months. When
and if payments are made, the Company will recognize compensation expense over
the 36 month vesting period equal to the value of the stock issued on the date
the share price goal is attained (i.e., $50 or $60, as appropriate) and the
actual amount of cash paid.
PRIVATE SECURITIES LITIGATION REFORM ACT DISCLOSURE
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, as set forth in Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such information includes, without limitation, discussions as to
estimates, expectations, beliefs, plans and objectives concerning the Company's
future financial and operating performance. Such forward-looking information is
subject to assumptions and beliefs based on current information known to the
Company and factors that could yield actual results differing materially from
those anticipated. Such factors include, without limitation, the prices received
for the Company's oil and natural gas production, the costs of acquiring,
finding, developing and producing reserves, the rates of production of the
Company's hydrocarbon reserves, the Company's success in acquiring or finding
additional reserves, unforeseen operational hazards, significant changes in tax
or regulatory environments, and the political and economic uncertainties of
foreign operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this item are presented on pages F-1 through F-32 of this Form
10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Information About Nominees
for Election as Directors," "Information About Continuing Directors," "Executive
Officers of the Company," and "Voting Securities and Principal Holders" in the
Company's proxy statement relating to Apache's 1997 annual meeting of
shareholders (the Proxy Statement) is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table,"
"Option/SAR Grants Table," "Option/SAR Exercises and Year-End Value Table,"
"Long-Term Incentive Plans -- Awards in Last Fiscal Year," "Employment Contracts
and Termination of Employment and Change-in-Control Arrangements," and "Director
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities and
Principal Holders" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Business Relationships
and Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents included in this report:
1. Financial Statements
Report of independent public accountants.................... F-1
Auditors' report............................................ F-2
Report of management........................................ F-3
Statement of consolidated income for each of the three years
in the period ended December 31, 1996..................... F-4
Statement of consolidated cash flows for each of the three
years in the period ended December 31, 1996............... F-5
Consolidated balance sheet as of December 31, 1996 and
1995...................................................... F-6
Statement of consolidated shareholders' equity for each of
the three years in the period ended December 31, 1996..... F-7
Notes to consolidated financial statements.................. F-8
Supplemental oil and gas disclosures........................ F-26
Supplemental quarterly financial data....................... F-32
2. Financial Statement Schedules
Financial statement schedules have been omitted because they are
either not required, not applicable or the information required to
be presented is included in the Company's financial statements and
related notes.
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3. Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 -- Stock Purchase Agreement, dated July 1, 1991, between
Registrant and Amoco Production Company (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report
on Form 8-K, dated July 1, 1991, SEC File No. 1-4300).
2.2 -- Form of Acquisition Agreement between Registrant, HERC
Acquisition Corporation and Hadson Energy Resources
Corporation, dated August 26, 1993, and amended September
28, 1993 (incorporated by reference to Exhibit 2.1 to
Registrant's Registration Statement on Form S-4,
Registration No. 33-67954, filed September 29, 1993).
2.3 -- Purchase and Sale Agreement by and between Texaco
Exploration and Production Inc., as seller, and
Registrant, as buyer, dated December 22, 1994
(incorporated by reference to Exhibit 99.3 to
Registrant's Current Report on Form 8-K, dated November
29, 1994, SEC File No. 1-4300).
2.4 -- Amended and Restated Agreement and Plan of Merger among
Registrant, XPX Acquisitions, Inc. and DEKALB Energy
Company, dated December 21, 1994 (incorporated by
reference to Exhibit 2.1 to Amendment No. 3 to
Registrant's Registration Statement on Form S-4,
Registration No. 33-57321, filed April 14, 1995).
2.5 -- Agreement and Plan of Merger among Registrant, YPY
Acquisitions, Inc. and The Phoenix Resource Companies,
Inc., dated March 27, 1996 (incorporated by reference to
Exhibit 2.1 to Registrant's Registration Statement on
Form S-4, Registration No. 333-02305, filed April 5,
1996).
3.1 -- Restated Certificate of Incorporation of Registrant,
dated December 1, 1993, as filed with the Secretary of
State of Delaware on December 16, 1993 (incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report on
Form 10-K for year ended December 31, 1993, SEC File No.
1-4300).
3.2 -- Certificate of Ownership and Merger Merging Apache Energy
Resources Corporation into Registrant, effective December
31, 1995, as filed with the Secretary of State of
Delaware on December 21, 1995 (incorporated by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K
for year ended December 31, 1995, SEC File No. 1-4300).
3.3 -- Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock of
Registrant, effective January 31, 1996, as filed with the
Secretary of State of Delaware on January 22, 1996
(incorporated by reference to Exhibit 3.3 to Registrant's
Annual Report on Form 10-K for year ended December 31,
1995, SEC File No. 1-4300).
3.4 -- Bylaws of Registrant, as amended July 11, 1996, effective
May 2, 1996 (incorporated by reference to Exhibit 3.1 to
Amendment No. 1 on Form 8-K/A to Registrant's Current
Report on Form 8-K, dated May 20, 1996, SEC File No.
1-4300).
4.1 -- Form of Registrant's common stock certificate
(incorporated by reference to Exhibit 4.1 to Registrant's
Annual Report on Form 10-K for year ended December 31,
1995, SEC File No. 1-4300).
4.2 -- Rights Agreement, dated January 31, 1996, between
Registrant and Norwest Bank Minnesota, N.A., rights
agent, relating to the declaration of a rights dividend
to Registrant's common shareholders of record on January
31, 1996 (incorporated by reference to Exhibit (a) to
Registrant's Registration Statement on Form 8-A, dated
January 24, 1996, SEC File No. 1-4300).
26
29
EXHIBIT NO. DESCRIPTION
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10.1 -- Third Amended and Restated Credit Agreement, dated March
1, 1995, among Registrant, the lenders named therein, and
The First National Bank of Chicago, as Administrative
Agent and Arranger, and Chemical Bank, as Co-Agent and
Arranger (incorporated by reference to Exhibit 10.2 to
Regi