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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, 1997,
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. [ ]
Aggregate market value of the voting stock held by
non-affiliates of registrant as of February 27, 1998...... $3,345,842,930
Number of shares of registrant's common stock outstanding as
of February 27, 1998...................................... 98,407,145
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to registrant's 1998
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.................................................. 11
3. LEGAL PROCEEDINGS........................................... 15
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 15
6. SELECTED FINANCIAL DATA..................................... 16
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 17
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 26
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 26
11. EXECUTIVE COMPENSATION...................................... 26
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 26
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 26
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 27
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 Poland, offshore The People's Republic of China,
offshore the Ivory Coast and in Indonesia. 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 (formerly known as Hadson Energy
Limited), Apache International, Inc., Apache Overseas, Inc. and Apache PHN
Company, Inc. (Phoenix, formerly known as 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.
1997 RESULTS
In 1997, Apache had record net income of $154.9 million, or $1.71 per
share, on total revenues of $1.2 billion. Net cash provided by operating
activities during 1997 was $723.8 million.
The year 1997 was Apache's 20th consecutive year of production growth and
10th consecutive year of oil and gas reserves growth. Apache's average daily
production was 68.9 Mbbls of oil and natural gas liquids and 609 MMcf of natural
gas for the year. Giving effect to 1997 production, acquisitions, dispositions
and drilling activity, the Company's estimated proved reserves increased by 79.6
MMboe in 1997 over the prior year to 585.7 MMboe, of which approximately 53
percent was natural gas. Based on 506.2 MMboe reported at year-end 1996,
Apache's reserve growth during the year reflects replacement of 228 percent of
the Company's 1997 production, including approximately 183 percent through
drilling, revisions, recompletions, workovers and other production enhancement
projects. Apache's active drilling and production-enhancement program yielded
321 new producing North American wells out of 399 attempts and involved 675
major North American workover and recompletion projects during the year.
At December 31, 1997, Apache had interests in approximately 4,246 net oil
and gas wells and 1,777,225 net developed acres of oil and gas properties. In
addition, the Company had approximately 601,258 net undeveloped acres under
North American leases and 20,303,930 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,
cash flow and earnings through a combination of exploratory drilling,
development of its inventory of existing projects and property acquisitions
meeting defined financial parameters. The Company's drilling program emphasizes
reserve additions through moderate-risk drilling primarily on its North American
interests, and exploratory drilling primarily on its international interests.
The Company also emphasizes reducing operating costs per unit produced and
selling marginal and non-strategic properties in order to enhance its profit
margins.
Apache's international investments and exploration activities are an
emerging component of its long-term growth strategy. In addition to an active,
moderate-risk drilling program in Apache's North American focus areas,
higher-risk international exploration offers potential for greater rewards and
significant reserve additions. Apache directed its international efforts in 1997
toward development of certain discoveries offshore Western Australia, Egypt and
offshore The People's Republic of China, and toward further exploration efforts
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in those areas and on its concessions offshore the Ivory Coast of western Africa
and in Poland. Apache believes that reserve additions in these international
areas are likely to continue 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 78
percent of its production.
1997 ACQUISITIONS AND DISPOSITIONS
On October 8, 1997, the Company entered into three agreements with
subsidiaries of Mobil Exploration & Producing Australia Pty Ltd (Mobil) pursuant
to which the Company acquired all the capital stock of three companies owning
interests in certain oil and gas properties and production facilities offshore
Western Australia (the Harriet/East Spar Properties), on November 20, 1997 (the
Ampolex Group Transaction). The total cost of the Ampolex Group Transaction was
approximately $300 million, of which $218 million represented the purchase price
for the capital stock of the acquired companies and $82 million was applied to
discharge existing intercompany debt of one of the acquired companies.
On December 9, 1997, the Company entered into an agreement with Hardy
Petroleum Limited (Hardy) under which Hardy agreed to purchase a 10 percent
interest in the Company's East Spar field and related production facilities. The
transaction closed on January 28, 1998, with a total sales price of
approximately $63 million in cash, such amount being more than Apache's
allocated cost. The Ampolex Group Transaction was recorded net of these
interests.
The Ampolex Group Transaction increased the Company's interest to 47.5
percent from 22.5 percent in the Carnarvon Basin's Harriet area, which includes
the Varanus Island pipeline, processing and production complex and eight
existing oil and gas fields. The transaction also raised the Company's interest
in the East Spar field, which produces through the Varanus Island facilities, to
45 percent from 20 percent net of the sale to Hardy. Apache operates the
Harriet/East Spar Properties.
EXPLORATION AND PRODUCTION
The Company's North American exploration and production activities were
diversified among five operating regions in 1997, Offshore, Midcontinent,
Western, Gulf Coast and Canada. Approximately 72 percent of the Company's proved
reserves are located in Apache's North American regions. Egypt and Australia are
the Company's most important international regions. The Company's Egyptian
operations are headquartered in Cairo, and Apache conducts its Australian and
Indonesian exploration and production from Perth, Australia. Information
concerning the amount of revenue, operating income and identifiable assets
attributable to U.S., Canadian and international operations is set forth in the
Supplemental Oil and Gas Disclosures under Item 8 below.
Offshore. The Offshore region included all of Apache's interests in
properties offshore Texas and Louisiana. The Offshore region was Apache's
leading region for oil and gas revenues in 1997 with $202 million in revenue
from 12.8 MMboe of production for the year. At December 31, 1997, the Offshore
region held 319,812 net acres, located in both state and federal waters, and
accounted for 45.7 MMboe, or eight percent, of the Company's year-end 1997 total
estimated proved reserves. Apache's operations in the Offshore region focused on
workovers and recompletions, which totaled 58 in the region for 1997. Apache
participated in drilling 27 wells that were drilled in the region during the
year, 14 of which were completed as producers. For 1997, Apache's gas production
from the Offshore region was approximately 66.6 Bcf. At the start of the 1998
fiscal year, the Offshore region was merged into the Gulf Coast region to take
advantage of administrative efficiencies.
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Midcontinent. Apache's Midcontinent region operates in Oklahoma, eastern
Texas, Arkansas 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 over four decades, developing an
extensive database of geologic information and a substantial acreage position.
The Midcontinent region was Apache's leading producing region for 1997 with
approximately 13.1 MMboe of production generating $197 million in revenue for
the Company.
At December 31, 1997 Apache held an interest in 403,796 net acres in the
region, which accounted for approximately 103.1 MMboe, or 18 percent, of
Apache's total estimated proved reserves. Apache participated in drilling 124
wells in the Midcontinent region during the year, 108 of which were completed as
producing wells. The Company performed 33 workover and recompletion operations
in the region during 1997.
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. In 1997, the Western region produced approximately 9.8
MMboe and $168 million in production revenue. At December 31, 1997, the Company
held 449,270 net acres in the region, which accounted for 136.8 MMboe, or 23
percent, of the Company's total estimated proved reserves. Apache participated
in drilling 124 wells in the Western region, 108 of which were productive wells.
Apache performed 236 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 1997, the Gulf Coast region
contributed approximately $172 million in revenues from production of 9.6 MMboe
for the year. The Company performed 215 workover and recompletion operations
during 1997 in the Gulf Coast region and participated in drilling 43 wells, 31
of which were completed as producers. As of December 31, 1997, the region
encompassed 246,227 net acres, and accounted for 70.9 MMboe, or 12 percent, of
the Company's year-end 1997 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 6.5 MMboe, 84 percent of which was natural gas, and
generated $61 million in production revenue, six percent of the Company's
production revenues in 1997. Apache participated in drilling 81 wells in this
region during the year, 60 of which were completed as producers. The Company
performed 133 workovers and recompletions on operated wells during 1997. At
December 31, 1997, the region encompassed approximately 317,524 net acres, and
accounted for 66 MMboe, or 11 percent, of the Company's year-end 1997 total
estimated proved reserves.
Egypt. At year end, Apache held 13,621,304 net acres in Egypt with 78.7
MMboe of estimated proved reserves or 13 percent of Apache's total estimated
proved reserves. 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.
Future production of gas from Khalda is expected to be delivered for sale to the
Egyptian General Petroleum Corporation (EGPC) at a point west of Alexandria,
Egypt, via a 34-inch gas pipeline, construction of which commenced in 1997 with
completion projected to occur in 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 are 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.
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In addition to the Qarun and Khalda Blocks, Apache holds interests in the
Darag Block in the northern Gulf of Suez, the East Beni Suef and Asyout Blocks
to the south of the Qarun Block, and three other blocks in the Western Desert of
Egypt, the North East Abu Gharadig Block, the East Bahariya Block, and the West
Mediterranean Block No. 1 (partly onshore and partly offshore). The latter three
blocks were purchased from Mobil Exploration Egypt, Inc. in January 1997, and
Apache's interest in the West Mediterranean Block was increased to 66 percent in
an October 1997 transaction with Amoco Egypt West Mediterranean B.V. Apache also
acquired interests in the Ras El Hekma and Ras Kanayes concessions from Repsol
Exploracion Egipta S.A. in December 1997. Exploratory drilling on the East Beni
Suef Block commenced in 1997 with a significant discovery made on the #1 well.
Delineation drilling is continuing in 1998. Due to conflicting governmental
requirements regarding the placement of drilling rigs on the Darag Block, the
Company is presently unable to explore on the block. Negotiations with
appropriate authorities are continuing to attempt to resolve the impasse and
Apache may ultimately relinquish the Darag concession.
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 1997, natural gas production
in the region increased by 88 percent from the prior year to approximately 26
MMcf/d. Apache acts as operator for most of its Western Australia properties
through a wholly-owned subsidiary, Apache Energy Limited (AEL). During 1997,
Apache's estimated proved reserves in Australia increased by 156 percent to 80
MMboe, or 14 percent of the Company's year-end total estimated proved reserves.
The increase reflects, among other matters, the acquisition of three companies
with holdings in the East Spar and Harriet fields. As of December 31, 1997,
Apache held 159,850 net developed acres and 1,104,440 net undeveloped acres in
Western Australia. Through AEL and its subsidiaries, Apache also operates the
Harriet Gas Gathering Project, a gas processing and compression facility with a
throughput capacity of 175 MMcf/d, and a 60-mile, 12-inch offshore pipeline with
a throughput capacity of 175 MMcf/d that connects to a pipeline grid onshore.
See "1997 Acquisitions and Dispositions" and "Oil and Natural Gas Marketing."
Other International Operations. Outside of Canada, Egypt and Australia,
Apache currently has exploration interests in Poland, offshore The People's
Republic of China, offshore the Ivory Coast and in Indonesia.
Effective April 16, 1997, Apache entered into an agreement with FX Energy,
Inc. (FX Energy) pursuant to which Apache assumed operatorship and a 50 percent
interest in over 5.5 million acres in Poland located near Lublin, southeast of
Warsaw. The Company has also acquired additional acreage in Poland in which FX
Energy does not participate, giving Apache interests in 8,176,065 total gross
undeveloped acres and 5,563,542 net undeveloped acres as of December 31, 1997.
The concessions in Poland include requirements for Apache to drill at least
eleven wells and to shoot at least 1,290 miles of seismic data. In February
1998, Apache entered into an additional agreement with FX Energy, acquiring a 50
percent interest in approximately 3 million acres in the Carpathian area near
the southern border of Poland and options to participate at the present interest
in a further 2.275 million acres in the Pomeranian area of northwest Poland.
Apache's operations in Poland are headquartered in Warsaw.
Apache is also the operator, with a 50 percent interest, of the Zhao Dong
Block in 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 involved a commitment to drill two additional exploratory wells. In early
1997, one well tested at rates up to 11,571 b/d of oil and another tested at
rates up to 15,359 b/d, and the Company is currently evaluating the discovery
areas for commercial potential. An overall development plan for the C and D
Fields in the Zhao Dong Block was submitted to Chinese authorities in late 1997
and is awaiting approval.
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 producibility of some oil from the field's lower horizons.
Apache is operator of the block, holding a 24 percent interest. In March 1997,
Apache and its partners signed a 10 year take or pay contract to supply
approximately 168 Bcf of gas to a power plant in Abidjan at 30 MMcf per day
initially, rising to 50 MMcf per day in the third year. Gas deliveries are to
commence in 1999, upon completion of a pipeline.
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In Indonesia, Apache holds a 39 percent interest in the Bentu Segat Block
on Central Sumatra, on which an undeveloped gas field is located.
OIL AND NATURAL GAS MARKETING
On October 27, 1995, wholly owned affiliates of each of Apache, Oryx Energy
Company and Parker & Parsley Petroleum Company (Parker & Parsley) 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. In
December 1997, Parker & Parsley gave notice to the other members that it was
withdrawing from ProEnergy effective as of January 1, 1998.
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. So long as there are two or more members, the approval of any action
requires the votes of at least two members holding the requisite voting
interests. 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, 1997, the Company held an approximate 48 percent interest in
ProEnergy.
Apache is also delivering natural gas under several long-term supply
agreements with terms greater than one-year. In 1997, Apache delivered an
average of 135 MMcf/d under such contracts at an average price of $2.48 per Mcf.
Apache assumed its own U.S. crude oil marketing operations in 1992. Most of
Apache's U.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 worldwide
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-term and short-term contracts. The oil and
gas contracts provide for sales at specified prices, or at prices that 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, 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 entered into seven gas sales contracts during
1997 and has a total of 13 contracts for periods of five to 11 years, to deliver
260 Bcf of AEL's gas from its Harriet and East Spar fields for mining, power
generation, nickel refining, ammonia production and other industrial and
domestic uses. Under these contacts AEL is required to deliver its gas at
contract rates of approximately 50 MMcf/day increasing to 80 MMcf/day by the
year 2000, with take or pay provisions, net to AEL, of approximately 14 Bcf/year
increasing to 20 Bcf/year by the year 2000. Apache operates both the Harriet and
the East Spar Joint Ventures, holding a 47.5 percent interest in Harriet and a
45 percent interest in East Spar.
AEL marketed all oil and natural gas liquids produced from its interests in
the Harriet and East Spar fields during 1997 through a contract with Glencore
International AG (Glencore). Pricing under the contract in 1997 represented a
fixed premium to the quoted market prices of Tapis crude oil, with payment made
in U.S. dollars. In 1997, the weighted average price based on regional
production was $20.51 per barrel. At the
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beginning of January 1998, the Glencore contract was terminated and replaced by
a similar contract with Mitsui Oil (Asia) Pty. Ltd.
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 a gas pipeline from the Khalda
Block. In late 1997, the same sellers entered into a supplement to the contract
with EGPC to sell an additional 50 MMcf/d through a southern gas line to be
constructed by the Company and its partners from the Khalda Block to a point
near the Qarun Block to tie into an existing gas pipeline.
OIL AND NATURAL GAS PRICES
Natural gas prices remained volatile during 1997, with Apache's realized
prices ranging from $3.38 per MMbtu in January to $1.78 per MMbtu in April.
Fluctuations are largely due to natural gas supply and demand perceptions.
Apache's average realized gas price of $2.28 per Mcf for 1997 increased 13
percent from the prior-year average of $2.02 per Mcf, and its 1996 average
realized natural gas price was 29 percent higher than the 1995 average price of
$1.57 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 1997. Total Australian gas sales in 1997,
including long-term contracts and spot sales averaged $1.78 per Mcf, a nine
percent decrease from the 1996 average of $1.96 per Mcf.
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 area and is announced from time to time by
EGPC. In 1997, the average price was $18.65 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.
Oil prices remained subject to unpredictable political and economic forces
during 1997 experiencing fluctuations similar to those seen in natural gas
prices for 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 worldwide 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.
In 1997, Apache's realized worldwide crude oil price ranged from $24.17 per
barrel in January to $16.71 per barrel in December. The average crude oil price
of $19.20 per barrel in 1997 was down eight percent from the average price of
$20.84 per barrel in 1996, but 12 percent higher than the average price of
$17.09 per barrel in 1995. The Company's average crude oil price for its
Australian production was $20.51 per barrel in 1997, eight percent less than the
average price in 1996.
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
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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. No price sharing
payments were required in 1997.
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.
FULL COST 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. The Company had no write-downs due to ceiling test
limitations during 1997. Under current pricing there is the potential, while not
a certainty, that a write-off may occur. If a write-down is required, the
one-time charge to earnings would not impact cash flow from operating
activities.
EFFECT OF VOLATILE PRICES
The Company continually analyzes, forecasts and updates its estimates of
energy prices for its internal use in planning, budgeting, and valuation and
reserve estimates. The Company's future financial condition and results of
operations will depend upon the prices received for the Company's oil and
natural gas production and the costs of acquiring, finding, developing and
producing reserves. Prices for oil and natural gas are subject to fluctuations
in response to relatively minor changes in supply, market uncertainty and a
variety of additional factors that are beyond the control of the Company. These
factors include worldwide political instability (especially in the Middle East
and other oil-producing regions), the foreign supply of oil and gas, the price
of foreign imports, the level of consumer product demand, government regulations
and taxes, the price and availability of alternative fuels and the overall
economic environment. A substantial or extended decline in oil and gas prices
would have a material adverse effect on the Company's financial position,
results of operations, quantities of oil and gas that may be economically
produced and access to capital. In addition, the sale of the Company's oil and
gas production depends on a number of factors beyond the Company's control,
including the availability and capacity of transportation and processing
facilities. Oil and natural gas prices have historically been and are likely to
continue to be volatile. Such volatility makes it difficult to estimate the
value of producing properties in acquisitions and to budget and project the
return on exploration and development projects involving the Company's oil and
gas properties. In addition, unusually volatile prices often disrupt the market
for oil and gas properties, as buyers and sellers have more difficulty agreeing
on the purchase price of properties.
RESERVES; RATES OF PRODUCTION; DEVELOPMENT EXPENDITURES; CASH FLOW
There are numerous uncertainties inherent in estimating quantities of oil
and natural gas reserves of any category and in projecting future rates of
production and timing of development expenditures which underlie such reserve
estimates, including many factors beyond the control of the Company. Reserve
data represents only estimates. In addition, the estimates of future net cash
flows from proved reserves of the Company and the present value thereof are
based upon various assumptions about future production levels, prices and costs
that may prove to be incorrect over time (see below). Any significant variance
from the assumptions could result in the actual quantity of the Company's
reserves and future net cash flows therefrom being materially
7
10
different from the estimates. In addition, the Company's estimated reserves may
be subject to downward or upward revision based upon production history, results
of future exploration and development, prevailing oil and gas prices, operating
and development costs and other factors. The rate of production from oil and gas
properties declines as reserves are depleted. Except to the extent that the
Company acquires additional properties containing proved reserves, conducts
successful exploration and development activities or, through engineering
studies, identifies additional behind-pipe zones or secondary recovery reserves,
the proved reserves of the Company will decline materially as reserves are
produced. Future oil and gas production is, therefore, highly dependent upon the
Company's level of success in acquiring or finding additional reserves.
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
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,
1997, 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.
8
11
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.
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.
HEDGING
To the extent that the Company engages in hedging activities, it may be
prevented from realizing the benefits of price increases above the levels of the
hedges. In addition, the Company is subject to basis risk when it engages in
hedging transactions, particularly where transportation constraints restrict the
Company's ability to deliver oil and gas volumes to the delivery point to which
the hedging transaction is indexed.
ACQUISITION RISKS
The Company from time to time acquires oil and gas properties. Although the
Company performs a review of the acquired properties that it believes is
consistent with industry practices, such reviews are inherently incomplete. It
generally is not feasible to review in depth every individual property involved
in each acquisition. Ordinarily the Company will focus its review efforts on the
higher-value properties and will sample the remainder. However, even a detailed
review of records and properties may not necessarily reveal existing or
potential problems, nor will it permit a buyer to become sufficiently familiar
with the properties to assess fully their deficiencies and potential.
Inspections may not always be performed on every well, and environmental
problems, such as ground water contamination, are not necessarily observable
even when an inspection is undertaken. Even when problems are identified, the
Company often assumes certain environmental and other risks and liabilities in
connection with acquired properties. There are numerous uncertainties inherent
in estimating quantities of proved oil and gas reserves and actual future
production rates and associated costs with respect to acquired properties, and
actual results may vary substantially from those assumed in the estimates (see
above). In addition, there can be no assurance that acquisitions will not have
an adverse effect upon the Company's operating results, particularly during the
periods in which the operations of acquired businesses are being integrated into
the Company's ongoing operations.
9
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GENERAL ECONOMIC CONDITIONS
Virtually all of the Company's operations are subject to the risks and
uncertainties of general economic conditions (domestically, in specific regions
of the United States and Canada, and internationally), the outcome of pending
and/or potential legal or regulatory proceedings, changes in environmental, tax,
labor and other laws and regulations to which the Company is subject, and the
condition of the capital markets utilized by Company to finance its operations.
RISKS OF NON-U.S. OPERATIONS
The Company's non-U.S. oil and natural gas exploration, development and
production activities are subject to political and economic uncertainties
(including but not limited to changes, sometimes frequent or marked, in
governmental energy policies or the personnel administering them), expropriation
of property, cancellation or modification of contract rights, foreign exchange
restrictions, currency fluctuations, royalty and tax increases and other risks
arising out of foreign governmental sovereignty over the areas in which the
Company's operations are conducted, as well as risks of loss due to civil
strife, acts of war, guerrilla activities and insurrection. These risks may be
higher in the developing countries in which the Company conducts such
activities. Consequently, the company's non-U.S. exploration, development and
production activities may be substantially affected by factors beyond the
Company's control, any of which could materially adversely affect the Company's
financial position or results of operations. Furthermore, in the event of a
dispute arising from non-U.S. operations, the Company may be subject to the
exclusive jurisdiction of courts outside the U.S. or may not be successful in
subjecting non-U.S. persons to the jurisdiction of the courts in the U.S., which
could adversely affect the outcome of such dispute.
EMPLOYEES
On December 31, 1997, Apache had 1,287 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 1997,
the Company maintained regional exploration and production offices in Tulsa,
Oklahoma; Houston, Texas; Calgary, Alberta; Cairo, Egypt; Perth, Western
Australia; and Warsaw, Poland.
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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, 1997, are as follows:
UNDEVELOPED ACREAGE DEVELOPED ACREAGE
------------------------ ----------------------
GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
---------- ---------- --------- ---------
OFFSHORE
Louisiana................................... 158,626 88,677 201,884 85,279
Texas....................................... 109,349 66,955 167,645 78,901
---------- ---------- --------- ---------
TOTAL..................................... 267,975 155,632 369,529 164,180
---------- ---------- --------- ---------
MIDCONTINENT
Arkansas.................................... 2,296 1,774 4,625 3,350
Kansas...................................... 160 -- 40 40
Louisiana................................... 11,735 10,180 51,199 34,837
Michigan.................................... 2,693 2,090 -- --
Oklahoma.................................... 127,874 49,505 484,911 192,394
Pennsylvania................................ -- -- 796 38
Texas....................................... 72,036 41,602 130,502 67,986
---------- ---------- --------- ---------
TOTAL..................................... 216,794 105,151 672,073 298,645
---------- ---------- --------- ---------
WESTERN
Alaska...................................... 14,262 -- -- --
Colorado.................................... 14,200 12,472 13,575 12,870
Illinois.................................... 140 56 -- --
New Mexico.................................. 93,888 51,726 98,628 50,746
Ohio........................................ 21 11 -- --
Texas....................................... 136,871 69,789 255,948 192,563
Utah........................................ 3,101 2,462 6,707 6,235
Wyoming..................................... 58,912 43,065 15,591 7,275
---------- ---------- --------- ---------
TOTAL..................................... 321,395 179,581 390,449 269,689
---------- ---------- --------- ---------
GULF COAST
Florida..................................... 162 23 -- --
Louisiana................................... 25,669 19,602 88,577 72,977
Mississippi................................. 10,515 5,108 5,293 3,316
Texas....................................... 53,045 27,937 189,778 117,264
---------- ---------- --------- ---------
TOTAL..................................... 89,391 52,670 283,648 193,557
---------- ---------- --------- ---------
TOTAL UNITED STATES......................... 895,555 493,034 1,715,699 926,071
---------- ---------- --------- ---------
INTERNATIONAL
Canada...................................... 191,454 108,224 338,527 209,300
Egypt....................................... 26,857,700 13,149,995 867,400 471,309
Australia................................... 3,224,740 1,104,440 425,270 159,850
Poland...................................... 8,172,605 5,563,542 -- --
China....................................... 41,580 20,790 7,100 1,740
Ivory Coast................................. 157,258 62,903 37,312 8,955
Indonesia................................... 1,034,380 402,260 -- --
---------- ---------- --------- ---------
TOTAL INTERNATIONAL....................... 39,679,717 20,412,154 1,675,609 851,154
---------- ---------- --------- ---------
TOTAL COMPANY............................... 40,575,272 20,905,188 3,391,308 1,777,225
========== ========== ========= =========
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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, 1997, is set forth below.
GAS OIL
-------------- --------------
GROSS NET GROSS NET
----- ----- ----- -----
Offshore.................................................... 180 67 66 22
Midcontinent................................................ 1,630 617 515 152
Western..................................................... 347 127 3,442 1,744
Gulf Coast.................................................. 315 249 980 798
Canada...................................................... 484 314 433 88
Egypt....................................................... 10 4 108 54
Australia................................................... 7 3 15 7
----- ----- ----- -----
Total..................................................... 2,973 1,381 5,559 2,865
===== ===== ===== =====
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, 1997, the Company was participating in 24 wells in the U.S., nine Canadian
wells, 21 Egyptian wells and two Australian wells in the process of drilling.
EXPLORATORY DEVELOPMENTAL
-------------------------- --------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
1997
United States.............................. 27 25 52 234 32 266
Canada..................................... 19 14 33 41 7 48
Egypt...................................... 7 19 26 23 4 27
Australia.................................. 3 6 9 6 1 7
Other International........................ 1 2 3 1 -- 1
-- -- --- --- -- ---
Total.................................... 57 66 123 305 44 349
== == === === == ===
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
== == === === == ===
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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
---------- ---- ----- ---------- ---- -----
1997
United States............................. 11.5 11.9 23.4 107.5 19.0 126.5
Canada.................................... 14.5 10.1 24.6 29.0 6.0 35.0
Egypt..................................... 3.7 12.3 16.0 14.4 2.0 16.4
Australia................................. 1.0 1.0 2.0 1.8 .2 2.0
Other International....................... .5 1.4 1.9 .5 -- .5
---- ---- ---- ----- ---- -----
Total................................... 31.2 36.7 67.9 153.2 27.2 180.4
==== ==== ==== ===== ==== =====
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
==== ==== ==== ===== ==== =====
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)
------------ ------- ------- ------- ------------ --------- --------- ---------
1997............... 24,291 843 222,237 $3.07 $19.20 $14.08 $2.28
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
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 international properties have been subject to review by Ryder Scott
Company Petroleum Engineers. In 1996, the proved reserve quantities of certain
of the Company's Egyptian properties were 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, 1997, 1996 and 1995:
OIL, NGLS
NATURAL AND
GAS CONDENSATE
(BCF) (MMBBLS)
------- ----------
1997
Developed................................................... 1,554.3 203.1
Undeveloped................................................. 317.5 70.7
------- -----
Total.................................................. 1,871.8 273.8
======= =====
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
======= =====
The following table sets forth the estimated future value of all the
Company's proved reserves, and proved developed reserves, as of December 31,
1997, 1996 and 1995. 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)
1997................................ $5,347,892 $4,301,768 $3,272,618 $2,728,747
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
At December 31, 1997, 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)
1998........................................................ $ 540,175 $ 618,938
1999........................................................ 711,613 623,300
2000........................................................ 665,515 522,793
Thereafter.................................................. 3,430,589 2,536,737
---------- ----------
Total............................................. $5,347,892 $4,301,768
========== ==========
The Company believes that no major discovery or other favorable or adverse
event has occurred since December 31, 1997, which would cause a significant
change in the estimated proved reserves reported herein. The estimates above are
based on year-end pricing in accordance with the SEC guidelines and do not
reflect current prices. Since January 1, 1997, no oil or gas reserve information
has been filed with, or included in any
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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 1997.
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 1997 and
1996. Prices shown are from the New York Stock Exchange Composite Transactions
Reporting System.
1997 1996
-------------------------- ------------------------
PRICE RANGE PRICE RANGE
------------ DIVIDENDS ----------- DIVIDENDS
HIGH LOW PER SHARE HIGH LOW PER SHARE
---- --- --------- ---- --- ---------
First Quarter.............................. $39 3/8 $31 1/4 $.07 $29 1/2 $24 3/8 $.07
Second Quarter............................. 35 5/8 30 1/8 $.07 33 1/2 26 3/8 $.07
Third Quarter.............................. 42 7/8 32 1/16 $.07 34 5/8 27 3/4 $.07
Fourth Quarter............................. 45 1/16 32 11/16 $.07 37 7/8 29 1/2 $.07
The closing price per share of Apache common stock, as reported on the New
York Stock Exchange Composite Transactions Reporting System for February 27,
1998, was $34.00. At December 31, 1997, there were 93,304,541 shares of Apache
common stock outstanding, held by approximately 10,000 shareholders of record
and 46,000 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.
The Company has paid cash dividends on its common stock for 124 consecutive
quarters through December 31, 1997, and expects to continue the payment of
dividends at current levels, although future
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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, 1997, which information has been derived from the Company's
audited financial statements. Apache's previously reported data for 1994 and
1993 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,
--------------------------------------------------------------
1997(1) 1996(2) 1995(3) 1994 1993(4)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Total revenues....................... $1,176,273 $ 977,151 $ 750,702 $ 592,626 $ 512,632
Income from continuing operations.... 154,896 121,427 20,207 45,583 41,421
Income per common share -- continuing
operations(5)
Basic........................... 1.71 1.42 .28 .65 .67
Diluted......................... 1.65 1.38 .28 .65 .67
Cash dividends per common share(6)... .28 .28 .28 .28 .28
BALANCE SHEET DATA
Working capital (deficit)............ $ 4,546 $ (41,501) $ (22,013) $ (3,203) $ (55,538)
Total assets......................... 4,138,633 3,432,430 2,681,450 2,036,627 1,759,203
Long-term debt....................... 1,501,380 1,235,706 1,072,076 719,033 504,334
Shareholders' equity................. 1,729,177 1,518,516 1,091,805 891,087 868,596
Common shares outstanding at end of
year............................... 93,305 90,059 77,379 69,666 69,504
- ---------------
(1) Includes financial data for the Ampolex Group Transaction after November 20,
1997.
(2) Includes financial data for Phoenix after May 20, 1996.
(3) Includes the results of the acquisitions of certain oil and gas properties
from Texaco Exploration and Production, Inc. (Texaco) and Aquila Energy
Resources Corporation (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.
(4) Includes financial data for AERC after June 30, 1993, and the results of the
acquisition of certain oil and gas properties from Hall-Houston Oil Company
(Hall-Houston) after July 31, 1993.
(5) Income per common share -- continuing operations has been restated in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
(6) No cash dividends were paid on outstanding DEKALB common stock in 1995, 1994
and 1993.
For a discussion of significant acquisitions, reference is made to Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" 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 achieved record earnings and cash flow on both an absolute and per
share basis during 1997. Higher natural gas prices, while contributing to the
year's improvements, were partially offset by lower oil prices. More than
product prices, the primary driver behind Apache's 1997 record performance was
increased production volumes, characterized by moderate growth in North American
gas production and substantial increases in oil volumes abroad.
The year's $154.9 million of earnings, coupled with a $75 million
conversion of debt to equity in November and $611 million of cash provided
before changes in working capital and other adjustments (cash flow from
operations), enabled Apache to end 1997 with a debt-to-capitalization ratio of
46.8 percent, up from 44.9 percent in 1996, despite $685.4 million invested in
exploration and development activities and $225.9 million of property
acquisitions. At year-end, approximately 69 percent of Apache's debt was locked
in at fixed rates averaging 7.42 percent.
Other specifics include:
Increased production and higher gas prices -- Higher oil and gas production
and natural gas prices contributed to record earnings and cash flow in 1997.
Egyptian oil development, a full year of production from Egyptian properties
acquired in 1996, and North American gas drilling drove the increased production
for 1997. Apache's oil production increased 25 percent from 1996 to 1997, which
added $92.6 million to revenues. Natural gas production increased nine percent
from 1996 to 1997, which contributed $38.5 million to the increase in revenues.
Apache's average realized natural gas price for 1997 was up 13 percent over
1996, favorably impacting revenues by $51.3 million.
Debt refinancing -- In January 1997, the Company established a $300 million
commercial paper program and expanded that program in June 1997 to $700 million.
Apache also replaced its $1 billion global borrowing-base credit facility with a
new $1 billion global corporate credit facility in June 1997. Apache issued $150
million of senior unsecured 50 year, 7.375-percent debentures in August 1997.
Three of the Company's Egyptian subsidiaries entered into a $250 million
secured, revolving credit facility in October 1997. Apache's Australian finance
subsidiary issued, in December 1997, $170 million of 10 year, 6.5-percent notes
guaranteed by Apache. The Company also received a rating upgrade on its senior
and subordinated long-term debt from Standard & Poor's in January 1997.
RESULTS OF OPERATIONS
NET INCOME AND REVENUE
Apache reported 1997 net income of $154.9 million, an increase of 28
percent or $33.5 million over 1996. The increase is primarily due to higher oil
and gas production, higher natural gas prices and lower operating costs per unit
of production. Basic net income per common share rose to $1.71 compared to $1.42
in 1996; diluted net income per common share increased to $1.65 in 1997 from
$1.38 in 1996. Net income of $121.4 million for 1996 rose from $20.2 million in
1995. Basic net income per common share increased five-fold in 1996 from $.28 in
1995; diluted net income per common share was also $.28 in 1995. The increase
was attributed to higher oil and gas prices and increased oil production.
Revenues increased 20 percent to $1.2 billion in 1997. Oil and natural gas
production revenues increased 18 percent, primarily due to increased oil and gas
production and natural gas prices. Crude oil, including natural gas liquids, and
natural gas contributed 49 percent and 51 percent, respectively, of total oil
and gas production revenues during 1997. Revenues increased 30 percent in 1996
to $977.2 million. Revenues for 1995 were $750.7 million. In 1996, crude oil,
including natural gas liquids, contributed 50 percent and natural gas
contributed 50 percent of total oil and gas production revenues.
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The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, oil and natural gas
liquids.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Revenues (in thousands):
Natural gas.............................................. $505,604 $415,736 $330,737
Oil...................................................... 466,291 405,724 313,214
Natural gas liquids...................................... 11,878 11,704 9,193
-------- -------- --------
Total................................................. $983,773 $833,164 $653,144
======== ======== ========
Natural Gas Volume -- Mcf per day:
United States............................................ 492,594 472,171 500,441
Canada................................................... 89,699 74,598 67,083
Egypt.................................................... 563 302 --
Australia................................................ 26,016 13,869 9,551
-------- -------- --------
Total................................................. 608,872 560,940 577,075
======== ======== ========
Average Natural Gas price -- Per Mcf:
United States............................................ $ 2.47 $ 2.17 $ 1.64
Canada................................................... 1.33 1.09 1.00
Egypt.................................................... 2.94 3.21 --
Australia................................................ 1.78 1.96 1.86
Total................................................. 2.28 2.02 1.57
Oil Volume -- Barrels per day:
United States............................................ 40,638 40,600 45,084
Canada................................................... 2,120 1,969 1,999
Egypt.................................................... 19,372 8,295 --
Australia................................................ 4,417 2,318 3,120
-------- -------- --------
Total................................................. 66,547 53,182 50,203
======== ======== ========
Average Oil Price -- Per barrel:
United States............................................ $ 19.31 $ 20.67 $ 17.00
Canada................................................... 19.27 20.84 16.90
Egypt.................................................... 18.65 21.29 --
Australia................................................ 20.51 22.33 18.56
Total................................................. 19.20 20.84 17.09
Natural Gas Liquids (NGL) Volume -- Barrels per day:
United States............................................ 1,684 1,308 1,521
Canada................................................... 627 641 569
-------- -------- --------
Total................................................. 2,311 1,949 2,090
======== ======== ========
Average NGL Price -- Per barrel:
United States............................................ $ 14.50 $ 17.23 $ 12.83
Canada................................................... 12.98 14.73 9.96
Total................................................. 14.08 16.41 12.05
Natural gas revenues increased by 22 percent from 1996 to 1997 due to
increased natural gas prices and increased production. The average price
received in 1997 was $.26 per Mcf, or 13 percent, higher than 1996. The Company
periodically engages in hedging activities, including fixed-price physical
contracts and financial contracts. Apache realized gains from open hedging
positions favorably impacting the gas price by $.06 per Mcf. Losses under
long-term fixed-price physical contracts negated the hedging gains reducing the
gas price by $.06 per Mcf. The higher prices in 1997 were the result of
favorable North American market conditions. Natural gas prices in Australia
declined in 1997 due to the effect of exchange rates on fixed Australian dollar-
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denominated gas contracts. Natural gas production for the United States
increased four percent from 1996 to 1997 due to drilling results in the
Midcontinent and Offshore regions. Canadian natural gas production increased 20
percent due to acquisition and drilling activity. Natural gas production from
Australia increased 88 percent from 1996 to 1997. Australian production
increases resulted primarily from a full year of production from the Company's
East Spar properties, which came on line in November 1996, and properties
acquired in the Ampolex Group Transaction.
Natural gas revenues increased 26 percent from 1995 to 1996. Average
natural gas prices were $.45 per Mcf, or 29 percent, higher in 1996 than 1995.
The Company's net hedging activity, including fixed-price physical contracts and
financial contracts reduced the reported prices by $.09 per Mcf in 1996,
compared to a $.07 per Mcf gain in 1995. Natural gas production declined three
percent from 1995 to 1996, primarily due 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.
Oil revenues increased 15 percent from 1996 to 1997. Egyptian oil
production more than doubled from 1997 due to development activity and the first
full year of production from the Company's Egyptian properties acquired in 1996.
Australian oil production increased 90 percent from 1996 to 1997 due to the
Agincourt prospect. These production increases were partially offset by a
decrease of eight percent in average oil prices received during 1997 due to poor
market conditions.
Oil revenues increased 30 percent from 1995 to 1996, primarily due to
properties acquired in connection with the Phoenix merger and new Egyptian
production from the Company's Qarun field. Decreases in domestic production due
to United States property sales in late 1995, partially offset the impact of
Egyptian production. The average oil price increased 22 percent from 1995 to
1996.
NGL revenues were slightly higher in 1997 than in 1996. NGL production
increased 19 percent from 1996 to 1997, which was offset by a 14 percent
decrease in average prices. NGL revenues increased 27 percent from 1995 to 1996.
Average prices in 1996 were 36 percent higher than in 1995 due to improved
market conditions. The increase in prices was partially offset by a seven
percent decline in production.
OTHER REVENUES AND OPERATING EXPENSES
Gas gathering, processing and marketing revenues increased 38 percent to
$197.0 million in 1997 from 1996. Increased gas volumes and higher gas prices in
1997 drove this increase. Correspondingly, gas gathering, processing and
marketing costs increased in 1997 by 40 percent to $194.3 million. Thus, lower
margins were realized in 1997. Lower crude oil trading margins and lower
pipeline gathering fees were mitigated by higher gas purchase and resale margins
in 1997. During 1996, gas gathering, processing and marketing revenues increased
47 percent to $142.9 million from $97.2 million in 1995. Lower margins were also
realized in 1996 as compared to 1995.
Equity in income (loss) of affiliates represents Apache's share of
ProEnergy losses. Equity in loss of affiliate was $1.7 million and $.3 million
in 1997 and 1996, respectively.
Other revenue for 1997 was a loss of $2.8 million. This amount includes
$4.8 million in foreign currency transaction losses on Canadian dollars and $1.2
million in foreign currency transaction losses on Australian dollars. Canadian
royalty credits of $1.0 million and proceeds received from settlements of $1.8
million partially mitigated these losses. 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. Currency transaction losses on
Canadian dollars of $.9 million partially offset these revenues. Other revenue
for 1995 was $.4 million. This amount 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. Losses from the decoupling of NYMEX and wellhead gas prices of $9.3
million offset these revenues.
The Company's depreciation, depletion and amortization (DD&A) expense
increased to $381.4 million in 1997 from $315.1 million in 1996. On an
equivalent barrel basis, full cost DD&A expense increased $.33 per boe, from
$5.44 per boe in 1996 to $5.77 per boe in 1997. Reserve revisions due to price
declines during the
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first part of 1997 and an increased cost environment in North America negatively
impacted the 1997 rate. Full cost DD&A expense increased in 1996 from $288.4
million, or $5.32 per boe, in 1995.
Apache's operating costs increased three percent to $231.4 million in 1997
from $225.5 million in 1996. Lease operating expense (LOE), excluding severance
taxes, increased from $186.4 million in 1996 to $190.8 million in 1997. LOE
increased as a result of Egyptian oil production enhancements and North American
gas production gains. On an equivalent barrel basis, LOE for 1997 averaged $3.07
per boe, a $.36 decline from $3.43 per boe in 1996. Production increased with a
lower incremental LOE than the 1996 average per unit cost. Specifically, North
American gas production and Egyptian oil production carry much lower per unit
costs than the 1996 property profile. The divestiture of marginal properties in
the U.S. also favorably impacted LOE per boe in 1997. Operating costs increased
seven percent in 1996 from $211.7 million in 1995. LOE, excluding severance
taxes, increased three percent in 1996 from $181.1 million in 1995. LOE per boe
increased three percent in 1996 from $3.34 per boe in 1995. The increase was
driven by a flat domestic cost structure with declining production in the Gulf
Coast region. The Phoenix acquisition in 1995 also increased LOE per boe.
Mitigating these increases was decreased LOE per boe in the Midcontinent region
due to incremental production added through the drillbit.
Administrative, selling and other costs increased $2.3 million, or six
percent, from 1996 to 1997. Under a new bonus plan initiated in 1997, Apache
provided incentive compensation to all employees based on the achievement of
targeted performance, which was the primary reason for the increase. On an
equivalent barrel basis, general and administrative (G&A) expense declined from
$.66 per boe in 1996 to $.62 per boe in 1997. Production increases were not met
with rising administrative costs. Administrative, selling and other costs were
lower in 1996 than in 1995 due to the Company's continuing efforts to control
costs. On an equivalent barrel basis, G&A expense declined two percent in 1996
from $.67 per boe in 1995.
Net financing costs for 1997 increased $10.7 million, or 17 percent, over
1996. Gross interest expense increased by $15.3 million due to higher average
aggregate debt outstanding at higher average interest rates, which resulted from
the extension of Apache's debt maturities. Average aggregate debt outstanding
and average interest rates increased to $1.4 billion and 7.69 percent,
respectively, from $1.2 billion and 7.40 percent in 1996. In 1997, Apache wrote
off $1.2 million in deferred loan costs related to cancellation of two secured
credit facilities with the International Finance Corporation (IFC). Additional
capitalized interest of $5.8 million in 1997 mitigated these increases.
Capitalized interest is based on the carrying value of unproved properties.
Higher international unevaluated costs caused the increase in 1997. 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 increased $11.7 million for 1996 due
to an increase in the unproved property base resulting from acquisitions made in
1995 and 1996. Gross interest expense increased $1.8 million for 1996 as
compared to 1995. Average outstanding debt increased $78.8 million compared to
1995. Offsetting this increase was a decline of .36 percent in Apache's weighted
average interest rate.
MARKET RISK
COMMODITY RISK
The Company's major market risk exposure is in the pricing applicable to
its oil and gas production. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to its
United States and Canadian natural gas production. Historically, prices received
for oil and gas production have been volatile and unpredictable. Pricing
volatility is expected to continue. Gas price realizations ranged from a monthly
low of $1.78 per Mcf to a monthly high of $3.38 per Mcf during 1997. Oil prices
ranged from a low of $16.71 per barrel to a high of $24.17 per barrel during the
same period.
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 may use 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
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production revenues when the associated production occurs. Apache does not hold
or issue derivative instruments for trading purposes. In 1997, Apache recognized
a net gain of $1.4 million from hedging activities that increased oil and gas
production revenues. The net gain in 1997 includes $14.5 million in derivative
income and $13.1 million in losses on fixed price physical gas contracts. In
1996, Apache recognized a net loss from hedging activities of $23.8 million.
Gains or losses on natural gas derivative contracts are expected to be offset by
sales at the spot market price or to preserve the margin on existing physical
contracts. A 10 percent improvement in year-end spot market prices would
increase the fair value of derivative contracts in effect at December 31, 1997
by $21 million, while a 10 percent fall in spot prices would decrease the fair
value of these instruments by $21 million.
Hedging activity relative to oil production resulted in a $.1 million gain
in 1997. The Company did not have any open positions with respect to crude oil
hedging at December 31, 1997.
INTEREST RATE RISK
The Company considers its interest rate risk exposure minimal as a result
of fixing interest rates on over two-thirds of the Company's debt. Total debt at
December 31, 1997, included about $473 million of floating-rate debt. As a
result, Apache's annual interest costs in 1998 will fluctuate based on
short-term interest rates on approximately 31 percent of its total debt
outstanding at December 31, 1997. The impact on annual cash flow of a 10 percent
change in the floating rate (approximately 64 basis points) would be $3 million.
FOREIGN CURRENCY RISK
The Company's cash flow stream relating to certain international operations
is based on the U.S. dollar equivalent of cash flows measured in foreign
currencies. Australia gas production is sold under fixed-price Australian dollar
contracts and substantially all capital expenditures and operating costs are
paid in Australian dollars. Revenue and disbursement transactions denominated in
Australian dollars are converted to U.S. dollar equivalents based on the
exchange rate on the transaction date. Reported cash flow relating to Canadian
operations is based on cash flows measured in Canadian dollars converted to the
U.S. dollar equivalent based on the average of the Canadian and U.S. dollar
exchange rates for the period reported. Substantially all of the Company's
international transactions, outside of Canada and Australia, are denominated in
U.S. dollars.
The Company's Canadian and Australian subsidiaries have net financial
obligations that are denominated in a currency other than the functional
reporting currency of the subsidiaries. A decrease in value of 10 percent in the
Australian and Canadian dollars relative to the U.S. dollar from the year-end
exchange rates would result in a foreign currency loss of approximately $11
million, based on December 31, 1997 amounts. The Company considers its current
risk exposure to exchange rate movements, based on net cash flows, to be
immaterial. The Company did not have any open derivative contracts relating to
foreign currencies at December 31, 1997.
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 funds its exploration and development activities through
internally generated cash flows. Apache budgets its capital expenditures based
upon projected cash flows. The Company routinely adjusts its capital
expenditures in response to changes in oil and natural gas prices and cash flow.
The Company cannot predict future product prices.
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Capital Expenditures -- Apache's oil and gas capital expenditures over the
last three years are summarized below:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Exploration and Development:
United States.................................... $375,015 $302,494 $216,430
Canada........................................... 57,669 58,768 27,788
Egypt............................................ 152,564 63,597 11,852
Australia........................................ 70,802 46,838 32,373
Ivory Coast...................................... 1,077 7,914 1,287
Other International.............................. 28,293 14,084 22,438
-------- -------- --------
Total......................................... $685,420 $493,695 $312,168
======== ======== ========
Acquisitions of Oil and Gas Properties............. $225,934 $446,205 $820,918
======== ======== ========
Expenditures for exploration and development totaled $685.4 million in 1997
compared to $493.7 million in 1996. Apache's drilling program in 1997 added
113.5 MMboe of reserves (including revisions) and replaced 183 percent of
production. In the United States, Apache completed 261 gross wells as producers
out of 318 gross wells drilled during the year, compared with 229 gross
producers out of 293 gross wells drilled in 1996. In Canada, Apache completed 60
gross wells as producers out of 81 gross wells drilled during the year, compared
with 50 gross producers out of 77 gross wells drilled in 1996.
Internationally, the Company completed 41 gross producers out of 73 gross
wells drilled in 1997, compared to 24 gross producers out of 36 gross wells in
1996. The international wells drilled in 1997 included 30 successful wells in
Egypt and nine successful wells in Australia.
The total capital expenditures budget for 1998 is $523.2 million. This
includes $274.0 million for North America. Estimated U.S. exploration and
development expenditures for 1998 are $227.8 million, which includes $122.6
million in the Gulf region, $70.0 million in the Midcontinent region and $35.2
million in the Western region. Apache expects to spend $46.2 million in Canada
in 1998. The Company expects its other international exploration and development
expenditures in 1998, exclusive of facilities, to total approximately $249.2
million.
On November 20, 1997, the Company, acquired all the capital stock of three
companies owning interests in certain oil and gas properties (including 31.9
MMboe of proved oil and natural gas reserves) and production facilities offshore
Western Australia for approximately $300 million pursuant to three agreements
with subsidiaries of Mobil. Funds for the Ampolex Group Transaction were
obtained principally from borrowings under the Company's global credit facility.
The Ampolex Group Transaction, net of the sale of certain properties to
Hardy Petroleum Limited (Hardy), increased the Company's interest to 47.5
percent from 22.5 percent in the Carnarvon Basin's Harriet area, which includes
the Varanus Island pipeline, processing and production complex and eight
existing oil and gas fields. In addition, the Company's interest in the East
Spar field, which produces through the Varanus Island facilities, increased to
45 percent from 20 percent. Apache operates the Harriet/East Spar Properties.
In conjunction with the closing of the Ampolex Group Transaction on
December 9, 1997, the Company entered into an agreement with Hardy under which
Hardy agreed to purchase a 10 percent interest in the Company's East Spar gas
field and related production facilities in Western Australia. The transaction
closed on January 28, 1998 with a total sales price of approximately $63 million
in cash.
In 1997, the Company also completed 45 tactical regional acquisitions for
cash consideration totaling $33.6 million. These acquisitions added
approximately 6.6 MMboe to the Company's reserves.
Cash expenditures for acquisitions of proved oil and gas properties during
1996 totaled $446.2 million compared to $820.9 million in 1995. The Company
added 52 MMboe of proved oil and gas reserves through
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purchases in 1996. The most significant transaction completed in 1996 was the
merger with Phoenix. Apache acquired oil and gas properties totaling $331.2
million from Phoenix. Apache also acquired $115.0 million of other oil and gas
properties located primarily in the Company's existing focus areas. This amount
included 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 facility.
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 substantially all of the oil and natural
gas assets of Aquila 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.
Debt and Interest Commitments -- At December 31, 1997, Apache had
outstanding debt of $255 million under its global credit facility and an
aggregate of $1,263.6 million of other debt. This other debt included notes and
debentures maturing in the years 2000 through 2096. Debt outstanding at December
31, 1997 of $1.5 billion was up 23 percent over the $1.2 billion outstanding at
December 31, 1996. The increase reflects the Ampolex Group Transaction and other
1997 property acquisitions. The Company's debt-to-capitalization ratio increased
from 44.9 percent at December 31, 1996 to 46.8 percent at December 31, 1997.
Apache's debt-to-capitalization ratio for January 1998 fell below 42 percent due
in part to the conversion of 90 percent of the $172.5 million 6-percent
debentures into approximately 5.1 million shares of Apache common stock.
Interest payments on the Company's debt for 1998 are projected to be $116.2
million (using weighted average balances for floating rate obligations).
Scheduled principal payments for 1998 total $17.2 million.
Dividend Payments -- Dividends paid during 1997 totaled $25.3 million, up
eight percent from 1996, due to the increased number of shares outstanding. The
Company has paid cash dividends on its common stock for 124 consecutive quarters
through December 31, 1997, and expects to continue payment of dividends at
current levels. Future dividend payments will depend on the Company's level of
earnings, financial requirements and other relevant factors.
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 1997 totaled $723.8 million, an increase of 48
percent from the $490.5 million provided in 1996. This increase was due
primarily to higher oil and gas production and higher gas prices in 1997. The
receipt of $115.2 million from a purchaser as an advance also impacted 1997 net
cash provided by operating activities. This advance was for future natural gas
deliveries of 20,000 MMbtu per day over a ten-year period commencing September
1997. Net cash provided by operating activities in 1996 rose $158.4 million from
1995 primarily due to higher product prices.
Long-Term Borrowings -- In January 1997, the Company established a $300
million commercial paper program that allows Apache to borrow funds for up to
270 days at competitive interest rates. The commercial paper program is
supported by availability under the U.S. portion of Apache's global credit
facility. In June 1997, the Company expanded its commercial paper program to
$700 million from $300 million to provide access to additional low-cost,
short-term funds. Since its inception in January 1997, the commercial paper
program has been rated A-2, Prime-2 and D-1- (D-One-Minus) by Standard & Poor's
(S&P), Moody's and Duff and Phelps, respectively.
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Also in January 1997, S&P upgraded the Company's senior long-term debt
rating from BBB to BBB+ and subordinated long-term debt rating from BBB- to BBB.
Apache was also named to the S&P 500 in 1997.
In June 1997, the Company replaced its $1 billion global borrowing-base
credit facility with a new $1 billion global credit facility that provides
Apache with greater borrowing capacity, increased financial flexibility and less
restrictive covenants, while lowering its all-in borrowing cost by 7 1/2 basis
points.
The global credit facility consists of three separate bank facilities: a
$700 million facility in the U.S.; a $175 million facility in Australia; and a
$125 million facility in Canada. The global credit facility enables Apache to
draw on the entire $1 billion facility without restrictions tied to periodic
revaluation of the Company's oil and gas reserves.
In August 1997, Apache issued $150 million principal amount, $148 million
net of discount, of senior unsecured 7.375-percent debentures maturing on August
15, 2047. The proceeds from this issuance were used to reduce the Company's
outstanding commercial paper obligations and for general corporate purposes.
The Company terminated two secured credit facilities with the IFC in
October 1997. This financing was replaced with a secured, revolving credit
facility that provides total commitments of $250 million and an initial
borrowing base of $150 million. This borrowing base will be redetermined
semi-annually. The total amount of commitments under the facility is currently
scheduled to be reduced by set increments every six months, beginning two and
one-half years after the effective date of the facility. The facility is
scheduled to mature on January 3, 2003.
In December 1997, Apache Finance Pty Ltd, an Australian finance subsidiary,
issued $170 million principal amount, $168.7 million net of discount, of 6.5
percent notes due on December 15, 2007. Apache irrevocably and unconditionally
guaranteed the notes, and has the right to redeem the notes prior to maturity,
subject to certain conditions. The proceeds from this issuance were used to
repay funds borrowed for the Ampolex Group Transaction and general corporate
purposes.
In February 1998, Apache issued $150 million principal amount, $148.2
million net of discount, of senior unsecured 7-percent notes maturing on
February 1, 2018. The notes are not redeemable prior to maturity. Net proceeds
from the sale were used to reduce existing short-term obligations and for
general corporate purposes.
Stock Transactions -- In November 1997, all the Company's 3.93-percent
convertible notes were converted into approximately 2.8 million shares of Apache
common stock. The notes were converted at a rate of 37.04 shares of common stock
per $1,000 principal amount.
In January 1998, approximately 90 percent, or $155.6 million, of the
Company's 6 percent debentures were converted into 5.1 million shares of Apache
common stock at a conversion rate of approximately 32.59 shares of common stock
per $1,000 principal amount. The remaining $16.9 million principal amount was
redeemed for $17.4 million in cash, plus accrued and unpaid interest.
Asset Sales -- Apache received $30.1 million in both 1997 and 1996 from the
sale of non-strategic oil and gas properties in a number of separate
transactions.
In January 1998, Apache closed the sale of a 10 percent interest in
Apache's East Spar gas field and related production facilities in Western
Australia for approximately $63 million in cash. Apache used the proceeds to
reduce outstanding loans under the Australian portion of the global credit
facility.
Liquidity -- The Company had $9.7 million in cash and cash equivalents on
hand at December 31, 1997, down from $13.2 million at December 31, 1996.
Apache's ratio of current assets to current liabilities increased from .87:1 at
December 31, 1996, to 1.01:1 at December 31, 1997.
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. As of December 31, 1997, Apache's
available borrowing capacity under its global credit facility was $694.2
million.
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IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer software being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. If left
unremediated, this could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send oil and gas revenue disbursement checks, or engage
in similar normal business activities.
The Company is in the process of replacing significant portions of its
software to more effectively and efficiently meet its business needs.
Replacement computer systems selected by the Company will properly recognize
dates beyond December 31, 1999. The Company presently believes that with
conversions to new software, the Year 2000 Issue will be eliminated. However, if
such conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company. The Company plans
to replace substantially all of its existing systems within 15 months or not
later than March 31, 1999.
The date on which the Company plans to complete installation of its new
system is based on management's best estimates, which were derived using
numerous assumptions of future events including the continued availability of
certain resources. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, and
similar uncertainties.
FUTURE TRENDS
Apache's strategy is to increase its oil and gas reserves, production and
cash flow by continuing to explore on and develop its inventory of existing
projects and making carefully targeted acquisitions of new assets. Robust oil
and gas prices early in 1997 gave way to weaker prices later in the year and on
into 1998. Crude oil prices have fallen near their lowest level of the 1990's.
While lower prices are expected to negatively impact Apache's 1998 earnings and
cash from operations (see, "Market Risk-Commodity Risk" above and "Item 1.
Business -- Oil and Natural Gas Prices," "Full Cost Center Ceiling Test,"
"Reserves; Rates of Production; Development Expenditures; Cash Flow," and
"Effect of Volatile Prices"), Apache has taken steps to improve its financial
liquidity for the purpose of better positioning the company to fund potential
opportunities that might result from industry adversity. Specific actions that
may be or have been taken which should impact the Company's activities in 1998
and beyond include:
(1) Selling and trading non-strategic properties to upgrade the Company's
property portfolio and reduce debt.
(2) Curtailing projected exploration and development expenditures to remain
within cash from operations.
(3) Calling for redempti