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, produces, gathers, processes and markets natural gas and crude oil. Domestically, Apache's exploration and production interests are spread over 15 states, focusing on the Gulf of Mexico, the Anadarko Basin of Oklahoma, the Permian Basin of West Texas and New Mexico, the Gulf Coast and the Rocky Mountain regions. Internationally, Apache has production interests in Australia and is currently focusing its international exploration efforts offshore Western Australia, along the Pacific Rim and in Africa. Apache's common stock 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 domestic and international properties through operating subsidiaries, such as MW Petroleum Corporation (MW), Apache Energy Resources Corporation (AERC, formerly known as Hadson Energy Resources Corporation), Apache Energy Limited (AEL, formerly known as Hadson Energy Limited), Apache International, Inc. and Apache Overseas, Inc. Properties referred to in this document may be held by those subsidiaries. Apache treats all operations as one segment of business.
1994 RESULTS
In 1994, Apache had net income of $42.8 million, or $.70 per share, on total revenues of $545.6 million. Net cash provided by operating activities during 1994 was $335.6 million.
The year represents Apache's seventeenth consecutive year of production growth and seventh consecutive year of oil and gas reserves growth. Apache's average daily production was approximately 36 Mbbls of oil and 427 MMcf of natural gas for the year. The Company's estimated proved reserves at December 31, 1994, were 269 MMboe, of which approximately 63 percent was natural gas. Apache's growth in reserves during the year reflects the replacement of 197 percent of the Company's 1994 production. Approximately 46 percent of the newly added reserves were acquired through Apache's ongoing acquisition efforts. The remainder was attributable to Apache's active drilling and workover program, which yielded 243 new producing domestic wells out of 299 attempts, and involved 390 domestic workover and recompletion projects during the year.
At December 31, 1994, Apache had interests in approximately 3,677 net oil and gas wells and 781,336 net developed acres of oil and gas properties. In addition, the Company had interests in 603,802 net undeveloped acres under domestic leases and 4,239,290 net undeveloped acres under international exploration and production rights.
APACHE'S GROWTH STRATEGY
Apache's growth strategy is to increase production, reserves and cash flow through a combination of acquisitions, moderate-risk drilling and development of its inventory of existing projects. The Company also emphasizes reducing operating costs per unit produced and selling marginal and non-strategic properties in order to increase its profit margins.
For Apache, property acquisition is only one phase in a continuing cycle of business growth. Apache's aim is to follow each acquisition cycle with a cycle of reserve enhancement, property consolidation and cash flow acceleration, facilitating asset growth and debt reduction. This approach requires well-planned and carefully executed property development and a commitment to a selective program of ongoing 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, and the Company therefore operates properties accounting for over 75 percent of its production.
Pursuing its acquire-and-develop strategy, Apache increased its total proved reserves more than 240 MMboe, or nearly eight-fold, in the last ten years. In addition to its acquisition strategy, Apache continues to develop and exploit its existing inventory of workover, recompletion and other development projects to increase reserves and production. During 1994, Apache acquired $180 million of additional properties and replaced over 106 percent of its domestic production through its drilling, workover and recompletion program.
Apache's international investments supplement its long-term growth strategy. Although international exploration is recognized as higher-risk than most of Apache's domestic activities, it offers potential for greater rewards and significant reserve additions. Apache directed its international efforts in 1994 towards the exploration and development of properties in Western Australia, China, Indonesia, Egypt, The Congo and the Ivory Coast of Western Africa, where it believes that reserve additions may be made through higher-risk exploration and through improved production practices and recovery techniques.
RECENT ACQUISITIONS AND DISPOSITIONS
1994 ACQUISITIONS. On December 30, 1994, Apache purchased substantially all of the U.S. oil and gas properties of Crystal Oil Company (Crystal) for approximately $95.8 million. The producing properties acquired from Crystal are located primarily along the Arkansas-Louisiana border and in southern Louisiana, and daily production at the time of acquisition was approximately 20 MMcf of gas and 2,700 bbls of oil. The acquisition also included approximately 32,000 net undeveloped mineral acres in southern Louisiana. Apache acquired an average 80-percent working interest in the properties overall, including a 97-percent working interest in two fields that account for approximately 60 percent of the value.
During 1994, Apache also acquired approximately 15 MMboe of proved reserves through 87 smaller, tactical acquisitions for an aggregate consideration of $84.2 million. Apache also sold $5.9 million of its non-strategic properties during 1994.
TRANSACTIONS IN EARLY 1995. On March 1, 1995, Apache purchased certain oil and gas properties from Texaco Exploration and Production Inc. (Texaco) for an adjusted purchase price of $571 million, effective January 1, 1995. The transaction is subject to customary closing and post-closing adjustments, and includes proved reserves at the effective date of approximately 113 million barrels of energy equivalent, of which approximately 70 percent is oil. The most recently reported average current daily production on the acquired properties is approximately 20 Mbbls of oil and 85 MMcf of gas.
The Texaco properties are highly concentrated, with approximately two-thirds of the reserves located in 54 fields, and are in producing regions where Apache has existing operations -- the Permian Basin, the Gulf Coast of Texas and Louisiana, western Oklahoma, eastern Texas, the Rocky Mountains and the Gulf of Mexico. Apache will operate approximately two-thirds of the production and acquire an average working interest of 70 percent in the operated properties. The total acquisition includes approximately 500,000 net mineral acres, as well as a substantial quantity of seismic data.
On December 21, 1994, Apache entered into a merger agreement with DEKALB Energy Company (DEKALB), under which the shareholders of DEKALB will receive, in the aggregate, between 8.0 and 8.9 million shares of Apache common stock and DEKALB will become a wholly-owned subsidiary of Apache. The transaction will be accounted for using the pooling of interests method of accounting. Apache and DEKALB estimate that the cost required to complete the transaction will total between $8 and $10 million.
DEKALB's reported oil and gas reserves, located almost entirely in Canada, were estimated to be approximately 364 Bcfe, and included approximately 300 Bcf of natural gas and 11 MMbbls of hydrocarbon liquids. DEKALB also has approximately 150,000 net undeveloped mineral acres, and has ownership interests in 14 gas processing plants, six of which it operates. Upon completion, the DEKALB merger will provide Apache with a substantial presence in North America's largest natural gas basin, together with the infrastructure, including skilled professionals, to conduct Canadian operations, and properties with significant further development potential.
The merger has been approved by the board of directors of Apache and DEKALB, and holders of a majority of DEKALB's voting stock have agreed to vote their shares to approve the merger. Consummation of the DEKALB merger is subject to the satisfaction of certain conditions including the receipt of necessary regulatory approvals and certain other consents, and is currently expected to be completed in the second quarter of 1995.
In early 1995, Apache announced plans to accelerate the disposition of approximately $200 million of lower margin and non-strategic properties, including sales of a substantial portion of its Rocky Mountain properties and non-strategic assets in its other regions.
1993 ACQUISITIONS. In 1993, Apache entered into two agreements to purchase a combined 104 Bcfe of proved reserves in the Gulf of Mexico from Hall-Houston Oil Company (Hall-Houston) for an aggregate consideration of $113.7 million. In June 1993, Apache closed the first of the two transactions, paying $29.3 million for Hall-Houston's interest in Mustang Island Blocks 787 and 805. Apache acquired substantially all of Hall-Houston's other producing properties in the Gulf of Mexico for an additional $84.4 million in the second transaction which closed on August 31, 1993. With the Hall-Houston acquisitions, Apache more than doubled its existing interest in offshore gas production, acquiring interests in 63 producing fields and 12 fields under development or awaiting pipeline connections.
Apache acquired Hadson Energy Resources Corporation (now AERC) through a series of private transactions and a subsequent merger on November 12, 1993. The aggregate consideration paid for the acquisition was approximately $98 million, including the issuance of 307,977 shares of Apache common stock. Apache acquired AERC and its subsidiaries subject to approximately $67.6 million of net liabilities at the time of the merger. Through the acquisition of AERC, Apache added proved reserves of 66 Bcfe domestically and 64 Bcfe in Australia. AERC's reserves fit well with Apache's existing interests in Oklahoma and the Carnarvon Basin offshore Western Australia. Domestically, nearly two-thirds of the value of AERC's properties are concentrated in Oklahoma, where Apache was already the largest independent gas producer. AERC's operations in Western Australia, including the Harriet complex of oil and natural gas fields, provide Apache with the reserves and infrastructure required for the commercial development of certain other Australian interests.
During 1993, Apache also acquired 11 MMboe of proved reserves through 71 smaller, tactical acquisitions for an aggregate consideration of $76.5 million. Apache also sold $3.3 million of its non- strategic properties during 1993.
EXPLORATION AND PRODUCTION
The Company's domestic exploration and production activities are divided into five operating regions, the Gulf of Mexico, Midcontinent, Permian Basin, Gulf Coast and Rocky Mountain regions. Approximately 96 percent of the Company's proved reserves are located in these five domestic operating regions. Internationally, the Company conducts its Australian exploration and production and Indonesian exploration through its Australian region. Apache's other international interests are directed by the Company and its subsidiaries through the Company's principal offices located in Houston, Texas.
GULF OF MEXICO. As a result of Apache's acquisitions of Matagorda Island Blocks 681 and 682 in late 1992 and the Hall-Houston acquisition in 1993, the Gulf of Mexico became Apache's largest producing region. Due to the growth resulting from these acquisitions, Apache divided its former Gulf Coast region into two regions: Gulf of Mexico and Gulf Coast. The Gulf of Mexico region encompasses all of Apache's interests in properties offshore Texas, Louisiana and Alabama. By year-end 1994, Apache increased its production in the Gulf of Mexico to approximately 203 MMcf of gas per day.
At December 31, 1994, the Gulf of Mexico region encompassed 282,302 net acres, located in both state and federal waters, and accounted for 48.1 MMboe, or 18 percent, of the Company's year-end 1994 reserves. Apache participated in 28 wells which were drilled in the region during the year, 21 of which were completed as producers. The Company performed 36 workover and recompletion operations in the region during 1994.
MIDCONTINENT. Apache's Midcontinent region is known for its sizable position in the Anadarko Basin. Apache has drilled and operated in the Anadarko Basin for over three decades, developing an extensive database of geologic information and a substantial acreage position. In 1993, Apache enhanced its position through the acquisition of AERC with its significant acreage and producing interests in the Anadarko Basin.
At December 31, 1994, Apache held an interest in 271,770 net acres in the region, which accounted for approximately 75.7 MMboe, or 28 percent, of Apache's total proved reserves. Apache participated in 103 wells which were drilled in the Midcontinent region during the year, 90 of which were completed as producing wells. The Company performed 36 workover and recompletion operations in the region during 1994.
PERMIAN BASIN. The Permian Basin of West Texas and New Mexico remained an important region to Apache in 1994, generating 17 percent of the Company's production revenues for the year. As of December 31, 1994, Apache held an interest in 103,247 net acres in the region, which accounted for 57.6 MMboe, or 21 percent, of the Company's total proved reserves. Apache's operations in the Permian Basin focused primarily on workovers and recompletions, which totaled 51 for the year. Compared with 1993, Apache nearly doubled its drilling activity in the region during 1994, with 32 of the 38 wells drilled in the region completed as producers.
GULF COAST. The Gulf Coast region encompasses the Texas and Louisiana coasts, central Texas, Mississippi and Alabama. In 1994, the region was one of the most prominent in the Company in the number of workover and recompletion projects completed and the number of wells drilled. Apache participated in 85 wells drilled in the Gulf Coast region during the year, 74 of which were completed as producers, including 30 Austin Chalk wells in central Texas, all of which were productive. The Company performed 173 workover and recompletion operations during 1994 in the Gulf Coast region. As of December 31, 1994, the region encompassed approximately 194,107 net acres, and accounted for 43 MMboe, or 16 percent, of the Company's year-end 1994 total proved reserves.
ROCKY MOUNTAIN. In the Rocky Mountain region, Apache emphasized oil enhancement opportunities during 1994, conducting 94 development projects. At year-end, Apache held an interest in 481,162 net acres in the region, which accounted for approximately 34.2 MMboe, or 13 percent, of the Company's total proved reserves. Apache participated in 45 wells in the region during the year, 26 of which were productive. Apache has announced the Company's intention to sell in 1995 substantially all of its Rocky Mountain properties in connection with its property rationalization program, which emphasizes the disposition of lower margin properties. The Company currently intends to close its Rocky Mountain regional office, located in Denver, Colorado, and redeploy those employees to provide support for its Gulf Coast and Permian Basin operations and the Company's operations in Canada following the DEKALB merger.
AUSTRALIA. The state of Western Australia has become an important region for Apache following the completion of the AERC acquisition. In the fourth quarter of 1993, Apache consolidated the operation of its Australian properties with AERC's Australian subsidiary, AEL, headquartered in Perth, Western Australia. During 1994, AEL participated in two successful horizontal development wells in the Harriet field offshore Western Australia and also participated in nine exploratory wells. Average oil production in the region increased by 70 percent from 1993 to approximately 3,200 bbls per day for 1994, primarily as a result of the addition of the AERC properties in the second half of 1993.
As of December 31, 1994, Apache held 3,373,150 net developed and undeveloped acres in Western Australia. Australian reserves accounted for 10.8 MMboe, or four percent, of the Company's total proved reserves at year end. Through AEL and its subsidiaries, Apache also owns a 22.5-percent interest in and operates the Harriet Gas Gathering Project, a gas processing and compression facility with a throughput capacity of 80 MMcfd, and a 60-mile, 12-inch offshore pipeline with a throughput capacity of 175 MMcfd. The facilities are located in close proximity to AEL's producing properties offshore in the Carnarvon Basin. During 1994, AEL produced 2.9 bcf of natural gas. Through AEL, Apache acts as operator for most of its properties in Western Australia.
In early 1993, Apache took over as operator and increased its interest in the Java Sea IV block offshore Indonesia and the Padang Panjang block on the island of Sumatra, Indonesia. In early 1994, operations for Indonesia were consolidated under the direction of AEL out of its offices in Perth, Western Australia. In 1994, two exploratory wells were drilled in Indonesia, one of which was a discovery.
OTHER INTERNATIONAL OPERATIONS. Outside of Australia, Apache's international interests currently consist only of exploration interests. In 1994, Apache Overseas, Inc., Apache International, Inc. and their subsidiaries (excluding Australia and Indonesia as referred to above) drilled three gross exploratory wells - one each in Egypt, China and The Congo, resulting in two discoveries.
One discovery well was in Zhao Dong block in the Bohai Bay, offshore the People's Republic of China, where Apache has a 33-percent interest in an area containing approximately 48,677 undeveloped acres (16,225 acres net to Apache). The well tested at a rate of over 2,000 bbls per day and was confirmed by an appraisal well which tested at over 3,500 bbls per day. Future plans call for at least one additional appraisal well which, if successful, would lead to field development of the block.
Apache holds a 25-percent interest in the two-million acre Qarun block in the western desert of Egypt which is operated by Phoenix Resource Companies of Qarun. In 1994, Apache participated in an apparent discovery well in the Qarun block which was plugged and abandoned when well bore problems developed. Plans call for an appraisal well on the same structure. In February 1995, Apache and its partners announced the discovery of a second field in the Qarun block approximately two kilometers from its first apparent discovery. The second well tested at rates up to 1,370 bopd.
In the Congo, an Apache subsidiary participated in a discovery well that tested at a rate over 2,000 bbls per day. Through its subsidiary, Apache holds a 20-percent working interest in the well. An appraisal well and an additional exploratory well are planned for 1995.
OIL AND NATURAL GAS MARKETING
During 1994, Apache sold approximately 89 percent of its domestic natural gas on the spot market through Natural Gas Clearinghouse (NGC) or through market responsive contracts with other parties; the remaining 11 percent was sold into long-term, premium-priced contracts. Sales to NGC accounted for 40 percent of the Company's oil and gas revenues in 1994. Apache and NGC have agreed that NGC will market substantially all of Apache's domestic spot market gas production under terms of their agreement which is effective through September 1995. The Company believes that if the NGC contract were terminated, it would not have a material adverse effect on the Company due to the existence of alternative marketing arrangements and purchasers.
In December 1994, the Company signed a long-term gas contract under which Apache received an advance payment of $67.4 million. Apache will supply the purchaser with approximately 43 Bcf of gas over six years, with volumes averaging 20 MMcfd. Initial deliveries began in January 1995. Apache also signed a long-term gas supply agreement with a cogeneration company in August 1994, under which Apache will supply a minimum of 51.1 Bcf over ten years for use in electric power generation from its cogeneration facility located in Northeast Texas. Deliveries of approximately 20 MMcfd are scheduled to begin in early 1997.
Apache assumed its own domestic crude oil marketing operations in 1992. Most of Apache's crude oil production is sold through lease-level marketing to refiners, traders and transporters, generally under 30-day contracts that renew automatically until canceled.
In Australia, approximately 22 Bcf of AEL's proved gas reserves are dedicated to the Gas Corporation of Western Australia, a corporation owned by the government of Western Australia, doing business as AlintaGas (formerly SECWA), under a long-term contract with a remaining period of 7 1/2 years. The agreement contains take-or-pay provisions that require AlintaGas to purchase a minimum of 35 MMcfd (approximately eight MMcfd net to AEL) through the remainder of the contract term at a stated minimum price that escalates with the Western Australia consumer price index. Payments received under this contract are in Australian dollars. If for any reason the AlintaGas contract was canceled, AEL might not be able to find other markets for its gas produced from the Harriet field.
AEL markets all oil and natural gas liquids produced from its interests in the Harriet field through a contract with Marubeni International Petroleum (Singapore) Pte Limited (Marubeni), which was extended in 1994. Pricing under the contract in 1994 represented a fixed premium to the average of the quoted spot market prices of Tapis and Dubai crude oil, with payment made in U.S. dollars. Production sold under this contract in 1994 realized an average price of $18.23 per barrel (exclusive of the impact of hedging activities). In 1995, pricing under this contract will represent a fixed premium of the quoted spot market price of Tapis crude oil. The Company believes that if this contract were terminated, it would not have a material adverse effect on the Company due to the demand for Australian crude oil and the existence of alternative purchasers.
OIL AND NATURAL GAS PRICES
Natural gas prices remained volatile in 1994 with Apache's average gas prices during the year ranging from $1.48 per Mcf in October to $2.15 per Mcf in February. Fluctuations are largely due to natural gas supply and demand perceptions. Apache's average realized gas price of $1.81 per Mcf for 1994 declined 11 percent from the prior-year average of $2.03 per Mcf. Apache's 1993 average realized natural gas price increased 15 percent above the 1992 average of $1.76 per Mcf.
Due to the escalating price contract with AlintaGas, AEL's natural gas production in Western Australia is not subject to the same degree of price volatility as is its domestic gas production, however, natural gas sales under the AlintaGas contract represented only about two percent of the Company's total natural gas sales at year end. In 1994, the price received for production under the contract averaged $1.94 per Mcf. Total Australian gas sales in 1994, including sales under the AlintaGas contract and spot sales to other parties, averaged $1.90 per Mcf, six percent above the 1993 average of $1.79 per Mcf.
Oil prices remained vulnerable due to unpredictable political and economic forces during 1994, but partially recovered from the five-year low that Apache experienced in the fourth quarter of 1993. Management believes that, absent a comprehensive U.S. energy policy, oil prices will continue to fluctuate in response to changes in the policies of the Organization of Petroleum Exporting Countries (OPEC), events in the Middle East and other factors associated with the world political environment. As a result of the many uncertainties associated with levels of production maintained by OPEC and other oil producing countries, the availabilities of world-wide energy supplies and the competitive relationships and consumer perceptions of various energy sources, management is unable to predict what changes will occur in crude oil and natural gas prices.
Apache's worldwide crude oil price averaged $15.66 per barrel in 1994, seven percent lower than the average price of $16.78 per barrel in 1993, and 14 percent lower than the average price of $18.16 per barrel in 1992. Apache's average crude oil price for its Australian production, including production sold under the Marubeni contract, was $17.95 per barrel in 1994, seven percent lower than the average price in 1993.
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. Pursuant to this provision, to the extent that oil prices exceed specified reference prices that rise to $33.12 per barrel over the eight-year period ending June 30, 1999, and to the extent that gas prices exceed specified reference prices that rise to $2.68 per Mcf over the five-year period ending June 30, 1996, Apache will share the excess price realization with Amoco on a portion of the MW production.
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 8 to the Company's financial statements under Item 8 below.)
The Company's business has been and will continue to be affected by future worldwide changes in oil and gas prices and the relationship between the prices of oil and gas. No assurance can be given as to the trend in, or level of, future oil and gas prices.
RESERVE VALUE CEILING TEST
Under the Securities and Exchange Commission's full cost accounting rules, 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 tax reserves. Application of this rule generally requires pricing future production at the unescalated oil and gas prices in effect at the end of each fiscal quarter and requires a write-down if the "ceiling" is exceeded, even if prices declined for only a short period of time. If a write-down is required, the one-time charge to earnings would not impact cash flow from operating activities. The Company had no write-downs due to ceiling test limitations during 1994, but a further weakening of oil and gas prices from year-end levels would likely result in a write-down of oil and gas properties during 1995.
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 federal level, the Federal Energy Regulatory Commission (FERC) regulates interstate transportation of natural gas under the Natural Gas Act and regulates the maximum selling prices of certain categories of gas sold in "first sales" in interstate and intrastate commerce under the Natural Gas Policy Act (NGPA). 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 domestically produced natural gas 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 and have enhanced the marketability of its natural gas production. To date, Apache has not experienced any material adverse effect on gas marketing 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.
ENVIRONMENTAL MATTERS
Apache, as an owner or lessee and operator of oil and gas properties, is subject to various federal, 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, require suspension or cessation of operations in affected areas and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater.
Apache maintains insurance coverage which it believes are 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, 1994, 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. Apache has established policies for continuing compliance with environmental laws and regulations, including regulations applicable to its operations in Australia and other countries. Apache has also established operational procedures designed to limit the environmental impact of its field facilities. The costs incurred by these policies and procedures are inextricably connected to normal operating expenses such that the Company is unable to separate the expenses related to environmental matters; however, the Company does not believe any such additional expenses are material to its financial position or results of operations.
Although environmental requirements do 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, but 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.
EMPLOYEES
On December 31, 1994, Apache had 1,086 full-time employees.
OFFICES
Apache's principal executive offices are located at One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400. During 1994, the Company maintained regional exploration and production offices in Tulsa, Oklahoma; Houston, Texas; Denver, Colorado; and Perth, Western Australia. In 1995, the Company intends to close its Denver, Colorado office and open a new office in Calgary, Alberta to oversee exploration and production activities in Canada following the DEKALB merger.
ITEM 2.
ITEM 2. PROPERTIES
OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES AND RESERVES
ACREAGE
The developed and undeveloped acreage, including both domestic leases and international production and exploration rights that Apache held as of December 31, 1994, are as follows:
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, 1994, is set forth below.
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, 1994, the Company was participating in 29 domestic wells and one international well in the process of drilling.
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.
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 and average sales prices.
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 financial statements under Item 8 below. The Company's estimates of proved reserve quantities of its domestic properties and certain international properties have been subject to review by Ryder Scott Company Petroleum Engineers. 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 information represents estimates only and should not be construed as being exact. See 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, 1994, 1993 and 1992:
The following table sets forth the estimated future value of all proved reserves of the Company, and proved developed reserves of the Company, as of December 31, 1994, 1993 and 1992. 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.
At December 31, 1994, estimated future net revenues expected to be received from all proved reserves of the Company, and from proved developed reserves of the Company, were as follows:
The Company believes that no major discovery or other favorable or adverse event has occurred since December 31, 1994, 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 Securities and Exchange Commission (SEC) guidelines and do not reflect current prices. Since January 1, 1994, no oil or gas reserve information has been filed with, or included in any report to, any U.S. authority or agency other than the SEC and the Energy Information Administration (EIA). The basis of reporting reserves to the EIA for the Company's reserves is identical to that set forth in the foregoing table.
TITLE TO INTERESTS
The Company believes that its title to the various interests set forth above is satisfactory and consistent with the standards generally accepted in the oil and gas industry, subject only to immaterial exceptions which do not detract substantially from the value of the interests or materially interfere with their use in the Company's operations. The interests owned by the Company may be subject to one or more royalty, overriding royalty and other outstanding interests customary in the industry. The interests may additionally be subject to 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.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under the caption "Litigation" in Note 9 to the Company's financial statements under Item 8 below is incorporated herein by reference.
ITEM 4.
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 1994.
PART II
ITEM 5.
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 1994 and 1993. Prices shown are from the New York Stock Exchange Composite Transactions Reporting System.
The closing price per share of Apache common stock, as reported on the New York Stock Exchange Composite Transactions Reporting System for February 28, 1995, was $25.00. At December 31, 1994, there were 61,440,004 shares of Apache common stock outstanding, held by approximately 10,400 shareholders of record and 30,000 beneficial owners.
Each share of Apache common stock also represents one common stock purchase right which, under certain circumstances, would entitle the holder to acquire additional shares of common stock. See Note 6 to the Company's financial statements under Item 8 below.
The Company has paid cash dividends on its common stock for 112 consecutive quarters and intends to continue the payment of dividends at current levels, although future dividend payments will depend upon the Company's level of earnings, financial requirements and other relevant factors.
ITEM 6.
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, 1994, which information has been derived from the Company's audited financial statements. This information should be read in connection with and is qualified in its entirety by the more detailed information and financial statements under Item 8 below.
*Includes financial data for AERC after June 30, 1993, and for Hall-Houston after July 31, 1993. See Note 1 to the Company's financial statements under Item 8 below.
**Includes financial data for MW after June 30, 1991.
Reference is made to Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," for a discussion of significant acquisitions and to the Summary of Significant Accounting Policies and Note 1 to the Company's financial statements under Item 8 below.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Apache's financial performance during 1994 is best understood in light of the following factors:
PRODUCTION INCREASES; COMMODITY PRICES -- The current year's performance was affected by substantial increases in natural gas production partially offset by lower average oil and natural gas prices for the year. Apache's natural gas production increased by 41 percent over the prior year, attributable principally to developmental drilling, recompletions and acquisitions completed in 1993. These gains were partially offset as Apache's average realized natural gas price declined 11 percent from the prior year. Apache's oil production increased by six percent over the prior year. Although oil prices improved from the five-year low experienced in the fourth quarter of 1993, Apache's average realized oil price in 1994 was seven percent lower than in 1993.
ACQUISITIONS-- Apache continued to acquire properties in 1994, acquiring $180 million of oil and gas properties in the current year following its mid-1993 acquisition of Hadson Energy Resources Corporation (now known as Apache Energy Resources Corporation or AERC) and substantially all of the producing properties of Hall-Houston Oil Company (Hall-Houston) in the Gulf of Mexico for an aggregate of $211.7 million. The Company's 1994 performance reflects a full 12 months of ownership of AERC and the Hall-Houston properties; however, over half of the 1994 acquisitions were booked in the fourth quarter, too late to have a significant impact on the Company's 1994 performance. Acquisitions which closed in 1993 and 1994 accounted for approximately 40 percent of the overall increase in gas production from a year ago.
INCREASE IN AVERAGE COMMON SHARES OUTSTANDING -- The weighted average number of shares of Apache common stock outstanding in 1994 increased by 7.8 million shares (15 percent) over 1993, primarily as a result of the issuance of 5.8 million shares in connection with a public stock offering in March 1993 and the issuance of 7.8 million shares in connection with the conversion of $150 million of subordinated debentures in September 1993. Proceeds from these transactions reduced outstanding debt by $281.8 million.
RESULTS OF OPERATIONS
NET INCOME AND REVENUES
The Company reported net income for the year of $42.8 million, a 15-percent increase from 1993 earnings of $37.3 million. Net income of $.70 per share was unchanged from 1993, as the increase in 1994 net income was offset by the increase in the weighted average number of shares of Apache common stock outstanding. Significant factors contributing to the higher earnings were increased oil production and substantially increased natural gas production partially offset by decreases in oil and natural gas prices. Volume and price information concerning the Company's 1994 and 1993 oil and gas production is summarized in the following table:
Revenues for 1994 totaled $545.6 million, or 17 percent higher than a year ago. Oil and gas revenues in 1994 totaled $493.5 million, an increase of 13 percent over production revenues of $437.3 million in 1993. Production revenues were influenced by record natural gas production, declining natural gas prices, increased oil production and lower average oil prices for the year. In addition, Apache's gathering, processing and marketing revenues increased 71 percent to $44.3 million in 1994 from $25.9 million in 1993. Revenues from international operations increased 70 percent to $26.3 million with a full twelve months of Australian production from the AERC acquisition.
Natural gas sales contributed $282.5 million to revenues, up 26 percent from 1993, the result of higher annual production partially offset by lower prices during 1994. Gas production for the year averaged 427 MMcf per day, up 41 percent from 1993, positively affecting gas sales by $92.1 million. This increase is principally the result of production increases from developmental drilling and the contribution from 12 months of operations from properties acquired in 1993, the most significant of which were the offshore properties acquired from Hall-Houston and the properties acquired in the merger with AERC. Acquisitions added approximately 49 MMcfd of production increases for the year, whereas developmental drilling and recompletions accounted for nearly 75 MMcfd.
Apache's average realized price for its natural gas was $1.81 per Mcf during 1994, 11 percent lower than the average price of $2.03 per Mcf during 1993, which negatively affected gas sales by $34.6 million. During 1994, Apache's average realized gas prices ranged from $1.48 per Mcf in October to $2.15 per Mcf in February. Gas prices remained depressed during the second half of 1994 due to warmer than usual weather in the northeastern United States and higher volumes of gas held in inventory by utilities and gas storage facilities. Hedging activities increased Apache's 1994 gas price by $.01 per Mcf ($1.6 million in sales) compared to $.05 per Mcf decrease ($5.4 million in sales) in 1993. The 1994 hedging was in the form of floating for fixed price swap agreements, with hedged volumes ranging from 10,000 MMBtud to 40,000 MMBtud. Hedging activities in 1993 included a $3.8 million net loss from swap agreements and a $1.6 million payment to Amoco Production Company (Amoco) under the terms of the price support hedging agreement described in Footnote 8 to the Company's financial statements. With natural gas spot prices rising significantly during the second and third quarters of 1993, the 1993 hedging activities in effect mitigated the upside potential of improving prices.
The impact of increased oil production was offset by lower oil prices in 1994. Oil production contributed $204.9 million to revenues during 1994, less than one percent below Apache's oil sales in 1993. Average daily oil production of approximately 35.8 Mbbls of oil increased six percent over the prior year, positively affecting oil sales by $13.3 million, as acquisitions offset the effects of natural depletion. Oil sales represented 42 percent of total oil and gas sales in 1994 compared to 47 percent of total oil and gas sales in 1993.
The Company's average realized oil price of $15.66 per barrel declined seven percent from 1993, negatively affecting oil sales by $14.7 million. Apache's average realized oil prices in 1994 ranged from $12.65 per barrel in March to $17.77 per barrel in July. Hedging activities increased Apache's average realized oil price by $.20 per barrel ($2.6 million in sales) as compared to a $.39 per barrel increase ($4.8 million in sales) in 1993. The 1994 hedges were in the form of floating for fixed price swap agreements with respect to the sale of oil, whereas 1993 sales hedges were due to the price support hedging agreement with Amoco.
Revenues from the sale of natural gas liquids increased one percent from 1993, to $6.1 million in 1994. The higher revenue reflects slightly increased volumes incidental to Apache's increased gas production.
Revenues from gas gathering, processing and marketing were $44.3 million in 1994, up 71 percent from 1993. The revenue increase primarily reflects additional volumes sold under crude oil and natural gas contracts, an activity that generally creates relatively low margins. Gross margins from gathering, processing and marketing were $6.4 million in 1994, an increase of 32 percent from 1993.
Other revenues increased to $7.4 million in 1994, up from $2.8 million in 1993. Non-recurring revenues in 1994 included $4 million from the favorable resolution of take-or-pay contract issues and $2.2 million in gains from the sale of stock held for investment.
COSTS AND EXPENSES
Operating costs per equivalent unit of production declined 14 percent in 1994, as a 27-percent increase in production volumes more than offset an eight-percent increase in operating costs. Aggregate operating costs increased from $128.1 million in 1993 to $137.8 million in 1994. Operating costs include lifting costs, workover expense, and applicable domestic or foreign production taxes. On an equivalent unit of production basis, operating costs in 1994 declined to $3.48 per boe, down from $4.10 per boe in 1993. Apache's declining costs per boe reflect increasing natural gas production and lower production costs associated with the operation of gas-bearing properties as compared with oil-bearing properties. The decline in unit cost reflects the Company's continued cost saving efforts and the addition of offshore properties which are not subject to production taxes and traditionally have lower unit lifting costs.
Depreciation, depletion and amortization (DD&A) expense rose 32 percent year-over-year to $232.6 million due to increased domestic sales of oil and natural gas and a higher domestic amortization rate expressed as a percentage of sales. Apache's domestic amortization rate of 45.5 percent of sales for 1994 increased from 38.7 percent in 1993. The increase in DD&A as a percentage of sales is a result of lower natural gas and oil prices during 1994 and a higher average finding cost in 1993 compared to recent years. Recurring international DD&A increased as a result of substantially increased Australian production.
Although Apache increased its international exploration activity in 1994, international impairments declined to $7.3 million in 1994 from $23.2 million in 1993, reflecting the Company's successful international exploration efforts in China, Egypt, The Congo and Indonesia during 1994.
Administrative, selling and other costs increased $1.7 million in 1994, or five percent from 1993. Administrative, selling and other costs, on an equivalent unit of production basis, declined 17 percent from the prior year to $.88 per boe in 1994 from $1.06 per boe in 1993, reflecting the increase in production over the prior year and results of the Company's sustained efforts to contain costs. The Company integrated AERC and the Hall-Houston properties with minimal increases in administrative staff.
Net financing costs of $30.7 million were 14 percent higher than 1993. This was primarily as a result of increasing interest rates and increased debt in 1994 related to the AERC and Hall-Houston acquisitions which were funded in the second half of 1993. By year end, effective interest rates on Apache's floating rate debt, which includes all advances under its bank credit facility, increased approximately 59 percent over year-end 1993 as market rates increased at six different times during the year. Apache's average effective interest rate during 1994 increased to 6.65 percent from 4.96 percent during 1993. On an equivalent unit of production basis, net financing costs declined to $.78 per boe in 1994 from $.86 per boe in 1993, as increased production offset the rising cost of financing. On December 31, 1994, Apache's outstanding debt balance was $658 million, an increase of 42 percent from $462 million on December 31, 1993.
PRIOR-YEAR COMPARATIVE INFORMATION
The Company reported net income for 1993 of $37.3 million, or $.70 per share, a 22-percent decrease from 1992 earnings of $47.8 million, or $1.02 per share. Significant factors contributing to the lower earnings were after-tax charges to earnings of $7.8 million, or $.15 per share, taken in the third quarter related to international impairments and changes in tax laws, the decline in the Company's realized oil prices during 1993, and the $18.5 million after-tax gain recognized during 1992 on the sale of the Company's interest in Natural Gas Clearinghouse (NGC). Excluding only the gain on the 1992 NGC sale, the Company's 1993 earnings increased 28 percent over 1992.
Volume and price information concerning the Company's 1993 and 1992 oil and gas production is summarized in the following table:
Revenues for 1993 totaled $466.6 million, a three-percent increase over the Company's 1992 revenues. Production revenues in 1993 totaled $437.3 million compared to $394.6 million in 1992. Oil and gas revenues were influenced by improved gas prices over 1992, declining second-half oil prices, and the acquisition of AERC and the Hall-Houston properties in the second half of the year. Revenues from international operations increased 93 percent in 1993, to $15.5 million, with six months of Australian production from the 1993 AERC acquisition.
Natural gas sales in 1993 contributed $225 million to revenues, up 33 percent from 1992, the result of sustained higher prices and higher production during 1993. During 1992, Apache's average realized gas price ranged from $1.17 per Mcf in February, the lowest price in 13 years, to a high of $2.40 per Mcf in October. Apache's average realized price for 1992 was $1.76 per Mcf. In 1993, prices remained in the higher range established in the latter half of 1992. Apache's average realized price for 1993 was $2.03 per Mcf, up 15 percent over the 1992 average, positively affecting 1993 gas sales by $30.4 million. Hedging activities decreased gas sales by $5.4 million ($.05 per Mcf) in 1993 as compared to a $2.5 million decrease in 1992. Both years included losses on swap agreements and price sharing obligations with Amoco.
The impact of higher gas prices was augmented by higher gas production in 1993 as compared with 1992. Gas production for the year averaged 303.1 MMcf per day, up 16 percent from 1992, positively affecting gas sales by $25.8 million. This increase is principally the result of production from newly acquired properties, the most significant of which were the offshore properties acquired from Hall-Houston, the additional 93-percent working interest in Matagorda Island Blocks 681 and 682 acquired in 1992, and the properties acquired in the merger with AERC. Combined, these three acquisitions comprised 332 Bcfe of proved reserves at year end 1993 and contributed 68 MMcf of gas per day to Apache's 1993 average daily production.
The impact of increased oil production in 1993 was offset by lower oil prices. Oil production contributed $206.3 million to revenues during 1993, six percent below Apache's record $218.9 million in oil sales in 1992. Average daily oil production of approximately 33.7 Mbbls of oil increased two percent over the prior year, positively affecting oil sales by $4.3 million, as acquisitions, continuing workover and recompletion operations, and new drilling in the Permian Basin and Austin Chalk trend offset the effects of natural depletion.
The Company's average realized oil price of $16.78 per barrel declined eight percent from 1992, negatively affecting oil sales by $16.9 million. Hedging activities boosted Apache's average realized oil price in 1993 by $.39 per barrel ($4.8 million in sales) as compared to a $.44 per barrel increase ($5.3 million in sales) in 1992. These were due to Amoco price support hedging activities.
Revenues from the sale of natural gas liquids and sulfur in 1993 declined 12 percent from 1992 to $6.0 million, a result of lower prices for natural gas liquids and the sale of the Whitney Canyon gas processing plant in 1992. The sale of natural gas liquids declined from 1.5 Mbbls per day in 1992 to 1.3 Mbbls per day in 1993.
Revenues from gas gathering, processing and marketing were $25.9 million in 1993, down 10 percent from 1992. The decline primarily reflects the sale of Apache's interest in a gas gathering system in western Oklahoma in March 1993. As a result, gross margins from gathering, processing and marketing were $4.9 million in 1993, a decline of 32 percent from 1992.
Operating costs were up two percent in 1993 to $128.1 million, as a decline in operating costs per barrel of oil equivalent was offset by the impact of increased production. Operating costs include lifting costs, workover expense, and applicable domestic or foreign production taxes. On an equivalent unit of production basis, operating costs declined six percent in 1993 to $4.10 per boe, down from $4.38 per boe in 1992. Apache's declining costs per boe reflect increasing natural gas production and lower production costs associated with operating gas-bearing properties as compared to oil-bearing properties. Apache's operating costs were also reduced by refunds of well-control insurance totaling $.7 million and production tax refunds totaling $1.8 million during 1993.
DD&A expense rose 12 percent year-over-year to $176.3 million due to increased sales of natural gas and increased Australian production. Although Apache's domestic amortization rate of 38.7 percent of sales for 1993 was down slightly from 1992, declining oil prices and the higher costs associated with newly acquired offshore properties, which reflect shorter reserve lives and faster expected payouts, combined to increase Apache's domestic amortization rate in the second half of 1993. Recurring international DD&A increased as a result of substantially increased Australian production.
International impairments, which rose to $23.2 million in 1993 from $12 million in 1992, included $6.7 million of the Company's investment in West Africa which the Company wrote-off in the third quarter of 1993 when it recognized a reduced probability of establishing commercial operations on two of Apache's concessions. The 1993 impairments also included provisions for Apache's investment in the Java Sea (Indonesia) and Nanteau (France).
Administrative, selling and other costs were down five percent from those incurred in 1992, despite the Company's acquisitions during 1993. The reduction reflects the Company's sustained efforts to contain costs, the non-recurring administrative costs incurred in the 1992 corporate relocation to Houston, and the integration of MW. In 1993, Apache successfully assimilated the AERC and Hall-Houston properties with minimal additions to its administrative staff. Administrative cost reductions were partially offset, however, by expenses associated with an employee benefit plan based on Apache common stock, which increased in price by approximately 25 percent from year-end 1992 to year-end 1993.
Net financing costs declined 17 percent in 1993 despite the use of bank debt to fund the AERC and Hall-Houston acquisitions. The decline is primarily attributable to a decline of approximately 100 basis points in Apache's effective interest in 1993 as compared with 1992, reflecting a general decline in interest rates and the conversion of Apache's 7 1/2-percent convertible subordinated debentures due 2000 into shares of Apache common stock in September 1993. Interest expense also declined as a result of Apache's repayment of bank debt from a portion of the $131.8 million in net proceeds of its public offering of common stock in March 1993, the successful conversion of approximately $150 million of its 7 1/2-percent convertible subordinated debentures due 2000 and through the redemption of $7 million of 9-percent convertible subordinated debentures due 2001. Debt reductions attributable to the public offering and debt conversion in 1993 were offset by debt incurred in connection with acquisitions. On December 31, 1993, Apache's outstanding debt balance was $462 million, an increase of one percent from $455.5 million on December 31, 1992.
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, and payment of dividends. The Company generally funds its exploration and development activities through internally generated cash flows. Apache budgets its capital expenditures based upon projected cash flows and routinely adjusts its capital expenditures in response to changes in oil and gas prices and corresponding changes in cash flow.
Expenditures for exploration and development increased to $302.5 million in 1994 from $218.9 million in 1993. Domestically, Apache completed 243 producing wells out of 299 gross wells drilled during the year compared with 266 gross wells drilled in 1993, of which 210 were completed as producers. Internationally, the Company had discoveries on nine of 17 wells drilled in 1994, while completing three of eight wells as producers in 1993. Domestic expenditures for exploration and development in 1995, including workover and recompletion operations, are expected to decline to approximately $170 million as additional funds are used to reduce debt. The Company will step-up its international activities in 1995 with exploration and development expenditures expected to rise to approximately $45 million, up from $32 million in 1994.
Cash expenditures for acquisitions during 1994 were $180 million, compared to $260.9 million in 1993. The most significant acquisition that Apache closed during 1994 was the purchase of substantially all of the U.S. oil and gas properties of Crystal Oil Company for $95.8 million. Apache also acquired approximately $84.2 million of other oil and gas properties through a number of different transactions during 1994. Funds for the 1994 acquisitions were obtained principally from borrowings under the Company's revolving bank credit facility.
During the fourth quarter of 1994, Apache entered into a merger agreement with DEKALB Energy Company (DEKALB), with DEKALB to survive as a wholly-owned subsidiary of Apache and DEKALB shares to be converted into the right to receive shares of Apache common stock. The Company contemplates that between 8.0 and 8.9 million shares of Apache common stock will be issued in connection with the merger.
On March 1, 1995, Apache purchased certain oil and gas properties from Texaco Exploration and Production Inc. (Texaco) for approximately $571 million in cash, subject to adjustment. Apache delivered a $25 million deposit, representing a portion of the purchase price, upon execution of the purchase and sale agreement with Texaco in December 1994, and delivered the balance in cash at closing. Funds for the Texaco transaction were obtained from several sources, including increased borrowing capacity under the Company's 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. On March 1, 1995, lenders increased the Apache revolving credit facility to $1 billion, subject to borrowing base availability.
The Company aggressively pursues acquisition opportunities as part of its reserve growth strategy. The amount and timing of future funding requirements for acquisitions are dependent upon several factors, including the market for oil and gas properties, and cannot be predicted for the upcoming year.
The aggregate cost of acquisitions in 1993, including the value of the shares issued and liabilities added through the merger of AERC, totaled $324.6 million. Apache's most significant transactions during 1993 were its acquisitions of oil and gas properties from Hall-Houston for $113.7 million in cash and the acquisition of AERC for approximately $98 million in cash and the issuance of 307,977 shares of Apache common stock. Apache also acquired more than $76.5 million of other properties during 1993, primarily representing purchases of additional working interests in properties in which Apache already held an interest, including the purchase of Key Production Company's interest in certain properties held by Apache Operating Partnership L.P. prior to its dissolution during the first quarter of 1993.
Other capital expenditures for 1993 include the purchase of NGC's interest in a gas gathering system in western Oklahoma which was sold in March 1993, in a transaction described under "Capital Resources and Liquidity" below.
At December 31, 1994, Apache had outstanding $454 million under its revolving bank credit facility, $25.8 million in additional bank debt consolidated through the AEL banker's acceptance facility, and an aggregate of $177.8 million in principal amount of other long-term debt, comprised principally of notes and debentures maturing in the years 1997 through 2002. The Company's overall debt at December 31, 1994, had increased $195.6 million from December 31, 1993, partly the result of borrowing to fund acquisitions and the purchase of approximately $15 million of AERC shares tendered to the Company in the first quarter of 1994. Apache made cash payments on long-term debt totaling $28.7 million in 1994, of which $9 million was scheduled under the Company's debt obligations and the remaining amount was paid due to the termination of AERC's bank credit facility. Interest payments on the Company's outstanding debt obligations during 1995 are projected (using weighted average balances for floating rate obligations) to be approximately $89 million, while scheduled principal payments for 1995 currently total $.1 million.
Dividends paid during 1994 totaled $17.1 million, up 15 percent from 1993, primarily due to the issuance of approximately 5.8 million shares in connection with the Company's March 1993 common stock offering, and the issuance of approximately 7.8 million shares in September 1993 upon the conversion of its subordinated debentures. The Company's dividend policy currently provides for the payment of regular quarterly dividends at the rate of $.28 per share annually. Although no change in the dividend policy is contemplated for 1995, the declaration and amount of future dividends is dependent upon the Company's cash requirements, applicable debt covenants and other factors deemed relevant by the Board of Directors.
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 during 1994 was $335.6 million, up $110.5 million from 1993. The 49-percent improvement in cash flows primarily reflects increased natural gas production and a $67.4 million advance on future gas deliveries related to the Company's sale of approximately 43.8 Bcf of natural gas for delivery over a six-year period. (See Note 5 to the Company's financial statements). Eliminating the effects of forward sale transactions, net cash provided by operating activities increased by 19 percent over 1993, reflecting the results of increased production partially offset by lower oil and gas prices.
The Company anticipates that it will engage in additional forward sale transactions in the future if sales can be made under terms and conditions that are favorable to the Company in light of market conditions. Future cash flows will be influenced by product prices and production volumes and are not presently ascertainable.
On January 4, 1995, Apache completed the issuance of $172.5 million principal amount of its 6-percent debentures to reduce bank debt, provide funding for acquisitions and general corporate purposes. The debentures are convertible at the option of the holder into Apache common stock at a conversion price of $30.68 per share.
On March 1, 1995, in connection with the acquisition of certain oil and gas properties from Texaco, lenders increased the size of Apache's revolving credit facility from $700 million to $1 billion, subject to borrowing base availability. The borrowing base is the estimated loan value of the Company's oil and gas reserves, not including reserves outside the United States and subject to certain other exclusions, based upon forecast rates of production, as periodically redetermined by the lenders. Upon closing the Texaco transaction on March 1, 1995, Apache had approximately $840 million in loans outstanding under the facility with approximately $60 million remaining available. (See Note 3 to the Company's financial statements under Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be filed under this item are presented on pages through of this Form 10-K, and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Information About Nominees for Election as Directors," "Continuing Directors," "Executive Officers of the Company," and "Voting Securities and Principal Holders" in the Company's proxy statement relating to the Company's 1995 annual meeting of shareholders (the "Proxy Statement") is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table," "Option/SAR Grants Table," "Option/SAR Exercises and Year-End Value Table," "Employment Contracts and Termination of Employment and Change-in-Control Arrangements," and "Director Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities and Principal Holders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Business Relationships and Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company's financial statements and related notes.
3. EXHIBITS
____________________ * Filed herewith.
+ Management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 14 hereof.
Note: Debt instruments of the Registrant defining the rights of long-term debt holders in principal amounts not exceeding 10 percent of the Registrant's consolidated assets have been omitted and will be provided to the Commission upon request.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the fiscal quarter ended December 31, 1994:
November 29, 1994 - Item 5. Other Events - Registrant entered into a memorandum of understanding, and subsequently into a purchase and sale agreement with Texaco Exploration and Production Inc., under which Registrant will acquire Texaco's interest in over 300 oil and gas fields for approximately $600 million, subject to certain adjustments.
December 6, 1994 - Item 5. Other Events - Registrant issued $172.5 million principal amount of 6 percent Convertible Subordinated Debentures due 2002, which are convertible into the Registrant's common stock at a conversion price of $30.68 per share.
December 21, 1994 - Item 5. Other Events - Registrant entered into an agreement and plan of merger with DEKALB Energy Company pursuant to which (i) each outstanding share of DEKALB stock will be converted into the right to receive between .85 and .90 shares of the Registrant's common stock, and (ii) DEKALB will become a wholly-owned subsidiary of the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APACHE CORPORATION
Date: March 6, 1995 By: /s/ Raymond Plank Raymond Plank, Chairman and Chief Executive Officer
POWER OF ATTORNEY
The officers and directors of Apache Corporation, whose signatures appear below, hereby constitute and appoint Raymond Plank, G. Steven Farris, Z. S. Kobiashvili and Mark A. Jackson, and each of them (with full power to each of them to act alone), the true and lawful attorney-in-fact to sign and execute, on behalf of the undersigned, any amendment(s) to this report and each of the undersigned does hereby ratify and confirm all that said attorneys shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.*
* Apache Corporation does not have a Principal Financial Officer.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders of Apache Corporation:
We have audited the accompanying consolidated balance sheet of Apache Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1994 and 1993, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apache Corporation and Subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas March 1, 1995
REPORT OF MANAGEMENT
The financial statements and related financial information of Apache Corporation and Subsidiaries were prepared by and are the responsibility of management. The statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's best estimates and judgments.
Management maintains and places reliance on systems of internal control designed to provide reasonable assurance, weighing the costs with the benefits sought, that all transactions are properly recorded in the Company's books and records, that policies and procedures are adhered to and that assets are safeguarded. The systems of internal controls are supported by written policies and guidelines, internal audits and the selection and training of qualified personnel.
The consolidated financial statements have been audited by Arthur Andersen LLP, independent public accountants. Their audits included developing an overall understanding of the Company's accounting systems, procedures and internal controls and conducting tests and other auditing procedures sufficient to support their opinion on the fairness of the consolidated financial statements.
The Board of Directors exercises its oversight responsibility for the financial statements through its Audit Committee, composed solely of directors who are not employed by Apache. The Audit Committee meets periodically with management, internal auditors and the independent public accountants to ensure that they are successfully completing designated responsibilities. The internal auditors and independent public accountants have open access to the Audit Committee to discuss auditing and financial reporting issues.
Raymond Plank Chairman of the Board and Chief Executive Officer
Mark A. Jackson Vice President, Finance
R. Kent Samuel Controller and Chief Accounting Officer
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
The accompanying summary of significant accounting policies and notes to consolidated financial statements are integral parts of this statement.
APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
The accompanying summary of significant accounting policies and notes to consolidated financial statements are integral parts of this statement.
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
The accompanying summary of significant accounting policies and notes to consolidated financial statements are integral parts of this statement.
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
The accompanying summary of significant accounting policies and notes to consolidated financial statements are integral parts of this statement.
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
The accompanying summary of significant accounting policies and notes to consolidated financial statements are integral parts of this statement.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Apache Corporation (Apache or the Company) and its subsidiaries after elimination of intercompany balances and transactions. The Company's interests in oil and gas ventures and partnerships are proportionately consolidated. Investments in incorporated affiliates in which Apache owns between a 20-percent and 50-percent interest are accounted for using the equity method.
INVENTORIES
Inventories consist principally of tubular goods and production equipment stated at the lower of weighted average cost or market.
PROPERTY AND EQUIPMENT
The Company uses the full cost method of accounting for its investment in oil and gas properties. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Apache capitalized $30.9 million, $25.4 million and $24 million of internal costs in 1994, 1993 and 1992, respectively. Costs associated with production and general corporate activities are expensed in the period incurred. Internal costs attributable to the management of the Company's producing properties, before recoveries from industry partners, totaled $12.2 million, $10.2 million and $10 million in 1994, 1993 and 1992, respectively, and are included in operating costs on the Company's Statement of Consolidated Income. Interest costs related to development projects in progress for an extended period are also capitalized to oil and gas properties. Unless significant reserves are involved, proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs and gains or losses are not recognized.
Apache computes the provision for depreciation, depletion and amortization (DD&A) of oil and gas properties on a quarterly basis using the future gross revenue method. The quarterly provision is calculated on a country-by-country basis by multiplying the quarter's oil and gas revenues by an overall rate which is determined by dividing the unamortized cost of proved oil and gas properties by the total estimated future oil and gas revenues from proved reserves. The amortizable base includes estimated future development cost and dismantlement, restoration and abandonment costs, net of estimated salvage values. These future costs are generally estimated by engineers employed by Apache.
Apache limits, on a country-by-country basis, the capitalized costs of proved oil and gas properties, net of accumulated DD&A, to the estimated future net cash flows from proved oil and gas reserves, net of related tax effects, discounted at 10 percent. If capitalized costs exceed this limit, the excess is charged to DD&A expense. The Company has not recorded any write downs of capitalized costs in any of the periods presented.
The costs of certain unevaluated domestic and foreign leasehold acreage and wells in the process of being drilled are not being amortized. Costs not being amortized are periodically assessed for possible impairments or reductions in value. If a reduction in value has occurred, costs being amortized are increased or a charge is made against earnings for those international operations where a reserve base is not yet established.
Buildings, equipment, gas gathering, transmission and processing facilities are depreciated on a straight-line basis over the estimated useful lives of the assets which range from three to 20 years. Accumulated depreciation for these assets totaled $23.7 million and $17.2 million at December 31, 1994 and 1993, respectively.
ACCOUNTS PAYABLE
Included in accounts payable at December 31, 1994 and 1993, are liabilities of approximately $30.3 million and $38.6 million, respectively, representing the amount by which checks issued but not presented to the Company's banks for collection exceeded balances in applicable bank accounts.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
Apache uses the sales method of accounting for natural gas revenues. Under this method, revenues are recognized based on actual volumes of gas sold to purchasers. The volumes of gas sold may differ from the volumes to which Apache is entitled based on its interests in the properties. Differences between volumes sold and volumes based on entitlements create gas imbalances which are generally reflected as adjustments to reported gas reserves and future cash flows. Adjustments for gas imbalances totaled less than one percent of Apache's proved gas reserves at December 31, 1994. Revenue is deferred and a liability is recorded for those properties where the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup their entitled share through production.
HEDGING ACTIVITIES
The Company periodically enters into commodity derivative contracts in order to either fix or support oil and gas prices at targeted levels and to minimize the impact of price fluctuations. Apache uses swaps, puts or fixed-price contracts to hedge its commodity prices. Gains or losses on these hedging activities are recognized in oil and gas production revenues when the hedged production occurs. Estimates of future liabilities and receivables applicable to oil and gas commodity hedges are reflected in future cash flows from proved reserves in the supplemental oil and gas disclosures, with such estimates based on prices in effect as of the date of the reserve report.
The Company also purchases interest rate caps and enters into interest rate swap transactions in its management of interest rate exposure. Interest rate swap agreements generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. Gains or losses on these activities are recognized in interest expense in the period hedged by the agreements.
INCOME TAXES
The Company provides deferred income taxes for all temporary differences between financial and income tax reporting. Effective January 1, 1993, the Company implemented the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability method specified by SFAS No. 109, deferred taxes are determined based on the estimated future tax effect of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. The adoption of SFAS No. 109 did not have a material effect on the accompanying financial statements.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is considered the functional currency for each of the Company's international operations. Translation gains or losses are recognized in current net income and were not material in any of the periods presented.
INCOME PER COMMON SHARE
Income per common share amounts are based on the weighted average number of common shares outstanding. The effects of common equivalent shares, which would include shares from the assumed conversion of the 3.93-percent notes, were immaterial or were not dilutive for each of the periods presented. Furthermore, fully diluted income per share, assuming conversion of certain of the convertible debentures, was not significantly different than primary income per share for all periods presented.
STATEMENT OF CONSOLIDATED CASH FLOWS
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. These investments are carried at cost which approximates market.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS AND DIVESTITURES
Completed Transactions
In December 1994, Apache purchased substantially all of the U.S. oil and gas properties of Crystal Oil Company (Crystal) for approximately $95.8 million. The producing oil and gas properties acquired from Crystal are located primarily along the Arkansas-Louisiana border and southern Louisiana. The acquisition also included approximately 32,000 net undeveloped mineral acres in southern Louisiana.
In 1993, Apache purchased the stock of Hadson Energy Resources Corporation, (now known as Apache Energy Resources Corporation, AERC) for approximately $98 million through a series of privately negotiated transactions and a merger offer approved by a majority of AERC stockholders. In July 1993, Apache completed the purchase of 4.2 million shares of AERC's outstanding common stock, or approximately 68 percent of the AERC common stock then outstanding, for $59.2 million. The Company agreed to pay an additional $1.00 per share ($4.2 million) to the selling stockholders if the Company increased its ownership in AERC to 80 percent or more. Pursuant to the merger agreement approved by AERC stockholders on November 12, 1993, AERC stockholders other than Apache could elect to receive, for each share of AERC common stock, either $15 in cash or .574 share of Apache common stock. Apache issued 307,977 shares of Apache common stock valued at $7.9 million and paid a total of $76.1 million to former stockholders of AERC as consideration for the merger. At December 31, 1993, Apache reflected a liability of $13.9 million accrued for AERC shares which had not yet been surrendered to Apache. During 1994, Apache completed the purchase of the remaining AERC shares.
Also in 1993, Apache entered into two agreements to purchase 104 Bcfe of proved reserves from Hall-Houston Oil Company (Hall-Houston) for an aggregate consideration of $113.7 million. In June 1993, Apache closed the first of the two transactions, paying $29.3 million for Hall-Houston's interest in Mustang Island Blocks 787 and 805. The second transaction, encompassing substantially all of Hall-Houston's producing properties in the Gulf of Mexico for an additional $84.4 million, was completed in August 1993. The acquisitions included interests in 63 producing fields and 12 fields under development or awaiting pipeline connections.
Effective November 1, 1992, Apache completed the acquisition of Shell Offshore Inc.'s 93-percent working interest in Matagorda Island Blocks 681 and 682 in the Gulf of Mexico. Apache paid $57.4 million for properties, which included 14 miles of gathering lines and approximately 11,500 net acres of leases.
All of the above acquisitions have been accounted for using the purchase method of accounting and have been included in the financial statements of Apache since the dates of acquisition.
Effective May 1, 1992, Apache sold its 31.67-percent general partnership interest in Natural Gas Clearinghouse (NGC) for $50.7 million. The Company recognized a gain on the sale of approximately $28.3 million or $18.5 million after tax.
The following unaudited pro forma summary of the Company's consolidated results of operations in 1993 was prepared as if the Hall-Houston and AERC acquisitions occurred as of January 1, 1993. The pro forma data for 1992 assumes that the Hall-Houston and AERC acquisitions and the NGC sale occurred as of or prior to January 1, 1992. The pro forma data is based on numerous assumptions and is not necessarily indicative of future operations.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 Acquisition
On March 1, 1995, Apache purchased certain oil and gas properties from Texaco Exploration and Production Inc. (Texaco) for an adjusted purchase price of $571 million, effective January 1, 1995. The transaction is subject to customary closing and post-closing adjustments. Apache delivered a $25 million deposit, representing a portion of the purchase price, upon execution of the purchase and sale agreement with Texaco in December 1994, and delivered the balance in cash at closing. Funds for the Texaco transaction were obtained from several sources, including increased borrowing capacity under the Company's bank credit facility and proceeds of Apache's $172.5 million 6-percent Convertible Subordinated Debentures due 2002, which were issued on January 4, 1995. (See Note 3.)
Planned Transactions
On December 21, 1994, Apache entered into a merger agreement with DEKALB Energy Company (DEKALB), under which shareholders of DEKALB will receive, in the aggregate, between eight and 8.9 million shares of Apache common stock and DEKALB will become a wholly-owned subsidiary of Apache. The transaction will be accounted for using the pooling of interests method and is expected to be completed in April 1995. Apache and DEKALB estimate that the cost required to complete the transaction will total between $8 and $10 million.
On February 15, 1995, Apache announced plans to sell non-core oil and gas properties in the Company's Rocky Mountain region and close its Denver, Colorado office. The Company anticipates that divestiture of selected Rocky Mountain properties, together with the disposition of non-strategic assets in its other operating regions, will result in total proceeds of approximately $200 million.
2. INVESTMENTS IN EQUITY SECURITIES
Apache has certain investments in equity securities which are classified as available for sale pursuant to SFAS No. 115. At December 31, 1994, the aggregate cost basis totaled $7.2 million and the related aggregate fair value approximated cost.
During 1994, the Company realized gross gains totaling $2.2 million from the sale of available-for-sale securities. Apache utilizes the average cost method in computing realized gains or losses, which are included in other revenues on the accompanying Statement of Consolidated Income.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, Apache owned approximately 20 percent of the outstanding shares of Key Production Company, Inc. (Key). In the fourth quarter of 1994, Apache reduced its ownership interest in Key to approximately 10 percent and discontinued reporting equity earnings from the former affiliate. Equity earnings attributable to Key, and an equity investment in NGC during part of 1992 (See Note 1), is presented below:
3. DEBT LONG-TERM DEBT
At December 31, 1994, Apache had a $700 million revolving bank facility funded by a group of banks. The maximum amount available was subject to periodic redetermination of a borrowing base, determined solely at the discretion of the banks, predicated upon the Company's oil and gas reserve values and forecast rate of production. As of December 31, 1994, the borrowing base was $560 million and the principal amount outstanding was $454 million. The bank facility was scheduled to mature on April 30, 1998, and the agreement provided for perpetual one-year extensions as requested year-by-year by the Company and subject to the approval of the banks. Interest on amounts borrowed was charged at the First National Bank of Chicago's base rate or at London Interbank Offered Rates (LIBOR) plus a margin determined by the Company's public senior debt rating and its ratio of debt to total capital. At December 31, 1994, the margin was .375 percent. Facility and commitment fees were also determined similar to borrowing fees. The Company paid a facility fee of .25 percent on the available portion of the commitment and .125 percent of the unavailable portion of the commitment.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 1, 1995, the Company's revolving bank facility agreement was amended and restated, increasing the facility to $1 billion. The Company's borrowing base, including the value of the Texaco properties, was initially set at $765 million. The facility expires on March 1, 2000, and may be extended in one-year increments with the lender's consent. In addition to the borrowing base predicated on the Company's oil and gas reserve value, the bank facility provides a non-conforming borrowing base as defined in the agreement. The initial non-conforming borrowing base of $135 million is available until May 10, 1996, and at reduced amounts through November 4, 1996. Financial covenants of the amended agreement are similar to those existing at December 31, 1994, and are described below. Based on the Company's ratio of debt to total capital at March 1, 1995, the interest rate margin over LIBOR increased from .375 percent to 1.125 percent. At the March 1, 1995 debt level, the Company will pay a facility fee of .375 percent of the available portion of the commitment and .1875 percent of the unavailable portion of the commitment.
The 9.25-percent notes totaling $100 million were issued in May 1992 and will mature in June 2002. The notes are not redeemable prior to maturity.
In December 1992, Apache issued the 3.93-percent convertible notes. These notes mature in November 1997, and are not redeemable prior to maturity. They are convertible into Apache common stock at $27 per share, subject to adjustment under certain circumstances.
The indentures for the two note issues impose substantially similar obligations on the Company including limits on the Company's ability to incur debt secured by certain liens and on its ability to enter into certain sale and leaseback transactions. Upon certain changes in control of the Company, both issues are subject to mandatory repurchase (or conversion at the option of the noteholders in the case of the 3.93-percent notes).
Financial covenants of the bank facility and the 3.93-percent notes require the Company to maintain a minimum consolidated tangible net worth ($576 million as of December 31, 1994 and $650 million as amended on March 1, 1995), which will be adjusted quarterly for subsequent earnings and equity transactions, and to maintain a ratio of (i) earnings before interest expense, state and federal taxes and depreciation, depletion and amortization to (ii) consolidated interest expense of not less than 3.7:1 for the banks and 3.5:1 for the lenders under the 3.93-percent notes. The Company was in compliance with all financial covenants at December 31, 1994.
In conjunction with the AERC acquisition, Apache assumed two bank credit agreements outstanding at the time it acquired a majority interest in AERC. During 1994, Apache terminated a bank credit facility held in the name of AERC and amended and restated the debt agreement of AERC's wholly-owned subsidiary, Apache Energy Limited (AEL, formerly known as Hadson Energy Limited). The AEL Acceptance Facility is a separate credit facility provided by Bank of Montreal which provided funding for the construction of an offshore gas gathering project. The borrowing base is $30 million, of which $25.8 million was outstanding at December 31, 1994. The AEL credit facility is not guaranteed by Apache.
An $18 million banking facility made by Apache on behalf of Apache Offshore Investment Partnership had $11.1 million outstanding at December 31, 1994, of which Apache's share was $3 million. Availability under this facility is reduced quarterly by $1.5 million beginning in October 1995.
On January 4, 1995, Apache completed the issue of $172.5 million of 6-percent Convertible Subordinated Debentures due 2002 (6-percent debentures). The debentures are convertible at the option of the holder into Apache common stock at a conversion price of $30.68 per share.
As of December 31, 1994 and 1993, the Company had approximately $12 million and $14 million, respectively, of unamortized costs associated with its various debt obligations. These costs are reflected as deferred charges and other in the accompanying Consolidated Balance Sheet and are being amortized over the life of the related debt.
See Note 8 for disclosure concerning the fair value of debt instruments.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
*Pro forma data reflects the issuance of $172.5 million of 6 percent debentures as described above and $840 million outstanding under the revolving bank facility on March 1, 1995.
4. INCOME TAXES
As discussed in the Summary of Significant Accounting Policies, effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for Income Taxes." The cumulative effect of adopting this statement was not material to the accompanying financial statements.
The total provision for income taxes consists of the following:
The 1993 provision for income taxes includes a $3.5 million charge for the change in federal statutory rates from 34 percent to 35 percent enacted under the Omnibus Budget Reconciliation Act of 1993 (OBRA).
The 1992 provision for income taxes includes approximately $1.2 million for Apache's tax provision related to its share of NGC's partnership income. This provision was reflected as a reduction of equity in income of affiliates in the Statement of Consolidated Income.
A reconciliation of the federal statutory income tax rates to the effective rate is as follows:
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities using the provisions of enacted tax laws.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
The net deferred tax liability as of December 31, 1994, is comprised of the following:
No valuation allowance has been recorded against deferred tax assets at December 31, 1994.
U.S. deferred taxes have not been provided on foreign earnings totaling $25 million which are permanently reinvested abroad. Presently, limited foreign tax credits are available to reduce the U.S. taxes on such amounts if repatriated.
At December 31, 1994, the Company has U.S. federal net operating loss carryforwards of $27 million and statutory depletion carryforwards of $6.6 million available to reduce future U.S. federal taxable income. The net operating loss carryforwards will expire unless otherwise utilized, beginning in 1995. The statutory depletion may be carried forward indefinitely. The Company has alternative minimum tax (AMT) credit carryforwards of $20.8 million. AMT credits can be carried forward indefinitely and may only be used to reduce regular tax liabilities in excess of AMT liabilities. The Company also has foreign net operating loss carryforwards of $22.2 million and foreign capital loss carryforwards of $8.4 million which may be carried forward indefinitely and may be utilized to reduce future foreign taxable income.
5. ADVANCE FROM GAS PURCHASER
In December 1994, Apache received $67.4 million from a purchaser as an advance payment for future natural gas deliveries of 20,000 MMBtu per day over a six-year period commencing January 1995. As a condition of the arrangement with the purchaser, Apache entered into a gas price swap contract with a third party under which Apache became a fixed price payor at identical volumes and at prices starting at $1.81 per MMBtu and escalating at $.10 per MMBtu per year through the year 2000. In addition, the purchaser will pay to Apache a monthly fee of $.05 per MMBtu on the contracted volumes. The net result of these related transactions is that gas delivered to the purchaser will be reported as revenue at prevailing spot prices in the future with Apache realizing a small premium associated with the monthly fee to be paid by the purchaser.
The payment has been classified as an advance on the December 31, 1994 balance sheet and will be reduced as gas is delivered to the purchaser under the terms of the contract. Gas volumes delivered to the purchaser will be reported as revenues at prices used to calculate the amount advanced, before inputed interest, minus or plus amounts paid or received by Apache applicable to the price swap agreement. Interest expense will be recorded based on a 9 1/2-percent rate.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
6. CAPITAL STOCK
COMMON STOCK OUTSTANDING
Public Offering -- In March 1993, Apache completed the public offering of approximately 5.8 million shares of Apache common stock for net proceeds of $131.8 million.
Stock Option Plans -- At December 31, 1994, common shares totaling 1,766,925 were reserved for issuance under stock option plans for officers and key employees. The outstanding options expire at various dates through 2004 and are exercisable at prices ranging from $8.625 to $26.875 with an aggregate exercise price of $21 million. The following table summarizes the changes in stock options for the year and the number of common shares available for grant at year end:
Rights to Purchase Common Stock -- In 1986, the Company declared a dividend of one right to purchase one share of common stock at $50 per share (subject to adjustment) on each outstanding share of common stock (the Rights). The Rights are exercisable only if certain persons or groups acquire 20 percent or more of the common stock or commence a tender offer for 30 percent or more of the common stock. If the Company engages in certain business combinations or a 20-percent stockholder engages in certain transactions with the Company, the Rights become exercisable for Apache common stock or common stock of the corporation acquiring the Company (as the case may be) at 50 percent of the then-market price. Any Rights that are or were beneficially owned by a person who has acquired 20 percent or more of the common stock and who engages in certain transactions or realizes the benefits of certain transactions with the Company will become void. The Company may redeem the Rights at a specified price at any time until 10 business days after public announcement that a person has acquired 20 percent or more of the outstanding shares of common stock. The Rights will expire on January 31, 1996, unless earlier redeemed by the Company. Unless the Rights have been previously redeemed, all shares of common stock issued by the Company will include Rights.
Preferred Stock -- The Company has five million shares of no par preferred stock authorized, of which none are outstanding.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
7. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing and financing activities is presented below.
In 1993, Apache purchased Hadson Energy Resources Corporation (now AERC) for approximately $98 million in cash and Apache common stock. The accompanying financial statements included the following attributable to the acquisition:
During the first quarter of 1994, the Company issued 2,974 shares of Apache common stock and paid $13.9 million for AERC shares which had not been surrendered by the end of 1993.
In September 1993, Apache called for the redemption of its 7 1/2-percent convertible subordinated debentures due 2000. Following receipt of the notice of redemption, nearly all holders of the debentures elected to convert the principal amount of their debentures into shares of Apache common stock. Holders of less than one-tenth of one percent of the debentures elected to receive cash ($.1 million).
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
8. FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1994 and 1993.
The following methods and assumptions were used to estimate the fair value of the financial instruments summarized in the above table. The carrying values of trade receivables and trade payables included in the accompanying Consolidated Balance Sheet approximated market value at December 31, 1994 and 1993.
Cash and Cash Equivalents -- The carrying amounts approximated fair value due to the short maturity of these instruments.
Investment Securities -- The fair value of investments are based on quoted market prices.
Debt -- The fair value of the 9.25-percent notes was based on the quoted market price for that issue, while the fair value of the 3.93-percent notes was estimated based on quotes obtained from private investment firms. The difference between the carrying amount and the fair value of the Company's other debt obligations was not significant.
Interest Rate Instruments -- The Company periodically enters into various financial instruments to manage its interest rate exposure. At December 31, 1994, the Company had one outstanding interest rate swap agreement with a notional principal amount totaling $14 million. The notional amount reduces by $2 million quarterly through July 1996, with interest fixed at 8.15 percent.
The fair value of the open interest rate swap was the estimated amount that the Company would pay to terminate the swap agreement, taking into account current interest rates and the credit worthiness of the swap counterparties.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Commodity Price Hedges -- The Company enters into certain commodity derivative contracts to reduce the risk caused by fluctuations in the prices of oil and natural gas. During the last three years, Apache has used swaps, puts and fixed-price contracts to hedge its commodity prices. Apache's hedging activities are primarily conducted with major investment and commercial banks which the Company believes are minimal credit risks. The agreements call for Apache to receive, or make, payments based upon the differential between a fixed and a variable commodity price as specified in the contract.
At December 31, 1994, Apache had two open price swap contracts as discussed below. Also at December 31, 1994, Apache's Consolidated Balance Sheet included deferred credits totaling $.9 million for gains realized on the early termination of commodity price hedges. The hedging gains will be amortized to oil and gas production revenues over periods ranging from one to 38 months.
Apache entered into a swap agreement under which the Company will receive a fixed price of $2.1825 per MMBtu and pay the floating price on 10,000 MMBtu per day over a five-year period starting in January 1995. Based on the estimated amount Apache would receive to terminate the swap agreement, the fair value of this asset at December 31, 1994 was $3.3 million.
Apache also entered into a swap agreement, as discussed in Note 5, to become a fixed price payor on 20,000 MMBtu per day over a six-year period starting January 1995. The estimated amount Apache would have to pay to terminate this contract at December 31, 1994 was $6.4 million.
In connection with the purchase of MW Petroleum Corporation in mid-1991, the Company and Amoco Production Company (Amoco) entered into a hedging agreement. Under the terms of this agreement, Apache would receive support payments in the event oil prices fell below specified reference prices for any year during the two-year period ended June 30, 1993, and Amoco will receive payments in the event oil prices rose above specified reference prices for any year during the eight-year period ending June 30, 1999, or in the event gas prices exceeded specified reference prices for any year during the five-year period ending June 30, 1996. In the event price sharing payments are due to Amoco, the volumes listed below would be doubled until Amoco recovers its net payments to Apache ($5.8 million through the contract year ended June 30, 1994) plus interest.
The notional volumes and the reference prices specified in the Amoco price support agreement are summarized below:
Based on the Company's projection of oil and gas prices for the years noted above, Apache will not be liable to Amoco for future price sharing payments.
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Investment in Program Operations -- Prior to 1989, the Company organized numerous oil and gas limited partnerships. At December 31, 1994, Apache was contingently liable for $8.1 million of bank financing arranged by the Company on behalf of the Apache Offshore Investment Partnership (See Note 3).
As compensation for its services as general partner and operator, the Company shares in oil and gas revenues, receives a management fee in accordance with formulas described in each limited partnership agreement, and is reimbursed for administrative, exploration and production expenses incurred on behalf of the partnerships. These reimbursements ($.5 million, $.6 million and $4.8 million in the years 1994, 1993 and 1992, respectively) have been netted against operating expenses in the accompanying financial statements.
Litigation -- The Company is involved in litigation and is subject to governmental and regulatory controls arising in the ordinary course of business. It is the opinion of the Company's management that all claims and litigation involving the Company are not likely to have a material adverse effect on its financial position or results of operations.
Environmental -- Apache, as an owner and operator of oil and gas properties, is subject to various federal, 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, require suspension or cessation of operations in affected areas and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate ground water. Apache maintains insurance coverage which it believes are 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, 1994, which would have a material impact on its financial position or results of operations.
International Commitments -- The Company, through its subsidiaries, has acquired or has been conditionally or unconditionally granted exploration rights in Australia, The Congo, Egypt, China, Indonesia and the Ivory Coast. In order to comply with the contracts and agreements granting these rights, the Company, through various wholly-owned subsidiaries, is committed to expend approximately $50 million through 1997.
Retirement and Deferred Compensation Plans -- The Company provides a retirement/401(k) savings plan and a non-qualified retirement/savings plan for employees. These plans allow participating employees to elect to contribute up to 10 percent of their salaries, with Apache making matching contributions up to a maximum of six percent of each employee's salary. In addition, the Company annually contributes a percentage of each participating employee's compensation, as defined, to the plan. Vesting in the Company's contributions occurs at the rate of 20 percent per year. Total expenses under these plans were $5.2 million, $5 million and $4.2 million for 1994, 1993 and 1992, respectively.
APACHE CORPORATION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Lease Commitments -- The Company has leases for office space with varying expiration dates through 2007. Net rental expense was $4.1 million, $4.6 million and $5.7 million for 1994, 1993 and 1992, respectively.
As of December 31, 1994, minimum rental commitments under long-term operating leases are as follows:
10. CUSTOMER INFORMATION
Major Purchasers -- NGC has been the principal purchaser of Apache's spot market gas production since April 1990. Sales to NGC accounted for 40 percent, 36 percent and 27 percent of the Company's oil and gas revenues in 1994, 1993 and 1992, respectively. Sales to Amoco represented 11 percent and 27 percent of the Company's 1993 and 1992 oil and gas revenues, respectively, and were less than 10 percent for 1994.
Concentration of Credit Risk -- The Company's revenues are derived principally from uncollateralized sales to customers in the oil and gas industry; therefore, customers may be similarly affected by changes in economic and other conditions within the industry. Apache has not experienced significant credit losses on such sales. The Company believes that if the NGC contract was terminated, it would not have a material adverse effect on the Company due to the existence of alternative marketing arrangements and purchasers.
The proved gas reserves in the Carnarvon Basin of Western Australia acquired in the AERC acquisition are dedicated for sale to the Gas Corporation of Western Australia, a corporation owned by the government of Western Australia, doing business as AlintaGas (formerly SECWA), pursuant to a long-term, take-or-pay contract. If the AlintaGas contract were terminated, the Company might not be able to find other markets for the gas produced from these fields. Although the Company considers such an occurrence highly unlikely, the loss of the AlintaGas contract might force the Company to write-down the carrying value of these fields.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
Oil and Gas Operations -- The following table sets forth revenue and direct cost information relating to the Company's oil and gas exploration and production activities. Apache has no long-term agreements to purchase oil or gas production from foreign governments or authorities.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED) (UNAUDITED)
Costs Not Being Amortized -- The following table sets forth a summary of oil and gas property costs not being amortized at December 31, 1994, by the year in which such costs were incurred.
Capitalized Costs Incurred -- The following table sets forth the capitalized costs incurred in oil and gas producing activities.
Foreign acquisitions in 1993 included $16.8 million of unevaluated costs added through the merger of AERC.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED) (UNAUDITED)
Capitalized Costs -- The following table sets forth the capitalized costs and related accumulated depreciation, depletion and amortization, including impairments, relating to the Company's oil and gas production, exploration and development activities.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED) (UNAUDITED)
Oil and Gas Reserve Information -- Proved oil and gas reserve quantities are based on estimates prepared by the Company's engineers in accordance with guidelines established by the Securities and Exchange Commission (SEC). The Company's estimates of proved reserve quantities of its domestic properties and certain international properties are subject to review by Ryder Scott Company Petroleum Engineers, independent petroleum engineers. International proved reserves, for all periods presented below, are located in Australia.
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 data represents estimates only and should not be construed as being exact.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED) (UNAUDITED)
Future Net Cash Flows -- Future revenues are based on year-end prices except in those instances where the sale of natural gas 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 escalation.
The following table sets forth unaudited information concerning future net cash flows for oil and gas reserves, net of income tax expense. Income tax expense has been computed using expected future tax rates and giving effect to permanent differences and credits which, under current laws, relate to oil and gas producing activities. This information does not purport to present the fair market value of the Company's oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
* Estimated future net cash flows before income tax expense, discounted 10 percent, totaled approximately $1.40 billion, $1.36 billion and $1.06 billion as of December 31, 1994, 1993 and 1992, respectively.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED) (UNAUDITED)
The following table sets forth the principal sources of change in the discounted future net cash flows:
Impact of Pricing -- The estimates of cash flows and reserve quantities shown above are based on year-end oil and gas prices, except in those cases where future gas sales are covered by contracts at specified prices. Estimates of future liabilities and receivables applicable to oil and gas commodity hedges are reflected in future cash flows from proved reserves with such estimates based on prices in effect as of the date of the reserve report. Fluctuations are largely due to supply and demand perceptions for natural gas and volatility in oil prices.
Under SEC rules, companies that follow full cost accounting methods are required to make quarterly "ceiling test" calculations. Under this test, 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 tax reserves. Application of these rules during periods of relatively low oil and gas prices, even if of short-term duration, may result in write-downs.
Many full cost companies, including Apache, are concerned about the impact of prolonged unfavorable gas prices on their ceiling test calculations. A further deterioration of gas or oil prices from year-end levels would likely result in the Company recording a non-cash charge to earnings related to its oil and gas properties in the first quarter of 1995. SEC rules permit the exclusion of capitalized costs and present value of recently acquired properties in performing ceiling test calculations. Pursuant to these rules, Apache has requested waivers and the SEC has granted one-year waivers with respect to the properties acquired from Texaco and Crystal. If the ceiling is exceeded on all domestic properties, Apache will be required to perform an additional ceiling test excluding the Texaco and Crystal properties and record a write-down of carrying value if the ceiling is still exceeded.
APACHE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
INDEX TO EXHIBITS
___________________ * Filed herewith.
+ Management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 14 hereof.