ITEM 2. PROPERTIES
See ITEM 1 (c) for a description of properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 2001, there were 1,011 record holders of the Company's ordinary shares, $0.01 par value. The ordinary shares are traded sporadically in the over-the-counter market. The Company understands that the trades that occur are made both at the quoted market price or on a negotiated basis outside of the quoted market. The high and low bid prices listed below were provided to the Company by the National Association of Securities Dealers Automated Quotation System (NASDAQ).
The Company has historically paid its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent upon numerous factors, including, among others, earnings, levels of capital spending, changes in governmental regulations and changes in crude oil and natural gas prices. The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the Directors. Refer to "Liquidity and Capital Resources" on page 16 for additional discussion of future dividend payments.
The Company has been advised that: a Cayman Islands company may not pay dividends to shareholders out of its share capital or share premium account; there are no current applicable Cayman Islands laws, decrees or regulations relating to restrictions on the import or export of capital or exchange controls affecting remittances of dividends, interest and other payments to non-resident holders of the Company's ordinary shares; there are no limitations either under the laws of the Cayman Islands or under the Company's Memorandum or Articles of Association restricting the right of foreigners to hold or vote the Company's ordinary shares; there are no existing laws or regulations of the Cayman Islands imposing taxes or containing withholding provisions to which United States holders of the Company's ordinary shares are subject; and there are no reciprocal tax treaties between the Cayman Islands and the United States.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Internally generated cash flow from the Company's interests in the Entre Lomas joint venture is the Company's primary source of liquidity. In the past, the Entre Lomas operation has had the ability to finance development and exploration expenditures with internally generated cash flow and to distribute excess cash to the Company and the other joint venture partners.
The economic situation in Argentina worsened throughout 2001. The country's mounting debt and failure to control its fiscal deficit, eventually led to its inability to obtain additional funding from international lending agencies such as the International Monetary Fund ("IMF"). As a result, because of concerns by Argentine depositors about the peso's value, money began flowing out of the country at a rate that was unsustainable by the Argentine banking system.
Efforts by President De la Rua's administration to implement spending cut policies in order to achieve IMF targets were highly unpopular in a country where unemployment exceeds 20% after more than three years of recession. This combination of factors made it impossible for the country to maintain its adherence to the convertibility plan that guaranteed a peso to US dollar exchange rate of 1:1. A lack of both political and public support led to the resignation in mid December 2001 of President De la Rua and his economy minister Domingo Cavallo, who up to the very end insisted that the government would not stray from its adherence to the convertibility plan and who in order to stem the flow of funds out of the country and protect the local banking system halted the foreign exchange operations of Argentine banks in December.
After a revolving door of Presidents that were appointed to office by Argentina's congress but quickly resigned in reaction to public outcry, Eduardo Duhalde was appointed President of Argentina to hold office until the next regularly scheduled Presidential election in 2003.
President Duhalde's new economic team immediately proceeded to declare default on Argentina's $130 billion debt and to overturn the long standing but unsustainable convertibility plan by devaluing the peso and establishing an official exchange rate of 1.4 pesos to 1 US dollar. In addition, the flow of funds in and out of the country is to be regulated, approved and executed by the Central Bank of Argentina, essentially restricting the liquidity of Argentines, and companies with operations in Argentina accustomed to moving excess cash flow and profits out of the country.
In addition to the above major changes, three monetary and commercial reforms in particular impact the Company's operations. The first is the requirement that domestic commercial transactions, or contracts for sales in Argentina that are denominated in US dollars, as was the case with approximately 40% of the company's 2001 oil and LPG sales and 100% of the company's 2001 gas sales, must be liquidated in the country in Argentine pesos at an exchange rate to be negotiated by sellers and buyers. Second, export sales, as was the case with approximately 60% of the Company's 2001 oil sales, can be liquidated in international banks, with the requirement that 30% of these sales be repatriated to Argentina and converted to Argentine pesos. Third, a new 20% tax on imports has been decreed on the value of hydrocarbon export sales. Such tax went in effect March 1, 2002 and is to be in effect for 5 years.
The effect of these new economic reforms on the Company's liquidity and results of operations is not yet certain for the following reasons. Many of the implementing regulations have not yet been issued. Intense industry lobbying may result in modifications to some of these reforms. Most
importantly, it must be seen how individuals and company's operating in Argentina react to the reforms and whether the economy stabilizes quickly.
An example of how in flux the current state of Argentina's economy is, in late January, the official exchange rate of 1.4 pesos to the US dollar established when President Duhalde assumed office, was abandoned in favor of a floating rate of exchange. Also, in spite of issuing an executive decree ordering the implementation of the 20% tax on oil exports, the government now seems to be sending out signals that it may modify the nature of this tax.
Since the rate of exchange required to be used to re-measure the Company's peso denominated assets and liabilities is the floating rate, it is clear that for now these new reforms negatively impact the average price in US dollars of the Company's oil and gas sales, with the partially offsetting benefit that the Company's cost of operations in the country will decline. As a result, for the foreseeable future, the Company's cash flow and results of operations will be negatively impacted in a manner that cannot yet be quantified. Furthermore, with the Central Bank now regulating the flow of funds out of Argentina, the Company's ability to transfer funds to its Cayman Island banks is currently limited to the payments in US dollars received from its export customers.
Uncertainty with respect to the level of impact of these economic reforms is the result of various factors that cannot as yet be determined and that must evolve over time. The most important of these is the government's ability to control inflation that may result in response to devaluation and the country's possible need to increase the nations money supply in an effort to reactivate the country's economy after three plus years of recession. The ability to control inflation will determine ultimately the confidence that Argentines and foreigners can place on the value of the Argentine peso and whether the spread between the commercial exchange rates currently being negotiated between sellers and buyers and the floating exchange rate will shrink or be eliminated.
In spite of the uncertainty described in the previous paragraphs, and the negative impact that recent events will have for the foreseeable future on the company's cash flow and results of operations, it is expected that internally generated cash flow will continue to fund the Company's operations in Argentina.
As described previously, one of the principal changes to come out of these new economic reforms is that for the foreseeable future the Central Bank of Argentina is regulating the flow of funds out of the country. This restricts the Company's ability to move excess cash flow out of the country and also restricts Petrolera's ability to pay dividends abroad. For the time being, Apco's out of country access to its Argentine cash flow is limited to payments received for its export sales, seventy percent of which are not required to be returned to Argentina.
PRODUCT PRICES
Volatility in oil prices has a significant impact on the Company's ability to generate earnings, fund capital requirements and pay shareholder dividends. Throughout the year 2000 and the first three quarters of 2001, the per barrel sales price of the Company's oil remained above the $25 level. As a result, the Company participated in aggressive capital programs in both the Entre Lomas and Acambuco concessions. During the fourth quarter of 2001, world oil prices quickly dropped and the Company's per barrel sales price averaged $17. Oil prices have since strengthened as a result of OPEC production cuts that were recently implemented, increased demand for crude oil as a result of a rebound in economic activity in parts of the world, and uncertainty about the state of Venezuela's government possibly impacting oil production in that country. Many factors affect oil markets, including among others, major exploration discoveries throughout the world, the level of development investments in the oil and gas industry, fluctuations in market demand, adherence by OPEC member nations to production quotas, and future decisions by OPEC to either increase or
decrease quotas. Recent economic reforms in Argentina are for the foreseeable future also impacting the company's product prices. As described previously in the sections "Oil Sales" on page 4 and "Gas Sales" on page 5, the Company's effective US dollar product prices for its domestic sales in Argentina have fallen as a result of these reforms.
OIL PRODUCTION AND SALES VOLUMES
During 2001, oil production net to the Company's consolidated and equity interests totaled 1.795 million barrels compared with 1.803 million barrels during 2000. The current level of production reflects results of drilling and workovers performed during 2001 that added production that essentially replaced normal production declines in existing fields. Oil sales for the same periods, net to the Company's combined interests totaled 1.756 million barrels and 1.800 millions barrels, respectively. Any difference between production and sale volumes is the result of inventory fluctuations, volume shrinkage from transportation losses and differences in the API gravity of crude oil delivered to the buyer.
CAPITAL SPENDING
The following are the major components of the 2001 capital program. During the year, the Entre Lomas joint venture partners continued to successfully drill development wells in the CB/PB, Entre Lomas and Borde Mocho fields while extending the size of the Lomas de Ocampo field to the northwest. Sixteen wells were drilled in Entre Lomas including one injection well and the El Caracol 33-xp well that was not successful at the intended target, the deep Precuyano formation. Secondary recovery operations were expanded in the Entre Lomas oil field bringing the number of injection wells in the field to 20 and additional producing wells in the CB/PB field were converted to injection. Finally, we continued the program to recomplete certain wells in the CB/PB field to the Quintuco formation.
In Acambuco, construction of production facilities, gas pipelines and a gas treatment plant were completed in the first quarter of the year. In addition, the joint venture drilled two development wells in the San Pedrito field, and drilled horizontal extensions of two wells on the Macueta structure.
In all, the Company's capital spending during 2001 totaled $7 million net to its consolidated interests of which $923 thousand represents the Company's direct interest cost associated with that portion of the El Caracol 33-xp well that was charged to expense during the fourth quarter of 2001. The Company's share of Entre Lomas capital spending that flowed through it's equity interest in Petrolera totaled an additional $6 million of which $989 thousands related to the expensed portion of the exploration well.
It is not yet clear what impact economic events in Argentina, the devaluation of the Argentine peso, and the negative effect these events have had on the Company's sales prices for domestically sold products will have on the capital budget for 2002 that totals $6.3 million for the Company's consolidated interests and $5.4 million for its equity interest in Petrolera. The Company and its partners have agreed to review proposed investments over the next quarter to determine whether to proceed with programs as originally planned or whether to curtail investment.
APCO GLOBEX MERGER
As described in all of the quarterly reports on Form 10-Q filed during 2001, on April 5, the Company and Globex Energy Inc. entered into an Agreement and Plan of Merger. After exhaustive attempts to complete the merger, on December 28, the Companies jointly announced that they had mutually agreed to terminate the merger agreement. The cumulative merger related costs incurred by the
Company during the year, including legal, accounting, banker and other merger costs totaled $2.3 million. These costs were expensed during the fourth quarter of 2001.
DEVALUATION OF ARGENTINA'S CURRENCY
As described previously in the section "Cash Flow," as part of the economic reforms implemented by President Duhalde, the convertibility plan was revoked in early January 2002 and as a result the Argentine peso was devalued. Foreign exchange operations of Argentine banks were suspended in mid December 2001 and the suspension was not lifted until January 11, 2002. When foreign exchange operations reopened, the free-floating peso to US dollar rate of exchange was 1.65:1. In accordance with the requirements of FASB Statement No. 52, Foreign Currency Translation, since foreign exchange operations were not permitted at December 31, 2001, exchangeability of the Argentine peso was lacking and the exchange rate of 1:1 that existed when exchange operations were suspended was not appropriate for conversion to US dollars of peso denominated monetary assets and liabilities that existed on December 31, 2001. As a result, the free-floating rate of exchange of 1.65:1 that existed on the day exchange operations were resumed was used to re-measure peso denominated monetary assets and liabilities to US dollars in the Company's Consolidated Financial Statements as of December 31, 2001.
OBLIGATORY SAVINGS
As described in Note 8 of Notes to Consolidated Financial Statements, in June 2001, the Entre Lomas joint venture partners completed making the Obligatory Savings Deposit in the amount of 9.2 million pesos, which payments were made in twelve equal installments commencing in June 2000. The Company's direct part of this deposit is 2.1 million pesos. The equity part of this deposit imbedded in the Company's Investment in Petrolera is 2.2 million pesos. Since these deposits were made prior to the devaluation of the Argentine peso described in the preceding paragraph, during a period when the peso to US dollar exchange rate was 1:1, they were originally recorded at an equivalent US dollar amount on the Company's and Petrolera's accounts. Due to the devaluation of the Argentine peso, the conversion to US dollars as of December 31, 2001 of the Company's direct share of the deposit generated a foreign currency exchange loss of $800 thousand. The exchange loss related to its Petrolera equity part of the deposit generated a similar loss of $900 thousand dollars, which loss was recorded as a charge to equity income from Argentine investment.
DIVIDENDS
The Company currently pays its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent on numerous factors, including among others, earnings, levels of capital spending, fluctuations in crude oil and natural gas prices, changes in Argentine governmental regulations, and as of the end of 2001, restrictions imposed by the Central Bank of Argentina on the movement of excess cash flow and profits out of Argentina.
The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the directors.
RESULTS OF OPERATIONS
REFER TO CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGE 24.
2001 VS 2000
During 2001, the Company generated net income of $8.5 million compared with $22.2 million during 2000. The primary reasons for the $13.7 million decrease are explained in the following paragraphs.
Operating revenues decreased by $4.9 million, or 16%, as a result of lower oil sales caused by a decline in the Company's average oil sales price of $5.21 per barrel during 2001. Refer to the table "Volume, Price and Cost Statistics" on page 49. Equity income from Argentine investments decreased by $5.9 million, or 50%.
Operating expense increased by $854 thousand due to a greater level of facilities upgrades and equipment maintenance and overhauls, an increase in the number of well workovers including injection wells, the cost of employee severance in the Entre Lomas concession, and operating expenses in Acambuco that commenced production operations in 2001. Selling and administrative expense increased by $2.7 million as a result of $2.3 million of costs directly associated with the terminated Apco/Globex merger, and engineering consultant expenses incurred in connection with a reservoir simulation study. Depreciation, depletion and amortization increased by $372 thousand. Exploration expense increased by $379 thousand due to dry hole costs of $923 thousand associated with the drilling of the El Caracol 33-xp well described in the section "Exploration" on page 8, partially offset by the lack of exploration expense in 2001 in Acambuco. Since March 2001, when Acambuco went on production, expenses there are being accounted for as operating expense. Other expense in 2001 includes $557 thousand of foreign exchange losses due to the devaluation of monetary assets and liabilities at December 31, 2001 that resulted from the Argentine peso's devaluation described in the section "Liquidity and Capital Resources" on page 16.
The negative variance described in the previous paragraphs were partially offset by lower provincial production taxes associated directly with the decrease in operating revenues, and lower income taxes associated directly with the decrease in income before income taxes.
With the exception of the negative variances in selling and administrative expense, and the increase in operating expense relating to the start up of production operations in Acambuco, the variance comparisons described in the previous three paragraphs that relate to Entre Lomas serve as explanations for the 50% decrease in the Company's equity income from Argentine investments. This equity income represents the Company's share of Petrolera's net income. Petrolera is the operator of the Entre Lomas concession, and its sole business is its interest in the Entre Lomas joint venture.
2000 VS 1999
During 2000, the Company generated net income of $22.2 million compared with $9.5 million during 1999. The primary reasons for the $12.7 million increase are explained in the following paragraphs.
Operating revenues increased by $10.9 million, or 56%. Equity income from Argentine investments increased by $5.9 million, or 98%. The increase in operating revenues was primarily the result of higher oil sales caused by the sharp rise in the Company's oil sales price during 2000. Refer to the table "Volume, Price and Cost Statistics" on page 49.
The positive effect of the increased oil price was complemented by an 8% increase in oil sales volumes and the reversal of the obligatory savings contingency reserve that is described in Note 8 under "Tax Disputes". The reversal of the reserve is reported as "other income" in the Consolidated Statement of Operations. These positive comparisons with last years results, were partially offset by the following factors: a 16% decrease in Entre Lomas gas sales volumes, increased operating expense that resulted from the added cost of a more aggressive well workover campaign carried out in Entre Lomas, increased provincial production taxes resulting directly from the increase in operating revenues, and increased Argentine income taxes resulting directly from the increase in the Company's before tax income.
The variance comparisons described in the previous two paragraphs that relate to Entre Lomas serve as explanations for the 98% increase in the Company's equity income from Argentine investments. This equity income includes the Company's share of Petrolera's net income. Petrolera is the operator of the Entre Lomas concession, and its sole business is its interest in the Entre Lomas joint venture.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of its financial condition and results of operation are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. Note 1 to the Company's consolidated financial statements, contained elsewhere in the Form 10-K, contains a comprehensive summary of the Company's significant accounting policies. The following is a discussion of the Company's most critical accounting policies, judgements and uncertainties that are inherent in the Company's application of GAAP.
Proved reserve estimates. Estimates of the Company's proved reserves included in this consolidated financial statements and elsewhere in this Form 10-K are prepared in accordance with guidelines established by GAAP and by the SEC. The accuracy of a reserve estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation of that data; (iii) the accuracy of various mandated economic assumptions; and (iv) the judgement of the persons preparing the estimate.
The Company's proved reserve information is based on estimates it prepared. Estimates prepared by others may be higher or lower than the Company's estimates. Because these estimates depend on many assumptions, all of which may substantially differ from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.
The present value of future net cash flows should not be assumed to be the current market value of the Company's estimated proved reserves. In accordance with SEC requirements, the Company based the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate.
The Company's estimates of proved reserves materially impact depletion, depreciation and amortization expense. If the estimates of proved reserves decline, the rate at which the Company records depletion, depreciation and amortization expense increases, reducing net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost reserves. In addition, the decline in proved reserve estimates may impact the outcome of the Company's assessment of its oil and gas producing properties for impairment.
Revenue recognition. Revenue is a key component of the Company's results of operations and also determines the timing of certain expenses, such as severance taxes and royalties. The Company follows a very specific and detailed guideline of recognizing revenues when oil and gas are
delivered to the purchaser. However, certain judgements affect the application of the Company's revenue recognition policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause the Company's operating results to vary significantly from quarter to quarter and could result in future operating losses.
Argentina economic and currency measures. The accounting for and translation of the Company's Argentina balance sheet as of December 31, 2001, reflects management's assumptions regarding some uncertainties unique to Argentina's current economic situation. See Note 10 to the Company's consolidated financial statements, contained elsewhere in the Form 10-K, for a description of the assumptions utilized in the preparation of these consolidated financial statements. The Argentine economic and political situation continues to evolve and the Argentine government may enact future regulations or policies that, when finalized and adopted, may materially impact, among other items, (i) the realized prices the Company receives for the commodities it produces and sells as a result of new taxes; (ii) the timing of repatriations of cash to the US; (iii) the Company's asset valuations; and (iv) peso-denominated monetary assets and liabilities.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's operations are exposed to market risks as a result of changes in commodity prices and foreign currency exchange rates.
COMMODITY PRICE RISK
The Company produces and sells crude oil and natural gas, and the Company's financial results can be significantly impacted by fluctuations in commodity prices due to changing market forces. The Company has historically not used derivatives to hedge price volatility.
FOREIGN CURRENCY AND OPERATIONS RISK
The Company's operations are located in Argentina. Therefore, the Company's financial results may be affected by factors such as changes in foreign currency exchange risks, weak economic conditions, or changes in Argentina's political climate.
ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT
Prior to 1989 and the election of President Carlos Menem, Argentina had experienced decades of economic uncertainty manifested by extended cycles of severe inflation and corresponding currency devaluation. Although parallel markets, such as the Bonex market, developed for freely moving funds in and out of the country, historically, the Central Bank of Argentina set the exchange rate for the Country's currency and regulated the movement of funds. In general, most economic activity in Argentina was controlled by the state including imports and exports, the oil and gas industry, communications, aviation etc.
Since 1989, with the election of Carlos Menem, Argentina's government has pursued free market policies, including the privatization of state-owned companies, deregulation of the oil and gas industry, tax reforms to equalize tax rates for domestic and foreign investors, liberalization of import and export laws and the lifting of exchange controls.
The cornerstone of the country's economic reforms since 1989 was its change in monetary policy. In April 1991, after a year of 5,000% inflation, the convertibility law was implemented establishing an exchange rate of one Argentine peso to one US dollar. The convertibility plan required that the country's monetary base be backed by an equivalent amount of international reserves including US dollars and gold. Essentially, the policy guaranteed an exchange rate of 1:1. As explained later, Argentina did not stray from this policy until January 2002.
These policies were successful as evidenced by the elimination of inflation within two or three years, and an influx of foreign investment capital into the country that led to substantial economic growth during the mid 1990's. However, over the last eleven years the Argentine government has failed to balance its fiscal budget, incurring repeated significant fiscal deficits that resulted in the accumulation of $130 billion of debt. Having tied its currency to the US dollar, the peso over time came to be overvalued, especially in light of the Brazilian devaluation of 1999. As a result, Argentine exports became less competitive in international markets while at the same time imports into Argentina became more competitive. This combination of factors led to a recession that has lasted three plus years and resulted in an unemployment rate exceeding twenty percent.
During 2000, President De la Rua's administration implemented various policies in an attempt to reduce Argentina's fiscal deficit including personal income tax increases that resulted in the unintended consequence of a notable reduction in internal consumption. Late in 2000, fears arose in financial markets about Argentina's ability to repay its debt and the possibility of debt default. At that time, the International Monetary Fund provided Argentina with a substantial assistance program predicated on the government taking steps to reduce its fiscal deficit.
In March 2001, President De la Rua appointed Domingo Cavallo as his new Minister of Economy. Mr. Cavallo was the Economy Minister that had implemented the convertibility law and other deregulation reforms adopted by Argentina in the early 1990's. During the remainder of the year, Mr. Cavallo achieved a successful debt swap of short-term bonds for long-term ones, and pushed through the adoption of a controversial zero deficit fiscal policy, which required highly unpopular government spending cuts. Financial markets lacked confidence in the government's ability to stay the course for lack of political support for President De la Rua and Minister Cavallo. Eventually, the country was unable to obtain additional funding from the IMF, ultimately leading to the resignation of President De la Rua and his entire administration.
After a revolving door of President's that were appointed to office by Argentina's congress but quickly resigned in reaction to public outcry, Eduardo Duhalde was appointed President of Argentina to hold office until the next regularly scheduled Presidential election in 2003.
President Duhalde's new economic team immediately proceeded to declare default on Argentina's $130 billion of debt and to overturn the long standing but unsustainable convertibility plan by devaluing the peso and establishing an official exchange rate of 1.4 pesos to 1 US dollar. Furthermore, the flow of funds in and out of the country at the new official exchange rate is to be regulated, approved and executed by the Central Bank of Argentina.
In addition to the above major changes, the government has prohibited the payment abroad in US dollars for domestic sales and is requiring the repatriation of 30% of export sales paid abroad. Finally, the new government has implemented new taxes against the oil and gas industry.
In late January, the official exchange rate of 1.4 pesos to the US dollar established when President Duhalde assumed office, was abandoned in favor of a floating rate of exchange. As of the end of February 2002, the peso to US dollar exchange rate was 2.2 pesos to the dollar.
The long-term effects of these economic events cannot as yet be determined as Argentina's current situation is in flux. For a description of the immediate effects of this turmoil, refer to the following sections: "Sale of Oil" on page 4, "Sale of Gas" on page 5 and "Liquidity and Capital Resources" on page 16.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Apco Argentina Inc.:
We have audited the accompanying consolidated balance sheets of Apco Argentina Inc. (a Cayman Islands corporation) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of Apco Argentina Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma March 1, 2002
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share)
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands Except Per Share)
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
GENERAL INFORMATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Apco Argentina Inc. (a Cayman Islands corporation) and its wholly owned subsidiary, Apco Properties Ltd. (a Cayman Islands corporation), which are herein collectively referred to as the Company. The Company has only one business segment and is engaged exclusively in joint ventures in oil and gas exploration, development and production in Argentina. Its principal businesses are a 23% participation in the Entre Lomas Concession (Entre Lomas, an unincorporated joint venture), which is accounted for following the proportional consolidation method, and a 33.684% interest in Petrolera Perez Companc S.A. (Petrolera, a privately owned Argentine corporation), which is accounted for following the equity method (see Note 3). Petrolera owns a 73.15% interest in Entre Lomas. The Company also owns a 1.5% interest in the Acambuco concession and a 45% interest in the Canadon Ramirez concession. All of the Company's operating revenues and equity income, and all of its long-lived assets are in Argentina.
A wholly owned subsidiary of The Williams Companies, Inc. ("Williams") currently owns 68.96% of the outstanding ordinary shares of the Company.
Oil and gas operations are high risk in nature. A successful operation requires that a company deal with uncertainties about the subsurface that even a combination of experience, scientific information and careful evaluation cannot always overcome.
Because the Company's assets are located in Argentina, management has historically been required to deal with threats from inflation, devaluation and currency controls (see Note 10).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CHANGE IN ACCOUNTING POLICY
Prior to 2001, the Company utilized proportionate consolidation for its investment in Petrolera because Petrolera's only activity is its participation in Entre Lomas. Management believed that such presentation was a better and more substantive disclosure of the Company's total investment in Entre Lomas than would be provided using equity accounting. During 2000, the Emerging Issues Task Force reached a consensus in EITF No. 00-1 that proportionate consolidation was not appropriate for corporate entities such as Petrolera. EITF 00-1 is effective for annual periods ending
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
after June 15, 2000. Accordingly, the Company implemented EITF No. 00-1 effective December 31, 2000 and retroactively applied such change by the restatement of all prior period information in these financial statements. Such restatement had no effect on previously reported net income or earnings per share (see Note 3).
REVENUE RECOGNITION
The Company recognizes revenues from sales of oil, gas, and plant products at the time the product is delivered to the purchaser and title has passed. Any product produced that has not been delivered is reported as inventory and is valued at the lower of cost or market. When cost is calculated, it includes total per unit operating cost and depreciation. Transportation and storage costs are recorded as expenses when incurred. The Company has had no contract imbalances relating to either oil or gas production.
PROPERTY AND EQUIPMENT
The Company uses the successful-efforts method of accounting for oil and gas exploration and production operations, whereby costs of acquiring non-producing acreage and costs of drilling successful exploration wells and development costs are capitalized. Costs of unsuccessful drilling are expensed as incurred. Oil and gas properties are depreciated over their productive lives using the units of production method based on proved producing reserves. Non oil and gas property is recorded at cost and is depreciated on a straight-line basis, using estimated useful lives of 3 to 15 years.
The Company reviews its proved properties for impairment on a concession by concession basis and recognizes an impairment whenever events or circumstances, such as declining oil and gas prices, indicate that a property's carrying value may not be recoverable. If an impairment is indicated, then a provision is recognized to the extent that the carrying value exceeds the present value of the estimated future net revenues ("fair value"). In estimating future net revenues, the Company assumes costs will escalate annually and applies an oil and gas price forecast that it believes to be reasonable after reviewing long-term forecasts of professional energy consultants. Due to the volatility of oil and gas prices, it is possible that the Company's assumptions regarding oil and gas prices may change in the future. For the years ended December 31, 2001, 2000 and 1999, the Company did not record any impairment expense as the estimated future undiscounted net revenues exceeded the carrying value of its properties.
NET INCOME PER ORDINARY SHARE
Net income per ordinary share is based on the weighted average number of ordinary shares outstanding. Basic and diluted net income per ordinary share are the same, as the Company has not issued any potentially dilutive securities such as stock options.
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FOREIGN EXCHANGE
The general policy followed in the translation of the Company's financial statements of foreign operations into United States dollars is in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, using the United States dollar as the functional currency. Accordingly, translation gain and losses that arise from exchange rate fluctuations applicable to transactions denominated in a currency other than the United States dollar are included in results of operations as incurred.
INCOME TAXES
Provision is made for deferred Argentine income taxes applicable to temporary differences between the financial statements and tax basis of the assets and liabilities, if any.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended by Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS No. 133 on January 1, 2001. The adoption had no impact on the Company's financial statements, as it is not currently using derivative instruments. Additional volatility in earnings and comprehensive income may occur as a result of the adoption of SFAS No. 133, should the Company use derivative instruments in the future.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life, but assessed annually for impairment by applying a fair-value-based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged,
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regardless of the acquirer's intent to do so. As a result, there will be more recognized intangible assets, such as non-patented technology and database content, separated from goodwill. Those assets will be amortized over their useful lives, other than assets than have an indefinite life. SFAS 142 application is required, starting with fiscal years beginning after December 15, 2001. The Company has no intangible assets and therefore the adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Currently the Company accrues such future abandonment costs of wells and related facilities through its depreciation, depletion and amortization calculation, and includes the cumulative accrual in accumulated depreciation, depletion and amortization. The new standard will require that the Company record the entire fair value of the retirement obligation as a cost of the well at the time it is drilled or acquired. The liability will accrete over time with a charge to interest expense. The new standard will apply to financial statements for the years beginning after June 15, 2002. While the new standard will require that the Company change its accounting for such abandonment obligations, the Company has not had an opportunity to evaluate the impact of the new standard on its financial statements.
As of December 31, 2001, the Company has accrued and classified in accumulated depreciation, depletion and amortization a total of $1.7 million of future abandonment costs relating to its direct interest in the Entre Lomas concession. The Company's present total undiscounted estimate of such costs to be incurred in the future is approximately $2.9 million net to its direct interest in the joint venture based on $27 thousand per well. Such estimate is based on current cost estimates for well abandonment net of estimated salvage. The Company has not incurred any significant abandonment costs to date and does not expect to incur any significant costs during the next several years. The accrual for future abandonment costs included in depreciation, depletion, and amortization expense for the years indicated, expressed in thousands, is as follows:
In August 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes accounting and reporting standards to establish a single accounting model, based on the framework established in SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, for long-lived assets to be disposed of by sale. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The
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provisions of this Statement generally are to be applied prospectively. The Company adopted SFAS 144 as of January 1, 2002, and does not believe that the adoption will have a material impact on its financial position or results of operations.
(2) ENTRE LOMAS JOINT VENTURE
As discussed in Note 1, the Company owns a 23% direct interest in Entre Lomas. It also owns a 24.64% indirect interest by virtue of its 33.684% stock ownership in Petrolera, the operator of the joint venture, which owns 73.15% of the joint venture. Consequently, the Company's combined direct and indirect interests in the Entre Lomas joint venture total 47.64%. The joint venture is engaged in the exploration, development and production of oil and gas in the Entre Lomas concession located in the provinces of Rio Negro and Neuquen in southern Argentina.
The Company's direct pro-rata share of the assets, liabilities, revenues and expenses of Entre Lomas are reflected in the Company's Consolidated Financial Statements using proportional consolidation.
(3) INVESTMENT IN PETROLERA PEREZ COMPANC S.A.
As described in Note 1, the Company accounts for its investment in Petrolera using the equity method of accounting, whereby the investment account is increased, and equity income is recognized, for the Company's share of Petrolera's net income. Dividends from Petrolera are recorded as a reduction of the investment. Petrolera is a non-public Argentine corporation. The Petrolera balance sheet as of December 31, 2001 and 2000, and income statement for each of the three years in the period ended December 31, 2001, are as follows:
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PETROLERA PEREZ COMPANC S.A. INCOME STATEMENTS
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The "Argentine GAAP" financial data above is stated in thousands of U.S. dollars, the Company's reporting currency. Petrolera's reporting currency is the Argentine peso. The Company plans to file the full audited financial statements of Petrolera, a foreign investee, when available.
The Company's carrying amount of its investment in Petrolera is less than its proportionate share of the net equity (basis difference) by $0.8 million as of December 31, 2001. The basis difference was created in periods prior to 1991 when the Company accounted for its interest in Petrolera under the cost recovery method due to past economic conditions in Argentina. The Company amortizes the basis difference to equity income based on the unit-of-production depreciation rate of Petrolera's oil and gas property interests in Entre Lomas. Such amortization totaled $245,000, $18,000 and $218,000 during 2001, 2000 and 1999, respectively.
At December 31, 2001 undistributed earnings of Petrolera included in the Company's retained earnings balance was approximately $29.8 million.
(4) CASH EQUIVALENTS
Cash and cash equivalents include highly liquid bank deposits of $13,600,000 and $14,238,000, with interest ranging from 1.38 - 1.95% and 5.99 - 6.19% in 2001 and 2000, respectively.
The carrying amount reported in the balance sheet for cash equivalents, accounts receivable and accounts payable is equivalent to fair value.
(5) MAJOR CUSTOMERS
Sales to customers with greater than ten percent of total operating revenues consist of the following:
* Less than 10 percent
Management believes that the credit risk imposed by this concentration is offset by the creditworthiness of the Company's customer base and that upon expiration, the oil sales contracts of these customers will be extended or replaced.
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(6) RELATED PARTY TRANSACTIONS
The Company paid $560,000, $205,000, and $147,000 in 2001, 2000 and 1999, respectively, to Williams and affiliates for management services, overhead allocation, general and administrative expenses and purchases of materials and supplies. Accounts payable to Williams and affiliates outstanding at December 31, 2001 and December 31, 2000, were approximately $200,000 and $351,000, respectively.
The Company is dependent on Williams as it relates to certain employees performing services for the Company, and certain other costs such as rent, reproduction, office supplies, computer support, etc. Williams directly charges Apco monthly for the time and associated costs of employees based on an allocation of time dedicated to the affairs of Apco. Apco also utilizes certain executive support services of Williams, primarily the time of the Company's executive officers who are also officers of Williams for which the Company accrues an executive support allocation charge by Williams.
(7) CAYMAN ISLANDS AND UNITED STATES INCOME TAXES
The Company incorporated in the Cayman Islands in 1979. Since then, the Company's income, to the extent that it is derived from sources outside the U.S., generally is not subject to U.S. Federal income taxes. Also, the Company has been granted an undertaking from the Cayman Islands government, expiring in 2019, to the effect that the Company will be exempt from tax liabilities resulting from tax laws enacted by the Cayman Islands government subsequent to 1979. The Cayman Islands currently has no applicable income tax or corporation tax and, consequently, the Company believes its earnings are not subject to U.S. income taxes or Cayman Islands income or corporation taxes. All of the Company's income during 2001, 2000 and 1999 was generated outside the United States.
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(8) ARGENTINE TAXES
The Company recorded Argentine taxes as presented in the following table. Amounts are stated in thousands of dollars. The Company is not subject to taxes in any other jurisdiction.
Income tax deposits made by the Company throughout 2001 exceed the total income tax expense recorded for the year. Consequently, at December 31, 2001, the Company's balance sheet reflects an income tax receivable of $358 thousand. Argentina income taxes payable at December 31, 2000 was $3.2 million.
The deferred Argentine income tax provision relates primarily to certain costs capitalized for U.S. reporting purposes that are expensed for Argentine local reporting and tax purposes. The deferred tax liability at December 31 consists of the following (in thousands):
TAX DISPUTES
In 1988, the Argentine government amended the Obligatory Savings Law requiring that all taxpayers deposit with the government, both in 1988 and 1989, amounts computed on the basis of prior year taxable incomes. It was the opinion of the Entre Lomas joint venture partners and Petrolera's legal and tax counsel that it was exempt from these deposits due to the tax exemption granted in the original Entre Lomas contract number 12,507. As a result, the deposits were not made.
In August 1993, the Direccion General Impositiva ("DGI"), the Argentine taxing authority, made a claim against Petrolera for the delinquent deposits pertaining to the Entre Lomas operation, which including interest and indexation for inflation, amounted to $9.2 million. An appeal was filed by Petrolera in Argentine Federal Tax Court, which ruled in favor of the DGI in April 1997. Petrolera appealed the ruling before Federal Appeals Court which
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in November 1998, ruled in favor of Petrolera. Subsequently the DGI filed an appeal with the Supreme Court which in May 2000 ruled in favor of the DGI requiring Petrolera and its Entre Lomas partners to make the $9.2 million obligatory savings deposit and pay court costs totaling $1.7 million or $2.1 million and $391 thousand, respectively, net to the Company's consolidated interest in Entre Lomas.
The Obligatory Savings Law provides that taxpayers are entitled to receive a full refund of the deposit in pesos, plus interest based on Argentina's national savings rate, sixty months from the date of making the deposit. However, the law also stipulates that deposits made after the original due date are subject to a penalty of fifty percent of the amount deposited, or $1.1 million net to the Company's consolidated interest in Entre Lomas.
Four months prior to the Supreme Court's ruling, the Argentine government on January 27, 2000 issued Decree P.E.N. No. 93/00, offering existing tax debt consolidation to all Argentine tax payers that had outstanding tax obligations owing the DGI. Among the outstanding tax obligations covered by this tax moratorium offer were those obligations owing the DGI that were under judicial consideration on the date the decree was published. Under the decree, the due date for filing the moratorium tax return was May 31, 2000, which was eventually extended for all taxpayers to June 26, 2000. Furthermore, the Decree offered penalty and sanction exemptions to taxpayers complying with the requirements of the moratorium.
In May 2000, when the Supreme Court rendered its ruling, the offer to take advantage of the tax moratorium was available to Petrolera and its Entre Lomas partners. Given that the Obligatory Savings dispute was under judicial review on the date the moratorium decree was published, Petrolera and its Entre Lomas partners determined that because of the penalty and sanction exemptions offered by the moratorium decree, it was to their advantage to pay the Obligatory Savings Deposit pursuant to a twelve month installment plan offered by the Argentine government in connection with the moratorium. Petrolera filed the moratorium tax return for the partners and the first installment payment was made on June 16, 2000.
Since the moratorium decree provides for penalty and sanction exemptions, and Petrolera and the Entre Lomas partners complied with all of the requirements of the moratorium decree, Petrolera, the Company, and its tax advisors concur that the Entre Lomas partners will not be subject to the aforementioned penalty and consequently will receive full reimbursement of the deposit at the end of five years. Therefore, in the third quarter of 2000, the Company and Petrolera reversed previously recorded probable loss contingencies amounting to $1.1 million, net to the Company.
The $9.2 million deposit, $2.1 million net to the Company's direct interest in Entre Lomas, was to be paid in twelve installments. This amount was recorded as a current liability in June 2000 and an equivalent offset was recorded as another asset to reflect the reimbursement of the deposit after five years. Also, as a consequence of the moratorium, the $1.7 million in court costs, or $391 thousand net, were reduced to $394 thousand, or $91 thousand net. Court costs were recorded as an expense in June 2000. A total of
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$9.9 million, or $2.3 million net, that included installment interest and court costs, was paid from June 2000 through June 2001 eliminating the current liability recorded in June 2000. Installment interest was charged to expense as the installments were paid. The following table summarizes the various components of the total amount paid.
In February 1993, the Neuquen Tax Bureau demanded that Petrolera pay the Stamp Tax on Additional Clause No. 3, the third amendment to the original Entre Lomas contract number 12,507. Petrolera appealed this decision before the Tax court of the province and lost. In March 1994, Petrolera deposited $1.6 million, the sum claimed. After various appeals, all of which had unfavorable results, in October 2001, a new appeal was filed by Petrolera before the National Supreme Court. A decision by the Supreme Court is pending.
Should Petrolera not prevail in the Supreme Court, in the opinion of its management and legal counsel, it is entitled to seek reimbursement from the National Executive Power pursuant to terms of contract 12,507. The National Executive Power assumed YPF S.A.'s pending obligations when YPF S.A., the former state owned oil company of Argentina, was privatized. Accordingly, the amount deposited was recorded as a receivable by Petrolera and the Company.
(9) LONG-TERM LIABILITIES
At December 31, 2001 and 2000, other current liabilities and long-term liabilities consisted of the following:
(10) ARGENTINE CURRENCY FLUCTUATIONS
Beginning in 1991, the Argentine peso ("peso") was tied to the US dollar at a rate of one peso to one US dollar. As a result of economic instability and substantial withdrawals from the banking system, in early December 2001, the Argentine
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government instituted restrictions that prohibited foreign money transfers without Central Bank approval and prohibited cash withdrawals from bank accounts above a certain amount with certain limited exceptions. While the legal exchange rate remained at one peso to one US dollar, financial institutions were allowed to conduct only limited activity due to these controls, and currency exchange activity was effectively halted except for personal transactions in small amounts. These actions by the government in effect caused a devaluation of the peso in December 2001. On January 11, 2002, the foreign currency markets re-opened with the floating exchange rate closing at a range of 1.6 to 1.7 pesos to one US dollar.
Because exchangeability of the peso was lacking from early December 2001 to January 11, 2002, the Company used the estimated exchange rate of 1.65 pesos to one US dollar at January 11, 2002 (the first rate subsequent to year end at which exchanges could be made) to translate peso-denominated balances at December 31, 2001, and peso-denominated transactions during December 2001. This translation generated a net foreign currency exchange loss of $557 thousand (included in other income (expense) on the statement of operations).
On January 6, 2002, the Argentine government enacted an emergency law that required certain contracts that were previously payable in US dollars to be payable in pesos. US dollars in Argentine banks on this date were converted to pesos at a rate of 1.4 pesos to one US dollar. Pursuant to the emergency law, US dollar obligations between private parties due after January 6, 2002, are to be liquidated in pesos at a negotiated rate of exchange, which reflects a sharing of the impact of the devaluation. The emergency law requires the obligor to make an interim payment of one peso per US dollar of the claim and provides a period of 180 days for the parties to negotiate the final amount to settle the US dollar obligations.
Absent the January 6, 2002, emergency law, the devaluation of the peso would have had no effect on the US dollar-denominated payables and receivables at December 31, 2001. Therefore, the effect of this involuntary conversion will be recorded in 2002.
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(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
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UNAUDITED SUPPLEMENTAL OIL AND GAS INFORMATION
OIL AND GAS RESERVES
The following tables summarize, for each of the years presented, changes in quantities, and balances of net proved oil, condensate and plant product reserves for all the Company's interests in Argentina as estimated by the Company's independent reserve engineers.
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The following tables summarize, for each of the years presented, changes in quantities, and balances of net proved natural gas reserves for all the Company's interests in Argentina as estimated by the Company's independent reserve engineers.
Natural Gas
Due to changed circumstances in Argentina resulting from the country's recent economic problems, described in the following sections: "Argentine Economic and Political Environment" on page 22 and "Liquidity and Capital Resources" on page 16, the Entre Lomas joint venture partners feel that because the granting of the ten year extension requires government approval, it is now appropriate to differentiate between reserves estimated to be produced through 2016, and reserves expected to be produced over the ten year extension period. Although the Entre Lomas partners have since
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1968 successfully obtained Entre Lomas contract extensions on several occasions, both Apco and Petrolera feel that reserves attributable to the extension period, or 2017-2026, that would otherwise be classified as proved using conventional engineering methods of estimating reserves, should in light of changed circumstances, be reclassified to the probable category. This reclassification has been identified separately in the preceding tables of oil and gas reserves.
There were no estimates of total proved net oil or gas reserves filed with any other United States Federal authority or agency during 2001.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table summarizes as of December 31, for each of the years presented, the standardized measure of discounted future net cash flows from proved oil and gas reserves that could be produced from all of the concessions in which the Company holds interests in Argentina.
(1) Estimates are made of quantities and timing of future production of oil and gas reserves.
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(2) Estimates of gross revenues from sales are made using prices in effect at December 31 for each year presented. The year-end per barrel oil price for 2001 was $17.66, as compared with $26.16 and $24.98 for 2000 and 1999, respectively. Gas prices for all years are based on gas sales contracts in effect during the respective years.
(3) Estimated production, transportation, marketing and development costs are based on the current cost of similar services and include all future capital expenditures.
(4) Estimated taxes consider all taxes to which the Company is subject in Argentina.
(5) Conversion to U.S. dollars is made utilizing the rate of exchange at December 31 for each of the years presented.
For the years 2000 and 1999, the rate of exchange was 1:1. Due to economic problems in Argentina that culminated in December, the Argentine government declared an exchange rate holiday from mid December until January 11. When exchange operations reopened, the rate of exchange was 1.65 pesos to 1 US dollar. Therefore, as required by FASB Statement No. 52, Foreign Currency Translation, a rate of 1.65:1 was used to convert peso denominated revenues and expenditures.
(6) The impact on the standardized measure of the reclassification to probable reserves of 4.6 mmbbls of estimated oil reserves and 2.5 bcf of estimated gas reserves expected to be produced during the extension period of 2017-2026 is less than 3%.
DISCOUNTED FUTURE NET CASH FLOWS PRESENTED HEREIN MAY NOT BE RELIABLE DUE TO THE DIFFICULTY OF ESTIMATING REMAINING RECOVERABLE RESERVES. ESTIMATES OF OIL AND GAS RESERVES AND RATES OF FUTURE PRODUCTION ARE INHERENTLY IMPRECISE AND CHANGE OVER TIME, AS NEW INFORMATION BECOMES AVAILABLE. AS A RESULT, SUBSEQUENT REVISIONS OF THE QUANTITY AND VALUATION OF PROVED RESERVES MAY BE SIGNIFICANT.
CHANGES IN STANDARDIZED MEASURE
The following analysis summarizes for each of the years presented the factors that caused the increases (decreases) in the amount of standardized measure attributable to the estimate of the Company's Argentine proved oil and gas reserves.
Total Including Equity Interest in Petrolera
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The standardized measure sensitivity that results from assuming the conditions that existed on the day the foreign exchange holiday commenced is $89 million, or a decrease of $85 million. This value is representative of prices and costs as of the date the foreign exchange holiday commenced when the exchange rate was still 1 peso to 1 US dollar and reflects no devaluation of either revenues or expenditures.
Most oil and gas sold by the Company domestically in Argentina is priced in US dollars and is paid for in pesos. Certain domestically purchased goods and services are also priced in US dollars and paid for in pesos. As described elsewhere in this document, as required by the Argentine government, the exchange rates for payment in January of these types of sale and purchase transactions that occurred in December 2001 were negotiated between sellers and buyers at rates that were less than the free floating rate of exchange. This has the effect of reducing the effective US dollar price and the US dollar cost of domestic sales and purchases.
The standardized measure sensitivity that results from assuming this effect, or conditions that existed after the day foreign exchange operations reopened, is $81 million. The decrease in value of $8 million from the previously described no devaluation sensitivity is representative of the effect the peso devaluation had on both the Company's revenues and expenditures.
DRILLING ACTIVITY
During 2001, the Company participated in the drilling of 19 gross wells, and 8 net wells (4 pertaining to the Company's consolidated interests, 4 to its equity interest in Petrolera). During 2000, the Company participated in the drilling of 17 gross wells, and 7 net wells (3 pertaining to the Company's consolidated interests, 4 to its equity interest in Petrolera). During 1999, the Company participated in the drilling of 15 gross wells and 6 net wells (3 pertaining to the Company's consolidated interests, 3 to its equity interest in Petrolera). Of the 51 gross wells drilled, and 21 net wells (10 pertaining to the Company's consolidated interests, 11 to its equity interest in Petrolera) over the three year period, all were development wells except 1 exploration well in Entre Lomas in which the Company has direct and indirect interests totaling 47.64%, and 3 exploration wells in Acambuco in which the Company has a 1.5% interest. All wells drilled over the three-year period were productive except 1 dry hole in Acambuco.
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WELL COUNT AND ACREAGE
The total gross and net well count from all acreage in which the Company has an interest is as follows:
The Company currently holds interest in three concessions with a total surface area of 542,571 acres, 132,810 acres net to the Company (87,603 acres pertaining to its consolidated interests, 45,207 to its equity interest in Petrolera). Developed acreage in the three concessions totals 44,599 acres, 18,850 acres net to the Company (9,141 acres pertaining to its consolidated interest, 9,709 acres to its equity interest in Petrolera). Undeveloped acreage in the three concessions totals 497,872 acres, 113,960 acres net to the Company (78,462 acres pertaining to its consolidated interests, 35,498 acres to its equity interest in Petrolera).
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
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VOLUME, PRICE AND COST STATISTICS
The following table shows total sales volumes of crude oil and condensate and natural gas and average sales prices and production costs for the last three years.
Volumes presented in the above table represent those sold to customers and have not been reduced by the 12% provincial production tax, which is paid separately and is accounted for as an expense by the Company. In calculating royalty payments, the Argentine producers are entitled to deduct gathering, storage, treating and compression costs.
Average production cost is calculated by taking into consideration all costs of operation, including the costs of remedial well workovers and depreciation of property and equipment. The per unit cost of depreciation included in average production cost for oil and gas is $3.42 and $.16, respectively.
Prices and costs for the consolidated interest and equity interest in Petrolera are the same. The two interests represent different ownership percentages in the Entre Lomas joint venture.
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COSTS INCURRED IN ACQUISITIONS, EXPLORATION, AND DEVELOPMENT
The following table details total expenditures for acquisitions, exploration, and development made by the Company during the current and two previous years. No acquisition costs were incurred by the Company during the three years.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors and hold office until relieved of such office by action of the Board of Directors.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None.
(d) FAMILY RELATIONSHIPS
There are no family relationships between any director or executive officer and any other director or executive officer in the Company.
(e) BUSINESS EXPERIENCE
Mr. Barnard is and has been President and General Manager of Williams International Company a wholly owned subsidiary of Williams since September 2000. He was previously Venezuelan Country Manager for Williams International from 1997 through August 2000 and prior to that, Managing Director of Business Development of Williams International. During the latter part of 2001, while the Company was endeavoring to complete the Apco/Globex merger, Mr. Barnard devoted as much as 20% of his time to the Company's business. Subsequently, he has devoted approximately 5% of his time to the Company's affairs.
Mr. Williams is engaged in personal investments. He was Chairman of the Board and Chief Executive Officer of Williams prior to retiring at the end of 1978. Mr. Williams is a director of Unit Corporation, Westwood Corporation, Willbros Group, Inc. and Petrolera Perez Companc S.A. Mr. Williams is retired and the time he devotes to the business of the Company is limited to the time required to perform his duties as a Director of Apco and a member of its Audit Committee.
Mr. Bueno has been employed by Williams since 1984 and has held various positions with the Company since 1985. Mr. Bueno is a director of Petrolera Perez Companc S.A. Mr. Bueno devotes approximately 90% of his time to the Company's business.
J. D. McCarthy is Senior Vice President of Finance of Williams. He was previously Vice President and Treasurer of Williams from 1987 through 1991.
Mr. LaFortune is self-employed and manages personal investments. He is the former Mayor of the city of Tulsa and was a retired Director of The Williams Companies, Inc. He is also a Director of the Bank of Oklahoma Financial Corporation.
Mr. Wright is and has been President and Chief Operating Officer of Williams Energy Services, since September 2001 as well as President and Chief Operating Officer of Williams Energy Partners L.P. since February 2001. He was previously Senior Vice President, Enterprise Development and Planning for Williams Energy Services from 1998-2001 and President and Chief Operations Officer of Williams Energy Derivitives and Trading from 1998-1996.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
(a) CASH COMPENSATION
Mr. Barnard receives no salary, bonus, or other compensation from the Company, and neither Williams nor Williams International charges the Company for Mr. Barnard's time in serving as the Company's Chief Executive Officer. No other executive officer of the Company has a total annual salary and bonus in excess of
$100,000. No other compensation was awarded to, earned by, or paid to any of the Company's executive officers of a nature required to be reported herein. The Company understands that it is the position of Williams that Mr. Barnard's compensation as an officer of Williams includes compensation for his responsibilities for Williams' investments, including its investment through Williams Global Energy in the Company, and that no additional compensation from the Company is appropriate.
Apco is dependent on Williams as it relates to its executive officers. Williams directly charges Apco monthly for the time and associated costs of Mr. Bueno and his administrative assistant based on an allocation of time dedicated to the affairs of the Company. The Company is also charged an executive support allocation by Williams for the services of Mr. Barnard and any other executive support other than Mr. Bueno.
(b) COMPENSATION PURSUANT TO PLANS
None.
(c) OTHER COMPENSATION
None.
(d) COMPENSATION OF DIRECTORS
Directors who are employees of Williams receive no additional compensation for service on the Board of Directors. Directors who are not employees of Williams receive an annual retainer of $8,000 and an additional fee for attending Board meetings of $500 per meeting. Additionally, Directors who are not employees of Williams and who serve on the audit committee receive a fee of $500 for attending audit committee meetings. The Chairman of the audit committee receives an annual retainer of $1,000. Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board or otherwise by reason of their being a director.
(e) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
None.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AT DECEMBER 31, 2001
(b) SECURITY OWNERSHIP OF MANAGEMENT AT DECEMBER 31, 2001
Each of the directors of the Company beneficially owns ten shares of the Company's ordinary shares, $.01 par value, as director's qualifying shares.
(c) CHANGES IN CONTROL
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related-party transactions are disclosed elsewhere herein in Notes 1 and 6 to the Notes to Consolidated Financial Statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements filed in this report are set forth in the Index to Consolidated Financial Statements under Item 8. All schedules have been omitted as the required information has been included in the consolidated financial statements and notes thereto, or because the schedules are not applicable or required.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
Exhibit Number -------
*(3) - Memorandum of Association of Apco Argentina Inc. as amended August 20, 1980, as filed with Form 10-K of the Company for the fiscal year ended on December 31, 1980, Commission File No. 0-8933 dated April 30, 1981.
*(3) - Articles of Association of Apco Argentina Inc. as filed with Form S-14 (Registration No. 2-6354), dated March 16, 1979.
*(10) - Agreement dated April 23, 1981, among the Company and Bridas S.A.P.I.C., with respect to the Acambuco project, Salta province, Argentina, as filed with Form 10-K, No. 0-8933, dated April 14, 1982.
*(10) - Agreement dated March 13, 1968, between Perez Companc and YPF for the Exploration, Exploitation and Development of the "Entre Lomas" area, Contract Number 12,507 as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Translation dated November 18, 1970, of agreement dated March 13, 1968, between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated April 1, 1968, among Apco Oil Corporation, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated February 29, 1972, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated March 23, 1977, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Contract dated December 1977 amending the March 13, 1968 Agreement between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Memorandum of Agreement dated August 16, 1979, among the Company, Perez Companc and Petrolera as filed with Form 10-K, No. 0-8933, dated March 28, 1980.
*(10) - Agreement dated December 7, 1983, between Petrolera and YPF regarding the delivery of propane and butane from the Entre Lomas area, as filed with Form 10-K, No. 0-8933, dated April 12, 1983.
*(10) - CONTRACT FOR THE EXPLORATION, EXPLOITATION AND DEVELOPMENT OF THE "ENTRE LOMAS" AREA, dated July 8, 1982 between Yacimientos Petroliferos Fiscales Sociedad Del Estado and Petrolera Perez Companc, Inc. relating to the extension of Contract No. 12,507, as filed with Form 10-K, No. 0-8933, dated April 12, 1983.
*(10) - ADDITIONAL CLAUSE NUMBER 3 dated December 18, 1985, to the agreement between Perez Companc and YPF covering the Entre Lomas area dated March 13, 1968 and attached translation as filed with Form 10-K, No. 0-8933, dated April 11, 1988.
*(10) - Agreement between the Joint Committee created by the Ministry of Public Works and Services and the Ministry of Energy, YPF and Petrolera Perez Companc S.A. dated December 26, 1990, constituting the conversion to concession and deregulation of the original Entre Lomas contract number 12,507.
(24) - Power of attorney.
(99) - Notification of Arthur Andersen LLP representations.
* Exhibits so marked have been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference.
SIGNATURE
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.
APCO ARGENTINA INC. (Registrant)
Dated: March 21, 2002 By: /s/ Thomas Bueno ---------------------------- Thomas Bueno Attorney-in-Fact
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 date indicated.
INDEX TO EXHIBITS
* Exhibits so marked have been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference.