Apache AR 2003


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Apache AR 2003

  1. 1. 2003 Summary Annual Report
  2. 2. 50 YEARS BUILDING LAST OF TO GROWING Through discovery APACHE CORPORATE PROFILE Established in 1954 with $250,000 of investor capital, Apache Corporation has grown to become one of the world’s top inde- pendent oil and gas exploration and production companies with APACHE’S QASR TEAM, KHALDA CONCESSION, $12.4 billion in assets. Apache’s U.S. operations are focused in EGYPT’S WESTERN DESERT some of the nation’s most important producing basins, including We are proud and excited to be on the team that the Outer Continental Shelf of the Gulf of Mexico, the Anadarko made what is perhaps the most significant dis- Basin of Oklahoma, the Permian Basin of West Texas and New covery in Apache’s history. Qasr is located in a Mexico, the Texas-Louisiana Gulf Coast and East Texas. In remote area on one of Apache’s westernmost Canada, Apache is active in British Columbia, Alberta, concessions in Egypt. To the casual observer, Saskatchewan and the Northwest Territories. The company also this area appears to be little more than a desolate has operations in the Carnarvon Basin offshore Western Australia, wasteland, but to geologists, geophysicists and Egypt’s Western Desert and offshore in the Mediterranean, the petroleum engineers—not to mention Apache United Kingdom sector of the North Sea, China and Argentina. shareholders—it’s a petroleum paradise. Prior to Apache’s arrival, the Western Desert was viewed as a relatively unimportant hydrocar- MAKING A DIFFERENCE bon play. A number of major oil and gas compa- Apache urges all who share a commitment to education to support nies operated in the area with limited success. the Fund for Teachers, a program which recognizes and encourages Their eventual pull-out left the door open to pre-kindergarten through 12th-grade teachers through grants for Apache for both exploration and exploitation. summer travel, and the Ucross Foundation, which provides artist-in- Qasr’s geology is characterized by highly pro- residence programs, meeting facilities for consensus-building, and a ductive sands in hydrocarbon columns that rival model of land stewardship integrated with open-space initiatives in or exceed the height of the Washington Wyoming. For more information, or to make a contribution to the Monument. And with a field area roughly the Fund for Teachers, please contact Karen Kovach Webb, Executive size of Manhattan Island, we have a lot of run- Director, 2000 Post Oak Boulevard, Suite 100, Houston, Texas, ning room for exploration and development. Apart from its significant gas and condensate 77056, or e-mail smiles@fundforteachers.org. For more information reserves, Qasr is important in another respect: or to make a contribution to the Ucross Foundation, please contact Coupled with exploration successes offshore Michelle Sullivan, President, 30 Big Red Lane, Clearmont, Wyo., Egypt and Western Australia, Qasr demonstrates 82835, or e-mail ucross@wyoming.com. that Apache is a discovery company, growing as much with the drill bit as we do through acquisi- tions and exploitation. (At the Qasr-2X wellhead, with Qasr-7X drilling in the background, left to right, front row are: Regional Geophysicist Jeff Reck; Gas Plant Operations Manager Warren Ford; General Manager and Managing Director Jim House; Exploration Manager John Polasek. Back row: Drilling Manager Jeff Hubbard; Engineering Manager Fernando Araujo; Field Operations Manager Mark McCool; Prospect Manager James Crowley; Operations Manager David Talbott; Field Operations Manager Johnny Allison; and Geophysical Expert Gabriele Mariotti. All titles are for Apache’s Khalda COVER PHOTO v Petroleum Company joint venture.)
  3. 3. PERFORMANCE HIGHLIGHTS: Apache Corporation and Subsidiaries For the Year Ended December 31, (Dollars in millions, except per-common-share data) 2002 2001 2003 FINANCIAL HIGHLIGHTS Revenues and other $ 2,560 $ 2,809 $ 4,190 Income attributable to common stock 544 704 1,116 Diluted net income per common share 1.80 2.37 3.43 Cash from operations before changes in operating assets and liabilities(a): Net cash provided by operating activities $ 1,381 $ 1,905 $ 2,706 Changes in operating assets and liabilities 186 22 95 Cash from operations before changes in operating assets and liabilities $ 1,567 $ 1,927 $ 2,801 Total assets $ 9,460 $ 8,934 $ 12,416 Long-term debt 2,159 2,244 2,327 Shareholders’ equity 4,924 4,418 6,533 Cash dividends paid per common share .19 .12 .21 OPERATIONAL HIGHLIGHTS Oil and gas capital expenditures (including acquisitions, gas gathering, transmission and processing facilities and goodwill) $ 1,288 $ 2,652 $ 3,150 Natural gas production (MMcf/d) 1,080 1,127 1,217 Oil and condensate production (Mbbls/d) 161 156 215 Proved reserves (MMboe) 1,313 1,267 1,657 Per-share results have been adjusted to reflect the five percent and 10 percent common stock dividends declared in 2002 and 2001, respectively, and the two-for-one stock split declared in 2003. (a) NON-GAAP FINANCIAL MEASURE This annual report discusses Apache’s cash from operations before changes in operating assets and liabilities. It is presented because management believes the information is useful for investors because it is used internally and widely accepted by those following the oil and gas industry as a financial indicator of a company’s ability to generate cash to internally fund exploration and development activi- ties, fund dividend programs, and service debt. It is also used by research analysts to value and compare oil and gas exploration and production companies, and is frequently included in published research when providing investment recommendations. Cash from operations before changes in operating assets and liabilities, therefore, is an additional measure of liquidity, but is not a measure of finan- cial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing, or financing activities. Statement of Consolidated Cash Flows . . . . . . . . . . . . . 24 CONTENTS Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . 25 A Record Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Statement of Consolidated Shareholders’ Equity . . . . . . . . 26 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Eleven-Year Statistical Summary . . . . . . . . . . . . . . . . . . 28 Strategy and Operations Review . . . . . . . . . . . . . . . . . . . 10 Oil and Gas Reserve Information . . . . . . . . . . . . . . . . . . 30 Apache Worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Future Net Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 32 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Shareholder Information . . . . . . . . . . . .Inside Back Cover Statement of Consolidated Operations . . . . . . . . . . . . . 23 Mboe Thousand barrels of oil equivalent ABBREVIATIONS Mboe/d Thousand barrels of oil equivalent per day Mcf Thousand cubic feet (of gas) MMboe Million barrels of oil equivalent MMBtu Million British thermal units Bbls Barrels MMcf Million cubic feet Mbbls Thousand barrels MMcf/d Million cubic feet per day Mbbls/d Thousand barrels per day Bcf Billion cubic feet MMbbls Million barrels Bcfe Billion cubic feet of gas equivalent NGLs Natural gas liquids Tcf Trillion cubic feet Boe Barrel of oil equivalent Six Mcf of gas is the energy equivalent of one barrel of oil. 1
  4. 4. A RECORD YEAR Earnings ($ millions) Assets ($ billions) Net Cash Provided by Operating Activities ($ millions) 1200 12 2800 2400 10 1000 2000 8 800 1600 6 600 1200 4 400 800 2 400 200 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Proved Reserves (MMboe) Annual Production (MMboe) Capitalization ($ billions) Gas Gas Debt Liquid Hydrocarbons Liquid Hydrocarbons Equity 1600 150 9 130 1200 6 90 800 60 3 400 30 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03
  5. 5. FELLOW SHAREHOLDERS: T hree forces combined in 2003, our 49th year, to go into this phenomenon comes at the expense of the shareholders the record book as a great one: and any society so inured to its impact that it loses its ability to • Commodity prices were strong; and additional value was differentiate between appropriate and contemptible behavior. largely captured for shareholders because a relatively With Apache’s longer-term horizons, we have managed to small portion of Apache’s production was hedged. remain a growth company over our first five decades, and we • Production volumes rose substantially, while reserves are in a strong position to continue doing so. increased beyond depletion, adding value to our asset The market value of Apache shares increased 49 percent base, lengthening our reserve life and increasing capacity. during 2003. Among a group of eight peer companies, • Costs of operations and overhead were kept under control. Apache placed first in market performance over the past We compared favorably with our competitors in these one-, five- and 10-year periods. categories. We had the lowest finding costs in our peer Over 10 years, our shareholders gained 301 percent com- group – another important operating measure. pared with an average gain of 70 percent among our peers. In summary: Price times volume, minus cash and non-cash Over the same 10-year period, Apache approximately dou- charges, represents the basic elements of performance. bled the percentage gain of the three leading averages: The Responsible and respectable debt ratios, represented by our “A” Dow Jones Industrial Average was up 179 percent; the credit rating (the best in our peer group), reduce the cost of Standard & Poor’s 500 Index was up 138 percent; and the money as well as the need to hedge production to protect cap- NASDAQ Composite Index was up 157 percent. ital expenditures, which are our investments in future growth. Here is another perspective for shareholders with long- With Apache now in its 50th year, we believe the energy term time horizons: The adjusted cost basis of a share of industry – the world’s largest – continues to afford a superior Apache common stock acquired in 1954 for $10 is now 4.4 long-term opportunity for investors, employees and those cents per share, the result of stock dividends and splits and with whom we interact on a responsible business basis. reinvesting cash dividends. Perhaps our five decades of experience have provided the We started paying dividends in 1965, our 11th year. At perspective to avoid the pitfalls of chasing unsustainable rates the current annual rate of 24 cents per share, the cash yield of quarter-over-quarter growth because we have seen business on original common shares is more than five times the and commodity cycles punish or obliterate firms caught up in original share cost basis. Apache’s current cash dividends such a pursuit. In the near term, management of these firms on shares currently outstanding approximate $80 million may accrue some benefits in the form of undeserved com- per year – or 324 times the original shareholders’ aggregate pensation and ego boosts, noted in recent scandals. However, investment of $250,000. 1956 REVENUES PRODUCTION $ 629,820 N/A EARNINGS RESERVES $ 88,773 151,560 Bbls TOTAL ASSETS $ 814,723 944 MMcf 3
  6. 6. 1965 REVENUES Production $ 22.8 million 1,300 Bbls/d EARNINGS 7.6 MMcf/d $ 1.1 million Reserves 3.1 MMbbls TOTAL ASSETS $ 39.4 million 50.7 Bcf What drives Apache forward is an internal culture – a core area new to Apache – the United Kingdom sector of including credibility from commitments kept and perform- the North Sea – brought acquisitions to a total of $1.6 billion ance achieved – to pursue orderly long-term growth in har- in 2003. Unlike drilling capital, which is planned, budgeted mony with our equity investors, whom we differentiate from and allocated closely, acquisition capital is neither budgeted trader-speculators who deal in a process of rapid turnover or nor allocated. Why? The specific timing of acquisitions is “churning” in the market with limited or non-existent long- not predictable. While that activity is a major focus, it is term identity of interest or loyalty. treated as non-recurring. In Democracy in America, Alexis de Tocqueville, the This is a vital activity, but a two-way process, requiring trenchant 19th Century French observer, wrote that constant contact and honorable relationships with a number Americans are different from citizens of other nations of the world’s largest energy companies as they shift, update because the young nation “relies on personal interest and and match their portfolios to their changing needs. The gives free scope to the unguided strength and common sense question is not one of “whether,” but “when.” We seek of individuals.” always to be ready. We do not waste our people’s time or We would add that this spirit is not now limited to morale kicking tires or “kissing frogs” in the auction process. Americans – it is a state of mind embraced by our employ- Steve and I would like to turn now from our enthusiasm ees throughout the world. about the present and for the future to some of the threats we An example of the way this outlook benefits Apache currently experience and foresee mounting for corporate shareholders – and provides excitement – is the discovery of America and its investors with longer-term horizons. oil and gas. Our technical teams, drawn from many nations, Our discussion is rooted in our aspiration to create an had an outstanding year in this arena, with notable discov- identity of interest among diverse peoples and to add to the eries in Egypt and Australia, and many Apaches feel that planet’s well-being, however modestly. we’ve just begun to tap the potential. Throughout the 20th century, the multi-faceted energy Discovery value does not have to be run through the prof- industry became the world’s largest and remains a major it and loss statement to increase the value of the underlying driver of living standards for citizens of developed nations. assets; it is the product of the capacity and dedication of our Over the next century, energy affords the prospect of bring- people to drive the enterprise and climb the ladder of suc- ing a better living standard for developing countries, where cess and fulfillment. half the world’s families live on $2 per day or less. We invite your attention to the operations section (page While we gladly accept our responsibility to help elevate 10) of this report for more on Apache’s exploration success- living standards, we also believe it is appropriate to identify es in 2003. and address two obstacles which have become rising hurdles Two acquisitions in the Gulf of Mexico and our entry into as we view 2004 and beyond.
  7. 7. 50 YEARS BUILDING LAST OF TO Publicly owned corporate America in 2004 continues to result in countless reports requiring much effort but produc- be immersed in scandals as a result of the actions of some ing limited value at best. Recently, these proposed resolu- individuals in positions of corporate and personal power who tions have shifted markedly toward opportunities for the pro- have used social, economic and political leverage to disad- ponents to advance their particular single-issue agendas. vantage not only others, but our country here and globally. These demands fit into a predictable pattern: Most refer- Apache stands for prompt identification and vigorous pub- ence their share ownership (often minuscule), assert that lic punishment of wrongdoing followed by increased trans- they represent shareholders’ interests, and imply their poten- parency that raises the bar of compliance with moral stan- tial influence over our other institutional investors. A typical dards. As a company and individually, we are proud of our opening paragraph presumes their common interest with us roles in these efforts, together with the media and appropri- in good governance and proceeds to tell of their particular ate legislation and regulation. interest and network of those whom they purport to advise. Unfortunately, the physical principle of “for every action The threat, though unstated, is implicit. To date, none there is an equal and opposite reaction,” is also alive. Just as have shown or demonstrated any interest in the company’s one shoe size does not fit all feet, the remedies do not dif- business, its financial and operational performance, or the ferentiate between good and bad behavior. responsibilities we accept. In fact, many are form letters; one Uncertainty, massive legal costs, and frightened account- received was misaddressed to a competitor instead of Apache. ing firms separated from their moorings all heap costly and For the most part, these demands are, in our judgment, variable interpretations on corporations. These uncertain- inflammatory. Acquiescing would come at the expense of ties magnify costs and the frustrations of managers, directors shareholders and deprive management of the focus that is and board committees, ultimately engulfing all levels of essential to conduct a successful enterprise. both corporations and nations. We are reminded of a comment by the late Hugh Take, for example, governance “reforms” introduced by Harrison, who was an outstanding person and an Apache the Sarbanes-Oxley legislation and other Washington director: “Designing change for others is fun; no responsi- responses to Enron-like scandals. One model would install a bility for the outcome.” “lead director” separated from management, but with duties In his recent book Financial Reckoning Day, author Bill that are well covered, we believe, within Apache’s existing Bonner suggests where we are headed: “Democracy is dif- structure. Throughout our history, the company has had two ferent. It invites people into the governing class and thus titles consisting of chairman and president; the board and turns them into unpaid agents of the government, and ulti- management agree that these positions for now should be mately their own oppressors.” separately occupied rather than consolidating the duties of We see it as a more serious challenge to Apache share- chairman, chief executive officer, and chief operating offi- holder interests – and to America – than our need to find oil cer in a single person. To introduce a lead director or any and gas and hold costs and debt in appropriate ratios to prof- director nominated outside our established practice risks itability and balance sheet capacity. divisiveness and unwise intrusion. Bonner also quoted Tocqueville, this time concerning a Perhaps of larger concern to us is the growing number of worrisome aspect of American democracy: well-intended demands for access to our governance struc- “After having thus successively taken each member of the ture through letters, e-mail, “required” responses, demands community in its powerful grasp and fashioned him at will, for special committees, and access to our proxies, which will the supreme power then extends its arm over the whole 5
  8. 8. 50 YEARS BUILDING LAST OF TO FOCUSED LEADERSHIP community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, RAYMOND PLANK - FOUNDER AND CHAIRMAN G. STEVEN FARRIS - CEO, PRESIDENT AND COO to rise above the crowd. The will of man is not shattered, but soft- ened, bent and guided … men are seldom forced to act, but they Fifty years ago this December, Apache was are constantly restrained from acting … Such a power does not founded with $250,000 of seed money and a destroy, but it prevents existence; it does not tyrannize, but it com- vision of building a company to last, with a long- presses, enervates, extinguishes, and stupefies a people… term, as opposed to quarter-to-quarter focus. “Thus, their spirit is gradually broken … gradually losing the fac- Central to that vision, then and now, are values: ulties of thinking, feeling, and acting for themselves. People then integrity; respect for people, other cultures and console themselves at the loss of their liberties by the reflection that the environment; entrepreneurial spirit; and a they have chosen their own guardians.” sense of urgency in everything we do. In a healthy corporate environment such as Apache’s, employees Those values continue to serve us well. We have enough self-respect and strong enough personal values to understand who we are, where we are going, and avoid blurring the line between strong ethics and amorality. on whose behalf we are working—our sharehold- ers, our employees, the citizens of those countries You may find one of a number of positive examples refreshing. where we operate, and society as a whole. We are An Apache father of two children had the wrenching experience of part of the largest industry in the world, energy, losing his wife to cancer. In the months following her death, Apache and know that it is the key to economic growth and friends brought meals and cheer to the family; others sent memorials rising standards of living everywhere. Because we to the church that had sustained his family during its trials. derive benefits from the Earth, we realize that pro- The day after the funeral, one of his friends called his office and tecting the environment is part of our charge, and asked, “And why aren’t you with your family?” He responded. we accept that responsibility willingly. “Apache is my family, too.” Having just completed the most profitable year One recent evening, more than an hour after Apache’s official in Apache’s history, we look back with much work day had ended, we walked to our board room to greet and thank pride and a little bit of amazement at how far we the people serving on a committee to select 82 Houston public have come. Some of our greatest strides have school teachers for Fund for Teachers grants for summer sabbaticals. been made over the last decade—achieving crit- The same Apache employee was present, pitching in to help his ical mass, seeing our international strategy pay community. (We will describe this program in greater detail later.) off, leading our sector in so many performance “Corporate values” is a phrase that may be overworked, with pos- indicators, making a difference by exposing cor- ruption in the energy merchant-trading sector, sible traces of self-serving rhetoric. Some tout it, mouthing the and brick by brick, building Apache to last. appropriate words but lacking the appropriate behavior. We appreciate our loyal shareholders, our ded- Let us describe how we use the heading and then brand it differ- icated employees and our industry partners at ently. Our values reflect and help drive what we seek to become. home and abroad for their continued confidence Values are at the core of individual and corporate and institutional and pledge to make the next 50 years as prof- culture; they need to be lived as they progressively empower and itable and rewarding as was Apache’s first half- become an integral part of the whole. century. (Steve Farris, left, and Raymond Plank.) Strategically and corporately that is why, in our acquisitions, we 7
  9. 9. 1974 Revenues Production $201.6 million 4,050 Bbls/d Earnings 46.5 MMcf/d $ 6.9 million Reserves 6.6 MMbbls Total Assets $192.4 million 118.6 Bcf seek to acquire assets rather than organizations. We find ative visual artists and writers to find the solitude and the assets that fit our strategy for creating long-term shareholder opportunity to realize more of their creative potential – is an wealth. Then, our people take over, working and growing important part of Ucross. Annie Proulx (who won a Pulitzer the base. Prize for The Shipping News, a novel written in part at We believe in our culture because we have tested, among Ucross) once wrote of purpose “casting a shadow into the many other examples, the value of attracting highly capable, future.” To date, 1,100 artists from all states and many coun- motivated individuals to people our growing enterprise. It ties have benefited. serves us in “building to last.” Twenty-two thousand acres is a theater of beauty in At Apache our people are encouraged to participate in which to study, preserve and improve the environment, to their communities – both for what they provide and what promote conservation of wildlife, landscape and streams, to they personally derive from their volunteer efforts. Apache employ holistic land management, and to plant several matches dollar contributions and provides time off to facili- thousand trees. tate the process. In this area of Wyoming, production of coalbed While Apache and its employees supported more than methane (CBM) from shallow depths containing potable 240 philanthropic, educational and civic organizations water is an environmental threat. Today, a consortium of financially in 2003, we prefer to concentrate on innova- industry, state and federal land and mineral bureaus is col- tion; we believe our profitable growth supports correspon- laborating on a study, headed by a senior Stanford ding efforts in these areas. In a rapidly changing global University professor, of the impact of CBM development scene, our preference is to build and innovate rather than on water, air and land resources. limit our support to the panoply of fine institutional phil- Apache is one of the industry funders of the study. anthropic organizations. However, to avoid conflicts of interest, we have said we will That is the context for our discussion of the ways in which not undertake coalbed methane production in Wyoming. we seek to meet our goal: stewardship of the Earth and the The knowledge gained there, however, contributes to our human spirit. Here are a few examples: efforts to develop coalbed methane reserves in Canada, Located in a remote and beautiful area in the foothills where we have significant CBM acreage and where respon- of northeastern Wyoming, the Ucross Foundation was sible water reinjection practices are required. We continued established in 1981. With 21 families, largely drawn from a CBM pilot project on our Canadian acreage in 2003; we the Minneapolis area (at the time our corporate head- expect the program to grow rapidly, adding reserves for quarters), we assembled the land and set about preserving Apache and providing clean energy for North America. its historic buildings. At Ucross, stewardship of the land and human spirit com- The Artists-in-Residence Program – which enables cre- bine and testify.
  10. 10. 50 YEARS BUILDING LAST OF TO In terms of time and funding, Apache’s largest direct In summary, stewardship of global commitment and involvement is in education. Through a fellowship program human spirit is our preference. for pre-kindergarten through 12th-grade teachers, the Fund We value each of our opportunities to communicate with for Teachers, we provide summer sabbatical grants of up to investors who share our long-term perspective. We welcome $5,000 per teacher for self-designed programs to expand any of you who would care to come to our annual meeting teachers’ and, through them, their students’ bases for life- May 6 in Houston; please feel free to request help with time learning. arranging accommodations. We’re generally less constrained In 2003, 267 teachers from seven cities visited all conti- at a podium than in print. nents except Antarctica, and again demonstrated the value Should you find an Apache dividend without a destina- of recognition, respect and renewal. It is our objective to tion, either Ucross or Fund for Teachers (both public foun- expand the program nationally with the goal of eventually dations) could use the contribution. reaching 3,000 to 5,000 teachers each year. Thank you each and all. We appreciate your support and In September, Apache’s board approved contributions up confidence – in many cases, over multiple decades. You’ve to $15 million over three years. Steve Farris is heading a made our day, shaped our lives, and motivated our best efforts. national effort to generate $35 million more to bring the Fund for Teachers endowment drive to $50 million in our 50th year. In 2004, a roster of approximately 400 teachers from eight cities will undertake sabbaticals funded in part through Raymond Plank regional and national support. Founder and Chairman In Egypt, we have three small programs in incubation. Each centers on females, children to adults. The objective in each case is to help people move from illiteracy and poverty to productive lives earned through learning and work. From little girls without birth certificates and living on G. Steven Farris 50 cents per day to women’s equality and pursuit of liveli- Chief Executive Officer, hood is a long journey. Lending a helping hand – “making President and Chief Operating Officer a difference” – is extremely rewarding. 1983 Revenues Production $ 112.4 million 1,800 Bbls/d Earnings 47.7 MMcf/day $ 21.9 million Reserves 3.8 MMbbls Total Assets $ 534.1 million 150.9 Bcf 9
  11. 11. STRATEGY OPERATIONS REVIEW AND M any factors combined to make 2003 a very successful year for Apache. Strong oil and gas prices combined with record production yielded record profits and cash from operations as well BUILDING as greater financial flexibility. Significant discoveries and acquisi- SHAREHOLDER VALUE tions brought a 26 percent increase in proved reserves. Some of the important developments in Apache’s progress in 2003 were the result of plans put in motion a decade ago; others HARRY E. CARNIGHAN LONG-TIME APACHE SHAREHOLDER were determined by our continuing analysis of the competitive landscape and our commitment to a strong balance sheet, which Apache has been a big part of my life for a long provides the firepower to act when opportunities arise. time. I bought my first shares of Apache stock Apache achieved many operating milestones during 2003: in 1970, when the company was still diversi- • Production averaged 417,400 boe per day, up 22 percent. fied, with everything from air conditioning sys- • Apache replaced 330 percent of production at an all-in finding tems to agricultural products, real estate, truck cost of $6.07 per barrel – the lowest in our peer group. components and auto parts stores—in addition Excluding acquisitions, we added 234 million boe – 154 percent to oil and gas—in its business portfolio. I added of 2003 production. to my position over the ensuing 34 years, with • Year-end reserves totaled 1.66 billion boe, marking the 18th con- the idea of building an estate for my family. I secutive year of reserve growth. stuck with Apache as it sold off various lines of Apache’s worldwide portfolio approach was developed to provide business in order to focus solely on exploration diversity in terms of hydrocarbon product (oil or gas), geologic risk and production. and geographic location. In each of our core producing areas, Through all those years, Apache has been a Apache has built teams that have the technical knowledge, sense of consistent performer, with a unique culture and urgency and drive to wring more value out of Apache’s assets. strong values imparted by its founder, Raymond Building local expertise also provides a platform to compete and Plank, whom I admire greatly. The first thing that expand in our core areas through operations and acquisitions. comes to mind when I think of Apache is integri- Fields on the Outer Continental Shelf of the Gulf of Mexico ty and profitable growth—and, of course, the generally have higher production rates and more rapid depletion sense of urgency that is evident in everything than do wells in the Permian and Anadarko basins. Western they do. Canada provides a combination of longer-lived wells and opportu- I have done very well with my investment in nities to find larger reserve targets. Apache; it is the best stock in my portfolio by far and has helped me achieve my financial Operations in North America generate substantial cash flow, goals while securing a better future for my fam- which provides funds for our international exploration activities, ily. (Back: Harry Carnighan and son Kelly. where we pursue larger reserve targets such as our discoveries in Front: Kelly’s wife Barbara and children Andrew Egypt and Australia. and Gwendolyn.) In 2003, Apache’s capital expenditures totaled about $3 billion, balanced between exploration and development activity and acqui- sitions in the North Sea and the Gulf of Mexico. 10
  12. 12. 50 YEARS BUILDING LAST OF TO There have been many changes in China’s economic and polit- GROWING ical environment since Apache entered the country in 1994 and OUR WORLDWIDE PORTFOLIO started down the unexpectedly long road to first production at Zhao Dong. In light of these changes, Apache is assessing whether addi- tional investments are warranted. NORTH SEA EMPLOYEES EMBRACE APACHE’S CAN-DO CULTURE OTHER INTERNATIONAL Apache acquired exploration and production assets in Argentina in The largest field ever discovered in the United 2001 that now comprise 376,000 net acres with 2003 production of Kingdom North Sea, Forties is a national treas- approximately 1,770 boe per day. Apache acquired 3-D seismic on ure. So it came as somewhat of a shock to us its 100 percent-owned El Santiagueno block in 2003 and plans to when we learned that BP was selling the asset to drill there in 2004. Apache continues to examine opportunities for an American company, no less, bearing the additional investment. name of a fierce Indian tribe. We didn’t know In 2003, Apache recorded a $10.2 million after-tax write-down reflecting the remaining costs associated with the termination of what to expect. operations in Poland. But Apache welcomed us with open arms and began investing in upgrading facilities to maximize FINANCIAL FLEXIBILITY production. And we started drilling again. Our new While the company’s capital spending last year exceeded $3 billion, company was infused with enthusiasm and a sense Apache strengthened its financial flexibility during 2003. At year-end, of urgency that was quite contagious. Management the company’s debt was 26 percent of total capitalization, down from has established excellent lines of communication 30 percent at year-end 2002. Apache is the only U.S.-based publicly with us, and Apache’s top executives from Houston traded independent producer with across-the-board “A” ratings from have visited on a number of occasions; it is clear the major ratings agencies. This financial strength provides Apache that they have a keen interest in Forties. with the flexibility to act quickly when acquisition opportunities arise. We were very surprised to return from the Christmas-New Year’s holiday to find birthday FINDING COST cards announcing Apache’s 50th anniversary year, Management considers finding cost to be an operational measure which, there- fore, does not require reconciliation to a GAAP number. However, to assist each containing a crisp, new U.S. $50 bill. We only investors in understanding how finding cost is calculated, we have provided the joined the company in April 2003, and they’ve following reconciliation to capitalized costs incurred. Finding cost is presented because management believes the information is useful for investors; it is used made us feel it has been our home all along. internally and widely accepted by those following the oil and gas industry as a measure of a company’s operational efficiency in finding and developing new We’re excited about boosting production at reserves of oil and natural gas. Calculations of finding cost generally exclude cap- Forties and perhaps expanding our region with italized interest because capitalized interest is a financing measure rather than an operational efficiency measure. Asset retirement obligations are excluded because more acquisitions in the North Sea. This is a they are estimates of future costs that in fact may not be incurred and therefore do great company and we are proud to be a part of not reflect the company’s current operational efficiency. it. (Left to right: Mick George, Production CALCULATION FINDING COST OF Technician; Bill Hamilton, Electrical Technician; For the year ended Dec. 31, 2003 Total boe Cost Gerry Scanlan, Operations Supervisor; Al (In thousands, except per-boe data) Worldwide Additions per Boe Duncan, Production Technician; and Dave Capitalized costs incurred $ 3,439,722 503,215 $ 6.84 Harris, Offshore Installation Manager; on Forties Less: Capitalized interest (52,891) Less: Asset retirement obligation costs (365,953) Bravo Platform.) Plus: Actual 2003 retirement expenditures 32,479 Total Finding Cost $ 3,053,357 503,215 $ 6.07 19
  13. 13. APACHE WORLDWIDE CANADA Apache has operations in Alberta, Saskatchewan, British Columbia and the Northwest Territories. In recent years, Canadian natural gas prices have strengthened, reflecting the tight balance of supply and demand in North America. Excluding acquisitions, Apache replaced 275 percent of its Canadian production. Liquid Hydrocarbons Natural Gas 2003 daily production: 27 Mbbls 319 MMcf Reserves: 168 MMbbls 1,606 Bcf 2003 wells drilled/productive: 984/913 Gross acreage: 6,572,830 U.S. CENTRAL REGION Apache operates in some of North America’s most important hydrocarbon basins, including the Permian Basin in West Texas and New Mexico, the Anadarko Basin of western Oklahoma, East Texas and the San Juan Basin in New Mexico. Apache’s first well was drilled in Cushing, Oklahoma, in 1955. Liquid Hydrocarbons Natural Gas 2003 daily production: 22 Mbbls 190 MMcf Reserves: 238 MMbbls 837 Bcf 2003 wells drilled/productive: 208/200 Gross acreage: 1,631,876 U.S. GULF COAST REGION Apache is the largest held-by-production acreage holder on the Outer Continental Shelf of the Gulf of Mexico (in waters to 1,200 feet) – an area with well-developed infrastructure that enables Apache to bring on new wells quickly and economically. Acquisitions from BP and Shell during 2003 replenished Apache’s drilling inventory. The company also has operations onshore along the Texas and Louisiana Gulf Coast. Liquid Hydrocarbons Natural Gas 2003 daily production: 55 Mbbls 475 MMcf Reserves: 151 MMbbls 1,192 Bcf 2003 wells drilled/productive: 85/67 Gross acreage: 2,127,162 ARGENTINA Apache’s exploration and production assets in Argentina were acquired in 2001 and now comprise 376,000 net acres. Apache acquired 3-D seismic on its 100 percent-owned El Santiagueno block in 2003 and has plans to drill in 2004. Apache continues to examine opportunities for additional investment. Liquid Hydrocarbons Natural Gas 2003 daily production: 579 bbls 7 MMcf Reserves: 1 MMbbls 3 Bcf Gross acreage: 709,088 20
  14. 14. NORTH SEA Apache acquired the Forties Field, the largest field ever discovered in the United Kingdom North Sea, in 2003. The field still has proved reserves of 148 million barrels, ranking Forties as the largest single field in Apache’s worldwide portfolio. Liquid Hydrocarbons Natural Gas 2003 daily production: 29 Mbbls 2 MMcf Reserves: 148 MMbbls 4 Bcf Gross acreage: 117,422 CHINA Production at Apache’s Zhao Dong field in Bohai Bay com- menced in July 2003. Apache has proposed a second-phase drilling program to its partners. If approved, the plan calls for 10 additional wells in 2004. Liquid Hydrocarbons Natural Gas 2003 daily production: 3 Mbbls – Reserves: 11 MMbbls – 2003 wells drilled/productive: 25/25 Gross acreage: 11,225 EGYPT Apache is the largest U.S. investor and the fourth-largest oil and gas producer in Egypt. In 2003, Apache drilled the Qasr-1X discovery, which is the most important discovery in Apache’s history, on the Khalda Offset Concession. Exploration and production drilling pushed Apache’s daily gross production in Egypt to all-time highs of 102,052 barrels of oil per day on Dec. 3 and 266 MMcf of gas per day on Dec. 31. Liquid Hydrocarbons Natural Gas 2003 daily production: 48 Mbbls 114 MMcf Reserves: 73 MMbbls 551 Bcf 2003 wells drilled/productive: 107/94 Gross acreage: 10,212,953 AUSTRALIA Apache’s exploration activities in Australia are focused in the Carnarvon and Perth Basins. In 2003, Apache drilled five discover- ies and 10 successful appraisal wells. Apache’s Varanus Island pro- cessing and transportation hub is an important asset. Liquid Hydrocarbons Natural Gas 2003 daily production: 31 Mbbls 111 MMcf Reserves: 53 MMbbls 683 Bcf 2003 wells drilled/productive: 37/19 Gross acreage: 8,699,120 21
  15. 15. BOARD DIRECTORS OF Apache Corporation and Subsidiaries Frederick M. Bohen Patricia Albjerg Graham Charles J. Pitman (3)(5) (4) (4) Executive Vice President and Charles Warren Research Professor Former Regional President - Middle Chief Operating Officer, of the History of American Education, East/Caspian/Egypt/India, BP Amoco The Rockefeller University Harvard University plc; Sole Member, Shaker Mountain Energy Associates, LLC G. Steven Farris John A. Kocur (1) (1)(3) President, Chief Executive Officer Attorney at Law; Former Vice Chairman Raymond Plank (1) and Chief Operating Officer, of the Board, Apache Corporation Chairman of the Board, Apache Corporation Apache Corporation George D. Lawrence (1)(3) Private Investor; Former Chief Randolph M. Ferlic, M.D. Jay A. Precourt (1)(2) (4) Founder and Former President, Surgical Executive Officer, The Phoenix Chairman of the Board and Chief Services of the Great Plains, P.C. Resource Companies, Inc. Executive Officer, Scissor Tail Energy LLC, Chairman of the Board, Hermes Eugene C. Fiedorek F. H. Merelli (2) (1)(2) Consolidated, Inc. Private Investor, Former Managing Chairman of the Board, Chief (1) Executive Committee Director, EnCap Investments L.C. Executive Officer and President, (2) Audit Committee Cimarex Energy Co.(formerly Key A. D. Frazier, Jr. (3)(5) (3) Management, Development and Production Company, Inc.) President and Chief Executive Officer, Compensation Committee Caremark Rx, Inc. Rodman D. Patton (2) (4) Corporate Governance and Former Managing Director, Nominating Committee Merrill Lynch Energy Group (5) Stock Option Plan Committee CORPORATE OFFICERS Janice K. Hartrick Raymond Plank Jon A. Jeppesen Vice President and Associate General Chairman of the Board Senior Vice President Counsel Gulf Coast Region G. Steven Farris President, Chief Executive Officer and P. Anthony Lannie Jeffrey M. Bender Vice President and General Counsel Chief Operating Officer Vice President - Human Resources Anthony R. Lentini, Jr. Michael S. Bahorich Michael J. Benson Vice President – Public and Executive Vice President - Exploration Vice President – Security International Affairs and Production Technology Thomas P. Chambers Vice President – Corporate Planning Janine J. McArdle John A. Crum Vice President – Oil and Gas Marketing Executive Vice President John J. Christmann Apache North Sea Vice President – Business Development Thomas L. Mitchell Vice President and Controller Rodney J. Eichler Matthew W. Dundrea Executive Vice President Vice President and Treasurer W. Kregg Olson General Manager – Egypt Vice President – Corporate Reservoir Robert J. Dye Engineering Roger B. Plank Vice President – Investor Relations Executive Vice President Jon W. Sauer and Chief Financial Officer Eric L. Harry Vice President – Tax Vice President and Associate General Floyd R. Price Counsel Cheri L. Peper Executive Vice President and Corporate Secretary President, Apache Canada Ltd.
  16. 16. STATEMENT CONSOLIDATED OPERATIONS OF Apache Corporation and Subsidiaries For the Year Ended December 31, (In thousands, except per-common-share data) 2002 2001 2003 REVENUES AND OTHER: Oil and gas production revenues $ 2,559,748 $ 2,822,959 $ 4,198,920 Other 125 (13,568) (8,621) 2,559,873 2,809,391 4,190,299 OPERATING EXPENSES: Depreciation, depletion and amortization 843,879 820,831 1,073,286 Asset retirement obligation accretion – – 37,763 International impairments 19,600 65,000 12,813 Lease operating costs 457,903 399,919 699,663 Gathering and transportation costs 38,567 34,584 60,460 Severance and other taxes 67,309 74,722 121,793 General and administrative 104,588 88,710 138,524 Financing costs: Interest expense 155,667 178,915 169,090 Amortization of deferred loan costs 1,859 2,460 2,163 Capitalized interest (40,691) (56,749) (52,891) Interest income (4,002) (5,864) (3,290) 1,644,679 1,602,528 2,259,374 16,224 7,609 PREFERRED INTERESTS OF SUBSIDIARIES 8,668 898,970 1,199,254 INCOME BEFORE INCOME TAXES 1,922,257 Provision for income taxes 344,641 475,855 827,004 554,329 723,399 INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 1,095,253 Cumulative effect of change in accounting principle, net of income tax – – 26,632 554,329 723,399 NET INCOME 1,121,885 Preferred stock dividends 10,815 19,601 5,680 $ 543,514 $ 703,798 INCOME ATTRIBUTABLE TO COMMON STOCK $ 1,116,205 BASIC NET INCOME PER COMMON SHARE: Before change in accounting principle $ 1.83 $ 2.44 $ 3.38 Cumulative effect of change in accounting principle – – .08 $ 1.83 $ 2.44 $ 3.46 DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle $ 1.80 $ 2.37 $ 3.35 Cumulative effect of change in accounting principle – – .08 $ 1.80 $ 2.37 $ 3.43 23
  17. 17. STATEMENT CONSOLIDATED CASH FLOWS OF Apache Corporation and Subsidiaries For the Year Ended December 31, (In thousands) 2002 2001 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 554,329 $ 723,399 $ 1,121,885 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 843,879 820,831 1,073,286 Asset retirement obligation accretion – – 37,763 Provision for deferred income taxes 137,672 305,214 546,357 Amortization of deferred loan costs 1,859 2,460 2,163 International impairments 19,600 65,000 12,813 Cumulative effect of change in accounting principle, net of income tax – – (26,632) Other 9,531 10,469 32,923 Changes in operating assets and liabilities, net of effects of acquisitions: (Increase) decrease in receivables (122,830) 199,160 (94,295) (Increase) decrease in inventories 717 (3,005) (4,216) (Increase) decrease in drilling advances and other (26,116) (14,474) (19,881) (Increase) decrease in deferred charges and other 496 (922) (29,520) Increase (decrease) in accounts payable 32,219 (143,969) 68,176 Increase (decrease) in accrued expenses (16,595) 10,065 11,227 Increase (decrease) in advances from gas purchasers (14,574) (13,079) (16,246) Increase (decrease) in deferred credits and noncurrent liabilities (39,469) (56,149) (9,903) 1,380,718 1,905,000 NET CASH PROVIDED BY OPERATING ACTIVITIES 2,705,900 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,037,368) (1,528,984) (1,594,936) Acquisition of BP properties – – (1,140,156) Acquisition of Shell properties – – (203,033) Acquisition of Louisiana properties (258,885) – – Acquisition of Fletcher subsidiaries, net of cash acquired – (465,018) – Acquisition of Repsol properties, net of cash acquired – (446,933) – Acquisition of Occidental properties (11,000) (11,000) (22,000) Proceeds from sales of oil and gas properties 7,043 348,296 58,944 Proceeds from (purchase of ) short-term investments, net 101,723 (103,863) – Other, net (37,520) (76,835) (57,576) (1,236,007) (2,284,337) NET CASH USED IN INVESTING ACTIVITIES (2,958,757) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings 1,467,929 2,759,740 1,780,870 Payments on long-term debt (1,553,471) (2,733,641) (1,613,362) Dividends paid (68,879) (54,492) (72,832) Common stock activity 30,708 10,205 582,865 Treasury stock activity, net 1,991 (42,959) 5,350 Cost of debt and equity transactions (6,728) (1,718) (5,417) (Repurchase of) proceeds from preferred interests of subsidiaries – 440,654 (443,000) (128,450) 377,789 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 234,474 16,261 (1,548) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,383) 35,625 37,173 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51,886 $ 51,886 $ 35,625 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,503
  18. 18. CONSOLIDATED BALANCE SHEET Apache Corporation and Subsidiaries December 31, (In thousands) 2002 2003 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 51,886 $ 33,503 Receivables, net of allowance 527,687 639,055 Inventories 109,204 125,867 Drilling advances 45,298 58,062 Prepaid assets and other 32,706 42,585 766,781 899,072 PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties 12,827,459 16,277,930 Unproved properties and properties under development, not being amortized 656,272 795,161 Gas gathering, transmission and processing facilities 784,271 828,169 Other 194,685 239,548 14,462,687 18,140,808 Less: Accumulated depreciation, depletion and amortization (5,997,102) (6,880,723) 8,465,585 11,260,085 OTHER ASSETS: Goodwill, net 189,252 189,252 Deferred charges and other 38,233 67,717 $ 9,459,851 $12,416,126 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 214,288 $ 300,598 Accrued operating expense 47,382 72,250 Accrued exploration and development 146,871 212,028 Accrued compensation and benefits 32,680 56,237 Accrued interest 30,880 32,621 Accrued income taxes 44,256 18,936 Oil and gas derivative instruments – 63,542 Other 15,878 64,166 532,235 820,378 2,158,815 LONG-TERM DEBT 2,326,966 DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes 1,120,609 1,697,238 Advances from gas purchasers 125,453 109,207 Asset retirement obligation – 739,775 Oil and gas derivative instruments 3,507 5,931 Other 158,326 183,833 1,407,895 2,735,984 436,626 PREFERRED INTERESTS OF SUBSIDIARIES – COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Preferred stock, no par value, 5,000,000 shares authorized – Series B, 5.68% Cumulative Preferred Stock, 100,000 shares issued and outstanding 98,387 98,387 Common stock, $0.625 par, 430,000,000 shares authorized, 332,509,478 and 310,929,080 shares issued, respectively 194,331 207,818 Paid-in capital 3,427,450 4,038,007 Retained earnings 1,427,607 2,445,698 Treasury stock, at cost, 8,012,302 and 8,422,656 shares, respectively (110,559) (105,169) Accumulated other comprehensive loss (112,936) (151,943) 4,924,280 6,532,798 $ 9,459,851 $12,416,126 25