NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods, on a basis consistent with the annual audited financial statements, with the exception of recently adopted accounting pronouncements discussed below. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, which contains a summary of the Company’s significant accounting policies and other disclosures.
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
As of
March 31, 2018
, Apache’s significant accounting policies are consistent with those discussed in Note 1—Summary of Significant Accounting Policies of its consolidated financial statements contained in Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, with the exception of Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (see “Revenue Recognition” section in this Note 1 below).
Use of Estimates
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom, the assessment of asset retirement obligations, the estimates of fair value for long-lived assets, and the estimate of income taxes. Actual results could differ from those estimates.
Fair Value Measurements
Certain assets and liabilities are reported at fair value on a recurring basis in Apache’s consolidated balance sheet. Accounting Standards Codification (ASC) 820-10-35, “Fair Value Measurement” (ASC 820), provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach, and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models, and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Recurring fair value measurements are presented in further detail in Note 4—Derivative Instruments and Hedging Activities and Note 8—Debt and Financing Costs.
Apache also uses fair value measurements on a nonrecurring basis when certain qualitative assessments of its assets indicate a potential impairment. The Company recorded
no
asset impairments in connection with fair value assessments in the
first
quarter of
2018
. For the
first
quarter of
2017
, the Company recorded asset impairments in connection with fair value assessments totaling
$8 million
for a United Kingdom (U.K.) Petroleum Revenue Tax (PRT) decommissioning asset that is no longer expected to be realizable from future abandonment activities in the North Sea.
In 2016, the U.K. government enacted Finance Bill 2016, providing tax relief to exploration and production (E&P) companies operating in the U.K. North Sea. Under the enacted legislation, the U.K. PRT rate was reduced to
zero
from the previously enacted
35 percent
rate in effect from January 1, 2016. PRT expense ceased prospectively from that date. During the first quarter of 2017, the Company fully impaired the aggregate remaining value of the recoverable PRT decommissioning asset of
$8 million
that would have been realized from future abandonment activities. The recoverable value of the PRT decommissioning asset was estimated
using the income approach. The expected future cash flows used in the determination were based on anticipated spending and timing of planned future abandonment activities for applicable fields, considering all available information at the date of review. Apache has classified this fair value measurement as Level 3 in the fair value hierarchy.
Oil and Gas Property
The Company follows the successful efforts method of accounting for its oil and gas property. Under this method of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas depending on, among other things, the amount of hydrocarbons discovered, the outcome of planned geological and engineering studies, the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan, and government sanctioning of development activities in certain international locations. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities; in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
Acquisition costs of unproved properties are assessed for impairment at least annually and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment based on the Company’s current exploration plans. Unproved oil and gas properties with individually insignificant lease acquisition costs are amortized on a group basis over the average lease term at rates that provide for full amortization of unsuccessful leases upon lease expiration or abandonment. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and gas properties. Costs of maintaining and retaining unproved properties, as well as amortization of individually insignificant leases and impairment of unsuccessful leases, are included in exploration costs in the statement of consolidated operations.
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production (UOP) method. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate depreciation for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost.
Oil and gas properties are grouped for depreciation in accordance with ASC 932 “Extractive Activities—Oil and Gas.” The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.
When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on Apache’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally estimated using the income approach described in ASC 820. If applicable, the Company utilizes prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a discount rate believed to be consistent with those applied by market participants. Apache has classified these fair value measurements as Level 3 in the fair value hierarchy.
The following table represents non-cash impairments of the carrying value of the Company’s proved and unproved property and equipment for the
first
quarters of
2018
and
2017
:
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|
Quarter Ended March 31,
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2018
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2017
|
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(In millions)
|
Oil and Gas Property:
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Proved
|
|
$
|
—
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|
|
$
|
—
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Unproved
|
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16
|
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|
15
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|
On the statement of consolidated operations, unproved impairments are recorded in exploration expense, and proved impairments are recorded in impairments.
Gains and losses on significant divestitures are recognized in the statement of consolidated operations.
Revenue Recognition
On January 1, 2018, Apache adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. The Company elected to evaluate all contracts at the date of initial application. While there was no impact to the opening balance of retained earnings as a result of the adoption, certain items previously netted in revenue are now recognized as “Gathering, transmission, and processing” in the Company’s statement of consolidated operations. The amounts reclassified are immaterial to the financial statements, and prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Adoption of the new standard is not anticipated to have a material impact on the Company’s net earnings on an ongoing basis.
The Company applies the provisions of ASC 606 for revenue recognition to contracts with customers. Sales of crude oil, natural gas, and natural gas liquids (NGLs) are included in revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu (MMBtu) of natural gas, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title. In each case, the term between delivery and when payments are due is not significant.
Apache markets its own United States (U.S.) natural gas and crude oil production based on market-priced contracts. Typically, these contracts are adjusted for quality, transportation, and other market-reflective differentials. Since the Company’s production may fluctuate as a result of operational issues, it is occasionally necessary to purchase third-party oil and gas to fulfill sales obligations and commitments. Sales proceeds related to third-party purchased oil and gas are determined to be revenue from a customer. Proceeds for these volumes, which offset the associated purchase costs, totaled
$104 million
for the period ending March 31, 2018. Proceeds and costs are both recorded as “Other” under “Revenues and Other” in the statement of consolidated operations.
Internationally, Apache sells its North Sea crude oil under contracts with a market-based index price. Natural gas from the North Sea Beryl field is processed through the SAGE gas plant. The gas is sold to a third party at the St. Fergus entry point of the national grid on a National Balancing Point index price basis. Apache’s gas production in Egypt is sold primarily under an industry-pricing formula, a sliding scale based on Dated Brent crude oil with a minimum of
$1.50
per MMBtu and a maximum of
$2.65
per MMBtu, plus an upward adjustment for liquids content. The Company’s Egypt oil production is sold at prices equivalent to the export market.
The Company’s Egyptian operations are conducted pursuant to production sharing contracts under which contractor partners pay all operating and capital costs for exploring and developing the concessions. A percentage of the production, generally up to
40 percent
, is available to contractor partners to recover these operating and capital costs over contractually defined periods. The balance of the production is split among the contractor partners and the Egyptian General Petroleum Corporation (EGPC) on a contractually defined basis. Additionally, the contractor partner’s income taxes, which remain the liability of the contractor partners under domestic law, are paid by EGPC on behalf of the contractor partners out of EGPC’s production entitlement. Income taxes paid to the Arab Republic of Egypt on behalf of Apache as contract partner are recognized as oil and gas sales revenue and income tax expense and reflected as production and estimated reserves. Revenues related to Egypt’s tax volumes are considered revenue from a non-customer.
For the period ending March 31, 2018, revenues from customers and revenues from non-customers were
$1.7 billion
and
$155 million
, respectively.
Apache records trade accounts receivable for its unconditional rights to consideration arising under sales contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents estimated net realizable value. The Company routinely assesses the collectability of all material trade and other receivables. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. Receivables from contracts with customers, net of allowance for doubtful accounts, totaled
$1.2 billion
and
$1.1 billion
as of March 31, 2018 and December 31, 2017, respectively.
Apache has concluded that disaggregating revenue by geographic area and by product appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 11—Business Segment Information for a disaggregation of revenue by each product sold.
Practical Expedients and Exemptions
Apache does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
Apache will utilize the practical expedient to expense incremental costs of obtaining a contract if the expected amortization period is one year or less. Costs to obtain a contract with expected amortization periods of greater than one year will be recorded as an asset and will be recognized in accordance with ASC 340, “Other Assets and Deferred Costs.” Currently, the Company does not have contract assets related to incremental costs to obtain a contract.
New Pronouncements Issued But Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, “Leases (Topic 842),” requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous GAAP. The guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted; however, the Company does not intend to early adopt. In January 2018, the FASB issued a proposed ASU update that would add a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. If finalized, comparative reporting would not be required and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. In the normal course of business, the Company enters into various lease agreements for real estate, aircraft, and equipment related to its exploration and development activities that are currently accounted for as operating leases. At this time, the Company cannot reasonably estimate the financial impact this will have on its consolidated financial statements; however, the Company believes adoption and implementation of this ASU will significantly impact its balance sheet, resulting in an increase in both assets and liabilities relating to its leasing activities. As part of the assessment to date, the Company has formed an implementation work team, developed a project plan, educated departments affected by the standard, and continues to evaluate contracts and monitor updates to the new standard to determine the impact this ASU will have on its consolidated financial statements.
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2.
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ACQUISITIONS AND DIVESTITURES
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2018 Activity
During the first quarter of 2018, Apache completed the sale of certain non-core assets, primarily in the Permian region, in multiple transactions for cash proceeds of
$9 million
. The Company recognized gains of approximately
$7 million
during the first quarter upon closing of these transactions.
Leasehold and Property Acquisitions
During the first quarter of 2018, Apache completed
$12 million
of leasehold and property acquisitions primarily in its U.S. onshore regions.
2017 Activity
During the first quarter of 2017, Apache completed the sale of certain non-core assets, primarily in the Permian region, in multiple transactions for cash proceeds of
$466 million
, subject to customary closing adjustments. A refundable deposit of
$40 million
was received in the fourth quarter of 2016 in connection with these transactions. The Company recognized gains of approximately
$341 million
during the first quarter upon closing of these transactions.
Leasehold and Property Acquisitions
During the first quarter of 2017, Apache completed
$49 million
of leasehold and property acquisitions primarily in its U.S. onshore regions.
3. CAPITALIZED EXPLORATORY WELL COSTS
The Company’s capitalized exploratory well costs were
$363 million
and
$350 million
at
March 31, 2018
and
December 31, 2017
, respectively. The increase is primarily attributable to additional drilling activities during the period, partially offset by successful transfers and dry hole write-offs.
No
suspended exploratory well costs previously capitalized for greater than one year at
December 31, 2017
were charged to dry hole expense during the three months ended
March 31, 2018
. Projects with suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development. Management is actively pursuing efforts to assess whether reserves can be attributed to these projects.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives and Strategies
The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. Apache has elected not to designate any of its derivative contracts as cash flow hedges.
Counterparty Risk
The use of derivative instruments exposes the Company to credit loss in the event of nonperformance by the counterparty. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of
March 31, 2018
, Apache had derivative positions with
14
counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.
Derivative Instruments
As of
March 31, 2018
, Apache had the following open crude oil derivative positions:
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|
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|
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|
|
|
|
|
|
Put Options
(1)
|
Production Period
|
|
Settlement Index
|
|
Mbbls
|
|
Weighted Average Strike Price
|
April—December 2018
|
|
Dated Brent
|
|
2,750
|
|
|
$50.00
|
July—December 2018
|
|
Dated Brent
|
|
5,520
|
|
|
$58.00
|
July—December 2018
|
|
NYMEX WTI
|
|
5,520
|
|
|
$53.00
|
|
|
(1)
|
The remaining unamortized premium paid as of
March 31, 2018
, was
$27 million
.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Price Swaps
|
|
Collars
|
|
Call Options
(2)
|
Production Period
|
|
Settlement Index
|
|
Mbbls
|
|
Weighted Average Fixed Price
|
|
Mbbls
|
|
Weighted Average Floor Price
|
|
Weighted Average Ceiling Price
|
|
Mbbls
|
|
Strike Price
|
April—June 2018
|
|
NYMEX WTI
|
|
1,365
|
|
|
$51.23
|
|
1,365
|
|
|
$45.00
|
|
$56.45
|
|
—
|
|
|
—
|
April—June 2018
|
|
Dated Brent
|
|
1,092
|
|
|
$54.57
|
|
1,092
|
|
|
$50.00
|
|
$58.77
|
|
—
|
|
|
—
|
April—December 2018
|
|
NYMEX WTI
|
|
—
|
|
|
—
|
|
5,088
|
|
|
$45.00
|
|
$57.00
|
|
5,088
|
|
|
$60.03
|
|
|
(2)
|
The remaining unamortized premium paid as of
March 31, 2018
, was
$8 million
.
|
As of
March 31, 2018
, Apache had the following open natural gas derivative positions:
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|
|
|
|
|
|
|
|
|
|
|
Fixed-Price Swaps
|
Production Period
|
|
Settlement Index
|
|
MMBtu
(in 000’s)
|
|
Weighted Average Fixed Price
|
April—June 2018
|
|
NYMEX Henry Hub
|
|
28,210
|
|
|
$3.02
|
July—December 2018
|
|
NYMEX Henry Hub
|
|
33,580
|
|
|
$2.96
|
As of
March 31, 2018
, Apache had the following open natural gas financial basis swap contracts:
|
|
|
|
|
|
|
|
|
Production Period
|
|
Settlement Index
|
|
MMBtu
(in 000’s)
|
|
Weighted Average Price Differential
|
July—December 2018
|
|
NYMEX Henry Hub/Waha
|
|
33,120
|
|
|
$(0.53)
|
October—December 2018
|
|
NYMEX Henry Hub/Waha
|
|
1,380
|
|
|
$(0.51)
|
January—March 2019
|
|
NYMEX Henry Hub/Waha
|
|
1,350
|
|
|
$(0.54)
|
January—June 2019
|
|
NYMEX Henry Hub/Waha
|
|
32,580
|
|
|
$(0.53)
|
January—December 2019
|
|
NYMEX Henry Hub/Waha
|
|
14,600
|
|
|
$(0.45)
|
Fair Value Measurements
Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps, options, and collars. The fair values of the Company’s derivatives are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments on a recurring basis, utilizing commodity futures pricing for the underlying commodities provided by a reputable third party, a Level 2 fair value measurement.
The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
Quoted Price in Active Markets (Level 1)
|
|
Significant Other Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Fair Value
|
|
Netting
(1)
|
|
Carrying Amount
|
|
|
(In millions)
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Instruments
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
(70
|
)
|
|
$
|
48
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Instruments
|
|
—
|
|
|
94
|
|
|
—
|
|
|
94
|
|
|
(70
|
)
|
|
24
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Instruments
|
|
$
|
—
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
$
|
(43
|
)
|
|
$
|
24
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Instruments
|
|
—
|
|
|
107
|
|
|
—
|
|
|
107
|
|
|
(43
|
)
|
|
64
|
|
|
|
(1)
|
The derivative fair values are based on analysis of each contract on a gross basis, excluding the impact of netting agreements with counterparties.
|
All derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In millions)
|
Current Assets: Prepaid assets and other
|
|
$
|
23
|
|
|
$
|
8
|
|
Other Assets: Deferred charges and other
|
|
25
|
|
|
16
|
|
Total Assets
|
|
$
|
48
|
|
|
$
|
24
|
|
|
|
|
|
|
Current Liabilities: Other current liabilities
|
|
$
|
24
|
|
|
$
|
64
|
|
Total Liabilities
|
|
$
|
24
|
|
|
$
|
64
|
|
Derivative Activity Recorded in the Statement of Consolidated Operations
The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
2018
|
|
2017
|
|
|
(In millions)
|
Realized loss:
|
|
|
|
|
Derivative settlements
|
|
$
|
(42
|
)
|
|
$
|
—
|
|
Amortization of call and put premium
|
|
(5
|
)
|
|
—
|
|
Unrealized gain
|
|
49
|
|
|
—
|
|
Derivative instrument gain (losses), net
|
|
$
|
2
|
|
|
$
|
—
|
|
Derivative instrument gains and losses are recorded in “Other” under “Revenues and Other” in the Company’s statement of consolidated operations. Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations
is reflected in the statement of consolidated cash flows separately as “Unrealized derivative instrument gain, net” in “Adjustments to reconcile net income to net cash provided by operating activities.”
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|
5.
|
OTHER CURRENT LIABILITIES
|
The following table provides detail of the Company’s other current liabilities as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In millions)
|
Accrued operating expenses
|
|
$
|
76
|
|
|
$
|
72
|
|
Accrued exploration and development
|
|
811
|
|
|
802
|
|
Accrued compensation and benefits
|
|
46
|
|
|
115
|
|
Accrued interest
|
|
104
|
|
|
145
|
|
Accrued income taxes
|
|
41
|
|
|
55
|
|
Current asset retirement obligation
|
|
42
|
|
|
43
|
|
Other
|
|
114
|
|
|
141
|
|
Total other current liabilities
|
|
$
|
1,234
|
|
|
$
|
1,373
|
|
|
|
6.
|
ASSET RETIREMENT OBLIGATION
|
The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the
three
-month period ended
March 31, 2018
:
|
|
|
|
|
|
|
|
(In millions)
|
Asset retirement obligation at December 31, 2017
|
|
$
|
1,835
|
|
Liabilities incurred
|
|
7
|
|
Liabilities settled
|
|
(8
|
)
|
Accretion expense
|
|
27
|
|
Asset retirement obligation at March 31, 2018
|
|
1,861
|
|
Less current portion
|
|
(42
|
)
|
Asset retirement obligation, long-term
|
|
$
|
1,819
|
|
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Non-cash impairments of the carrying value of the Company’s oil and gas properties, gains and losses on the sale of assets, statutory tax rate changes, and other significant or unusual items are recognized as discrete items in the quarter in which they occur.
During the
first
quarter of
2018
, Apache’s effective income tax rate was primarily impacted by an increase in the amount of valuation allowance against its U.S. deferred tax assets. During the
first
quarter of
2017
, Apache’s effective income tax rate was primarily impacted by gains on the sale of oil and gas properties, non-cash impairments of the Company’s PRT decommissioning asset, and an increase in the amount of valuation allowance against its Canadian deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. In 2018, the Internal Revenue Service (IRS) issued additional guidance related to the Act’s deemed repatriation of foreign earnings (i.e., transition inclusion). In light of this new guidance, the Company is reevaluating the tax impact of the transition inclusion in 2017. Tax benefit associated with the change in transition inclusion is likely to be fully offset by a change in the Company’s valuation allowance against its U.S. deferred tax assets. The Company has not revised any other 2017 provisional estimates under Staff Accounting Bulletin No. 118, but is continuing to gather information and awaits further guidance from the IRS, SEC and FASB on the Act.
Apache and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is currently under IRS audit for the 2014-2016 tax years and is also under audit in various states and foreign jurisdictions as part of its normal course of business.
|
|
8.
|
DEBT AND FINANCING COSTS
|
The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
(In millions)
|
Commercial paper and committed bank facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Notes and debentures
|
|
8,336
|
|
|
8,758
|
|
|
8,484
|
|
|
9,244
|
|
Total Debt
|
|
$
|
8,336
|
|
|
$
|
8,758
|
|
|
$
|
8,484
|
|
|
$
|
9,244
|
|
The Company’s debt is recorded at the carrying amount, net of related unamortized discount and deferred loan costs, on its consolidated balance sheet. When recorded, the carrying amount of the Company’s commercial paper, committed bank facilities, and uncommitted bank lines approximates fair value because the interest rates are variable and reflective of market rates. Apache uses a market approach to determine the fair value of its notes and debentures using estimates provided by an independent investment financial data services firm (a Level 2 fair value measurement).
The following table presents the carrying value of the Company’s debt as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In millions)
|
Debt before unamortized discount and deferred loan costs
|
|
$
|
8,430
|
|
|
$
|
8,580
|
|
Unamortized discount
|
|
(47
|
)
|
|
(47
|
)
|
Deferred loan costs
|
|
(47
|
)
|
|
(49
|
)
|
Total debt
|
|
8,336
|
|
|
8,484
|
|
Current maturities
|
|
(400
|
)
|
|
(550
|
)
|
Long-term debt
|
|
$
|
7,936
|
|
|
$
|
7,934
|
|
As of
March 31, 2018
, current debt included
$400 million
of
6.9%
senior notes due September 15, 2018. As of
December 31, 2017
, current debt also included
$150 million
of
7.0%
senior notes due February 1, 2018. On February 1, 2018, Apache’s
7.0%
notes in original principal amount of
$150 million
matured and were repaid.
In March 2018, the Company entered into a revolving credit facility that matures in
March 2023
(subject to Apache’s
two
,
one
-year extension options) with commitments totaling
$4.0 billion
. The Company can increase commitments up to
$5.0 billion
by adding new lenders or obtaining the consent or any increasing existing lenders. The facility includes a letter of credit subfacility of up to
$3.0 billion
, of which
$2.08 billion
was committed as of
March 31, 2018
. The facility is for general corporate purposes and committed borrowing capacity fully supports Apache’s commercial paper program. As of
March 31, 2018
, letters of credit aggregating approximately
£129.1 million
and
no
borrowings were outstanding under this facility. In connection with entry into this facility, Apache terminated
$3.5 billion
and
£900 million
in commitments under
two
former credit facilities and wrote off
$4 million
of associated deferred loan costs, which is included in “Financing costs, net” in the Company’s consolidated statement of operations.
The Company’s
$3.5 billion
commercial paper program, which is subject to market availability, facilitates Apache borrowing funds for up to
270
days at competitive interest rates. As of
March 31, 2018
, the Company had no commercial paper outstanding.
Financing Costs, Net
The following table presents the components of Apache’s financing costs, net:
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In millions)
|
Interest expense
|
|
$
|
112
|
|
|
$
|
116
|
|
Amortization of deferred loan costs
|
|
5
|
|
|
2
|
|
Capitalized interest
|
|
(12
|
)
|
|
(14
|
)
|
Loss on extinguishment of debt
|
|
—
|
|
|
1
|
|
Interest income
|
|
(6
|
)
|
|
(5
|
)
|
Financing costs, net
|
|
$
|
99
|
|
|
$
|
100
|
|
|
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Matters
Apache is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. As of
March 31, 2018
, the Company has an accrued liability of approximately
$38 million
for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. Apache’s estimates are based on information known about the matters and its experience in contesting, litigating, and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to Apache’s financial position, results of operations, or liquidity after consideration of recorded accruals. For material matters that Apache believes an unfavorable outcome is reasonably possible, the Company has disclosed the nature of the matter and a range of potential exposure, unless an estimate cannot be made at this time. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.
For additional information on each of the Legal Matters described below, please see Note 10—Commitments and Contingencies to the consolidated financial statements contained in Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
Argentine Environmental Claims and Argentina Tariff
No material change in the status of the YPF Sociedad Anónima and Pioneer Natural Resources Company indemnities matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
Louisiana Restoration
As more fully described in Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, Louisiana surface owners often file lawsuits or assert claims against oil and gas companies, including Apache, claiming that operators and working interest owners in the chain of title are liable for environmental damages on the leased premises, including damages measured by the cost of restoration of the leased premises to its original condition, regardless of the value of the underlying property. From time to time restoration lawsuits and claims are resolved by the Company for amounts that are not material to the Company, while new lawsuits and claims are asserted against the Company. With respect to each of the pending lawsuits and claims, the amount claimed is not currently determinable or is not material, except as noted. Further, the overall exposure related to these lawsuits and claims is not currently determinable. While an adverse judgment against Apache is possible, Apache intends to actively defend these lawsuits and claims.
Starting in November of 2013 and continuing into 2018, several parishes in Louisiana have pending lawsuits against many oil and gas producers, including Apache. These cases are pending in federal and state courts in Louisiana. In these cases, the Parishes, as plaintiffs, allege that defendants’ oil and gas exploration, production, and transportation operations in specified fields were conducted in violation of the State and Local Coastal Resources Management Act of 1978, as amended, and applicable regulations, rules, orders, and ordinances promulgated or adopted thereunder by the Parish or the State of Louisiana. Plaintiffs allege that defendants caused substantial damage to land and water bodies located in the coastal zone of Louisiana. Plaintiffs seek, among other things, unspecified damages for alleged violations of applicable state law within the coastal zone, the payment of costs necessary to clear, re-vegetate, detoxify, and otherwise restore the subject coastal zone as near as practicable to its original condition, and actual restoration of the coastal zone to its original condition. While an adverse judgment against Apache might be possible, Apache intends to vigorously oppose these claims.
No other material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
Escheat Audits
In September 2010, the State of Delaware, Department of Finance, Division of Revenue (Unclaimed Property) (Delaware), notified Apache Corporation that Delaware’s consultant, Kelmar Associates, would examine Apache’s books and records and those of its subsidiaries and related entities to determine compliance with Delaware Escheat Laws. Delaware notified the Company that its audit was complete and the Company was able to resolve all audit issues for an amount that is not material to the Company.
Apollo Exploration Lawsuit
In a case captioned
Apollo Exploration, LLC, Cogent Exploration, Ltd. Co. & SellmoCo, LLC v. Apache Corporation
, Cause No. CV50538 in the 385
th
Judicial District Court, Midland County, Texas, plaintiffs alleged damages in excess of
$200 million
(having previously claimed in excess of
$1.1 billion
) relating to purchase and sale agreements, mineral leases, and areas of mutual interest agreements concerning properties located in Hartley, Moore, Potter, and Oldham Counties, Texas. The Court recently granted motions filed by Apache reducing the plaintiffs’ alleged damages to an amount that is not material to the Company. Apache believes that plaintiffs’ claims lack merit and will vigorously oppose the claims. No other material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
Australian Operations Divestiture Dispute
By a Sale and Purchase Agreement dated April 9, 2015 (SPA), the Company and its subsidiaries divested their remaining Australian operations to Quadrant Energy Pty Ltd (Quadrant). Closing occurred on June 5, 2015. In April 2017, Apache filed suit against Quadrant for breach of the SPA. In its suit, Apache seeks approximately
$80 million
. In December 2017, Quadrant filed a defense of equitable set-off to Apache’s claim and a counterclaim seeking approximately
$200 million
in the aggregate. The Company believes that Quadrant’s claims lack merit and will not have a material adverse effect on the Company’s financial position, results of operation, or liquidity.
California Litigation
On July 17, 2017, in three separate actions, San Mateo County, California, Marin County, California, and the City of Imperial Beach, California, all filed suit individually and on behalf of the people of the state of California against over
30
oil, gas, and coal companies alleging damages as a result of global warming. Plaintiffs seek unspecified damages and abatement under various tort theories. On December 20, 2017, in two separate actions, the City of Santa Cruz and Santa Cruz County and in a separate action on January 22, 2018, the City of Richmond, filed similar lawsuits against many of the same defendants. The lawsuits were removed to federal court and then consolidated. Although the federal court remanded the lawsuits back to state court, it stayed its order of remand and certified the jurisdictional inquiry for appeal to the 9
th
Circuit Court of Appeals. Apache believes that the claims made against it are baseless and intends to vigorously defend these lawsuits.
Environmental Matters
As of
March 31, 2018
, the Company had an undiscounted reserve for environmental remediation of approximately
$4 million
. The Company is not aware of any environmental claims existing as of
March 31, 2018
, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.
Net Income per Common Share
A reconciliation of the components of basic and diluted net income per common share for the quarters ended
March 31, 2018
and
2017
, is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
Income
|
|
Shares
|
|
Per Share
|
|
Income
|
|
Shares
|
|
Per Share
|
|
|
(In millions, except per share amounts)
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stock
|
|
$
|
145
|
|
|
382
|
|
|
$
|
0.38
|
|
|
$
|
213
|
|
|
380
|
|
|
$
|
0.56
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
$
|
—
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
—
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stock
|
|
$
|
145
|
|
|
384
|
|
|
$
|
0.38
|
|
|
$
|
213
|
|
|
383
|
|
|
$
|
0.56
|
|
The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling
6.7 million
and
8.4 million
for the quarters ended
March 31, 2018
and
2017
, respectively.
Common Stock Dividends
For each of the quarters ended
March 31, 2018
, and
2017
, Apache paid
$95 million
in dividends on its common stock.
Stock Repurchase Program
Apache’s Board of Directors has authorized the purchase of up to
40 million
shares of the Company’s common stock. Shares may be purchased either in the open market or through privately negotiated transactions. The Company initiated the buyback program on June 10, 2013, and through
March 31, 2018
, had repurchased a total of
32.2 million
shares at an average price of
$88.96
per share. The Company is not obligated to acquire any specific number of shares and has not purchased any shares during
2018
.
|
|
11.
|
BUSINESS SEGMENT INFORMATION
|
Apache is engaged in a single line of business. Both domestically and internationally, the Company explores for, develops, and produces natural gas, crude oil, and natural gas liquids. At
March 31, 2018
, the Company had production in
three
reporting segments: the U.S., Egypt, and offshore the U.K. in the North Sea (North Sea). Apache also has exploration interests in Suriname that may, over time, result in a reportable discovery and development opportunity. Financial information for each area is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
(1)
|
|
Egypt
(2,3)
|
|
North Sea
|
|
Other
International
|
|
Total
|
|
|
(In millions)
|
For the Quarter Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenues
|
|
$
|
552
|
|
|
$
|
—
|
|
|
$
|
569
|
|
|
$
|
271
|
|
|
$
|
—
|
|
|
$
|
1,392
|
|
Natural gas revenues
|
|
106
|
|
|
—
|
|
|
88
|
|
|
24
|
|
|
—
|
|
|
218
|
|
Natural gas liquids revenues
|
|
111
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
—
|
|
|
118
|
|
Total Oil and Gas Production Revenues
|
|
$
|
769
|
|
|
$
|
—
|
|
|
$
|
660
|
|
|
$
|
299
|
|
|
$
|
—
|
|
|
$
|
1,728
|
|
Operating Income (Loss)
(4)
|
|
$
|
184
|
|
|
$
|
—
|
|
|
$
|
336
|
|
|
$
|
68
|
|
|
$
|
(1
|
)
|
|
$
|
587
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on divestitures, net
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Other
(5)
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
Financing costs, net
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Income Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
388
|
|
Total Assets
|
|
$
|
13,927
|
|
|
$
|
—
|
|
|
$
|
4,813
|
|
|
$
|
3,009
|
|
|
$
|
42
|
|
|
$
|
21,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenues
|
|
$
|
397
|
|
|
$
|
49
|
|
|
$
|
486
|
|
|
$
|
240
|
|
|
$
|
—
|
|
|
$
|
1,172
|
|
Natural gas revenues
|
|
85
|
|
|
45
|
|
|
102
|
|
|
23
|
|
|
—
|
|
|
255
|
|
Natural gas liquids revenues
|
|
70
|
|
|
8
|
|
|
3
|
|
|
4
|
|
|
—
|
|
|
85
|
|
Total Oil and Gas Production Revenues
|
|
$
|
552
|
|
|
$
|
102
|
|
|
$
|
591
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
1,512
|
|
Operating Income (Loss)
(4)
|
|
$
|
60
|
|
|
$
|
(13
|
)
|
|
$
|
301
|
|
|
$
|
38
|
|
|
$
|
(21
|
)
|
|
$
|
365
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on divestitures, net
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
Transaction, reorganization, and separation
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Financing costs, net
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
Income Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538
|
|
Total Assets
|
|
$
|
12,361
|
|
|
$
|
1,556
|
|
|
$
|
5,006
|
|
|
$
|
3,634
|
|
|
$
|
53
|
|
|
$
|
22,610
|
|
|
|
(1)
|
Apache exited its Canadian operations in the third quarter of 2017.
|
|
|
(2)
|
Includes a noncontrolling interest in Egypt.
|
|
|
(3)
|
Includes revenue from non-customer of
$139 million
,
$15 million
, and
$1 million
for oil, natural gas, and natural gas liquids, respectively.
|
|
|
(4)
|
Operating income (loss) consists of oil and gas production revenues less lease operating expenses, gathering, transmission, and processing costs, taxes other than income, exploration costs, depreciation, depletion, and amortization, asset retirement obligation accretion, and impairments. The operating income of U.S. includes asset impairments totaling
$16 million
for the
first
quarter of
2018
. The operating income of U.S. and North Sea includes asset impairments totaling
$15 million
and
$8 million
, respectively, for the
first
quarter of
2017
.
|
|
|
(5)
|
Included in Other are sales proceeds related to U.S. third-party purchased oil and gas totaling
$104 million
for the period ending March 31, 2018, which are determined to be revenue from customers.
|