e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission File Number 1-4300
APACHE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   41-0747868
     
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
     
Suite 100, One Post Oak Central    
2000 Post Oak Boulevard, Houston, TX   77056-4400
     
(Address of Principal Executive Offices)   (Zip Code)
Registrant’s Telephone Number, Including Area Code: (713) 296-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ       NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES þ       NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ       Accelerated filer o      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o      NO þ
Number of shares of Registrant’s common stock, outstanding as of March 31, 2007.............................331,160,393
 
 

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 — CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
Exhibit Index
Non-Employee Directors' Compensation Plan
Equity Compensation Plan for Non-Employee Directors
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certifications of CEO & CFO Pursuant to Section 906


Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
                 
    For the Quarter Ended March 31,  
    2007     2006  
    (In thousands, except per common share data)  
REVENUES AND OTHER:
               
Oil and gas production revenues
  $ 2,023,067     $ 1,950,298  
Other
    (25,726 )     48,804  
 
           
 
               
 
    1,997,341       1,999,102  
 
           
 
               
OPERATING EXPENSES:
               
Depreciation, depletion and amortization
    530,913       372,577  
Asset retirement obligation accretion
    24,064       20,645  
Lease operating expenses
    392,509       291,614  
Gathering and transportation costs
    28,025       26,104  
Severance and other taxes
    97,272       146,414  
General and administrative
    67,862       45,672  
Financing costs:
               
Interest expense
    65,732       42,863  
Amortization of deferred loan costs
    694       508  
Capitalized interest
    (21,776 )     (14,193 )
Interest income
    (2,587 )     (6,364 )
 
           
 
               
 
    1,182,708       925,840  
 
           
 
               
INCOME BEFORE INCOME TAXES
    814,633       1,073,262  
Provision for income taxes
    321,684       412,341  
 
           
 
               
NET INCOME
    492,949       660,921  
Preferred stock dividends
    1,420       1,420  
 
           
 
               
INCOME ATTRIBUTABLE TO COMMON STOCK
  $ 491,529     $ 659,501  
 
           
 
               
NET INCOME PER COMMON SHARE:
               
Basic
  $ 1.48     $ 2.00  
 
           
Diluted
  $ 1.47     $ 1.97  
 
           
The accompanying notes to consolidated financial statements
are an integral part of this statement.

1


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
                 
    For the Quarter Ended  
    March 31,  
    2007     2006  
    (In thousands)  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 492,949     $ 660,921  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    530,913       372,577  
Provision for deferred income taxes
    135,162       160,672  
Asset retirement obligation accretion
    24,064       20,645  
Other
    9,372       9,385  
Changes in operating assets and liabilities:
               
(Increase) decrease in receivables
    45,365       22,257  
(Increase) decrease in inventories
    (8,250 )     (4,132 )
(Increase) decrease in drilling advances and other
    (4,502 )     108,789  
(Increase) decrease in deferred charges and other
    3,304       (16,664 )
Increase (decrease) in accounts payable
    (3,296 )     (40,217 )
Increase (decrease) in accrued expenses
    (156,217 )     (226,350 )
Increase (decrease) in advances from gas purchasers
    (9,449 )     (6,368 )
Increase (decrease) in deferred credits and noncurrent liabilities
    4,144       (18,231 )
 
           
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
    1,063,559       1,043,284  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Additions to property and equipment
    (1,109,095 )     (919,667 )
Acquisition of Anadarko properties
    (1,000,000 )      
Acquisition of Hess properties
          (230,080 )
Proceeds from sale of Egyptian properties
          409,197  
Additions to gas gathering, transmission and processing facilities
    (96,427 )     (92,372 )
Other, net
    (23,672 )     (53,582 )
 
           
 
               
NET CASH USED IN INVESTING ACTIVITIES
    (2,229,194 )     (886,504 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Debt borrowings
    2,746,801       158,273  
Payments on debt
    (1,553,884 )     (3,800 )
Dividends paid
    (51,032 )     (34,433 )
Common stock activity
    5,821       3,238  
Treasury stock activity, net
    1,949       936  
Cost of debt and equity transactions
    (13,389 )     (182 )
Other
    5,313       (5,657 )
 
           
 
               
NET CASH PROVIDED BY FINANCING ACTIVITIES
    1,141,579       118,375  
 
           
 
               
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    (24,056 )     275,155  
 
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    140,524       228,860  
 
           
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 116,468     $ 504,015  
 
           
The accompanying notes to consolidated financial statements
are an integral part of this statement.

2


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
                 
    March 31,     December 31,  
    2007     2006  
    (In thousands)  
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 116,468     $ 140,524  
Receivables, net of allowance
    1,616,073       1,651,664  
Inventories
    373,707       320,386  
Drilling advances
    83,560       78,838  
Derivative instruments
    21,773       139,756  
Prepaid assets and other
    160,190       159,103  
 
           
 
               
 
    2,371,771       2,490,271  
 
           
 
               
PROPERTY AND EQUIPMENT:
               
Oil and gas, on the basis of full cost accounting:
               
Proved properties
    31,275,816       29,107,921  
Unproved properties and properties under development, not being amortized
    1,304,411       1,284,743  
Gas gathering, transmission and processing facilities
    1,822,046       1,725,619  
Other
    365,223       358,605  
 
           
 
               
 
    34,767,496       32,476,888  
Less: Accumulated depreciation, depletion and amortization
    (11,660,989 )     (11,130,636 )
 
           
 
               
 
    23,106,507       21,346,252  
 
           
 
               
OTHER ASSETS:
               
Goodwill, net
    189,252       189,252  
Deferred charges and other
    386,277       282,400  
 
           
 
               
 
  $ 26,053,807     $ 24,308,175  
 
           
The accompanying notes to consolidated financial statements
are an integral part of this statement.

3


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
                 
    March 31,     December 31,  
    2007     2006  
    (In thousands)  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 636,025     $ 644,889  
Accrued operating expense
    61,214       70,551  
Accrued exploration and development
    631,427       534,924  
Accrued compensation and benefits
    98,385       127,779  
Accrued interest
    60,285       30,878  
Accrued income taxes
    27,607       2,133  
Current debt
    1,501,360       1,802,094  
Asset retirement obligation
    365,817       376,713  
Derivative instruments
    98,380       70,128  
Other
    111,777       151,523  
 
           
 
               
 
    3,592,277       3,811,612  
 
           
 
               
LONG-TERM DEBT
    3,512,180       2,019,831  
 
           
 
               
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
               
Income taxes
    3,407,925       3,618,989  
Advances from gas purchasers
    33,718       43,167  
Asset retirement obligation
    1,372,981       1,370,853  
Derivative instruments
    47,953        
Other
    638,918       252,670  
 
           
 
               
 
    5,501,495       5,285,679  
 
           
 
               
COMMITMENTS AND CONTINGENCIES (Note 11)
               
 
               
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, 340,103,164 and 339,783,392 shares issued, respectively
    212,564       212,365  
Paid-in capital
    4,291,660       4,269,795  
Retained earnings
    9,292,202       8,898,577  
Treasury stock, at cost, 8,942,771 and 9,045,967 shares, respectively
    (253,811 )     (256,739 )
Accumulated other comprehensive loss
    (193,147 )     (31,332 )
 
           
 
               
 
    13,447,855       13,191,053  
 
           
 
               
 
  $ 26,053,807     $ 24,308,175  
 
           
The accompanying notes to consolidated financial statements
are an integral part of this statement.

4


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(Unaudited)
                                                                   
                                                      Accumulated        
              Series B                                     Other     Total  
    Comprehensive       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Shareholders’  
    Income       Stock     Stock     Capital     Earnings     Stock     Income (Loss)     Equity  
    (In thousands)  
BALANCE AT DECEMBER 31, 2005
            $ 98,387     $ 210,623     $ 4,170,714     $ 6,516,863     $ (89,764 )   $ (365,608 )   $ 10,541,215  
Comprehensive income (loss):
                                                                 
Net income
  $ 660,921                           660,921                   660,921  
Commodity hedges, net of income tax expense of $39,414
    71,610                                       71,610       71,610  
 
                                                               
Comprehensive income
  $ 732,531                                                            
 
                                                               
Dividends:
                                                                 
Preferred
                                (1,420 )                 (1,420 )
Common ($.10 per share)
                                (33,036 )                 (33,036 )
Common shares issued
                    125       6,027                         6,152  
Treasury shares issued, net
                          976             225             1,201  
Compensation Expense
                          9,821                         9,821  
Other
                          32                         32  
 
                                                 
 
                                                                 
BALANCE AT MARCH 31, 2006
            $ 98,387     $ 210,748     $ 4,187,570     $ 7,143,328     $ (89,539 )   $ (293,998 )   $ 11,256,496  
 
                                                 
 
                                                                 
BALANCE AT DECEMBER 31, 2006
            $ 98,387     $ 212,365     $ 4,269,795     $ 8,898,577     $ (256,739 )   $ (31,332 )   $ 13,191,053  
Comprehensive income (loss):
                                                                 
Net income
  $ 492,949                           492,949                   492,949  
Commodity hedges, net of income tax benefit of $87,020
    (161,815 )                                     (161,815 )     (161,815 )
 
                                                               
Comprehensive income
  $ 331,134                                                            
 
                                                               
Dividends:
                                                                 
Preferred
                                (1,420 )                 (1,420 )
Common ($.15 per share)
                                (49,654 )                 (49,654 )
Common shares issued
                    199       10,288                         10,487  
Treasury shares issued, net
                          1,170             2,928             4,098  
Compensation Expense
                          10,359                         10,359  
FIN 48 Adoption
                                (48,502 )                 (48,502 )
Other
                          48       252                   300  
 
                                                 
 
                                                                 
BALANCE AT MARCH 31, 2007
            $ 98,387     $ 212,564     $ 4,291,660     $ 9,292,202     $ (253,811 )   $ (193,147 )   $ 13,447,855  
 
                                                   
The accompanying notes to consolidated financial statements
are an integral part of this statement.

5


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
     These 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), and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. 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 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. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included in the company’s most recent annual report on Form 10-K.
Reclassifications
     Certain prior period amounts have been reclassified to conform with current year presentations.
1. ACQUISITIONS AND DIVESTITURES
2007 Acquisition
     U.S. Permian Basin
     On March 29, 2007, the company closed its acquisition of controlling interest in 28 oil and gas fields in the Permian Basin of West Texas from Anadarko Petroleum Corporation (Anadarko) for $1 billion. Apache estimates that these fields had proved reserves of 57 million barrels (MMbbls) of liquid hydrocarbons and 78 billion cubic feet (Bcf) of natural gas as of yearend 2006. The company funded the acquisition with debt. Apache and Anadarko entered into a joint-venture arrangement to effect the transaction. The company entered into cash flow hedges for a portion of the crude oil and the natural gas production.
2. HEDGING AND DERIVATIVE INSTRUMENTS
     Apache uses a variety of strategies to manage its exposure to fluctuations in crude oil and natural gas commodity prices. The company’s hedging policy allows management to enter into hedges in connection with investments such as acquisitions. The success of an acquisition is significantly influenced by the company’s ability to achieve targeted production at forecasted prices and commodity hedges effectively reduce price risk on a portion of the acquired production. In addition, the company’s board of directors separately authorized management to enter into derivative contracts on a portion of production projected to be generated from the 2006 and 2007 drilling programs. Hedge positions entered into for the drilling programs are designed to protect the underlying investment economics of our drilling operations.

6


Table of Contents

     As of March 31, 2007, the total outstanding positions of Apache’s natural gas and crude oil cash flow hedges were as follows:
Costless Collars
                                                                                                         
                                                                            Weighted        
Production       Commodity       Total Volumes   Floor Price     Ceiling Price     Average     Fair Value  
Period   Region   Type   Index   (MMBtu/Bbl/GJ)   Range     Range     Floor/Ceiling     Asset/(Liability)  
                                                                                                    (In thousands)  
2007
  US   Gas   NYMEX     56,345,000     MMBtu   $ 5.25             8.65     $ 5.85             11.00     $ 6.99       /       9.01     $ (20,139 )
 
  US   Gas   PEPL     17,875,000     MMBtu   $ 6.85             7.00     $ 9.52             10.15     $ 6.88       /       9.67     $ 5,334  
 
  Canada   Gas   AECO     22,350,000     GJ   $ 5.20             6.30     $ 8.24             9.03     $ 5.38       /       8.73     $ (3,500 )
 
  US   Oil   NYMEX     9,249,500     Bbl   $ 33.00             75.00     $ 39.25             85.00     $ 58.73       /       70.66     $ (37,360 )
 
                                                                                                       
2008
  US   Gas   NYMEX     49,410,000     MMBtu   $ 7.00             8.15     $ 9.20             10.80     $ 7.52       /       10.26     $ (7,065 )
 
  US   Gas   PEPL     23,790,000     MMBtu   $ 6.90             7.00     $ 9.55             10.05     $ 6.91       /       9.74     $ 3,326  
 
  Canada   Gas   AECO     32,940,000     GJ   $ 5.63             6.30     $ 8.21             9.34     $ 5.71       /       8.95     $ (9,693 )
 
  US   Oil   NYMEX     10,797,000     Bbl   $ 52.00             69.00     $ 63.60             81.50     $ 62.59       /       74.58     $ (12,139 )
 
                                                                                                       
2009
  US   Gas   NYMEX     5,475,000     MMBtu   $ 7.00             7.50     $ 8.40             8.70     $ 7.17       /       8.60     $ (2,598 )
 
  Canada   Gas   AECO     29,200,000     GJ   $ 5.63             5.63     $ 8.67             8.89     $ 5.63       /       8.76     $ (6,430 )
 
  US   Oil   NYMEX     5,475,000     Bbl   $ 52.00             62.00     $ 65.00             73.65     $ 57.60       /       70.07     $ (19,592 )
 
                                                                                                       
2010
  US   Gas   NYMEX     1,350,000     MMBtu   $ 7.00             7.50     $ 10.35             10.70     $ 7.17       /       10.58     $ (548 )
 
  US   Oil   NYMEX     1,084,000     Bbl   $ 52.00             58.00     $ 66.05             71.30     $ 53.99       /       67.53     $ (5,147 )
Fixed Price Swaps
                                                         
Production       Commodity       Total Volumes   Fixed Price     Average     Fair Value  
Period   Region   Type   Index   (MMBtu/Bbl)   Range     Fixed Price     Asset/(Liability)  
                                                    (In thousands)  
2007
  US   Gas   NYMEX   1,100,000   $ 5.46             5.51     $ 5.50     $ (2,554 )
 
  US   Oil   NYMEX   3,351,000   $ 36.78             73.26     $ 70.36     $ 5,204  
 
  Australia   Oil   BRENT   300,000   $ 61.00             61.00     $ 61.00     $ (2,138 )
 
                                                       
2008
  US   Oil   NYMEX   4,392,000   $ 66.85             70.90     $ 69.21     $ (3,040 )
     The Canadian natural gas prices shown in the above table are converted to U.S. dollars utilizing March 31, 2007 exchange rates and are settled against the AECO Index. The NYMEX, AECO and Panhandle Eastern Pipe Line (PEPL) hedges are valued using actively quoted prices and quotes obtained from reputable third-party financial institutions.
     The above prices represent a weighted average of several contracts entered into on a per million British thermal units (MMBtu), per gigajoule (GJ) or per barrel (Bbl) basis for gas and oil derivatives.
     A reconciliation of the components of accumulated other comprehensive income (loss) in the Statement of Consolidated Shareholders’ Equity related to Apache’s commodity derivative activity is presented in the table below:
                 
    Before tax     After tax  
    (In thousands)  
Unrealized gain (loss) on derivatives at December 31, 2006
  $ 129,325     $ 83,534  
Net gains realized into earnings
    23,644       15,224  
Net change in derivative fair value
    (272,479 )     (177,039 )
 
           
 
               
Unrealized gain (loss) on derivatives at March 31, 2007
  $ (119,510 )   $ (78,281 )
 
           
     Differences between the fair values and the unrealized loss on derivatives before income taxes recognized in accumulated other comprehensive income (loss) are primarily related to premiums, recognition of unrealized gains and losses on certain derivatives that did not qualify for hedge accounting and hedge ineffectiveness. Based on current market prices as of March 31, 2007, the company recorded an unrealized loss in other comprehensive income (loss) of $120 million ($78 million after tax), primarily representing commodity derivative hedges. Gains and losses on the commodity hedges will be realized in future earnings contemporaneously with the related sales of natural gas and crude oil production applicable to specific hedges. Of the $120 million estimated unrealized loss on derivatives at March 31, 2007, approximately $79 million ($52 million after tax) applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions. These contracts, designated as hedges, qualified and continue to qualify for hedge accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, as amended.

7


Table of Contents

3. DEBT
     On January 26, 2007, the company issued $500 million principal amount, $499.5 million net of discount, of senior unsecured 5.625-percent notes maturing January 15, 2017 and $1.0 billion principal amount, $993 million net of discount, of senior unsecured 6.0-percent notes maturing January 15, 2037. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The proceeds were used to repay a portion of the company’s outstanding commercial paper to prepare for our $1.0 billion acquisition of Permian Basin properties from Anadarko which closed March 29, 2007, and for general corporate purposes.
Subsequent Events
     On April 16, 2007, the company issued $500 million principal amount, $498.8 million net of discount, of senior unsecured 5.25-percent notes maturing April 15, 2013. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The proceeds were used to repay a portion of the company’s outstanding commercial paper and for general corporate purposes.
     In April 2007, the company amended its existing $1.5 billion U.S. five-year revolving credit facility to extend the maturity date to May 28, 2012 from the current maturity date of May 28, 2011. The amendment also allows the company to increase the size of the facility by up to $750 million by adding commitments from new or existing lenders.
     The company also amended its $450 million U.S. credit facility, $150 million Australian credit facility and $150 million Canadian credit facility to extend the maturity dates of all the commitments to May 12, 2012. The amendment also allows the company to increase the size of the U.S. facility by up to $250 million, the Australian facility by up to $150 million and the Canadian facility by up to $150 million by adding commitments from new or existing lenders.
4. INCOME TAXES
     The company uses an estimated annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the company operates. Statutory tax rate changes and other significant or unusual items are discretely recognized in the quarter in which they occur.
     Apache adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” as of January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position must meet before being recognized in the financial statements. As a result of the implementation of FIN 48, the company recorded a $49 million increase in its tax reserves and an offsetting decrease to retained earnings for uncertain tax positions. As of the adoption date, the company had total tax reserves of $563 million, including $521 million of unrecognized tax benefits which, if recognized, would impact the company’s effective income tax rate in future periods. This reserve includes an estimate of potential interest and penalties, which are recorded as components of income tax expense, in the amount of $91 million as of January 1, 2007. While no significant changes were made to the company’s tax reserve balances during the quarter ended March 31, 2007, an additional $9 million of potential interest expense was recorded.
     Apache and its subsidiaries are subject to U.S. federal income tax as well as income tax in various state and foreign jurisdictions. In many cases, the company’s uncertain tax positions are related to tax years that may be subject to examination by the relevant taxing authority. The company’s open tax years in its key jurisdictions are as follows:
         
Jurisdiction   Earliest Open Tax Year
United States
  December 31, 2002
Canada
  December 31, 2001
Egypt
  December 31, 1998
Australia
  December 31, 2001
United Kingdom
  December 31, 2003
Argentina
  December 31, 2001

8


Table of Contents

     As previously disclosed, the company is under audit by the U.S. Internal Revenue Service for the 2002 through 2005 income tax years. The company is also under audit in various states and in most of the company’s foreign jurisdictions as part of its normal course of business. During the quarter there were no significant changes to the status of these examinations.
5. CAPITAL STOCK
     During the first quarter of 2007 and 2006, Apache declared $50 million and $33 million, respectively, in dividends on its Common Stock. The increase in the first-quarter 2007 common stock dividends from the amount declared for the same period last year, reflects a 50 percent higher common stock dividend rate and a slight increase in common shares outstanding. On September 13, 2006, the company announced that its board of directors voted to increase the quarterly cash dividend on its common stock to 15 cents per share from 10 cents per share, effective with the November 2006 payment. In addition, in each period, Apache paid a total of $1.4 million in dividends on its Series B Preferred Stock issued in August 1998.
6. NET INCOME PER COMMON SHARE
     A reconciliation of the components of basic and diluted net income per common share is presented in the table below:
                                                 
    For the Quarter Ended March 31,  
    2007     2006  
    Income     Shares     Per Share     Income     Shares     Per Share  
            (In thousands, except per share amounts)  
Basic:
                                               
Income attributable to common stock
  $ 491,529       331,213     $ 1.48     $ 659,501       330,416     $ 2.00  
 
                                           
 
                                               
Effect of Dilutive Securities:
                                               
Stock options and other
          2,089                     4,053          
 
                                       
 
                                               
Diluted:
                                               
Income attributable to common stock, including assumed conversions
  $ 491,529       333,302     $ 1.47     $ 659,501       334,469     $ 1.97  
 
                                   
7. SUPPLEMENTAL CASH FLOW INFORMATION
     The following table provides supplemental disclosure of cash flow information:
                 
    For the Quarter Ended  
    March 31,  
    2007     2006  
    (In thousands)  
Cash paid during the period for:
               
Interest (net of amounts capitalized)
  $ 13,263     $ 13,341  
Income taxes (net of refunds)
    136,757       280,358  
8. PENSION AND POST-RETIREMENT BENEFITS
     Apache has a non-contributory defined benefit pension plan that provides retirement benefits for certain U.K. employees meeting established age and service requirements. Apache also has a post-retirement benefit plan which provides benefits for substantially all of its U.S. employees. The post-retirement benefit plan provides medical benefits up until age 65 and is contributory.

9


Table of Contents

Net Periodic Cost
     The following table presents the plans’ net periodic benefit cost for the quarters ended March 31, 2007 and 2006:
                                 
    Pension Benefits     Postretirement Benefits  
    For the Quarter Ended March 31,  
    2007     2006     2007     2006  
    (In thousands)  
Components of net periodic benefit cost:
                               
Service cost
  $ 1,775     $ 1,700     $ 401     $ 400  
Interest cost
    1,593       1,234       269       250  
Expected return on plan assets
    (1,867 )     (1,360 )            
Amortization of transition obligation
                11       13  
Amortization of actuarial (gain)/loss
                63       87  
 
                       
 
                               
Net periodic benefit cost
  $ 1,501     $ 1,574     $ 744     $ 750  
 
                       
Employer Contributions
     As previously disclosed in our financial statements for the year ended December 31, 2006, the company expects to contribute $6 million to the pension plan and $402,000 to the post-retirement benefit plan in 2007. As of March 31, 2007, approximately $1.2 million of contributions have been made to the plans.
9. BUSINESS SEGMENT INFORMATION
     Apache has interests in the United States, Canada, Egypt, Australia, offshore the United Kingdom (UK) in the North Sea, and Argentina. The company evaluates segment performance based on profit and loss from oil and gas operations before income and expense items incidental to oil and gas operations and income taxes. Apache’s reportable segments are managed separately because of their geographic locations. Financial information by reportable segment is presented below:
                                                                 
    United                             UK             Other        
    States     Canada     Egypt     Australia     North Sea     Argentina     International     Total  
    (In thousands)  
For the Quarter Ended March 31, 2007
                                                               
 
                                                               
Oil and Gas Production Revenues
  $ 861,317     $ 320,170     $ 396,607     $ 104,184     $ 273,608     $ 67,181     $     $ 2,023,067  
     
 
                                                               
Operating Income (1)
  $ 373,556     $ 133,840     $ 273,909     $ 42,724     $ 115,748     $ 10,507     $     $ 950,284  
             
 
                                                               
Other Income (Expense):
                                                               
Other
                                                            (25,726 )
General and administrative
                                                            (67,862 )
Financing costs, net
                                                            (42,063 )
 
                                                             
Income Before Income Taxes
                                                          $ 814,633  
 
                                                             
 
                                                               
Total Assets
  $ 12,663,370     $ 5,978,178     $ 2,603,969     $ 1,442,133     $ 1,894,525     $ 1,459,814     $ 11,818     $ 26,053,807  
     
 
                                                               
For the Quarter Ended March 31, 2006
                                                               
 
                                                               
Oil and Gas Production Revenues
  $ 693,685     $ 381,309     $ 398,470     $ 94,311     $ 353,841     $ 4,835     $ 23,847     $ 1,950,298  
     
 
                                                               
Operating Income (1)
  $ 357,439     $ 216,748     $ 304,331     $ 48,547     $ 151,329     $ 598     $ 13,952     $ 1,092,944  
         
 
                                                               
Other Income (Expense):
                                                               
Other
                                                            48,804  
General and administrative
                                                            (45,672 )
Financing costs, net
                                                            (22,814 )
 
                                                             
Income Before Income Taxes
                                                          $ 1,073,262  
 
                                                             
 
                                                               
Total Assets
  $ 9,112,847     $ 5,257,647     $ 2,530,666     $ 1,302,364     $ 1,641,706     $ 62,409     $ 91,464     $ 19,999,103  
     
 
1)   Operating Income consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, lease operating expenses, gathering and transportation costs, and severance and other taxes.

10


Table of Contents

10. ASSET RETIREMENT OBLIGATIONS
     The following table describes changes to the company’s asset retirement obligation (ARO) liability for the quarter ended March 31, 2007 (in thousands):
         
Asset retirement obligation as of December 31, 2006
  $ 1,747,566  
Liabilities incurred
    74,821  
Liabilities settled
    (107,653 )
Accretion expense
    24,064  
 
     
 
       
Asset retirement obligation as of March 31, 2007
  $ 1,738,798  
 
     
     Liabilities incurred primarily relate to abandonment obligations assumed in connection with current drilling activity and acquisitions closed during the period. Liabilities settled during the period relate to properties plugged and abandoned, primarily in the U.S. Gulf of Mexico.
11. COMMITMENTS AND CONTENGENCIES
Litigation
Texaco China B.V.
     In March, 2007, Apache paid $81.5 million to settle Texaco China B.V.’s international arbitration award. The settlement was effective April 23, 2007 and was fully reserved. The history of this matter is discussed in Note 10 of the financial statements in Apache’s annual report on Form 10-K for our 2006 fiscal year.
Grynberg
     As more fully described in Note 10 of the financial statements in our annual report on Form 10-K for our 2006 fiscal year, in 1997, Jack J. Grynberg began filing lawsuits against other natural gas producers, gatherers, and pipelines claiming that the defendants have under paid royalty to the federal government and Indian tribes by mis-measurement of the volume and heating content of natural gas and are responsible for acts of others who mis-measured natural gas. The claims against Apache were dismissed, though Mr. Grynberg has appealed the dismissal. No material changes in this matter have occurred since the filing of our most recent annual report on Form 10-K.
Argentine Environmental Claims
     In connection with the Pioneer acquisition, the company acquired a subsidiary of Pioneer in Argentina (PNRA) that is involved in various administrative proceedings with environmental authorities in the Neuquén Province relating to permits for and discharges from operations in that province. In addition, PNRA was named in a suit initiated against oil companies operating in the Neuquén basin entitled Asociación de Superficiarios de la Patagonia v. YPF S.A., et. al., originally filed on August 21, 2003, in the Argentine National Supreme Court of Justice relating to various environmental and remediation claims. All of these matters are more fully described in Note 10 of the financial statements in our annual report on Form 10-K for our 2006 fiscal year. No material change in the status of these matters has occurred since the filing of our most recent annual report on Form 10-K.
Louisiana Restoration
     As more fully described in Note 10 of the financial statements in our annual report on Form 10-K for our 2006 fiscal year, numerous surface owners have filed claims or sent demand letters to various oil and gas companies, including Apache, claiming that, under either expressed or implied lease terms or Louisiana law, they are liable for damage measured by the cost of restoration of leased premises to their original condition as well as damages for contamination and cleanup. No material change in the status of these matters has occurred since the filing of our most recent annual report on Form 10-K.

11


Table of Contents

Hurricane Related Litigation
     As more fully described in Note 10 of the financial statements in our annual report on Form 10-K for our 2006 fiscal year, two cases were filed against oil and gas companies and others relating to damages caused by Hurricanes Katrina and Rita in 2005. In a class action lawsuit has been filed styled Barasich, et al., individually and as representatives of all those similarly situated vs. Columbia Gulf Transmission Co., et al, No. 05-4161, United States District Court, Eastern District of Louisiana, the plaintiffs’ claim that defendants were negligent by constructing canals and conducting oil and gas operations, which plaintiffs contend is the sole and/or almost the sole cause of the alleged destruction of the marshes in South Louisiana, which plaintiffs blame for all and/or substantially all loss of life and destruction of property which was incurred from Hurricane Katrina. In a case styled Ned Comer, et al vs.Murphy Oil USA, Inc., et al, Case No: 1:05-cv-00436; U.S.D.C., United States District Court, Southern District of Mississippi., Mississippi property owners allege that hurricanes’ meteorological effects increased in frequency and intensity due to global warming, and there will be continued future damage from increasing intensity of storms and sea level rises. They claim this was caused by the various defendants (oil and gas companies, electric and coal companies, and chemical manufacturers). No material change in the status of these matters has occurred since the filing of our most recent annual report on Form 10-K.
Insurance Claims
     In connection with damage related to Hurricanes Katrina and Rita in 2005, Apache has filed claims with OIL Insurance Ltd. (“OIL”), who provided Apache’s first level of property damage insurance coverage (“OIL Coverage”) and with its principal commercial insurance underwriters, who provided Apache with property damage insurance coverage in excess of OIL Coverage, business interruption insurance coverage, and liability coverage (collectively “Excess Coverage”). Through March 31, 2007, we have received payments of $53 million from OIL for property damage and $150 million from underwriters providing Excess Coverage for business interruption (the entire amount of the business interruption coverage) and $5 million for property damage. In addition, Apache’s liability policy with certain underwriters who provided Excess Coverage includes an endorsement providing $165 million per occurrence for wreck removal costs and expenses. Similarly, Apache has a second layer of liability coverage from certain underwriters which provides an additional $100 million of excess coverage per occurrence which includes the same endorsement for wreck removal costs and expenses (the “Second Excess Coverage”). Apache informed the lead underwriter on the Excess Coverage policy and the Second Excess Coverage policy, of our plans to make a claim under the wreck removal coverage, and the lead underwriter requested that Apache not make such claims in return for payment of the claims still outstanding under the Excess Coverage and a waiver of the underwriters’ alleged right to seek repayment of the amounts already paid to Apache for property damage and business interruption. On account of this request from the lead underwriter, Apache filed an action styled “Apache Corporation v. Houston Casualty Company, and Certain Underwriters at Interest” in the District Court of Harris County in Houston, Texas seeking a declaratory judgment that the underwriters providing Excess Coverage are obligated to pay any outstanding claims and have no right to seek repayment of any previously paid amounts, regardless of any final resolution of Apache’s right to recovery under the wreck removal endorsement. Subsequent to our filing the lawsuit, the underwriters agreed to pay the $114 million of remaining claims for physical damage and not to seek repayment of that amount or the $155 million previously paid for physical damage and business interruption. Although the underwriters are still disputing Apache’s right to recovery under the wreck removal endorsement, an agreement was executed by all parties on the dismissal of the lawsuit and on attempting to resolve the remaining claims through negotiation.
General
     The company is involved in other litigation and is subject to governmental and regulatory controls arising in the ordinary course of business. The company has an accrued liability of approximately $8 million for other legal contingencies that are probable of occurring and can be reasonably estimated. It is management’s opinion that the loss for any such other litigation matters and claims that are reasonably possible to occur will not have a material adverse affect on the company’s financial position or results of operations.

12


Table of Contents

Other Commitments and Contingencies
Environmental
     As of March 31, 2007, the company had an undiscounted reserve for environmental remediation of approximately $21 million. Apache is not aware of any environmental claims existing as of March 31, 2007, which have not been provided for or would otherwise have a material impact on its financial position or results of operations. 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.
Subsequent Event
     On May 7, 2007, Apache, on behalf of its joint venture, announced that it signed a contract for a floating production, storage and offloading vessel that will be used in the company’s Van Gogh development in Western Australia’s Exmouth Basin. Apache and its partner will pay $40 million per year plus operating expenses for a seven-year term with options for an eight-year extension or to acquire the vessel. Apache owns 52.5 percent of the development.
12. SUPPLEMENTAL GUARANTOR INFORMATION
     Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance Canada Corporation (Apache Finance Canada) are subsidiaries of Apache that have issued publicly traded securities and require the following condensed consolidating financial statements be provided as an alternative to filing separate financial statements.
     Each of the companies presented in the condensed consolidating financial statements has been fully consolidated in Apache’s consolidated financial statements. As such, the condensed consolidating financial statements should be read in conjunction with the financial statements of Apache Corporation and Subsidiaries and notes.

13


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2007
                                                         
                                    All Other              
                    Apache     Apache     Subsidiaries              
    Apache     Apache     Finance     Finance     of Apache     Reclassifications        
    Corporation     North America     Australia     Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
REVENUES AND OTHER:
                                                       
Oil and gas production revenues
  $ 837,548     $     $     $     $ 1,231,734     $ (46,215 )   $ 2,023,067  
Equity in net income (loss) of affiliates
    296,573       4,480       7,830       38,010       (12,911 )     (333,982 )      
Other
    306                         (26,032 )           (25,726 )
 
                                         
 
    1,134,427       4,480       7,830       38,010       1,192,791       (380,197 )     1,997,341  
 
                                         
 
                                                       
OPERATING EXPENSES:
                                                       
Depreciation, depletion and amortization
    226,892                         304,021             530,913  
Asset retirement obligation accretion
    17,638                         6,426             24,064  
Lease operating expenses
    204,233                         234,491       (46,215 )     392,509  
Gathering and transportation costs
    8,989                         19,036             28,025  
Severance and other taxes
    24,215                         73,057             97,272  
General and administrative
    52,329                         15,533             67,862  
Financing costs, net
    34,372             4,513       14,112       (10,934 )           42,063  
 
                                         
 
    568,668             4,513       14,112       641,630       (46,215 )     1,182,708  
 
                                         
 
                                                       
INCOME (LOSS) BEFORE INCOME TAXES
    565,759       4,480       3,317       23,898       551,161       (333,982 )     814,633  
Provision (benefit) for income taxes
    72,810             (1,163 )     (4,551 )     254,588             321,684  
 
                                         
 
                                                       
NET INCOME
    492,949       4,480       4,480       28,449       296,573       (333,982 )     492,949  
Preferred stock dividends
    1,420                                     1,420  
 
                                         
INCOME ATTRIBUTABLE TO COMMON STOCK
  $ 491,529     $ 4,480     $ 4,480     $ 28,449     $ 296,573     $ (333,982 )   $ 491,529  
 
                                         

14


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2006
                                                         
                                    All Other              
                    Apache     Apache     Subsidiaries              
    Apache     Apache     Finance     Finance     of Apache     Reclassifications        
    Corporation     North America     Australia     Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
REVENUES AND OTHER:
                                                       
Oil and gas production revenues
  $ 666,299     $     $     $     $ 1,349,184     $ (65,185 )   $ 1,950,298  
Equity in net income (loss) of affiliates
    441,811       6,760       9,555       71,778       (12,166 )     (517,738 )      
Other
    69,875                         (21,071 )           48,804  
 
                                         
 
    1,177,985       6,760       9,555       71,778       1,315,947       (582,923 )     1,999,102  
 
                                         
 
                                                       
OPERATING EXPENSES:
                                                       
Depreciation, depletion and amortization
    150,692                         221,885             372,577  
Asset retirement obligation accretion
    15,083                         5,562             20,645  
Lease operating expenses
    131,736                         225,063       (65,185 )     291,614  
Gathering and transportation costs
    7,710                         18,394             26,104  
Severance and other taxes
    27,609                         118,805             146,414  
General and administrative
    37,310                         8,362             45,672  
Financing costs, net
    19,924             4,583       14,111       (15,804 )           22,814  
 
                                         
 
    390,064             4,583       14,111       582,267       (65,185 )     925,840  
 
                                         
 
                                                       
INCOME (LOSS) BEFORE INCOME TAXES
    787,921       6,760       4,972       57,667       733,680       (517,738 )     1,073,262  
Provision (benefit) for income taxes
    127,000             (1,788 )     (4,740 )     291,869             412,341  
 
                                         
 
                                                       
NET INCOME
    660,921       6,760       6,760       62,407       441,811       (517,738 )     660,921  
Preferred stock dividends
    1,420                                     1,420  
 
                                         
INCOME ATTRIBUTABLE TO COMMON STOCK
  $ 659,501     $ 6,760     $ 6,760     $ 62,407     $ 441,811     $ (517,738 )   $ 659,501  
 
                                         

15


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 31, 2007
                                                         
                                    All Other              
                    Apache     Apache     Subsidiaries              
    Apache     Apache     Finance     Finance     of Apache     Reclassifications        
    Corporation     North America     Australia     Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  $ 352,318     $     $ (3,562 )   $ (641 )   $ 715,444     $     $ 1,063,559  
 
                                         
 
                                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                                                       
Additions to property and equipment
    (479,825 )                       (629,270 )           (1,109,095 )
Acquisition of Anadarko properties
    (1,000,000 )                                   (1,000,000 )
Additions to gas gathering, transmission and processing facilities
                            (96,427 )           (96,427 )
Non-cash portion of net oil and gas property additions
    12,478                         (12,478 )            
Investment in subsidiaries, net
    (28,669 )     (3,500 )                 (4,555 )     36,724        
Other, net
    (3,008 )                       (20,664 )           (23,672 )
 
                                         
NET CASH USED IN INVESTING ACTIVITIES
    (1,499,024 )     (3,500 )                 (763,394 )     36,724       (2,229,194 )
 
                                         
 
                                                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                                                       
Debt borrowings
    2,730,165             64       641       38,220       (22,289 )     2,746,801  
Payments on debt
    (1,530,500 )                       (23,384 )           (1,553,884 )
Dividends paid
    (51,032 )                                   (51,032 )
Common stock activity
    5,821       3,500       3,500             7,435       (14,435 )     5,821  
Treasury stock activity, net
    1,949                                     1,949  
Cost of debt and equity transactions
    (13,389 )                                   (13,389 )
Other
    5,313                                     5,313  
 
                                         
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    1,148,327       3,500       3,564       641       22,271       (36,724 )     1,141,579  
 
                                         
 
                                                       
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    1,621             2             (25,679 )           (24,056 )
 
                                                       
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    4,148                   1       136,375             140,524  
 
                                         
 
                                                       
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 5,769     $     $ 2     $ 1     $ 110,696     $     $ 116,468  
 
                                         

16


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 31, 2006
                                                         
                                    All Other              
                    Apache     Apache     Subsidiaries              
    Apache     Apache     Finance     Finance     of Apache     Reclassifications        
    Corporation     North America     Australia     Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  $ 401,155     $     $ (3,699 )   $ (1,575 )   $ 647,403     $     $ 1,043,284  
 
                                         
 
                                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                                                       
Additions to property and equipment
    (328,668 )                       (683,371 )           (1,012,039 )
Acquisition of Amerada Hess properties
    (230,080 )                                   (230,080 )
Proceeds from sale of Egyptian properties
                            409,197             409,197  
Investment in subsidiaries, net
    18,046       (3,500 )                 (5,264 )     (9,282 )      
Other, net
    26,817                         (80,399 )           (53,582 )
 
                                         
NET CASH USED IN INVESTING ACTIVITIES
    (513,885 )     (3,500 )                 (359,837 )     (9,282 )     (886,504 )
 
                                         
 
                                                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                                                       
Debt borrowings
    158,199             199       1,575       (22,468 )     20,768       158,273  
Payments on debt
    (3,800 )                                   (3,800 )
Dividends paid
    (34,433 )                                   (34,433 )
Common stock activity
    3,238       3,500       3,500             4,486       (11,486 )     3,238  
Treasury stock activity, net
    936                                     936  
Cost of debt and equity transactions
    (182 )                                   (182 )
Other
    (5,657 )                                   (5,657 )
 
                                         
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    118,301       3,500       3,699       1,575       (17,982 )     9,282       118,375  
 
                                         
 
                                                       
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    5,571                         269,584             275,155  
 
                                                       
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    3,785             2       1       225,072             228,860  
 
                                         
 
                                                       
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 9,356     $     $ 2     $ 1     $ 494,656     $     $ 504,015  
 
                                         

17


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2007
                                                         
                                    All Other              
                    Apache     Apache     Subsidiaries              
    Apache     Apache     Finance     Finance     of Apache     Reclassifications        
    Corporation     North America     Australia     Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
ASSETS
                                                       
 
CURRENT ASSETS:
                                                       
Cash and cash equivalents
  $ 5,769     $     $ 2     $ 1     $ 110,696     $     $ 116,468  
Receivables, net of allowance
    784,517             1,573             829,983             1,616,073  
Inventories
    22,777                         350,930             373,707  
Drilling advances and others
    223,247                         42,276             265,523  
 
                                         
 
    1,036,310             1,575       1       1,333,885             2,371,771  
 
                                         
 
                                                       
PROPERTY AND EQUIPMENT, NET
    11,226,687                         11,879,820             23,106,507  
 
                                         
 
                                                       
OTHER ASSETS:
                                                       
Intercompany receivable, net
    1,034,761             (6,358 )     (254,339 )     (774,064 )            
Goodwill, net
                            189,252             189,252  
Equity in affiliates
    8,079,586       287,532       520,120       1,978,407       (1,194,113 )     (9,671,532 )      
Deferred charges and other
    199,711                   3,906       182,660             386,277  
 
                                         
 
  $ 21,577,055     $ 287,532     $ 515,337     $ 1,727,975     $ 11,617,440     $ (9,671,532 )   $ 26,053,807  
 
                                         
 
                                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                       
 
CURRENT LIABILITIES:
                                                       
Current debt
  $ 1,277,500     $     $ 169,879     $     $ 53,981     $     $ 1,501,360  
Accounts payable
    348,019                         288,006             636,025  
Other accrued expenses
    898,298             3,612       52,042       500,940             1,454,892  
 
                                         
 
    2,523,817             173,491       52,042       842,927             3,592,277  
 
                                         
LONG-TERM DEBT
    2,764,510             99,828       646,943       899             3,512,180  
 
                                         
 
                                                       
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
                                                       
Income taxes
    1,419,430             (45,514 )     4,387       2,029,622             3,407,925  
Advances from gas purchasers
    33,718                                     33,718  
Asset retirement obligation
    924,014                         448,967             1,372,981  
Derivative instruments
    38,078                         9,875             47,953  
Other
    425,633                   7,721       205,564             638,918  
 
                                         
 
    2,840,873             (45,514 )     12,108       2,694,028             5,501,495  
 
                                         
 
                                                       
COMMITMENTS AND CONTINGENCIES
                                                       
 
                                                       
SHAREHOLDERS’ EQUITY
    13,447,855       287,532       287,532       1,016,882       8,079,586       (9,671,532 )     13,447,855  
 
                                         
 
  $ 21,577,055     $ 287,532     $ 515,337     $ 1,727,975     $ 11,617,440     $ (9,671,532 )   $ 26,053,807  
 
                                         

18


Table of Contents

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2006
                                                         
                                    All Other              
                    Apache             Subsidiaries              
    Apache     Apache     Finance     Apache     of Apache     Reclassifications        
    Corporation     North America     Australia     Finance Canada     Corporation     & Eliminations     Consolidated  
    (In thousands)  
ASSETS
                                                       
 
CURRENT ASSETS:
                                                       
Cash and cash equivalents
  $ 4,148     $     $     $ 1     $ 136,375     $     $ 140,524  
Receivables, net of allowance
    824,404             861             826,399             1,651,664  
Inventories
    30,580                         289,806             320,386  
Drilling advances and other
    374,067                         3,630             377,697  
 
                                         
 
    1,233,199             861       1       1,256,210             2,490,271  
 
                                         
 
                                                       
PROPERTY AND EQUIPMENT, NET
    9,960,531                         11,385,721             21,346,252  
 
                                         
 
                                                       
OTHER ASSETS:
                                                       
Intercompany receivable, net
    1,013,099             (6,355 )     (253,715 )     (753,029 )            
Goodwill, net
                            189,252             189,252  
Equity in affiliates
    7,761,686       279,129       511,806       1,908,263       (1,171,863 )     (9,289,021 )      
Deferred charges and other
    122,893                   3,985       155,522             282,400  
 
                                         
 
  $ 20,091,408     $ 279,129     $ 506,312     $ 1,658,534     $ 11,061,813     $ (9,289,021 )   $ 24,308,175  
 
                                         
 
                                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                                       
 
                                                       
CURRENT LIABILITIES:
                                                       
Accounts payable
  $ 381,780     $     $     $ 57     $ 263,052     $     $ 644,889  
Other accrued expenses
    958,294             2,599       38,201       365,535             1,364,629  
Current debt
    1,570,500             169,837             61,757             1,802,094  
 
                                         
 
    2,910,574             172,436       38,258       690,344             3,811,612  
 
                                         
 
                                                       
LONG-TERM DEBT
    1,271,845             99,809       646,926       1,251             2,019,831  
 
                                         
 
                                                       
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
                                                       
Income taxes
    1,631,847             (45,062 )     4,273       2,027,931             3,618,989  
Advances from gas purchasers
    43,167                                     43,167  
Asset retirement obligation
    932,844                         438,009             1,370,853  
Other
    110,078                         142,592             252,670  
 
                                         
 
    2,717,936             (45,062 )     4,273       2,608,532             5,285,679  
 
                                         
 
                                                       
COMMITMENTS AND CONTINGENCIES
                                                       
 
                                                       
SHAREHOLDERS’ EQUITY
    13,191,053       279,129       279,129       969,077       7,761,686       (9,289,021 )     13,191,053  
 
                                         
 
  $ 20,091,408     $ 279,129     $ 506,312     $ 1,658,534     $ 11,061,813     $ (9,289,021 )   $ 24,308,175  
 
                                         

19


Table of Contents

ITEM 2 —   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included in the company’s most recent annual report on Form 10-K.
Overview
     Apache Corporation (Apache or the company) reported first-quarter 2007 earnings of $492 million, compared to $660 million in the first quarter of 2006. First-quarter 2007 results, relative to the comparable 2006 quarter, saw a 12 percent drop in price realizations and a nine percent increase in per unit costs, which were partially offset by a 17 percent increase in equivalent production. Also, for comparative purposes, the 2006 quarter included $71 million in business interruption claims related to production shut-in because of two 2005 hurricanes. Natural gas production averaged a record of 1.76 billion cubic feet per day (Bcf/d) during the current-year quarter, 30 percent higher than first-quarter 2006 daily production. Crude oil and natural gas liquids production totaled 242,726 barrels per day (b/d), five percent above 2006 first-quarter levels. Crude oil prices averaged $55.87 per barrel, three percent below first-quarter 2006 prices, while natural gas prices averaged $5.22 per Mcf, down 18 percent. For a more detailed discussion of the revenue and cost components please refer to Results of Operation in this Item 2.
     On March 29, 2007, the company closed its acquisition of controlling interest in 28 oil and gas fields in the Permian Basin of West Texas from Anadarko Petroleum Corporation (Anadarko) for $1 billion. Apache estimates that these fields had proved reserves of 57 million barrels (MMbbls) of liquid hydrocarbons and 78 billion cubic feet (Bcf) of natural gas as of yearend 2006. The company funded the acquisition with debt. Apache and Anadarko entered into a joint-venture arrangement to effect the transaction. The company entered into cash flow hedges for a portion of the crude oil and the natural gas production.
     Other first-quarter 2007 operational highlights include:
  ¨     On January 9, 2007, the company announced several discoveries in the Western Desert of Egypt which included; the Qasr 34 which tested at 18.4 million cubic feet per day (MMcf/d) of natural gas and 725 barrels of condensate per day; the Qasr 36 which flowed 2,945 b/d of crude oil and 2.1 MMcf/d of gas; and the Hathor Deep 1X well which tested 12 MMcf/d of gas and 1,237 b/d of oil. Apache operates the Khalda Concession with a 100 percent contractor interest.
 
  ¨     On January 11, 2007, the company announced that our Alexandrite 1X well located on Egypt’s Matruh Concession tested 19.8 MMcf/d and 4,045 barrels of condensate per day. Apache operates the Matruh Concession with a 100 percent contractor interest.
 
  ¨     On February 2, 2007, Apache announced that the Syrah 5X appraisal well located on Egypt’s Khalda Concession test-flowed 47.6 MMcf/d of natural gas. Initial production from the field is expected to commence in late 2008 upon infrastructure expansion in the Khalda area. Apache operates the Khalda Concession with a 100 percent contractor interest.
 
  ¨     On February 20, 2007, the company announced completion of three wells in the Carnarvon Basin offshore Western Australia. The two gas wells, the Doric-2 and the Lee-3, came on line at initial production rates of 65 MMcf and 50 MMcf per day, respectively. The West Cyad-2 oil well had initial production of 6,000 barrels of oil per day. Apache operates all three wells through the Harriet Joint Venture with a 68.5 percent working interest.
 
  ¨     On April 4, 2007, Apache announced that the Jade 1-X discovery on the company’s Matruh Concession in Egypt’s Western Desert tested 25.6 MMcf per day. The company believes this discovery extends the Jurrassic gas fairway 12 miles to the Southwest, opening additional drilling opportunities. Apache operates the Matruh Concession with a 100 percent contractor interest.
 
  ¨     On April 17, 2007, the company announced that the Julimar-1 gas discovery on Australia’s Northwest Shelf tested a combined 85 MMcf/d from two zones. An appraisal well is planned for later in 2007. Apache owns a 65 percent interest in the field.

20


Table of Contents

Results of Operations
Revenues
     The table below presents oil and gas production revenues, production and average prices received from sales of natural gas, oil and natural gas liquids.
                         
    For the Quarter Ended March 31,  
                    Increase  
    2007     2006     (Decrease)  
Revenues (in thousands):
                       
Oil
  $ 1,159,929     $ 1,138,998       1.84 %
Natural gas
    826,761       779,399       6.08 %
Natural gas liquids
    36,377       31,901       14.03 %
 
                   
 
                       
Total
  $ 2,023,067     $ 1,950,298       3.73 %
 
                   
Oil Volume – Barrels per day:
                       
United States
    74,652       59,290       25.91 %
Canada
    19,032       21,691       (12.26 %)
Egypt
    60,371       57,292       5.37 %
Australia
    12,141       11,911       1.93 %
North Sea
    53,671       64,445       (16.72 %)
Argentina
    10,797       1,272     NM
China
          4,559       (100.00 %)
 
                   
 
                       
Total
    230,664       220,460       4.63 %
 
                   
Average Oil Price – Per barrel:
                       
United States
  $ 55.89     $ 50.22       11.29 %
Canada
    53.62       54.17       (1.02 %)
Egypt
    56.64       60.89       (6.98 %)
Australia
    66.96       66.39       0.86 %
North Sea
    56.35       60.66       (7.11 %)
Argentina
    40.61       39.30       3.33 %
China
          58.12       (100.00 %)
Total
    55.87       57.41       (2.68 %)
 
                       
Natural Gas Volume – Mcf per day:
                       
United States
    739,828       601,045       23.09 %
Canada
    383,020       385,982       (0.77 %)
Egypt
    243,485       212,874       14.38 %
Australia
    194,961       153,659       26.88 %
North Sea
    1,889       2,269       (16.75 %)
Argentina
    198,239       3,143     NM
 
                   
 
                       
Total
    1,761,422       1,358,972       29.61 %
 
                   
Average Natural Gas Price – Per Mcf:
                       
United States
  $ 6.96     $ 7.41       (6.07 %)
Canada
    6.44       7.73       (16.69 %)
Egypt
    4.06       4.41       (7.94 %)
Australia
    1.77       1.67       5.99 %
North Sea
    8.30       9.98       (16.83 %)
Argentina
    1.14       1.19       (4.20 %)
Total
    5.22       6.37       (18.05 %)
 
                       
Natural Gas Liquids (NGL) – Barrels per day:
                       
United States
    7,195       7,553       (4.74 %)
Canada
    2,232       2,178       2.48 %
Argentina
    2,635           NM
 
                   
 
                       
Total
    12,062       9,731       23.95 %
 
                   
Average NGL Price – Per barrel:
                       
United States
  $ 35.02     $ 36.52       (4.11 %)
Canada
    31.47       36.10       (12.83 %)
Argentina
    31.10           NM
Total
    33.51       36.43       (8.02 %)
 
NM – not meaningful

21


Table of Contents

     Contributions to Oil and Natural Gas Revenues
     The following table presents each segment’s oil revenues and gas revenues as a percentage of total oil revenues and gas revenues, respectively.
                                 
    Oil Revenues   Gas Revenues
    For the Quarter Ended   For the Quarter Ended
    March 31,   March 31,
    2007   2006   2007   2006
United States
    32 %     24 %     56 %     51 %
Canada
    8 %     9 %     27 %     35 %
 
                               
 
                               
North America
    40 %     33 %     83 %     86 %
 
Egypt
    27 %     28 %     11 %     11 %
Australia
    6 %     6 %     4 %     3 %
North Sea
    24 %     31 %            
Argentina
    3 %           2 %      
Other International
          2 %            
 
                               
 
                               
Total
    100 %     100 %     100 %     100 %
 
                               
     Crude Oil Contribution
     First-quarter 2007 oil revenue contributions from North America were up seven percent from first-quarter 2006 to 40 percent of our total consolidated oil revenues. Several factors drove the shift in revenue contributions. The United States’ contribution increased eight percent on a 26 percent rise in production and an 11 percent increase in realized oil price. The North Sea’s contribution fell seven percent with production and prices down 17 percent and seven percent, respectively. Argentina’s contribution increased to three percent of consolidated oil revenues, reflecting the impact of our 2006 acquisition activity. The decline in Other International’s contribution reflects our exit from China.
     Crude Oil Revenues
     First-quarter crude oil revenue increased $21 million from the comparable 2006 quarter with a five percent increase in production offsetting the impact of a three percent decrease in average realized oil price. Higher revenue in the U.S., Argentina and Australia were mostly offset by lower oil revenue in the North Sea, Canada and Egypt, and the impact of our exit from China.
     U.S. first-quarter 2007 crude oil revenues increased $108 million compared to the same quarter of 2006, reflecting a 26 percent increase in production and an 11 percent increase in realized crude oil prices. The increase in production generated $77 million in revenues, generally reflecting a 55 percent increase in our Gulf Coast region production. Higher realized prices contributed the other $31 million. The Gulf Coast region’s production increase was associated with restoration of hurricane damaged properties, drilling and recompletion activity, and properties acquired in 2006. Central Region production fell two percent on natural decline.
     Argentina’s crude oil revenues increased $35 million in the first quarter of 2007 compared to the first quarter of 2006 because of the second-quarter 2006 acquisition from Pioneer Natural Resources (Pioneer) and the third-quarter 2006 acquisition from Pan American Fueguina S.R.L. (Pan American). Combined, these acquisitions added 9,525 b/d of oil production.
     Australia’s first-quarter 2007 crude oil revenues increased $2 million compared to the first-quarter 2006 on a two percent increase in production and a one percent increase in realized price. The increase in daily oil production was driven by completion of West Cyad, additional production from the Bambra field, and increased liquids associated with the Doric and Lee gas fields, which offset natural decline and cyclone related downtime.
     Egypt’s crude oil revenues decreased by $6 million in the first quarter of 2007 compared to the same quarter in 2006. A five percent increase in crude oil production was more than offset by a seven percent decrease in realized price. Khalda condensate production accounted for most of the production increase, with less downtime at the Obaiyed gas plant.

22


Table of Contents

     The North Sea’s first-quarter 2007 crude oil revenues were $80 million less than the comparable 2006 period, reflecting a 17 percent decrease in oil production and a seven percent decrease in realized price. The lower production is primarily related to major equipment commissioning which displaces production and delays workover or re-drilling of wells temporarily shut-in due to mechanical problems.
     Canada’s first-quarter 2007 revenues decreased $14 million over first-quarter 2006 on a 12 percent decrease in oil production related to natural decline and downtime. Additionally, realized prices were one percent less than the year-ago period.
     Apache manages a portion of its exposure to fluctuations in crude oil prices using financial derivatives. During the quarter, approximately 14 percent of our average worldwide crude oil production was subject to financial derivative hedges, compared to eight percent in the same period in 2006. (See Note 2, Hedging and Derivative Instruments, of this Form 10-Q for a summary of the current derivative positions and terms.) These financial derivative instruments increased our first-quarter 2007 worldwide realized prices $.76 per barrel and reduced 2006 first-quarter prices by $1.32 per barrel.
     Natural Gas Contribution
     Apache’s North American operations contributed 83 percent of the first-quarter 2007 consolidated natural gas revenues, compared to 86 percent in the first quarter of 2006. The rise in international, non-North American revenue is primarily related to the 2006 acquisitions in Argentina, which contributed two percent to Apache’s 2007 consolidated natural gas revenues. Australia’s contribution increased one percent, while Egypt’s contribution remained at 11 percent, compared to the same period in 2006.
     Natural Gas Revenues
     Apache’s first-quarter 2007 natural gas revenues increased $47 million from the prior-year quarter, with $189 million of additional revenues from 30 percent production growth offsetting an 18 percent decrease in realized natural gas prices. All core gas producing regions, except Canada, saw higher natural gas revenues with the largest increase in the U.S. and Argentina.
     U.S. first-quarter 2007 natural gas revenues were $62 million higher than the same quarter of 2006. U.S. first-quarter natural gas production increased 23 percent and contributed $87 million of additional revenues, while a six percent decline in realized prices lowered revenues $25 million, when compared to the prior-year quarter. Production increased 33 percent in the Gulf Coast region reflecting the 2006 acquisition impact, an active drilling program and continuing restoration of production from hurricane damaged properties. Central region production was up eight percent from an active drilling and recompletion program and several smaller acquisitions.
     Argentina’s first-quarter 2007 natural gas revenues increased $20 million compared to first-quarter 2006 because of the acquisitions from Pioneer and Pan American previously discussed.
     Australia’s 2007 first-quarter natural gas revenues were $8 million higher than the respective prior-year period on 27 percent higher production, which contributed $7 million, and a six percent price increase which added $1 million. The increase in gas production was related to increased production and sales from the John Brookes, Doric, and Lee gas fields with a partial offset from natural decline on the Wonnich, Linda, Rose and Harriet gas fields.
     Egypt contributed an additional $4 million to first-quarter 2007 consolidated natural gas revenues compared to the same quarter of 2006. A 14 percent increase in natural gas production added $11 million to 2007 revenues. An eight percent decline in price lowered revenues $7 million, when compared to the 2006 period. Egypt’s production growth was primarily associated with increasing throughput from the Shell operated Obaiyed gas plant from the Qasr Field.
     Canada’s first-quarter 2007 natural gas revenues decreased $46 million over the comparable quarter of 2006. This decrease is the result of a 17 percent decrease in our realized natural gas price. Natural gas production was flat with gains in the Exxon Mobil Grant lands, offset by natural decline in other areas.
     Although a majority of our worldwide gas sales contracts are indexed to prevailing market prices, approximately six percent and nine percent of our first-quarter 2007 and 2006 U.S. natural gas production, respectively, was subject to long-term, fixed-price physical contracts. These fixed-price contracts reduced first-quarter 2007 and 2006 worldwide realized prices $.08 and $.21 per Mcf, respectively.

23


Table of Contents

     Approximately 14 percent and eight percent of our worldwide natural gas production was subject to financial derivative hedges for the first quarter of 2007 and 2006, respectively. These derivative financial instruments increased our first-quarter 2007 consolidated realized prices $.07 per Mcf and decreased our 2006 price by $.17 per Mcf. (See Note 2, Hedging and Derivative Instruments, of this Form 10-Q for a summary of our current derivative positions and terms.)
Costs
     The table below presents a comparison of our expenses on an absolute dollar basis and an equivalent unit of production (boe) basis. Our discussion may reference expenses either on a boe basis or on an absolute dollar basis, or both, depending on their relevance.
                                 
    For the Quarter Ended March 31,     For the Quarter Ended March 31,  
    2007     2006     2007     2006  
    (In millions)     (Per Boe)  
Depreciation, depletion and amortization:
                               
Oil and gas property and equipment
  $ 497     $ 346     $ 10.29     $ 8.42  
Other assets
    34       26       .71       .64  
Asset retirement obligation accretion
    24       21       .50       .50  
Lease operating expenses
    393       292       8.13       7.09  
Gathering and transportation costs
    28       26       .58       .64  
Severance and other taxes
    97       146       2.02       3.56  
General and administrative expenses
    68       46       1.41       1.11  
Financing costs, net
    42       23       .87       .57  
 
                       
 
                               
Total
  $ 1,183     $ 926     $ 24.51     $ 22.53  
 
                       
Depreciation, Depletion and Amortization (DD&A)
     First-quarter 2007 full-cost DD&A expense of $497 million was $151 million higher than the comparative quarter of 2006. Increased production of 7 MMboe accounted for $96 million of the change. The company’s 2007 first-quarter full-cost DD&A rate increased $1.87 per boe, to $10.29, from the same quarter last year reflecting rising industry-wide drilling and finding costs, especially in the U.S. and Canada. The increase in costs, including increased estimates of future development costs, is related to increased demand for drilling services, a consequence of both higher oil and gas prices and the demand for services to repair damage caused by hurricanes Katrina and Rita.
Lease Operating Expenses (LOE)
     LOE increased 35 percent on an absolute dollar basis reflecting two significant acquisitions in Argentina, and one in the Gulf of Mexico, hurricane repairs, and generally rising costs. While the acquisitions added cost, they also added production, thereby limiting the increase in our worldwide per unit rate to 15 percent.
     Our worldwide LOE per boe increased $1.04, of which $.66 is related to hurricane repairs in excess of insurance coverage. We expect to complete repairs around mid-year. The remaining increase in the worldwide rate was driven predominately by higher service costs, primarily in the Gulf of Mexico where service costs increased significantly with higher demand after the hurricanes.
     By country, first-quarter 2007 LOE was up from the comparable 2006 period as follows:
     U.S. – The U.S. added $1.06 per boe to the worldwide rate driven entirely by the Gulf Coast region. Reducing the impact of a $75 million increase in LOE expenses in the Gulf Coast region was a 37 percent increase in production. Costs incurred for hurricane repairs of $32 million coupled with higher service costs drove the rate increase. The Central Region reduced worldwide LOE per boe $.10 on four percent production growth coupled with a slight decline in costs.
     Canada – Canada increased the worldwide rate $.18 per boe on increased workover rig costs and activity levels, road location maintenance costs and property taxes coupled with lower production.
     Egypt – Egypt reduced the worldwide rate $.06 per boe as a nine percent increase in production more than offset slightly higher costs.
     Australia – Australia reduced the worldwide rate by $.09 with production growth more than offsetting associated incremental operating costs.

24


Table of Contents

     North Sea – The North Sea added $.32 per boe to the consolidated rate, $.23 of which was related to lower relative production. The balance of the increase was attributed to the impact of the weakening U.S. dollar relative to the U.K. Pound.
     Argentina – Argentina reduced the 2007 first-quarter consolidated rate $.51 with production growth related to the 2006 acquisitions more than offsetting associated incremental costs.
     Gathering and Transportation Costs
     Gathering and transportation costs totaled $28 million in the first quarter of 2007, up $2 million from the 2006 comparative quarter. The following table presents gathering and transportation costs paid by Apache to third-party carriers for each of the periods presented.
                 
    For the Quarter Ended  
    March 31,  
    2007     2006  
    (In millions)  
U.S.
  $ 9     $ 8  
Canada
    8       9  
North Sea
    6       7  
Egypt
    4       2  
Argentina
    1        
 
           
 
               
Total Gathering and Transportation
  $ 28     $ 26  
 
           
     The increase from first-quarter 2006 resulted primarily from additional Egyptian crude oil exports.
     Severance and Other Taxes
     First-quarter 2007 severance and other taxes totaled $97 million, $49 million less than the prior-year quarter. A detail of these taxes follows:
                 
    For the Quarter Ended  
    March 31,  
    2007     2006  
    (In millions)  
Severance taxes
  $ 29     $ 31  
U.K. PRT
    61       108  
Canadian taxes
    5       5  
Other
    2       2  
 
           
 
               
Total Severance and Other Taxes
  $ 97     $ 146  
 
           
     North Sea Petroleum Revenue Tax (PRT) is assessed on net profits from subject fields in the United Kingdom (U.K.) North Sea. U.K. PRT was $47 million below first-quarter 2006 PRT on a 43 percent decline in net profits, reflecting lower comparable revenues and higher deductible costs, which include capital expenditures, LOE, G&A, and transportation tariffs. Severance taxes are incurred primarily on onshore properties in the U.S. and certain properties in Australia. The decrease in severance taxes resulted from lower taxable revenues in the U.S. associated with additional tax incentives in the first quarter of 2007, relative to 2006.
     General and Administrative Expenses
     General and administrative expenses (G&A) were $22 million higher when compared to the first quarter of 2006. The incremental costs in 2007 were primarily associated with rising insurance rates, additional costs associated with our stock-based and incentive compensation plans, and overhead costs related to significant acquisitions and expansion of our international operations, which also increased production.

25


Table of Contents

     On a boe basis, first-quarter 2007 G&A averaged $1.41, up $.30 from the first quarter of 2006. Increases in the cost of insurance coverage after Hurricanes Rita and Katrina accounted for $.17 of the increase, while appreciation of Apache’s stock price increased stock based compensation expense, adding another $.08 per boe. Apache’s stock price closed at $70.70 per share at the end of the first quarter of 2007, up six percent from the end of 2006. Comparatively, Apache’s stock price decreased four percent in the first quarter of 2006.
     Provision for Income Taxes
     During interim periods, income tax expense is based on the estimated effective income tax rate that is expected for the entire fiscal year. There were no significant changes in the statutory tax rates in the major jurisdictions in which the company operates during the first quarter of 2006 or 2007.
     The first-quarter 2007 provision for income taxes was $91 million less than the prior-year quarter on lower taxable income. The lower taxable income was related to higher operating costs, with revenues flat compared to the prior-year quarter. The effective income tax rate in the first quarter of 2007 was 39.5 percent compared to 38.4 percent in the first quarter of 2006.
Capital Resources and Liquidity
Financial Indicators
                 
    March 31,   December 31,
    2007   2006
Millions of dollars except as indicated
               
 
Current ratio
    .66       .65  
Total debt
  $ 5,014     $ 3,822  
Shareholders’ equity
  $ 13,448     $ 13,191  
Percent of total debt to capitalization
    27 %     22 %
Floating-rate debt/total debt
    27 %     43 %
Net Cash Provided by Operating Activities
     Apache’s net cash provided by operating activities for the first quarter of 2007 totaled $1 billion, up slightly from the same period in 2006.
     For a detailed discussion of commodity prices, production, costs and expenses, refer to the “Results of Operations” of this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     Historically, fluctuations in commodity prices have been the primary reason for the company’s short-term changes in cash flow from operating activities. Sales volume changes have also impacted cash flow in the short-term, but have not been as volatile as commodity prices. Apache’s long-term cash flow from operating activities is dependent on commodity prices, reserve replacement and the level of costs and expenses required for continued operations.
Debt
     During the first quarter of 2007, the company’s debt-to-capitalization ratio increased to 27 percent from 22 percent on December 31, 2006, primarily to fund the $1.0 billion acquisition of Permian Basin properties from Anadarko with debt.
     On January 26, 2007, the company issued $500 million principal amount, $499.5 million net of discount, of senior unsecured 5.625-percent notes maturing January 15, 2017 and $1.0 billion principal amount, $993 million net of discount, of senior unsecured 6.0-percent notes maturing January 15, 2037. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The proceeds were used to repay a portion of the company’s outstanding commerical paper and for general corporate purposes. The company’s outstanding debt includes notes and debentures maturing in the years 2007 through 2096.

26


Table of Contents

     The company has available a $1.95 billion commercial paper program which enables Apache to borrow funds for up to 270 days at competitive interest rates. As of March 31, 2007, Apache had $1.27 billion of commercial paper outstanding. Our weighted-average interest rate for commercial paper was 5.36 percent and 4.51 percent for the first quarter of 2007 and 2006, respectively. If the company is unable to issue commercial paper following a significant credit downgrade or dislocation in the market, the company’s U.S. credit facilities are available as a 100 percent backstop. The company had available borrowing capacity under our total credit facilities of approximately $1.0 billion at March 31, 2007.
     The company was in compliance with the terms of all credit facilities as of March 31, 2007.
Subsequent Events
     On April 16, 2007, the company issued $500 million principal amount, $498.8 million net of discount, of senior unsecured 5.25-percent notes maturing April 15, 2013. The notes are redeemable, as a whole or part, at Apache’s option, subject to a make-whole premium. The proceeds were used to repay a portion of the company’s outstanding commercial paper and for general corporate purposes.
     In April 2007, the company amended its existing $1.5 billion U.S. five-year revolving credit facility to extend the maturity date to May 28, 2012 from the current maturity date of May 28, 2011. The amendment also allows the company to increase the size of the facility by up to $750 million by adding commitments from new or existing lenders.
     The company also amended its $450 million U.S. credit facility, $150 million Australian credit facility and $150 million Canadian credit facility to extend the maturity dates of all the commitments to May 12, 2012. The amendment also allows the company to increase the size of the U.S. facility by up to $250 million, the Australian facility by up to $150 million and the Canadian facility by up to $150 million by adding commitments from new or existing lenders.
Contingencies
     Apache Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” as of January 1, 2007. FIN 48 requires, among other things, that uncertain income tax contingencies be disclosed separately from the company’s deferred tax liability. As of the adoption date, the company had total tax reserves of $563 million, which represents potential future cash obligations. For further discussion, refer to Note 4. Income Taxes in this Form 10-Q.
     On May 7, 2007, Apache, on behalf of its joint venture, announced that it signed a contract for a floating production, storage and offloading vessel that will be used in the company’s Van Gogh development in Western Australia’s Exmouth Basin. Apache and its partner will pay $40 million per year plus operating expenses for a seven-year term with options for an eight-year extension or to acquire the vessel. Apache owns 52.5 percent of the development.

27


Table of Contents

Oil and Gas Capital Expenditures
     Capital expenditures totaled $2.3 billion for the first three months of 2007, compared to $1.3 billion for the comparable period last year. Acquisition capital in the first-quarter 2007 exceeded $1 billion marking the difference between the two comparable periods. The following table presents a summary of the company’s capital expenditures for each of our reportable segments for the three months ended March 31, 2007 and 2006.
                 
    For the Quarter Ended  
    March 31,  
    2007     2006  
    (In thousands)  
Exploration and development:
               
United States
  $ 467,349     $ 320,309  
Canada
    201,501       375,851  
Egypt
    145,062       99,668  
Australia
    75,496       33,560  
North Sea
    146,626       82,001  
Argentina
    56,210       4,064  
Other International
          2,254  
 
           
 
               
 
  $ 1,092,244     $ 917,707  
 
           
 
               
Capitalized Interest
  $ 21,776     $ 14,193  
 
           
 
               
Gathering Transmission and Processing Facilities
  $ 96,428     $ 92,398  
 
           
 
               
Asset Retirement Costs (ARC)
  $ 53,124     $ 5,301  
 
           
 
               
ARC – Acquired
  $ 21,697     $ 5,806  
 
           
 
               
Acquisitions:
               
Oil and gas properties
  $ 1,005,199     $ 256,840  
 
           
     All of our reportable segments, except for Canada, reported an increase in exploration and development expenditures. The U.S. accounted for 43 percent of the E&D activity in first-quarter 2007, up from 35 percent in the prior year’s comparable quarter. Canada, which accounted for 41 percent of worldwide E&D expenditures in the first quarter of 2006, reduced their activity in 2007 decreasing E&D expenditures to 18 percent of the company’s total. All other segments reported increases in their expenditures reflecting higher levels of activity compared to first-quarter 2006.
Cash Dividends
     Common dividends declared during the first quarter of 2007 rose to $50 million, reflecting a slight increase in common shares outstanding and the higher common stock dividend rate. The company increased its quarterly cash dividend 50 percent, to 15 cents per share from 10 cents per share, effective with the November 2006 dividend payment. During the first quarter of 2007 and 2006, Apache paid $1.4 million in dividends on its Series B Preferred Stock issued in August 1998.

28


Table of Contents

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk
     Average monthly oil price realizations, including the impact of fixed-price contracts and hedges, ranged from a low of $51.14 per barrel to a monthly high of $59.83 per barrel during the first quarter of 2007. Average monthly gas price realizations, including the impact of fixed-price contracts and hedges, ranged from a monthly low of $4.96 per Mcf to a monthly high of $5.35 per Mcf during the same period. Based on the company’s worldwide oil production levels, a $1.00 per barrel change in the weighted-average realized price of oil would increase or decrease revenues by $21 million. Based on the company’s worldwide gas production levels, a $.10 per Mcf change in the weighted-average realized price of gas would increase or decrease revenues by $17 million.
     Apache has historically only hedged long-term oil and gas prices related to a portion of its expected production associated with acquisitions; however, in 2006 and 2007, the company’s board of directors authorized management to hedge a portion of production generated from the company’s drilling program. In the first quarter of 2007, financial derivative hedges represented approximately 14 percent of the average worldwide natural gas production and crude oil production. Hedges in place at the end of the quarter represent approximately 18 percent of worldwide production for natural gas and crude oil.
     On March 31, 2007, the company had open natural gas derivative hedge positions with a fair value of $(44) million. A 10 percent increase in natural gas prices would change the fair value by $(94) million. A 10 percent decrease in prices would change the fair value by $97 million. The company also had open oil derivative positions with a fair value of $(74) million on March 31, 2007. A 10 percent increase in crude oil prices would change the fair value by $(175) million. A 10 percent decrease in prices would change the fair value by $170 million. See Note 2, Hedging and Derivative Instruments of this Form 10-Q, for notional volumes associated with the company’s derivative contracts.
Interest Rate Risk
     The company considers its interest rate risk exposure to be minimal as a result of fixing interest rates on approximately 73 percent of the company’s debt. At March 31, 2007, total debt included $1.3 billion of floating-rate debt. As a result, Apache’s annual interest costs in 2007 will fluctuate based on short-term interest rates on what is presently approximately 27 percent of our total debt outstanding at March 31, 2007. The impact on cash flow of a 10 percent change in the floating interest rate would be approximately $1.9 million per quarter on March 31, 2007.
Foreign Currency Risk
     The company’s cash flow stream relating to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign currencies. In Australia, oil production is sold under U.S. dollar contracts and the majority of the gas production is sold under fixed-price Australian dollar contracts. Over half the costs incurred for Australian operations are paid in U.S. dollars. In Canada, the majority of oil and gas production is sold under Canadian dollar contracts. The majority of the costs incurred are paid in Canadian dollars. The North Sea production is sold under U.S. dollar contracts and the majority of costs incurred are paid in U.K. pounds. In Egypt, all oil and gas production is sold for U.S. dollars and the majority of the costs incurred are denominated in U.S. dollars. Argentina revenues and expenditures are largely denominated in U.S. dollars but translated into pesos at the then current exchange rate. Revenue and disbursement transactions denominated in Australian dollars, Canadian dollars, U.K. pounds, Egyptian pounds and Argentine pesos are converted to U.S. dollars equivalents based on the exchange rate as of the transaction date.
     Foreign currency gains and losses also come about when monetary assets and liabilities denominated in foreign currencies are translated at the end of each month. A 10 percent strengthening or weakening of the Australian dollar, Canadian dollar, U.K. pound, Egyptian pound, and Argentine peso as of December 31, 2006, would result in a foreign currency net loss or gain of approximately $117 million.
Forward-Looking Statements And Risk
     Certain statements in this report, including statements of the future plans, objectives, and expected performance of the company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the company’s control, and which could cause actual results to differ materially from those

29


Table of Contents

anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict.
     There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Although Apache may make use of futures contracts, swaps, options and fixed-price physical contracts to mitigate risk, fluctuations in oil and natural gas prices or a prolonged continuation of low prices, may adversely affect the company’s financial position, results of operations and cash flows.
ITEM 4 – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     G. Steven Farris, the company’s President, Chief Executive Officer and Chief Operating Officer, and Roger B. Plank, the company’s Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007, the end of the period covered by this report. Based on that evaluation and as of the date of that evaluation, these officers concluded that the company’s disclosure controls were effective, providing effective means to ensure that information we are required to disclose under applicable laws and regulations is recorded, processed, summarized and reported in a timely manner. We also made no changes in internal controls over financial reporting during the quarter ending March 31, 2007, that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
     We periodically review the design and effectiveness of our disclosure controls, including compliance with various laws and regulations that apply to our operations both inside and outside the United States. We make modifications to improve the design and effectiveness of our disclosure controls, and may take other corrective action, if our reviews identify deficiencies or weaknesses in our controls.
Management’s Report on Internal Control over Financial Reporting
     The management report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Report of Management on Internal Control Over Financial Reporting, included on Page F-1 in Item 15 of the company’s 2006 Form 10-K.
     The independent auditors attestation report called for by Item 308(b) of Regulation S-K is incorporated by reference to Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, included on Page F-3 in Item 15 of the company’s 2006 Form 10-K.
Changes in Internal Control over Financial Reporting
     There was no change in our internal controls over financial reporting during the period covered by this quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

30


Table of Contents

PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10 to the Consolidated Financial Statements contained in the company’s annual report on Form 10-K for the year ended December 31, 2006 (filed with the SEC on March 1, 2007) and the updating of those matters in this quarterly report in Item 1 – Financial Statements, is incorporated herein by reference.
ITEM 1A. RISK FACTORS
During the quarter ending March 31, 2007, there were no material changes from the risk factors as previously disclosed in the company’s Form 10-K for the year end December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None

31


Table of Contents

ITEM 6. EXHIBITS
         
10.1
    Apache Corporation Non-Employee Directors’ Compensation Plan, as amended and restated February 8, 2007, effective as of January 1, 2007.
 
       
10.2
    Apache Corporation Equity Compensation Plan for Non-Employee Directors, as amended and restated February 8, 2007.
 
       
12.1
    Statement of computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends.
 
       
31.1
    Certification of Chief Executive Officer.
 
       
31.2
    Certification of Chief Financial Officer.
 
       
32.1
    Certification of Chief Executive Officer and Chief Financial Officer.

32


Table of Contents

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  APACHE CORPORATION
 
 
Dated: May 9, 2007  /s/ ROGER B. PLANK    
  Roger B. Plank   
  Executive Vice President and Chief Financial Officer   
 
     
Dated: May 9, 2007  /s/ REBECCA A. HOYT    
  Rebecca A. Hoyt   
  Vice President and Controller
(Chief Accounting Officer) 
 
 

 


Table of Contents

Exhibit Index
         
10.1
    Apache Corporation Non-Employee Directors’ Compensation Plan, as amended and restated February 8, 2007, effective as of January 1, 2007.
 
       
10.2
    Apache Corporation Equity Compensation Plan for Non-Employee Directors, as amended and restated February 8, 2007.
 
       
12.1
    Statement of computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends.
 
       
31.1
    Certification of Chief Executive Officer.
 
       
31.2
    Certification of Chief Financial Officer.
 
       
32.1
    Certification of Chief Executive Officer and Chief Financial Officer.