UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR [ ] 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 0-13546 ---------- APACHE OFFSHORE INVESTMENT PARTNERSHIP ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 41-1464066 ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Suite 100, One Post Oak Central 77056-4400 2000 Post Oak Boulevard, Houston, TX ---------- ---------------------------------------- (Zip Code) (Address of Principal Executive Offices) 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 [X] NO [ ]
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE OFFSHORE INVESTMENT PARTNERSHIP STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
APACHE OFFSHORE INVESTMENT PARTNERSHIP STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
APACHE OFFSHORE INVESTMENT PARTNERSHIP CONSOLIDATED BALANCE SHEET (UNAUDITED)
APACHE OFFSHORE INVESTMENT PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The financial statements included herein have been prepared by the Apache Offshore Investment Partnership (the Partnership), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, 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 generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Partnership 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 thereto included in the Partnership's latest annual report on Form 10-K. 1. RECEIVABLE FROM/PAYABLE TO APACHE CORPORATION Payable to Apache Corporation, the Partnership's managing partner (Apache or the Managing Partner), represents the net result of the Investing Partners' revenue and expenditure transactions in the current month. Generally, cash in this amount will be transferred to Apache in the month after the Partnership's transactions are processed and the net results of operations are determined. 2. RIGHT OF PRESENTMENT As provided in the Amended Partnership Agreement, a first right of presentment offer for 2002 of $8,686 per Unit, plus interest to the date of payment, was made to Investing Partners in April 2002, based on a valuation date of December 31, 2001. As a result, the Partnership purchased 15.1 Units in June 2002 for a total of $134,477. A second right of presentment offer for 2002 of $7,362 per Unit, plus interest to the date of payment, was made to the Investing Partners on October 23, 2002, based on a valuation date of June 30, 2002. The Investing Partners have until the close of business on November 22, 2002 to present their Units for repurchase by the Partnership. The Partnership will determine by December 20, 2002, whether or not to accept each Unit offered during this election period. The Partnership is not in a position to predict how many Units will be presented for repurchase during the fourth quarter of 2002 and cannot, at this time, determine if the Partnership will have sufficient funds available to repurchase any Units. The Partnership has no obligation to purchase any Units presented to the extent it determines that it has insufficient funds for such purchases. The Amended Partnership Agreement contains limitations on the number of Units that the Partnership can repurchase, including a limit of 10 percent of the outstanding Units on an annual basis. 3. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires companies to record the fair value of legal obligations associated with the retirement of tangible long-lived assets in the period in which the obligation is incurred. The liability is capitalized as part of the related long-lived asset's carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Partnership's asset retirement obligations relate primarily to the dismantlement of offshore platforms. The Partnership expects to adopt this new standard effective January 1, 2003. The Partnership is currently evaluating the impact of adopting this new standard and accordingly has not quantified the impact on the consolidated financial statements. 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS NET INCOME AND REVENUE The Partnership reported net income in the third quarter of 2002 of $.8 million, down 42 percent from the prior year period due to lower oil and gas production. Net income for the quarter per Investing Partner Unit decreased 46 percent, from $907 per Unit to $490 per Unit. For the nine months of 2002, net income totaled $2.3 million, or $1,461 per Investing Partner Unit, down 64 percent and 66 percent, respectively, from $6.4 million, or $4,324 per Unit, in the same period last year. The decrease in net income was attributable to decreases in oil and gas production and prices in 2002. Revenues for the quarter decreased 19 percent, falling from $2.1 million in the third quarter of 2001 to $1.7 million in the third quarter of 2002. For the first nine months of 2002, revenues decreased 46 percent to $4.8 million. Natural gas sales accounted for 58 percent of the Partnership's total revenues during the first nine months of 2002 compared to 74 percent during the first nine months of 2001. The Partnership's oil and gas production volume and price information is summarized in the following table (gas volumes presented in thousand cubic feet (Mcf) per day):
The production decline from a year ago reflected natural depletion at South Pass 83 and shut-in production at North Padre Island 969. For the nine months ended September 30, 2002, oil sales decreased 11 percent to $2.0 million when compared to the same period last year. The Partnership's oil sales revenues were unfavorably impacted by a 10 percent decrease in average realized oil price, and a one percent decrease in daily oil production. Declines in oil and gas production can be expected in future periods due to natural depletion. Given the small number of producing wells owned by the Partnership, and the fact that offshore wells tend to decline at a faster rate than onshore wells, the Partnership's future production will be subject to more volatility than those companies with greater reserves and longer-lived properties. Fourth quarter 2002 production will also be impacted by production interruptions from Hurricane Lili, a category 4 storm which blew through the Gulf of Mexico in October. OPERATING EXPENSES The Partnership's depreciation, depletion and amortization (DD&A) rate, expressed as a percentage of oil and gas production revenues, was approximately 35 percent during the third quarter of 2002 compared to 22 percent during the same period in 2001. For the first nine months, the Partnership's DD&A rate increased from 19 percent in 2001 to 33 percent in the current year. Lease operating expense (LOE) in the third quarter 2002 was 14 percent greater than the same quarter a year ago due to increases in repair and maintenance costs. For the first nine months of 2002, LOE of $.5 million was up 14 percent from a year ago due to higher repair and maintenance cost during the first nine months of 2002. Oil and gas gathering and transportation costs paid directly by the Partnership are reported as a separate expense on the statement of income. Previously, these costs were netted against oil and gas revenues. The declines in expense for the third quarter and first nine months compared to a year ago reflected lower sales volumes in 2002. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES AND LIQUIDITY The Partnership's primary capital resource is net cash provided by operating activities, which was $3.5 million for the first nine months of 2002. Net cash provided by operating activities in 2002 was down 56 percent from a year ago primarily due to lower prices and gas production. Future cash flows will be influenced by fluctuations in product prices, production levels and operating costs. CAPITAL COMMITMENTS The Partnership's primary needs for cash are for operating expenses, drilling and recompletion expenditures, distributions to Investing Partners, and the purchase of Units offered by Investing Partners under the right of presentment. During the first nine months of 2002, the Partnership's oil and gas property additions totaled $2.7 million, which primarily related to drilling and recompletion projects at South Timbalier 295. The Partnership participated in drilling five wells (B-2 through B-6) at South Timbalier 295. The B-2 and B-3 wells were brought on production during the second quarter of 2002, and the B-4 and B-5 wells were brought on production during the third quarter. Drilling was still in progress on the B-6 well as of September 30, 2002 and was delayed subsequent to the end of the quarter by Hurricane Lili. The Partnership anticipates capital expenditures of approximately $.1 million for the remainder of 2002. Such estimates may change based on realized prices, drilling results or changes by the operator to the development plan. The Partnership made no cash distributions to Investing Partners during the first nine months of 2002 due to low oil and gas price realizations during the first quarter and the comparatively high level of capital cost from drilling activities. The Partnership declared a distribution of $1,000 per Investing Partner unit on September 12, 2002, payable to Unitholders on October 9, 2002. The amount of future distributions will be dependent on actual and expected production levels, realized and expected oil and gas prices, expected drilling and recompletion 6
expenditures, and prudent cash reserves for future dismantlement and abandonment costs that will be incurred after the Partnership's reserves are depleted. As provided in the Amended Partnership Agreement, a first right of presentment offer for 2002 of $8,686 per Unit, plus interest to the date of payment, was made to Investing Partners in April 2002, based on a valuation date of December 31, 2001. As a result, the Partnership purchased 15.1 Units in June 2002 for a total of $134,477. A second right of presentment offer for 2002 of $7,362 per Unit, plus interest to the date of payment, was made to the Investing Partners on October 23, 2002, based on a valuation date of June 30, 2002. The Investing Partners have until the close of business on November 22, 2002 to present their Units for repurchase by the Partnership. The Partnership will determine by December 20, 2002, whether or not to accept each Unit offered during this election period. The Partnership is not in a position to predict how many Units will be presented for repurchase during the fourth quarter of 2002 and cannot, at this time, determine if the Partnership will have sufficient funds available to repurchase any Units. The Partnership has no obligation to purchase any Units presented to the extent it determines that it has insufficient funds for such purchases. The Amended Partnership Agreement contains limitations on the number of Units that the Partnership can repurchase, including a limit of 10 percent of the outstanding Units on an annual basis. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership's major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to its natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. Based on the Partnership's average daily production for the first nine months of 2002, a $1.00 per barrel change in the weighted average price of oil would have increased or decreased revenues for the nine month period by approximately $82,000 and $.10 per Mcf change in the weighted average price of natural gas would have increased or decreased revenues for the nine month period by approximately $90,000. The Partnership has not used derivative financial instruments or otherwise engaged in hedging activities during 2001 or the first nine months of 2002. ITEM 4 - CONTROLS AND PROCEDURES The certifying officers of the general partner evaluated the effectiveness of the Partnership's disclosure controls and procedures within the last 90 days preceding the date of this report. Based on that review and as of the date of that evaluation, these officers found the Partnership's disclosure controls to be adequate, providing effective means to insure that the Partnership timely and accurately disclose the information it is required to disclose under applicable laws and regulations. We also made no significant changes in the Partnership's internal controls or any other factors that could affect the Partnership's internal controls since our most recent internal controls evaluation. FORWARD-LOOKING STATEMENTS AND RISK Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Partnership, are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the Partnership's control, and which could cause actual results to differ materially from those 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 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. Fluctuations in oil and gas prices, or a prolonged period of low prices, may substantially adversely affect the Partnership's financial position, results of operations and cash flows. 7
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 99.1 - Certification of Chief Executive Officer and Chief Financial Officer b. Reports on Form 8-K - None. 8
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 OFFSHORE INVESTMENT PARTNERSHIP By: Apache Corporation, General Partner Dated: November 12, 2002 /s/ Roger B. Plank --------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer Dated: November 12, 2002 /s/ Thomas L. Mitchell --------------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer)
CERTIFICATIONS I, Roger B. Plank, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Offshore Investment Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Roger B. Plank - ---------------------------------------------------- Roger B. Plank Executive Vice President and Chief Financial Officer of Apache Corporation, General Partner Date: November 12, 2002
CERTIFICATIONS I, G. Steven Farris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Apache Offshore Investment Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ G. Steven Farris - ---------------------------------------------- G. Steven Farris President, Chief Executive Officer and Chief Operating Officer of Apache Corporation, General Partner Date: November 12, 2002
EXHIBIT INDEX
EXHIBIT 99.1 APACHE OFFSHORE INVESTMENT PARTNERSHIP BY APACHE CORPORATION, GENERAL PARTNER CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER I, G. Steven Farris, certify that the Quarterly Report of Apache Offshore Investment Partnership on Form 10-Q for the quarterly period ending September 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Offshore Investment Partnership. /s/ G. Steven Farris - ----------------------------------------- By: G. Steven Farris Title: President, Chief Executive Officer and Chief Operating Officer I, Roger B. Plank, certify that the Quarterly Report of Apache Offshore Investment Partnership on Form 10-Q for the quarterly period ending September 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or Section 78o (d)) and that information contained in such report fairly represents, in all material respects, the financial condition and results of operations of Apache Offshore Investment Partnership. /s/ Roger B. Plank - ------------------------------------ By: Roger B. Plank Title: Executive Vice President and Chief Financial Officer