SEC Filing | APA Corporation

1 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, 1999 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 --- ---

2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE OFFSHORE INVESTMENT PARTNERSHIP STATEMENT OF INCOME (UNAUDITED) FOR THE QUARTER FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUES: Oil and gas production revenues $ 2,067,810 $ 1,713,277 $ 5,789,695 $ 6,062,749 Interest income 38,702 21,820 74,508 47,068 ----------- ----------- ----------- ----------- 2,106,512 1,735,097 5,864,203 6,109,817 ----------- ----------- ----------- ----------- EXPENSES: Depreciation, depletion and amortization 788,292 622,671 2,287,411 2,070,659 Lease operating expense 176,035 380,910 529,023 771,372 Administrative 135,000 129,137 405,000 405,116 ----------- ----------- ----------- ----------- 1,099,327 1,132,718 3,221,434 3,247,147 ----------- ----------- ----------- ----------- NET INCOME $ 1,007,185 $ 602,379 $ 2,642,769 $ 2,862,670 =========== =========== =========== =========== NET INCOME ALLOCATED TO: Managing Partner $ 338,507 $ 195,817 $ 866,543 $ 826,414 Investing Partners 668,678 406,562 1,776,226 2,036,256 ----------- ----------- ----------- ----------- $ 1,007,185 $ 602,379 $ 2,642,769 $ 2,862,670 =========== =========== =========== =========== NET INCOME PER INVESTING PARTNER UNIT $ 588 $ 352 $ 1,559 $ 1,737 =========== =========== =========== =========== WEIGHTED AVERAGE INVESTING PARTNER UNITS OUTSTANDING 1,136.7 1,154.4 1,139.5 1,172.5 =========== =========== =========== =========== The accompanying notes to financial statements are an integral part of this statement. 1

3 APACHE OFFSHORE INVESTMENT PARTNERSHIP STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,642,769 $ 2,862,670 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 2,287,411 2,070,659 Changes in operating assets and liabilities: Decrease in accrued revenues receivable 509,151 344,054 Increase (decrease) in accrued operating expenses payable (35,809) 77,852 Increase in payable to Apache Corporation 43,855 135,274 ------------ ------------ Net cash provided by operating activities 5,447,377 5,490,509 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and gas properties (1,112,072) (2,144,221) Non-cash portion of oil and gas property additions 286,390 (951,355) Proceeds from sales of oil and gas properties 140,620 363,534 Increase in drilling advances -- 72,020 ------------ ------------ Net cash used in investing activities (685,062) (2,660,022) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of Partnership Units (45,512) (348,000) Distributions to Investing Partners (855,728) -- Distributions to Managing Partner, net (1,122,295) (804,419) ------------ ------------ Net cash used in financing activities (2,023,535) (1,152,419) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 2,738,780 1,678,068 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,324,949 691,797 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,063,729 $ 2,369,865 ============ ============ The accompanying notes to financial statements are an integral part of this statement. 2

4 APACHE OFFSHORE INVESTMENT PARTNERSHIP BALANCE SHEET (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1999 1998 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,063,729 $ 1,324,949 Accrued revenues receivable 788,848 1,297,999 -------------- -------------- 4,852,577 2,622,948 -------------- -------------- OIL AND GAS PROPERTIES, on the basis of full cost accounting: Proved properties 169,303,152 168,331,700 Less - Accumulated depreciation, depletion and amortization (163,401,505) (161,114,094) -------------- -------------- 5,901,647 7,217,606 -------------- -------------- $ 10,754,224 $ 9,840,554 ============== ============== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Distribution payable $ 3,123,493 $ -- Accrued exploration and development 878,310 591,920 Accrued operating expenses payable and other 62,558 98,367 Payable to Apache Corporation 113,828 69,973 -------------- -------------- 4,178,189 760,260 -------------- -------------- PARTNERS' CAPITAL: Managing Partner 341,308 597,060 Investing Partners (1,135.8 and 1,141.0 units outstanding, respectively) 6,234,727 8,483,234 -------------- -------------- 6,576,035 9,080,294 -------------- -------------- $ 10,754,224 $ 9,840,554 ============== ============== The accompanying notes to financial statements are an integral part of this statement. 3

5 APACHE OFFSHORE INVESTMENT PARTNERSHIP NOTES TO 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 Receivable from/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 from/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 Partnership Agreement, as amended (the Amended Partnership Agreement), a first right of presentment offer for 1999 of $8,410 per Unit, plus interest to the date of the payment, was made to Investing Partners based on a valuation date of December 31, 1998. As a result, the Partnership agreed in July 1999 to acquire 5.14835 Units for a total of $45,512 in cash. A second right of presentment offer of $6,769 per Unit, plus interest to the date of payment, was made to the Investing Partners on November 1, 1999, based on a valuation date of June 30, 1999. The Partnership is not in a position to predict how many Units will be presented for repurchase during the fourth quarter of 1999 and cannot, at this time, determine if the Partnership will have sufficient funds available to purchase 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. 4

6 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 of $1 million in the third quarter of 1999, versus $.6 million in the prior year period. Net income per Investing Partner Unit increased 67 percent, from $352 per Unit to $588 per Unit. Higher oil and natural gas prices during the current period contributed to the increase. For the first nine months of 1999, net income of $2.6 million, or $1,559 per Investing Partner Unit, decreased eight percent and 10 percent, respectively, from $2.9 million, or $1,737 per Investing Partner Unit, in the same period last year. The declines were attributable to lower natural gas prices and production, combined with higher depreciation, depletion and amortization (DD&A) expense. Revenues increased 21 percent, from $1.7 million in the third quarter of 1998 to $2.1 million in the third quarter of 1999. Natural gas and crude oil sales represented 77 percent and 21 percent, respectively, of the Partnership's total revenues during the third quarter of 1999. For the first nine months of 1999, revenues decreased four percent to $5.9 million as lower natural gas prices and production more than offset an increase in oil prices. Natural gas and crude oil sales contributed 77 percent and 22 percent, respectively, to the Partnership's total revenues during the first nine months of 1999. 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): FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------- -------------------------------------------- INCREASE INCREASE 1999 1998 (DECREASE) 1999 1998 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- Gas volume - Mcf per day 6,903 7,857 (12%) 8,106 8,622 (6%) Average gas price - per Mcf $ 2.55 $ 1.91 34% $ 2.04 $ 2.11 (3%) Oil volume - barrels per day 248 287 (14%) 303 305 (1%) Average oil price - per barrel $ 19.74 $ 12.60 57% $ 15.48 $ 13.10 18% THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 Natural gas production revenues for the third quarter of 1999 totaled $1.6 million, 17 percent higher than the third quarter of 1998. Natural gas prices increased 34 percent for the third quarter of 1999 compared to the year-earlier period, which favorably impacted revenue by $.5 million. Natural gas volumes for the quarter declined 12 percent from a year ago due to production declines at Matagorda 681, and downtime for repairs at Ship Shoal 259 and East Cameron 60. The Partnership's crude oil production revenues for the third quarter of 1999 totaled $.5 million, a 36 percent increase from the third quarter of 1998. The $.1 million increase in oil sales was attributable to the 57 percent increase in average realized oil price, offset by a 14 percent decrease in oil production. YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998 Gas sales for the first nine months of 1999 of $4.5 million decreased $.5 million, or nine percent, when compared to the same period in 1998. Average realized gas prices decreased $.07 per Mcf, or three percent, when compared with the first nine months of 1998, negatively impacting sales by $.2 million. Gas production for the first nine months of 1999 decreased by six percent when compared to the same period in 1998, negatively impacting revenues by $.3 million. Production decreases in 1999 were primarily due to natural declines in production. 5

7 For the nine months ended September 30, 1999, oil sales increased 17 percent to $1.3 million when compared to the same period last year. The Partnership's oil sales revenues were favorably impacted by an 18 percent increase in realized prices. OPERATING EXPENSES The Partnership's DD&A rate, expressed as a percentage of oil and gas production revenues, was approximately 38 percent during the third quarter of 1999 compared to 36 percent during the same period in 1998. For the first nine months, the Partnership's DD&A rate rose from 34 percent in 1998 to 40 percent in 1999. The increase in the DD&A rate for the nine-month period was primarily a result of lower natural gas prices in 1999. Lease operating expense (LOE) in the third quarter of 1999 declined substantially from the third quarter of 1998 due to lower workover activity. For the first nine months of 1999, LOE of $.5 million was down 31 percent from a year ago due to lower repair and workover expense in 1999. 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 $5.4 million for the first nine months of 1999. Net cash provided by operating activities in 1999 was down one percent from a year ago, as the eight percent decrease in net income in 1999 was largely offset by the impact of reduced revenue receivables. Future cash flows will be influenced similarly 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 1999, the Partnership's oil and gas property additions totaled $1.1 million. These additions related primarily to recompletions at South Timbalier Block 295 and drilling activity at North Padre Block 969. Based on information supplied by the operators of the properties, the Partnership anticipates capital expenditures of approximately $.5 million for the remainder of 1999. The anticipated capital expenditures primarily relate to South Timbalier Block 295. Such estimates may change based on realized prices, drilling results or changes by the operator to the development plan. The Partnership made distributions to Investing Partners of $750 per Unit on March 18, 1999, and $2,750 per Unit on October 4, 1999. 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 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 1999 of $8,410 per Unit, plus interest to the date of payment, was made to Investing Partners, based on a valuation date of December 31, 1998. As a result, the Partnership agreed in July 1999 to acquire 5.14835 Units for a total of $45,512 in cash. A second right of presentment offer for 1999 of $6,769 per Unit, plus interest to the date of payment, was made to Investing Partners on November 1, 1999, based on a valuation date of June 30, 1999. The Partnership is not in a position to predict how many Units will be presented for repurchase during the fourth quarter and cannot, at this time, determine if the Partnership will have sufficient funds available to repurchase 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. On May 18, 1999, the Managing Partner acquired from Shell Offshore Inc. and affiliated Shell entities (Shell) its interest in certain Gulf of Mexico properties, together with certain production-related assets and proprietary 3D seismic data. The purchase price, subject to post closing adjustments, was $687.6 million in cash and one million shares of 6

8 Apache common stock. As a result of Apache's purchase of the properties from Shell, Apache and the Partnership expect an acceleration of recompletion projects at South Timbalier Block 295. IMPACT OF THE YEAR 2000 ISSUE The inability of some computer programs and embedded computer chips to distinguish between the year 1900 and the year 2000 (the Year 2000 issue) poses a serious threat of business disruption to any organization that utilizes computer technology and computer chip technology in their business systems or equipment. Apache, as Managing Partner, manages the Partnership's operations. Apache uses a portion of its staff for this purpose and is reimbursed for actual costs paid on behalf of the Partnership, as well as for general, administrative and overhead costs properly allocable to the Partnership. Apache has formed a Year 2000 Task Force with representation from major business units to inventory and assess the risk of hardware, software, telecommunications systems, office equipment, embedded chip controls and systems, process control systems, facility control systems and dependencies on external trading partners. The project phases, expected completion dates and percentage complete as of September 1999 are as follows: PHASE COMPLETION DATE PERCENT COMPLETE - ----------------------------------- --------------- ---------------- Organization July 1998 100% Assessment November 1998 100% Desktop Computers Network Hardware Software Embedded Systems External Trading Partners Building/Infrastructure Systems Telecommunications Systems Implementation/Replacement November 1999 90% Computer Hardware Core Business Software Desktop Software Embedded Systems Building Systems Contact External Trading Partners March 1999 100% Contingency Planning November 1999 90% To date, the Managing Partner is not aware of any significant Year 2000 issues that would cause problems in the area of safety, environmental or business interruption. Apache has assessed the risks associated with hardware, software, infrastructure, embedded chips and external trading partners that are not Year 2000 compliant. While Apache is confident that Year 2000 remediation efforts will succeed in minimizing exposure to business disruption, plans are being developed that will allow continuation of business in all but the worst case scenarios. All remediation and replacement efforts and contingency planning are expected to be complete by November 1999. All critical external trading partners have been contacted to determine Year 2000 readiness. Such responses indicate they will be compliant by year-end. In 1997, the Managing Partner initiated a project to replace existing business software as it relates to Apache's production, land, marketing, accounting and financial systems to more effectively and efficiently meet its business needs. Replacement computer systems selected by the Managing Partner from SAP America, Inc., PricewaterhouseCoopers LLP, Innovative Business Solutions and Landmark Graphics will properly recognize dates beyond December 31, 1999. The implementation of the business software project was completed and operational effective with January 1999 production. 7

9 The Managing Partner expects that its cost to achieve Year 2000 compliance will not exceed $4 million, excluding the cost of implementing business replacement systems. These costs will be borne by the Managing Partner and will not have any impact on the financial results of the Partnership. The Managing Partner presently believes that with conversions to new software and completion of efforts planned by the Year 2000 Task Force, the risk associated with Year 2000 will be significantly reduced. However, the Managing Partner is unable to assure that the consequences of Year 2000 failures of systems maintained by Apache or by third parties will not materially adversely impact the Partnership's results of operations, liquidity or financial condition. 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, 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. Future oil and gas prices also could affect results of operations and cash flows. 8

10 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. 27.1 Financial Data Schedule. b. Reports on Form 8-K - None. 9

11 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 11, 1999 /s/ Roger B. Plank ------------------------------------------ Roger B. Plank Vice President and Chief Financial Officer Dated: November 11, 1999 /s/ Thomas L. Mitchell ------------------------------------------ Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer)

12 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1 - Financial Data Schedule

5 9-MOS DEC-31-1999 SEP-30-1999 4,063,729 0 788,848 0 0 4,852,577 169,303,152 (163,401,505) 10,754,224 4,178,189 0 0 0 0 6,576,035 10,754,224 5,789,695 5,864,203 2,816,434 2,816,434 405,000 0 0 2,642,769 0 2,642,769 0 0 0 2,642,769 1,559 1,559