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