Edgar Filing: APACHE CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-4300

LOGO

APACHE CORPORATION

(exact name of registrant as specified in its charter)

Delaware

41-0747868

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x


Number of shares of registrant’s common stock outstanding as of July 31, 2014			382,473,038

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED OPERATIONS

(Unaudited)


	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
	(In millions, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues
Oil revenues	$	2,950		$	3,130		$	5,765		$	6,322
Gas revenues		589			721			1,235			1,402
Natural gas liquids revenues		169			150			355			298

		3,708			4,001			7,355			8,022
Derivative instrument gains (losses), net		(174	)		247			(194	)		147
Other		(50	)		20			(2	)		45

		3,484			4,268			7,159			8,214

OPERATING EXPENSES:
Depreciation, depletion and amortization:
Oil and gas property and equipment
Recurring		1,155			1,258			2,264			2,468
Additional		203			—			203			—
Other assets		99			92			196			194
Asset retirement obligation accretion		45			64			89			127
Lease operating expenses		613			781			1,210			1,503
Gathering and transportation		66			77			136			150
Taxes other than income		181			170			362			399
General and administrative		94			126			199			238
Acquisition, divestiture, and separation costs		14			—			30			—
Financing costs, net		35			52			62			107

		2,505			2,620			4,751			5,186

NET INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		979			1,648			2,408			3,028
Current income tax provision		325			284			741			781
Deferred income tax provision		41			327			203			432

NET INCOME FROM CONTINUING OPERATIONS INCLUDING NONCONTROLLING INTEREST		613			1,037			1,464			1,815
Net loss from discontinued operations, net of tax		—			(2	)		(517	)		(63	)

NET INCOME INCLUDING NONCONTROLLING INTEREST		613			1,035			947			1,752
Preferred stock dividends		—			19			—			38
Net income attributable to noncontrolling interest		108			—			206			—

NET INCOME ATTRIBUTABLE TO COMMON STOCK	$	505		$	1,016		$	741		$	1,714

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS:
Net income from continuing operations attributable to common shareholders	$	505		$	1,018		$	1,258		$	1,777
Net loss from discontinued operations		—			(2	)		(517	)		(63	)

Net income attributable to common shareholders	$	505		$	1,016		$	741		$	1,714

NET INCOME PER COMMON SHARE:
Basic net income from continuing operations per share	$	1.31		$	2.60		$	3.23		$	4.53
Basic net loss from discontinued operations per share		—			(0.01	)		(1.33	)		(0.16	)

Basic net income per share	$	1.31		$	2.59		$	1.90		$	4.37

DILUTED NET INCOME PER COMMON SHARE:
Diluted net income from continuing operations per share	$	1.31		$	2.54		$	3.21		$	4.45
Diluted net loss from discontinued operations per share		—			—			(1.32	)		(0.15	)

Diluted net income per share	$	1.31		$	2.54		$	1.89		$	4.30

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic		385			392			390			392
Diluted		387			408			392			408

DIVIDENDS DECLARED PER COMMON SHARE	$	0.25		$	0.20		$	0.50		$	0.40

The accompanying notes to consolidated financial statements

are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)


	For the Quarter Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014			2013
	(In millions)

NET INCOME INCLUDING NONCONTROLLING INTEREST	$	613	$	1,035	$	947		$	1,752

OTHER COMPREHENSIVE INCOME (LOSS):
Commodity cash flow hedge activity, net of tax:
Reclassification of loss on settled derivative instruments		—		8		—			14
Change in fair value of derivative instruments		—		7		(1	)		(1	)

		—		15		(1	)		13

COMPREHENSIVE INCOME INCLUDING NONCONTROLLING INTEREST		613		1,050		946			1,765
Preferred stock dividends		—		19		—			38
Comprehensive income attributable to noncontrolling interest		108		—		206			—

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK	$	505	$	1,031	$	740		$	1,727

The accompanying notes to consolidated financial statements

are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,
	2014			2013
	(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest	$	947		$	1,752
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations		517			63
Depreciation, depletion, and amortization		2,663			2,662
Asset retirement obligation accretion		89			127
Provision for deferred income taxes		203			432
Other		31			(186	)
Changes in operating assets and liabilities:
Receivables		463			122
Inventories		(7	)		(33	)
Drilling advances		28			289
Deferred charges and other		(114	)		(149	)
Accounts payable		(140	)		195
Accrued expenses		(158	)		6
Deferred credits and noncurrent liabilities		28			(4	)

NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES		4,550			5,276
NET CASH PROVIDED BY DISCONTINUED OPERATIONS		82			104

NET CASH PROVIDED BY OPERATING ACTIVITIES		4,632			5,380
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property		(4,871	)		(5,050	)
Additions to gas gathering, transmission, and processing facilities		(721	)		(491	)
Proceeds from sale of Deepwater Gulf of Mexico assets		1,367			—
Restricted cash related to divestitures		(1,367	)		—
Proceeds from Kitimat LNG transaction, net		—			405
Proceeds from sale of other oil and gas properties		381			—
Acquisitions		(5	)		(148	)
Other, net		(23	)		14

NET CASH USED IN CONTINUING INVESTING ACTIVITIES		(5,239	)		(5,270	)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS		748			(94	)

NET CASH USED IN INVESTING ACTIVITIES		(4,491	)		(5,364	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper and bank credit facilities, net		(1	)		945
Payments on fixed rate debt		—			(500	)
Distributions to noncontrolling interest		(66	)		—
Dividends paid		(176	)		(183	)
Treasury stock activity, net		(1,263	)		(249	)
Other		25			3

NET CASH PROVIDED BY (USED IN) CONTINUING FINANCING ACTIVITIES		(1,481	)		16
NET CASH USED IN DISCONTINUED OPERATIONS		(42	)		(8	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,523	)		8
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,382	)		24
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,906			160

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	524		$	184

SUPPLEMENTARY CASH FLOW DATA:
Interest paid, net of capitalized interest	$	62		$	79
Income taxes paid, net of refunds		781			802

The accompanying notes to consolidated financial statements

are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)


	June 30,			December 31,
	2014			2013
	(In millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	524		$	1,906
Short-term restricted cash		778			—
Receivables, net of allowance		2,407			2,952
Inventories		794			891
Drilling advances		331			371
Prepaid assets and other		292			246

		5,126			6,366

PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full-cost accounting:
Proved properties		84,033			83,390
Unproved properties and properties under development, not being amortized		7,789			8,363
Gathering, transmission and processing facilities		7,587			6,995
Other		1,103			1,071

		100,512			99,819
Less: Accumulated depreciation, depletion and amortization		(48,042	)		(47,398	)

		52,470			52,421

OTHER ASSETS:
Long-term restricted cash		589			—
Goodwill		1,369			1,369
Deferred charges and other		1,617			1,481

	$	61,171		$	61,637

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,491		$	1,616
Current debt		1			53
Current asset retirement obligation		178			121
Derivative instruments		272			299
Other current liabilities		2,628			2,611

		4,570			4,700

LONG-TERM DEBT		9,674			9,672

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes		8,566			8,364
Asset retirement obligation		3,050			3,101
Other		419			407

		12,035			11,872

COMMITMENTS AND CONTINGENCIES (Note 8)

EQUITY:
Common stock, $0.625 par, 860,000,000 shares authorized, 409,441,006 and 408,041,088 shares issued, respectively		256			255
Paid-in capital		12,324			12,251
Retained earnings		22,581			22,032
Treasury stock, at cost, 27,110,079 and 12,268,180 shares, respectively		(2,290	)		(1,027	)
Accumulated other comprehensive loss		(116	)		(115	)

APACHE SHAREHOLDERS’ EQUITY		32,755			33,396
Noncontrolling interest		2,137			1,997

TOTAL EQUITY		34,892			35,393

	$	61,171		$	61,637

The accompanying notes to consolidated financial statements

are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES

STATEMENT OF CONSOLIDATED CHANGES IN EQUITY

(Unaudited)


	Series D Preferred Stock		Common Stock		Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			APACHE SHAREHOLDERS’ EQUITY			Non Controlling Interest			TOTAL EQUITY
	(In millions)

BALANCE AT DECEMBER 31, 2012	$	1,227	$	245	$	9,859		$	20,161		$	(30	)	$	(131	)	$	31,331		$	—		$	31,331
Net income		—		—		—			1,752			—			—			1,752			—			1,752
Commodity hedges, net of tax		—		—		—			—			—			13			13			—			13
Dividends:
Preferred		—		—		—			(38	)		—			—			(38	)		—			(38	)
Common ($0.40 per share)		—		—		—			(157	)		—			—			(157	)		—			(157	)
Common stock activity, net		—		1		(18	)		—			—			—			(17	)		—			(17	)
Treasury stock activity, net		—		—		—			—			(250	)		—			(250	)		—			(250	)
Compensation expense		—		—		87			—			—			—			87			—			87

BALANCE AT JUNE 30, 2013	$	1,227	$	246	$	9,928		$	21,718		$	(280	)	$	(118	)	$	32,721		$	—		$	32,721


BALANCE AT DECEMBER 31, 2013	$	—	$	255	$	12,251		$	22,032		$	(1,027	)	$	(115	)	$	33,396		$	1,997		$	35,393
Net income		—		—		—			741			—			—			741			206			947
Distributions to noncontrolling interest		—		—		—			—			—			—			—			(66	)		(66	)
Commodity hedges, net of tax		—		—		—			—			—			(1	)		(1	)		—			(1	)
Dividends:
Common ($0.50 per share)		—		—		—			(192	)		—			—			(192	)		—			(192	)
Common stock activity, net		—		1		(25	)		—			—			—			(24	)		—			(24	)
Treasury stock activity, net		—		—		(1	)		—			(1,263	)		—			(1,264	)		—			(1,264	)
Compensation expense		—		—		99			—			—			—			99			—			99

BALANCE AT JUNE 30, 2014	$	—	$	256	$	12,324		$	22,581		$	(2,290	)	$	(116	)	$	32,755		$	2,137		$	34,892

The accompanying notes to consolidated financial statements

are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

These financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with Apache’s Current Report on Form 8-K dated July 17, 2014 for the fiscal year ended December 31, 2013, which contains a summary of the Company’s significant accounting policies and other disclosures.

The Company’s financial statements for prior periods include reclassifications that were made to conform to the current-period presentation. In March 2014, Apache completed the sale of all of its operations in Argentina. Results of operations and cash flows for Argentina operations are reflected as discontinued operations in the Company’s financial statements for all periods presented. For more information regarding this divestiture, please refer to Note 2–Acquisitions and Divestitures.

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As of June 30, 2014, Apache’s significant accounting policies are consistent with those discussed in Note 1—Summary of Significant Accounting Policies to the consolidated financial statements contained in Apache’s Current Report on Form 8-K dated July 17, 2014 for the fiscal year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom, assessing asset retirement obligations, and the estimate of income taxes. Actual results could differ from those estimates.

Restricted Cash

The Company classifies cash balances as restricted cash when cash is restricted as to withdrawal or usage. As of June 30, 2014, the Company had approximately $1.4 billion of proceeds from the sale of our deepwater Gulf of Mexico properties held by a qualified intermediary and available for use in a like-kind exchange under Section 1031 of the U.S. Internal Revenue Code. The Company has the option to use these funds for the acquisition of properties or receive the funds in cash after a short-term contractual period. As of the date of this filing, the Company expects to close on the acquisition of like-kind properties for $589 million, and as such, the balance is classified as long-term restricted cash on Apache’s consolidated balance sheet as of June 30, 2014. The remaining proceeds of approximately $778 million are classified as short-term restricted cash as of June 30, 2014. Should the Company elect to use additional funds for a like-kind exchange, the balance will be reclassified to long-term restricted cash until the funds are expended. For more information regarding the sale of the deepwater Gulf of Mexico properties, please refer to Note 2—Acquisitions and Divestitures.

Oil and Gas Property

The Company follows the full-cost method of accounting for its oil and gas property. Under this method of accounting, all costs incurred for both successful and unsuccessful exploration and development activities, including salaries, benefits and other internal costs directly identified with these activities, and oil and gas property acquisitions are capitalized. The net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum and adjusted for designated cash flow hedges. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements.

Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as “Additional depreciation, depletion and amortization” (DD&A) in the accompanying statement of consolidated operations. Such limitations are imposed separately on a country-by-country basis and are tested quarterly. For a discussion of the calculation of estimated future net cash flows, please refer to Note 14—Supplemental Oil and Gas Disclosures to the consolidated financial statements contained in Apache’s Current Report on Form 8-K dated July 17, 2014 for the fiscal year ended December 31, 2013.

In the second quarter of 2014, the Company recorded a $203 million ($77 million net of tax) non-cash write-down of the carrying value of the Company’s North Sea proved oil and gas properties.

New Pronouncements Issued But Not Yet Adopted

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08—Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 modifies the criteria for disposals to qualify as discontinued operations and expands related disclosures. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. Adoption of this amendment will not have a material effect on our financial position or results of operations.

In May 2014, the FASB and the International Accounting Standards Board (IASB) issued a joint revenue recognition standard, ASU 2014-09. The new standard removes inconsistencies in existing standards, changes the way companies recognize revenue from contracts with customers, and increases disclosure requirements. The guidance requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. The standard is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet. The Company is currently evaluating the level of effort needed to implement the standard, the impact of adopting this standard on its consolidated financial statements, and whether to use the full retrospective approach or the modified retrospective approach.

2.	ACQUISITIONS AND DIVESTITURES

2014 Activity

Gulf of Mexico Deepwater Divestiture

On June 30, 2014, Apache completed the sale of non-operated interests in the Lucius and Heidelberg development projects and 11 primary term deepwater exploration blocks in the Gulf of Mexico for $1.4 billion. The effective date of the transaction was May 1, 2014. Apache’s net book value of oil and gas properties was reduced by approximately $850 million of proved property costs and $518 million of unproved property costs as a result of the transaction.

Canada Divestiture

On April 30, 2014, Apache completed the sale of primarily dry gas producing hydrocarbon assets in the Deep Basin area of western Alberta and British Columbia, Canada, for $374 million. The assets comprise 328,400 net acres in the Ojay, Noel, and Wapiti areas. Apache retained 100 percent of its working interest in horizons below the Cretaceous in the Wapiti area, including rights to the liquids-rich Montney and other deeper horizons. The effective date of the transaction was January 1, 2014.

Argentina Divestiture

On March 12, 2014, Apache’s subsidiaries completed the sale of all of the Company’s operations in Argentina to YPF Sociedad Anónima for cash consideration of $800 million (subject to customary closing adjustments) plus the assumption of $52 million of bank debt as of June 30, 2013. The results of operations related to Argentina have been classified as discontinued operations in all periods presented in this Quarterly Report on Form 10-Q. The carrying amounts of the major classes of assets and liabilities associated with the disposition were as follows:


	December 31,
	2013
	(In millions)

ASSETS
Current assets	$	150
Net property and equipment		1,416
Other assets		12

Total assets	$	1,578


LIABILITIES
Current debt	$	51
Other current liabilities		95
Asset retirement obligations		91
Other long-term liabilities		21

Total liabilities	$	258

Sales and other operating revenues and loss from discontinued operations related to the Argentina disposition were as follows:


	For the Quarter Ended					For the Six Months Ended
	June 30,					June 30,
	2014		2013			2014			2013
	(In millions)

Revenues and other from discontinued operations	$	—	$	115		$	87		$	246


Loss from Argentina divestiture		—		—			(539	)		—
Loss from operations in Argentina		—		(2	)		(1	)		(63	)
Income tax benefit		—		—			23			—

Loss from discontinued operations, net of tax	$	—	$	(2	)	$	(517	)	$	(63	)

2013 Activity

Egypt Partnership

On November 14, 2013, Apache completed the sale of a one-third minority participation in its Egypt oil and gas business to a subsidiary of Sinopec International Petroleum Exploration and Production Corporation (Sinopec). Apache received cash consideration of $2.95 billion after customary closing adjustments. Apache continues to operate its Egypt upstream oil and gas business. Apache recorded $1.9 billion of the proceeds as a noncontrolling interest, which is reflected as a separate component of equity in the Company’s consolidated balance sheet. This represents one-third of Apache’s net book value of its Egypt holdings at the time of the transaction. The remaining proceeds were recorded as additional paid-in capital. Included in “Net income including noncontrolling interest” for the quarter ended June 30, 2014, is net income attributable to Sinopec’s interest totaling $108 million. For the first half of 2014, net income attributable to Sinopec’s interest totaled $206 million, of which the Company has distributed $66 million to Sinopec.

Gulf of Mexico Shelf Divestiture

On September 30, 2013, Apache completed the sale of its Gulf of Mexico Shelf operations and properties to Fieldwood Energy LLC (Fieldwood), an affiliate of Riverstone Holdings. Under the terms of the agreement, Apache received cash consideration of $3.7 billion, and Fieldwood assumed $1.5 billion of discounted asset abandonment liabilities. Additionally, Apache retained 50 percent of its ownership interest in all exploration blocks and in horizons below production in developed blocks.

Canada LNG Project

In February 2013, Apache completed a transaction with Chevron Canada Limited (Chevron Canada) under which each company became a 50-percent owner of the Kitimat LNG plant, the Pacific Trail Pipelines Limited Partnership (PTP), and 644,000 gross undeveloped acres in the Horn River and Liard basins. Chevron Canada will operate the LNG plant and pipeline while Apache Canada will continue to operate the upstream assets. Apache’s net proceeds from the transaction were $396 million after post-closing adjustments, and no gain or loss was recorded.

3.	DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and options, to manage fluctuations in cash flows resulting from changes in commodity prices.

Counterparty Risk

The use of derivative instruments exposes the Company to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of June 30, 2014, Apache had derivative positions with 14 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.

The Company executes commodity derivative transactions under master agreements that have netting provisions that provide for offsetting payables against receivables. In general, if a party to a derivative transaction incurs a material deterioration in its credit ratings, as defined in the applicable agreement, the other party has the right to demand the posting of collateral, demand a transfer, or terminate the arrangement. The Company’s net derivative liability position at June 30, 2014, represents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position. The Company has not provided any collateral to any of its counterparties as of June 30, 2014.

Derivative Instruments

As of June 30, 2014, Apache had the following commodity derivative positions:


			Fixed-Price Swaps
					MMBtu		Weighted Average
Production Period	Commodity	Settlement Index	Mbbls		(in 000’s)		Fixed Price

2014	Crude Oil	NYMEX WTI		11,500		—	$	90.83
2014	Crude Oil	Dated Brent		11,500		—		100.05
2014	Natural Gas	Various⁽¹⁾		—		32,470		4.37

⁽¹⁾	The natural gas price represents a weighted-average of several contracts entered into on a per-million British thermal units (MMBtu) basis. These contracts are settled against NYMEX Henry Hub and various Inside FERC indices.

Apache has currently elected not to designate any of its qualifying natural gas and oil derivatives as cash flow hedges. Changes in the fair value of these derivatives for the current period are recorded in the Company’s statement of consolidated operations.

Fair Value Measurements

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps. The fair values of the Company’s derivatives are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments, utilizing commodity futures price strips for the underlying commodities provided by a reputable third party.

The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:


	Fair Value Measurements Using
	Quoted Price in Active Markets (Level 1)		Significant Other Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Netting⁽¹⁾			Carrying Amount
	(In millions)
June 30, 2014
Assets:
Commodity Derivative Instruments	$	—	$	1	$	—	$	1	$	(1	)	$	—

Liabilities:
Commodity Derivative Instruments		—		273		—		273		(1	)		272

December 31, 2013
Assets:
Commodity Derivative Instruments	$	—	$	3	$	—	$	3	$	(2	)	$	1

Liabilities:
Commodity Derivative Instruments		—		301		—		301		(2	)		299

⁽¹⁾	The derivative fair values are based on analysis of each contract on a gross basis, excluding the impact of netting agreements with counterparties.

Derivative Assets and Liabilities Recorded in the Consolidated Balance Sheet

All derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:


	June 30,		December 31,
	2014		2013
	(In millions)

Current Assets: Prepaid assets and other	$	—	$	1

Current Liabilities: Derivative instruments	$	272	$	299

Derivative Activity Recorded in the Statement of Consolidated Operations

The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:


	Gain (Loss) on Derivatives	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	Recognized in Income	2014			2013			2014			2013
		(In millions)
Loss on cash flow hedges reclassified from accumulated other comprehensive loss	Oil and Gas Production Revenues	$	—		$	(11	)	$	—		$	(20	)

Derivatives not designated as cash flow hedges:
Realized gain (loss)		$	(125	)	$	5		$	(221	)	$	(47	)
Unrealized gain (loss)			(49	)		242			27			194

Gain (loss) on derivatives not designated as cash flow hedges	Derivative instrument gains (losses), net	$	(174	)	$	247		$	(194	)	$	147

Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations is reflected in the statement of consolidated cash flows as a component of “Other” in “Adjustments to reconcile net income to net cash provided by operating activities.”

Derivative Activity in Accumulated Other Comprehensive Loss

A reconciliation of the components of accumulated other comprehensive loss in the statement of consolidated changes in equity related to Apache’s cash flow hedges is presented in the table below. The Company has no derivatives designated as cash flow hedges as of June 30, 2014.


	For the Six Months Ended June 30,
	2014						2013
	Before tax			After tax			Before tax			After tax
	(In millions)

Unrealized gain (loss) on derivatives at beginning of period	$	1		$	1		$	(10	)	$	(6	)
Realized amounts reclassified into earnings		—			—			20			14
Net change in derivative fair value		(1	)		(1	)		—			(1	)

Unrealized gain on derivatives at end of period	$	—		$	—		$	10		$	7

4.	OTHER CURRENT LIABILITIES

The following table provides detail of our other current liabilities:


	June 30,		December 31,
	2014		2013
	(In millions)

Accrued operating expenses	$	131	$	190
Accrued exploration and development		1,616		1,582
Accrued compensation and benefits		167		242
Accrued interest		161		161
Accrued income taxes		266		248
Accrued U.K. Petroleum Revenue Tax		64		9
Other		223		179


Total Other current liabilities	$	2,628	$	2,611

5.	ASSET RETIREMENT OBLIGATION

The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the six-month period ended June 30, 2014:


	(In millions)
Asset retirement obligation at December 31, 2013	$	3,222
Liabilities incurred		63
Liabilities divested		(91	)
Liabilities settled		(55	)
Accretion expense		89

Asset retirement obligation at June 30, 2014		3,228

Less current portion		(178	)

Asset retirement obligation, long-term	$	3,050

6.	DEBT AND FINANCING COSTS

The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt:


	June 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)

Uncommitted credit lines	$	1	$	1	$	53	$	53
Notes and debentures		9,674		10,828		9,672		10,247

Total Debt	$	9,675	$	10,829	$	9,725	$	10,300

The Company’s debt is recorded at the carrying amount, net of unamortized discount, on its consolidated balance sheet. The carrying amount of the Company’s commercial paper and uncommitted credit facilities and overdraft lines approximates fair value because the interest rates are variable and reflective of market rates. Apache uses a market approach to determine the fair value of its notes and debentures using estimates provided by an independent investment financial data services firm (a Level 2 fair value measurement).

As of June 30, 2014, the Company had unsecured committed revolving credit facilities totaling $3.3 billion, of which $1.0 billion matures in August 2016 and $2.3 billion matures in June 2018 pursuant to a one-year extension approved in May 2014 under the terms of the $2.3 billion facilities. The facilities consist of a $1.7 billion facility and $1.0 billion facility for the U.S., a $300 million facility for Australia, and a $300 million facility for Canada. As of June 30, 2014, available borrowing capacity under the Company’s credit facilities was $3.3 billion. The Company’s committed credit facilities are used to support Apache’s commercial paper program.

The Company has available a $3.0 billion commercial paper program, which generally enables Apache to borrow funds for up to 270 days at competitive interest rates. The commercial paper program is fully supported by available borrowing capacity under our committed credit facilities. At June 30, 2014 and December 31, 2013, the Company had no outstanding commercial paper.

As of June 30, 2014, the Company had approximately $1 million of current debt outstanding borrowed on uncommitted credit facilities and overdraft lines, compared with $53 million as of December 31, 2013.

Financing Costs, Net

The following table presents the components of Apache’s financing costs, net:


	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
	(In millions)

Interest expense	$	124		$	141		$	248		$	287
Amortization of deferred loan costs		1			2			3			4
Capitalized interest		(90	)		(88	)		(185	)		(178	)
Interest income		—			(3	)		(4	)		(6	)

Financing costs, net	$	35		$	52		$	62		$	107

7.	INCOME TAXES

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. Accordingly, the Company recorded the income tax impact of a $203 million non-cash write-down of its North Sea proved oil and gas properties as a discrete item in the second quarter of 2014.

Apache and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is under audit with the Internal Revenue Service for the 2011 and 2012 tax years. The Company is also under audit in various states and in most of the Company’s foreign jurisdictions as part of its normal course of business.

8.	COMMITMENTS AND CONTINGENCIES

Legal Matters

Apache is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. As of June 30, 2014, the Company has an accrued liability of approximately $21 million for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. Apache’s estimates are based on information known about the matters and its experience in contesting, litigating, and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to Apache’s financial position, results of operations, or liquidity after consideration of recorded accruals. For material matters that Apache believes an unfavorable outcome is reasonably possible, the Company has disclosed the nature of the matter and a range of potential exposure, unless an estimate cannot be made at this time. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

For additional information on each of the Legal Matters described below, please see Note 8—Commitments and Contingencies to the consolidated financial statements contained in Apache’s Current Report on Form 8-K dated July 17, 2014 for the fiscal year ended December 31, 2013.

Argentine Environmental Claims and Argentina Tariff

In 2003, the Asociación de Superficiarios de la Patagonia (ASSUPA) filed lawsuits against Company subsidiaries in Argentina courts relating to various environmental and remediation claims concerning certain geographic areas of Argentina, including the Neuquén and Austral basins. In addition, effective December 1, 2011, Enargas, an autonomous entity that functions under the Argentine Ministry of Economy, created a tariff charge on all fuel gas used by oil and gas producers in field operations, which is likewise the subject of legal proceedings in Argentina.

On March 12, 2014, the Company and its subsidiaries completed the sale of all of the Company’s subsidiaries’ operations and properties in Argentina to YPF Sociedad Anonima (YPF). As part of that sale, YPF assumed responsibility for all of the past, present, and future litigation in Argentina involving Company subsidiaries, including the ASSUPA and Enargas matters, except that Company subsidiaries have agreed to indemnify YPF for certain environmental, tax, and royalty obligations capped at an aggregate of $100 million. The indemnity is subject to specific agreed conditions precedent, thresholds, contingencies, limitations, claim deadlines, loss sharing, and other terms and conditions. On April 11, 2014, YPF provided its first notice of claims pursuant to the indemnity. Company subsidiaries have not paid any amounts under the indemnity, but will continue to review and consider claims presented by YPF. Further, Company subsidiaries retain the right to enforce certain Argentina-related indemnification obligations against Pioneer Natural Resources Company (Pioneer) up to $67.5 million pursuant to the terms and conditions of stock purchase agreements entered in 2006 between Company subsidiaries and Pioneer subsidiaries. No other material change in the status of these matters has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Louisiana Restoration

Numerous surface owners have filed claims or sent demand letters to various oil and gas companies, including Apache, claiming that, under either expressed or implied lease terms or Louisiana law, they are liable for damage measured by the cost of restoration of leased premises to their original condition as well as damages for contamination and cleanup.

In a case captioned Heloise, LLC, et al. v. BP America Production Company, et al., Case No. 120113 in the District Court for the Parish of Lafourche, plaintiff landowners allege that defendants’ oil and gas operations contaminated their property primarily with chlorides. Apache, a defendant in the case, acquired its interest in the oil and gas operations on plaintiffs’ property from the former operator, Amoco Production Company, when the Company purchased the stock of Amoco’s subsidiary, MW Petroleum Corporation, in 1991. BP America Production Company, as Amoco’s successor in interest, and Apache dispute whether and to what extent they might owe each other indemnity in the case. Plaintiffs’ expert has recently opined that the cost of remediating plaintiffs’ 825 acres exceeds $200 million. Trial is set for December 2014. While an adverse judgment against the Company might be possible, Apache intends to vigorously defend the case.

With respect to Board of Commissioners of the Southeast Louisiana Flood Protection Authority – East v. Tennessee Gas Pipeline Company et al., Civil Action no. 13-5410, in the United States District Court for the Eastern District of Louisiana, the federal court has retained jurisdiction over the matter after denying plaintiff’s motion to remand on June 27, 2014. Further, the Louisiana state government has passed a new law (SB 469) clarifying that only entities authorized under the Coastal Zone Management Act may bring litigation to assert claims arising out of the permitted activities. Plaintiff is not one of those authorized entities. The Company and other defendants will seek dismissal of the case, including pursuant to SB 469.

No other material change in the status of these matters has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Australia Gas Pipeline Force Majeure

In 2008, Company subsidiaries reported a pipeline explosion that interrupted deliveries of natural gas in Australia to customers under various long-term contracts.

In the case captioned Alcoa of Australia Limited v. Apache Energy Limited, Apache Northwest Pty Ltd, Tap (Harriet) Pty Ltd, and Kufpec Australia Pty Ltd, Civ. 1481 of 2011, in the Supreme Court of Western Australia, on June 20, 2012, the Supreme Court struck out Alcoa’s claim that the liquidated damages provisions under two long-term contracts are unenforceable as a penalty and also struck out Alcoa’s claim for damages for breach of statutory duty. On September 17, 2013, the Western Australia Court of Appeal dismissed the Company subsidiaries’ appeal concerning Alcoa’s remaining tort claim for economic loss. On October 15, 2013, the Company subsidiaries applied to the High Court of Australia for special leave to appeal. On April 11, 2014, the High Court refused special leave to appeal. All of the Company subsidiaries’ defenses remain intact for further proceedings at the trial court level, including the defenses that were the subject of the special leave application. Further, in January 2014, an Alcoa affiliate pleaded guilty in United States of America v. Alcoa World Alumina LLC, Criminal No. 14-7, in the United States District Court for the Western District of Pennsylvania, to a charge under the Foreign Corrupt Practices Act (FCPA) anti-bribery provisions, 15 U.S.C. Section 78dd-2 and 18 U.S.C. Section 2. This matter overlaps with Alcoa’s claims against Company subsidiaries in that both cases concern alumina produced from Alcoa’s alumina refineries in Western Australia during the period of the gas supply disruption in 2008-2009. In the circumstances of the admitted, agreed, and stipulated facts set forth in the Alcoa affiliate’s Plea Agreement, which is a public document, Company subsidiaries will defend against Alcoa’s claims on the basis that Alcoa is barred by law from recovering economic losses.

In the week prior to expiration of the applicable six-year limitations period on June 3, 2014, the following civil lawsuits were filed in connection with the Varanus Island pipeline explosion (the Incident):

•

As previously reported, a lawsuit filed by Burrup Fertilisers Pty Ltd (Burrup Fertilisers) in Texas in December 2009 was dismissed in March 2013 on the ground of forum non conveniens. On May 29, 2014, Burrup Fertilisers (now known as Yara Pilbara Fertilisers Pty Ltd, YPFPL) re-filed the lawsuit in Western Australia, captioned Yara Pilbara Fertilisers Pty Ltd vs. Apache Energy Limited et al., Civ. 1742 of 2014, in the Supreme Court of Western Australia. In the lawsuit, which is being pressed by YPFPL’s insurers, YPFPL alleges that a joint venture whose members include an Apache subsidiary supplied YPFPL with natural gas and that, as a consequence of a disruption in gas supply following the Incident, plaintiff incurred damages in the amount of nearly $166 million USD for economic losses and, alternatively, contractual liquidated damages and “abnormal costs” in the amount of approximately $13 million USD. In addition to all of their other defenses, the Company and its subsidiaries will defend against YPFPL’s claims on the basis that during the gas supply disruption there was no enforceable gas supply contract between YPFPL and Company subsidiaries.

•

In Wesfarmers LPG Pty Ltd et al. vs. Apache Energy Limited et al., Civ. 1740 of 2014, in the Supreme Court of Western Australia, plaintiffs allege that Alinta Sales Pty Ltd (Alinta) supplied them (and associated entities) with natural gas and that, as a consequence of a disruption in gas supply following the Incident, plaintiffs incurred an unspecified amount of damages for alleged lost profits, alternative gas, and associated expenses. Plaintiffs’ Indorsement of Claim (a short form of pleading) has been filed with the court but not yet served on the Apache defendants.

•

In Iluka Resources Limited vs. Apache Energy Limited et al., Civ. 1748 of 2014, in the Supreme Court of Western Australia, plaintiff alleges that Alinta supplied it with natural gas and power and that, as a consequence of a disruption in gas supply following the Incident, plaintiff incurred damages of approximately $23 million (no currency is specified) for alleged lost profits, alternative energy, and associated expenses. Plaintiff’s Indorsement of Claim has been filed with the court but not yet served on the Apache defendants.

•

In Harvey Industries Group Pty Ltd vs. Apache Energy Limited et al., Civ. 1749 of 2014, in the Supreme Court of Western Australia, plaintiff alleges that Alinta supplied it with natural gas and power and that, as a consequence of a disruption in gas supply following the Incident, plaintiff incurred an unspecified amount of damages for alleged lost profits, the cost of alternative gas and power, and associated expenses. Plaintiff’s Indorsement of Claim has been filed with the court but not yet served on the Apache defendants.

•

In EDL LNG (WA) Pty Ltd et al. vs. Apache Energy Limited et al., Civ. 1751 of 2014, in the Supreme Court of Western Australia, plaintiffs allege that an Apache subsidiary and Santos (BOL) Pty Ltd supplied one such plaintiff with natural gas and that, as a consequence of a disruption in gas supply following the Incident, plaintiffs incurred damages of approximately $17.5 million (no currency is specified) for alleged alternative gas and diesel, and, alternatively, plaintiffs seek an unspecified amount of liquidated damages from their gas sellers.

•

In Newmont Mining Services Pty Ltd et al. vs. Apache Energy Limited et al., Civ. 1727 of 2014, in the Supreme Court of Western Australia, plaintiffs allege that Santos (BOL) Pty Ltd supplied one such plaintiff with natural gas and that, as a consequence of a disruption in gas supply following the Incident, plaintiffs incurred an unspecified amount of damages for alleged alternative energy and associated expenses, except that as an alternative measure of damage plaintiffs seek to recover $6.4 million (no currency is specified) in liquidated damages from Santos (BOL) Pty Ltd. Plaintiffs’ Indorsement of Claim has been filed with the court but not yet served on the Apache defendants.

With respect to the claims in which the plaintiffs have not specified an amount of alleged damages, the exposure related to such claims is not currently determinable but, in each case, the alleged damages are not expected to be material. Insurance statistics maintained by the Insurance Council of Australia show that the total insured loss resulting from the gas supply disruption was $230 million AUD.

The applicable six-year limitations period has expired. In six years none of the above-referenced plaintiffs presented a claim to Apache or its subsidiaries prior to filing suit and instead allowed the same plaintiff law firm to file suit in Western Australia at the latest possible moment. The Apache defendants do not believe that any of the claims have merit and will vigorously pursue their defenses against such claims. The plaintiffs seek relief primarily in tort, in circumvention of their own positive arrangements regarding risk allocation. In respect of the pending claims filed prior to expiration of the limitations period, contractual liquidated damages under the long-term contracts with such provisions, and under which an Apache subsidiary is a gas supplier, would not be expected to exceed $20 million AUD exclusive of interest. This is a reduction from previous estimates.

No other material change in the status of these matters has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Breton Lawsuit

On October 29, 2012, plaintiffs filed an amended complaint in Breton Energy, L.L.C. et al. v. Mariner Energy Resources, Inc., et al., Case 4:11-cv-03561, in the United States District Court for the Southern District of Texas, Houston Division, seeking compensation from defendants for allegedly depriving plaintiffs of rights to hydrocarbons in a reservoir described by plaintiffs as a common reservoir in West Cameron Blocks 171 and 172 offshore Louisiana in the Gulf of Mexico. On May 28, 2013, the United States District Court for the Southern District of Texas dismissed the plaintiffs’ claims and entered judgment in favor of the defendants. On June 3, 2013, the plaintiffs filed a notice of appeal in the United States Court of Appeals for the Fifth Circuit. The appeal is pending. No material change in the status of this matter has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Escheat Audits

The State of Delaware, Department of Finance, Division of Revenue (Unclaimed Property), has notified numerous companies, including Apache Corporation, that the State intends to examine its books and records and those of its subsidiaries and related entities to determine compliance with the Delaware Escheat Laws. The review is ongoing, and no material change in the status of this matter has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Burrup-Related Gas Supply Lawsuits

On October 11, 2013, a lawsuit captioned Pankaj Oswal v. Apache Corporation, No. WAD 389/2013, in the Federal Court of Australia, District of Western Australia, General Division, was filed in which plaintiff asserts claims against the Company under the Australian Trade Practices Act. The Company does not believe the lawsuit has merit and will vigorously defend against it. No other material change in the status of this matter has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

In the case captioned Radhika Oswal v. Australia and New Zealand Banking Group Limited (ANZ) et al., No. SCI 2011 4653, in the Supreme Court of Victoria, plaintiff filed an application seeking to amend her statement of claim in order to add parties as defendants to the proceedings, including the Company and certain of its subsidiaries. Similarly, in a companion case captioned Pankaj Oswal v. Australia and New Zealand Banking Group Limited (ANZ) et al., No. SCI 2012 01995, in the Supreme Court of Victoria, plaintiff also filed an application seeking to amend his statement of claim in order to add parties as defendants to the proceedings, including the Company and certain of its subsidiaries. This is the second attempt by the plaintiffs to amend their pleadings, with their first attempt having been unsuccessful. While reserving all rights, including all defenses to the plaintiffs’ proposed amended pleadings, the Company and its subsidiaries did not object to the plaintiffs’ revised applications to amend their pleadings, which is a procedural matter. The court granted plaintiffs’ applications and entered a scheduling order with respect to the filing of all amended pleadings. On July 23, 2014, the Apache defendants filed their responsive pleadings, which include substantial counterclaims against the Oswals by a Company subsidiary. No other material change in the status of these matters has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Concerning the action filed by Tap (Harriet) Pty Ltd (Tap) against Burrup Fertilisers Pty Ltd et al., Civ. 2329 of 2009, in the Supreme Court of Western Australia, no material change in the status of this matter has occurred since the filing of Apache’s Current Report on Form 8-K dated July 17, 2014 for its 2013 fiscal year.

Environmental Matters

As of June 30, 2014, the Company had an undiscounted reserve for environmental remediation of approximately $89 million. The Company is not aware of any environmental claims existing as of June 30, 2014, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.

9.	CAPITAL STOCK

Net Income per Common Share

A reconciliation of the components of basic and diluted net income per common share for the quarters and six-month periods ended June 30, 2014 and 2013 is presented in the table below.


	For the Quarter Ended June 30,
	2014								2013
	Income			Shares		Per Share			Income			Shares		Per Share
	(In millions, except per share amounts)
Basic:
Income from continuing operations	$	505			385	$	1.31		$	1,018			392	$	2.60
Loss from discontinued operations		—			385		—			(2	)		392		(0.01	)

Income attributable to common stock	$	505			385	$	1.31		$	1,016			392	$	2.59


Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock	$	—			—				$	19			14
Stock options and other		—			2					—			2

Diluted:
Income from continuing operations	$	505			387	$	1.31		$	1,037			408	$	2.54
Loss from discontinued operations		—			387		—			(2	)		408		—

Income attributable to common stock	$	505			387	$	1.31		$	1,035			408	$	2.54


	For the Six Months Ended June 30,
	2014								2013
	Income			Shares		Per Share			Income			Shares		Per Share
	(In millions, except per share amounts)
Basic:
Income from continuing operations	$	1,258			390	$	3.23		$	1,777			392	$	4.53
Loss from discontinued operations		(517	)		390		(1.33	)		(63	)		392		(0.16	)

Income attributable to common stock	$	741			390	$	1.90		$	1,714			392	$	4.37


Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock		—			—					38			14
Stock options and other		—			2					—			2

Diluted:
Income from continuing operations	$	1,258			392	$	3.21		$	1,815			408	$	4.45
Loss from discontinued operations		(517	)		392		(1.32	)		(63	)		408		(0.15	)

Income attributable to common stock	$	741			392	$	1.89		$	1,752			408	$	4.30

The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 3.2 million and 6.7 million for the quarters ending June 30, 2014 and 2013, and 5 million and 7.4 million for the six months ended June 30, 2014 and 2013, respectively.

Common and Preferred Stock Dividends

For the quarters ended June 30, 2014 and 2013, Apache paid $97 million and $78 million, respectively, in dividends on its common stock. For the six months ended June 30, 2014 and 2013, Apache paid $176 million and $145 million, respectively.

During the first quarter of 2014, Apache’s Board of Directors approved a 25 percent increase for the regular quarterly cash dividend on the Company’s common stock to $0.25 per share. This increase applied to the dividend on common stock payable on May 22, 2014, to stockholders of record on April 22, 2014, and will apply to all subsequent dividends paid.

In the first six months of 2013, the Company also paid $38 million in dividends on its Series D Preferred Stock, which was converted to common stock in August 2013.

Stock Repurchase Program

Apache’s Board of Directors has authorized the purchase of up to 40 million shares of the Company’s common stock. Shares may be purchased either in the open market or through privately held negotiated transactions. The Company initiated the buyback program on June 10, 2013, and has since repurchased a total of 26.1 million shares at an average price of $86.75. For the six-months period ended June 30, 2014, the Company repurchased a total of 14.9 million shares at an average price of $85.14. The Company is not obligated to acquire any specific number of shares.

10.

BUSINESS SEGMENT INFORMATION

Apache is engaged in a single line of business. Both domestically and internationally, the Company explores for, develops, and produces natural gas, crude oil and natural gas liquids. At June 30, 2014, the Company had production in five countries: the United States, Canada, Egypt, Australia, and the United Kingdom (U.K.) North Sea. Apache also pursues exploration interests in other countries that may, over time, result in reportable discoveries and development opportunities. Financial information for each country is presented below:


	United States		Canada		Egypt⁽²⁾		Australia		North Sea			Other International		Total
	(In millions)
For the Quarter Ended
June 30, 2014
Oil and Gas Production Revenues	$	1,529	$	293	$	989	$	237	$	660		$	—	$	3,708

Operating Income (Loss) ⁽¹⁾	$	679	$	47	$	585	$	74	$	(39	)	$	—	$	1,346

Other Income (Expense):
Derivative instrument gains (losses), net															(174	)
Other															(50	)
General and administrative															(94	)
Acquisition, divestiture, and separation costs															(14	)
Financing costs, net															(35	)

Income Before Income Taxes														$	979


For the Six Months Ended
June 30, 2014
Oil and Gas Production Revenues	$	3,034	$	611	$	1,939	$	493	$	1,278		$	—	$	7,355

Operating Income (Loss) ⁽¹⁾	$	1,342	$	119	$	1,121	$	169	$	144		$	—	$	2,895

Other Income (Expense):
Derivative instrument gains (losses), net															(194	)
Other															(2	)
General and administrative															(199	)
Acquisition, divestiture, and separation costs															(30	)
Financing costs, net															(62	)

Income Before Income Taxes														$	2,408


Total Assets	$	31,547	$	6,842	$	7,264	$	8,763	$	6,713		$	42	$	61,171


For the Quarter Ended
June 30, 2013
Oil and Gas Production Revenues⁽³⁾	$	1,836	$	329	$	893	$	291	$	652		$	—	$	4,001

Operating Income (Loss)⁽¹⁾⁽³⁾	$	712	$	14	$	512	$	119	$	202		$	—	$	1,559

Other Income (Expense):
Derivative instrument gains (losses), net															247
Other															20
General and administrative															(126	)
Financing costs, net															(52	)

Income Before Income Taxes⁽³⁾														$	1,648


For the Six Months Ended
June 30, 2013
Oil and Gas Production Revenues⁽³⁾	$	3,513	$	627	$	1,902	$	588	$	1,392		$	—	$	8,022

Operating Income (Loss) ⁽¹⁾⁽³⁾	$	1,298	$	11	$	1,170	$	254	$	448		$	—	$	3,181

Other Income (Expense):
Derivative instrument gains (losses), net															147
Other															45
General and administrative															(238	)
Financing costs, net															(107	)

Income Before Income Taxes⁽³⁾														$	3,028


Total Assets⁽³⁾	$	33,376	$	6,927	$	6,951	$	7,124	$	7,114		$	130	$	61,622

⁽¹⁾

Operating Income (Loss) consists of oil and gas production revenues less depreciation, depletion and amortization, asset retirement obligation accretion, lease operating expenses, gathering and transportation costs, and taxes other than income. North Sea’s operating income (loss) for the second quarter and first six months of 2014 includes a $203 million non-cash write-down of the carrying value of oil and gas properties.

⁽²⁾	Includes a noncontrolling interest in Egypt for the quarter and six months ended June 30, 2014.

⁽³⁾	Amounts for 2013 have been recast to exclude discontinued operations.

11.

SUPPLEMENTAL GUARANTOR INFORMATION

In December 1999, Apache Finance Canada issued approximately $300 million of publicly-traded notes due in 2029. The notes are fully and unconditionally guaranteed by Apache. The following condensed consolidating financial statements are provided as an alternative to filing separate financial statements.

Apache Finance Canada has been fully consolidated in Apache’s consolidated financial statements. As such, these condensed consolidating financial statements should be read in conjunction with Apache’s consolidated financial statements and the notes thereto, of which this note is an integral part.

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended June 30, 2014


							All Other
				Apache			Subsidiaries
	Apache			Finance			of Apache			Reclassifications
	Corporation			Canada			Corporation			& Eliminations			Consolidated
	(In millions)
REVENUES AND OTHER:
Oil and gas production revenues	$	895		$	—		$	2,813		$	—		$	3,708
Equity in net income (loss) of affiliates		491			24			11			(526	)		—
Derivative instrument losses, net		(125	)		—			(49	)		—			(174	)
Other		(69	)		13			2			4			(50	)

		1,192			37			2,777			(522	)		3,484

OPERATING EXPENSES:
Depreciation, depletion and amortization		356			—			1,101			—			1,457
Asset retirement obligation accretion		8			—			37			—			45
Lease operating expenses		121			—			492			—			613
Gathering and transportation		14			—			52			—			66
Taxes other than income		47			—			134			—			181
General and administrative		96			—			(6	)		4			94
Acquisition, divestiture, and separation costs		14			—			—			—			14
Financing costs, net		41			10			(16	)		—			35

		697			10			1,794			4			2,505

NET INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		495			27			983			(526	)		979
Provision (benefit) for income taxes		(10	)		(8	)		384			—			366

NET INCOME FROM CONTINUING OPERATIONS INCLUDING NONCONTROLLING INTEREST		505			35			599			(526	)		613
Net loss from discontinued operations, net of tax		—			—			—			—			—

NET INCOME INCLUDING NONCONTROLLING INTEREST		505			35			599			(526	)		613
Net income attributable to noncontrolling interest		—			—			108			—			108

NET INCOME ATTRIBUTABLE TO COMMON STOCK	$	505		$	35		$	491		$	(526	)	$	505


COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK ⁽¹⁾	$	505		$	35		$	491		$	(526	)	$	505

⁽¹⁾	Comprehensive income (loss) activity is recorded on the Apache Corporation entity and consists of derivative instrument reclassifications and changes in fair value as reflected on our Statement of Consolidated Comprehensive Income.

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended June 30, 2013


						All Other
			Apache			Subsidiaries
	Apache		Finance			of Apache			Reclassifications
	Corporation		Canada			Corporation			& Eliminations			Consolidated
	(In millions)
REVENUES AND OTHER:
Oil and gas production revenues	$	1,255	$	—		$	2,746		$	—		$	4,001
Equity in net income (loss) of affiliates		718		(6	)		2			(714	)		—
Derivative instrument gains (losses), net		247		—			—			—			247
Other		3		15			3			(1	)		20

		2,223		9			2,751			(715	)		4,268

OPERATING EXPENSES:
Depreciation, depletion and amortization		470		—			880			—			1,350
Asset retirement obligation accretion		20		—			44			—			64
Lease operating expenses		267		—			514			—			781
Gathering and transportation		17		—			60			—			77
Taxes other than income		57		—			113			—			170
General and administrative		102		—			25			(1	)		126
Financing costs, net		34		14			4			—			52

		967		14			1,640			(1	)		2,620

NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,256		(5	)		1,111			(714	)		1,648
Provision (benefit) for income taxes		221		(1	)		391			—			611

NET INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDING NONCONTROLLING INTEREST		1,035		(4	)		720			(714	)		1,037
Net loss from discontinued operations, net of tax		—		—			(2	)		—			(2	)

NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST		1,035		(4	)		718			(714	)		1,035
Preferred stock dividends		19		—			—			—			19

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK	$	1,016	$	(4	)	$	718		$	(714	)	$	1,016


COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK ⁽¹⁾	$	1,031	$	(4	)	$	718		$	(714	)	$	1,031

⁽¹⁾	Comprehensive income (loss) activity is recorded on the Apache Corporation entity and consists of derivative instrument reclassifications and changes in fair value as reflected on our Statement of Consolidated Comprehensive Income.

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2014


						All Other
				Apache		Subsidiaries
	Apache			Finance		of Apache			Reclassifications
	Corporation			Canada		Corporation			& Eliminations			Consolidated
	(In millions)
REVENUES AND OTHER:
Oil and gas production revenues	$	1,787		$	—	$	5,568		$	—		$	7,355
Equity in net income (loss) of affiliates		743			53		5			(801	)		—
Derivative instrument gains (losses), net		(145	)		—		(49	)		—			(194	)
Other		(72	)		27		40			3			(2	)

		2,313			80		5,564			(798	)		7,159

OPERATING EXPENSES:
Depreciation, depletion and amortization		684			—		1,979			—			2,663
Asset retirement obligation accretion		15			—		74			—			89
Lease operating expenses		249			—		961			—			1,210
Gathering and transportation		28			—		108			—			136
Taxes other than income		126			—		236			—			362
General and administrative		189			—		7			3			199
Acquisition, divestiture, and separation costs		30			—		—			—			30
Financing costs, net		73			20		(31	)		—			62

		1,394			20		3,334			3			4,751

NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		919			60		2,230			(801	)		2,408
Provision for income taxes		52			2		890			—			944

NET INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDING NONCONTROLLING INTEREST		867			58		1,340			(801	)		1,464
Net loss from discontinued operations, net of tax		(127	)		—		(390	)		—			(517	)

NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST		740			58		950			(801	)		947
Net income attributable to noncontrolling interest		—			—		206			—			206

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK	$	740		$	58	$	744		$	(801	)	$	741


COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK⁽¹⁾	$	739		$	58	$	744		$	(801	)	$	740

⁽¹⁾	Comprehensive income (loss) activity is recorded on the Apache Corporation entity and consists of derivative instrument reclassifications and changes in fair value as reflected on our Statement of Consolidated Comprehensive Income.

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2013


						All Other
			Apache			Subsidiaries
	Apache		Finance			of Apache			Reclassifications
	Corporation		Canada			Corporation			& Eliminations			Consolidated
	(In millions)
REVENUES AND OTHER:
Oil and gas production revenues	$	2,401	$	—		$	5,621		$	—		$	8,022
Equity in net income (loss) of affiliates		1,328		(17	)		5			(1,316	)		—
Derivative instrument gains (losses), net		147		—			—			—			147
Other		1		30			17			(3	)		45

		3,877		13			5,643			(1,319	)		8,214


OPERATING EXPENSES:
Depreciation, depletion and amortization		871		—			1,791			—			2,662
Asset retirement obligation accretion		40		—			87			—			127
Lease operating expenses		548		—			955			—			1,503
Gathering and transportation		31		—			119			—			150
Taxes other than income		101		—			298			—			399
General and administrative		202		—			39			(3	)		238
Financing costs, net		68		28			11			—			107

		1,861		28			3,300			(3	)		5,186

NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		2,016		(15	)		2,343			(1,316	)		3,028
Provision (benefit) for income taxes		264		(3	)		952			—			1,213

NET INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDING NONCONTROLLING INTEREST		1,752		(12	)		1,391			(1,316	)		1,815
Net loss from discontinued operations, net of tax		—		—			(63	)		—			(63	)

NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST		1,752		(12	)		1,328			(1,316	)		1,752
Preferred stock dividends		38		—			—			—			38

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK	$	1,714	$	(12	)	$	1,328		$	(1,316	)	$	1,714


COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK ⁽¹⁾	$	1,727	$	(12	)	$	1,328		$	(1,316	)	$	1,727

⁽¹⁾	Comprehensive income (loss) activity is recorded on the Apache Corporation entity and consists of derivative instrument reclassifications and changes in fair value as reflected on our Statement of Consolidated Comprehensive Income.

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2014


							All Other
				Apache			Subsidiaries
	Apache			Finance			of Apache			Reclassifications
	Corporation			Canada			Corporation			& Eliminations			Consolidated
	(In millions)
CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES	$	70		$	(33	)	$	4,513		$	—		$	4,550
CASH PROVIDED BY DISCONTINUED OPERATIONS		—			—			82			—			82

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		70			(33	)		4,595			—			4,632

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property		(1,703	)		—			(3,168	)		—			(4,871	)
Additions to gas gathering, transmission and processing facilities		(2	)		—			(719	)		—			(721	)
Proceeds from sale of Deepwater Gulf of Mexico assets		1,367			—			—			—			1,367
Restricted cash related to divestitures		(1,367	)		—			—			—			(1,367	)
Proceeds from sale of other oil and gas properties		69			—			312			—			381
Acquisitions		(5	)		—			—			—			(5	)
Investment in subsidiaries, net		2,899			—			—			(2,899	)		—
Other		(35	)		—			12			—			(23	)

NET CASH PROVIDED BY (USED IN) CONTINUING INVESTING ACTIVITIES		1,223			—			(3,563	)		(2,899	)		(5,239	)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS		—			—			748			—			748

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,223			—			(2,815	)		(2,899	)		(4,491	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper and bank credit facilities, net		—			—			(1	)		—			(1	)
Intercompany borrowings		—			11			(2,909	)		2,898			—
Distributions to noncontrolling interest		—			—			(66	)		—			(66	)
Dividends paid		(176	)		—			—			—			(176	)
Treasury stock activity, net		(1,263	)		—			—			—			(1,263	)
Other		—			19			5			1			25

NET CASH PROVIDED BY (USED IN) CONTINUING FINANCING ACTIVITIES		(1,439	)		30			(2,971	)		2,899			(1,481	)
NET CASH USED IN DISCONTINUED OPERATIONS		—			—			(42	)		—			(42	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,439	)		30			(3,013	)		2,899			(1,523	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(146	)		(3	)		(1,233	)		—			(1,382	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		155			3			1,748			—			1,906

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9		$	—		$	515		$	—		$	524

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2013


							All Other
				Apache			Subsidiaries
	Apache			Finance			of Apache			Reclassifications
	Corporation			Canada			Corporation			& Eliminations			Consolidated
	(In millions)
CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES	$	688		$	(76	)	$	4,664		$	—		$	5,276
CASH PROVIDED BY DISCONTINUED OPERATIONS		—			—			104			—			104

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		688			(76	)		4,768			—			5,380

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property		(1,854	)		—			(3,196	)		—			(5,050	)
Additions to gas gathering, transmission and processing facilities		(54	)		—			(437	)		—			(491	)
Proceeds from Kitimat LNG transaction, net		—			—			405			—			405
Acquisitions		—			—			(148	)		—			(148	)
Investment in subsidiaries, net		1,258			—			—			(1,258	)		—
Other		(58	)		—			72			—			14

NET CASH USED IN CONTINUING INVESTING ACTIVITIES		(708	)		—			(3,304	)		(1,258	)		(5,270	)
NET CASH USED IN DISCONTINUED OPERATIONS		—			—			(94	)		—			(94	)

NET CASH USED IN INVESTING ACTIVITIES		(708	)		—			(3,398	)		(1,258	)		(5,364	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper and bank credit facilities, net		945			—			—			—			945
Intercompany borrowings		—			1			(1,253	)		1,252			—
Payments on fixed rate debt		(500	)		—			—			—			(500	)
Dividends paid		(183	)		—			—			—			(183	)
Treasury stock activity, net		(249	)		—			—			—			(249	)
Other		7			75			(85	)		6			3

NET CASH PROVIDED BY (USED IN) CONTINUING FINANCING ACTIVITIES		20			76			(1,338	)		1,258			16
NET CASH USED IN DISCONTINUED OPERATIONS		—			—			(8	)		—			(8	)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		20			76			(1,346	)		1,258			8

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			—			24			—			24

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		—			—			160			—			160

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	—		$	184		$	—		$	184

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2014


					All Other
			Apache		Subsidiaries
	Apache		Finance		of Apache		Reclassifications
	Corporation		Canada		Corporation		& Eliminations			Consolidated
	(In millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	9	$	—	$	515	$	—		$	524
Short-term restricted cash		—		—		778		—			778
Receivables, net of allowance		873		—		1,534		—			2,407
Inventories		24		—		770		—			794
Drilling advances		29		2		300		—			331
Prepaid assets and other		90		—		202		—			292
Intercompany receivable		6,065		—		—		(6,065	)		—

		7,090		2		4,099		(6,065	)		5,126

PROPERTY AND EQUIPMENT, NET		17,436		—		35,034		—			52,470

OTHER ASSETS:
Intercompany receivable		—		—		1,327		(1,327	)		—
Equity in affiliates		25,486		1,203		445		(27,134	)		—
Long-term restricted cash		—		—		589		—			589
Goodwill, net		173		—		1,196		—			1,369
Deferred charges and other		191		1,005		1,421		(1,000	)		1,617

	$	50,376	$	2,210	$	44,111	$	(35,526	)	$	61,171

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	831	$	13	$	647	$	—		$	1,491
Current debt		—		—		1		—			1
Asset retirement obligation		115		—		63		—			178
Derivative instruments		272		—		—		—			272
Other current liabilities		1,128		1		1,499		—			2,628
Intercompany payable		—		—		6,065		(6,065	)		—

		2,346		14		8,275		(6,065	)		4,570

LONG-TERM DEBT		9,375		298		1		—			9,674

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Intercompany payable		1,327		—		—		(1,327	)		—
Income taxes		3,641		—		4,925		—			8,566
Asset retirement obligation		455		—		2,595		—			3,050
Other		477		250		692		(1,000	)		419

		5,900		250		8,212		(2,327	)		12,035

COMMITMENTS AND CONTINGENCIES APACHE SHAREHOLDERS’ EQUITY		32,755		1,648		25,486		(27,134	)		32,755
Noncontrolling interest		—		—		2,137		—			2,137

TOTAL EQUITY		32,755		1,648		27,623		(27,134	)		34,892

	$	50,376	$	2,210	$	44,111	$	(35,526	)	$	61,171

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2013


					All Other
			Apache		Subsidiaries
	Apache		Finance		of Apache		Reclassifications
	Corporation		Canada		Corporation		& Eliminations			Consolidated
	(In millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	155	$	3	$	1,748	$	—		$	1,906
Receivables, net of allowance		1,043		—		1,909		—			2,952
Inventories		48		—		843		—			891
Drilling advances		49		—		322		—			371
Derivative instruments		1		—		—		—			1
Prepaid assets and other		99		—		146		—			245
Intercompany receivable		5,357		—		—		(5,357	)		—

		6,752		3		4,968		(5,357	)		6,366

PROPERTY AND EQUIPMENT, NET		16,092		—		36,329		—			52,421

OTHER ASSETS:
Intercompany receivable		1,572		—		—		(1,572	)		—
Equity in affiliates		24,743		1,155		449		(26,347	)		—
Goodwill, net		173		—		1,196		—			1,369
Deferred charges and other		166		1,006		1,309		(1,000	)		1,481

	$	49,498	$	2,164	$	44,251	$	(34,276	)	$	61,637

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	956	$	2	$	658	$	—		$	1,616
Current debt		—		—		53		—			53
Asset retirement obligation		115		—		6		—			121
Derivative instruments		299		—		—		—			299
Other current liabilities		896		10		1,705		—			2,611
Intercompany payable		—		—		5,357		(5,357	)		—

		2,266		12		7,779		(5,357	)		4,700

LONG-TERM DEBT		9,374		298		—		—			9,672

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Intercompany payable		—		—		1,572		(1,572	)		—
Income taxes		3,586		—		4,778		—			8,364
Asset retirement obligation		430		—		2,671		—			3,101
Other		446		250		711		(1,000	)		407

		4,462		250		9,732		(2,572	)		11,872

COMMITMENTS AND CONTINGENCIES APACHE SHAREHOLDERS’ EQUITY		33,396		1,604		24,743		(26,347	)		33,396
Noncontrolling interest		—		—		1,997		—			1,997

TOTAL EQUITY		33,396		1,604		26,740		(26,347	)		35,393

	$	49,498	$	2,164	$	44,251	$	(34,276	)	$	61,637

ITEM 2 –

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Apache Corporation, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops and produces natural gas, crude oil, and natural gas liquids. The Company has exploration and production interests in five countries: the United States (U.S.), Canada, Egypt, Australia, and the United Kingdom (U.K.) North Sea. Apache also pursues exploration interests in other countries that may over time result in reportable discoveries and development opportunities.

This discussion relates to Apache Corporation and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Current Report on Form 8-K dated July 17, 2014 for our 2013 fiscal year.

Strategic Overview

Over the last five years, Apache has greatly enlarged and enhanced its North American onshore resource base, which we believe is capable of driving our growth and performance over the next several years. During the last 18 months, we have further increased the focus on our North American Onshore business by divesting $10 billion of properties. In North America, we completed the sale of our Gulf of Mexico Shelf region assets, certain non-producing assets in the deepwater Gulf of Mexico, and non-strategic, primarily dry-gas, assets in Canada. Internationally, we sold a one-third noncontrolling interest in our Egypt operations and all of our assets in Argentina. In addition, we intend to completely exit the Wheatstone and Kitimat LNG projects, and, in light of our expanding opportunity set in North American Onshore, we are evaluating our international assets and exploring multiple opportunities, including the potential separation of some or all of them through the capital markets.

In addition, we have launched a share repurchase program. Since June 2013, we have repurchased a total of 26 million of the 40 million shares authorized by our Board of Directors. Under the program, we are not obligated to acquire any specific number of shares.

Financial Highlights

•

Apache reported earnings for the quarter of $505 million, or $1.31 per diluted common share, compared with $1.0 billion, or $2.54 per diluted share, for the prior-year period.

•

First-half 2014 earnings totaled $741 million, or $1.89 per diluted common share, compared with $1.7 billion, or $4.30 per diluted share, in the comparable prior-year period. Earnings for first half of 2014 reflect an after-tax loss of $517 million on discontinued operations in Argentina.

•

Net cash provided by operating activities (operating cash flows or cash flows) totaled $4.6 billion for the first half of 2014, driven by the strength of our North American drilling program.

Second Quarter Operational Developments

Average daily production in the second quarter of 2014 totaled 636 thousand barrels of oil equivalent (Mboe), a decrease of 111 Mboe from the comparative 2013 quarter. The prior-year quarter includes volumes from properties in the Gulf of Mexico Shelf and Canada that have since been divested.

North America

•

North American onshore liquids averaged 202,861 barrels per day, up 16 percent over the prior-year quarter.

•

North American onshore liquids production represented nearly 54 percent of our worldwide liquids production and 32 percent of our overall production.

•

Permian region surpassed a significant milestone as production averaged over 150,000 barrels of oil equivalent per day (boe/d) in the second quarter of 2014, a nearly 200 percent increase since we launched the region just over four years ago.

•

Permian region averaged 37 rigs during the quarter, resulting in a production increase of 26 percent relative to the prior-year period.

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Gulf Coast region increased its acreage position to 200,000 net acres in the East Texas Eagle Ford play and drilled 26 horizontal wells. Based on strong well results to date, we plan on having 10 rigs running in the play by year-end.

•

In the Canyon Lime play within our Central region, we have had strong early results. Our most recent well, the Bivins 94-1H, had a 30-day initial production (IP) rate of 1,718 boe/d. We hold approximately 100,000 net acres in this emerging area and are planning to drill a total of six wells this year as we further delineate the play.

•

Central region’s Anadarko basin, however, experienced several challenges over the last two quarters, and total wells drilled are 26 percent behind plan. We are scaling back activity and reducing capital and rigs as we retool the region to ensure proper investment decisions.

•

Canada region had positive drilling results in the first quarter, as we ramped up activity in the Montney and Duvernay plays. We increased our acreage position to 146,000 net acres in the Montney and 177,000 net acres in the Duvernay, and we plan to spud 10 wells and 2 wells in the Duvernay and Montney plays, respectively, by year-end.

•

We completed the sale of our Lucius and Heidelberg deepwater development projects and 11 primary term deepwater exploration blocks in the Gulf of Mexico for $1.4 billion.

•

We completed the sale of non-strategic producing oil and gas assets in Canada for $374 million.

International

•

North Sea region drilled eight new wells, including a new well in the Beryl field that achieved a 30-day IP rate of 4,500 boe/d and a new Forties area well that achieved a 30-day IP rate of 5,100 boe/d.

•

Egypt region made two notable discoveries: the Herunefer-1X discovery located in the Matruh Basin had tests in the Lower Safa and Upper Safa intervals that flowed at a combined rate of 49 million cubic feet of natural gas per day (MMcf/d) and 7,700 barrels of condensate per day, and the BAT-1X in the northern Shushan Basin, which tested at rates of 31 MMcf/d and 390 barrels of condensate per day.

•

Our Balnaves project in Western Australia is expected to come online in the third quarter.

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Australia region’s Coniston development project, originally scheduled for first oil in the third quarter of 2014, is delayed until early 2015 as a result of additional repairs identified during upgrades and capacity expansion on the floating, production, storage, and offloading vessel required to bring our new wells online.

Results of Operations

Oil and Gas Revenues

Oil and gas production revenues for the second quarter of 2014 totaled $3.7 billion, a $293 million decrease from the comparative 2013 quarter. The table below presents revenues by region and each region’s percent contribution to revenues for 2014 and 2013.


	For the Quarter Ended June 30,										For the Six Months Ended June 30,
	2014					2013					2014					2013
	$		%			$		%			$		%			$		%
	Value		Contribution			Value		Contribution			Value		Contribution			Value		Contribution
	($ in millions)
Total Oil Revenues:
United States	$	1,145		39	%	$	1,390		44	%	$	2,237		39	%	$	2,659		42	%
Canada		154		5	%		148		5	%		294		5	%		275		4	%

North America		1,299		44	%		1,538		49	%		2,531		44	%		2,934		46	%

Egypt ⁽¹⁾		885		30	%		796		26	%		1,731		30	%		1,708		27	%
Australia		153		5	%		199		6	%		323		6	%		402		7	%
North Sea		613		21	%		597		19	%		1,180		20	%		1,278		20	%

International ⁽¹⁾		1,651		56	%		1,592		51	%		3,234		56	%		3,388		54	%

Total⁽¹⁾⁽²⁾	$	2,950		100	%	$	3,130		100	%	$	5,765		100	%	$	6,322		100	%

Total Gas Revenues:
United States	$	245		41	%	$	319		44	%	$	511		41	%	$	607		43	%
Canada		122		21	%		166		23	%		270		22	%		318		23	%

North America		367		62	%		485		67	%		781		63	%		925		66	%

Egypt ⁽¹⁾		99		17	%		97		13	%		202		16	%		194		14	%
Australia		84		14	%		92		13	%		170		14	%		186		13	%
North Sea		39		7	%		47		7	%		82		7	%		97		7	%

International ⁽¹⁾		222		38	%		236		33	%		454		37	%		477		34	%

Total⁽¹⁾⁽³⁾	$	589		100	%	$	721		100	%	$	1,235		100	%	$	1,402		100	%

Natural Gas Liquids (NGL) Revenues:
United States	$	139		82	%	$	127		85	%	$	286		81	%	$	247		83	%
Canada		17		10	%		15		10	%		47		13	%		34		11	%

North America		156		92	%		142		95	%		333		94	%		281		94	%

Egypt ⁽¹⁾		5		3	%		—		0	%		6		2	%		—		0	%
North Sea		8		5	%		8		5	%		16		4	%		17		6	%

International ⁽¹⁾		13		8	%		8		5	%		22		6	%		17		6	%

Total ⁽¹⁾	$	169		100	%	$	150		100	%	$	355		100	%	$	298		100	%

Total Oil and Gas Revenues:
United States	$	1,529		41	%	$	1,836		46	%	$	3,034		41	%	$	3,513		44	%
Canada		293		8	%		329		8	%		611		9	%		627		8	%

North America		1,822		49	%		2,165		54	%		3,645		50	%		4,140		52	%

Egypt ⁽¹⁾		989		27	%		893		23	%		1,939		26	%		1,902		24	%
Australia		237		6	%		291		7	%		493		7	%		588		7	%
North Sea		660		18	%		652		16	%		1,278		17	%		1,392		17	%

International ⁽¹⁾		1,886		51	%		1,836		46	%		3,710		50	%		3,882		48	%

Total ⁽¹⁾	$	3,708		100	%	$	4,001		100	%	$	7,355		100	%	$	8,022		100	%


Discontinued Operations - Argentina
Oil Revenues	$	—				$	67				$	45				$	130
Gas Revenues		—					47					39					101
NGL Revenues		—					4					3					12

Total	$	—				$	118				$	87				$	243

⁽¹⁾	Includes revenues attributable to a noncontrolling interest in Egypt for the quarter and six months ended June 30, 2014.

⁽²⁾	Financial derivative hedging activities decreased oil revenues $1 million and $2 million for the 2014 second quarter and six-month period, respectively, and $18 million and $37 million for the 2013 second quarter and six-month period, respectively.

⁽³⁾	Financial derivative hedging activities increased natural gas revenues $1 million and $2 million for the 2014 second quarter and six-month period, respectively, and $7 million and $17 million for the 2013 second quarter and six-month period, respectively.

Production

The table below presents the second-quarter and year-to-date 2014 and 2013 production and the relative increase or decrease from the prior period.


	For the Quarter Ended June 30,							For the Six Months Ended June 30,
					Increase							Increase
	2014		2013		(Decrease)			2014		2013		(Decrease)
Oil Volume – b/d
United States		130,398		157,298		(17	%)		129,181		153,303		(16	%)
Canada		17,981		18,573		(3	%)		17,786		17,878		(1	%)

North America		148,379		175,871		(16	%)		146,967		171,181		(14	%)

Egypt⁽¹⁾⁽²⁾		88,643		88,002		1	%		88,370		89,649		(1	%)
Australia		14,555		21,810		(33	%)		15,683		20,911		(25	%)
North Sea		61,610		63,667		(3	%)		60,358		66,051		(9	%)

International		164,808		173,479		(5	%)		164,411		176,611		(7	%)

Total		313,187		349,350		(10	%)		311,378		347,792		(10	%)

Natural Gas Volume – Mcf/d
United States		596,970		860,661		(31	%)		594,840		857,195		(31	%)
Canada		316,740		520,797		(39	%)		347,057		519,991		(33	%)

North America		913,710		1,381,458		(34	%)		941,897		1,377,186		(32	%)

Egypt⁽¹⁾⁽²⁾		367,950		357,291		3	%		372,628		361,428		3	%
Australia		210,470		212,022		(1	%)		213,116		213,202		0	%
North Sea		54,848		48,411		13	%		49,986		51,704		(3	%)

International		633,268		617,724		3	%		635,730		626,334		2	%

Total		1,546,978		1,999,182		(23	%)		1,577,627		2,003,520		(21	%)

NGL Volume – b/d
United States		56,625		57,018		(1	%)		54,851		53,180		3	%
Canada		5,921		6,686		(11	%)		6,840		6,675		2	%

North America		62,546		63,704		0	%		61,691		59,855		3	%

Egypt⁽¹⁾⁽²⁾		884		—		NM			560		—		NM
North Sea		1,367		1,201		14	%		1,230		1,346		(9	%)

International		2,251		1,201		87	%		1,790		1,346		33	%

Total		64,797		64,905		0	%		63,481		61,201		4	%

BOE per day⁽³⁾
United States		286,518		357,759		(20	%)		283,173		349,349		(19	%)
Canada		76,692		112,059		(32	%)		82,469		111,218		(26	%)

North America		363,210		469,818		(23	%)		365,642		460,567		(21	%)

Egypt⁽²⁾		150,853		147,551		2	%		151,035		149,887		1	%
Australia		49,633		57,147		(13	%)		51,203		56,444		(9	%)
North Sea		72,118