UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ

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

For the quarterly period ended March 31, 2011

o

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

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 þ No o

     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 þ No o

     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.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Number of shares of registrant’s common stock outstanding as of April 30, 2011        383,446,599

 

 

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)

		For the Quarter Ended March 31,
		2011				2010
		(In millions, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues		$	3,878			$	2,693
Other			47				(20	)
			3,925				2,673
OPERATING EXPENSES:
Depreciation, depletion and amortization			936				639
Asset retirement obligation accretion			37				24
Lease operating expenses			623				440
Gathering and transportation			76				40
Taxes other than income			164				177
General and administrative			112				87
Merger, acquisitions & transition			5				—
Financing costs, net			45				59
			1,998				1,466
INCOME BEFORE INCOME TAXES			1,927				1,207
Current income tax provision			643				343
Deferred income tax provision			150				159
NET INCOME			1,134				705
Preferred stock dividends			19				—
INCOME ATTRIBUTABLE TO COMMON STOCK		$	1,115			$	705
NET INCOME PER COMMON SHARE:
Basic		$	2.91			$	2.09
Diluted		$	2.86			$	2.08

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 Quarter Ended March 31,
		2011				2010
		(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,134			$	705
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			936				639
Asset retirement obligation accretion			37				24
Provision for deferred income taxes			150				159
Other			(14	)			42
Changes in operating assets and liabilities:
Receivables			(357	)			(269	)
Inventories			(26	)			(8	)
Drilling advances			(18	)			4
Deferred charges and other			104				4
Accounts payable			95				116
Accrued expenses			(65	)			(274	)
Deferred credits and noncurrent liabilities			3				12
NET CASH PROVIDED BY OPERATING ACTIVITIES			1,979				1,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property			(1,571	)			(959	)
Additions to gas gathering, transmission and processing facilities			(125	)			(115	)
Other			(53	)			26
NET CASH USED IN INVESTING ACTIVITIES			(1,749	)			(1,048	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper, credit facility and bank notes, net			19				(3	)
Dividends paid			(76	)			(50	)
Common stock activity			26				11
Treasury stock activity, net			4				1
Other			19				13
NET CASH USED IN FINANCING ACTIVITIES			(8	)			(28	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			222				78
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			134				2,048
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	356			$	2,126
SUPPLEMENTARY CASH FLOW DATA:
Interest paid, net of capitalized interest		$	73			$	74
Income taxes paid, net of refunds			448				293

The accompanying notes to consolidated financial statements
are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)

		March 31,				December 31,
		2011				2010
		(In millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	356			$	134
Receivables, net of allowance			2,490				2,134
Inventories			593				564
Drilling advances			277				259
Prepaid assets and other			285				389
			4,001				3,480
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full-cost accounting:
Proved properties			59,397				57,904
Unproved properties and properties under development, not being amortized			5,237				5,048
Gathering, transmission and processing facilities			4,337				4,212
Other			606				582
			69,577				67,746
Less: Accumulated depreciation, depletion and amortization			(30,531	)			(29,595	)
			39,046				38,151
OTHER ASSETS:
Goodwill			1,032				1,032
Deferred charges and other			787				762
		$	44,866			$	43,425
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	906			$	779
Accrued operating expense			191				163
Accrued exploration and development			1,399				1,367
Accrued compensation and benefits			131				231
Current debt			30				46
Current asset retirement obligation			373				407
Derivative instruments			491				194
Other			436				337
			3,957				3,524
LONG-TERM DEBT			8,130				8,095
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes			4,265				4,249
Asset retirement obligation			2,482				2,465
Other			834				715
			7,581				7,429
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, 6% Cumulative Mandatory Convertible, Series D, $1,000 per share liquidation preference, 1,265,000 shares issued and outstanding			1,227				1,227
Common stock, $0.625 par, 430,000,000 shares authorized, 384,557,618 and 383,668,297 shares issued, respectively			240				240
Paid-in capital			8,928				8,864
Retained earnings			15,281				14,223
Treasury stock, at cost, 1,179,647 and 1,276,555 shares, respectively			(33	)			(36	)
Accumulated other comprehensive loss			(445	)			(141	)
			25,198				24,377
		$	44,866			$	43,425

The accompanying notes to consolidated financial statements
are an integral part of this statement.

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(Unaudited)

																											Accumulated
							Series D																				Other				Total
		Comprehensive					Preferred				Common				Paid-In				Retained				Treasury				Comprehensive				Shareholders’
		Income					Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Equity
		(In millions)
BALANCE AT DECEMBER 31, 2009							$	—			$	215			$	4,634			$	11,437			$	(217	)		$	(290	)		$	15,779
Comprehensive income:
Net income		$	705					—				—				—				705				—				—				705
Commodity hedges, net of income tax expense of $111			250					—				—				—				—				—				250				250
Comprehensive income		$	955
Common stock dividends ($.15 per share)								—				—				—				(51	)			—				—				(51	)
Common shares issued								—				—				12				—				—				—				12
Treasury shares issued, net								—				—				1				—				1				—				2
Compensation expense								—				—				61				—				—				—				61
BALANCE AT MARCH 31, 2010							$	—			$	215			$	4,708			$	12,091			$	(216	)		$	(40	)		$	16,758
BALANCE AT DECEMBER 31, 2010							$	1,227			$	240			$	8,864			$	14,223			$	(36	)		$	(141	)		$	24,377
Comprehensive income:
Net income		$	1,134					—				—				—				1,134				—				—				1,134
Commodity hedges, net of income tax benefit of $131			(304	)				—				—				—				—				—				(304	)			(304	)
Comprehensive income		$	830
Cash dividends:
Preferred								—				—				—				(19	)			—				—				(19	)
Common ($.15 per share)								—				—				—				(58	)			—				—				(58	)
Common shares issued								—								16				—				—				—				16
Treasury shares issued, net								—				—				3				—				3				—				6
Compensation expense								—				—				45				—				—				—				45
Other								—				—				—				1				—				—				1
BALANCE AT MARCH 31, 2011							$	1,227			$	240			$	8,928			$	15,281			$	(33	)		$	(445	)		$	25,198

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 the Amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010, which contains a summary of the Company’s significant accounting policies and other disclosures. Additionally, the Company’s financial statements for prior periods include reclassifications that were made to conform to the current-period presentation.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     As of March 31, 2011, Apache’s significant accounting policies are consistent with those discussed in Note 1 of its consolidated financial statements contained in the Amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010.

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 and disclosure of contingent 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 fair value of acquired assets and liabilities, the estimate of proved oil and gas reserves and related present value estimates of future net cash flow therefrom, asset retirement obligations and income taxes. Actual results could differ from those estimates.

2. ACQUISITIONS AND DIVESTITURES

2011 Activity

Kitimat LNG Project

     In 2010 Apache Canada Ltd. (Apache Canada) and EOG Resources Canada, Inc. (EOG Canada), through their subsidiaries, purchased 51-percent and 49-percent interests, respectively, in a planned liquefied natural gas (LNG) export terminal (Kitimat LNG facility) and 25.5-percent and 24.5-percent interests, respectively, in Pacific Trail Pipelines Limited Partnership (PTP), a partnership that owns a related proposed pipeline. In February 2011, in order to align ownership and interests on the planned facility and pipeline development, Apache Canada and EOG Canada agreed to purchase Pacific Northern Gas Ltd.’s (PNG) remaining interest in PTP for $50 million. Following the close of the acquisition, Apache and EOG owned 51-percent and 49-percent interests, respectively, in PTP and secured full ownership in the proposed pipeline to transport natural gas from production areas to the Kitimat LNG facility. Under the terms of the agreement, PNG will operate and maintain the pipeline under a seven-year agreement with provisions for five-year renewals.

     In March 2011, Apache Canada and EOG Canada announced that Encana Corporation agreed to purchase a 30-percent working interest ownership in both the Kitimat LNG facility and PTP. Under the new ownership agreement, Apache retained a 40-percent interest in both the facility and the related pipeline while EOG retained a 30-percent interest.

2010 Activity

     During 2010 Apache completed the following material transactions:

Gulf of Mexico Shelf Acquisition

     In June 2010 Apache completed an acquisition of oil and gas assets on the Gulf of Mexico shelf from Devon Energy Corporation (Devon) for $1.05 billion, subject to normal post-closing adjustments. The acquisition was effective January 1, 2010 and was funded primarily from existing cash balances.

BP Acquisitions

     In July 2010 Apache entered into three definitive purchase and sale agreements to acquire properties from subsidiaries of BP plc (collectively referred to as “BP”) for aggregate consideration of $7.0 billion. The effective date of the transactions was July 1, 2010. The acquisition of BP’s oil and gas operations, related infrastructure and acreage in the Permian Basin of west Texas and New Mexico was completed on August 10, 2010, for an agreed-upon purchase price of $3.1 billion. Apache completed the acquisition of substantially all of BP’s Western Canadian upstream natural gas assets on October 8, 2010, for $3.25 billion. On November 4, 2010, the Company completed the acquisition of BP’s interests in four development licenses and one exploration concession in the Western Desert of Egypt for $650 million. Preferential purchase rights for $658 million of the value of the Permian Basin properties were exercised, and accordingly, the aggregate purchase price for all three transactions was reduced to approximately $6.4 billion, subject to normal post-closing adjustments.

     The acquisitions were funded by issuing a combination of common stock and mandatory convertible preferred shares, issuing new term debt and commercial paper, and using existing cash balances.

Mariner Energy, Inc. Merger

     In November 2010 Apache acquired Mariner Energy, Inc. (Mariner), an independent exploration and production company, in a stock and cash transaction totaling $2.7 billion. The Company also assumed approximately $1.7 billion of Mariner’s debt with the merger. Mariner’s oil and gas properties are primarily located in the Gulf of Mexico deepwater and shelf, the Permian Basin and onshore in the Gulf Coast region. The transaction was accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Certain assets and liabilities may be adjusted as additional information is obtained, but no later than one year from the acquisition date.

Pro Forma Impact of Acquisitions (Unaudited)

     The Devon acquisition, BP acquisitions and Mariner merger were completed subsequent to the first quarter of 2010. The following table presents pro forma information for Apache as if the acquisitions and merger occurred prior to January 1, 2010:

		For the Quarter
		Ended
		March 31, 2010
		(In millions,
		except per share
		amounts)
Revenues and Other		$	3,261
Net Income		$	792
Preferred Stock Dividends			19
Income Attributable to Common Stock			773
Net Income per Common Share — Basic		$	2.03
Net Income per Common Share — Diluted		$	2.00

     Apache’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the acquisitions and merger and factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisitions and merger been completed prior to January 1, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company. Adjustments and assumptions made for this pro forma calculation are consistent with those used in the Company’s annual pro forma information as more fully described in Note 2 of the financial statements in Apache’s Amended Annual Report on Form 10-K/A for its 2010 fiscal year.

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. Management believes it is prudent to manage the variability in cash flows by entering into derivative instruments 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. Derivatives entered into are typically designated as cash flow hedges.

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 March 31, 2011, Apache had derivative positions with 20 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.

Derivative Instruments

     As of March 31, 2011, Apache had the following open natural gas derivative positions:

		Fixed-Price Swaps												Collars
										Weighted												Weighted				Weighted
Production		MMBtu				GJ				Average				MMBtu				GJ				Average				Average
Period		(in 000’s)				(in 000’s)				Fixed Price(1)				(in 000’s)				(in 000’s)				Floor Price(1)				Ceiling Price(1)
2011			55,699				—			$	5.99				6,875				—			$	5.00			$	8.85
2011			—				38,500			C$	6.26				—				2,750			C$	6.50			C$	7.10
2012			41,554				—			$	6.30				21,960				—			$	5.54			$	7.30
2012			—				43,920			C$	6.61				—				7,320			C$	6.50			C$	7.27
2013			7,665				—			$	6.83				6,825				—			$	5.35			$	6.67
2014			755				—			$	7.23				—				—			$	—			$	—

     As of March 31, 2011, Apache had the following open crude oil derivative positions:

		Fixed-Price Swaps								Collars
						Weighted								Weighted				Weighted
Production						Average								Average				Average
Period		Mbbls				Fixed Price(1)				Mbbls				Floor Price(1)				Ceiling Price(1)
2011			4,127			$	73.57				22,595			$	69.15			$	96.66
2012			3,786				72.26				9,142				69.30				98.11
2013			1,860				74.38				2,416				78.02				103.06
2014			76				74.50				—				—				—

     Apache North Sea Ltd has entered into a physical sales contract to deliver 20,000 barrels of oil per day in 2011, settled against Dated Brent with a floor price of $70 per barrel and an average ceiling price of $98.56 per barrel. These sales are in the normal course of business and are recognized in oil and gas revenues on an accrual basis.

Fair Values of Derivative Instruments Recorded in the Consolidated Balance Sheet

     The Company accounts for derivative instruments and hedging activity in accordance with Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging,” and 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 fair market value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:

		March 31,				December 31,
		2011				2010
		(In millions)
Current Assets: Prepaid assets and other		$	144			$	167
Other Assets: Deferred charges and other			108				139
Total Assets		$	252			$	306
Current Liabilities: Derivative instruments		$	491			$	194
Noncurrent Liabilities: Other			217				124
Total Liabilities		$	708			$	318

     The methods and assumptions used to estimate the fair values of the Company’s commodity derivative instruments and gross amounts of commodity derivative assets and liabilities are more fully discussed in Note 9 — Fair Value Measurements.

Derivative Activity Recorded in Statement of Consolidated Operations

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

						For the Quarter Ended
		Gain (Loss) on Derivatives				March 31,
		Recognized In Income				2011				2010
						(In millions)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into operations (effective portion)		Oil and Gas Production Revenues				$	6			$	(1	)
Gain (loss) on derivatives recognized in operations (ineffective portion and basis)		Revenues and Other: Other				$	(3	)		$	(1	)

Derivative Activity in Accumulated Other Comprehensive Income (Loss)

     A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders’ equity related to Apache’s cash flow hedges is presented in the table below:

		For the Quarter Ended March 31,
		2011								2010
		Before				After				Before				After
		tax				tax				tax				tax
		(In millions)
Unrealized gain (loss) on derivatives at beginning of period		$	(54	)		$	(19	)		$	(267	)		$	(170	)
Realized amounts reclassified into earnings			(6	)			(4	)			1				1
Net change in derivative fair value			(432	)			(302	)			359				249
Ineffectiveness and basis swaps reclassified into earnings			3				2				1				—
Unrealized gain (loss) on derivatives at end of period		$	(489	)		$	(323	)		$	94			$	80

     Gains and losses on existing hedges will be realized in future earnings through mid-2014, in the same period as the related sales of natural gas and crude oil production occur. Included in accumulated other comprehensive loss as of March 31, 2011, is a net loss of approximately $360 million ($248 million after tax) that applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions.

4. ASSET RETIREMENT OBLIGATION

     The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the quarter ended March 31, 2011:

		(In millions)
Asset retirement obligation at December 31, 2010		$	2,872
Liabilities incurred			98
Liabilities settled			(152	)
Accretion expense			37
Asset retirement obligation at March 31, 2011			2,855
Less current portion			(373	)
Asset retirement obligation, long-term		$	2,482

5. DEBT AND FINANCING COSTS

     The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt at March 31, 2011 and December 31, 2010:

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
						(In millions)
Money market lines of credit		$	30			$	30			$	46			$	46
Commercial paper			947				947				913				913
Notes and debentures			7,183				7,672				7,182				7,870
Total Debt		$	8,160			$	8,649			$	8,141			$	8,829

     The Company’s debt is recorded at the carrying amount on its consolidated balance sheet, net of unamortized discount. The carrying amount of the Company’s money market lines of credit and commercial paper 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). For further discussion on determining fair value, please see Note 9 — Fair Value Measurements.

     As of March 31, 2011, the Company had unsecured committed revolving syndicated bank credit facilities totaling $3.3 billion, of which $1.0 billion matures in August 2011 and $2.3 billion matures in May 2013. The facilities consist of a $1.0 billion 364-day facility, a $1.5 billion facility and a $450 million facility in the U.S., a $200 million facility in Australia and a $150 million facility in Canada. As of March 31, 2011, available borrowing capacity under the Company’s credit facilities was $2.4 billion. The U.S. credit facilities are used to support Apache’s commercial paper program.

     The Company has available a $2.95 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 U.S. committed credit facilities, which expire in 2011 and 2013. As of March 31, 2011, the Company had $947 million in commercial paper outstanding, compared with $913 million outstanding as of December 31, 2010.

     As of March 31, 2011, there was $30 million borrowed on uncommitted overdraft lines in Canada and Argentina. As of December 31, 2010, there was $46 million drawn on uncommitted overdraft lines in the U.S. and Argentina.

Financing Costs

     Financing costs incurred during the periods noted are composed of the following:

		For the Quarter Ended
		March 31,
		2011				2010
		(In millions)
Interest expense		$	108			$	77
Amortization of deferred loan costs			1				1
Capitalized interest			(60	)			(17	)
Interest income			(4	)			(2	)
Financing costs, net		$	45			$	59

6. 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. There were no significant discrete tax events that occurred during the first quarter of 2011 and 2010.

     In March 2011 the U.K. government proposed a 12-percent increase to the supplementary tax rate applied to North Sea oil and gas profits. The legislation is expected to be enacted in the third quarter of 2011. Upon enactment, the Company will adjust its outstanding deferred tax liabilities and will record a non-recurring charge to tax expense in that quarter. The enacted tax rate change will also increase the provision for income taxes in the Company’s consolidated financial statements for periods the rate is effective. The Company estimates the proposed legislation to result in additional tax expense in 2011 of $300 to $350 million based on current forecasts.

     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 in Administrative Appeals with the United States Internal Revenue Service (IRS) regarding the 2004 through 2007 tax years and under audit for the 2008 tax year. 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.

7. 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. The Company has an accrued liability of approximately $15 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 or results of operations after consideration of recorded accruals. 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 or results of operations.

Argentine Environmental Claims

     As more fully described in Note 8 of the financial statements in our Amended Annual Report on Form 10-K/A for our 2010 fiscal year, in connection with the Pioneer acquisition in 2006, the Company acquired a subsidiary of Pioneer in Argentina (PNRA) that is involved in various administrative proceedings with environmental authorities in the Neuquén Province relating to permits for and discharges from operations in that province. In addition, PNRA was named in a suit initiated against oil companies operating in the Neuquén basin entitled Asociación de Superficiarios de la Patagonia v. YPF S.A., et. al., originally filed on August 21, 2003, in the Argentine National Supreme Court of Justice relating to various environmental and remediation claims. No material change in the status of these matters has occurred since the filing of our most recent Amended Annual Report on Form 10-K/A, except as follows:

Louisiana Restoration

     As more fully described in Note 8 of the financial statements in our Amended Annual Report on Form 10-K/A for our 2010 fiscal year, numerous surface owners have filed claims or sent demand letters to various oil and gas companies, including Apache, claiming that, under either expressed or implied lease terms or Louisiana law, they are liable for damage measured by the cost of restoration of leased premises to their original condition as well as damages for contamination and cleanup. No material change in the status of these matters has occurred since the filing of our most recent Amended Annual Report on Form 10-K/A.

Australia Gas Pipeline Force Majeure

     As more fully described in Note 8 of the financial statements in our Amended Annual Report on Form 10-K/A for our 2010 fiscal year, in 2008 Company subsidiaries reported a pipeline explosion that interrupted deliveries of natural gas in Australia to customers under various long-term contracts. No material change in the status of these matters has occurred since the filing of our most recent Amended Annual Report on Form 10-K/A except as follows:

     In the first quarter of 2011, Apache Northwest Pty Ltd and Apache Energy Limited were served with a lawsuit captioned Alcoa of Australia Limited vs. 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. The lawsuit concerns the pipeline explosion at Varanus Island in Western Australia on June 3, 2008 that interrupted deliveries of natural gas to Alcoa under two long-term contracts. Alcoa challenges the declaration of force majeure and the validity of the liquidated damages provisions in the contracts. Alcoa asserts claims based on breach of contract, statutory duties, and duty of care. Alcoa seeks approximately $158 million AUD in general damages or, alternatively, approximately $5.7 million AUD in liquidated damages. Apache Northwest and Apache Energy do not believe that Alcoa’s claims have merit and will vigorously pursue their defenses against such claims.

     In reference to the pipeline license described in Note 8 of the financial statements in our Amended Annual Report on Form 10-K/A for our 2010 fiscal year, the application by Apache Northwest Pty Ltd, Kufpec Australia Pty Ltd, and Tap (Harriet) Pty Ltd for renewal and variation of the pipeline license covering the area of the Varanus Island facility was granted on April 19, 2011 by the Government of Western Australia, Department of Mines and Petroleum. The period of the license is 21 years commencing April 20, 2011.

Mariner Stockholder Lawsuits

     As more fully described in Note 8 of the financial statements in our Amended Annual Report on Form 10-K/A for our 2010 fiscal year, in connection with the Mariner merger, two shareholder lawsuits styled as class actions were filed against Mariner and its board of directors. These lawsuits have been settled and will not have a material impact on Apache. On March 14, 2011, the Court of Chancery in the State of Delaware certified the settlement class and approved the parties’ settlement. An Order and Final Judgment was entered by such Court on March 15, 2011. The plaintiffs in the related action in the District Court of Harris County, Texas, filed a notice of nonsuit resulting in the Court’s dismissal of the case with prejudice, thus concluding the matter.

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 will be conducted by Kelmar Associates on behalf of the State. At least 30 other states have retained their own consultants and have sent similar notifications. The scope of each state’s audit varies. The State of Delaware advises, for example, that the scope of its examination will be for the period 1981 through the present. It is possible that one or more of the State audits could extend to all 50 states.

Environmental Matters

     As of March 31, 2011, the Company had an undiscounted reserve for environmental remediation of approximately $135 million. The Company is not aware of any environmental claims existing as of March 31, 2011, that have not been provided for or would otherwise have a material impact on its financial position or results of operations. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.

     Apache Canada Ltd. has asserted a claim against BP Canada arising out of the acquisition of certain Canadian properties under the parties’ Partnership Interest and Share Purchase and Sale Agreement dated July 20, 2010. The dispute centers on Apache Canada Ltd.’s identification of Alleged Adverse Conditions, as that term is defined in the parties’ agreement, and more specifically the contention that liabilities associated with such conditions were retained by BP Canada as seller. Apache Canada Ltd. is diligently pursuing this claim.

     On March 4, 2011, Mariner Energy, Inc. (MEI) (predecessor in interest to Apache Deepwater LLC) received notice of a civil penalty assessment in the amount of $460,000 in relation to an Incident of Noncompliance dated August 5, 2010 at High Island Area Block 116, Platform B, Lease No. OCS-G 06156, in Civil Penalty Case G-2010-023. The civil penalty assessment concerned sustained casing pressure and the basis of the assessment was 30 CFR 250.107(a). The March 4, 2011, notice advised MEI of the initiation of administrative civil penalty proceedings. Within 30 days from the date of the notice MEI paid the assessment, thus concluding the matter.

8. CAPITAL STOCK

Net Income per Common Share

     A reconciliation of the components of basic and diluted net income per common share for the quarters ended March 31, 2011 and 2010 is presented in the table below.

		For the Quarter Ended March 31,
		2011												2010
		Income				Shares				Per Share				Income				Shares				Per Share
						(In millions, except per share amounts)
Basic:
Income attributable to common stock		$	1,115				383			$	2.91			$	705				337			$	2.09
Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock			19				12								—				—
Stock options and other			—				2								—				2
Diluted:
Income attributable to common stock, including assumed conversions		$	1,134				397			$	2.86			$	705				339			$	2.08

     The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 1.6 million for each of the quarters ending March 31, 2011 and 2010.

Issuance of Common and Preferred Shares

      In July 2010, in conjunction with Apache’s acquisition of properties from BP, the Company issued 26.45 million shares of common stock, as well as 25.3 million depositary shares, each representing a 1/20^th interest in a share of Apache’s 6.00-percent Mandatory Convertible Preferred Stock, Series D, or 1.265 million Preferred Shares. Each outstanding Preferred Share will, on August 1, 2013, automatically convert into a minimum of 9.164 or a maximum of 11.364 shares of Apache common stock depending on an average underlying price of the common stock immediately preceding the conversion.

     In November 2010, in connection with the Mariner merger, Apache issued 17.3 million shares of common stock in exchange for Mariner common and restricted stock. For further discussion of the BP acquisitions and Mariner merger, please see Note 2 — Acquisitions and Divestitures.

Common and Preferred Stock Dividends

     During the first quarters of 2011 and 2010, Apache paid $57 million and $50 million, respectively, in dividends on its common stock. In the first quarter of 2011, the Company also paid a total of $19 million in dividends on its Series D Preferred Stock.

Conditional Restricted Stock Units

     To provide long-term incentives for Apache employees to deliver competitive returns to the Company’s stockholders, in January 2010 the Company’s Board of Directors approved the 2010 Performance Program, pursuant to the 2007 Omnibus Equity Compensation Plan (the 2007 Plan). Eligible employees received initial conditional restricted stock unit awards totaling 541,465 units. A total of 503,840 units were outstanding at March 31, 2011, from which a minimum of zero and a maximum of 1,259,600 units could be awarded based upon measurement of total shareholder return of Apache common stock as compared to a designated peer group during a three-year performance period. Should any restricted stock units be awarded at the end of the three-year performance period, 50 percent of restricted stock units awarded will immediately vest, and an additional 25 percent will vest on succeeding anniversaries of the end of the performance period.

     In January 2011 the Company’s Board of Directors approved the 2011 Performance Program, pursuant to the 2007 Plan, with terms similar to the 2010 Performance Program. Eligible employees received initial conditional restricted stock unit awards totaling 585,811 units. A total of 570,645 units were outstanding at March 31, 2011, with the ultimate number of restricted stock units to be awarded ranging from zero to a maximum of 1,426,613 units.

9. FAIR VALUE MEASUREMENTS

     Certain assets and liabilities are reported at fair value on a recurring basis in Apache’s consolidated balance sheet. The following methods and assumptions were used to estimate the fair values:

Cash, Cash Equivalents, Short-Term Investments, Accounts Receivable and Accounts Payable

     The carrying amounts approximate fair value because of the short-term nature or maturity of the instruments.

Commodity Derivative Instruments

     Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps and options. The Company uses a market approach to estimate the fair values of its derivative instruments. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s derivatives are not actively quoted in the open market but are valued utilizing commodity futures price strips for the underlying commodities, which are provided by a reputable third-party. For further information regarding Apache’s derivative instruments and hedging activities, please see Note 3 — Derivative Instruments and Hedging Activities of this Form 10-Q.

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

		Fair Value Measurements Using
		Quoted
		Price in				Significant				Significant
		Active				Other				Unobservable				Total
		Markets				Inputs				Inputs				Fair								Carrying
		(Level 1)				(Level 2)				(Level 3)				Value				Netting(1)				Amount
		(In millions)
March 31, 2011
Assets:
Commodity Derivative Instruments		$	—			$	404			$	—			$	404			$	(152	)		$	252
Liabilities:
Commodity Derivative Instruments			—				860				—				860				(152	)			708
December 31, 2010
Assets:
Commodity Derivative Instruments		$	—			$	454			$	—			$	454			$	(148	)		$	306
Liabilities:
Commodity Derivative Instruments			—				466				—				466				(148	)			318

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 March 31, 2011, the Company had exploration and production interests in seven countries: the United States, Canada, Egypt, Australia, offshore the United Kingdom (U.K.) in the North Sea, Argentina and Chile. Financial information for each country is presented below:

		United																U.K.								Other
		States				Canada				Egypt				Australia				North Sea				Argentina				International				Total
		(In millions)
For the Quarter Ended March 31, 2011
Oil and Gas Production Revenues		$	1,377			$	402			$	1,199			$	372			$	430			$	98			$	—			$	3,878
Operating Income (1)		$	629			$	78			$	893			$	226			$	206			$	10			$	—			$	2,042
Other Income (Expense):
Other																															47
General and administrative																															(112	)
Merger, acquisitions & transition																															(5	)
Financing costs, net																															(45	)
Income Before Income Taxes																														$	1,927
Total Assets		$	21,683			$	8,635			$	6,266			$	4,016			$	2,609			$	1,598			$	59			$	44,866
For the Quarter Ended March 31, 2010
Oil and Gas Production Revenues		$	993			$	252			$	741			$	224			$	391			$	92			$	—			$	2,693
Operating Income (1)		$	511			$	95			$	493			$	100			$	149			$	25			$	—			$	1,373
Other Income (Expense):
Other																															(20	)
General and administrative																															(87	)
Financing costs, net																															(59	)
Income Before Income Taxes																														$	1,207
Total Assets		$	11,943			$	4,115			$	5,809			$	3,515			$	2,335			$	1,459			$	52			$	29,228

11. SUPPLEMENTAL GUARANTOR INFORMATION

     Apache Finance Canada Corporation (Apache Finance Canada) is a wholly-owned subsidiary of Apache and issued approximately $300 million of publicly-traded notes due in 2029 and an additional $350 million of publicly-traded notes due in 2015 that 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 the financial statements of Apache Corporation and subsidiaries and notes thereto, of which this note is an integral part.

 

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2011

										All Other
						Apache				Subsidiaries
		Apache				Finance				of Apache				Reclassifications
		Corporation				Canada				Corporation				& Eliminations				Consolidated
		(In millions)
REVENUES AND OTHER:
Oil and gas production revenues		$	1,006			$	—			$	2,872			$	—			$	3,878
Equity in net income (loss) of affiliates			894				(14	)			(28	)			(852	)			—
Other			1				(20	)			67				(1	)			47
			1,901				(34	)			2,911				(853	)			3,925
OPERATING EXPENSES:
Depreciation, depletion and amortization			300				—				636				—				936
Asset retirement obligation accretion			17				—				20				—				37
Lease operating expenses			191				—				432				—				623
Gathering and transportation			12				—				64				—				76
Taxes other than income			41				—				123				—				164
General and administrative			89				—				24				(1	)			112
Merger, acquisitions & transition			5				—				—				—				5
Financing costs, net			37				14				(6	)			—				45
			692				14				1,293				(1	)			1,998
INCOME (LOSS) BEFORE INCOME TAXES			1,209				(48	)			1,618				(852	)			1,927
Provision (benefit) for income taxes			75				(6	)			724				—				793
NET INCOME (LOSS)			1,134				(42	)			894				(852	)			1,134
Preferred stock dividends			19				—				—				—				19
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK		$	1,115			$	(42	)		$	894			$	(852	)		$	1,115

 

APACHE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2010

										All Other
						Apache				Subsidiaries
		Apache				Finance				of Apache				Reclassifications
		Corporation				Canada				Corporation				& Eliminations				Consolidated
		(In millions)
REVENUES AND OTHER:
Oil and gas production revenues		$	898			$	—			$	1,795			$	—			$	2,693
Equity in net income (loss) of affiliates			458				24				(5	)			(477	)			—
Other			1				14				(34	)			(1	)			(20	)
			1,357				38				1,756				(478	)			2,673
OPERATING EXPENSES:
Depreciation, depletion and amortization			217				—				422				—				639
Asset retirement obligation accretion			12				—				12				—				24
Lease operating expenses			168				—				272				—				440
Gathering and transportation			10				—				30				—				40
Taxes other than income			36				—				141				—				177
General and administrative			72				—				16				(1	)			87
Financing costs, net			53				14				(8	)			—				59
			568				14				885				(1	)			1,466
INCOME BEFORE INCOME TAXES			789				24				871				(477	)			1,207
Provision for income taxes			84				6				412				—				502
INCOME ATTRIBUTABLE TO COMMON STOCK		$	705			$	18			$	459			$	(477	)		$	705