-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M8xWm7qvHrv4KoqBBOChjwBT0tyA2l894bdxLG6K9LEYsnqVHVifX8NS/VmG4qya kpaXi0askvRjRyE4BZkx7g== 0000950134-00-002131.txt : 20000321 0000950134-00-002131.hdr.sgml : 20000321 ACCESSION NUMBER: 0000950134-00-002131 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APCO ARGENTINA INC/NEW CENTRAL INDEX KEY: 0000311471 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742041263 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-08933 FILM NUMBER: 573776 BUSINESS ADDRESS: STREET 1: P O BOX 2400 CITY: TULSA STATE: OK ZIP: 74102 BUSINESS PHONE: 9185882164 MAIL ADDRESS: STREET 1: P O BOX 2400 STREET 2: MD 47-17 CITY: TULSA STATE: OK ZIP: 74102 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to -------------- --------------- Commission file number 0-8933 APCO ARGENTINA INC. (Exact name of registrant as specified in its charter) Cayman Islands (State or other jurisdiction of EIN 98-0199453 incorporation or organization) P. O. Box 2400 Tulsa, Oklahoma 74102 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 573-2164 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Ordinary Shares $.01 Par Value (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 15, 2000, was $73,688,444. This value was calculated based upon the average bid and asked prices of the registrant's stock of $32 1/4 on March 15, 2000, as reported to the Company by the National Association of Securities Dealers. Since the shares of the registrant's stock trade sporadically in the over-the-counter market, the bid and asked prices and the aggregate market value of stock held by non-affiliates based thereon may not necessarily be representative of the actual market value. See Item 5. At March 15, 2000 there were outstanding 7,360,311 shares, $.01 par value, of the registrant. Documents Incorporated By Reference List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: 2 P A R T I ITEM I. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Apco Argentina Inc. ("the Company") is a Cayman Islands corporation which was organized April 6, 1979 as a successor to Apco Argentina Inc., a Delaware corporation organized July 1, 1970. The principal business of the Company is its 47.6 percent participation in a joint venture engaged in the exploration, production, and development of oil and gas in the Entre Lomas concession located in the provinces of Rio Negro and Neuquen in southwest Argentina. The Company also owns a 1.5 percent participation in a joint venture engaged in oil and gas exploration and development in the Acambuco concession located in the province of Salta in northwest Argentina, and a 45 percent participation in a third joint venture engaged in oil exploration and development in the Canadon Ramirez concession located in the province of Chubut in southern Argentina. Over the last three years the price of crude oil has fluctuated dramatically. The Company's per barrel oil sales price during this period averaged $17.75 in 1999, $12.71 in 1998, and $19.52 in 1997. This volatility manifested itself in particular during 1998 and 1999 during which the price of West Texas Intermediate, the reference crude price for sales of oil produced in Argentina, declined to approximately $10, a level not experienced since 1986, and then commencing March 1999 recovered dramatically to just over $30 by March 2000. During the year, the Company generated net income of $9.5 million, compared with $3.4 million and $13 million for 1998 and 1997, respectively. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS None. (c) NARRATIVE DESCRIPTION OF BUSINESS ENTRE LOMAS The Company participates in a joint venture with Petrolera Perez Companc S.A. ("Petrolera") and Perez Companc S.A. ("Perez Companc"). Both partners are Argentine companies. The purpose of the joint venture is the exploration and development of the Entre Lomas oil and gas concession in the provinces of Rio Negro and Neuquen in southwest Argentina. The Company's interest in the joint venture totals 47.6 percent of which 23 percent is a direct participation and 24.6 percent is owned indirectly by virtue of the Company's 33.6 percent stock ownership in Petrolera, the operator of the joint venture. Petrolera owns a 73.15 percent direct interest in the joint venture. YPF CONTRACTS In 1967, Yacimientos Petroliferos Fiscales ("YPF"), then the national oil company of Argentina, sought bids for the development of the Entre Lomas area. Perez Companc won the bid and entered into contract 12,507, dated March 13, 1968, which contract permitted the Entre Lomas joint venture to explore for, develop, and produce oil in the area. Similar contracts with YPF with respect to natural gas produced and liquids extracted from natural gas were entered into on November 18, 1970, and February 10, 1977, respectively. Originally, the joint venture's interests in the Entre Lomas area were derived from such contracts and not from direct ownership of the mineral 2 3 resources involved. Under Argentine hydrocarbon laws, the Argentine government retains ownership of the minerals in place. JOINT VENTURE AGREEMENTS On April 1, 1968, Perez Companc and Petrolera entered into a joint venture agreement with Apco Oil Corporation pursuant to which Petrolera became operator of the Entre Lomas area. On July 1, 1970, Apco Oil Corporation transferred its interest in the Entre Lomas area to the Company. Similar joint venture agreements among the Company, Perez Companc and Petrolera for the development of natural gas and extraction of propane and butane were entered into February 29, 1972, and March 23, 1977, respectively. DEREGULATION On November 8, 1989, the Argentine government issued decree 1212/89 describing steps necessary to deregulate hydrocarbon production from existing production and development contracts, including Entre Lomas. The decree directed YPF to negotiate with producers the conversion of contracts to the concession or association system described in the 1967 Hydrocarbon Law 17,319, and gave owners of the converted contracts the right to freely dispose of hydrocarbons produced at world prices. Complete deregulation of the Entre Lomas area was implemented by an agreement that went into effect January 22, 1991, amended in February 1994. Pursuant to the agreement, Entre Lomas was converted to a concession giving the joint venture partners ownership of produced hydrocarbons at the wellhead. Under this agreement, the concession holders, or joint venture partners, have the right to freely sell produced hydrocarbons in internal or external markets, and have complete authority over operation of the concession including future exploration and development plans. The partners, throughout the term of the concession, are subject to provincial royalties, production taxes, and federal income taxes, which rates of tax are currently twelve percent (12%), two percent (2%), and thirty five percent (35%), respectively. The Entre Lomas concession term currently runs through the year 2016, with an option granted the joint venture partners to extend the concession for an additional ten years, or 2026. SALE OF OIL The Entre Lomas concession participates in several contracts negotiated by the Perez Companc group. This arrangement allows the joint venturers to pool Entre Lomas oil with other concessions in the Medanito area providing greater negotiation strength with Argentine refiners and export customers. During 1999, 30 percent of Entre Lomas oil sold was exported to Petrobras, the Brazilian national oil company. The remainder was sold domestically to Refineria San Lorenzo S.A. and Shell C.A.P.S.A under various short-term contracts. Excellent demand exists for Medanito area crude oil because of its relative quality and favored geographical location. While there is no guarantee, management is confident that upon expiration, these contracts can be extended or replaced. The per barrel price for Argentine crude oil continues to be based on the spot market price of West Texas Intermediate less a discount to provide for differences in gravity and quality. The average weighted price discount for contracts in effect during 1999 was $1.37, as compared with $1.58 for 3 4 contracts in effect in 1998, and $1.26 for contracts in effect during 1997. Since deregulation of Argentina's energy industry in 1991, domestic market conditions have evolved to the point that the discount for oil sold in country appears to have stabilized in the $1.00 to $1.50 range depending on market conditions. Discounts for oil exported to Brazil are approximately fifty percent higher. Export oil is not subject to domestic production tax. SALE OF GAS Since 1994, the Entre Lomas joint venture partners have sold gas to Litoral Gas S.A. pursuant to a five-year primary contract. This contract expired in March 1999 and was replaced by a new primary gas sales contract with Camuzzi Gas Pampeana S.A. ("Camuzzi") that expires on April 30, 2002. Under the contract, the daily gas volume commitment is 28 million cubic feet ("mmcf") during peak winter months and 13 mmcf during the remainder of the year. Gas production volume for 1999 averaged 41 mmcf per day and is expected to continue at or near that level for the foreseeable future. The additional production of 13 mmcf per day in winter and 28 mmcf per day in summer above the Camuzzi volume commitment will be sold primarily to Metrogas S.A. and Camuzzi under the terms of two separate Perez Companc master contracts in which the Entre Lomas joint venture participates. Both contracts expire in March 2001. Any additional gas production will be sold in the spot market to Genelba S.A., a subsidiary of Perez Companc that owns and operates an electric power plant near the city of Buenos Aires. The gas sales prices contained in the previously described contracts vary depending on seasonal demand, but in general, the peak season price will average $1.45 per mcf while the summer season price will average $1.33 per mcf. The Neuquen basin, wherein the Entre Lomas concession is located, is served by a substantial gas pipeline network that delivers gas to the Buenos Aires metropolitan and surrounding areas, the industrial regions of Bahia Blanca and Rosario and by export pipelines to Chile. Entre Lomas is well situated in the basin with two major pipelines in close proximity. The above described contracts expire in the years 2001 and 2002. While the joint venture partners have since deregulation of Argentina's gas industry in 1994, been able to find markets for Entre Lomas gas, there can be no guarantee that these contracts can be renewed or replaced. Failure to renew or replace these contracts would have an adverse effect on the Company's cash flow and results of operations. TRANSPORTATION Oil produced in the Entre Lomas concession is sold in Puerto Rosales, a major industrial port in southern Buenos Aires Province, and is shipped there through the Oleoductos del Valle S.A. ("Oldelval") pipeline system. From the concession, oil is transported through the joint venture's 8 inch, 6 3/4 mile pipeline. This line has a capacity of 16,000 barrels per day and is directly connected to the Medanito-Allen leg of the system. Medanito-Allen, with a daily capacity of 130,000 barrels, transports oil to the Allen terminal. Two Oldelval lines, originating in Allen, with a daily capacity of 175,000 barrels, complete the journey to Puerto Rosales. The Entre Lomas joint venture's current volume allocation in this pipeline system is 11,600 barrels per day. The system at this time is operating at 90 percent of capacity. 4 5 The cost to transport oil through this system and use the storage and handling facilities in Puerto Rosales averaged $1.06 per barrel in 1999. Current transportation tariffs were established by government decree in 1992. PETROLERA Petrolera was established for the express purpose of carrying out production and development operations in the Entre Lomas area. Major investment and distribution decisions are made by the joint venture and implemented by Petrolera. Petrolera has a board of 11 directors, 5 of whom are nominees of the Company and 6 of whom are nominees of Perez Companc or its affiliates. In 1999, the shareholders of Petrolera reduced the number of directors from 15 to 11. Petrolera's senior officers are generally the same as those of Perez Companc with other general office and field personnel being employed exclusively by Petrolera. The Company understands that Petrolera's sole business at present is its role as joint venture operator. The Company's branch office in Buenos Aires obtains from Petrolera operational and financial data that is used to monitor joint venture operations. Whenever possible, the branch provides technical assistance to Petrolera and makes recommendations regarding field development and reservoir management. DISTRIBUTIONS AND DIVIDENDS In 1999, the Company received direct distributions of $5.0 million and Petrolera dividends of $4.4 million. During 1998 and 1997, direct distributions totaled $3.6 and $7.5 million, respectively, while Petrolera dividends totaled $1.5 million and $3.7 million, respectively. Future distributions and dividends are necessarily dependent upon numerous factors, including among others, the joint venture's ability to generate future earnings, the level and timing of future investments in the concession, and fluctuations in crude oil and natural gas prices. DESCRIPTION OF THE CONCESSION The Entre Lomas concession is located about 950 miles southwest of the city of Buenos Aires on the eastern slopes of the Andes mountains. It straddles the provinces of Rio Negro and Neuquen approximately 100 kilometers north of the city of Neuquen. The concession produces oil and gas primarily from the Charco Bayo/Piedras Blancas field complex ("CB/PB"). Two smaller fields, the Entre Lomas and El Caracol fields, located to the northwest of the main field complex also produce oil and gas. In 1996 the well Borde Mocho x-1, located southwest of CB/PB, discovered oil and has since been on production. During 1999 a second well in the Borde Mocho region of the concession was drilled and completed with excellent results, confirming the existence of a reservoir with development potential. The largest oil producing formation is called Tordillo which in the CB/PB field has generated 83 percent of all oil produced in the concession. The Tordillo also produces associated gas which is consumed for field operations. Propane and butane are extracted from this gas in the joint venture's gas processing plant. Other important formations are the Quintuco, which produces gas in CB/PB and oil in the Entre Lomas and El Caracol fields and the Petrolifera formation which produces gas in the Entre Lomas gas field and some oil in CB/PB. Since inception 455 wells have been drilled in the concession, of which at year end, 280 are oil wells, 19 are gas wells, 102 are water injection wells, 11 are water producing wells, and 43 wells are inactive or abandoned. 5 6 The CB/PB and El Caracol fields are secondary recovery projects. Water injection has been introduced in CB/PB in phases since 1975. There still exist areas in CB/PB which lack injection. The El Caracol field has been under injection since 1989. Secondary recovery operations commenced in the Entre Lomas oil field in 1998 and implementation of a field wide secondary recovery is currently underway. CHARCO BAYO/PIEDRAS BLANCAS FIELD CB/PB produces principally from the Tordillo formation with some minor production from the Petrolifera formation. Production in the CB/PB field commenced in 1968, with the largest part of this complex developed before 1974. Additional development drilling has continued through the present with two significant drilling campaigns occurring during 1979-1981 and 1986-1988. These two campaigns were the result of renegotiations of the original Entre Lomas contract. Secondary recovery was introduced with a successful pilot in 1975 and has slowly been expanded to include 83 injection wells. CB/PB can best be described as a mature oil field with remaining potential. Development of this field has historically been gradual due to the sporadic nature of past major investment programs which, until the Entre Lomas area was converted to a concession, occurred as a result of major renegotiations of the original contract. The field's ultimate development is likely to result from a combination of expansion of secondary recovery throughout the entire producing field, selective infill drilling, continued step out drilling, and recompletion of existing wells with behind pipe reserves. The results of these programs can be enhanced, and higher percentage recoveries achieved, by improving the efficiency of the waterflood through various means. Such means include substantially increasing the rate of water injection in areas of the field already under flood, modifying existing patterns of injection, increasing lift capacity to handle greater volumes of fluid by accelerating the conversion of wells from gas lift to pump, placing idle wells back on production, and attempting to reduce the effects of channeling of injection water. Although the CB/PB waterflood has been in operation since 1975, there has been insufficient water injected in some areas of the field already under injection and other areas in which there has not been injection to date. As a result, recoveries normally attributed to waterfloods after 15 to 20 years have not been attained and it is currently estimated that this field has a remaining productive life in excess of twenty years. Expansion and improvement of secondary recovery throughout this field is a primary emphasis for the joint venture. Insofar as future drilling activity in the CB/PB field, it is felt that the oil/water contact, or the lowest structural point at which oil can be produced, is fairly well defined. Nevertheless, there remain undrilled step out locations in the flanks of the structure and selective infill locations which should be drilled in order to produce from areas of the field not currently drained by existing wells. The level of development drilling activity in CB/PB will, of course, be dependent on an oil price level that provides adequate returns for the joint venture partners. During 1999, four additional wells were drilled and completed as producers. In the CB/PB field, the Quintuco formation is gas productive. Approximately 37 percent of gas sold by the joint venture is produced from a few gas wells interspersed among the many Tordillo oil wells located on this structure. Quintuco gas reserves in this field are believed to be fully developed. 6 7 In 1992, the Argentine Department of Energy issued Resolution 105 requiring environmental control. As a result, from 1993 through 1999, investments have been made to change the system of produced water disposal in the Entre Lomas concession. Until 1998, fresh water had been the sole source of injection in all waterflood projects in the concession. Prior to 1996, produced water was disposed of in evaporation and filtration pits, however, this practice was forbidden by the province in that year. Produced water has since been injected into a shallower formation with high injectivity capacity. Commencing 1998, produced water in CB/PB began to be reinjected into the producing formation in a portion of the field. Surface and down hole injection lines were replaced with those that withstand the corrosive effects of reinjecting formation water. This first phase of the conversion is now being evaluated. EL CARACOL FIELD The El Caracol field is located in the northwestern most part of the concession. This field produces oil from the Quintuco formation. Thirty one wells have been drilled here to date. Additional development drilling potential may still exist. Water injection began here in 1989 and response has been favorable. Potential for further expansion of the waterflood may also exist. During 1999, one additional producing well was converted to injection. ENTRE LOMAS/LOMAS DE OCAMPO FIELDS The Entre Lomas structure is located in the central part of the concession to the northwest of CB/PB. This anticline is cut by a fault near its crest. An oil field exists on the southwest or upthrown side of this fault and a gas field exists on the northeast or downthrown side. OIL RESERVOIRS The oil field is productive from the Quintuco formation, with some minor production from the Tordillo formation. Quintuco continues to demonstrate development potential toward the northwest. During the last three years, 21 development wells have been drilled and completed in this field, some with very good results. Eight wells were drilled and completed in 1999. Over this time, the size of the field has been extended in all directions, but principally to the northwest. This field now includes 49 producing wells and contributes approximately twenty five percent of oil produced in the concession. Additional wells will be drilled in 2000. However, the plan to drill additional wells could be altered in the event of a return to oil price levels experienced throughout 1998 and early 1999. Other risks that could affect the Company's plans are described under "Forward-Looking Statements" on page 12. The southeast, or older part of this field, has shown signs of pressure depletion. The Quintuco formation responded favorably to water flooding in the El Caracol field. Reservoir simulation studies have predicted that the Entre Lomas field will have a similar response to secondary recovery. Investments to implement waterflooding in this field commenced in 1997 and continued into 1999. Water injection commenced in 1998. Secondary recovery will be expanded throughout this field in the next two to three years. 7 8 GAS RESERVOIRS Deregulation of Argentina's gas industry in 1993 fueled considerable interest in gas development throughout the country. As a result, a well drilled in 1970 that had discovered significant gas potential from several sections of the Petrolifera formation was placed on production at a rate of 8 mmcf per day. Since then, nine wells have been drilled, of which eight are productive. Another well drilled in the early 1970's was also put on production making a total of nine wells on production in this field. Although the main body of this field appears to have been defined, additional expansion possibilities exist to the northwest. Late in 1997, the Lomas De Ocampo 4 well, drilled to the northwest of the existing field was found to be productive in both the Petrolifera and Quintuco formations. This well produced from the Quintuco formation during 1998 and 1999, leaving the Petrolifera intervals behind pipe. In 1999 the Lomas de Ocampo 5 well located further to the northwest also found productive Petrolifera sands. 3D seismic studies are currently being conducted to evaluate the continuation of Petrolifera development to the northwest. The drilling of an additional well is planned for 2000. EXPLORATION In the Entre Lomas concession, there are approximately 147,000 undeveloped acres. Since inception, 455 wells have been drilled inside the concession of which only a few have been drilled significant distances from the main producing fields. Although the joint venture partners believe the major producing structures have been identified and are being developed, the concession remains relatively unexplored. Since 1993, the Entre Lomas partners have conducted three seismic campaigns. The most recent survey was completed in late 1998. As a result, the concession is now covered by more than 500 square kilometers of 3D seismic that image the principal producing fields and surrounding acreage believed to be of most interest. These separate seismic programs have been successfully integrated into one continuous seismic block. The seismic has multiple objectives the first of which is finding lower risk exploration opportunities that target formations known to be productive from structural closures and/or fault traps that exist away from the principal producing field areas. Other important objectives are to evaluate for high risk deep exploration potential in as yet unexplored sedimentary sequences that exist between the base of the Petrolifera formation and the basement floor, and utilize the 3D seismic in ways that may help exploit the existing producing fields. The second of the three seismic surveys was acquired in 1995. This 3D survey proved helpful in the efficient development of the Entre Lomas gas field and the current northwest extensions of both the Entre Lomas/Lomas de Ocampo oil and gas fields. Interpretation of the just acquired 3D survey is currently ongoing and so far it has been instrumental in selecting the location for the Borde Mocho #2 well discussed in the following section. The partners are at this time studying the possibility of drilling a deep exploration test to the basement before the end of the year. As is the case with all investments, drilling exploration wells is dependent on an oil price that provides adequate returns for the joint venture partners. BORDE MOCHO In early 1996, the joint venture partners drilled the Borde Mocho x-1 ("BM1") well. This exploration well was completed in both the Quintuco and Tordillo formations. Its performance over the years has been modest but its continued steady rate of production revealed a potential for development of the surrounding area. The location of the BM1 well was based on interpretation of 2D seismic. 8 9 In December 1999, the Borde Mocho #2 ("BM2") well was drilled and completed about 1 1/2 kilometers from the BM1 in a structurally superior location that was identified by 3D seismic. The BM2 found both the Quintuco and Tordillo formations and during completion tested a combined rate in excess of 3,000 barrels per day. The well was put on production in late December from the Tordillo at an initial rate of 600 barrels per day flowing. Production has declined over the first 60 days, a behavior typical during the early life of a Tordillo well. The Quintuco formation will now be produced separately for an extended period. Since Borde Mocho is located several kilometers from the concession's main production facilities and is not served by a pipeline or other production installations, for the short-term, oil from the BM2 is being shipped by truck. The well's behavior is being monitored closely in order to estimate the size of the reservoir, size facilities appropriately, and select the location for the next well. The partners expect to drill a third well in the near future. It should be noted that although the early results of this well are quite positive, until the well is produced for extended periods from each formation and reservoir pressures are monitored, there is insufficient information at this time to accurately estimate the size of the producing reservoirs. ACAMBUCO The Company owns a 1.5 percent participation interest in the Acambuco joint venture, an oil and gas exploration and development concession located in Northwest Argentina, in the province of Salta, on the border with Bolivia. The Acambuco concession covers an area of 267,000 acres. DESCRIPTION OF THE CONCESSION The Company has been a participant in the Acambuco area since 1981. The principal objective in Acambuco is the Huamampampa formation, a deep fractured limestone considered to have sizable gas exploration potential. In Acambuco, Huamampampa is found at depths in excess of 14,000 feet. The Ramos and Aguarague concessions, immediately to the south and east of Acambuco, have major gas fields with significant gas production and reserves from Huamampampa. Acambuco also has potential for oil development in shallower formations considered secondary targets. Acambuco is situated in an overthrust belt wherein drilling can be difficult and costly not only because of the depths of the primary objectives, but also from the risk of mechanical problems during drilling. BACKGROUND Three wells were drilled unsuccessfully in the early 1980's to depths ranging from 16,000 to 18,000 feet. Although two wells gave indications of oil and gas productive potential, they had to be abandoned for mechanical reasons. Little activity occurred in Acambuco between 1983 and 1994 due to a lack of market for potential gas. During the early to mid 1990's, the rapid growth of demand for energy in southern Brazil generated significant interest in the construction of pipelines to deliver gas from Bolivian and Northwest Argentine gas producing basins to the markets of Sao Paulo and Rio de Janeiro. Due to deregulation of the gas industry in Argentina in 1994, and as the Bolivia to Brazil pipeline and the Atacamba and Norandino pipelines from the province of Salta to northern Chile began to materialize, interest in the Acambuco area was rekindled. 9 10 In 1994, the Acambuco partners, consisting of Bridas S.A.P.I.C., Northwest Argentina Corporation, and the Company, entered into a farmout agreement with YPF whereby YPF received a 45 percent interest in the concession in exchange for drilling, within five years, four exploration wells on four separate geologic structures. The costs of the four wells were to be paid 100 percent by YPF. Pursuant to the terms of the agreement, the San Pedrito x-1 ("SPx1") well was drilled to depth of 14,500 feet. Due to mechanical problems, the well penetrated only the uppermost section of the objective formation, the Huamampampa. For this initial well, the Company exercised its non-consent option. The well had a successful initial test. See "Current and Future Activity" later in this section for a description of the results of a long-term production test conducted in April. In May 1996, YPF commenced drilling the second exploration well, the San Antonio x-1, on a separate structure. One year later, the well reached its intended depth of 15,700 feet at a cost of $36 million. The Company again exercised its non-consent option. The well penetrated the Huamampampa formation in a structurally unfavorable position and produced water. However, this well tested oil in a secondary target, the Tupambi formation. Confirmation of oil potential in the Tupambi is now a primary objective in this structure. The Huamampampa formation is still considered prospective. In 1997, Bridas and Amoco Argentina S.A. formed a strategic alliance by combining certain of each Company's oil and gas assets in the southern cone of South America. In the combination Pan American Energy Investments Ltd. ("PAE") was formed to hold the combined assets including Acambuco. Subsequently in January 1998, YPF assigned to O & G Developments Ltd., a wholly owned subsidiary of PAE, 22.5 percent, or one-half of the 45 percent interest it had acquired in the 1994 farmout agreement, in exchange for cancellation of YPF's remaining obligation to drill the last two wells of its four well drilling commitment. PAE became the operator of the concession. In mid 1998, Shell C.A.P.S.A. purchased O & G Development's Ltd's 22.5 percent interest. The Acambuco joint venture now consists of Pan American Energy (representing Amoco and Bridas) with 52 percent, Shell and YPF, with 22.5 percent each, and the Company and Northwest Argentina with 1.5 percent each. CURRENT AND FUTURE ACTIVITY In September 1998, the Acambuco partners commenced drilling the San Pedrito x-2 ("SPx2") well at a location approximately 3 miles south of the SPx1 discovery well. After 15 months of drilling, the well reached a total depth of 16,800 feet penetrating almost the entire Huamampampa section. Although the well encountered Huamampampa in a structural position that is 1,200 feet lower than SPx1 well, in late February 2000, the well successfully tested daily volumes of 20 million cubic feet and 350 barrels of condensate with no water. The joint venture plans to drill the San Pedrito x-3 well later in the year. The total cost of SPx1 reached $50 million ($750 thousand net to the Company) due to problems encountered while drilling through over-pressured formations in a structure that is extremely folded and faulted. In April 1999 a successful long term production test was conducted in the SPx1. The maximum daily volume achieved in this test was 32 million cubic feet and 470 barrels of condensate. This test indicates that the Huamampampa reservoir in the San Pedrito structure is extensive, is capable of 10 11 long term production, and should be developed. As described previously, the Company exercised its non-consent option for this well and will share in its future revenue stream after its partners reach a 300% payout limited to this well. A second exploration well, the Cerro Tuyunti x-1 ("CTx1") commenced drilling in January 1999 on the largest of the structures in the concession. In December, the well reached a total depth of 20,300 feet. During drilling, this well encountered several reverse faults that caused unexpected repetitions of the Tupambi formation. For this reason, Huamampampa was found at a depth much greater than planned. In late January 2000, the well flowed non-commercial volumes of gas. The results of this initial test are being analyzed. The joint venture expects to return to this well in the near future to test the Tupambi formation that has produced in oil fields close to Acambuco. The total cost of this well reached $43 million, ($645 thousand net to the Company). Exploration activity in the concession will remain strong through the end of 2001 and the joint venture plans to invest in excess of $100 million, ($1.5 million net to the Company) in the year 2000. The Company participated in both the SPx2 and CTx1 wells, and at this time, plans to participate in all wells drilled this year and next. The Company's future participation in Acambuco wells is subject to the risk of unfavorable oil and gas prices that could adversely impact its future cash flow, and to other risks described under "Forward-Looking Statements" on page 12. In late February 2000, the joint venture commenced drilling the Macueta x-1001(bis). Projected total depth is 16,700 feet and the estimated cost is $30 million ($450 thousand net to the Company). The well is located close to the San Alberto block wherein a significant gas discovery was made on the opposite side of the Bolivian border. MARKETS The first major international pipeline to supply gas to markets in Sao Paulo and Rio de Janeiro is the Bolivia to Brazil pipeline commonly referred to as the "BTB Pipeline". This 32 inch, 1,800 kilometer line went into operation in April 1999. The line commences at Rio Grande/Santa Cruz, Bolivia and currently extends to Sao Paulo. Estimated to cost approximately $2 billion, the line's capacity is 1 BCF per day. This line is expected to operate at full capacity within three years. Current plans are to extend the line from Sao Paulo to Rio de Janeiro and the southern Brazilian city of Porto Allegre. The contractual commitments to supply gas to southern Brazil through the BTB Pipeline give preference to Bolivian gas. Approximately 8 trillion cubic feet of gas reserves are needed to fill the line to capacity for twenty years. When construction of the line commenced, there were insufficient Bolivian reserves to satisfy commitments and it was believed the line would have capacity availability for gas produced in Northwest Argentina. Due to significant exploration activity that resulted from deregulation of the Bolivian energy sector, during the two last years, gas reserves in southern Bolivia have increased to 15 TCF. It now appears that gas produced in the Acambuco region will not have access to the BTB line. Construction of facilities in Acambuco that include gathering lines, a gas pipeline, and a gas treatment plant will be built later in the year. The partners expect to start selling San Pedrito gas to Argentine markets before year end. 11 12 CANADON RAMIREZ On September 30, 1997, in exchange for its commitment to pay $1.75 million for exploration and well workovers, the Company acquired a 45 percent interest in the 92,000 acre Canadon Ramirez concession, located in southern Argentina, in Chubut province. This region produces hydrocarbons from the Golfo San Jorge basin, the oldest oil producing province in the country. The Company obtained its interest in Canadon Ramirez from Pan Am Group S.A. ("Pan Am"), owned by the Melhem family in Argentina. A third partner in the concession is ROCH S.A. which holds a 10 percent interest and is operator. During the 1980's YPF drilled eighteen wells in Canadon Ramirez, with several giving evidence of potential oil production. Objective formations in the area are fairly shallow and occur at depths of less than 6,000 feet. Production operations have never been conducted in the block, hence it is considered exploratory in nature. The Company's investment commitment was fulfilled by mid 1998 and included well workovers and recompletions, extended production testing, and reprocessing and reinterpretation of existing seismic. Insufficient oil was found to merit additional investment. Efforts to sell the property are currently underway. FORWARD-LOOKING STATEMENTS Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. As required by such Act, the Company hereby identifies the following important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by the Company in forward-looking statements: risks and uncertainties impacting the Company as a whole relate to changes in general economic conditions in Argentina; future unpredictability and volatility of product prices, in particular oil prices, which can be affected by political events in producer nations; the availability and cost of capital; changes in laws and regulations to which the Company is subject, including tax, environmental and employment laws and regulations; the cost and effects of legal and administrative claims and proceedings against the Company or its subsidiaries or which may be brought against the Company. It is also possible that certain aspects of the Company's business that are currently unregulated may be subject to regulation in the future. 12 13 ITEM 2. PROPERTIES See ITEM 1 (c) for a description of properties. ITEM 3. LEGAL PROCEEDINGS Other than as described in the financial statements, there are no material pending legal proceedings to which the Company is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 14 P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At December 31, 1999, there were 1,146 record holders of the Company's ordinary shares, $0.01 par value. The ordinary shares are traded sporadically in the over-the-counter market. The Company understands that the trades which occur are made both at the quoted market price or on a negotiated basis outside of the quoted market. The high and low bid prices listed below were provided to the Company by the National Association of Securities Dealers Automated Quotation System (NASDAQ). The Company currently pays its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent upon numerous factors, including, among others, earnings, levels of capital spending, changes in governmental regulations and changes in crude oil and natural gas prices. The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the Directors.
Stock Price -------------- High Low Dividend ---- --- -------- Quarter of 1999 First $ 19 3/4 $ 13 1/2 $.16 1/4 Second 22 1/2 14 .16 1/4 Third 19 1/2 16 1/4 .16 1/4 Fourth 31 1/2 15 3/4 .16 1/4 Quarter of 1998 First $ 31 1/2 $ 26 1/4 $.16 1/4 Second 29 24 .16 1/4 Third 25 18 .16 1/4 Fourth 23 17 .16 1/4
The Company has been advised that: a Cayman Islands company may not pay dividends to shareholders out of its share capital or share premium account; there are no Cayman Islands laws, decrees or regulations relating to restrictions on the import or export of capital or exchange controls affecting remittances of dividends, interest and other payments to non-resident holders of the Company's ordinary shares; there are no limitations either under the laws of the Cayman Islands or under the Company's Memorandum or Articles of Association restricting the right of foreigners to hold or vote the Company's ordinary shares; there are no existing laws or regulations of the Cayman Islands imposing taxes or containing withholding provisions to which United States holders of the Company's ordinary shares are subject; and there are no reciprocal tax treaties between the Cayman Islands and the United States. 14 15 ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Dollars in thousands except per share amounts) Revenues $40,736 $34,105 $48,009 $46,765 $36,942 Net Income 9,488 3,368 13,023 12,661 8,268 Income per Ordinary Share, Basic and Diluted 1.29 .46 1.77 1.72 1.12 Dividends Declared per Ordinary Share .65 .65 .65 .65 .975 Total Assets at December 31 71,001 62,274 64,990 55,684 46,498 Stockholders' Equity at December 31 55,105 50,401 51,817 43,578 35,702
15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES CASH FLOW The Company and its Entre Lomas partners continue their efforts to maximize cash flow from the Entre Lomas concession. During 1999, the Company received $9.4 million in distributions and dividends compared with $5.1 million and $11.2 million in 1998 and 1997, respectively. Receipt of future distributions and dividends will depend on the joint venture's ability to generate earnings, cash availability exceeding capital requirements, stable oil and gas prices, and continued ability to repatriate funds free from government control and restrictions. OIL PRICES During the last three years oil prices have behaved in a volatile manner. The Company's sales price per barrel of oil averaged $19.52 in 1997, starting with a high for the year of $24 in January, falling to $17 by year's end. In 1998, the per barrel sales price continued to fall, averaging $12.71 and starting with a high of $16 in January, then falling to $10 by year end. Such a low price had not been seen since the oil price collapse of 1986. Prices were even more volatile in 1999, changing direction and climbing to over $25 by year end and as high as $30 by March 2000, a level not seen since the Persian Gulf War in 1990. During 1999, the Company's sales price per barrel averaged $17.75. Nineteen ninety-seven was the end of a brief period of favorable world oil prices. During that period, energy companies around the world benefited from the favorable price environment and exploration and development investments surged worldwide leading to increases in oil production. In late 1997, the Organization of Petroleum Exporting Countries ("OPEC") increased production targets. That decision occurred as the Far East Asian and Russian economic crises began to worsen and chain react through Latin America and other developing regions. The result was an oversupply of oil that led to the sharp drop in oil price in 1998 and early 1999. With the drop in prices, energy companies were forced to cut exploration and development investments sharply throughout 1998 and early 1999, while OPEC implemented important reductions in production quotas in March. Commodities markets reacted favorably to OPEC's decision and oil prices began to rise. By mid 1999, the Far East Asian economies began to recover and this combination of events resulted in a shortage of oil that has led to the recent price increase. These large swings in oil prices have been the primary contributor to the recent fluctuations in the Company's net income and cash flow from operations. Over the last three years, the Company has generated net income of $9.5 million in 1999, $3.4 million in 1998, and $13 million in 1997. 16 17 OIL PRODUCTION Entre Lomas oil production for 1999 totaled 3.57 million barrels, or 1.7 million net to the Company. This was three percent below the previous year's production of 3.69 million barrels, or 1.75 million net. Production trended down through most of the year averaging 9,400 barrels per day during the last quarter. Recent successes in drilling should help to improve production levels for the year 2000. As of March, daily production exceeded 10,000 barrels, or 4,800 barrels net to the Company. Natural gas production during the year was lower mostly due to market restrictions during Argentina's summer months. Concession production for the year totaled 14.8 billion cubic feet ("bcf"), or 7.1 bcf net to the Company, as compared with 16.2 bcf, or 7.7 bcf net during 1998. CAPITAL SPENDING The Company is strategically committed to the long-term development of the Entre Lomas concession. In spite of the sharp decline in oil sales prices during 1998 and early 1999, the Entre Lomas partners invested $23 million, or $11 million net to the Company, in exploration, development, and other major expense items such as workovers. In addition to the above mentioned workovers, the major components of 1999's investment program included, drilling, the continued implementation of secondary recovery in the Entre Lomas oil field, interpretation of 3D seismic, and phase one of a project to convert to rod pump all remaining gas lift wells in the CB/PB field. This project estimated to cost approximately $10 million, or $4.8 million net, includes converting almost 100 wells to rod pump and should be completed by the end of 2000. In addition to enabling a more efficient extraction of fluid in the CB/PB field, associated gas previously consumed in the operation of the gas lift system will be available for sale. During 2000, the Entre Lomas partners plan to invest $29 million, or $14 million net to the Company, including major expense items. As in years past, the full amount is expected to be paid for by internally generated cash flow. ACAMBUCO As described on page 10, under "Current and Future Activity", the Acambuco joint venture plans to invest in excess of $100 million during 2000. The Company's net share is equivalent to $1.5 million. Although the Company did not participate in the drilling of the San Pedrito x-1 and San Antonio x-1 exploration wells. It has participated in the two wells drilled since, and plans to continue participating in future wells. DIVIDENDS The Company currently pays its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent on numerous factors, including among other, earnings, levels of capital spending, changes in governmental regulations, and fluctuations in crude oil and natural gas prices. The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the directors. YEAR 2000 COMPLIANCE During 1999, most companies faced a potentially serious information systems problem because many software applications and the operational programs written in the past would not properly recognize calendar dates beginning in the year 2000. This problem had the potential to force 17 18 computers to shut down or provide incorrect data or information. Petrolera, the operator of the Entre Lomas concession, from which the Company derives one-hundred percent of its operating revenue, carried out the process of identifying changes required to computer programs to safeguard the critical aspects of the joint venture's business that guaranteed continuation of its production and sales operations, including major interfaces with customers and suppliers such as pipelines that carry products to market and companies that provide power to the concession. Petrolera completed an inventory of all equipment and software that could be affected by the change of the century, and evaluated modifications required to become Year 2000 compatible. During the year, new financial, accounting and administrative systems were put in place that are fully compatible. By the end of 1999, Petrolera achieved the fundamental objective of full Year 2000 compliance of the systems over which it has direct control at a cost not material to the joint venture's business, financial condition, or results of operation. Petrolera also monitored compliance efforts by major third party companies upon which the Entre Lomas concession depends. As the year changed and through March of 2000, Petrolera and the Company have up to now detected no manifestations of the year 2000 bug or any interruptions to the joint venture's production or sales operations, or the operations of any third party companies upon which the Entre Lomas joint venture depends. FOREIGN OPERATIONS As described on page 20, under "Argentine Economic and Political Environment" the Company believes that its Argentine operations present minimal currency risk. Argentina's inflation rate was less than 1 percent in 1999. The governments' convertibility law essentially guarantees an exchange rate of one Argentine peso to one U.S. dollar. RESULTS OF OPERATIONS REFER TO CONSOLIDATED STATEMENT OF OPERATIONS ON PAGE 24. 1999 VS 1998 During 1999, the Company generated net income of $9.5 million compared with $3.4 million during 1998. The primary reasons for the increase are explained in the following paragraphs The improvement in net income is primarily due to increased operating revenues resulting from higher oil sales caused by the sharp rise in the Company's oil sales price. Operating revenues increased by $6.9 million or 21 percent. The factors that gave rise to the price increase are explained previously under "Liquidity and Capital Resources - Oil Prices" on page 16. Average oil sales prices for the current and prior two years are listed in the table of "Sales and Price Statistics" on page 38. The improvement in oil price was complemented by a decrease in operating expenses due to a reduced volume of workovers performed during 1999, personnel reductions implemented in the Entre Lomas concession, and the cessation of operations in Canadon Ramirez. In 1998, the Company was incurring expenses related to its Canadon Ramirez work commitment. 18 19 The decrease in selling and administrative expenses was primarily the result of severance and contract termination costs recorded in 1998. The decrease in exploration expenses is directly related to the expensing of 3D seismic costs incurred in the Entre Lomas concession in 1998. Exploration expense in 1999 was limited to costs associated with the Acambuco exploration program and interpretation of Entre Lomas 3D seismic. Provincial royalties increased from year to year due to the increase in oil sales, and Argentine taxes increased as a result of higher before tax income. 1998 VS 1997 During 1998, the Company generated net income of $3.4 million compared with $13 million during 1997. The primary reasons for the decrease are explained in the following paragraphs. Operating revenues decreased by $13.7 million, or 30 percent, compared with 1997, due to sharply lower oil prices as explained under "Liquidity and Capital Resources - Oil Prices" on page 16. The increase in selling and administrative expenses was primarily the result of severance and contract termination costs recorded during 1998. Completion of the 3D seismic program, in the Entre Lomas concession in 1998, and exploration expenses incurred in both the Acambuco and Canadon Ramirez concessions caused the increase in exploration expense. Provincial royalties decreased from year to year due to the decrease in oil sales, and Argentine taxes decreased as a result of lower before tax income. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company's operations are exposed to market risks as a result of changes in commodity and foreign currency exchange rates. COMMODITY PRICE RISK The Company produces and sells crude oil and natural gas. As a result, the Company's financial results can be significantly impacted by fluctuations in commodity prices due to changing market forces. FOREIGN CURRENCY AND OPERATIONS RISK The Company's operations are located in Argentina. Therefore, the Company's financial results may be affected by factors such as changes in foreign currency exchange risks, weak economic conditions, or changes in Argentina's political climate. 19 20 ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT Since 1989, Argentina's government has pursued free market policies, including the privatization of state-owned companies, deregulation of the oil and gas industry, that included the successful sale of YPF shares in public markets, tax reform to equalize income tax rates for domestic and foreign investors, liberalization of import and export laws, and the lifting of exchange controls. The cornerstone of the country's economic reforms since 1989 has been its change in monetary policy. In April 1991, the convertibility law was implemented establishing an exchange rate of one Argentine peso to one U.S. dollar. The convertibility plan requires that the country's monetary base be backed by an equivalent amount of international reserves, including U.S. dollars and gold. Essentially, the policy guarantees an exchange rate of 1:1. The Argentine government has not strayed from this policy since implementation of the plan. These policies have been successful as evidenced, first, by a reduction in annual inflation from the 1989 rate of 5,000 percent to less than 1 percent in 1999 and, second, an influx of foreign investment capital into the country. Presidential elections occurred in 1999. President Carlos Menem, who enacted the privatization, deregulation, and monetary policies described above, completed his second and final term. The new President, Fernando De la Rua of the Alianza party, assumed office on December 10. He has stated his intent to preserve Argentina's commitment to the convertibility law. Since 1991, the convertibility law and the Argentine pesos one to one parity with the US dollar have withstood the 1994 devaluation of Mexico's currency that shocked banking systems throughout Latin America, the resignation in July, 1996 of Domingo Cavallo, President Menem's first Economy Minister and author of the convertibility plan, the far East Asian and Russian financial crises of 1997 and 1998, and most recently the devaluation of Brazil's currency in early 1999 which has had an adverse impact on Argentina's exports to Brazil, Argentinas largest trading partner. After growing at rates of 8 percent in 1997 and 4 percent in 1998, Argentina's gross domestic product contracted by 3.5 percent in 1999 owing in large part to Brazil's currency devaluation. Argentina is a part of "Mercosur" a common market established by customs agreements between Argentina, Brazil, Uruguay, and Paraguay. The "Mercosur" market comprises a population of approximately 200 million with a total gross domestic product of $1.1 trillion. 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants 22 Consolidated Balance Sheets December 31, 1999 and 1998 23 Consolidated Statements of Operations Three Years Ended December 31, 1999 24 Consolidated Statements of Stockholders' Equity Three Years Ended December 31, 1999 25 Consolidated Statements of Cash Flows Three Years Ended December 31, 1999 26 Notes to Consolidated Financial Statements 27
Schedules--All schedules have been omitted, as the required information has been included in the consolidated financial statements and notes thereto, or because the schedules are not applicable or required. 21 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Apco Argentina Inc.: We have audited the accompanying consolidated balance sheets of Apco Argentina Inc. (a Cayman Islands corporation) and subsidiary as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Apco Argentina Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Tulsa, Oklahoma March 3, 2000 22 23 APCO ARGENTINA INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, -------------------- (Amounts in Thousands) 1999 1998 -------- -------- ASSETS Current Assets: Cash and cash equivalents $ 14,207 $ 13,596 Accounts receivable 7,967 5,653 Inventory 892 865 Other current assets 461 472 -------- -------- Total Current Assets 23,527 20,586 -------- -------- Property and Equipment: Cost 87,724 79,596 Accumulated depreciation (43,569) (38,458) -------- -------- 44,155 41,138 -------- -------- Other Assets 3,319 550 -------- -------- $ 71,001 $ 62,274 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,127 $ 5,415 Accrued liabilities 6,000 2,092 Dividends payable 1,196 1,196 Other liabilities 1,189 -- -------- -------- Total Current Liabilities 11,512 8,703 -------- -------- Long-term liabilities 4,027 3,170 Deferred income taxes 357 -- Stockholders' Equity, per accompanying statements: Ordinary shares, par value $.01 per share; 15,000,000 shares authorized; 7,360,311 shares outstanding 74 74 Additional paid-in capital 9,326 9,326 Retained earnings 45,705 41,001 -------- -------- Total Stockholders' Equity 55,105 50,401 -------- -------- $ 71,001 $ 62,274 ======== ========
The accompanying notes are an integral part of these consolidated statements. 23 24 APCO ARGENTINA INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, -------------------------------- (Amounts in Thousands Except Per Share) 1999 1998 1997 ------- ------- ------- REVENUES: Operating revenues $40,252 $33,333 $47,065 Other revenues 484 772 944 ------- ------- ------- 40,736 34,105 48,009 ------- ------- ------- COST AND EXPENSES: Operating expense 11,074 13,286 12,732 Provincial royalties 4,441 3,577 4,936 Transportation & storage 1,803 1,997 2,040 Selling and administrative 1,971 3,027 1,891 Depreciation, depletion and amortization 5,252 4,568 4,761 Exploration expense 473 1,358 313 Argentine taxes 5,928 2,543 7,035 Other expense, net 306 381 1,278 ------- ------- ------- 31,248 30,737 34,986 ------- ------- ------- NET INCOME $ 9,488 $ 3,368 $13,023 ======= ======= ======= INCOME PER ORDINARY SHARE, Basic and Diluted $ 1.29 $ 0.46 $ 1.77 ======= ======= ======= AVERAGE ORDINARY SHARES OUTSTANDING, Basic and Diluted 7,360 7,360 7,360 ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. 24 25 APCO ARGENTINA INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands) Ordinary Shares Additional ----------------- Paid-in Retained Shares Amount Capital Earnings ------ ------ ------- -------- BALANCE, January 1, 1997 7,360 $ 74 $ 9,326 $ 34,178 Net income -- -- -- 13,023 Dividends declared ($ 0.65 per share) -- -- -- (4,784) -------- -------- -------- -------- BALANCE, December 31, 1997 7,360 74 9,326 42,417 Net income -- -- -- 3,368 Dividends declared ($ 0.65 per share) -- -- -- (4,784) -------- -------- -------- -------- BALANCE, December 31, 1998 7,360 74 9,326 41,001 Net income -- -- -- 9,488 Dividends declared ($ 0.65 per share) -- -- -- (4,784) -------- -------- -------- -------- BALANCE, December 31, 1999 7,360 $ 74 $ 9,326 $ 45,705 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 25 26 APCO ARGENTINA INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- (Amounts in Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 9,488 $ 3,368 $ 13,023 Adjustments to reconcile to cash provided by operating activities: Depreciation, depletion and amortization 5,252 4,568 4,761 Abandonment of well drilled in prior year 23 -- -- Changes in accounts receivable (2,314) 1,375 (653) Changes in inventory (27) 1,612 1,621 Changes in other current assets 11 (145) 37 Changes in accounts payable (2,288) 2,688 (108) Changes in accrued liabilities 3,908 (3,956) 361 Other (366) 208 156 -------- -------- -------- Net cash provided by operating activities 13,687 9,718 19,198 CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures (8,292) (12,521) (12,184) CASH FLOW FROM FINANCING ACTIVITIES: Dividends paid (4,784) (4,784) (4,784) -------- -------- -------- NET CHANGES IN CASH AND CASH EQUIVALENTS 611 (7,587) 2,230 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,596 21,183 18,953 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,207 $ 13,596 $ 21,183 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for Argentine income taxes $ 1,926 $ 3,916 $ 7,451
The accompanying notes are an integral part of these consolidated statements. 26 27 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES GENERAL AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Apco Argentina Inc. (a Cayman Islands corporation) and its wholly owned subsidiary, Apco Properties Ltd. (a Cayman Islands corporation), which are herein collectively referred to as the Company. The Company has only one business segment and is engaged exclusively in joint ventures in oil and gas exploration, development and production in Argentina. Its principal business is a 47.6 percent participation in the Entre Lomas Concession, which is accounted for following the proportional consolidation method. All of the Company's revenues and all of its long lived assets are in Argentina. The Williams Companies, Inc. ("Williams") owns 68.96 percent of the outstanding ordinary shares of the Company. Oil and gas operations are risky in nature. A successful operation requires that a company deal with uncertainties about the subsurface that even a combination of experience, scientific information and careful evaluation cannot always overcome. Because the Company's assets are located in Argentina, management, in previous years, was required to deal with threats from inflation, devaluation and currency controls (see Note 9). Since 1991, the economic and political environment in the country has improved dramatically due to free market economic policies implemented by the government of President Carlos Menem. These policies have resulted in significantly reducing inflation and stabilization of the Argentine peso. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT The Company uses the successful-efforts method of accounting for oil and gas exploration and production operations, whereby costs of acquiring non-producing acreage, costs of drilling successful exploration wells and development costs are capitalized. Costs of unsuccessful drilling are expensed as incurred. Oil and gas properties are depreciated over their productive lives using the units of production method based proved reserves. Non oil and gas property is recorded at cost and is depreciated on a straight-line basis, using estimated useful lives of 3 to 15 years. 27 28 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The Company reviews its proved properties for impairment on a concession by concession basis and recognizes an impairment whenever events or circumstances, such as declining oil and gas prices, indicate that a property's carrying value may not be recoverable. If an impairment is indicated then a provision is recognized to the extent that the carrying value exceeds the present value of the estimated future net revenues ("fair value"). In estimating future net revenues, the Company assumes costs will escalate annually and applies an oil and gas price forecast that it believes to be reasonable after reviewing long-term forecasts of professional energy consultants. Due to the volatility of oil and gas prices, it is possible that the Company's assumptions regarding oil and gas prices may change in the future. For the years ended December 31, 1999, 1998 and 1997, the Company did not record any impairment expense as the estimated future undiscounted net revenues exceeded the carrying value of its properties. NET INCOME PER ORDINARY SHARE Net income per ordinary share is based on the weighted average number of ordinary shares outstanding. Basic and diluted net income per ordinary share are the same as the Company has not issued any potentially dilutive securities such as stock options. FOREIGN EXCHANGE The general policy followed in the translation of the Company's financial statements of foreign operations into United States dollars is in accordance with Statement of Financial Accounting Standards No. 52, using the United States dollar as the functional currency. INCOME TAXES Provision is made for deferred income taxes applicable to temporary differences between the financial statements and tax basis of the assets and liabilities, if any. RECLASSIFICATIONS Certain amounts in the 1998 and 1997 Consolidated Statements of Operations have been reclassified to conform to the 1999 presentation format. These changes have no impact on net income for those years. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently 28 29 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, which amended SFAS No. 133 to extend the effective date of adoption for fiscal periods after June 15, 2000. Further, SFAS 137 requires companies to either (a) recognize as an asset or liability in the balance sheet all embedded derivative instruments at the date of initial application or (b) select either January 1, 1998 or January 1, 1999 as an application date, and only those derivatives issued, acquired, or substantively altered on or after that date shall be recognized in the balance sheet. SFAS Nos. 133 and 137 have no impact on the Company's financial statements as it currently is not using derivative instruments. (2) ENTRE LOMAS JOINT VENTURE The Company owns a 23 percent direct interest in the Entre Lomas joint venture. It also owns a 24.6 percent indirect interest by virtue of its 33.68 percent stock ownership in Petrolera Perez Companc S.A., the operator of the joint venture, which owns 73.15 percent of the joint venture. Consequently, the Company's combined direct and indirect interests in the Entre Lomas joint venture total 47.6 percent. The joint venture is engaged in the exploration, development and production of oil and gas in the Entre Lomas concession located in the provinces of Rio Negro and Neuquen in southern Argentina. The Company's pro-rata share of the assets, liabilities, revenues and expenses of the Entre Lomas joint venture and Petrolera Perez Companc S.A. are reflected in the Company's Consolidated Financial Statements using proportional consolidation. 29 30 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (3) CASH EQUIVALENTS Cash equivalents are defined by the Company as short-term investments with original maturities of three months or less. Amounts are stated in thousands of dollars.
Principal --------------------------------- 1999 1998 ------------- ------------- Short-term investments: Eurodollar term deposits with interest ranging from 4.875 - 5.656% in 1999 and 4.719 - 4.875% in 1998, maturing in January - March 2000 and January and February 1999, respectively. $ 8,490 $ 9,262 Argentine time deposits 4,676 4,066 --------- --------- $ 13,166 $ 13,328 ========= =========
The carrying amount reported in the balance sheet for short-term investments is equivalent to fair value. (4) MAJOR CUSTOMERS Sales to customers with greater than ten percent of total sales consist of the following:
For the Years Ended December 31, ---------------------------------------- 1999 1998 1997 ------ ------ ----- Refineria San Lorenzo S.A. 30.1% 24.1% 54.3% Petrobras S.A. 21.3% 17.3% * Litoral S.A. * 13.8% 10.9% Shell C.A.P.S.A. 21.3% 16.7% 16.0% Camuzzi Gas Pampeana S.A. 16.3% * *
* Less than 10 percent 30 31 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (5) RELATED PARTY TRANSACTIONS The Company paid approximately $147,000, $164,000, and $166,000 in 1999, 1998 and 1997, respectively, to Williams and affiliates for management services, overhead allocation, general and administrative expenses and purchases of materials and supplies. Accounts payable to Williams and affiliates outstanding at December 31, 1999 and December 31, 1998, were approximately $382,000 and $141,000, respectively. (6) CAYMAN ISLANDS AND UNITED STATES INCOME TAXES In 1979, the Company changed the jurisdiction of its incorporation from Delaware to the Cayman Islands. The Company's income since that date, to the extent that it is derived from sources outside the U.S., generally is not subject to U.S. Federal income taxes. Also, the Company has been granted an undertaking from the Cayman Islands government, expiring in 2019, to the effect that the Company will be exempt from tax liabilities resulting from tax laws enacted by the Cayman Islands government subsequent to 1979. The Cayman Islands currently has no applicable income tax or corporation tax and, consequently, the Company believes its earnings are not subject to U.S. income taxes or Cayman Islands income or corporation taxes. (7) ARGENTINE TAXES The Company recorded Argentine taxes as presented in the following table. Amounts are stated in thousands of dollars. The Company is not subject to taxes in any other jurisdiction.
1999 1998 1997 ------ ------ ------ Income taxes $ 5,330 $ 2,089 $ 6,208 Other taxes 598 454 827 ------- ------- ------- $ 5,928 $ 2,543 $ 7,035 ======= ======= =======
INCOME TAXES A tax reform enacted by the Argentine government in 1998, served to increase the corporate income tax rate from 33 percent to 35 percent. The new rate went into effect in January, 1999 retroactive to January 1, 1998. TAX DISPUTES In 1988, the Argentine government amended the Obligatory Savings Law requiring that all taxpayers deposit with the government, both in 1988 and 1989, amounts computed on the basis of prior year taxable incomes. It was the opinion of the Entre Lomas joint venture and its legal and tax counsels that it was exempted from these deposits due to the tax 31 32 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued exemption granted in the original Entre Lomas contract number 12,507. As a result the deposits were not made. In August 1993, the Direccion General Impositiva ("DGI"), the Argentine taxing authority, made a claim against Petrolera for the delinquent deposits pertaining to the Entre Lomas operation, which including interest and indexation for inflation, amounted to $9.2 million. An appeal was filed by Petrolera in Argentine Federal Tax Court which ruled in favor of the DGI in April 1997. Petrolera appealed the ruling before Federal Appeals Court which in November 1998, ruled in favor of Petrolera. The DGI has now filed an appeal before the Supreme Court. Although the DGI can require that the amount in question be deposited, it has not done so pending the courts final ruling. As of the date of these Consolidated Financial Statements, the Supreme Court has not yet rendered its decision. Although there exists an unfavorable ruling in the court in a prior case regarding Obligatory Savings, the Petrolera case is different and there are arguments that support the Appellate Court's decision in favor of Petrolera and the joint venture. In the opinion of legal and tax counsel, the possibility that this claim will result in an unfavorable outcome for the joint venture is only reasonably possible. The Company has no reason to believe otherwise. Nevertheless, management does not believe the Company will incur a significant negative effect on its financial condition or results of operation in the event of an unfavorable ruling in excess of reserves previously provided by the joint venture and the Company. In February 1993, the Neuquen Tax Bureau demanded that Petrolera pay the Stamp Tax on Additional Clause No. 3, the third amendment to the original Entre Lomas contract number 12,507. Petrolera appealed this decision before the Tax Court of the province and lost. In March 1994, Petrolera deposited $1.6 million, the sum claimed, and subsequently filed a suit before the Neuquen Superior Court asking for full reimbursement. Should Petrolera not prevail in Superior Court, in the opinion of its management and legal counsel, it is entitled to seek reimbursement from YPF pursuant to terms of contract 12,507. Accordingly, the amount deposited was recorded as a receivable by Petrolera and the Company. 32 33 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (8) OTHER LIABILITIES AND LONG-TERM LIABILITIES At December 31, 1999 and 1998, other current liabilities and long-term liabilities consisted of the following:
1999 1998 ---- ---- Current liabilities other: Retirement obligation - Petrolera $ 1,189 $ - ======= ======= Long-term liabilities: Accrued tax and other long-term obligations $ 2,633 $ 2,033 Retirement obligation - Petrolera 1,394 1,137 ------- ------- $ 4,027 $ 3,170 ======= =======
(9) ARGENTINE CURRENCY FLUCTUATIONS Argentina has in previous decades experienced cycles of acute inflation followed by extreme devaluation. However, inflation and devaluation have diminished since 1991 due to implementation of the convertibility law, privatization of public sector companies, deregulation and modifications in fiscal and monetary policy. In April of 1991, the convertibility law was implemented establishing an exchange rate of one Argentine peso to one U.S. dollar. The convertibility law requires that the country's monetary base be backed by an equivalent amount of international reserves, including U.S. dollars and gold. Essentially the policy guarantees an exchange rate of 1:1. No exchange gains or losses have been realized by the Company during the three years ended December 31, 1999 as the rate of exchange has remained 1 to 1. 33 34 APCO ARGENTINA INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (10) QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Amounts in Thousands Except Per Share Amounts) 1999 Revenues $7,760 $9,548 $12,050 $11,378 Costs and expenses 6,384 7,224 8,900 8,740 Net income 1,376 2,324 3,150 2,638 Net income per ordinary share .19 .31 .43 .36 1998 Revenues $8,621 $8,200 $ 9,824 $ 7,460 Costs and expenses 6,811 6,969 8,312 8,645 Net income (loss) 1,810 1,231 1,512 (1,185) Net income (loss) per ordinary share .25 .16 .21 (.16)
The loss generated in the fourth quarter 1998 was the result of oil sales prices reaching their lowest level of the decade during the fourth quarter. 34 35 SUPPLEMENTAL OIL AND GAS INFORMATION OIL AND GAS RESERVES (UNAUDITED) The following tables summarize, for each of the years presented, changes in quantities, and balances of net proved oil and gas reserves for all the Company's interests in Argentina. Proved Oil, Condensate and Plant Products
(Millions of Barrels) ------------------------------------- 1999 1998 1997 ---- ---- ---- Beginning of year 20.6 33.2 34.7 Revisions of previous estimates -Engineering revisions (0.7) (1.9) 0.1 -Due to oil price changes 8.5 (9.7) - Extensions and discoveries 2.3 0.8 0.2 Production (1.7) (1.8) (1.8) ----- ----- ----- End of Year 29.0 20.6 33.2 ==== ==== ==== Proved developed oil reserves 20.0 15.5 23.7 ==== ==== ====
Natural Gas
(Billions of cubic feet) ------------------------------------ 1999 1998 1997 ---- ---- ---- Beginning of year 27.5 36.6 46.8 Revisions of previous estimates 38.9 (1.4) (8.6) Extensions and discoveries 12.4 - 6.1 Production (7.1) (7.7) (7.7) ---- ----- ----- End of Year 71.7 27.5 36.6 ==== ==== ==== Proved developed gas reserves 51.1 26.8 35.8 ==== ==== ====
Extensions and discoveries in the table of proved oil reserves include additions associated with Borde Mocho and extensions of existing fields. The increase in natural gas reserves attributed to revisions of previous estimates is the result of better than predicted performance of existing gas fields, and the elimination of the gas lift system in the CB/PB field described under "Capital Spending" on page 17. The increase in natural gas reserves attributed to extensions and discoveries is the result of gas field extensions in the Entre Lomas concession and new gas reserve additions in the San Pedrito field in the Acambuco concession. There were no estimates of total proved net oil or gas reserves filed with any other United States Federal authority or agency during 1999. 35 36 SUPPLEMENTAL OIL AND GAS INFORMATION STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) The following table summarizes as of December 31, for each of the years presented, the standardized measure of discounted future net cash flows from proved oil and gas reserves that could be produced from all of the concessions in which the Company holds interests in Argentina.
(Millions of U.S. Dollars) ----------------------------------- 1999 1998 1997 ---- ---- ------ Future revenues (1 and 2) $ 813 $ 250 $ 619 ------ ------ ------ Future expenditures (3) 360 199 378 ------ ------ ------ 453 51 241 Argentine taxes (4) 149 11 67 ------ ------ ------ Future net cash flows 304 40 174 Effect of discounting 10% 161 13 90 ------ ------ ------ Standardized measure of discounted future net cash flows $ 143 $ 27 $ 84 ====== ====== ======
(1) Estimates are made of quantities and timing of future production of oil and gas reserves. (2) Estimates of gross revenues from sales are made using prices in effect at December 31 for each year presented. The year end per barrel oil price for 1999 was $24.98, as compared with $10.09 and $17.20 for 1998 and 1997, respectively. Gas prices for all years are based on gas sales contracts in effect during the respective years. (3) Estimated production, transportation, marketing and development costs are based on the current cost of similar services and include all future capital expenditures. (4) Estimated taxes consider all taxes to which the Company is subject in Argentina. (5) Conversion to U.S. dollars is made utilizing the rate of exchange at December 31 for each of the years presented. DISCOUNTED FUTURE NET CASH FLOWS PRESENTED HEREIN MAY NOT BE RELIABLE DUE TO THE IMPRECISION OF ESTIMATING REMAINING RECOVERABLE RESERVES. ESTIMATES OF OIL AND GAS RESERVES AND RATES OF FUTURE PRODUCTION ARE INHERENTLY IMPRECISE AND CHANGE OVER TIME AS NEW INFORMATION BECOMES AVAILABLE. AS A RESULT, SUBSEQUENT REVISIONS OF THE QUANTITY AND VALUATION OF PROVED RESERVES MAY BE SIGNIFICANT. 36 37 SUPPLEMENTAL OIL AND GAS INFORMATION CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED OIL AND GAS RESERVES (UNAUDITED) The following analysis summarizes for each of the years presented the factors that caused the increases (decreases) in the amount of standardized measure attributable to the estimate of the Company's proved oil and gas reserves.
(Millions of U.S. Dollars) ----------------------------------- 1999 1998 1997 ---- ---- ---- Prices and costs: Net changes in prices and production costs $ 88 $ (82) $ (129) Quantities: Revenues, net of production costs (32) (18) (15) Additions and revisions of previous estimates - net 129 (50) 1 Other: Changes in estimated future development costs (12) (4) 6 Accretion of discount 3 12 24 Net changes in Argentine taxes (66) 42 40 Timing of future production and other 6 43 (8) ------- ------- ------- Net increase (decrease) in standardized measure $ 116 $ (57) $ (81) ======= ======= =======
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. 37 38 SUPPLEMENTAL OIL AND GAS INFORMATION - CONT. SALES AND PRICE STATISTICS (UNAUDITED) The following table shows total sales of crude oil and condensate and natural gas and average sales prices and production costs for the last three years.
1999 1998 1997 ---------- --------- ---------- Total Sales-Net to Company Crude Oil and Condensate (bbls) 1,667,717 1,732,261 1,811,956 Gas (mcf) 7,086,576 7,734,396 7,733,392 LPG (tons) 6,495 6,192 6,607 Average Sales Prices (in U.S. Dollars) Oil (per bbl) $ 17.75 $ 12.71 $ 19.52 Gas (per mcf) 1.35 1.33 1.34 LPG (per ton) 170.10 168.78 198.72 Average Production Costs (in U.S. Dollars) Oil (per bbl) $ 8.26 $ 9.09 $ 8.27 Gas (per mcf) .21 .23 .21 LPG (per ton) 74.75 86.55 89.70
Volumes presented in the above table represent those sold to customers and have not been reduced by the 12 percent provincial royalty, which is paid separately and is accounted for as an expense by the Company. In calculating royalty payments, the Argentine producers are entitled to deduct gathering, storage, treating and compression costs. Average production cost is calculated by taking into consideration all costs of operation, including the costs of remedial well workovers and depreciation of property and equipment. 38 39 SUPPLEMENTAL OIL AND GAS INFORMATION - CONT. COSTS INCURRED IN ACQUISITIONS, EXPLORATION, AND DEVELOPMENT The following table details total investments for acquisitions, exploration, and development made by the Company during the current and two previous years.
(Millions of U.S. Dollars) -------------------------------------------- 1999 1998 1997 ---- ---- ---- Property Acquisitions $ - $ - $ 1 Exploration 1 2 - Development 8 13 11 Workovers 1 2 3 ---- ---- --- Total $ 10 $ 17 $15 ==== ==== ===
DRILLING ACTIVITY During 1999, the Company participated in the drilling of 15 gross, and 6 net wells. In 1998, the Company participated in the drilling of 18 gross, and 8 net wells, and in 1997, the Company participated in the drilling of 11 gross and 5 net wells. Of the 44 gross, and 19 net wells drilled over the three year period, all wells were development, except two wells drilled in Acambuco, in which the Company has a 1.5 percent participation. All wells drilled over the three year period were productive except the Cerro Tuyunti x-1 well in Acambuco, the status of which is still undetermined. WELL COUNT AND ACREAGE (UNAUDITED) The total gross and net well count from all acreage in which the Company has an interest for the years ended December 31, 1999 and 1998, are as follows:
1999 1998 ----------------- -------------- Gross Net Gross Net ----- --- ----- --- Oil 285 133 299 141 Gas 21 9 19 9 Abandoned and Inactive 72 28 50 17 Injection 113 54 111 53 --- --- --- --- Total 491 224 479 220 === === === ===
The Company currently holds interest in three concessions with a total surface area of 542,000 acres, 132,586 acres net to the Company. Gross and net developed acres held by the Company total 39,108 acres, and 17,674 acres, respectively. Gross and net undeveloped acres held by the Company total 502,892 acres, and 114,912 acres, respectively. 39 40 SUPPLEMENTAL OIL AND GAS INFORMATION - CONT. CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(Thousands of U.S. Dollars) --------------------------- 1999 1998 ------------- ------------ Unproved $ 892 $ 892 Proved oil and gas properties 86,516 78,265 Accumulated depreciation, depletion and amortization (43,312) (38,079) -------- -------- Net capitalized costs $ 44,096 $ 41,078 ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. 40 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) IDENTIFICATION OF DIRECTORS
Director's Term of Director Office Name Age Position Since Expires ----------------- --- ---------------------------------- -------- ---------- J. C. Bumgarner 57 Chairman of the Board and 1994 2000 Chief Executive Officer J. H. Williams 81 Director 1992 2001 T. Bueno 48 Director, Chief Accounting Officer 1998 2002 and General Manager R. J. LaFortune 73 Director 1998 2002
(b) IDENTIFICATION OF EXECUTIVE OFFICERS Executive officers of the Company are elected by the Board of Directors and hold office until relieved of such office by action of the Board of Directors.
Officer Name Age Position Since ---------------------- --- ----------------------------------- -------- John C. Bumgarner 57 Chairman of the Board and 1996 Chief Executive Officer J. D. McCarthy 57 Vice President and 1991 Chief Financial Officer Thomas Bueno 48 Controller, Chief Accounting 1991 Officer and General Manager
Mr. Bueno serves as General Manager over the Company's operations in Argentina. (c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES None. 41 42 (d) FAMILY RELATIONSHIPS There are no family relationships between any director or executive officer and any other director or executive officer in the Company. (e) BUSINESS EXPERIENCE Mr. Bumgarner is Senior Vice President Corporate Development and Planning of Williams and President of Williams International Company. He has held various officer level positions with Williams since 1977. Mr. Williams is engaged in personal investments. He was Chairman of the Board and Chief Executive Officer of Williams prior to retiring in 1978. Mr. Williams is also a director of General Cable Corporation and Unit Corporation. Mr. Bueno has been employed by Williams since 1984 and has held various positions with the Company since 1985. J. D. McCarthy is Senior Vice President of Finance of Williams. He was previously Vice President and Treasurer of Williams from 1987 through 1991. Mr. LaFortune is engaged in personal investments. He is a Director of The Williams Companies, Inc. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS None. ITEM 11. EXECUTIVE COMPENSATION (a) CASH COMPENSATION The Company has not paid its present executive officers any cash compensation or bonuses. (b) COMPENSATION PURSUANT TO PLANS None. (c) OTHER COMPENSATION None. 42 43 (d) COMPENSATION OF DIRECTORS Directors who are employees of Williams receive no additional compensation for service on the Board of Directors. Directors who are not employees of Williams receive an annual retainer of $8,000 and an additional fee for attending Board meetings of $500 per meeting. (e) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AT DECEMBER 31, 1999
Amount and Nature of Percent Name and Address of Beneficial of Title of Class Beneficial Owner Ownership Class -------------- ---------------- --------- ----- Ordinary Shares The Williams Companies, Inc. 5,075,398 68.96 $.01 Par Value One Williams Center Tulsa, Oklahoma 74172 Ordinary Shares Lehman Brothers Holdings Inc. 437,062 6.0 $.01 Par Value 3 World Financial Center, 24th Floor New York, NY 10285
(b) SECURITY OWNERSHIP OF MANAGEMENT AT DECEMBER 31, 1999 Each of the directors of the Company beneficially owns ten shares of the Company's ordinary shares, $.01 par value, as director's qualifying shares. (c) CHANGES IN CONTROL None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related-party transactions are disclosed elsewhere herein in Notes 1 and 5 to the Notes to Consolidated Financial Statements. 43 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial Statements filed in this report are set forth in the Index to Consolidated Financial Statements under Item 8. All schedules have been omitted as the required information has been included in the consolidated financial statements and notes thereto, or because the schedules are not applicable or required. (b) REPORTS ON FORM 8-K None. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K Exhibit Number ------- *(3) - Memorandum of Association of Apco Argentina Inc. as amended August 20, 1980, as filed with Form 10-K of the Company for the fiscal year ended on December 31, 1980, Commission File No. 0-8933 dated April 30, 1981. *(3) - Articles of Association of Apco Argentina Inc. as filed with Form S-14 (Registration No. 2-6354), dated March 16, 1979. *(10) - Agreement dated April 23, 1981, among the Company and Bridas S.A.P.I.C., with respect to the Acambuco project, Salta province, Argentina, as filed with Form 10-K, No. 0-8933, dated April 14, 1982. *(10) - Agreement dated March 13, 1968, between Perez Companc and YPF for the Exploration, Exploitation and Development of the "Entre Lomas" area, Contract Number 12,507 as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Translation dated November 18, 1970, of agreement dated March 13, 1968, between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Joint Venture Agreement dated April 1, 1968, among Apco Oil Corporation, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. 44 45 *(10) - Joint Venture Agreement dated February 29, 1972, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Joint Venture Agreement dated March 23, 1977, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Contract dated December 1977 amending the March 13, 1968 Agreement between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Memorandum of Agreement dated August 16, 1979, among the Company, Perez Companc and Petrolera as filed with Form 10-K, No. 0-8933, dated March 28, 1980. *(10) - Agreement dated December 7, 1983, between Petrolera and YPF regarding the delivery of propane and butane from the Entre Lomas area, as filed with Form 10-K, No. 0-8933, dated April 12, 1983. *(10) - CONTRACT FOR THE EXPLORATION, EXPLOITATION AND DEVELOPMENT OF THE "ENTRE LOMAS" AREA, dated July 8, 1982 between Yacimientos Petroliferos Fiscales Sociedad Del Estado and Petrolera Perez Companc, Inc. relating to the extension of Contract No. 12,507, as filed with Form 10-K, No. 0-8933, dated April 12, 1983. *(10) - ADDITIONAL CLAUSE NUMBER 3 dated December 18, 1985, to the agreement between Perez Companc and YPF covering the Entre Lomas area dated March 13, 1968 and attached translation as filed with Form 10-K, No. 0-8933, dated April 11, 1988. *(10) - Agreement between the Joint Committee created by the Ministry of Public Works and Services and the Ministry of Energy, YPF and Petrolera Perez Companc S.A. dated December 26, 1990, constituting the conversion to concession and deregulation of the original Entre Lomas contract number 12,507. (24) - Power of attorney. (27) - Financial data schedule. * Exhibits so marked have heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference. 45 46 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APCO ARGENTINA INC. (Registrant) Dated: March 20, 2000 By: /s/ Thomas Bueno ----------------------- Thomas Bueno Attorney-in-Fact Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ *John C. Bumgarner March 20, 2000 - ------------------------------------------------- John C. Bumgarner, Chairman of the Board and Chief Executive Officer /s/ *Jack D. McCarthy March 20, 2000 - ------------------------------------------------- Jack D. McCarthy, Vice President and Chief Financial Officer /s/ *Thomas Bueno March 20, 2000 - ------------------------------------------------- Thomas Bueno, Director, Controller, Chief Accounting Officer, and General Manager /s/ *John H. Williams March 20, 2000 - ------------------------------------------------- John H. Williams, Director /s/ *Robert J. LaFortune March 20, 2000 - ------------------------------------------------- Robert J. LaFortune, Director *By: /s/ Thomas Bueno March 20, 2000 -------------------------------------------- Thomas Bueno, Attorney-in-Fact 46 47 INDEX TO EXHIBITS
Exhibit Number Description ------- ------------ *(3) - Memorandum of Association of Apco Argentina Inc. as amended August 20, 1980, as filed with Form 10-K of the Company for the fiscal year ended on December 31, 1980, Commission File No. 0-8933 dated April 30, 1981. *(3) - Articles of Association of Apco Argentina Inc. as filed with Form S-14 (Registration No. 2-6354), dated March 16, 1979. *(10) - Agreement dated April 23, 1981, among the Company and Bridas S.A.P.I.C., with respect to the Acambuco project, Salta province, Argentina, as filed with Form 10-K, No. 0-8933, dated April 14, 1982. *(10) - Agreement dated March 13, 1968, between Perez Companc and YPF for the Exploration, Exploitation and Development of the "Entre Lomas" area, Contract Number 12,507 as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Translation dated November 18, 1970, of agreement dated March 13, 1968, between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Joint Venture Agreement dated April 1, 1968, among Apco Oil Corporation, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Joint Venture Agreement dated February 29, 1972, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Joint Venture Agreement dated March 23, 1977, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Contract dated December 1977 amending the March 13, 1968 Agreement between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978. *(10) - Memorandum of Agreement dated August 16, 1979, among the Company, Perez Companc and Petrolera as filed with Form 10-K, No. 0-8933, dated March 28, 1980. *(10) - Agreement dated December 7, 1983, between Petrolera and YPF regarding the delivery of propane and butane from the Entre Lomas area, as filed with Form 10-K, No. 0-8933, dated April 12, 1983. *(10) - CONTRACT FOR THE EXPLORATION, EXPLOITATION AND DEVELOPMENT OF THE "ENTRE LOMAS" AREA, dated July 8, 1982 between Yacimientos Petroliferos Fiscales Sociedad Del Estado and Petrolera Perez Companc, Inc. relating to the extension of Contract No. 12,507, as filed with Form 10-K, No. 0-8933, dated April 12, 1983. *(10) - ADDITIONAL CLAUSE NUMBER 3 dated December 18, 1985, to the agreement between Perez Companc and YPF covering the Entre Lomas area dated March 13, 1968 and attached translation as filed with Form 10-K, No. 0-8933, dated April 11, 1988. *(10) - Agreement between the Joint Committee created by the Ministry of Public Works and Services and the Ministry of Energy, YPF and Petrolera Perez Companc S.A. dated December 26, 1990, constituting the conversion to concession and deregulation of the original Entre Lomas contract number 12,507. (24) - Power of attorney. (27) - Financial data schedule.
* Exhibits so marked have heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference. EX-24 2 POWER OF ATTORNEY 1 Exhibit 24 APCO ARGENTINA, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned individuals, in their capacity as a director or officer, or both, as hereinafter set forth below their signature, of APCO ARGENTINA, INC., a Cayman Islands corporation ("Apco"), does hereby constitute and appoint THOMAS BUENO their true and lawful attorney and in their name and in their capacity as a director or officer, or both, of Apco, as hereinafter set forth below their signature, to sign Apco's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1999, and any and all amendments thereto or all instruments necessary or incidental in connection therewith; and THAT the undersigned Apco does hereby constitute and appoint THOMAS BUENO its true and lawful attorney for it and in its name and on its behalf to sign said Form 10-K and any and all amendments thereto and any and all instruments necessary or incidental in connection therewith. Said attorney shall have full power of substitution and resubstitution, and said attorney or any substitute appointed by him hereunder shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully to all intents and purposes as each of the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney or of any such substitute pursuant hereto. IN WITNESS WHEREOF, the undersigned have executed this instrument, all as of the 14th day of January, 2000. /s/ John C. Bumgarner, Jr. /s/ Jack D. McCarthy - --------------------------------------- --------------------------------------- John C. Bumgarner, Jr. Jack D. McCarthy President, Chief Executive Chief Financial Officer Officer, and Director (Principal Financial Officer) (Principal Executive Officer) /s/ Thomas Bueno --------------------------------------- Thomas Bueno Controller and Director (Principal Accounting Officer) 2 /s/ Robert J. LaFortune /s/ John H. Williams - ------------------------------------- --------------------------------------- Robert J. LaFortune John H. Williams Director Director APCO ARGENTINA, INC. By /s/ John C. Bumgarner, Jr. ------------------------------ John C. Bumgarner, Jr. President ATTEST: /s/ Shawna L. Gehres - ------------------------------------- Shawna L. Gehres Secretary EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 14,207 0 7,967 0 892 23,527 87,724 43,569 71,001 11,512 0 0 0 74 55,031 71,001 40,252 40,736 0 24,541 1,377 0 0 14,818 5,330 9,488 0 0 0 9,488 1.29 1.29
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