0001733037-18-000009.txt : 20181101 0001733037-18-000009.hdr.sgml : 20181101 20181101161719 ACCESSION NUMBER: 0001733037-18-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 62 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181101 DATE AS OF CHANGE: 20181101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APACHE CORP CENTRAL INDEX KEY: 0000006769 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 410747868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04300 FILM NUMBER: 181153972 BUSINESS ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 BUSINESS PHONE: 7132966000 MAIL ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 FORMER COMPANY: FORMER CONFORMED NAME: APACHE OIL CORP DATE OF NAME CHANGE: 19660830 10-Q 1 apaq3201810q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 ________________________________________________________________
FORM 10-Q 
  ________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-4300
APACHE CORPORATION
(exact name of registrant as specified in its charter)
    _______________________________________________________________________
Delaware
41-0747868
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400
(Address of principal executive offices)
Registrant’s Telephone Number, Including Area Code: (713) 296-6000
__________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
Emerging growth company
 
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
Number of shares of registrant’s common stock outstanding as of October 31, 2018
379,543,642







Forward-Looking Statements and Risk
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information that was used to prepare our estimate of proved reserves as of December 31, 2017, and other data in our possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:
 
the market prices of oil, natural gas, natural gas liquids (NGLs), and other products or services;

our commodity hedging arrangements;

the supply and demand for oil, natural gas, NGLs, and other products or services;

pipeline and gathering system capacity;

production and reserve levels;

drilling risks;

economic and competitive conditions;

the availability of capital resources;

capital expenditure and other contractual obligations;

currency exchange rates;

weather conditions;

inflation rates;

the availability of goods and services;

legislative, regulatory, or policy changes;

terrorism or cyber attacks;

occurrence of property acquisitions or divestitures;

the integration of acquisitions;

the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks; and

other factors disclosed under Items 1 and 2—Business and Properties—Estimated Proved Reserves and Future Net Cash Flows, Item 1A—Risk Factors, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A—Quantitative and Qualitative Disclosures About Market Risk and elsewhere in our most recently filed Annual Report on Form 10-K, other risks and uncertainties in our third-quarter 2018 earnings release, other factors disclosed under Part II, Item 1A—Risk Factors of this Quarterly Report on Form 10-Q, and other filings that we make with the Securities and Exchange Commission.
All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.





PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
 
 
For the Quarter Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions, except per common share data)
REVENUES AND OTHER:
 
 
 
 
 
 
 
 
Oil and gas production revenues
 
 
 
 
 
 
 
 
Oil revenues
 
$
1,555

 
$
1,070

 
$
4,524

 
$
3,292

Natural gas revenues
 
241

 
238

 
675

 
726

Natural gas liquids revenues
 
180

 
81

 
446

 
229

 
 
1,976

 
1,389

 
5,645

 
4,247

Derivative instrument losses, net
 
(23
)
 
(110
)
 
(46
)
 
(69
)
Gain on divestitures
 
1

 
296

 
10

 
616

Other
 
29

 

 
50

 
43

 
 
1,983

 
1,575

 
5,659

 
4,837

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Lease operating expenses
 
382

 
353

 
1,087

 
1,059

Gathering, transmission, and processing
 
92

 
44

 
260

 
151

Taxes other than income
 
58

 
46

 
162

 
117

Exploration
 
99

 
231

 
251

 
431

General and administrative
 
99

 
98

 
330

 
307

Transaction, reorganization, and separation
 
8

 
20

 
20

 
14

Depreciation, depletion, and amortization:
 
 
 
 
 
 
 
 
Oil and gas property and equipment
 
575

 
524

 
1,666

 
1,598

Other assets
 
35

 
35

 
105

 
109

Asset retirement obligation accretion
 
27

 
30

 
81

 
103

Impairments
 
10

 

 
10

 
8

Financing costs, net
 
192

 
101

 
385

 
300

 
 
1,577

 
1,482

 
4,357

 
4,197

NET INCOME BEFORE INCOME TAXES
 
406

 
93

 
1,302

 
640

Current income tax provision
 
262

 
99

 
709

 
413

Deferred income tax benefit
 
(17
)
 
(111
)
 
(43
)
 
(758
)
NET INCOME INCLUDING NONCONTROLLING INTEREST
 
161

 
105

 
636

 
985

Net income attributable to noncontrolling interest
 
80

 
42

 
215

 
137

NET INCOME ATTRIBUTABLE TO COMMON STOCK
 
$
81

 
$
63

 
$
421

 
$
848

 
 
 
 
 
 
 
 
 
NET INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
 
Basic
 
$
0.21

 
$
0.16

 
$
1.10

 
$
2.23

Diluted
 
$
0.21

 
$
0.16

 
$
1.09

 
$
2.22

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
Basic
 
383

 
381

 
383

 
381

Diluted
 
385

 
383

 
385

 
383

DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75

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

1



APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
 
 
 
For the Quarter Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
NET INCOME INCLUDING NONCONTROLLING INTEREST
 
$
161

 
$
105

 
$
636

 
$
985

OTHER COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
 
Currency translation adjustment
 

 
109

 

 
109

COMPREHENSIVE INCOME INCLUDING NONCONTROLLING INTEREST
 
161

 
214

 
636

 
1,094

Comprehensive income attributable to noncontrolling interest
 
80

 
42

 
215

 
137

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCK
 
$
81

 
$
172

 
$
421

 
$
957


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

2



APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income including noncontrolling interest
 
$
636

 
$
985

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Unrealized derivative instrument (gain) loss, net
 
(88
)
 
42

Gain on divestitures
 
(10
)
 
(616
)
Exploratory dry hole expense and unproved leasehold impairments
 
133

 
350

Depreciation, depletion, and amortization
 
1,771

 
1,707

Asset retirement obligation accretion
 
81

 
103

Impairments
 
10

 
8

Deferred income tax benefit
 
(43
)
 
(758
)
Loss on extinguishment of debt
 
94

 
1

Other
 
147

 
166

Changes in operating assets and liabilities:
 
 
 
 
Receivables
 
(113
)
 
(70
)
Inventories
 
(7
)
 
17

Drilling advances
 
(22
)
 
(72
)
Deferred charges and other
 
91

 
(60
)
Accounts payable
 
110

 
2

Accrued expenses
 
(54
)
 
(65
)
Deferred credits and noncurrent liabilities
 
(2
)
 
20

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
2,734

 
1,760

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Additions to oil and gas property
 
(2,338
)
 
(1,471
)
Leasehold and property acquisitions
 
(86
)
 
(142
)
Additions to gas gathering, transmission, and processing facilities
 
(412
)
 
(384
)
Proceeds from sale of Canadian assets, net of cash divested
 

 
661

Proceeds from sale of oil and gas properties
 
51

 
743

Other, net
 
(55
)
 
(30
)
NET CASH USED IN INVESTING ACTIVITIES
 
(2,840
)
 
(623
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Fixed-rate debt borrowings
 
992

 

Payments on fixed-rate debt
 
(1,370
)
 
(70
)
Distributions to noncontrolling interest
 
(256
)
 
(212
)
Dividends paid
 
(287
)
 
(285
)
Other
 
(48
)
 
(5
)
NET CASH USED IN FINANCING ACTIVITIES
 
(969
)
 
(572
)
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
(1,075
)
 
565

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF YEAR
 
1,668

 
1,377

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
 
$
593

 
$
1,942

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Interest paid, net of capitalized interest
 
$
344

 
$
341

Income taxes paid, net of refunds
 
649

 
315

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

3



APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
593

 
$
1,668

Receivables, net of allowance
 
1,457

 
1,345

Inventories
 
362

 
368

Drilling advances
 
229

 
207

Prepaid assets and other
 
144

 
137

 
 
2,785

 
3,725

PROPERTY AND EQUIPMENT:
 
 
 
 
Oil and gas, on the basis of successful efforts accounting:
 
 
 
 
Proved properties
 
41,518

 
39,197

Unproved properties and properties under development
 
1,704

 
1,783

Gathering, transmission and processing facilities
 
1,742

 
1,376

Other
 
1,081

 
1,046

 
 
46,045

 
43,402

Less: Accumulated depreciation, depletion, and amortization
 
(27,399
)
 
(25,643
)
 
 
18,646

 
17,759

OTHER ASSETS:
 
 
 
 
Deferred charges and other
 
439

 
438

 
 
$
21,870

 
$
21,922

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
744

 
$
641

Current debt
 
150

 
550

Other current liabilities (Note 5)
 
1,313

 
1,373

 
 
2,207

 
2,564

LONG-TERM DEBT
 
8,053

 
7,934

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
 
 
 
 
Income taxes
 
502

 
545

Asset retirement obligation
 
1,867

 
1,792

Other
 
295

 
296

 
 
2,664

 
2,633

COMMITMENTS AND CONTINGENCIES (Note 9)
 

 

EQUITY:
 
 
 
 
Common stock, $0.625 par, 860,000,000 shares authorized, 415,660,982 and 414,125,879 shares issued, respectively
 
260

 
259

Paid-in capital
 
11,945

 
12,128

Accumulated deficit
 
(1,667
)
 
(2,088
)
Treasury stock, at cost, 34,092,692 and 33,171,015 shares, respectively
 
(2,930
)
 
(2,887
)
Accumulated other comprehensive income
 
4

 
4

APACHE SHAREHOLDERS’ EQUITY
 
7,612

 
7,416

Noncontrolling interest
 
1,334

 
1,375

TOTAL EQUITY
 
8,946

 
8,791

 
 
$
21,870

 
$
21,922

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

4



APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY
(Unaudited)
 
 
 
Common
Stock
 
Paid-In
Capital
 
Accumulated Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
APACHE
SHAREHOLDERS’
EQUITY
 
Noncontrolling
Interest
 
TOTAL
EQUITY
 
 
(In millions)
BALANCE AT DECEMBER 31, 2016
 
$
258

 
$
12,364

 
$
(3,385
)
 
$
(2,887
)
 
$
(112
)
 
$
6,238

 
$
1,441

 
$
7,679

Net income
 

 

 
848

 

 

 
848

 
137

 
985

Distributions to noncontrolling interest
 

 

 

 

 

 

 
(212
)
 
(212
)
Common dividends ($0.75 per share)
 

 
(286
)
 

 

 

 
(286
)
 

 
(286
)
Other
 
1

 
108

 
(7
)
 

 
109

 
211

 

 
211

BALANCE AT SEPTEMBER 30, 2017
 
$
259

 
$
12,186

 
$
(2,544
)
 
$
(2,887
)
 
$
(3
)
 
$
7,011

 
$
1,366

 
$
8,377

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2017
 
$
259

 
$
12,128

 
$
(2,088
)
 
$
(2,887
)
 
$
4

 
$
7,416

 
$
1,375

 
$
8,791

Net income
 

 

 
421

 

 

 
421

 
215

 
636

Distributions to noncontrolling interest
 

 

 

 

 

 

 
(256
)
 
(256
)
Common dividends ($0.75 per share)
 

 
(287
)
 

 

 

 
(287
)
 

 
(287
)
Other
 
1

 
104

 

 
(43
)
 

 
62

 

 
62

BALANCE AT SEPTEMBER 30, 2018
 
$
260

 
$
11,945

 
$
(1,667
)
 
$
(2,930
)
 
$
4

 
$
7,612

 
$
1,334

 
$
8,946

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


5



APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods, on a basis consistent with the annual audited financial statements, with the exception of recently adopted accounting pronouncements discussed below. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which contains a summary of the Company’s significant accounting policies and other disclosures.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of September 30, 2018, Apache’s significant accounting policies are consistent with those discussed in Note 1—Summary of Significant Accounting Policies of its consolidated financial statements contained in Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, with the exception of Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (see “Revenue Recognition” section in this Note 1 below).
Use of Estimates
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom, the assessment of asset retirement obligations, the estimates of fair value for long-lived assets, and the estimate of income taxes. Actual results could differ from those estimates.
Fair Value Measurements
Certain assets and liabilities are reported at fair value on a recurring basis in Apache’s consolidated balance sheet. Accounting Standards Codification (ASC) 820-10-35, “Fair Value Measurement” (ASC 820), provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach, and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models, and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Recurring fair value measurements are presented in further detail in Note 4—Derivative Instruments and Hedging Activities and Note 8—Debt and Financing Costs.
Apache also uses fair value measurements on a nonrecurring basis when certain qualitative assessments of its assets indicate a potential impairment. For the third quarter and nine-month period ended September 30, 2018, the Company recorded asset impairments in connection with fair value assessments totaling $10 million. In the third quarter of 2018, Apache agreed to sell certain of its unproved properties offshore the U.K. in the North Sea (North Sea). As a result, the Company performed a fair value assessment of the properties and recorded a $10 million impairment on the carrying values of the associated capitalized exploratory well costs. The fair value of the impaired assets was determined using the negotiated sales price, a Level 1 fair value measurement.
The Company recorded no asset impairments in connection with fair value assessments in the third quarter of 2017. For the nine-month period ended September 30, 2017, the Company recorded asset impairments in connection with fair value assessments

6



totaling $8 million for a United Kingdom (U.K.) Petroleum Revenue Tax (PRT) decommissioning asset that is no longer expected to be realizable from future abandonment activities in the North Sea.
In 2016, the U.K. government enacted Finance Bill 2016, providing tax relief to exploration and production (E&P) companies operating in the U.K. North Sea. Under the enacted legislation, the U.K. PRT rate was reduced to zero from the previously enacted 35 percent rate in effect from January 1, 2016. PRT expense ceased prospectively from that date. During the first quarter of 2017, the Company fully impaired the aggregate remaining value of the recoverable PRT decommissioning asset of $8 million that would have been realized from future abandonment activities. The recoverable value of the PRT decommissioning asset was estimated using the income approach. The expected future cash flows used in the determination were based on anticipated spending and timing of planned future abandonment activities for applicable fields, considering all available information at the date of review. Apache has classified this fair value measurement as Level 3 in the fair value hierarchy.
Oil and Gas Property
The Company follows the successful efforts method of accounting for its oil and gas property. Under this method of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas depending on, among other things, the amount of hydrocarbons discovered, the outcome of planned geological and engineering studies, the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan, and government sanctioning of development activities in certain international locations. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities; in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
Acquisition costs of unproved properties are assessed for impairment at least annually and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment based on the Company’s current exploration plans. Unproved oil and gas properties with individually insignificant lease acquisition costs are amortized on a group basis over the average lease term at rates that provide for full amortization of unsuccessful leases upon lease expiration or abandonment. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and gas properties. Costs of maintaining and retaining unproved properties, as well as amortization of individually insignificant leases and impairment of unsuccessful leases, are included in exploration costs in the statement of consolidated operations.
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production (UOP) method. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate depreciation for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost.
Oil and gas properties are grouped for depreciation in accordance with ASC 932 “Extractive Activities—Oil and Gas.” The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.

7



When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on Apache’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally estimated using the income approach described in ASC 820. If applicable, the Company utilizes prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a discount rate believed to be consistent with those applied by market participants. Apache has classified these fair value measurements as Level 3 in the fair value hierarchy.
The following table represents non-cash impairments of the carrying value of the Company’s proved and unproved property for the third quarters and first nine months of 2018 and 2017:
 
 
For the Quarter Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Oil and Gas Property:
 
 
 
 
 
 
 
 
Proved
 
$

 
$

 
$

 
$

Unproved
 
49

 
160

 
86

 
214

On the statement of consolidated operations, unproved leasehold impairments are recorded in exploration expense, and all other impairments of proved and unproved properties based on fair value assessments are recorded separately in impairments.
Revenue Recognition
On January 1, 2018, Apache adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. The Company elected to evaluate all contracts at the date of initial application. While there was no impact to the opening balance of retained earnings as a result of the adoption, certain items previously netted in revenue are now recognized as “Gathering, transmission, and processing” in the Company’s statement of consolidated operations. The amounts reclassified are immaterial to the financial statements, and prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Adoption of the new standard is not anticipated to have a material impact on the Company’s net earnings on an ongoing basis.
The Company applies the provisions of ASC 606 for revenue recognition to contracts with customers. Sales of crude oil, natural gas, and NGLs are included in revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu (MMBtu) of natural gas, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title. In each case, the term between delivery and when payments are due is not significant.
Apache markets its own United States (U.S.) natural gas and crude oil production based on market-priced contracts. Typically, these contracts are adjusted for quality, transportation, and other market-reflective differentials. Since the Company’s production may fluctuate as a result of operational issues, it is occasionally necessary to purchase third-party oil and gas to fulfill sales obligations and commitments. Sales proceeds related to third-party purchased oil and gas are determined to be revenue from a customer. Proceeds for these volumes totaled $124 million and $326 million for the third quarter and first nine months of 2018, respectively. Associated purchase costs for these volumes totaled $109 million and $308 million for the third quarter and first nine months of 2018, respectively. Proceeds and costs are both recorded as “Other” under “Revenues and Other” in the statement of consolidated operations.
Internationally, Apache sells its North Sea crude oil under contracts with a market-based index price. Natural gas from the North Sea Beryl field is processed through the SAGE gas plant. The gas is sold to a third party at the St. Fergus entry point of the national grid on a National Balancing Point index price basis. Apache’s gas production in Egypt is sold primarily under an industry-

8



pricing formula, a sliding scale based on Dated Brent crude oil with a minimum of $1.50 per MMBtu and a maximum of $2.65 per MMBtu, plus an upward adjustment for liquids content. The Company’s Egypt oil production is sold at prices equivalent to the export market.
The Company’s Egyptian operations are conducted pursuant to production sharing contracts under which contractor partners pay all operating and capital costs for exploring and developing the concessions. A percentage of the production, generally up to 40 percent, is available to contractor partners to recover these operating and capital costs over contractually defined periods. The balance of the production is split among the contractor partners and the Egyptian General Petroleum Corporation (EGPC) on a contractually defined basis. Additionally, the contractor partner’s income taxes, which remain the liability of the contractor partners under domestic law, are paid by EGPC on behalf of the contractor partners out of EGPC’s production entitlement. Income taxes paid to the Arab Republic of Egypt on behalf of Apache as contract partner are recognized as oil and gas sales revenue and income tax expense and reflected as production and estimated reserves. Revenues related to Egypt’s tax volumes are considered revenue from a non-customer.
For the third quarter of 2018, revenues from customers and non-customers were $1.9 billion and $198 million, respectively. For the first nine months of 2018, revenues from customers and non-customers were $5.4 billion and $534 million, respectively.
Apache records trade accounts receivable for its unconditional rights to consideration arising under sales contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents estimated net realizable value. The Company routinely assesses the collectability of all material trade and other receivables. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. Receivables from contracts with customers, net of allowance for doubtful accounts, totaled $1.3 billion and $1.1 billion as of September 30, 2018 and December 31, 2017, respectively.
Apache has concluded that disaggregating revenue by geographic area and by product appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 11—Business Segment Information for a disaggregation of revenue by each product sold.
Practical Expedients and Exemptions
Apache does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
Apache will utilize the practical expedient to expense incremental costs of obtaining a contract if the expected amortization period is one year or less. Costs to obtain a contract with expected amortization periods of greater than one year will be recorded as an asset and will be recognized in accordance with ASC 340, “Other Assets and Deferred Costs.” Currently, the Company does not have contract assets related to incremental costs to obtain a contract.
New Pronouncements Issued But Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, “Leases (Topic 842),” requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous GAAP. The guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted; however, the Company does not intend to early adopt. In January 2018, the FASB issued ASU 2018-01, which permits an entity an optional election to not evaluate under ASU 2016-02 those existing or expired land easements that were not previously accounted for as leases prior to the adoption of ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. Apache intends to elect both transitional practical expedients.
In the normal course of business, the Company enters into various lease agreements for real estate, aircraft, and equipment related to its exploration and development activities that are currently accounted for as operating leases. To track these lease arrangements and facilitate compliance with this ASU, the Company is in the process of implementing a third-party lease accounting software solution and designing processes and internal controls. The Company continues to evaluate contracts, train departments affected by the standard, and monitor updates to the standard to determine the impact this ASU will have on its consolidated financial statements. At this time, the Company cannot reasonably estimate the financial impact this will have on its consolidated financial statements; however, the Company believes adoption and implementation of this ASU will significantly impact its balance sheet, resulting in an increase in both assets and liabilities relating to its leasing activities.

9



In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, the same guidance that provides for employee share-based payments, including most of the requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASU 2018-07 is effective for financial statements issued for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company anticipates adopting this guidance for the first quarter of 2019 and does not expect it to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement,” which changes the disclosure requirements for fair value measurements by removing, adding, and modifying certain disclosures. ASU 2018-13 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. The company is currently evaluating the impact of adoption of this ASU on its related disclosures and does not expect it to have a material impact on its financial statements.
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework: Changes to the Disclosure Requirements for Defined Benefit Plans,” which eliminates, modifies, and adds disclosure requirements for defined benefit plans. The ASU is effective for financial statements issued for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this ASU on its related disclosures and does not expect it to have a material impact on its financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This pronouncement clarifies the requirements for capitalizing implementation costs in cloud computing arrangements and aligns them with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements and does not expect it to have a material impact.
2.
ACQUISITIONS AND DIVESTITURES
2018 Activity
U.S. Divestitures
On August 8, 2018, Apache and Kayne Anderson Acquisition Corp. (KAAC) announced an agreement pursuant to which Apache will contribute Apache’s Alpine High midstream assets into a newly formed limited partnership, Altus Midstream LP. Upon closing, KAAC will contribute to the partnership approximately $952 million in cash, less anticipated transaction expenses and any amount associated with potential KAAC share redemptions. The partnership will be jointly owned by Apache and KAAC. Apache will own an estimated 71 percent ownership interest in Altus Midstream LP, adjusted accordingly for any KAAC share redemptions, and expects to fully consolidate the entity in its consolidated financial statements, with the corresponding noncontrolling interest of third-party ownership reflected separately in the financial statements. The transaction is subject to approval by KAAC shareholders, as well as other customary closing conditions. Closing is expected in the fourth quarter of 2018. Upon closing, KAAC will be renamed Altus Midstream Company.
During the first nine months of 2018, Apache completed the sale of certain non-core assets, primarily in the Permian region, in multiple transactions for cash proceeds of $51 million. The Company recognized gains of approximately $10 million during the first nine months of 2018 upon the closing of these transactions.
Leasehold and Property Acquisitions
During the third quarter and first nine months of 2018, Apache completed $48 million and $86 million, respectively, of leasehold and property acquisitions primarily in its U.S. onshore and Egypt regions.
2017 Activity
Canada Divestitures
On June 30, 2017, Apache completed the sale of its Canadian assets at Midale and House Mountain, located in Saskatchewan and Alberta, for aggregate cash proceeds of approximately $228 million. The Company recognized a $52 million loss during the second quarter of 2017 in association with this sale.

10



During the third quarter of 2017, Apache announced the sale of its subsidiary Apache Canada Ltd. (ACL) and complete exit of its Canadian operations for aggregate cash proceeds of approximately $478 million. The Company recognized a $74 million gain upon closing of these transactions in the third quarter of 2017.
A summary of the assets and liabilities at closing of the August transactions is detailed below:
 
 
(In millions)
ASSETS
 
 
Current assets
 
$
110

Property, plant & equipment
 
1,132

Total Assets
 
$
1,242

LIABILITIES
 
 
Current liabilities, excluding asset retirement obligation
 
$
120

Asset retirement obligation
 
780

Other long-term liabilities
 
46

Total Liabilities
 
$
946

The net carrying value of the assets disposed included a currency translation loss of $109 million, which was recorded in “Accumulated Other Comprehensive Loss” on the Company’s consolidated balance sheet at December 31, 2016. The currency translation loss was recognized as a reduction of the net gain on sale during the third quarter of 2017 upon closing of the transactions.
Apache’s Canadian operations recorded pretax losses of $12 million and $141 million for the third quarter and first nine months of 2017, respectively.
U.S. Divestitures
During the first nine months of 2017, Apache completed the sale of certain non-core assets, consisting primarily of leasehold acreage in the Permian and Midcontinent/Gulf Coast regions, in multiple transactions for cash proceeds of $783 million, subject to customary closing adjustments. A refundable deposit of $40 million was received in the fourth quarter of 2016 in connection with certain of these transactions. The Company recognized gains of approximately $594 million during the first nine months of 2017 in connection with these transactions.
Leasehold and Property Acquisitions
During the third quarter and first nine months of 2017, Apache purchased $75 million and $142 million, respectively, of leasehold and property acquisitions primarily in its U.S. onshore regions.
3.   CAPITALIZED EXPLORATORY WELL COSTS
The Company’s capitalized exploratory well costs were $300 million and $350 million at September 30, 2018 and December 31, 2017, respectively. The decrease is primarily attributable to successful transfers of well costs and dry hole write-offs, partially offset by additional drilling activities during the period. No suspended exploratory well costs previously capitalized for greater than one year at December 31, 2017 were charged to dry hole expense during the nine months ended September 30, 2018; however, during the third quarter of 2018, Apache announced an agreement to sell certain of its unproved properties in the North Sea. Exploratory well costs of approximately $70 million that have been capitalized greater than one year are included in the divestiture, which is anticipated to be completed prior to year-end.
Projects with suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development. Management is actively pursuing efforts to assess whether reserves can be attributed to these projects.
4.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives and Strategies
The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. Apache has elected not to designate any of its derivative contracts as cash flow hedges.

11



Counterparty Risk
The use of derivative instruments exposes the Company to credit loss in the event of nonperformance by the counterparty. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of September 30, 2018, Apache had derivative positions with 15 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.
Derivative Instruments
As of September 30, 2018, Apache had the following open crude oil derivative positions:
 
 
 
 
Put Options(1)
Production Period
 
Settlement Index
 
Mbbls
 
Weighted Average Strike Price
October—December 2018
 
Dated Brent
 
3,680

 
$56.00
October—December 2018
 
NYMEX WTI
 
2,760

 
$53.00
(1)
The remaining unamortized premium paid as of September 30, 2018, was $12 million.
 
 
 
 
Collars
 
Call Options(2)
Production Period
 
Settlement Index
 
Mbbls
 
Weighted Average Floor Price
 
Weighted Average Ceiling Price
 
Mbbls
 
Strike Price
October—December 2018
 
NYMEX WTI
 
1,702

 
$45.00
 
$57.00
 
1,702

 
$60.03
(2)
The remaining unamortized premium paid as of September 30, 2018, was $3 million.
As of September 30, 2018, Apache had the following open crude oil financial basis swap contracts:
Production Period
 
Settlement Index
 
Mbbls
 
Weighted Average Price Differential
October—December 2018
 
Midland-WTI/Cushing-WTI
 
1,380

 
$(9.23)
January—September 2019
 
Midland-WTI/Cushing-WTI
 
7,371

 
$(8.60)
October—December 2019
 
Midland-WTI/Cushing-WTI
 
1,380

 
$(3.72)

As of September 30, 2018, Apache had the following open natural gas derivative positions:
 
 
 
 
Fixed-Price Swaps
Production Period
 
Settlement Index
 
MMBtu
(in 000’s)
 
Weighted Average Fixed Price
October—December 2018
 
NYMEX Henry Hub
 
16,790

 
$2.96

12



As of September 30, 2018, Apache had the following open natural gas financial basis swap contracts:
Production Period
 
Settlement Index
 
MMBtu
(in 000’s)
 
Weighted Average Price Differential
October—December 2018
 
NYMEX Henry Hub/Waha
 
17,940

 
$(0.53)
January—March 2019
 
NYMEX Henry Hub/Waha
 
1,350

 
$(0.54)
January—June 2019
 
NYMEX Henry Hub/Waha
 
32,580

 
$(0.53)
January—December 2019
 
NYMEX Henry Hub/Waha
 
14,600

 
$(0.45)

Fair Value Measurements
Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps, options, and collars. The fair values of the Company’s derivatives are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments on a recurring basis, utilizing commodity futures pricing for the underlying commodities provided by a reputable third party, a Level 2 fair value measurement.
The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements Using
 
 
 
 
 
 
 
 
Quoted Price in Active Markets (Level 1)
 
Significant Other Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Netting(1)
 
Carrying Amount
 
 
(In millions)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Instruments
 
$

 
$
84

 
$

 
$
84

 
$
(36
)
 
$
48

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Instruments
 

 
41

 

 
41

 
(36
)
 
5

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Instruments
 
$

 
$
67

 
$

 
$
67

 
$
(43
)
 
$
24

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Instruments
 

 
107

 

 
107

 
(43
)
 
64

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

13



All derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Current Assets: Prepaid assets and other
 
$
46

 
$
8

Other Assets: Deferred charges and other
 
2

 
16

Total Assets
 
$
48

 
$
24

 
 
 
 
 
Current Liabilities: Other current liabilities
 
$
4

 
$
64

Noncurrent Liabilities: Other
 
1

 

Total Liabilities
 
$
5

 
$
64


Derivative Activity Recorded in the Statement of Consolidated Operations
The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:

 
 
For the Quarter Ended September 30,
 
For the Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Realized gain (loss):
 
 
 
 
 
 
 
 
Derivative settlements
 
$
7

 
$
23

 
$
(110
)
 
$
23

Amortization of call and put premium
 
(14
)
 
(50
)
 
(24
)
 
(50
)
Unrealized gain (loss)
 
(16
)
 
(83
)
 
88

 
(42
)
Derivative instrument gain (losses), net
 
$
(23
)
 
$
(110
)
 
$
(46
)
 
$
(69
)
Derivative instrument gains and losses are recorded in “Derivative instrument losses, net” under “Revenues and Other” in the Company’s statement of consolidated operations. Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations are reflected in the statement of consolidated cash flows separately as “Unrealized derivative instrument (gain) loss, net” in “Adjustments to reconcile net income to net cash provided by operating activities.”
5.
OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities as of September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Accrued operating expenses
 
$
79

 
$
72

Accrued exploration and development
 
660

 
680

Accrued gathering, transmission, and processing
 
67

 
122

Accrued compensation and benefits
 
147

 
115

Accrued interest
 
99

 
145

Accrued income taxes
 
89

 
55

Current asset retirement obligation
 
38

 
43

Other
 
134

 
141

Total other current liabilities
 
$
1,313

 
$
1,373


14



6.
ASSET RETIREMENT OBLIGATION
The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the nine-month period ended September 30, 2018:
 
 
(In millions)
Asset retirement obligation at December 31, 2017
 
$
1,835

Liabilities incurred
 
27

Liabilities settled
 
(39
)
Accretion expense
 
81

Revisions in estimated liabilities
 
1

Asset retirement obligation at September 30, 2018
 
1,905

Less current portion
 
(38
)
Asset retirement obligation, long-term
 
$
1,867


15



7.
INCOME TAXES
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Non-cash impairments of the carrying value of the Company’s oil and gas properties, gains and losses on the sale of assets, statutory tax rate changes, and other significant or unusual items are recognized as discrete items in the quarter in which they occur.
During the third quarter of 2018, Apache’s effective income tax rate was primarily impacted by an increase in the amount of valuation allowance against its U.S. deferred tax assets. During the third quarter of 2017, Apache’s effective income tax rate was primarily impacted by gains on the sale of oil and gas properties, a $30 million current tax benefit associated with U.S. federal income tax credits, a deferred tax asset associated with its realizable capital loss on the sale of ACL, and a decrease in the Company’s deferred tax liability associated with its investment in foreign subsidiaries. For more information regarding the sale of ACL, please refer to Note 2—Acquisitions and Divestitures.
Apache’s 2018 year-to-date effective income tax rate was primarily impacted by an increase in the amount of valuation allowance against its U.S. deferred tax assets. Apache’s 2017 year-to-date effective income tax rate was primarily impacted by the decrease in deferred taxes associated with its investments in foreign subsidiaries, gains on the sale of oil and gas properties, non-cash impairments of the Company’s PRT decommissioning asset, the current tax benefit associated with U.S. federal income tax credits, and the sale of ACL.
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. In 2018, the Internal Revenue Service (IRS) issued additional guidance related to the Act’s deemed repatriation of foreign earnings (i.e., transition inclusion). In light of this new guidance, the Company continues to reevaluate the tax impact of the transition inclusion in 2017. Tax benefit associated with the change in transition inclusion is likely to be fully offset by a change in the Company’s valuation allowance against its U.S. deferred tax assets. The Company has not revised any other 2017 provisional estimates under Staff Accounting Bulletin No. 118, but is continuing to gather information and awaits further guidance from the IRS, SEC and FASB on the Act.
Apache and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is currently under IRS audit for the 2014-2016 tax years and is also under audit in various states and foreign jurisdictions as part of its normal course of business.
8.
DEBT AND FINANCING COSTS
The following table presents the carrying amounts and estimated fair values of the Company’s outstanding debt as of September 30, 2018 and December 31, 2017:
 
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
(In millions)
Commercial paper and committed bank facilities
 
$

 
$

 
$

 
$

Notes and debentures
 
8,203

 
8,293

 
8,484

 
9,244

Total Debt
 
$
8,203

 
$
8,293

 
$
8,484

 
$
9,244

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

16



The following table presents the carrying value of the Company’s debt as of September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Debt before unamortized discount and deferred loan costs
 
$
8,299

 
$
8,580

Unamortized discount
 
(45
)
 
(47
)
Debt issuance costs
 
(51
)
 
(49
)
Total debt
 
8,203

 
8,484

Current maturities
 
(150
)
 
(550
)
Long-term debt
 
$
8,053

 
$
7,934

As of September 30, 2018, current debt included $150 million of 7.625% senior notes due July 1, 2019. As of December 31, 2017, current debt included $150 million of 7.0% senior notes due February 1, 2018 that matured and were timely repaid and $400 million of 6.9% senior notes due September 15, 2018 that matured and were timely repaid.
On August 23, 2018, Apache closed an offering of $1.0 billion in aggregate principal amount of senior unsecured 4.375% notes due October 15, 2028. The notes are redeemable at any time, in whole or in part, at Apache’s option, subject to a make-whole premium. The net proceeds from the sale of the notes were used to purchase certain outstanding notes in cash tender offers, repay notes that matured in September 2018, and for general corporate purposes.
On August 24, 2018, the Company closed cash tender offers for certain outstanding notes. Apache accepted for purchase $731 million aggregate principal amount of certain notes covered by the tender offers. Apache paid holders an aggregate of approximately $828 million reflecting principal, the discount to par, early tender premium, and accrued and unpaid interest. The Company recorded a net loss of $94 million on extinguishment of debt, including $5 million of unamortized debt issuance costs and discount, in connection with the note purchases.
In March 2018, the Company entered into a revolving credit facility that matures in March 2023 (subject to Apache’s two, one-year extension options) with commitments totaling $4.0 billion. The Company can increase commitments up to $5.0 billion by adding new lenders or obtaining the consent of any increasing existing lenders. The facility includes a letter of credit subfacility of up to $3.0 billion, of which $2.08 billion was committed as of September 30, 2018. The facility is for general corporate purposes and committed borrowing capacity fully supports Apache’s commercial paper program. As of September 30, 2018, letters of credit aggregating approximately £129.1 million and no borrowings were outstanding under this facility. In connection with entry into this facility, Apache terminated $3.5 billion and £900 million in commitments under two former credit facilities and wrote off $4 million of associated debt issuance costs, which is included in “Financing costs, net” in the Company’s consolidated statement of operations.
The Company’s $3.5 billion commercial paper program, which is subject to market availability, facilitates Apache borrowing funds for up to 270 days at competitive interest rates. As of September 30, 2018, the Company had no commercial paper outstanding.
Financing Costs, Net
The following table presents the components of Apache’s financing costs, net:
 
 
For the Quarter Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Interest expense
 
$
113

 
$
113

 
$
335

 
$
344

Amortization of deferred loan costs
 
2

 
3

 
8

 
7

Capitalized interest
 
(11
)
 
(12
)
 
(36
)
 
(39
)
Loss on extinguishment of debt
 
94

 

 
94

 
1

Interest income
 
(6
)
 
(3
)
 
(16
)
 
(13
)
Financing costs, net
 
$
192

 
$
101

 
$
385

 
$
300


17



9.
COMMITMENTS AND CONTINGENCIES
Legal Matters
Apache is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. As of September 30, 2018, the Company has an accrued liability of approximately $39 million for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. Apache’s estimates are based on information known about the matters and its experience in contesting, litigating, and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to Apache’s financial position, results of operations, or liquidity after consideration of recorded accruals. For material matters that Apache believes an unfavorable outcome is reasonably possible, the Company has disclosed the nature of the matter and a range of potential exposure, unless an estimate cannot be made at this time. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.
For additional information on each of the Legal Matters described below, please see Note 10—Commitments and Contingencies to the consolidated financial statements contained in Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Argentine Environmental Claims and Argentina Tariff
No material change in the status of the YPF Sociedad Anónima and Pioneer Natural Resources Company indemnities matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Louisiana Restoration 
As more fully described in Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, Louisiana surface owners often file lawsuits or assert claims against oil and gas companies, including Apache, claiming that operators and working interest owners in the chain of title are liable for environmental damages on the leased premises, including damages measured by the cost of restoration of the leased premises to its original condition, regardless of the value of the underlying property. From time to time restoration lawsuits and claims are resolved by the Company for amounts that are not material to the Company, while new lawsuits and claims are asserted against the Company. With respect to each of the pending lawsuits and claims, the amount claimed is not currently determinable or is not material, except as noted. Further, the overall exposure related to these lawsuits and claims is not currently determinable. While an adverse judgment against Apache is possible, Apache intends to actively defend these lawsuits and claims.
Starting in November of 2013 and continuing into 2018, several parishes in Louisiana have pending lawsuits against many oil and gas producers, including Apache. These cases have all been removed to federal court after having once been remanded back to state court. In these cases, the Parishes, as plaintiffs, allege that defendants’ oil and gas exploration, production, and transportation operations in specified fields were conducted in violation of the State and Local Coastal Resources Management Act of 1978, as amended, and applicable regulations, rules, orders, and ordinances promulgated or adopted thereunder by the Parish or the State of Louisiana. Plaintiffs allege that defendants caused substantial damage to land and water bodies located in the coastal zone of Louisiana. Plaintiffs seek, among other things, unspecified damages for alleged violations of applicable law within the coastal zone, the payment of costs necessary to clear, re-vegetate, detoxify, and otherwise restore the subject coastal zone as near as practicable to its original condition, and actual restoration of the coastal zone to its original condition. While an adverse judgment against Apache might be possible, Apache intends to vigorously oppose these claims.
No other material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Apollo Exploration Lawsuit
In a case captioned Apollo Exploration, LLC, Cogent Exploration, Ltd. Co. & SellmoCo, LLC v. Apache Corporation, Cause No. CV50538 in the 385th Judicial District Court, Midland County, Texas, plaintiffs alleged damages in excess of $200 million (having previously claimed in excess of $1.1 billion) relating to purchase and sale agreements, mineral leases, and areas of mutual interest agreements concerning properties located in Hartley, Moore, Potter, and Oldham Counties, Texas. The Court granted motions filed by Apache reducing the plaintiffs’ alleged damages to an amount that is not material to the Company. Apache believes that plaintiffs’ claims lack merit and will vigorously oppose the claims. No other material change in the status of these matters has occurred since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

18



Australian Operations Divestiture Dispute
By a Sale and Purchase Agreement dated April 9, 2015 (SPA), the Company and its subsidiaries divested their remaining Australian operations to Quadrant Energy Pty Ltd (Quadrant). Closing occurred on June 5, 2015. In April 2017, Apache filed suit against Quadrant for breach of the SPA. In its suit, Apache seeks approximately $80 million. In December 2017, Quadrant filed a defense of equitable set-off to Apache’s claim and a counterclaim seeking approximately $200 million in the aggregate. The Company believes that Quadrant’s claims lack merit and will not have a material adverse effect on the Company’s financial position, results of operation, or liquidity.
California Litigation
On July 17, 2017, in three separate actions, San Mateo County, California, Marin County, California, and the City of Imperial Beach, California, all filed suit individually and on behalf of the people of the state of California against over 30 oil, gas, and coal companies alleging damages as a result of global warming. Plaintiffs seek unspecified damages and abatement under various tort theories. On December 20, 2017, in two separate actions, the City of Santa Cruz, California and Santa Cruz County, California and in a separate action on January 22, 2018, the City of Richmond, California, filed similar lawsuits against many of the same defendants. The lawsuits were removed to federal court and then consolidated. Although the federal court remanded the lawsuits back to state court, it stayed its order of remand and certified the jurisdictional inquiry for appeal to the 9th Circuit Court of Appeals. Apache believes that the claims made against it are baseless and intends to vigorously defend these lawsuits.
Environmental Matters
As of September 30, 2018, the Company had an undiscounted reserve for environmental remediation of approximately $4 million. The Company is not aware of any environmental claims existing as of September 30, 2018, that have not been provided for or that would otherwise have a material impact on its financial position, results of operations, or liquidity. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.
Commitments
During the third quarter of 2018, the Company executed a 10-year firm transportation agreement associated with the third-party Permian Highway Pipeline project to transport a minimum of 500,000 MMBtu per day at a fixed rate per MMBtu. The fees will commence when the pipeline accepts first commercial delivery, which is expected to begin service in late 2020, assuming timely receipt of regulatory approvals. Apache has entered into no other material commitments since the filing of Apache’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
10.
CAPITAL STOCK
Net Income per Common Share
A reconciliation of the components of basic and diluted net income per common share for the quarters and nine months ended September 30, 2018 and 2017, is presented in the table below.
 
 
 
For the Quarter Ended September 30,
 
 
2018
 
2017
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
 
 
(In millions, except per share amounts)
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to common stock
 
$
81

 
383

 
$
0.21

 
$
63

 
381

 
$
0.16

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and other
 
$


2


$

 
$

 
2

 
$

Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to common stock
 
$
81

 
385

 
$
0.21

 
$
63

 
383

 
$
0.16



19



 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
 
 
(In millions, except per share amounts)
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to common stock
 
$
421

 
383

 
$
1.10

 
$
848

 
381

 
$
2.23

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and other
 
$

 
2

 
$
(0.01
)
 
$

 
2

 
$
(0.01
)
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to common stock
 
$
421

 
385

 
$
1.09

 
$
848

 
383

 
$
2.22

The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 4.9 million and 8.4 million for the quarters ended September 30, 2018 and 2017, respectively, and 5.8 million and 7.5 million for the nine months ended September 30, 2018 and 2017, respectively.
Common Stock Dividends
For the quarters ended September 30, 2018 and 2017, Apache paid $96 million and $95 million, respectively, in dividends on its common stock. For the nine months ended September 30, 2018 and 2017, the Company paid $287 million and $285 million, respectively.
Stock Repurchase Program
In 2013 and 2014, Apache’s Board of Directors authorized the purchase of up to 40 million shares of the Company’s common stock. Shares may be purchased either in the open market or through privately negotiated transactions. The Company initiated the buyback program on June 10, 2013, and through September 30, 2018, had repurchased a total of 33.1 million shares at an average price of $87.77 per share. During the third quarter of 2018, the Company repurchased a total of 0.9 million shares at an average price of $46.38 per share. On October 30, 2018, the Company’s Board of Directors authorized the purchase of up to 40 million additional shares of the Company’s common stock. The Company is not obligated to acquire any specific number of shares.

20



11.
BUSINESS SEGMENT INFORMATION
Apache is engaged in a single line of business. Both domestically and internationally, the Company explores for, develops, and produces natural gas, crude oil, and natural gas liquids. At September 30, 2018, the Company had production in three reporting segments: the U.S., Egypt, and offshore the U.K. in the North Sea. Apache also has exploration interests in Suriname that may, over time, result in a reportable discovery and development opportunity. Financial information for each area is presented below:
 
 
United
States
 
Canada(1)
 
Egypt(2,3)
 
North Sea
 
Other
International
 
Total
 
 
(In millions)
For the Quarter Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 

Oil revenues
 
$
583

 
$

 
$
669

 
$
303

 
$

 
$
1,555

Natural gas revenues
 
125

 

 
86

 
30

 

 
241

Natural gas liquids revenues
 
171

 

 
4

 
5

 

 
180

Total Oil and Gas Production Revenues
 
$
879

 
$

 
$
759

 
$
338

 
$

 
$
1,976

Operating Income (Loss)(4)
 
$
147

 
$

 
$
438

 
$
114

 
$
(1
)
 
$
698

Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
 
Gain on divestitures, net
 
 
 
 
 
 
 
 
 
 
 
1

Derivative instrument losses, net
 
 
 
 
 
 
 
 
 
 
 
(23
)
Other(5)
 
 
 
 
 
 
 
 
 
 
 
29

General and administrative
 
 
 
 
 
 
 
 
 
 
 
(99
)
Transaction, reorganization, and separation
 
 
 
 
 
 
 
 
 
 
 
(8
)
Financing costs, net
 
 
 
 
 
 
 
 
 
 
 
(192
)
Income Before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
$
406

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Oil revenues
 
$
1,743

 
$

 
$
1,887

 
$
894

 
$

 
$
4,524

Natural gas revenues
 
331

 

 
263

 
81

 

 
675

Natural gas liquids revenues
 
421

 

 
11

 
14

 

 
446

Total Oil and Gas Production Revenues
 
$
2,495

 
$

 
$
2,161

 
$
989

 
$

 
$
5,645

Operating Income (Loss)(4)
 
$
523

 
$

 
$
1,176

 
$
327

 
$
(3
)
 
$
2,023

Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
 
Gain on divestitures, net
 
 
 
 
 
 
 
 
 
 
 
10

Derivative instrument losses, net
 
 
 
 
 
 
 
 
 
 
 
(46
)
Other(5)
 
 
 
 
 
 
 
 
 
 
 
50

General and administrative
 
 
 
 
 
 
 
 
 
 
 
(330
)
Transaction, reorganization, and separation
 
 
 
 
 
 
 
 
 
 
 
(20
)
Financing costs, net
 
 
 
 
 
 
 
 
 
 
 
(385
)
Income Before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
$
1,302

Total Assets
 
$
14,389

 
$

 
$
4,404

 
$
3,033

 
$
44

 
$
21,870

 
 
 
 
 
 
 
 
 
 
 
 
 

21



 
 
United
States
 
Canada(1)
 
Egypt(2)
 
North Sea
 
Other
International
 
Total
 
 
(In millions)
For the Quarter Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Oil revenues
 
$
381

 
$
14

 
$
442

 
$
233

 
$

 
$
1,070

Natural gas revenues
 
97

 
19

 
98

 
24

 

 
238

Natural gas liquids revenues
 
72

 
3

 
3

 
3

 

 
81

Total Oil and Gas Production Revenues
 
$
550

 
$
36

 
$
543

 
$
260

 
$

 
$
1,389

Operating Income (Loss)(6)
 
$
(114
)
 
$
(1
)
 
$
226

 
$
16

 
$
(1
)
 
$
126

Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
 
Gain on divestitures, net
 
 
 
 
 
 
 
 
 
 
 
296

Derivative instrument losses, net
 
 
 
 
 
 
 
 
 
 
 
(110
)
General and administrative
 
 
 
 
 
 
 
 
 
 
 
(98
)
Transaction, reorganization, and separation
 
 
 
 
 
 
 
 
 
 
 
(20
)
Financing costs, net
 
 
 
 
 
 
 
 
 
 
 
(101
)
Income Before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
$
93

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Oil revenues
 
$
1,133

 
$
110

 
$
1,351

 
$
698

 
$

 
$
3,292

Natural gas revenues
 
266

 
104

 
295

 
61

 

 
726

Natural gas liquids revenues
 
194

 
17

 
9

 
9

 

 
229

Total Oil and Gas Production Revenues
 
$
1,593

 
$
231

 
$
1,655

 
$
768

 
$

 
$
4,247

Operating Income (Loss)(6)
 
$
(71
)
 
$
(33
)
 
$
740

 
$
59

 
$
(24
)