Apache Corporation 2006 Annual Report

Apache Corporation 2006 Summary Annual Report COMMITTED OUR COMMITMENTS Apache’s employees are committed to our mission to build a dynamic, global exploration and production company to provide oil and natural gas for the purpose of advancing the quality of human lives. In the center spread of the Summary Annual Report, we have reproduced the signatures of many of our colleagues affirming our commitments: · Finding and producing essential energy supplies that contribute to improved living standards throughout the world; · Preserving and strengthening our unique culture with its foundation of urgency, integrity and mutual respect; and · Pursuing Apache’s long-term profitable growth and building wealth for our shareholders. We did not have space in this report for all of the signatures. Please visit Apache’s Web site, www.apachecorp.com, to see all of them. Apache Corporation Profile Established in 1954 with $250,000 of investor capital, Apache Corporation has grown to $24 billion in assets and has become one of the world’s top independent oil and gas exploration and production companies. Apache’s U.S. operations are focused in some of the nation’s most important producing basins, including the Outer Continental Shelf of the Gulf of Mexico, the Anadarko Basin of Oklahoma, the Permian Basin of West Texas and New Mexico, the Texas-Louisiana Gulf Coast and East Texas. In Canada, Apache is active in British Columbia, Alberta, Saskatchewan and the Northwest Territories. The company also has exploration and production operations in the Carnarvon, Perth and Gippsland basins offshore Australia, Egypt’s Western Desert, the United Kingdom sector of the North Sea and Argentina. CONTENTS Performance Highlights Fellow Shareholders: Our 2006 Story Strategic Review Statement of Consolidated Operations Statement of Consolidated Cash Flows Consolidated Balance Sheet Statement of Consolidated Shareholders’ Equity Eleven-Year Statistical Summary Oil and Gas Reserve Information Future Net Cash Flows Board of Directors and Corporate Officers Corporate Information 1 3 13 29 30 31 32 34 36 38 39 40 ABBREVIATIONS Mbbls MMbbls Mcf MMcf Bcf Tcf Boe Mboe MMboe Thousand Barrels Million barrels Thousand cubic feet (of gas) Million cubic feet Billion cubic feet Trillion cubic feet Barrel of oil equivalent Thousand barrels of oil equivalent Million barrels of oil equivalent Six Mcf of gas is the energy equivalent of one barrel of oil. PERFORMANCE HIGHLIGHTS (dollars in millions, except per-share data) Year Ended December 31, 2006 Financial Highlights 2005 2004 Revenues Income attributable to common stock Diluted net income per common share Cash from operations before changes in operating assets and liabilities (a): Net cash provided by operating activities Changes in operating assets and liabilities Cash from operations before changes in operating assets and liabilities Total assets Long-term debt Shareholders’ equity Cash dividends paid per common share Operational Highlights $ 8,289 2,547 7.64 $ 7,584 2,618 7.84 $ 5,333 1,663 5.03 $ 4,313 755 $ 4,332 412 $ 3,232 193 $ 5,068 $ 24,308 2,020 13,191 .45 $ 4,744 $ 19,272 2,192 10,541 .34 $ 3,425 $ 15,502 2,588 8,204 .26 Oil and gas capital expenditures (including acquisitions, capitalized interest and asset retirement cost) Natural gas production (MMcf/day) Oil and condensate production (Mbbls/day) Proved reserves (MMboe) $ 6,444 1,589 236 2,313 $ 4,011 1,264 244 2,117 $ 3,650 1,235 242 1,937 (a) NON-GAAP FINANCIAL MEASURE: The annual report discusses Apache’s cash from operations before changes in operating assets and liabilities. It is presented because management believes the information is useful for investors because it is used internally and widely accepted by those following the oil and gas industry as a financial indicator of a company’s ability to generate cash to internally fund exploration and development activities, fund dividend programs, and service debt. It is also used by research analysts to value and compare oil and gas exploration and production companies, and is frequently included in published research when providing investment recommendations. Cash from operations before changes in operating assets and liabilities, therefore, is an additional measure of liquidity, but is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing, or financing activities. This summary annual report contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995, including, without limitation, expectations, beliefs, plans and objectives regarding Apache’s capital expenditures and exploration and development plans, and the future prices of crude oil and natural gas. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are delays and difficulties in completing acquisitions and developing currently owned properties, the failure of exploratory drilling to result in commercial wells, delays due to the limited availability of drilling equipment and personnel, fluctuations in oil and gas prices, general economic conditions and the risk factors detailed from time to time in Apache’s periodic reports and registration statements filed with the Securities and Exchange Commission (SEC). 1 PROVED RESERVES (MMBOE) GAS LIQUID HYDROCARBONS 2500 0.5 DIVIDENDS (DOLLARS) OPERATIONS 2000 0.4 RESERVES (MMboe) US.G 1500 0.3 1. U.S. GULF COAST 2. U.S. CENTRAL 3. CANADA 4. NORTH SEA 5. EGYPT 6. AUSTRALIA 7. ARGENTINA TOTAL 393.25 551.24 575.26 196.81 281.48 204.48 110.67 2,313.19 17% 24% 25% 9% 12% 9% 5% 5 4 7 6 1 1000 0.2 2 3 500 0.1 PRODUCTION* (MMboe) 1. U.S. GULF COAST 2. U.S. CENTRAL 3. CANADA 4. NORTH SEA 5. EGYPT 6. AUSTRALIA 7. ARGENTINA TOTAL 40.58 27.30 32.96 21.49 33.89 15.66 9.88 181.76 22% 15% 18% 12% 19% 9% 5% AU US.G 7 6 5 2 4 NS 1 ANNUAL PRODUCTION (MMBOE) GAS LIQUID HYDROCARBONS 200 25 20 15 150 RETURN ON AVERAGE CAPITAL EMPLOYED (PERCENT) 3 100 10 50 5 EXPLORATION & DEVELOPMENT CAPITAL EXPENDITURES* ($Millions) E 6 7 5 1 4 2 U 1. U.S. GULF COAST 2,146.192 2. U.S. CENTRAL 935.050 3. CANADA 1,109.567 4. NORTH SEA 332.558 5. EGYPT 461.281 6. AUSTRALIA 209.800 7. ARGENTINA 1,237.743 TOTAL 6,432.191 33% 15% 17% 5% 7% 3% 19% Can 3 US CAPITALIZATION ($BILLIONS) EQUITY DEBT 20 5 15 4 NET CASH PROVIDED BY OPERATING ACTIVITIES ($BILLIONS) PRODUCTION REVENUE* ($Millions) 6 7 5 1 US.G 3 10 2 5 1 1. U.S. GULF COAST 2. U.S. CENTRAL 3. CANADA 4. NORTH SEA 5. EGYPT 6. AUSTRALIA 7. ARGENTINA TOTAL 1,866 1,162 1,380 1,355 1,664 408 167 8,002 23% 15% 17% 17% 21% 5% 2% 2 4 3 NS 02 03 04 05 06 02 03 04 05 06 *Excluding China assets sold August 2006 2 FELLOW SHAREHOLDERS Our 2006 Story Apache’s 2006 story is one of progress in the face of new and recurring challenges: • Near-record earnings ($2.55 billion or $7.64 per diluted share); • Record production for the 27th time in 28 years; • Record reserves for the 21st consecutive year, up 9 percent in 2006; and • $5 billion cash from operations before changes in operating assets and liabilities. This is not an aberration. A $10,000 investment in Apache at its founding 52 years ago would now be worth $7.8 million, earning $17,289 in dividends each quarter. Behind the numbers is the Apache team, with our sense of urgency driving growth by: • Increasing daily production by 10 percent, passing the half-million-equivalent-barrels milestone; • Restoring output from hurricane-damaged facilities in the Gulf of Mexico; • A commitment to double operated production in Egypt by 2010; and • Drilling high-impact exploration wells in Canada, Australia, the North Sea and Egypt. Our Challenges While not an aberration, our success has never been guaranteed. Apache operates, and has always operated, in a world full of risks: • Despite vast improvements in equipment and technology, exploration and development remain inherently risky and require expensive, multi-year commitments; • The vast majority of the world’s remaining oil and gas is owned by foreign governments, many of which have unfriendly political, legal or business environments; • Environmental concerns, which we believe must be addressed, add another layer of cost, complexity and uncertainty; and • Unpredictable and continual shifts in U.S. regulatory policy – from energy policy to corporate governance – make it hard to plan, staff and deliver on long-term projects. 3 4 Our Response Apache’s survival and success over 52 years is not accidental. We continually assess and address our challenges: • We have steadily diversified. Apache has seven core areas, five outside the United States. No single basin contributes more than 25 percent of our production. Each has undeveloped acreage for growth. • We are leaders in using technology to improve exploration and shorten delivery times and project lengths. In the Anadarko Basin of western Oklahoma we are using improved drilling techniques to bring wells on more quickly, as well as better fracture stimulation methods to improve performance, contributing to a 16 percent increase in our Central Region’s 2006 production. In Egypt, our technical teams have shortened the time needed to turn newly processed 3-D seismic into drilling prospects. • We believe producing oil and gas contributes to improving standards of living. In addition to the economic contribution from direct employment, we create programs and charities that ensure that our presence benefits our host countries as well as our stakeholders. In Egypt, through funds donated by Apache employees and directors, friends and other U.S. firms to Springboard – Educating the Future, a non-profit, we have constructed 200 rural schools for Egyptian girls who otherwise would not receive a basic education. • We use innovative solutions to address unique problems. For example, in Canada we’ve formed creative partnerships to deal with limited acquisition opportunities and rising land costs. Apache strengthened its Gulf of Mexico operations in 2006 with its acquisition of 13 fields on the Gulf of Mexico Shelf from BP. The company also acquired significant assets in the Permian Basin and Argentina. Tim Custer, left, business development manager, and Mike Cavanaugh, corporate reservoir engineering manager, review some of the acquired assets. Custer says: “Acquisitions have been an important element in Apache’s growth. If we do our job right in identifying and negotiating transactions, the technical and operating guys will be able to run with these properties; pretty soon, they will be exceeding our forecasts.” • We work to minimize our environmental footprint. We have reduced carbon dioxide emissions in the North Sea by converting power generation from diesel to natural gas U. S. G U L F C O A S T 5 6 (with the added benefit of saving $1 million a month). In Canada we have invested $200 million to use and sequester carbon dioxide and extend the life of a mature field by 20 years. We regularly work with environmental experts and explore ways to better protect our environment. Working with Apache Foundation, we plant lots of trees, which offset greenhouse gas emissions. It is, after all, a world we live in, too. • We divest non-core assets with the same discipline we use to acquire new assets. • We have a highly talented and stable work force. We aggressively recruit at all levels throughout the organization -- from entry level and recent college graduates to experienced professional and technical staff. • Our board members and executives don’t just act like long-term owners; they are owners. We are rare among large companies for having Apache’s founder as our chairman. Founders bring long-term vision and commitment no stock option can buy; indeed, Apache’s founder is voluntarily giving up options with a seven-figure value simply as a leadership move to set the tone at the top for keeping costs down. New Challenges Many oil and gas exploration companies don’t make it because the existing challenges are so formidable. But three new challenges are rapidly increasing the difficulties that even successful U.S. companies face: Central Region engineers Breezi Fischer, left, and Rick Crist are among 21 young engineers and geoscientists who have joined Apache since 2001, working alongside seasoned veterans and bringing new energy to Apache’s strong culture. Fischer says: “My team is finding new reserves and better techniques to produce gas from plays that were not economic in order to make the most of resources within the United States.” • With oil and gas largely in non-U.S. hands and in increasingly short supply, many host governments are seeking larger shares of the economic rent of oil operations on their territory. In addition, these countries increasingly feel free to alter the terms of their contracts with U. S. C E N T R A L 7 District Manager Brian Evert oversees Apache Canada’s carbon dioxide (CO2) flood project at Midale, Saskatchewan. The enhanced oil recovery project will increase the field’s ultimate recovery by 60 million barrels of oil. “Each property I work with contributes to the local community through employment, local taxes, lease rentals to the landowners, contractors, suppliers, and community donations,” Evert says. The Midale project, which utilizes CO2 from the Dakota Gasification Plant in Beulah, N.D., has received international attention as a successful example of geologic sequestration of approximately 500,000 tons of CO2 (a greenhouse gas) per year. exploration companies, making it harder to use profits in good years to offset bad years in this notoriously cyclical industry. • The embarrassment of failures which collectively makes up U.S. energy policy is increasing. The laudable desire to encourage alternative sources of energy is creating a stampede to subsidize first, think second. If Apache and other companies that find and produce oil and gas upon which our economy depends are taxed to subsidize flights of fancy that may never prove workable, we may harm our ability to operate in the short term and our ability to shift to new energy sources over time. CANADA 8 • More troubling, particularly to an industry with extremely long lead times and massive fixed costs, is the extraordinary shift in U.S. legal, regulatory and judicial policy. The traditional system of decision making by officers and boards of directors is effectively being replaced by decision making by shareholders. No public company can long survive in such an environment. Apache is committed to protecting its shareholders. But management by giant committee is not management, and planning by quarterly results is not planning. Many of Apache’s best decisions were unpopular at the time they were made. This includes our entry into Egypt: Once questioned by investors and analysts, it is now one of our best growth areas. A company that takes major risks, makes quick decisions, and operates in a highly technical and ever-changing environment cannot survive without a board empowered to seek longterm success and stand by management in tough times to get there. If the United States wants to have oil and gas exploration companies – indeed, if the United States wants to have public companies at all – it must resist the temptation to turn them into smaller versions of our gridlocked political institutions. In difficult years, as well as in easy ones, we at Apache have proved time and again that we can deliver. We believe we have earned enough respect to be given fair room to operate. Give us reasonable legal and regulatory environments, and we will continue to deliver to our shareholders, royalty owners, employees and fellow citizens who depend on us and the energy we produce. Pat Brennan, left, Apache Egypt commercial manager, and Warren Ford, general manager of the Apache-operated Khalda Petroleum Company joint venture, are members of the Apache team driving to double the company’s operated production in Egypt by 2010. Ford says: “We make use of technology as it becomes available and applicable. Some other companies hang back. We are always at the sharp edge and it is paying back in our exploration and production results.” The Bottom Line Apache had a great year in 2006. We enter 2007 with a stronger base of core assets and future potential than at any time in our 52-year history. Despite the obstacles we have discussed, we expect Apache will continue to grow in 2007. We hope you share our enthusiasm. EGYPT Raymond Plank Chairman and Founder G. Steven Farris President, Chief Executive Officer and Chief Operating Officer 10 12 STRATEGIC REVIEW Apache’s 2006 operational results demonstrate how its diversified portfolio enables the company to deliver consistent and profitable results while exposing shareholders to upside potential from 38 million acres across seven regions -- a land position that could not be replicated in today’s competitive environment. Senior Geophysical Advisor David Phelps (from left), Drilling Engineer Brett Lawrence, Chief Facilities Engineer Simon Bingham, Senior Geologist Kerri Auld, and Senior Petroleum Engineer Allan McDiarmid are planning development of Apache’s Van Gogh field, which is expected to commence production in 2009 in the Exmouth Basin offshore Western Australia. Bingham says: “Apache can only do this sort of development adjacent to the pristine internationally acclaimed Ningaloo environmental conservation park because of its commitment to environmental excellence.” In spite of rising service costs, recovery efforts in the Gulf of Mexico, and unplanned production interruptions in the North Sea, Apache still increased production by 10 percent and proved reserves by 9 percent. The company also took several steps to rebalance and grow its asset base. Apache enters 2007 with momentum from rising production in 2006 and a deep inventory of drilling prospects. Production is forecasted to increase in the range of 6 to 10 percent before considering the impact of the recently announced $1 billion acquisition of Anadarko’s assets in the Permian Basin (expected to close in the first quarter) as well as any other acquisition or divestiture activity. Apache also plans to drill a number of higher-risk, higher-potentialreward exploration projects in the North Sea, Australia, Canada and Egypt in addition to our consistently active drilling program. Rising drilling expenses and other service costs were a major concern during 2006, particularly in North America. Apache’s 2007 North America exploration and development budget has been reduced, but international activity will increase to fund several large developments and facilities projects in Egypt and Australia. Capital budgets are reviewed quarterly and are subject to adjustments based on the relative levels of commodity prices and service costs. In recent months, service costs have moderated with the reduction in commodity prices. If service costs start moving higher, Apache will reduce drilling activities to maintain margins. 13 AUSTRALIA Apache’s current portfolio – seven core areas in six nations – was developed one building block at a time over the last two decades, starting from the Anadarko Basin in Western Oklahoma, expanding to the Gulf of Mexico, then to Canada and Australia, Egypt, the North Sea and – most recently – Argentina. Each region has significant producing assets and large undeveloped acreage to provide running room for the future, but no single region contributes more than 25 percent of production or reserves. Natural gas now represents 53 percent of production, while oil is 47 percent – a balanced product mix that provides upside potential in either market. Apache’s U.S. regions provide substantial cash flow that is available for reinvestment in other areas with greater exploration potential. The growth of Apache’s reserve base in 2006 was the result of exploration and exploitation of our core assets – 1,611 wells drilled with an 87 percent success rate – and strategic acquisitions. Also, just as an investor rebalances a portfolio of holdings from time to time, Apache sold certain assets that were non-strategic. NORTH SEA 14 Apache North Sea Drilling Manager Derek Reynolds (left) is overseeing extensive Forties Field rig upgrades that will equip rigs on each of the Forties platforms for modern and innovative drilling techniques. “The drilling group is focused on advanced drilling techniques that will improve efficiency and help extend the life of the Forties Field,” he says. Apache’s Phase 1 refurbishment of the Forties platforms will be completed in 2007. All told, Apache invested $6.4 billion in 2006 for acquisitions and exploration and development activities, while divesting $673 million worth of non-core properties. Apache replaced 213 percent of its production, adding 390 MMboe of proved reserves, half of which were added through the drillbit. History has shown that acquisitions often lead to additional reserves in future years as Apache’s technical teams identify new drilling opportunities. Although many analysts and industry observers have argued that high commodity prices create a difficult environment for acquisitions, Apache was able to complete several strategic transactions that strengthened its core areas in the Gulf of Mexico and the Permian Basin and established a new core area in Argentina. Apache acquired eight Permian Basin fields with estimated reserves of 31 MMboe from Hess, as well as 13 fields with 44 MMboe on the Gulf of Mexico Shelf from BP. In both cases, the value was enhanced by Apache’s operational strength and familiarity with the assets. In January 2007, Apache announced that it would acquire 28 Permian fields with 70 MMboe of proved reserves from Anadarko Petroleum for $1 billion. Two acquisitions totaling $1.1 billion completed during 2006 provided a strategic property base in Argentina with 111 MMboe of estimated reserves. The new core area now represents 5 percent of Apache’s reserve base and has significant upside potential. On the divestiture side, Apache sold its 24.5 percent interest in the Zhao Dong block in China for $260 million and the undeveloped deepwater West Mediterranean Concession in ARGENTINA 16 16 Egypt’s Nile Delta for $413 million. The Zhao Dong block was not a core asset in the company’s portfolio; Apache’s capital is better utilized elsewhere. Selling the West Med Fernando Araujo, who started with Apache in Egypt, is operations manager of Apache’s newest core area, Argentina. Apache completed two acquisitions with 111 million boe of proved reserves in Argentina in 2006. “Our main focus is to grow production and control operating costs in our two operating districts, Neuquen and Tierra del Fuego, where we have significant potential for growth,” he says. “At the region level, we have good management systems which set transparent goals for each department, and these goals are easily translated through the chain to the field operators.” deepwater concession alleviated the need to undertake a costly development program and enabled the Apache team in Egypt to concentrate on doubling production from Apache’s Western Desert concessions by 2010. In summary, Apache acquired nearly 200 MMboe of proved reserves for $2.3 billion and divested about 12 MMboe for $673 million. (The totals include some smaller purchases and sales.) U.S. Central Region Production in Apache’s Central Region, which comprises producing assets in the Anadarko, Permian and East Texas basins, averaged 259 MMcf and 31,700 barrels per day – a 16 percent increase in barrel-equivalent terms. Reserves increased 10 percent during the region’s most active year, with 374 wells drilled and a 97 percent success rate. With approximately 2 million acres across the three basins – including fields acquired from Hess in 2006 – the region has an inventory of drilling locations that exceeds 2006 levels; the actual activity level will depend on service costs and commodity prices. The recently announced acquisition of Anadarko’s Permian Basin fields is expected to add production of 9,000 barrels of liquid hydrocarbons and 19 MMcf of gas per day during 2007. WORLDWIDE OPERATIONS Canada 2006 Natural gas production 404 MMcf/day 2006 Liquid hydrocarbon production 22,902 Bbls/day Proved reserves 575 MMboe 2006 Wells drilled/productive 874/740 Gross acreage 6.8 million U.S. Central Region 2006 Natural gas production 2006 Liquid hydrocarbon production Proved reserves 2006 Wells drilled/productive Gross acreage 259 MMcf/day 31,692 bbls/day 551 MMboe 374/363 1.8 million U.S. Gulf Coast Region 2006 Natural gas production 408 MMcf/day 2006 Liquid hydrocarbon production 43,125 Bbls/day Proved reserves 393 MMboe 2006 Wells drilled/productive 83/65 Gross acreage 2.7 million Argentina 2006 Natural gas production 2006 Liquid hydrocarbon production Proved reserves 2006 Wells drilled/productive Gross acreage 112 MMcf/day 8394 Bbls/day 111 MMboe 83/74 2.7 million Committed to our t producing essential energy supplies that throughout Dedicated to preserving and strengthening urgency, integrity and Single-minded in our pursuit of Apache’s l wealth for our task of finding and contribute to improved living standards the world; g our unique culture with its foundation of mutual respect; and long-term profitable growth and building shareholders North Sea 2006 Natural gas production 2 MMcf/day 2006 Liquid hydrocarbon production 58,545 Bbls/day Proved reserves 197 MMboe 2006 Wells drilled/productive 5/4 Gross acreage 1.5 million With the acquisition and planned drilling activity, the region should achieve double-digit production growth in 2007. The Hess and Anadarko acquisitions provide additional opportunities to tap one of Apache’s core strengths – exploitation of mature fields through workovers, recompletions and drilling that will increase production and reserves, reduce costs per unit produced, and enhance profitability. U.S. Gulf Coast Region Apache’s Gulf Coast region consistently delivers high returns on capital employed as well as cash flow that significantly exceeds exploration and development spending in the region. Although some analysts have questioned the Gulf’s continued viability, it remains a key element of Apache’s diversified portfolio and generates more cash than any other region. The acquisition of BP’s assets brought operational control of the Grand Isle/West Delta Complex, which will enable Apache to step up development in the field, one of the largest ever discovered on the Shelf. In 2006, the region focused on rebuilding facilities damaged in the unprecedented 2005 Australia 2006 Natural gas production 2006 Liquid hydrocarbon production Proved reserves 2006 Wells drilled/productive Gross acreage 186 MMcf/day 11893 Bbls/day 204 MMboe 21/5 11.8 million hurricane season. Substantially all production has been restored on damaged facilities, although some platforms must be replaced before all production is back online. During 2007, Apache expects to restore additional production totaling 5,000 barrels and 10 MMcf per day. The unusually calm 2006 hurricane season helped speed the repair process. Total production, measured on a barrel-equivalent basis, increased 2 percent over 2005 levels, and Apache entered 2007 with momentum from restored production, including output from fields acquired from BP, and additional drilling. In 2007, Apache plans to drill 90 wells offshore and onshore along the Texas and Louisiana Gulf Coast. Canada Apache’s total production in Canada increased 4 percent, fueled by natural gas production that grew 9 percent to 404 MMcf per day. The region drilled 874 wells with a success rate of 85 percent. Softer commodity prices and higher service costs will result in a lower activity level in 2007. In 2006, exploration and development spending of $1.1 billion was focused on Egypt 2006 Natural gas production 218 MMcf/day 2006 Liquid hydrocarbon production 56,570 Bbls/day Proved reserves 281 MMboe 2006 Wells drilled/productive 163/140 Gross acreage 10.2 million shallow conventional and unconventional drilling locations across Apache’s acreage. The 2007 program will target some deeper, higher-potential exploration projects on the ExxonMobil farm-in acreage and in other areas. (The farm-in was a creative way to earn 24 acreage without upfront costs in a basin where acreage has been difficult – and costly – to acquire.) Apache has acquired 477 square miles of 3-D seismic over the South Grant Lands area, which is part of the ExxonMobil farm-in. Using the new data, Apache’s geoscientists have generated several structural prospects reaching depths of 13,000 feet in Mississippian-age formations. The Canada Region also has identified deeper targets in British Columbia. North Sea The North Sea was the only region in Apache’s portfolio that did not increase production in 2006; output declined 11 percent to 58,544 barrels per day while reserves increased slightly. The region made steady progress on facilities upgrades during 2006, but the number and frequency of unplanned shut-ins, including an extensive curtailment for repairs of the BP Forties pipeline, were disappointing. These interruptions affected production and drilling and pushed completion of Phase One refurbishments into 2007. Other projects scheduled in 2007 aim to: Upgrade the produced-water and re-injection systems to double injection volumes to 300,000 barrels per day; upgrade the primary gas lift compression; and finish replacement of instrumentation control systems on several platforms. Australia Apache’s Australia production increased 19 percent in 2006 as the company started delivering gas through several new contracts. Significant exploration activity is planned in 2007, including four high-potential wildcats in the Exmouth Basin. These wells follow up on five Exmouth discoveries in the Pyrenees development area, which will begin production in 2009 with expected net volumes of 20,000 barrels per day, and Apache’s 2006 Theo discovery, also expected to commence production in 2009 with net volumes of approximately 20,000 barrels per day. In the Carnarvon Basin, Apache will drill a large gas prospect north of the 1-Tcf John Brookes discovery, as well as three exploration wells in the Reindeer area where Apache expects to commence production in early 2009 at 100 MMcf of gas per day. Recent contracts in the range of $4 per Mcf have signaled a change in the Western Australia gas market. In the Gippsland Basin offshore Southeast Australia, Apache is planning a 10well, high-potential exploration program beginning in 2008 on its 1.8 million acre position. Apache’s drilling program in Australia totals 33 wells in 2007, up 45 percent from 2006. 25 Egypt PHILANTHROPY 26 26 Apache drilled 163 wells in Egypt during 2006 with a success rate of 86 percent. Production and reserves increased 12 percent and 4 percent, respectively. Industry data provider IHS reported that one in five of Egypt’s 42 recorded discoveries in 2006 was drilled by Apache. In early 2007, Apache announced five successful wells – including two new-field discoveries and the recently tested Syrah-5 appraisal well, which logged more than 200 feet of net pay in the Jurassic Lower Safa formation and tested at more than 47 MMcf of gas per day. Much of Apache’s exploration success in Egypt is attributable to 3-D seismic acquisition; in 2006, the company acquired over 2,400 square miles of new data in nine different concessions. In 2005, Apache and the Egyptian General Petroleum Corp. agreed to undertake the “2X Program” to double gross operated production from Apache’s concessions to approximately 700 MMcf of gas and 200,000 barrels a day by the end of 2010. Apache’s Qasr discovery and other Jurassic formation gas discoveries should provide adequate deliverability to achieve the gas production goal when additional processing capacity is brought online in 2008 and 2009. Higher oil production is expected from 1,500 identified oil drilling locations that will be pursued over the next several years. Most of that activity will focus on Cretaceous-age oil plays from 6,000 feet to 12,000 feet in the greater Khalda and East Bahariya concession areas. In 2007, Apache plans to drill 274 wells in Egypt, including 42 exploration wells, a 68 percent increase over the 2006 activity level. Argentina After completing two acquisitions in Argentina in 2006, year-end reserves totaled 111 MMboe – roughly 5 percent of Apache’s worldwide total. A 700-square-mile 3-D seismic program will cover much of Apache’s 733,000 acres in Tierra del Fuego, where the company owns a 70 percent interest. By midyear, the company expects to have two drilling rigs active in the area. Apache plans to drill more than 20 wells in Tierra del Fuego in 2007 -more wells than were drilled by the prior operator in the previous decade. All told, Apache plans to drill more than 100 wells in Tierra del Fuego and Neuquen this year. Leaving the World a Better Place In rural villages in the Fayoum, Giza and Minya governorates of Egypt, 7,000 girls are getting their first opportunity to learn reading, writing and basic arithmetic as a result of a partnership that brings together Apache; U.S. non-profit Springboard – Educating the Future; the Egyptian government’s National Council for Childhood and Motherhood and Ministry of Education; and Egypt’s non-profit Sawiris Foundation. Two hundred schools are now complete, the result of Apache’s sense of urgency coupled with an outpouring of $3 million from Apache’s employees, officers, directors, friends and other U.S. firms. The one-room schools program is just the latest example of high-impact projects to spring from Apache’s parallel commitments to profitable growth and leaving the world a better place. Through the public foundation, Fund for Teachers, Apache supports sabbaticals and growth experiences for teachers from pre-kindergarten through high school across the United States. Teachers, chosen for the creativity of proposals of their own design, return from their experiences motivated to teach and transfer their enthusiasm and commitment for lifetime learning to their bright-eyed pupils. The Fund for Teachers has created opportunities for more than 2,070 teachers from more than 950 different schools to study and travel in 93 different countries on all seven continents with awards of up to $5,000 each. In 2006, 497 teachers received awards. The Ucross Foundation, launched in Wyoming by Apache and friends in 1981, is known for its artists-in-residence program that has awarded more than 1,300 fellowships for artists to paint, write, compose music and create in the unique and striking landscape of the Ucross Ranch in the Powder River Basin. In 2005, the Ucross Foundation decided to focus its energies on the artists-in-residence program, while Apache Foundation agreed to operate the Ucross conservation and holistic ranching programs. Apache Foundation also assumed responsibility for a long-term program to plant 1 million trees for conservation, beautification and mitigation of greenhouse gas emissions. Safety Apache believes that work-related injuries and illnesses are preventable. From 2005, Apache experienced an 11 percent improvement in its lost-time incident rate and a 16 percent improvement in incidents per vehicle. These results reflect an even greater focus by the Apache Regions on “back-to-basics” in injury prevention, field-driven empowerment of workers to accept personal responsibility for safety, and other technical training areas such as driving and accident investigation. Apache continues to implement such broad-based initiatives as behavior-based safety leadership training, safety management system regional audits, major contractor safety audits, and scheduled facility site inspections 28 28 Statement of Consolidated Operations (In thousands, except per-common-share data) For the Year Ended December 31, 2006 2005 2004 $ 8,074,253 173,545 40,981 8,288,779 REVENUES AND OTHER: Oil and gas production revenues Gain on China devestiture Other $ 7,457,291 – 126,953 7,584,244 $ 5,308,017 – 24,560 5,332,577 OPERATING EXPENSES: Depreciation, depletion and amortization Asset retirement obligation accretion Lease operating costs Gathering and transportation costs Severance and other taxes General and administrative China litigation provision Financing costs: Interest expense Amortization of deferred loan costs Capitalized interest Interest income 1,816,359 88,931 1,362,374 104,322 553,978 211,334 – 217,454 2,048 (61,301) (16,315) 4,279,184 4,009,595 1,457,144 2,552,451 – 2,552,451 5,680 $ 2,546,771 1,415,682 53,720 1,040,475 100,260 453,258 198,272 – 175,419 3,748 (56,988) (5,856) 3,377,990 4,206,254 1,582,524 2,623,730 – 2,623,730 5,680 $ 2,618,050 $ 1,222,152 46,060 864,378 82,261 93,748 173,194 71,216 168,090 2,471 (50,748) (3,328) 2,669,494 2,663,083 993,012 1,670,071 (1,317) 1,668,754 5,680 1,663,074 INCOME BEFORE INCOME TAXES Provision for income taxes INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE Cumulative effect of change in accounting principle, net of income tax NET INCOME Preferred stock dividends INCOME ATTRIBUTABLE TO COMMON STOCK BASIC NET INCOME PER COMMON SHARE: Before change in accounting principle Cumulative effect of change in accounting principle $ $ 7.72 – 7.72 $ $ 7.96 – 7.96 $ $ 5.10 – 5.10 DILUTED NET INCOME PER COMMON SHARE: Before change in accounting principle Cumulative effect of change in accounting principle $ $ 7.64 – 7.64 $ $ 7.84 – 7.84 $ $ 5.04 (.01) 5.03 29 Statement of Consolidated Cash Flows (In thousands) 2006 CASH FLOWS FROM OPERATING ACTIVITIES: For the Year Ended December 31, 2005 2004 $ 2,623,730 $ 1,668,754 Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization Provision for deferred income taxes Asset retirement obligation accretion Gain on sale of China operations Other Changes in operating assets and liabilities, net of effects of acquisitions: (Increase) decrease in receivables (Increase) decrease in inventories (Increase) decrease in drilling advances and other (Increase) decrease in deferred charges and other Increase (decrease) in accounts payable Increase (decrease) in accrued expenses Increase (decrease) in advances from gas purchasers Increase (decrease) in deferred credits and noncurrent liabilities NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: $ 2,552,451 1,816,359 751,457 88,931 (173,545) 32,380 (153,616) 10,238 66,323 (126,869) (136,663) (475,021) (25,601) 86,082 4,312,906 (3,891,639) (833,820) (704,809) (229,134) (396,056) – – 264,081 409,203 (248,589) 4,740 (149,559) (5,775,582) 1,779,963 (150,266) (154,143) 31,963 (166,907) (2,061) 35,791 1,374,340 (88,336) 228,860 140,524 1,415,682 598,927 53,720 – 52,274 (504,038) 11,295 (144,154) (26,454) 97,447 214,491 (22,108) (38,542) 4,332,270 (3,715,856) – – – – – – – – – 79,663 (95,649) (3,731,842) 153,368 (549,530) (117,395) 18,864 6,620 (861) 6,273 (482,661) 117,767 111,093 228,860 1,222,152 444,906 46,060 – 43,482 (296,383) (659) (35,761) (35,328) 182,454 28,431 (18,331) (18,258) 3,231,519 (2,456,488) – – – – (348,173) (531,963) – – – 4,042 (78,431) (3,411,013) 544,824 (283,400) (90,369) 21,595 12,472 (2,303) 54,265 257,084 77,590 33,503 111,093 Additions to property and equipment Acquisition of BP plc properties Acquisition of Pioneer’s Argentine properties Acquisition of Amerada Hess properties Acquisition of Pan American properties Acquisition of ExxonMobil properties Acquisition of Anadarko properties Proceeds from China divestiture Proceeds from sale of Egypt properties Additions to gas gathering, transmission and processing facilities Proceeds from sales of oil and gas properties Other, net NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES: Debt borrowings Payments on debt Dividends paid Common stock activity Treasury stock activity, net Cost of debt and equity transactions Other NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR $ $ $ 30 Consolidated Balance Sheet (In thousands) December 31, ASSETS $ 2006 140,524 1,651,664 320,386 78,838 139,756 159,103 2,490,271 29,107,921 1,284,743 1,725,619 358,605 32,476,888 (11,130,636) 21,346,252 189,252 282,400 24,308,175 644,889 70,551 534,924 127,779 30,878 2,133 1,802,094 376,713 70,128 – 151,523 3,811,612 2,019,831 3,618,989 43,167 1,370,853 – 252,670 5,285,679 2005 $ 228,860 1,444,545 209,670 146,047 16,319 116,636 2,162,077 CURRENT ASSETS: Cash and cash equivalents Receivables, net of allowance Inventories Drilling advances Derivative instruments Prepaid assets and other PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties Unproved properties and properties under development, not being amortized Gas gathering, transmission and processing facilities Other Less: Accumulated depreciation, depletion and amortization OTHER ASSETS: 23,836,789 795,706 1,359,477 312,970 26,304,942 (9,513,602) 16,791,340 189,252 129,127 19,271,796 714,598 66,609 460,203 125,022 32,564 120,153 274 93,557 256,115 174,491 142,978 2,186,564 2,191,954 2,580,629 68,768 1,362,358 152,430 187,878 4,352,063 Goodwill, net Deferred charges and other CURRENT LIABILITIES: LIABILITIES AND SHAREHOLDERS’ EQUITY $ $ $ $ Accounts payable Accrued operating expense Accrued exploration and development Accrued compensation and benefits Accrued interest Accrued income taxes Current debt Asset retirement obligation Derivative instruments United Kingdom Petroleum Revenue Tax Other LONG-TERM DEBT DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes Advances from gas purchasers Asset retirement obligation Derivative instruments Other COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Preferred stock, no par value, 5,000,000 shares authorized – Series B, 5.68% Cumulative Preferred Stock, 100,000 shares issued and outstanding Common stock, $0.625 par, 430,000,000 shares authorized, 339,783,392 and 336,997,053 shares issued, respectively Paid-in capital Retained earnings Treasury stock, at cost, 9,045,967 and 6,875,823 shares, respectively Accumulated other comprehensive loss $ 98,387 212,365 4,269,795 8,898,577 (256,739) (31,332) 13,191,053 24,308,175 98,387 210,623 4,170,714 6,516,863 (89,764) (365,608) 10,541,215 19,271,796 31 $ Statement of Consolidated Shareholders’ Equity (In thousands) Comprehensive Income BALANCE AT DECEMBER 31, 2003 Series B Preferred Stock $ 98,387 – – $ Common Stock 207,818 – – $ Paid-In Capital 4,038,007 – – Comprehensive income (loss): Net income Commodity hedges, net of income tax expense of $13,742 Comprehensive income Cash dividends: Preferred Common ($.28 per share) Five percent common stock dividend Common shares issued Treasury shares issued, net Compensation expense Other BALANCE AT DECEMBER 31, 2004 $ 1,668,754 22,461 1,691,215 $ – – – – – – – 98,387 $ 2,623,730 (236,126) 2,387,604 – – – – – 1,502 – – – 209,320 – – – – – 25,030 8,312 34,462 371 4,106,182 – – Comprehensive income (loss): Net income Commodity hedges, net of income tax benefit of $128,990 Comprehensive income Cash dividends: Preferred Common ($.36 per share) Common shares issued Treasury shares issued, net Compensation expense Other BALANCE AT DECEMBER 31, 2005 $ – – – – – – 98,387 $ 2,552,451 (6,116) 340,392 2,886,727 – – – – – 1,303 – – – 210,623 – – – – – 21,125 2,736 40,528 143 4,170,714 – – – Comprehensive income (loss): Net income Post retirement, net of income tax benefit of $2,816 Commodity hedges, net of income tax expense of $187,162 Comprehensive income Cash dividends: Preferred Common ($.50 per share) Common shares issued Treasury shares purchased, net Compensation expense Other BALANCE AT DECEMBER 31, 2006 $ $ – – – – – – 98,387 $ – – 1,742 – – – 212,365 $ – – 54,917 1,968 42,085 111 4,269,795 32 Retained Earnings $ 2,445,698 1,668,754 – $ Treasury Stock (105,169) – – Accumulated Other Comprehensive Income (Loss) $ (151,943) – 22,461 Total Shareholders’ Equity $ 6,532,798 1,668,754 22,461 (5,680) (91,433) – – – – – 4,017,339 2,623,730 – – – – – 7,844 – – (97,325) – – – – – – – – – (129,482) – (236,126) (5,680) (91,433) – 26,532 16,156 34,462 371 8,204,421 2,623,730 (236,126) (5,680) (118,526) – – – – 6,516,863 2,552,451 – – – – – 7,561 – – (89,764) – – – – – – – – – (365,608) – (6,116) 340,392 (5,680) (118,526) 22,428 10,297 40,528 143 10,541,215 2,552,451 (6,116) 340,392 $ (5,680) (165,059) – – – 2 8,898,577 $ – – – (166,967) – (8) (256,739) $ – – – – – – (31,332) $ (5,680) (165,059) 56,659 (164,999) 42,085 105 13,191,053 33 Eleven-Year Statistical Summary (In millions of dollars, except as otherwise indicated) 2006 Financial Data 2005 7,457.3 – 126.9 7,584.2 2,618.1 4,332.3 3,464.0 19,271.8 2,192.0 10,541.2 330.1 1,325.3 37.6% 100,673.3 2004 5,308.0 – 24.6 5,332.6 1,663.1 3,231.5 3,455.7 15,502.5 2,588.4 8,204.4 327.5 1,149.2 37.3% 66,103.4 2003 4,198.9 – (8.6) 4,190.3 1,116.2 2,705.9 3,073.8 12,416.1 2,327.0 6,532.8 324.5 1,003.3 43.0% 46,959.0 Oil and gas production revenues Gain on China divestiture Other Consolidated revenues Income (loss) attributable to common stock Net cash provided by operating activities Oil and gas capital expenditures (including acquisitions) Total assets Long-term debt Shareholders’ equity Common shares outstanding at year end Amortization of oil and gas properties-recurring Effective tax rate (benefit) Future cash inflows Shareholder Data 8,074.3 173,545 41.0 8,288.8 2,546.8 4,312.9 6,053.9 24,308.2 2,019.8 13,191.1 330.7 1,698.6 36.3% 93,906.1 Basic net income (loss) per common share Cash dividends per common share Shareholders’ equity per common share Operations Data 7.72 .45 39.60 7.96 .34 31.63 5.10 .26 24.75 3.46 .21 19.83 Natural gas production (Bcf) Oil, condensate and natural gas liquids production (MMbbls) Total production (MMboe) Average price of natural gas (per Mcf) Average price of oil (per barrel) Oil, condensate and NGL reserves (MMbbls): Proved developed Proved undeveloped Natural gas reserves (Bcf): Proved developed Proved undeveloped Total proved reserves (MMboe) Reserve life (in years) 580.0 86.2 182.9 5.17 59.92 728.5 332.6 5,125.5 2,387.4 2,313.2 12.6 461.3 89.0 165.9 6.35 51.66 676.7 299.2 4,775.9 2,072.1 2,117.2 12.8 452.0 88.7 164.1 4.91 35.24 662.7 269.4 3,844.1 2,183.9 1,936.7 11.8 444.3 78.3 152.3 4.61 27.76 593.7 250.2 3,541.0 1,335.0 1,656.5 10.9 34 2002 2,559.8 – .1 2,559.9 543.5 1,380.7 1,252.6 9,459.9 2,158.8 4,924.3 302.5 783.6 38.3% 33,806.4 2001 2,823.0 – (13.6) 2,809.4 703.8 1,905.0 2,280.2 8,933.7 2,244.4 4,418.5 287.9 760.2 39.7% 20,584.9 2000 2,308.9 – (6.9) 2,302.0 693.1 1,517.4 2,194.7 7,482.0 2,193.3 3,754.6 285.6 547.5 40.1% 39,081.9 1999 1,159.0 – 2.7 1,161.7 186.4 638.2 1,842.3 5,502.5 1,879.7 2,669.4 263.3 415.6 41.7% 14,951.6 1998 773.5 – (0.7) 772.8 (131.4) 471.5 649.1 3,996.1 1,343.3 1,801.8 225.8 359.7 (31.0)% 6,502.7 1997 985.4 – (4.4) 981.0 154.9 723.8 911.4 4,138.6 1,501.4 1,729.2 215.5 358.9 40.1% 8,559.9 1996 835.8 – 1.2 837.0 121.4 490.5 939.9 3,432.4 1,235.7 1,518.5 208.0 296.0 39.3% 11,427.4 1.83 .19 15.95 2.44 .12 14.28 2.54 .12 12.07 .75 .12 8.96 (.58) .12 7.54 .74 .12 8.02 .61 .12 7.30 394.3 58.9 124.6 2.87 24.78 414.4 222.4 3,206.5 848.1 1,312.5 10.5 411.5 57.0 125.6 3.70 23.18 411.8 187.6 3,203.8 801.5 1,266.9 10.1 304.0 44.6 95.2 3.64 27.41 354.0 168.5 2,664.8 718.9 1,086.4 11.4 239.5 34.7 74.6 2.16 18.45 302.0 113.2 1,873.7 477.9 807.2 10.8 215.4 27.7 63.6 1.93 12.70 178.0 73.0 1,450.1 722.1 613.0 9.6 222.2 25.2 62.2 2.28 19.24 203.1 70.7 1,554.3 317.5 585.7 9.4 205.3 20.2 54.4 2.03 20.94 183.2 52.1 1,435.3 190.0 506.2 9.3 35 Oil and Gas Reserve Information We engage Ryder Scott Company, L.P. Petroleum Consultants as independent petroleum engineers to review our estimates of proved hydrocarbon liquid and gas reserves and provide an opinion letter on the reasonableness of Apache’s internal projections. Ryder Scott opined that they were in acceptable agreement with the Company’s overall reserve estimates and that the reserves they reviewed conform to the SEC’s definition of proved reserves as set forth in Rule 210.4-10 (a) of Regulation S-X. The independent reviews typically cover a large percentage of major value fields, international properties and new wells drilled during the year. During 2006, 2005 and 2004, their review covered 75, 74 and 79 percent of Apache’s worldwide estimated reserve value, respectively. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data only represent estimates and should not be construed as being exact. (Thousands of barrels) United States Proved developed reserves: Canada 91,501 87,914 87,012 102,417 Crude Oil, Condensate and Natural Gas Liquids North Egypt Australia Sea Argentina 54,881 57,084 59,197 58,366 China 6,448 4,811 3,393 – Total 593,689 662,650 676,690 728,464 December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 Total proved reserves: 265,135 320,752 313,580 343,743 26,999 18,919 22,550 20,197 147,880 172,260 189,385 178,364 845 910 1,573 25,378 Balance December 31, 2003 Extensions, discoveries and other additions Purchases of minerals in-place Revisions of previous estimates Production Sales of properties Balance December 31, 2004 Extensions, discoveries and other additions Purchases of minerals in-place Revisions of previous estimates Production Sales of properties Balance December 31, 2005 Extensions, discoveries and other additions Purchases of minerals in-place Revisions of previous estimates Production Sales of properties Balance December 31, 2006 389,365 26,600 84,375 (13,588) (27,867) (408) 458,477 27,055 2,020 4,039 (26,945) (3,078) 461,568 12,354 53,853 (2,009) (27,308) (3,187) 495,271 168,406 1,106 165 (1,207) (10,209) – 158,261 16,531 1,874 2,591 (9,028) (32) 170,197 18,430 643 63 (8,359) – 180,974 73,173 26,865 – (2,955) (19,099) – 77,984 37,431 – (4,396) (20,126) – 90,893 18,535 – 31 (20,648) – 88,811 53,102 10,422 – 2 (9,214) – 54,312 2,623 – – (5,613) – 51,322 23,517 – 24 (4,341) – 70,522 147,880 45,261 389 (4) (19,338) – 174,188 44,977 – 1 (23,904) – 195,262 21,777 – – (21,369) – 195,670 1,140 229 – (2) (207) – 1,160 880 – 45 (424) – 1,661 3,422 28,351 147 (3,064) (724) 29,793 10,822 (43) – (346) (2,775) – 7,658 427 – (110) (2,968) – 5,007 3,386 – (19) (1,156) (7,218) – 843,888 110,440 84,929 (18,100) (88,709) (408) 932,040 129,924 3,894 2,170 (89,008) (3,110) 975,910 101,421 82,847 (1,763) (86,245) (11,129) 1,061,041 As of December 31, 2006, 2005 and 2004, on a barrel-of-equivalent basis 32, 30 and 33 percent of our estimated worldwide reserves, respectively, were classified as proved undeveloped. Approximately 22 percent of our year-end 2006 estimated proved developed reserves are classified as proved not producing. These reserves relate to zones that are either behind pipe, or that have been completed but not yet produced, or zones that have been produced in the past, but are not now producing due to mechanical reasons. These reserves may be regarded as less certain than producing reserves because they are frequently based on volumetric calculations rather than performance data. Future production associated with behind pipe reserves is scheduled to follow depletion of the currently producing zones in the same wellbores. It should be noted that additional capital may have to be spent to access these reserves. The capital and economic impact of production timing are reflected in this Note 14, under “Future Net Cash Flows.” 36 (Millions of cubic feet) United States 1,565,855 1,722,803 1,711,060 1,840,105 Canada 1,411,877 1,479,271 1,799,102 1,591,157 Egypt 337,844 474,028 605,687 664,818 Natural Gas North Australia Sea 218,745 158,789 649,972 584,236 Argentina 2,750 2,364 2,594 438,391 China – – – – Total 3,540,973 3,844,059 4,775,890 5,125,547 Mboe Total 1,183,851 1,303,327 1,472,672 1,582,722 3,902 6,804 7,475 6,840 2,029,392 291,303 268,386 53,816 (236,660) (657) 2,405,580 388,844 17,792 23,470 (218,080) (51,419) 2,566,187 253,707 195,552 (74,225) (243,441) (2,418) 2,695,362 1,605,683 542,779 17,273 (61,695) (119,669) – 1,984,371 526,876 5,749 (13,717) (135,749) (938) 2,366,592 248,549 1,500 (102,922) (147,579) (421) 2,365,719 550,967 452,509 – (18,572) (50,412) – 934,492 241,420 – (35,071) (60,484) – 1,080,357 151,086 – 3,965 (79,424) – 1,155,984 683,273 54,272 – 1 (43,228) – 694,318 175,502 – – (45,003) – 824,817 46,860 – 4 (67,934) – 803,747 3,902 3,575 12 – (685) – 6,804 1,441 – 72 (842) – 7,475 118 – – (753) – 6,840 2,751 1,007 – 1 (1,395) – 2,364 1,350 – 17 (1,137) – 2,594 36,986 484,707 1,858 (40,878) – 485,267 – – – – – – – – – – – – – – – – – – – 4,875,968 1,345,445 285,671 (26,449) (452,049) (657) 6,027,929 1,335,433 23,541 (25,229) (461,295) (52,357) 6,848,022 737,306 681,759 (171,320) (580,009) (2,839) 7,512,919 1,656,549 334,681 132,541 (22,508) (164,050) (518) 1,936,695 352,496 7,818 (2,035) (165,890) (11,836) 2,117,248 224,305 196,473 (30,317) (182,913) (11,602) 2,313,194 37 Future Net Cash Flows Future cash inflows are based on year-end oil and gas prices except in those instances where future natural gas or oil sales are covered by physical contract terms providing for higher or lower amounts. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation. The following table sets forth unaudited information concerning future net cash flows for oil and gas reserves, net of income tax expense. Income tax expense has been computed using expected future tax rates and giving effect to tax deductions and credits available, under current laws, and which relate to oil and gas producing activities. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used. (In thousands) United States 2006 Cash inflows Production costs Development costs Income tax expense Net cash flows 10 percent discount rate Discounted future net cash flows (2) 2005 Cash inflows Production costs Development costs Income tax expense Net cash flows 10 percent discount rate Discounted future net cash flows (2) 2004 Cash inflows Production costs Development costs Income tax expense Net cash flows 10 percent discount rate Discounted future net cash flows (2) 1) 2) Canada (1) Egypt Australia North Sea Argentina 1,775,939 $ (427,363) (190,508) (298,424) 859,644 (278,584) 581,060 $ China Total – $ 93,906,084 – (28,771,338) – (8,498,841) – (19,185,485) – 37,450,420 – (18,081,031) – $ 19,369,389 $ 42,809,947 $ 22,835,940 $ (10,930,520) (7,602,015) (3,207,033) (1,888,896) (8,862,385) (5,049,325) 19,810,009 8,295,704 (9,910,108) (4,714,251) $ 9,899,901 $ 3,581,453 $ 9,000,743 $ 5,747,306 $ 11,736,209 $ (1,101,859) (1,804,495) (6,905,086) (1,554,931) (985,414) (672,059) (2,466,836) (883,814) (1,624,701) 3,877,117 2,073,583 2,534,363 (1,404,781) (850,124) (923,183) 2,472,336 $ 1,223,459 $ 1,611,180 $ $ 47,315,554 $ 29,305,244 $ (10,164,938) (7,299,065) (2,355,717) (1,189,550) (11,098,793) (6,232,460) 23,696,106 14,584,169 (11,617,808) (7,868,888) $ 12,078,298 $ 6,715,281 $ 8,545,414 $ 4,298,054 $ 10,879,416 $ (972,441) (1,132,858) (6,345,449) (1,072,391) (537,257) (650,721) (2,307,759) (715,294) (1,355,266) 4,192,823 1,912,645 2,527,980 (1,537,495) (723,140) (787,319) 2,655,328 $ 1,189,505 $ 1,740,661 $ 77,752 $ 251,906 $ (22,743) (42,027) (3,305) (34,553) (5,746) (39,906) 45,958 135,420 (8,598) (23,504) 37,360 $ 111,916 $ 100,673,340 (25,979,521) (5,843,494) (21,755,224) 47,095,101 (22,566,752) 24,528,349 $ 32,557,246 $ 17,140,078 $ (8,185,633) (7,451,626) (1,620,421) (584,160) (7,342,348) (2,461,911) 15,408,844 6,642,381 (7,414,246) (3,177,411) $ 7,994,598 $ 3,464,970 $ 6,233,328 $ 3,065,332 $ 6,783,414 $ (818,876) (891,117) (4,098,870) (596,249) (422,045) (569,435) (1,790,617) (423,263) (617,244) 3,027,586 1,328,907 1,497,865 (1,165,331) (568,722) (418,169) 1,862,255 $ 760,185 $ 1,079,696 $ 37,659 $ 286,304 $ (12,339) (76,941) (3,795) (21,425) (4,268) (38,046) 17,257 149,892 (3,740) (29,035) 13,517 $ 120,857 $ 66,103,361 (21,535,402) (3,817,530) (12,677,697) 28,072,732 (12,776,654) 15,296,078 Prior to 2007, Canadian provincial tax credits were included in the estimated future net cash flows. Effective January 1, 2007, the Alberta government eliminated the Royalty Tax Credit program. Estimated future net cash flows before income tax expense, discounted at 10 percent per annum, totaled approximately $29.6 billion, $35.9 billion and $22.2 billion as of December 31, 2006, 2005 and 2004, respectively. 38 BOARD OF DIRECTORS Patricia Albjerg Graham(4) Charles Warren Research Professor Emerita of the History of American Education, Harvard University John A. Kocur (1)(3) Attorney at Law; Former Vice Chairman of the Board, Apache Corporation George D. Lawrence (1)(3) Private Investor; Former Chief Executive Officer, The Phoenix Resource Companies, Inc. F. H. Merelli (1)(2) Chairman of the Board, Chief Executive Officer and President, Cimarex Energy Co. Rodman D. Patton (2) Former Managing Director, Merrill Lynch Energy Group Charles J. Pitman (4) Former Regional President - Middle East/Caspian/Egypt/India, BP Amoco plc; Sole Member, Shaker Mountain Energy Associates, LLC Raymond Plank (1) Founder and Chairman of the Board, Apache Corporation Jay A. Precourt (4) Chairman of the Board, Hermes Consolidated, Inc. Frederick M. Bohen (3)(5) Former Executive Vice President and Chief Operating Officer, The Rockefeller University G. Steven Farris (1) President, Chief Executive Officer and Chief Operating Officer, Apache Corporation Randolph M. Ferlic, M.D. (1)(2) Founder and Former President, Surgical Services of the Great Plains, P.C. Eugene C. Fiedorek (2) Private Investor, Former Managing Director, EnCap Investments L.C. A. D. Frazier, Jr. (3)(5) Chairman and Chief Executive Officer, Danka Business Systems PLC (1) Executive Committee (2) Audit Committee (3) Management Development and Compensation Committee (4) Corporate Governance and Nominating Committee (5) Stock Option Plan Committee CORPORATE OFFICERS Raymond Plank Founder and Chairman of the Board G. Steven Farris President, Chief Executive Officer and Chief Operating Officer Michael S. Bahorich Executive Vice President Exploration and Production Technology John A. Crum Executive Vice President Rodney J. Eichler Executive Vice President and General Manager, Apache Egypt Companies Roger B. Plank Executive Vice President and Chief Financial Officer Floyd R. Price Executive Vice President Eurasia, Latin America and New Ventures Jon A. Jeppesen Senior Vice President P. Anthony Lannie Senior Vice President and General Counsel Sarah B. Teslik Senior Vice President Policy and Governance Jeffrey M. Bender Vice President Human Resources Michael J. Benson Vice President Security Thomas P. Chambers Vice President Corporate Planning John J. Christmann Vice President Business Development Matthew W. Dundrea Vice President and Treasurer Robert J. Dye Vice President Investor Relations Rebecca A. Hoyt Vice President and Controller Anthony R. Lentini, Jr. Vice President Public and International Affairs Janine J. McArdle Vice President Oil and Gas Marketing W. Kregg Olson Vice President Corporate Reservoir Engineering Jon W. Sauer Vice President Tax Cheri L. Peper Corporate Secretary 39 SHAREHOLDER INFORMATION Stock Data Price Range High 2006 First Quarter Second Quarter Third Quarter Fourth Quarter 2005 First Quarter Second Quarter Third Quarter Fourth Quarter $76.25 75.66 72.40 70.50 Low $63.17 56.50 59.18 59.99 Dividends per Share Declared $.10 .10 .15 .15 Paid $.10 .10 .10 .15 Dividend Reinvestment Plan Shareholders of record may invest their dividends automatically in additional shares of Apache common stock at the market price. Participants may also invest up to an additional $25,000 in Apache shares each quarter through this service. All bank service fees and brokerage commissions on purchases are paid by Apache. A prospectus describing the terms of the Plan and an authorization form may be obtained from the Company’s stock transfer agent, Wells Fargo Bank, N.A. Direct Registration Shareholders of record may hold their shares of Apache common stock in bookentry form. This eliminates costs related to safekeeping or replacing paper stock certificates. In addition, shareholders of record may request electronic movement of book-entry shares between your account with the Company’s stock transfer agent and your broker. Stock certificates may be converted to book-entry shares at any time. Questions regarding this service may be directed to the Company’s stock transfer agent, Wells Fargo Bank, N.A. Annual Meeting Apache will hold its annual meeting of shareholders at 10 a.m. on Wednesday, May 2, 2007, in the Ballroom, Hilton Houston Post Oak, 2001 Post Oak Boulevard, Houston, Texas. Apache plans to webcast the annual meeting live; connect through the Apache Web site: http://www.apachecorp.com. Stock Held in “Street Name” The Company maintains a direct mailing list to ensure that shareholders with stock held in brokerage accounts receive information on a timely basis. Shareholders wishing to be added to this list should direct their requests to Apache’s Public and International Affairs Department, 2000 Post Oak Boulevard, Suite 100, Houston, Texas, 77056-4400, by calling (713) 296-6157 or by registering on Apache’s Web site: http://www.apachecorp.com. Form 10-K Request Shareholders and other persons interested in obtaining, without cost, a copy of the Company’s Form 10-K filed with the Securities and Exchange Commission may do so by writing to Cheri L. Peper, Corporate Secretary, 2000 Post Oak Boulevard, Suite 100, Houston, Texas, 77056-4400. Investor Relations Shareholders, brokers, securities analysts or portfolio managers seeking information about the Company are welcome to contact Robert J. Dye, Vice President of Investor Relations, at (713) 296-6662. Members of the news media and others seeking information about the Company should contact Apache's Public and International Affairs Department at (713) 296-6107. Web site: http://www.apachecorp.com $65.90 67.99 78.60 75.95 $47.45 51.52 64.85 59.36 $.08 .08 .10 .10 $.08 .08 .08 .10 The Company has paid cash dividends on its common stock for 42 consecutive years through December 31, 2006. Future dividend payments will depend upon the Company’s level of earnings, financial requirements and other relevant factors. Apache common stock (symbol APA) is listed on the New York and Chicago stock exchanges and the NASDAQ National Market. At December 31, 2006, the Company’s shares of common stock outstanding were held by approximately 7,000 shareholders of record and 319,000 beneficial owners. Also listed on the New York Stock Exchange are: • Apache Finance Canada’s 7.75% notes, due 2029 (symbol APA 29) Corporate Offices One Post Oak Central 2000 Post Oak Boulevard Suite 100 Houston, Texas 77056-4400 (713) 296-6000 Independent Public Accountants Ernst & Young LLP Five Houston Center 1401 McKinney Street, Suite 1200 Houston, Texas 77010-2007 Stock Transfer Agent and Registrar Wells Fargo Bank, N.A. Attn: Shareowner Services P.O. Box 64854 South St. Paul, Minnesota 55164-0854 (651) 450-4064 or (800) 468-9716 Communications concerning the transfer of shares, lost certificates, dividend checks, duplicate mailings or change of address should be directed to the stock transfer agent. Shareholders may access account information on the Web site: http://www.shareowneronline.com. 40 APACHE CORPORATION 2000 Post Oak Boulevard, Suite 100 Houston, Texas 77056-4400 www.apachecorp.com