UNDERSTANDING EGYPT PRODUCTION SHARING CONTRACTS AND TAX BARRELS

Transcription

1 UNDERSTANDING EGYPT PRODUCTION SHARING CONTRACTS AND TAX BARRELS

2 FORWARD-LOOKING STATEMENTS Certain statements in this presentation contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 including, without limitation, expectations, beliefs, plans and objectives regarding production and exploration activities. Any matters that are not historical facts are forward-looking and, accordingly, involve estimates, assumptions, risks and uncertainties, including, without limitation, risks, uncertainties and other factors discussed in our most recently filed Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, recent filed Current Reports on Form 8-K available on our website, and in our other public filings and press releases. These forward-looking statements are based on Apache Corporation s (Apache) current expectations, estimates and projections about the company, its industry, its management s beliefs and certain assumptions made by management. No assurance can be given that such expectations, estimates or projections will prove to have been correct. A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this presentation, including, Apache s ability to meet its production targets, successfully manage its capital expenditures and to complete, test and produce the wells and prospects identified in this presentation; to successfully plan, secure necessary government approvals, finance, build and operate the necessary infrastructure and LNG plants; and to achieve its production and budget expectations on its projects. Whenever possible, these forward-looking statements are identified by words such as expects, believes, anticipates, projects, and similar phrases. Because such statements involve risks and uncertainties, Apache s actual results and performance may differ materially from the results expressed or implied by such forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. Unless legally required, we assume no duty to update these statements as of any future date. However, you should review carefully reports and documents that Apache files periodically with the Securities and Exchange Commission. Cautionary Note to Investors: The United States Securities and Exchange Commission ("SEC") permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable, and possible reserves that meet the SEC's definitions for such terms. Apache may use certain terms in this presentation, such as resource, resource potential, net resource potential, potential resource, resource base, identified resources, potential net recoverable, potential reserves, unbooked resources, economic resources, net resources and other similar terms that the SEC guidelines strictly prohibit Apache from including in filings with the SEC. Such terms do not take into account the certainty of resource recovery, which is contingent on exploration success, technical improvements in drilling access, commerciality and other factors, and are therefore not indicative of expected future resource recovery and should not be relied upon. Investors are urged to consider carefully the disclosure in Apache s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, available from Apache at or by writing Apache at: 2000 Post Oak Blvd., Suite 100, Houston, Texas (Attn: Corporate Secretary). You can also obtain this report from the SEC by calling SEC-0330 or from the SEC's website at 2

3 EGYPT OVERVIEW STRONG RETURNS AND FREE CASH FLOW FROM CONSISTENT E&D PROGRAM Shushan-Khalda Ridge Faghur Matruh Abu Gharadiq Major Basins Apache Acreage Alamein E. Abu Gharadiq Capital 3 Gindi / Beni Suef Gulf of Suez CURRENT LEASEHOLD 1 : 6.8 MM gross acres 24 Concessions 2014 Plans $1.37 Bn ($0.91 Bn APA) 2014 Avg. Rigs 27 Gross Wells Gross Production Net Production 2 Cash Flow 2 Capital Highlights 350 MBOE/D With Tax: 149 MBOE/D w/o Tax: 108 MBOE/D PF w/o Tax: 72 MBOE/D $2.4 Bn (PF $1.6 Bn APA) $1.25 Bn (PF $0.8 Bn APA) Average Rigs 26 Gross Wells Success Rate 86% 3 Drilling Targets Note 1. As of February 2014 Note 2. Pro Forma (PF) excludes full year amounts attributable to noncontrolling interest Note 3. Capital includes E&D + GTP. Pro Forma (PF) excludes full year amounts attributable to noncontrolling interest Note 4. Includes water injector wells Bahariya, Abu Roash, AEB, Jurassic and Paleozoic

4 EGYPT PRO FORMA OUTSTANDING FREE CASH FLOW GENERATION $Bn PF CAPEX Cash Flow 4 Notes: Cash flow from operations before changes in working capital items actual number include s noncontrolling interest. 2013PF excludes noncontrolling interest. CAPEX includes E&D + GTP but excludes A&D.

5 APACHE EGYPT COMPANIES - ORGANIZATION EGPC Apache Khalda Petroleum Company Jointly Owned Operating Companies Qarun Petroleum Company Apache Egypt Companies Shushan Matruh Faghur Alamein Ghazalat Abu Gharadig Ghindi Beni Suef 5

6 EGYPT PRODUCTION SHARING CONTRACT (PSC) THREE MAIN PARTIES TO AGREEMENT Arab Republic of Egypt ( A.R.E. or the State ) Owns sovereign land / minerals Receives Income Tax from EGCP on behalf of Contractor Egypt General Petroleum Corporation ( EGPC ) State-owned petroleum company Partner with Contractor in development Contractor (e.g. Apache) Partner with EGPC Primarily responsible for exploration and development of State minerals within concession area 6

7 7 TYPICAL EGYPT DEVELOPMENT LEASE Apache s operations in Egypt are conducted pursuant to production sharing agreements in 24 separate concessions Duration 20 years oil discovery plus 5-year extension 25 years from date of first commercial gas sale Cost Recovery Up to 40% of production revenue Eligible recoverable costs (ring fenced within concessions) Exploration (wells, seismic, G&G studies, leasehold) Development (wells, infrastructure) Operating and overhead costs Amortization of costs E&D costs 20%-25% per year Operating costs as incurred Monetary amount paid in production (barrels and mcfs)

8 TYPICAL EGYPT DEVELOPMENT LEASE (CONT D) Excess Cost Recovery Amount of the cost recovery pool that exceeds costs currently eligible for recovery Excess Cost Recovery flows into profit splits when shared Profit Split 20% - 30% Contractor share Sliding scale based on production A.R.E. Income Tax Contractor s income tax (~40.55% statutory rate) is paid by EGPC on Contractor s behalf from EGPC s share of profit split Apache grosses up revenue by the amount of income tax paid to conform with consistent worldwide accounting treatment 8

9 TYPICAL EGYPT PSC STRUCTURE Excess Cost Recovery Revenue EGPC Share Contractor Share 9

10 ILLUSTRATIVE PSC EXAMPLE Key Assumptions Gross Oil Production 210 MBbls / d Gross Gas Production 900 MMcf / d Realized Oil Price $111 / Bbl Realized Gas Price $3.90 / Mcf Operating Costs ($MM) $450 / Year GAAP DD&A ($MM) $925 / Year Capital Cost Amortization ($MM) $900 / Year Profit Oil Percentage 60% Cost Recovery Percentage 40% Profit Split 80% / 20% Revenue Calculation Oil = 210 MBbls / d x 365 days x $111 / Bbl $8.5 BN Gas = 900 MMcf / d x 365 days x $3.90 / Mcf 1.3 BN Total Revenue $9.8 BN 10

11 ILLUSTRATIVE PSC EXAMPLE CALCULATION OF REVENUE SPLITS ($ in millions) Oil Gas Revenues $8,508 $1,281 % of Revenues 87% 13% Total Profit Oil Revenues Cost Recovery Pool $9,789 60% 40% Operating Costs (450) $5,873 Capital Cost Amort. (900) 2,566 Excess Cost Recovery $2,566 $8,439 Profit Oil plus Excess Cost Recovery Recoverable $3,916 Costs $1,350 Profit Split 20% Apache 80% EGPC $1,688 Profit Oil 1,350 Recoverable Costs $3,038 Apache Share (31%) $6,751 EGPC Share (69%) $9,789 Total Revenues 11

12 ILLUSTRATIVE PSC EXAMPLE APACHE OPERATING RESULTS BEFORE TAX ($ in millions) Apache Revenues $3,038 Less: Operating Costs (450) DD&A (925) ($1,375) Pre-tax income $1,663 Plus DD&A 925 Operating cash flow $2,588 What about taxes? 12

13 ILLUSTRATIVE EXAMPLE TAX BARRELS HOW DO THEY WORK? How do income taxes work in Egypt? Apache and EGPC both incur A.R.E. federal income taxes Per the terms of the PSC, EGPC pays Apache s income taxes to the A.R.E on behalf of Apache The taxes paid by EGPC on behalf of Apache are treated as additional income to Apache for U.S. GAAP purposes Results in a gross-up calculation Apache files tax returns with A.R.E. and is issued a certificate from the Tax Authority stating EGPC paid taxes to A.R.E. on Apache s behalf Calculation of Income Tax Gross-Up Pre-tax Income ($MM) = $1,663 x (Effective Tax Rate / (1 Effective Tax Rate)) Tax Gross Up ($MM) = $1,475 13

14 ILLUSTRATIVE PSC EXAMPLE TAX GROSS-UP IS EARNINGS AND CASH FLOW NEUTRAL What is the accounting bottom line? ($ in millions) Before Taxes Tax Gross-Up After Taxes Apache Revenues $3,038 + $1,475 = $4,512 Less: Operating Costs (450) (450) DD&A (925) (925) (1,375) (1,375) Pre-tax Income $1,663 $3,137 Less: Income Tax 0 + (1,475) (1,475) Net Income $1,663 $0 $1,663 Plus: DD&A Operating Cash Flow $2,588 $2,588 Egypt Before-Tax and After-Tax Earnings and Cash Flow are Equivalent Earnings and Cash Flow Neutral 14

15 15 EXCERPT FROM APACHE K, F-56

16 ILLUSTRATIVE PSC EXAMPLE INCOME AND CASH FLOW ARE GREAT, WHAT ABOUT PRODUCTION? ($ in billions) Oil Gas Total (MBbls) (MMcf) (MBoe) Gross Daily Production Gross Revenues $8.5 + $1.3 = $9.8 % of Revenues 87% 13% 100% Apache Revenues Without Tax $2.6 + $0.4 = $3.0 Divided by Realized Price $111 / Bbl $3.90 / Mcf Apache Net Production Without Tax Annual 23, ,942 40,777 Daily % of Gross 31.0% 31.0% 31.0% Apache Income Tax Expense $1.3 + $0.2 = $1.5 Divided by Realized Price $111 / Bbl $3.90 / Mcf Apache Tax Barrels Annual 11,546 49,484 19,793 Daily Allocated Based Upon % of Gross Revenues Allocated Based Upon % of Gross Revenues Apache Net Production With Tax (GAAP) Daily % of Gross 46.1% 46.1% 46.1% Apache Reported Revenues $3.9 + $0.6 = $4.5 Reported Includes Tax Gross-Up 16

17 EARNINGS, CASH FLOW AND PRODUCTION 1 HISTORICAL PERSPECTIVES Illustrative For The Year Ended December Example Realized Prices Oil ($/Bbl) $91.37 $61.34 $79.45 $ $ $ Gas ($/Mcf) $5.25 $3.70 $3.62 $4.66 $3.90 $3.90 Gross Production Oil (MBbl/d) Gas (MMcf/d) Total (Mboe/d) Net Production with Tax (GAAP) Oil (MBbl/d) Gas (MMcf/d) Total (Mboe/d) % of Gross with Tax Oil 52% 57% 52% 48% 47% 46% Gas 48% 52% 47% 42% 39% 46% Total 50% 55% 50% 46% 44% 46% Net Production without Tax (Contractor Share) Oil (MBbl/d) Gas (MMcf/d) Total (Mboe/d) % of Gross without Tax Oil 34% 39% 35% 31% 31% 31% Gas 31% 37% 33% 29% 28% 31% Total 33% 38% 35% 30% 30% 31% Cash Flow From Operations** (MM) $1,479 $1,456 $1,944 $2,659 $2,578 $2,588 Results of Operations (MM) $1,081 $878 $1,190 $1,841 $1,654 $1, Note 1. Includes noncontrolling interest. **Cash Flow From Operations before changes in working capital.