ITEM 2. PROPERTIES
See ITEM 1(c) for a description of properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Other than as described in the financial statements, there are no material pending legal proceedings to which the Company is a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1998, there were 1,201 record holders of the Company's ordinary shares, $0.01 par value. The ordinary shares are traded sporadically in the over-the-counter market. The Company understands that the trades which occur are made both at the quoted market price or on a negotiated basis outside of the quoted market. The high and low bid prices listed below were provided to the Company by the National Association of Securities Dealers Automated Quotation System (NASDAQ).
The Company currently pays its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent upon numerous factors, including, among others, earnings, levels of capital spending, changes in governmental regulations and changes in crude oil and natural gas prices. The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the Directors.
The Company has been advised that: a Cayman Islands company may not pay dividends to shareholders out of its share capital or share premium account; there are no Cayman Islands laws, decrees or regulations relating to restrictions on the import or export of capital or exchange controls affecting remittances of dividends, interest and other payments to non-resident holders of the Company's ordinary shares; there are no limitations either under the laws of the Cayman Islands or under the Company's Memorandum or Articles of Association restricting the right of foreigners to hold or vote the Company's ordinary shares; there are no existing laws or regulations of the Cayman Islands imposing taxes or containing withholding provisions to which United States holders of the Company's ordinary shares are subject; and there are no reciprocal tax treaties between the Cayman Islands and the United States.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company and its Entre Lomas partners continue their efforts to maximize cash flow from the Entre Lomas concession. During 1998, the Company received $5.1 million in distributions and dividends compared with $11.2 million and $9.8 million in 1997 and 1996, respectively. The decrease in distributions and dividends received was caused by the sharp decline in oil prices which commenced in the latter stages of 1997, and continued to worsen through the end of the current year, reaching levels not seen since 1986.
Receipt of future distributions and dividends will depend on the joint venture's ability to generate earnings, cash availability exceeding capital requirements, stable oil and gas prices, and continued ability to repatriate funds free from government control and restrictions.
OIL PRICES
Throughout 1996 and most of 1997, the Company benefited from favorable world oil prices. The Company's per barrel sales price averaged $20.87 and $19.52 during 1996 and 1997, respectively. This favorable price environment was a major contributor to the record levels of net income reported by the Company during those years.
Likewise, energy companies and oil producing countries around the world also benefited from favorable oil prices during those years. Exploration and development investments surged worldwide leading to increases in oil production, while in late 1997, the Organization of Petroleum Exporting Countries ("OPEC") increased its production targets. These events occurred, as the Far East Asian and Russian financial crises began to worsen and chain react through Latin America and other developing regions. The result was an oversupply of oil production which led to a sharp drop in oil prices.
During 1998, the sales price for Entre Lomas oil averaged $12.71, reaching as low as $10.09 in December, a drop of nearly 50 percent from the prior two years. This drop in prices has had a significant negative impact on net income and cash flow during 1998. Should oil prices remain at these levels, this impact will be prolonged. Net income for the year was $3.4 million, compared with $13 million and $12.7 million for 1997 and 1996, respectively.
OIL PRODUCTION
Entre Lomas oil production for 1998 totaled 3.69 million barrels, or 1.75 million net to the Company. This was two percent below the previous year's production of 3.77 million barrels, or 1.79 million net. As described on page 7, under "Entre Lomas Fields - Oil Reservoirs", the year was marked by the continuation of successful development drilling in the Entre Lomas oil
field in the middle of the concession. In October when the drilling program for the year was completed, daily production volume in the concession peaked in excess of 11,500 barrels, or 5,500 barrels net.
Natural gas production during the year remained stable. Concession production for the year totaled 16.2 BCF, or 7.7 BCF net to the Company, the same total volume as 1997.
CAPITAL SPENDING
The Company is strategically committed to the long-term development of its properties. In spite of the sharp decline in the sale price of Entre Lomas oil during 1998, the joint venture partners invested in exploration and development and major expense items such as well workovers, $36 million, or $17.2 million net to Company. In addition to the above mentioned workovers, the major components of 1998's program included development drilling, continued expansion of secondary recovery in CB/PB, increases in lift capacity, implementation of secondary recovery in the Entre Lomas oil field, and completion of the 3D seismic program described under "Exploration" on page 8.
The joint venture's initial capital plan for 1999 estimated investments of $26 million, or $12.5 million net to the Company. This level of investment was contemplated, in spite of the price decline, due to the commitment of the partners to accelerate full development of the concession. However, as oil prices continued to drop, reaching $10.09 in December, the joint venture was forced to reevaluate its investment program, cutting 1999 investments by fifty percent to just over $12 million, or $5.8 million net. This reduction will result in a modest drop in anticipated production for 1999.
ACAMBUCO
As described on page 11, under "Current and Future Activity", the Acambuco joint venture is projecting capital spending in excess of $100 million during 1999 in the Acambuco concession. The Company's net share is equivalent to $1.5 million. There is no reason to believe that this program will be modified.
DIVIDENDS
The Company currently pays its shareholders a quarterly dividend of 16.25 cents per share. Future dividends are necessarily dependent on numerous factors, including among other, earnings, levels of capital spending, changes in governmental regulations, and fluctuations in crude oil and natural gas prices.
The Company reserves the right to change the level of dividend payments or to discontinue or suspend such payments at the discretion of the directors.
YEAR 2000 COMPLIANCE
During 1999, most companies will face a potentially serious information systems problem because many software applications and the operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. This problem could force
computers to shut down or provide incorrect data or information. Petrolera, the operator of the Entre Lomas concession, from which the Company derives one-hundred percent of its operating revenue, has initiated the process of identifying changes required to computer programs that impact the critical aspects of the joint venture's business and guarantee continuation of its production and sales operations, including major interfaces with customers and suppliers such as pipelines that carry products to market and companies that provide power to the concession.
Petrolera has completed an inventory of all equipment and software that may be affected by the change of the century, and is evaluating modifications required to become Year 2000 compatible. At this time, new financial, accounting and administrative systems have been implemented which are fully compatible. Petrolera, and the Company, believe that systems over which they have direct control will be fully compliant. It is estimated that by the end of June 1999, Petrolera will have achieved the fundamental objective of full Year 2000 compliance of the systems over which it has direct control at a cost which is not material to the joint venture's business, financial condition, or results of operation.
Although Petrolera is monitoring compliance efforts by major third party companies upon which the Entre lomas concession depends, there does exist the possibility of operation disruptions in the event of non-compliance by third parties. Sales disruption would be the worst case manifestation of this possibility exposing the Company to a loss of sales revenue of approximately $60 thousand per day. Based on Petrolera's discussions with third parties, the Company expects them to also be fully compliant by mid 1999 thereby minimizing the chance of a disruption of operations.
Petrolera is currently in the process of developing contingency plans in the event that disruptions occur as a result of third party non-compliance or any failure of its systems.
FOREIGN OPERATIONS
As described on page 20, under "Argentine Economic and Political Environment" the Company believes that its Argentine operations present minimal currency risk. Argentina's inflation rate was less than two percent in 1998. The governments' convertibility law essentially guarantees an exchange rate of one Argentine peso to one U.S. dollar.
RESULTS OF OPERATIONS
REFER TO CONSOLIDATED STATEMENT OF OPERATIONS ON PAGE 24.
1998 VS 1997
During 1998, the Company generated net income of $3.4 million compared with $13 million during 1997. The primary reasons for the decrease are explained in the following paragraphs.
Operating revenues decreased by $13.7 million, or thirty percent, compared with 1997, due to sharply lower oil prices. There is a discussion of the oil price decline experienced by the Company under "Liquidity and Capital Resources" on page 16. The average oil sales prices for the current and prior two years are listed in the table of "Sales and Price Statistics" on page 38.
Provincial royalties decreased by $1.4 million. The decrease was directly related to the sharp decline in oil prices.
The increase of $1.1 million in selling and administrative expenses was primarily the result of severance and contract termination costs recorded during the year.
Completion of the 3D seismic program in the Entre Lomas concession, described under "Exploration" on page 8, and exploration expenses incurred in both the Acambuco and Canadon Ramirez concessions, caused the increase in exploration expense.
Argentine taxes decreased by $4.5 million. The decrease is primarily the result of the sharp decline in oil sales prices.
The decrease of $0.9 million in other expenses is explained in the 1997 vs 1996 comparison. No similar accrual for contingent liabilities was made in 1998, and year end crude oil inventories did not fluctuate significantly from last year to this year.
1997 VS 1996
During 1997, the Company generated net income of $13 million compared with $12.7 million during 1996. The primary reasons for the increase are explained in the following paragraphs.
Operating revenues increased by $1.1 million compared with 1996 due to higher oil sales volumes which resulted from drilling successes which occurred in the Entre Lomas oil field in late 1996 and early 1997 described on the previous page under "Oil Production". This effect was partially offset by lower average oil sales prices resulting from the sharp decline in world oil prices which occurred during the latter part of 1997, and lower gas sales volumes.
Depreciation, depletion, and amortization expense decreased by $815 thousand due to completion, in mid 1997, of the amortization of the Company's $8.3 million share of settlement costs associated with obtaining the right, commencing in 1994, to sell in the open market gas produced in the Entre Lomas concession.
Argentine taxes were higher by $473 thousand due to greater income taxes associated with the greater Argentine taxable income generated during the year.
The variation in other expense of $1.5 million results from a combination of two factors. The first is an increase in the general provision for contingent liabilities of approximately $800 thousand, which is reflected on the Company's Consolidated Balance Sheets by the increase in "Other liabilities". The second is inventory fluctuation expense of $400 thousand associated with the reduction, through sales during the year, of crude oil inventories in the Entre Lomas concession.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's operations are exposed to market risks as a result of changes in commodity and foreign currency exchange rates.
COMMODITY PRICE RISK
The Company produces and sells crude oil and natural gas. As a result, the Company's financial results can be significantly impacted by fluctuations in commodity prices due to changing market forces.
FOREIGN CURRENCY AND OPERATIONS RISK
The Company's operations are located in Argentina. Therefore, the Company's financial results may be affected by factors such as changes in foreign currency exchange risks, weak economic conditions, or changes in Argentina's political climate.
ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT
Since 1989, the government of President Menem has pursued free market policies, including the privatization of state-owned companies, deregulation of the oil and gas industry, which included the successful sale of YPF shares in public markets, tax reform to equalize income tax rates for domestic and foreign investors, liberalization of import and export laws, and the lifting of exchange controls.
The cornerstone of the country's economic reforms since 1989 has been its change in monetary policy. In April 1991, the convertibility law was implemented establishing an exchange rate of one Argentine peso to one U.S. dollar. The convertibility plan requires that the country's monetary base be backed by an equivalent amount of international reserves, including U.S. dollars and gold. Essentially, the policy guarantees an exchange rate of 1:1. The Argentine government has not strayed from this policy since implementation of the plan.
These policies have been successful as evidenced, first, by a reduction in annual inflation from the 1989 rate of 5,000 percent to less than one percent in 1998 and, second, an influx of foreign investment capital into the country. In July 1996, Domingo Cavallo, Economy Minister and author of the convertibility plan, was replaced by Roque Fernandez, formerly president of the Central Bank. The country's economy showed no adverse reactions to this replacement.
The Far East Asian and Russian financial crises of 1997 and 1998 have impacted the economies of many emerging market countries. Argentina was not affected significantly but did experience a slow down in economic growth. In 1998, the country's Gross Domestic Product grew at a rate of 4 percent compared with 8.6 percent in 1997.
Argentina is a part of "Mercosur" a common market established by customs agreements between Argentina, Brazil, Uruguay, and Paraguay. The "Mercosur" market comprises a population of approximately 200 million with a total gross domestic product of $1.1 trillion. The devaluation of Brazil's currency in early 1999 is having an adverse impact on Argentine economic growth. Brazil is Argentina's largest trading partner.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedules--All schedules have been omitted, as the required information has been included in the consolidated financial statements and notes thereto, or because the schedules are not applicable or required.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Apco Argentina Inc.:
We have audited the accompanying consolidated balance sheets of Apco Argentina Inc. (a Cayman Islands corporation) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Apco Argentina Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma March 9, 1999
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated statements.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
GENERAL AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Apco Argentina Inc. (a Cayman Islands corporation) and its wholly owned subsidiary, Apco Properties Ltd. (a Cayman Islands corporation), which are herein collectively referred to as the Company. The Company is engaged in joint ventures in oil and gas exploration, development and production in Argentina. Its principal business is a 47.6 percent participation in the Entre Lomas Concession, which is accounted for following the proportional consolidation method.
The Williams Companies, Inc. ("Williams") owns 68.96 percent of the outstanding ordinary shares of the Company.
Oil and gas operations are risky in nature. A successful operation requires that a Company deal with uncertainties about the subsurface that even a combination of experience, scientific information and careful evaluation cannot always overcome.
Because the Company's assets are located in Argentina, management, in previous years, was required to deal with threats from inflation, devaluation and currency controls (see Note 8). Since 1991, the economic and political environment in the country has improved dramatically due to free market economic policies implemented by the government of President Carlos Menem. These policies have resulted in significantly reducing inflation and stabilization of the Argentine peso.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
The Company uses the successful-efforts method of accounting for oil and gas exploration and production operations, whereby costs of acquiring non-producing acreage, costs of drilling successful exploration wells and development costs are capitalized. Costs of unsuccessful drilling are expensed as incurred.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Non oil and gas property is recorded at cost and is depreciated on a straight-line basis, using estimated useful lives of 3 to 15 years. Oil and gas properties are depreciated over their productive lives using the units of production method.
The company reviews its proved properties for impairment on a concession by concession basis and recognizes an impairment whenever events or circumstances, such as declining oil and gas prices, indicate that a property's carrying value may not be recoverable. If an impairment is indicated then a provision is recognized to the extent that the carrying value exceeds the present value of the estimated future net revenues ("fair value"). In estimating future net revenues, the Company assumed costs would escalate annually and that the current low oil and gas price environment would return to more historical levels over a period of time. Due to the volatility of oil and gas prices, it is possible that the Company's assumptions regarding oil and gas prices may change in the future. For the years ended December 31, 1998, 1997 and 1996, the Company did not record any impairment expense as the estimated future undiscounted net revenues exceeded the carrying value of its properties.
NET INCOME PER ORDINARY SHARE
Net income per ordinary share is based on the weighted average number of ordinary shares outstanding. Basic and diluted net income per ordinary share are the same as the Company has not issued any potentially dilutive securities such as stock options.
FOREIGN EXCHANGE
The general policy followed in the translation of the Company's financial statements of foreign operations into United States dollars is in accordance with Statement of Financial Accounting Standards No. 52, using the United States dollar as the functional currency.
INCOME TAXES
Provision is made for deferred income taxes applicable to temporary differences between the financial statements and tax basis of the assets and liabilities, if any.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income ("SFAS No. 130"), establishing standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 defines comprehensive income as the total of net income and all other non-owner changes in equity. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company had no non-owner changes in equity other than net income during the years ended December 31, 1998, 1997 and 1996.
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of an enterprise and Related Information ("SFAS No. 131"), which changes the way the Company reports information about its operating segments. SFAS No. 131 has no impact on the Company's financial statements as the Company has only one operating segment for which the Chief Executive Officer makes decisions. Furthermore, 100 percent of the Company's revenues from outside customers are generated in Argentina, and approximately 100 percent of the Company's long-lived assets are located in Argentina.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999; however, beginning June 16, 1998, companies may implement the statement as the beginning of any fiscal quarter. SFAS No. 133 cannot be applied retroactively and must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). SFAS No. 133 has no impact on the Company's financial statements as it currently is not using derivative instruments.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(2) ENTRE LOMAS JOINT VENTURE
The Company owns a 23 percent direct interest in the Entre Lomas joint venture. It also owns a 24.6 percent indirect interest by virtue of its 33.68 percent stock ownership in Petrolera Perez Companc S.A., the operator of the joint venture, which owns 73.15 percent of the joint venture. Consequently, the Company's combined direct and indirect interests in the Entre Lomas joint venture total 47.6 percent. The joint venture is engaged in the exploration, development and production of oil and gas in the Entre Lomas concession located in the provinces of Rio Negro and Neuquen in southern Argentina.
The Company's pro-rata share of the assets, liabilities, revenues and expenses of the Entre Lomas joint venture and Petrolera Perez Companc are reflected in the Company's Consolidated Financial Statements using proportional consolidation.
(3) CASH EQUIVALENTS
Cash equivalents are defined by the Company as short-term investments with original maturities of three months or less. Amounts are stated in thousands of dollars.
The carrying amount reported in the balance sheet for short-term investments is equivalent to fair value.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(4) MAJOR CUSTOMERS
Sales to customers with greater than ten percent of total sales consist of the following:
* Less than 10 percent
(5) RELATED PARTY TRANSACTIONS
The Company paid approximately $164,000, $166,000, and $182,000 in 1998, 1997 and 1996, respectively, to Williams and affiliates for management services, overhead allocation, general and administrative expenses and purchases of materials and supplies. Accounts payable to Williams and affiliates outstanding at December 31, 1998 and December 31, 1997, of approximately $141,000 and $24,000, were paid or are payable in 1999 and 1998, respectively.
(6) CAYMAN ISLANDS AND UNITED STATES INCOME TAXES
In 1979, the Company changed the jurisdiction of its incorporation from Delaware to the Cayman Islands. The Company's income since that date, to the extent that it is derived from sources outside the U.S., generally is not subject to U.S. Federal income taxes. Also, the Company has been granted an undertaking from the Cayman Islands government, expiring in 1999, to the effect that the Company will be exempt from tax liabilities resulting from tax laws enacted by the Cayman Islands government subsequent to 1979. The Cayman Islands currently has no applicable income tax or corporation tax and, consequently, the Company believes its earnings are not subject to U.S. income taxes or Cayman Islands income or corporation taxes.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(7) ARGENTINE TAXES
The Company recorded Argentine taxes as presented in the following table. Amounts are stated in thousands of dollars. The Company is not subject to taxes in any other jurisdiction.
INCOME TAXES
A tax reform enacted by the Argentine government in 1998, served to increase the corporate income tax rate from 33 percent to 35 percent. The new rate goes into effect in January, 1999.
TAX DISPUTES
In 1988, the Argentine government amended the obligatory Savings Law requiring that all taxpayers deposit with the government, both in 1988 and 1989, amounts computed on the basis of prior year taxable incomes. The deposits were to be repaid after five years and earned interest at the rate stipulated by the law. It was the opinion of the joint venture and its legal and tax counsels that it was exempted from these deposits due to the tax exemption granted in the original Entre Lomas contract number 12,507. As a result the deposits were not made.
In August 1993, the Direccion General Impositiva ("DGI"), the Argentine taxing authority, made a claim against Petrolera for the delinquent deposits pertaining to the Entre Lomas operation, which including interest and indexation for inflation, amounted to $9.2 million. An appeal was filed by Petrolera in Argentine Federal Tax Court which ruled in favor of the DGI in April 1997. Petrolera appealed the ruling before Federal Appeals Court which in November 1998, ruled in favor of Petrolera. The DGI has now filed an appeal before the Supreme Court. As of the date of these Consolidated Financial Statements the Supreme Court had not yet rendered its decision. Although the DGI can require that the amount in question be deposited, it has not done so pending the Supreme Court's final ruling. In the opinion of Petrolera's management and its legal and tax counsel, the possibility that this claim will result in an unfavorable outcome for the joint venture is remote. The Company has no reason to believe otherwise, and accordingly, has not recorded a liability for its share of the asserted claim.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In February 1993, the Neuquen Tax Bureau demanded that Petrolera pay the Stamp Tax on Additional Clause No. 3, the third amendment to the original Entre Lomas contract number 12,507. Petrolera appealed this decision before the Tax Court of the province and lost. In March 1994, Petrolera deposited $1.6 million, the sum claimed, and subsequently filed a suit before the Neuquen Superior Court asking for full reimbursement.
Should Petrolera not prevail in Superior Court, in the opinion of its management and legal counsel, it is entitled to seek reimbursement from YPF pursuant to terms of contract 12,507. Accordingly, the amount deposited has been recorded as a receivable by Petrolera and the Company.
(8) ARGENTINE CURRENCY FLUCTUATIONS
Argentina has in previous decades experienced cycles of acute inflation followed by extreme devaluation. However, inflation and devaluation have diminished since 1991 due to implementation of the convertibility law, privatization of public sector companies, deregulation and modifications in fiscal and monetary policy.
In April of 1991, the convertibility law was implemented establishing an exchange rate of one Argentine peso to one U.S. dollar. The convertibility law requires that the country's monetary base be backed by an equivalent amount of international reserves, including U.S. dollars and gold. Essentially the policy guarantees an exchange rate of 1:1. No exchange gains or losses have been realized by the Company during the three years ended December 31, 1997 as the rate of exchange has remained 1 to 1.
APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
The loss generated in the fourth quarter is attributable to various factors the most important being that oil sales prices reached their lowest level in the fourth quarter, combined with certain severance and contract termination costs and 3D seismic charged to expense in the quarter.
SUPPLEMENTAL OIL AND GAS INFORMATION
OIL AND GAS RESERVES (UNAUDITED)
The following tables summarize, for each of the years presented, changes in quantities, and balances of net proved oil and gas reserves for all the Company's interests in Argentina.
Proved Oil, Condensate and Plant Products
Natural Gas
There were no estimates of total proved net oil or gas reserves filed with any other United States Federal authority or agency during 1998.
SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The following table summarizes as of December 31, for each of the years presented, the standardized measure of discounted future net cash flows from proved oil and gas reserves that could be produced from all of the concessions in which the Company holds interests in Argentina.
(1) Estimates are made of quantities and timing of future production of oil and gas reserves.
(2) Estimates of gross revenues from sales are made using prices in effect at December 31 for each year presented. The year end per barrel oil price for 1998 was $10.09, as compared with $17.20 and $24.52 for 1997 and 1996 respectively. Gas prices for all years are based on gas sales contracts in effect during the respective years.
(3) Estimated production, transportation, marketing and development costs are based on the current cost of similar services and include all future capital expenditures.
(4) Estimated taxes consider all taxes to which the Company is subject in Argentina.
(5) Conversion to U.S. dollars is made utilizing the rate of exchange at December 31 for each of the years presented.
DISCOUNTED FUTURE NET CASH FLOWS PRESENTED HEREIN MAY NOT BE RELIABLE DUE TO THE IMPRECISION OF ESTIMATING REMAINING RECOVERABLE RESERVES. ESTIMATES OF OIL AND GAS RESERVES AND RATES OF FUTURE PRODUCTION ARE INHERENTLY IMPRECISE AND CHANGE OVER TIME AS NEW INFORMATION BECOMES AVAILABLE. AS A RESULT, SUBSEQUENT REVISIONS OF THE QUANTITY AND VALUATION OF PROVED RESERVES MAY BE SIGNIFICANT.
SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED OIL AND GAS RESERVES (UNAUDITED)
The following analysis summarizes for each of the years presented the factors that caused the increases (decreases) in the amount of standardized measure attributable to the estimate of the Company's proved oil and gas reserves.
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.
SALES AND PRICE STATISTICS (UNAUDITED)
The following table shows total sales of crude oil and condensate and natural gas and average sales prices and production costs for the last three years.
Volumes presented in the above table represent those sold to customers and have not been reduced by the 12 percent provincial royalty, which is paid separately and is accounted for as an expense by the Company. In calculating royalty payments, the Argentine producers are entitled to deduct gathering, storage, treating and compression costs.
Average production cost is calculated by taking into consideration all costs of operation, including the costs of remedial well workovers and depreciation of property and equipment.
SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.
COSTS INCURRED IN ACQUISITIONS, EXPLORATION, AND DEVELOPMENT
The following table details total investments for acquisitions, exploration, and development made by the Company during the current and two previous years.
DRILLING ACTIVITY
During 1998, the Company participated in the drilling of 18 gross, and 8 net wells. In both 1997 and 1996, the Company participated in the drilling of 11 gross, and 5 net wells. All wells were drilled in Argentina. Of the 40 gross, and 18 net wells drilled over the three year period, all wells were development, except two wells drilled in Acambuco, in which the Company has a 1.5 percent participation. All wells drilled over the three year period were productive except the San Antonio x-1 well, in Acambuco, the status of which is still undetermined.
WELL COUNT AND ACREAGE
The total gross and net well count from all acreage in which the Company has an interest for the years ended December 31, 1998 and 1997, are as follows:
The Company currently holds interest in three concessions with a total surface area of 542,000 acres, 132,586 acres net to the Company. Gross and net developed acres held by the Company total 37,140 acres, and 17,093 acres, respectively. Gross and net undeveloped acres held by the Company total 404,860 acres, and 115,943 acres, respectively.
SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
Stephen L. Cropper was named a Director of the Company, to replace Keith E. Bailey, at the June 1998 Directors Meeting, and subsequently elected a Director at the Annual General Meeting of Shareholders held on September 15, 1998. Subsequent to his election, he resigned from the Board. Messrs. Thomas Bueno and Robert J. LaFortune were named to the Board, at the December 1998 Directors meeting, to serve until the next Annual General Meeting of Shareholders of the Company.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors and hold office until relieved of such office by action of the Board of Directors.
Mr. Bueno also serves as General Manager over the Company's operations in Argentina.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None.
(d) FAMILY RELATIONSHIPS
There are no family relationships between any director or executive officer and any other director or executive officer in the Company.
(e) BUSINESS EXPERIENCE
Mr. Bumgarner is Senior Vice President Corporate Development and Planning of Williams and President of Williams International Company. He has held various officer level positions with Williams since 1977.
Mr. Williams is engaged in personal investments. He was Chairman of the Board and Chief Executive Officer of Williams prior to retiring in 1978. Mr. Williams is also a director of General Cable Corporation and Unit Corporation.
Mr. Bueno has been employed by Williams since 1984 and has held various positions with the Company since 1985.
J. D. McCarthy is Senior Vice President of Finance of Williams. He was previously Vice President and Treasurer of Williams from 1987 through 1991.
Mr. LaFortune is engaged in personal investments. He is a Director of The Williams Companies, Inc.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
(a) CASH COMPENSATION
The Company has not paid its present executive officers any cash compensation or bonuses.
(b) COMPENSATION PURSUANT TO PLANS
None.
(c) OTHER COMPENSATION
None.
(d) COMPENSATION OF DIRECTORS
Directors who are employees of Williams receive no additional compensation for service on the Board of Directors. Directors who are not employees of Williams receive an annual retainer of $8,000 and an additional fee for attending Board meetings of $500 per meeting.
(e) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
None.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AT DECEMBER 31,
(b) SECURITY OWNERSHIP OF MANAGEMENT AT DECEMBER 31, 1998
Each of the directors of the Company beneficially owns ten shares of the Company's ordinary shares, $.01 par value, as director's qualifying shares.
(c) CHANGES IN CONTROL
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related-party transactions are disclosed elsewhere herein in Notes 1 and 6 to the Notes to Consolidated Financial Statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements filed in this report are set forth in the Index to Consolidated Financial Statements under Item 8. All schedules have been omitted as the required information has been included in the consolidated financial statements and notes thereto, or because the schedules are not applicable or required.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
Exhibit Number
*(3) - Memorandum of Association of Apco Argentina Inc. as amended August 20, 1980, as filed with Form 10-K of the Company for the fiscal year ended on December 31, 1980, Commission File No. 0-8933 dated April 30, 1981.
*(3) - Articles of Association of Apco Argentina Inc. as filed with Form S-14 (Registration No. 2-6354), dated March 16, 1979.
*(10) - Agreement dated April 23, 1981, among the Company and Bridas S.A.P.I.C., with respect to the Acambuco project, Salta province, Argentina, as filed with Form 10-K, No. 0-8933, dated April 14, 1982.
*(10) - Agreement between The Williams Companies, Inc., Northwest Argentina Corporation and Apco Argentina Inc. dated April 15, 1987 relating to reimbursement of costs incurred by Williams pursuant to the guarantee by Williams of the bank loan made to Bridas in connection with the release by Bridas of Northwest Argentina Corporation's and Apco Argentina Inc.'s liability in the Acambuco Joint Venture as filed with Form 10-K, No. 0-8933, dated April 11, 1988.
*(10) - Agreement dated March 13, 1968, between Perez Companc and YPF for the Exploration, Exploitation and Development of the "Entre Lomas" area, Contract Number 12,507 as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Translation dated November 18, 1970, of agreement dated March 13, 1968, between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated April 1, 1968, among Apco Oil Corporation, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated February 29, 1972, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Joint Venture Agreement dated March 23, 1977, among the Company, Perez Companc and Petrolera as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Contract dated December 1977 amending the March 13, 1968 Agreement between Perez Companc and YPF as filed with Form S-1, Registration No. 2-62187 dated September 26, 1978.
*(10) - Memorandum of Agreement dated August 16, 1979, among the Company, Perez Companc and Petrolera as filed with Form 10-K, No. 0-8933, dated March 28, 1980.
*(10) - Agreement dated December 7, 1983, between Petrolera and YPF regarding the delivery of propane and butane from the Entre Lomas area, as filed with Form 10-K, No. 0-8933, dated April 12, 1983.
*(10) - CONTRACT FOR THE EXPLORATION, EXPLOITATION AND DEVELOPMENT OF THE "ENTRE LOMAS" AREA, dated July 8, 1982 between Yacimientos Petroliferos Fiscales Sociedad Del Estado and Petrolera Perez Companc, Inc. relating to the extension of Contract No. 12,507, as filed with Form 10-K, No. 0-8933, dated April 12, 1983.
*(10) - ADDITIONAL CLAUSE NUMBER 3 dated December 18, 1985, to the agreement between Perez Companc and YPF covering the Entre Lomas area dated March 13, 1968 and attached translation as filed with Form 10-K, No. 0-8933, dated April 11, 1988.
*(10) - Agreement between the Joint Committee created by the Ministry of Public Works and Services and the Ministry of Energy, YPF and Petrolera Perez Companc S.A. dated December 26, 1990, constituting the conversion to concession and deregulation of the original Entre Lomas contract number 12,507.
(24) - Power of attorney.
(27) - Financial data schedule.
* Exhibits so marked have heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APCO ARGENTINA INC. (Registrant)
Dated: March 19, 1999 By: /s/ Thomas Bueno ----------------------------------- Thomas Bueno Attorney-in-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ *John C. Bumgarner March 19, 1999 - -------------------------------------------- John C. Bumgarner, Chairman of the Board and Chief Executive Officer
/s/ *Jack D. McCarthy March 19, 1999 - -------------------------------------------- Jack D. McCarthy, Vice President and Chief Financial Officer
/s/ *Thomas Bueno March 19, 1999 - -------------------------------------------- Thomas Bueno, Director, Controller and Chief Accounting Officer
/s/ *John H. Williams March 19, 1999 - -------------------------------------------- John H. Williams, Director
/s/ *Robert J. LaFortune March 19, 1999 - -------------------------------------------- Robert J. LaFortune, Director
*By: /s/ Thomas Bueno March 19, 1999 --------------------------------------- Thomas Bueno, Attorney-in-Fact
INDEX TO EXHIBITS