UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4300

APACHE CORPORATION

(exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		41-0747868 (I.R.S. Employer Identification Number)

One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400
(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: (713) 296-6000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þ

Number of shares of registrant’s common stock outstanding as of October 31, 2010...................364,591,339

 

 

PART I — FINANCIAL INFORMATION

		ITEM 1 — FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)

		For the Quarter								For the Nine Months
		Ended September 30,								Ended September 30,
		2010				2009				2010				2009
		(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues		$	3,046,445			$	2,325,705			$	8,708,835			$	6,003,663
Other			(33,786	)			6,726				(51,015	)			55,971
			3,012,659				2,332,431				8,657,820				6,059,634
OPERATING EXPENSES:
Depreciation, depletion and amortization
Recurring			786,237				625,898				2,154,486				1,779,874
Additional			—				—				—				2,818,161
Asset retirement obligation accretion			24,783				26,053				73,545				79,274
Lease operating expenses			506,556				445,535				1,392,751				1,248,297
Gathering and transportation			42,840				36,232				126,243				103,050
Taxes other than income			158,627				183,931				522,398				387,211
General and administrative			96,908				82,492				275,887				258,443
Financing costs, net			59,350				61,684				174,374				181,426
			1,675,301				1,461,825				4,719,684				6,855,736
INCOME (LOSS) BEFORE INCOME TAXES			1,337,358				870,606				3,938,136				(796,102	)
Current income tax provision			206,709				262,430				888,834				483,171
Deferred income tax provision (benefit)			352,384				166,160				705,833				(409,069	)
NET INCOME (LOSS)			778,265				442,016				2,343,469				(870,204	)
Preferred stock dividends			13,276				1,420				13,276				4,260
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK		$	764,989			$	440,596			$	2,330,193			$	(874,464	)
NET INCOME (LOSS) PER COMMON SHARE:
Basic		$	2.14			$	1.31			$	6.78			$	(2.61	)
Diluted		$	2.12			$	1.30			$	6.72			$	(2.61	)

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

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)

		For the Nine Months
		Ended September 30,
		2010				2009
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	2,343,469			$	(870,204	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization			2,154,486				4,598,035
Asset retirement obligation accretion			73,545				79,274
Provision for (benefit from) deferred income taxes			705,833				(409,069	)
Other			109,928				140,527
Changes in operating assets and liabilities:
Receivables			(207,073	)			(228,095	)
Inventories			(21,066	)			11,897
Drilling advances			13,989				(49,569	)
Deferred charges and other			(137,055	)			868
Accounts payable			138,853				(183,884	)
Accrued expenses			(351,431	)			(351,153	)
Deferred credits and noncurrent liabilities			(23,284	)			(59,156	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			4,800,194				2,679,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property			(3,040,609	)			(2,761,327	)
Additions to gas gathering, transmission and processing facilities			(328,223	)			(203,783	)
Acquisition of Marathon properties			—				(181,133	)
Acquisition of Devon properties			(1,017,718	)			—
Acquisition of BP properties and facilities			(2,472,339	)			—
Acquisitions — other			(60,239	)			(77,210	)
Short-term investments			—				791,999
Deposit related to acquisition of BP properties			(3,500,000	)			—
Restricted cash			—				13,880
Other, net			(36,767	)			(98,096	)
NET CASH USED IN INVESTING ACTIVITIES			(10,455,895	)			(2,515,670	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper, credit facility and bank notes, net			(37,426	)			230,176
Fixed-rate debt borrowings			1,484,040				—
Payments on fixed-rate notes			—				(100,000	)
Proceeds from issuance of common stock			2,257,772				—
Proceeds from issuance of mandatory convertible preferred stock			1,227,050				—
Dividends paid			(151,735	)			(155,125	)
Common stock activity, net			28,478				19,028
Treasury stock activity, net			4,190				5,344
Cost of debt and equity transactions			(16,617	)			(618	)
Other			23,271				13,308
NET CASH PROVIDED BY FINANCING ACTIVITIES			4,819,023				12,113
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(836,678	)			175,914
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			2,048,117				1,181,450
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,211,439			$	1,357,364
SUPPLEMENTARY CASH FLOW DATA:
Interest paid, net of capitalized interest		$	176,104			$	199,570
Income taxes paid, net of refunds			968,897				461,024

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

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)

		September 30,				December 31,
		2010				2009
		(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	1,211,439			$	2,048,117
Receivables, net of allowance			1,756,874				1,545,699
Inventories			528,725				533,251
Drilling advances			213,195				230,733
Derivative instruments			218,119				13,218
Prepaid taxes			254,242				146,653
Prepaid assets and other			67,866				68,178
			4,250,460				4,585,849
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full-cost accounting:
Proved properties			50,097,256				44,267,037
Unproved properties and properties under development, not being amortized			2,791,504				1,479,008
Gas gathering, transmission and processing facilities			3,592,400				3,189,177
Other			543,851				492,511
			57,025,011				49,427,733
Less: Accumulated depreciation, depletion and amortization			(28,678,895	)			(26,527,118	)
			28,346,116				22,900,615
OTHER ASSETS:
Goodwill, net			189,252				189,252
Deposit related to acquisition of BP properties			3,500,000				—
Deferred charges and other			642,521				510,027
		$	36,928,349			$	28,185,743

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

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)

		September 30,				December 31,
		2010				2009
		(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	598,037			$	396,564
Accrued operating expense			101,881				90,151
Accrued exploration and development			1,028,134				923,084
Accrued compensation and benefits			125,168				151,408
Current debt			135,369				117,326
Asset retirement obligation			153,298				146,654
Derivative instruments			58,956				128,219
Other			325,887				439,152
			2,526,730				2,392,558
LONG-TERM DEBT			6,380,579				4,950,390
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes			3,581,675				2,764,901
Asset retirement obligation			1,948,718				1,637,357
Other			545,265				661,916
			6,075,658				5,064,174
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, 6% Cumulative Mandatory Convertible, Series D, $1,000 per share liquidation preference, 1,265,000 shares issued and outstanding			1,227,050				—
Common stock, $0.625 par, 430,000,000 shares authorized, 365,885,145 and 344,076,790 shares issued, respectively			228,678				215,048
Paid-in capital			6,870,445				4,634,326
Retained earnings			13,610,838				11,436,580
Treasury stock, at cost, 1,460,329 and 7,639,818 shares, respectively			(41,457	)			(216,831	)
Accumulated other comprehensive income (loss)			49,828				(290,502	)
			21,945,382				15,778,621
		$	36,928,349			$	28,185,743

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

     

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(Unaudited)

																														Accumulated
						Series D				Series B																				Other				Total
		Comprehensive				Preferred				Preferred				Common				Paid-In				Retained				Treasury				Comprehensive				Shareholders’
		Income (Loss)				Stock				Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Equity
		(In thousands)
BALANCE AT DECEMBER 31, 2008						$	—			$	98,387			$	214,221			$	4,472,826			$	11,929,827			$	(228,304	)		$	21,764			$	16,508,721
Comprehensive loss:
Net loss		$	(870,204	)			—				—				—				—				(870,204	)			—				—				(870,204	)
Commodity hedges, net of income tax benefit of $124,671			(228,470	)			—				—				—				—				—				—				(228,470	)			(228,470	)
Comprehensive loss		$	(1,098,674	)
Dividends:
Preferred							—				—				—				—				(4,260	)			—				—				(4,260	)
Common ($.45 per share)							—				—				—				—				(151,040	)			—				—				(151,040	)
Common stock activity, net							—				—				721				3,778				—				—				—				4,499
Treasury stock activity, net							—				—				—				(5,706	)			—				8,832				—				3,126
Compensation expense							—				—				—				95,731				—				—				—				95,731
Other							—				—				—				(2,781	)			—				—				—				(2,781	)
BALANCE AT SEPTEMBER 30, 2009						$	—			$	98,387			$	214,942			$	4,563,848			$	10,904,323			$	(219,472	)		$	(206,706	)		$	15,355,322
BALANCE AT DECEMBER 31, 2009						$	—			$	—			$	215,048			$	4,634,326			$	11,436,580			$	(216,831	)		$	(290,502	)		$	15,778,621
Comprehensive income:
Net income		$	2,343,469				—				—				—				—				2,343,469				—				—				2,343,469
Commodity hedges, net of income tax expense of $152,101			340,330				—				—				—				—				—				—				340,330				340,330
Comprehensive income		$	2,683,799
Dividends:
Preferred							—				—				—				—				(13,276	)			—				—				(13,276	)
Common ($.45 per share)							—				—				—				—				(155,936	)			—				—				(155,936	)
Mandatory convertible preferred stock issued							1,227,050				—				—				—				—				—				—				1,227,050
Common stock issuance							—				—				12,781				2,074,711				—				170,280				—				2,257,772
Common stock activity, net							—				—				849				18,053				—				—				—				18,902
Treasury stock activity, net							—				—				—				700				—				5,094				—				5,794
Compensation expense							—				—				—				142,652				—				—				—				142,652
Other							—				—				—				3				1				—				—				4
BALANCE AT SEPTEMBER 30, 2010						$	1,227,050			$	—			$	228,678			$	6,870,445			$	13,610,838			$	(41,457	)		$	49,828			$	21,945,382

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

APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     These financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with the Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which contains a summary of the Company’s significant accounting policies and other disclosures. Additionally, the Company’s financial statements for prior periods include reclassifications that were made to conform to the current-period presentation.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     As of September 30, 2010, Apache’s significant accounting policies are consistent with those discussed in Note 1 of its consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserves and related present value estimates of future net cash flow therefrom, asset retirement obligations and income taxes. Actual results could differ from those estimates.

2. ACQUISITIONS

Kitimat LNG Terminal

     During the first quarter of 2010 Apache’s wholly-owned subsidiary, Apache Canada Ltd., entered into an agreement with Galveston LNG, Inc. and its wholly-owned subsidiary to acquire a 51–percent interest in Kitimat LNG Inc.’s planned liquefied natural gas (LNG) export terminal (Kitimat LNG terminal) and a 25.5-percent interest in a related proposed pipeline. The Kitimat LNG terminal is to be to be located at Bish Cove near the Port of Kitimat, north of Vancouver, British Columbia. Gross throughput capacity is estimated to be approximately 700 million cubic feet of natural gas per day (MMcf/d), or five million metric tons of LNG per year, of which Apache has reserved 51 percent. The proposed 300-mile pipeline will originate in Summit Lake, British Columbia, and is designed to link the Kitimat LNG terminal to the pipeline system currently servicing western Canada’s natural gas producing regions. Apache will have rights to 350 MMcf/d of the capacity in the proposed pipeline. The project has the potential to open new markets in the Asia-Pacific region for gas from Apache’s Canadian operations, including the Horn River Basin area in northeast British Columbia.

      Gross construction costs, which will be refined upon completion of a front-end engineering and design (FEED), are currently estimated at around C$3 billion for the LNG terminal and C$1.1 billion for the pipeline and would be incurred throughout what is projected to be a three and one-half year construction phase, with initial LNG shipments currently projected for 2015. Completion of the FEED study and a final investment decision are expected in 2011.

Devon Gulf of Mexico Shelf Acquisition

     On June 9, 2010, Apache completed an acquisition of oil and gas assets on the Gulf of Mexico shelf from Devon Energy Corporation (Devon) for $1.05 billion, subject to normal post-closing adjustments. The acquisition was effective as of January 1, 2010. The acquired assets include 477,000 net acres across 150 blocks and estimated proved reserves of 41 million barrels of oil equivalent (MMboe). Approximately half of the estimated net proved reserves were liquid hydrocarbons, and seven major fields account for 90 percent of the estimated proved reserves. Virtually all of the production is located in fields in water depths less than 500 feet, and Apache now operates 75 percent of the production. Apache allocated $361 million of the purchase price to unproved property and $4 million to gas plant facilities. Apache also recorded abandonment obligations for the properties of $233 million. The acquisition was funded primarily from existing cash balances.

Mariner Energy, Inc. Merger Agreement

     On April 15, 2010, Apache and Mariner Energy, Inc., a Delaware corporation (Mariner), announced that they had entered into a definitive agreement pursuant to which Apache will acquire Mariner in a stock and cash transaction. The Agreement and Plan of Merger dated April 14, 2010 (as amended by amendment No. 1 dated August 2, 2010, referred to as the Merger Agreement), by and among Apache, Mariner and Apache Deepwater LLC (formerly known as ZMZ Acquisitions LLC), a Delaware limited liability company and wholly owned subsidiary of Apache (Merger Sub), contemplates a merger (the Merger) whereby Mariner will be merged with and into Merger Sub, with Merger Sub surviving the Merger as a wholly owned subsidiary of Apache.

     The total amount of cash and shares of Apache common stock that will be paid and issued, respectively, pursuant to the Merger Agreement is fixed, and Mariner stockholders will be entitled to receive (on an aggregate basis) 0.17043 of a share of Apache common stock, par value $0.625 per share, and $7.80 in cash for each share of Mariner common stock (the Mixed Consideration). Mariner stockholders have the right to elect to receive all cash ($26.00 per share), all Apache common stock (0.24347 of a share of Apache common stock) or the Mixed Consideration, subject to proration procedures as provided in the Merger Agreement.

     Upon completion of the Merger, each outstanding employee option to purchase Mariner common stock will be converted into a fully vested option to purchase 0.24347 shares of Apache common stock.

     In connection with the Merger, Apache expects to issue approximately 17.5 million shares of common stock (an increase of approximately five percent of the Company’s outstanding common shares) and pay cash of approximately $800 million to Mariner stockholders. Apache intends to fund the cash portion of the consideration with existing cash balances and commercial paper. Upon consummation of the Merger, Apache will assume Mariner’s debt, which had a fair value of approximately $1.6 billion as of September 30, 2010.

     The Merger Agreement has been approved by the boards of directors of Apache, Mariner, and Merger Sub. The completion of the Merger is subject to certain conditions, including: (i) the adoption of the Merger Agreement by the stockholders of Mariner; (ii) with certain materiality exceptions, the accuracy of the representations and warranties made by Apache and Mariner; (iii) the effectiveness of a registration statement on Form S-4 associated with the issuance of its common stock in the Merger, and the approval of the listing of these shares on the New York Stock Exchange; (iv) the termination or expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act); (v) the delivery of customary opinions from counsel to Apache and Mariner that the Merger will be treated as a tax-free reorganization for U.S. federal income tax purposes; (vi) compliance by Apache and Mariner with their respective obligations under the Merger Agreement; and (vii) the absence of legal impediments prohibiting the Merger. On May 3, 2010, the U.S. Department of Justice and the Federal Trade Commission granted early termination of the waiting period under the HSR Act. Additional post-closing regulatory approvals are pending. The registration statement on Form S-4 was effective as of October 5, 2010. Mariner is holding a special meeting of stockholders on November 10, 2010, to consider and vote to approve and adopt the merger agreement. Assuming approval by shareholders and satisfactory completion of all remaining conditions, Apache expects the merger to close on November 10.

     The Merger Agreement contains customary representations and warranties that the parties have made to each other as of specific dates. Apache and Mariner have each agreed to certain covenants in the Merger Agreement. Among other covenants, Mariner has agreed, subject to certain exceptions, not to initiate, solicit, negotiate, provide information in furtherance of, approve, recommend or enter into an Acquisition Proposal (as defined in the Merger Agreement).

     The Merger Agreement also contains certain termination rights for both Apache and Mariner, including if the Merger is not completed by January 31, 2011. In the event of a termination of the Merger Agreement, under certain circumstances, Mariner may be required to pay Apache a termination fee of $67 million (less any Apache expenses previously reimbursed by Mariner). In connection with the settlement of two stockholder lawsuits, on August 2, 2010, Apache and Mariner amended the Merger Agreement to eliminate the termination fee in the event that Mariner terminates the Merger Agreement in order to enter into an unsolicited “superior proposal” with another party. For further discussion of these lawsuits, please refer to Note 9— Commitments and Contingencies of this Form 10-Q. In addition, under certain circumstances, the Merger Agreement requires each of Apache and Mariner to reimburse the other’s expenses, up to $7.5 million, in the event the Merger Agreement is terminated. Any reimbursement of expenses by Mariner to Apache will reduce the amount of any termination fee paid by Mariner to Apache.

     At year-end 2009, Mariner had estimated proved reserves of 181 MMboe. Mariner’s oil and gas properties are primarily located in the Gulf of Mexico deepwater and shelf, the Permian Basin and onshore in the Gulf Coast, encompassing 541,000 net developed and 623,000 net undeveloped acres at December 31, 2009. Mariner’s deepwater Gulf of Mexico portfolio includes over 99 blocks, seven discoveries in development and more than 50 drilling prospects. The Permian Basin and Gulf of Mexico shelf assets are complementary to Apache’s existing holdings and provide an inventory of future potential drilling locations particularly in the Spraberry and Wolfcamp formation oil plays of the Permian Basin. Additionally, Mariner has accumulated acreage in emerging unconventional shale oil resources in the U.S.

     Assuming the Merger is approved by Mariner stockholders and satisfactory completion of all remaining conditions, the transaction will be accounted for as a business combination, with Mariner’s assets and liabilities reflected in Apache’s financial statements at fair value.

Agreement to acquire Permian Basin, Egypt and Canada properties from BP

     In July 2010 Apache entered into three definitive purchase and sale agreements to acquire the properties described below (BP Properties) from subsidiaries of BP plc (collectively referred to as “BP”) for aggregate consideration of $7.0 billion, subject to customary adjustments (BP Acquisition). The effective date of the transactions was July 1, 2010. Preferential purchase rights for approximately $653 million of the value of the BP properties in the Permian Basin have been exercised and, accordingly, the purchase price for the BP properties has been reduced to approximately $6.4 billion. Certain rights of first refusal in Canada totaling approximately $1.6 billion are the subject of a court proceeding, as discussed further in Note 9 — Commitments and Contingencies of this Form 10-Q.

     Permian Basin On August 10, 2010, Apache completed the acquisition of substantially all of BP’s oil and gas operations, related infrastructure and acreage in the Permian Basin of west Texas and New Mexico. The acquired assets, net of preferential purchase rights exercised, include interests in several field areas, including Block 16/Coy Waha, Brown Basset, Empire/Yeso, Pegasus, Southeast Lea, Spraberry, Wilshire, North Misc and Delaware Penn, approximately 405,000 net mineral and fee acres, approximately 351,000 leasehold acres and a gas processing plant. The Permian Basin assets had estimated net proved reserves of 124 MMboe at June 30, 2010 (64 percent liquid hydrocarbons, or “liquids”). The agreed-upon purchase price of $3.1 billion was reduced by $653 million for the exercise of preferential rights to purchase. Apache allocated $621 million of the purchase price to unproved property and $75 million to gas plant facilities. Apache also recorded abandonment obligations for the properties of $12 million. BP will continue to operate the properties on Apache’s behalf through November 30, 2010.

     Western Canada Sedimentary Basin On October 8, 2010, Apache completed the acquisition of substantially all of BP’s Western Canadian upstream natural gas assets, including approximately 1,278,000 net mineral and leasehold acres, interests in approximately 1,600 active wells, and eight operated and 14 non-operated gas processing plants. The position includes many drilling opportunities ranging from conventional to several unconventional targets, including shale gas, tight gas and coal bed methane in historically productive formations including the Montney, Cadomin and Doig. These properties had estimated net proved reserves of 224 MMboe at June 30, 2010 (94 percent gas). The purchase price was $3.25 billion. Certain rights of first refusal are the subject of a court proceeding, as discussed in Note 9 — Commitments and Contingencies of this Form 10-Q.

     Western Desert, Egypt On November 4, 2010, Apache completed the acquisition of BP’s interests in four development licenses and one exploration concession (East Badr El Din) in the Western Desert of Egypt. These properties, covering 394,000 net acres south of El Alamein, are operated by Gulf of Suez Petroleum Company, a joint venture between BP and the Government of Egypt. The transaction includes BP’s interests in 65 active wells, a 24-inch gas line to Dashour, a liquefied petroleum gas plant in Dashour, a gas processing plant in Abu Gharadig and a 12-inch oil export line to the El Hamra Terminal on the Mediterranean Sea. These properties had estimated net proved reserves of 20 MMboe at June 30, 2010 (59 percent liquids). The BP Properties in Egypt are complementary to the over 11 million gross acres in 21 separate concessions in the Western Desert that Apache currently holds. The Merged Concession Agreement related to the development licenses runs through 2024, subject to a five-year extension at the option of the operator. The purchase price of the Egypt properties was $650 million, of which $250 million was paid in a deposit to BP on July 30, 2010, with the balance paid upon closing.

     The BP Acquisition is subject to certain post-closing requirements relating to, among other things, resolution of title, environmental and legal issues and any exercise of preferential purchase rights after closing.

     The Company financed the BP Acquisition by issuing 26.45 million shares of common stock and 25.3 million depositary shares, raising net proceeds of $3.5 billion; securing a bridge loan facility; issuing new term debt and commercial paper; and using existing cash balances. For further discussion of these debt instruments and equity issuances, please see Note 6 — Debt and Note 8 — Capital Stock, respectively, of this Form 10-Q.

Actual and Pro Forma Impact of Acquisitions (Unaudited)

     Revenues attributable to the Devon and BP Permian Basin acquisitions included in Apache’s statement of consolidated operations for the quarter and nine months ended September 30, 2010, were $135 million and $155 million, respectively. Direct expenses attributable to the acquisitions included in the statement of consolidated operations for the same periods were $35 million and $40 million, respectively.

     The following table presents pro forma information for Apache as if the acquisition of properties from Devon and the BP Acquisition had occurred at the beginning of January 1, 2009:

		For the Quarter Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In millions, except per share amounts)
Revenues and Other		$	3,327			$	2,784			$	9,668			$	6,994
Net Income (Loss)		$	841			$	503			$	2,559			$	(859	)
Preferred Stock Dividends			19				20				57				61
Income (Loss) Attributable to Common Stock			822				483				2,502				(920	)
Net Income (Loss) per Common Share — Basic		$	2.25			$	1.33			$	6.88			$	(2.54	)
Net Income (Loss) per Common Share — Diluted		$	2.22			$	1.33			$	6.76			$	(2.54	)

     The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the acquisitions and factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisitions on January 1, 2009. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company. The unaudited pro forma consolidated results reflect pro forma adjustments for additional depreciation expense related to the fair value adjustment to property, plant and equipment acquired, additional asset retirement obligation accretion expense related to the assets acquired, pro forma interest expense associated with $1.5 billion principal amount of senior unsecured 5.1-percent notes maturing September 1, 2040, to fund a portion of the purchase price of the BP Acquisition and amortization of the associated deferred financing costs, capitalization of interest expense, increased general and administrative expense as a result of the purchase of the properties, issuance of 26.45 million shares of Apache common stock to partially fund the BP Acquisition, issuance of 25.3 million depositary shares each representing a 1/20th interest in a share of 6.00-percent Mandatory Convertible Preferred Stock, Series D, to partially fund the BP Acquisition and the related preferred dividends, and applicable income tax impacts.

3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies for Using Derivative Instruments

     The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in cash flows by entering into hedges on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and options, to manage fluctuations in cash flows resulting from changes in commodity prices. Derivative instruments entered into are typically designated as cash flow hedges.

Counterparty Risk

     The use of derivative transactions exposes the Company to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of September 30, 2010, Apache had derivative positions with 17 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate its exposure to an increase in counterparty credit risk. Should any or all of these counterparties not perform, Apache may not realize the benefit on some or all of its derivative instruments resulting from lower commodity prices.

     The Company executes commodity derivative transactions under master agreements that allow payables to offset receivables with the same counterparty. In general, if a party to a derivative transaction incurs a material deterioration in its credit ratings, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a transfer of contracts to another counterparty or terminate the arrangement.

Commodity Derivative Instruments

     As of September 30, 2010, Apache had the following open crude oil derivative positions:

		Fixed-Price Swaps								Collars
						Weighted								Weighted				Weighted
Production						Average								Average				Average
Period		Mbbls				Fixed Price(1)				Mbbls				Floor Price(1)				Ceiling Price(1)
2010			920			$	70.10				2,990			$	68.02			$	85.44
2011 (2)			3,650				70.12				16,605				68.43				93.18
2012			3,292				70.99				9,142				69.30				98.11
2013			1,451				72.01				2,416				78.02				103.06
2014			76				74.50				—				—				—

     As of September 30, 2010, Apache had the following open natural gas derivative positions:

		Fixed-Price Swaps												Collars
										Weighted												Weighted				Weighted
Production		MMBtu				GJ				Average				MMBtu				GJ				Average				Average
Period		(in 000’s)				(in 000’s)				Fixed Price(1)				(in 000’s)				(in 000’s)				Floor Price(1)				Ceiling Price(1)
2010			24,840				—			$	5.64				7,360				—			$	5.41			$	6.91
2010			—				13,800			C$	5.37				—				—				—				—
2011			46,538				—			$	6.13				9,125				—			$	5.00			$	8.85
2011			—				51,100			C$	6.26				—				3,650			C$	6.50			C$	7.10
2012			19,215				—			$	6.51				21,960				—			$	5.54			$	7.30
2012			—				43,920			C$	6.61				—				7,320			C$	6.50			C$	7.27
2013			1,825				—			$	7.05				6,825				—			$	5.35			$	6.67
2014			755				—			$	7.23				—				—				—				—

     As of September 30, 2010, Apache had the following open natural gas financial basis swap contracts:

						Weighted
		MMBtu				Average
Production Period		(in 000’s)				Price Differential(1)
2010			10,580			$	(0.54	)
2011			18,250			$	(0.30	)
2012			10,980			$	(0.36	)

     Subsequent to September 30, 2010, Apache North Sea Ltd entered into a physical sales contract to deliver 20 thousand barrels of oil per day in 2011, settled against Platts Dated Brent with a floor price of $70 and an average ceiling price of $98.56. These sales are in the normal course of business and will be recognized in oil and gas revenues.

Fair Values of Derivative Instruments Recorded in the Consolidated Balance Sheet

     The Company accounts for derivative instruments and hedging activity in accordance with Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging,” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The fair market value of the Company’s derivative assets and liabilities are as follows:

		September 30,				December 31,
		2010				2009
		(In millions)
Current Assets: Derivative instruments		$	218			$	13
Other Assets: Deferred charges and other			159				51
Total Derivative Assets		$	377			$	64
Current Liabilities: Derivative instruments		$	59			$	128
Noncurrent Liabilities: Other			90				202
Total Derivative Liabilities		$	149			$	330

     The methods and assumptions used to estimate the fair values of the Company’s commodity derivative instruments and gross amounts of commodity derivative assets and liabilities are more fully discussed in Note 10 — Fair Value Measurements of this Form 10-Q.

Commodity Derivative Activity Recorded in Statement of Consolidated Operations

     The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:

						For the Quarter								For the Nine Months
						Ended								Ended
		Gain (Loss) on Derivatives				September 30,								September 30,
		Recognized In Income				2010				2009				2010				2009
										(In millions)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into operations (effective portion)		Oil and Gas Production Revenues				$	53			$	49			$	104			$	157
Gain (loss) derivatives recognized in operations (ineffective portion and basis)		Revenues and Other: Other				$	—			$	—			$	(1	)		$	(3	)

Commodity Derivative Activity in Accumulated Other Comprehensive Income (Loss)

     As of September 30, 2010, substantially all of the Company’s derivative instruments were designated as cash flow hedges in accordance with ASC Topic 815. A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders’ equity related to Apache’s cash flow hedges is presented in the table below:

		For the Nine Months Ended September 30,
		2010								2009
		Before tax				After tax				Before tax				After tax
						(In millions)
Unrealized gain (loss) on derivatives at beginning of period		$	(267	)		$	(170	)		$	212			$	138
Realized amounts reclassified into earnings			(104	)			(67	)			(157	)			(107	)
Net change in derivative fair value			596				407				(195	)			(121	)
Ineffectiveness reclassified into earnings			—				—				(1	)			(1	)
Unrealized gain (loss) on derivatives at end of period		$	225			$	170			$	(141	)		$	(91	)

     Based on market prices as of September 30, 2010, the Company’s net unrealized income in accumulated other comprehensive income (loss) for commodity derivatives designated as cash flow hedges totaled a gain of $225 million ($170 million after tax). Gains and losses on hedges will be realized in future earnings through mid-2014, contemporaneously with the related sales of natural gas and crude oil production applicable to specific hedges. Included in accumulated other comprehensive income (loss) as of September 30, 2010 is a net gain of approximately $158 million ($114 million after tax) that applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions.

4. DEPOSIT RELATED TO ACQUISITION OF BP PROPERTIES

     At September 30, 2010, a $3.5 billion deposit, of which $3.25 billion was related to the purchase of the BP Canadian properties and $250 million was related to the BP Egyptian properties, was recorded as a long-term asset on Apache’s consolidated balance sheet. For additional information on the transactions, please see Note 2 – Acquisitions of this Form 10-Q. Subsequent to September 30, 2010, both acquisitions were closed, and the associated deposits were applied to the purchase price of the assets.

5. ASSET RETIREMENT OBLIGATION

     The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the nine months ended September 30, 2010:

		(In millions)
Asset retirement obligation at December 31, 2009		$	1,784
Liabilities incurred			385
Liabilities settled			(198	)
Revisions			57
Accretion expense			74
Asset retirement obligation at September 30, 2010			2,102
Less current portion			(153	)
Asset retirement obligation, long-term		$	1,949

     ARO reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with Apache’s oil and gas properties. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. To determine the current present value of this obligation, some key assumptions the Company must estimate include the ultimate productive life of the properties, a risk adjusted discount rate and an inflation factor. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. The period includes liabilities incurred related to the Devon and BP Permian Basin acquisitions.

     In September 2010 the Bureau of Ocean Management, Regulation and Enforcement (BOEMRE, formerly known as the Minerals Management Service), a division of the U.S. Department of the Interior, issued Notice to Lessees (NTL) No. 2010-G05, which includes guidelines for decommissioning idle infrastructure on active leases in the Gulf of Mexico within a specified period of time. The Company is currently evaluating the impact of these new guidelines on its financial statements.

6. DEBT

     As of September 30, 2010, the Company had unsecured committed revolving syndicated bank credit facilities totaling $3.3 billion, of which $1.0 billion matures in August 2011 and $2.3 billion matures in May 2013. These consist of a new $1.0 billion 364-day facility, a $1.5 billion facility and a $450 million facility in the U.S., a $200 million facility in Australia and a $150 million facility in Canada. Since there are no outstanding borrowings or commercial paper at quarter-end, the full $3.3 billion of committed credit capacity is available to the Company.

     The Company has available a $2.95 billion commercial paper program, which generally enables Apache to borrow funds for up to 270 days at competitive interest rates. The commercial paper program is fully supported by available borrowing capacity under U.S. committed credit facilities, which expire in 2011 and 2013.

     On July 20, 2010, in connection with the acquisition of certain BP properties, the Company entered into a term loan agreement that initially provided a $5.0 billion unsecured bridge facility with a September 29, 2010, maturity, unless extended at the Company’s option until December 29, 2010. The commitment under the facility was subsequently reduced by $3.5 billion to reflect receipt of the net proceeds from the issuance of common and preferred stock on July 28, 2010, as discussed in Note 8 — Capital Stock of this Form 10-Q. On August 10, 2010, the Company borrowed $1.0 billion under the bridge facility to finance a portion of the consideration for the acquisition and subsequently repaid the bridge facility borrowings and terminated the bridge facility on August 20, 2010. Apache incurred $6 million of loan costs related to this bridge facility that were charged to financing costs upon termination of the facility.

     On August 13, 2010, Apache entered into a $1.0 billion 364-day syndicated revolving credit facility. The credit facility is subject to covenants, events of default and representations and warranties that are substantially similar to those in Apache’s existing revolving credit facilities. It may be used for acquisitions and for general corporate purposes or to support the Company’s commercial paper program.

     The facility will terminate and all amounts outstanding will be due on August 12, 2011, unless Apache requests a 364-day extension, which is subject to lender approval, as defined, or Apache elects a one-year term out option. Loans under the facility will bear interest at a base rate, as defined, or at LIBOR plus a margin, which varies based upon prices reported in the credit default swap market with respect to Apache’s one-year indebtedness and the rating for Apache’s senior, unsecured long-term debt. Based upon prices for Apache’s one-year credit default swaps and its current senior unsecured long-term debt rating, the margin at September 30, 2010, would be .75 percent. Apache must also pay a commitment fee on the undrawn portion of the facility which is based on its senior, unsecured long term debt rating. The commitment fee is currently .125 percent.

     On August 20, 2010, the Company issued $1.5 billion principal amount of senior unsecured 5.1-percent notes maturing September 1, 2040. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The proceeds were used to repay borrowings under the Company’s bridge facility and commercial paper program.

     One of the Company’s Australian subsidiaries has a secured revolving syndicated credit facility for its Van Gogh and Pyrenees oil developments offshore Western Australia. The Company agreed to guarantee the credit facility until the subsidiary satisfied the contractual “completion test” as defined in the Syndicated Facility Agreement. Elements of this completion test include among other things, physical completion of the facilities, minimum cumulative production volumes and satisfaction of the Debt Service Reserve Account. Under the terms of the Debt Service Reserve Account, the subsidiary is required to deposit an amount equal to 50 percent of the next debt reduction amount plus three months of interest.

     The borrowing base was initially set at $350 million and will be redetermined upon project completion, as defined in the facility, and semi-annually thereafter. The subsidiary expects to satisfy the completion test in the fourth quarter of 2010. In the event project completion does not occur by December 31, 2010, pursuant to the terms of the facility, the lenders may require repayment of outstanding amounts in the first quarter of 2011. The outstanding balance under the facility as of September 30, 2010, was $300 million. Under the terms of the agreement, the facility amount was reduced initially on June 30, 2010, and will be further reduced semi-annually thereafter until the earlier of maturity on March 31, 2014, or the date on which the remaining proved reserves fall below 25 percent of the initial proved reserves. As $60 million and $55 million of the existing balance will be repaid by December 31, 2010, and June 30, 2011, respectively, $115 million has been classified as current debt at September 30, 2010.

     At September 30, 2010 and December 31, 2009, there was $20.4 million and $7.3 million, respectively, borrowed on uncommitted overdraft lines in Argentina and Canada.

Financing Costs, Net

     Financing costs incurred during the periods noted comprised the following:

		For the Quarter Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(In millions)
Interest expense		$	86			$	77			$	237			$	233
Amortization of deferred loan costs			7				1				10				4
Capitalized interest			(29	)			(14	)			(64	)			(45	)
Interest income			(5	)			(2	)			(9	)			(10	)
Financing costs, net		$	59			$	62			$	174			$	182

7. INCOME TAXES

     The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. There were no significant discrete tax events that occurred during the first nine months of 2010. The 2009 year-to-date tax provision includes the impact of a non-cash write-down of proved oil and gas properties, which was recognized as a discrete item in the first quarter of 2009.

     Apache and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is in Administrative Appeals with the United States Internal Revenue Service (IRS) regarding the 2004 through 2007 tax years and under audit for the 2008 tax year. The Company is also under audit in various states and in most of the Company’s foreign jurisdictions as part of its normal course of business.

8. CAPITAL STOCK

Net Income (Loss) per Common Share

     A reconciliation of the components of basic and diluted net income (loss) per common share for the quarters and nine-month periods ended September 30, 2010 and 2009 is presented in the table below. The loss for the first nine months of 2009 reflects a $1.98 billion after-tax write-down of the carrying value of the Company’s March 31, 2009, proved property balances in the U.S. and Canada.

		For the Quarter Ended September 30,
		2010												2009
		Income				Shares				Per Share				Income				Shares				Per Share
						(In thousands, except per share amounts)
Basic:
Income attributable to common stock		$	764,989				356,718			$	2.14			$	440,596				336,159			$	1.31
Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock			13,276				9,258								—				—
Stock options and other			—				1,463								—				1,713
Diluted:
Income attributable to common stock, including assumed conversions		$	778,265				367,439			$	2.12			$	440,596				337,872			$	1.30

		For the Nine Months Ended September 30,
		2010												2009
		Income				Shares				Per Share				Loss				Shares				Per Share
						(In thousands, except per share amounts)
Basic:
Income (loss) attributable to common stock		$	2,330,193				343,826			$	6.78			$	(874,464	)			335,637			$	(2.61	)
Effect of Dilutive Securities:
Mandatory Convertible Preferred Stock			13,276				3,120								—				—
Stock options and other			—				1,838								—				—
Diluted:
Income (loss) attributable to common stock, including assumed conversions		$	2,343,469				348,784			$	6.72			$	(874,464	)			335,637			$	(2.61	)

     The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 3.7 million and 2.4 million for the quarters ending September 30, 2010 and 2009, respectively, and 3.2 million and 4.0 million for the nine months ended September 30, 2010 and 2009, respectively. The provisions of ASC Topic 260, “Earnings Per Share,” state that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are participating securities prior to vesting and are required to be included in the earnings allocations in computing basic EPS under the two-class method. These participating securities had a negligible impact on earnings per share for the periods presented.

Issuance of Common Stock

     On July 28, 2010, in conjunction with Apache’s acquisition of properties from BP plc, the Company issued 26.45 million shares of common stock at a public offering price of $88 per share. Proceeds, after underwriting discounts and before expenses, from the common stock offering totaled approximately $2.3 billion.

Mandatory Convertible Preferred Stock, Series D

     Also on July 28, 2010, Apache issued 25.3 million depositary shares, each representing a 1/20th interest in a share of Apache’s 6.00-percent Mandatory Convertible Preferred Stock, Series D (Preferred Share), or 1.265 million Preferred Shares. The Company received proceeds of approximately $1.2 billion, after underwriting discounts and before expenses, from the sale.

     Each Preferred Share has an initial liquidation preference of $1,000 per share (equivalent to $50 liquidation preference per depositary share). When and if declared by the Board of Directors, Apache will pay cumulative dividends on each Preferred Share at a rate of 6.00 percent per annum on the initial liquidation preference. Dividends will be paid in cash quarterly on February 1, May 1, August 1 and November 1 of each year, commencing on November 1, 2010, and until and including May 1, 2013. The final dividend payment on August 1, 2013, may be paid or delivered, as the case may be, in cash, shares of Apache common stock, or a combination thereof, at the election of the Company.

     The Preferred Shares may be converted, at the option of the holder, into 9.164 shares of Apache common stock at any time prior to July 15, 2013. If not converted prior to that time, each Preferred Share will automatically convert on August 1, 2013, into a minimum of 9.164 or a maximum of 11.364 shares of Apache common stock depending on the volume-weighted average price per share of Apache’s common stock over the ten trading day period ending on, and including, the third scheduled trading day immediately preceding the mandatory conversion. Upon conversion, a minimum of 11.6 million Apache common shares and a maximum of 14.4 million common shares will be issued.

Common and Preferred Stock Dividends

     For the quarter ending September 30, 2010 and 2009, Apache paid $51 million and $50 million, respectively, in dividends on its common stock. For the nine-month periods ended September 30, 2010 and 2009, the Company paid $152 million and $151 million, respectively. In the three- and nine-month periods ended September 30, 2009, Apache paid a total of $1.4 million and $4.3 million, respectively, in dividends on its Series B Preferred Stock issued in August 1998. The Company redeemed all outstanding shares of its Series B Preferred Stock on December 30, 2009. Dividend payments on the Company’s Series D Preferred Stock commenced on November 1, 2010.

Stock-Based Compensation

 Share Appreciation Plans

     The Company utilizes share appreciation plans from time to time to provide incentives for substantially all full-time employees to increase Apache’s share price within a stated measurement period. To achieve the payout under those plans, the Company’s stock price must close at or above a stated threshold for 10 out of any 30 consecutive trading days before the end of the stated period. The provisions of ASC 718, “Compensation — Stock Compensation,” dictate that expense should be amortized over the requisite service period, and should the stated threshold not be met before the end of the stated period, any unamortized expense must be immediately recognized. Since 2005, two separate share appreciation plans have been approved. A summary of these plans follows:

	•		On May 7, 2008, the Stock Option Plan Committee of the Company’s Board of Directors, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan, approved the 2008 Share Appreciation Program, with a target to increase Apache’s share price to $216 by the end of 2012 and an interim goal of $162 to be achieved by the end of 2010. Any awards under the plan would be payable in five equal annual installments. As of September 30, 2010, neither share price threshold had been met. If the interim goal of $162 is not met prior to December 31, 2010, the Company estimates that $42 million of unamortized expense would be immediately recognized at year-end, of which approximately one-third would be capitalized.
	•		On May 5, 2005, the Company’s stockholders approved the 2005 Share Appreciation Plan, with a target to increase Apache’s share price to $108 by the end of 2008 and an interim goal of $81 to be achieved by the end of 2007. Awards under the plan were payable in four equal annual installments to eligible employees remaining with the Company. Apache’s share price exceeded the interim $81 threshold for the 10-day requirement on June 14, 2007. The final installment was awarded in June 2010. Apache’s share price exceeded the $108 threshold for the 10-day requirement as of February 29, 2008. The third installment was awarded in March 2010, and the final installment will be awarded in March 2011.

 2010 Performance Program and Restricted Stock Awards

     To provide long-term incentives for Apache employees to deliver competitive returns to our stockholders, in November 2009, the Company’s Board of Directors approved the 2010 Performance Program, pursuant to the 2007 Omnibus Equity Compensation Plan. Eligible employees were granted initial conditional restricted stock units totaling 541,440 units. The ultimate number of restricted stock units to be awarded will be based upon measurement of the total shareholder return of Apache common stock as compared to a designated peer group during a three-year performance period. Should any restricted stock units be awarded at the end of the three-year performance period, December 31, 2012, 50 percent of restricted stock units awarded will immediately vest, and an additional 25 percent will vest on the two succeeding anniversaries following the end of the performance period. In January 2010 the Company’s Board of Directors also approved one-time restricted stock unit awards totaling 502,470 shares to eligible Apache employees, with one-third of the units granted immediately vesting and an additional one-third vesting on each of the first and second anniversaries of the grant date.

9. COMMITMENTS AND CONTINGENCIES

Legal Matters

     Apache is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. The Company has an accrued liability of approximately $11 million for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. Apache’s estimates are based on information known about the matters and its experience in contesting, litigating and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to Apache’s financial position or results of operations after consideration of recorded accruals. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position or results of operations.

 Argentine Environmental Claims

     In connection with the acquisition from Pioneer in 2006, the Company acquired a subsidiary of Pioneer in Argentina (PNRA) that is involved in various administrative proceedings with environmental authorities in the Neuquén Province relating to permits for and discharges from operations in that province. In addition, PNRA was named in a suit initiated against oil companies operating in the Neuquén basin entitled Asociación de Superficiarios de la Patagonia v YPF S.A., et. al., originally filed on August 21, 2003, in the Argentine National Supreme Court of Justice. The plaintiffs, a private group of landowners, have also named the national government and several provinces as third parties. The lawsuit alleges injury to the environment generally by the oil and gas industry. The plaintiffs principally seek from all defendants, jointly, (i) the remediation of contaminated sites, of the superficial and underground waters, and of soil that allegedly was degraded as a result of deforestation, (ii) if the remediation is not possible, payment of an indemnification for the material and moral damages claimed from defendants operating in the Neuquén basin, of which PNRA is a small portion, (iii) adoption of all the necessary measures to prevent future environmental damages, and (iv) the creation of a private restoration fund to provide coverage for remediation of potential future environmental damages. Much of the alleged damage relates to operations by the Argentine state oil company, which conducted oil and gas operations throughout Argentina prior to its privatization, which began in 1990. While the plaintiffs will seek to make all oil and gas companies operating in the Neuquén basin jointly liable for each others’ actions, PNRA will defend on an individual basis and attempt to require the plaintiffs to delineate damages by company. PNRA intends to defend itself vigorously in the case. It is not certain exactly how or what the court will do in this matter as it is the first of its kind. While it is possible PNRA may incur liabilities related to the environmental claims, no reasonable prediction can be made as PNRA’s exposure related to this lawsuit is not currently determinable.

 Louisiana Restoration

     Numerous surface owners have filed claims or sent demand letters to various oil and gas companies, including Apache, claiming that, under either expressed or implied lease terms or Louisiana law, they are liable for damage measured by the cost of restoration of leased premises to their original condition as well as damages from contamination and cleanup. Many of these lawsuits claim small amounts, while others assert claims in excess of $1 million. Also, some lawsuits or claims are being settled or resolved, while others are still being filed. Any exposure, therefore, related to these lawsuits and claims is not currently determinable. While an adverse judgment against Apache is possible, Apache intends to actively defend the cases.

 Hurricane-Related Litigation

     In a case styled Ned Comer, et al vs. Murphy Oil USA, Inc., et al, Case No: 1:05-cv-00436; U.S.D.C., United States District Court, Southern District of Mississippi, Mississippi property owners allege that hurricanes’ meteorological effects increased in frequency and intensity due to global warming, and there will be continued future damage from increasing intensity of storms and sea level rises. They claim this was caused by the various defendants (oil and gas companies, electric and coal companies, and chemical manufacturers). Plaintiffs claim defendants’ emissions of “greenhouse gases” cause global warming, which they blame as the cause of their damages. They also claim that the oil company defendants artificially inflated and manipulated the prices of gasoline, diesel fuel, jet fuel, natural gas, and other end-use petrochemicals, and covered it up by misrepresentations. They further allege a conspiracy to disseminate misinformation and cover up the relationship between the defendants and global warming. Plaintiffs seek, among other damages, actual, consequential, and punitive or exemplary damages. The District Court dismissed the case on August 30, 2007. The plaintiffs appealed the dismissal. Prior to the dismissal, the plaintiffs filed a motion to amend the lawsuit to add additional defendants, including Apache. On October 16, 2009, the United States Court of Appeals for the Fifth Circuit reversed the judgment of the District Court and remanded the case to the District Court. The Fifth Circuit held that plaintiffs have pleaded sufficient facts to demonstrate standing for their public and private nuisance, trespass, and negligence claims, and that those claims are justifiable and do not present a political question. However, the Fifth Circuit declined to find standing for the unjust enrichment, civil conspiracy, and fraudulent misrepresentation claims, and therefore dismissed those claims. Several defendants filed a petition with the Fifth Circuit for a rehearing en banc. In granting an appeal for an en banc hearing, the U.S. Fifth Circuit Court of Appeals vacated an earlier ruling by its three-member panel. That decision reinstated the district judge’s dismissal of the lawsuit. Subsequently, the Fifth Circuit Court of Appeals could not form a quorum to hear the en banc appeal. Therefore, the court ruled that its earlier order (vacating the panel’s ruling) stood, which had the effect of dismissing the original lawsuit. Plaintiffs have filed a petition for writ of mandamus with the U.S. Supreme Court.

 Australia Gas Pipeline Force Majeure

     The Company subsidiaries reported a pipeline explosion that interrupted deliveries of natural gas to customers under various long-term contracts. Company subsidiaries believe that the event was a force majeure, and as a result, the subsidiaries and their joint venture participants have declared force majeure under those contracts. On December 16, 2009, a customer, Burrup Fertilisers Pty Ltd, filed a lawsuit on behalf of itself and certain of its underwriters at Lloyd’s of London and other insurers, against the Company and its subsidiaries in Texas state court, asserting claims for negligence, breach of contract, alter ego, single business enterprise, res ipsa loquitur, and gross negligence/exemplary damages. Other customers have threatened to file suit challenging the declaration of force majeure under their contracts. Contract prices under their contracts are significantly below current spot prices for natural gas in Australia. In the event it is determined that the pipeline explosion was not a force majeure, Company subsidiaries believe that liquidated damages should be the extent of the damages under those long-term contracts with such provisions. Approximately 90 percent of the natural gas volumes sold by Company subsidiaries under long-term contracts have liquidated damages provisions. Contractual liquidated damages under the long-term contracts with such provisions would not be expected to exceed $200 million AUD. In their Harris County petition, Burrup Fertilisers and its underwriters and insurers seek to recover unspecified actual damages, cost of repair and replacement, exemplary damages, lost profits, loss of business goodwill, value of the gas lost under the GSA, interest and court costs. No assurance can be given that Burrup Fertilisers and other customers would not assert claims in excess of contractual liquidated damages, and exposure related to such claims is not currently determinable. While an adverse judgment against Company subsidiaries (and Company, in the case of the Burrup Fertilisers lawsuit) is possible, the Company and Company subsidiaries do not believe any such claims would have merit and plan to vigorously pursue their defenses against any such claims.

     In December 2008, the Senate Economics Committee of the Parliament of Australia released its findings from public hearings concerning the economic impact of the gas shortage following the explosion on Varanus Island and the government’s response. The Committee concluded, among other things, that the macroeconomic impact to Western Australia will never be precisely known, but cited to a range of estimates from $300 million AUD to $2.5 billion AUD consisting in part of losses alleged by some parties who have long-term contracts with Company subsidiaries (as described above), but also losses alleged by third parties who do not have contracts with Company subsidiaries (but who may have purchased gas that was re-sold by customers or who may have paid more for energy following the explosion or who lost wages or sales due to the inability to obtain energy or the increased price of energy). A timber industry group, whose members do not have a contract with Company subsidiaries, has announced that it intends to seek compensation for its members and their subcontractors from Company subsidiaries for $20 million AUD in losses allegedly incurred as a result of the gas supply shortage following the explosion. In Johnson Tiles Pty Ltd v. Esso Australia Pty Ltd [2003] VSC 27 (Supreme Court of Victoria, Gillard J presiding), which concerned a 1998 explosion at an Esso natural gas processing plant at Longford in East Gippsland, Victoria, the Court held that Esso was not liable for $1.3 billion AUD of pure economic losses suffered by claimants that had no contract with Esso, but was liable to such claimants for reasonably foreseeable property damage which Esso settled for $32.5 million plus costs. In reaching this decision the Court held that third-party claimants should have protected themselves from pure economic losses, through the purchase of insurance or the installation of adequate backup measures, in case of an interruption in their gas supply from Esso. While an adverse judgment against Company subsidiaries is possible if litigation is filed, Company subsidiaries do not believe any such claims would have merit and plan to vigorously pursue their defenses against any such claims. Exposure related to any such potential claims is not currently determinable.

     On October 10, 2008, the Australia National Offshore Petroleum Safety Authority (NOPSA) released a self-titled “Final Report” of the findings of its investigation into the pipeline explosion, prepared at the request of the Western Australian Department of Industry and Resources (DoIR). NOPSA concluded in its report that the evidence gathered to date indicates that the main causal factors in the incident were: (1) ineffective anti-corrosion coating at the beach crossing section of the 12-inch sales gas pipeline, due to damage and/or dis-bondment from the pipeline; (2) ineffective cathodic protection of the wet-dry transition zone of the beach crossing section of the 12-inch sales gas pipeline; and (3) ineffective inspection and monitoring by Company subsidiaries of the beach crossing and shallow water section of the 12-inch sales gas pipeline. NOPSA further concluded that the investigation identified that Apache Northwest Pty Ltd and its co-licensees may have committed offenses under the Petroleum Pipelines Act 1969, Sections 36A & 38(b) and the Petroleum Pipelines Regulations 1970, Regulation 10, and that some findings may also constitute non-compliance with pipeline license conditions. NOPSA states in its report that an application for renewal of the pipeline license covering the area of the Varanus Island facility was granted in May 1985 with 21 years validity, and an application for renewal of the license was submitted to DoIR by Company subsidiaries in December 2005 and remains pending.

     Company subsidiaries disagree with NOPSA’s conclusions and believe that the NOPSA report is premature, based on an incomplete investigation and misleading. In a July 17, 2008, media statement, DoIR acknowledged, “The pipelines and Varanus Island facilities have been the subject of an independent validation report [by Lloyd’s Register] which was received in August 2007. NOPSA has also undertaken a number of inspections between 2005 and the present.” These and numerous other inspections, audits and reviews conducted by top international consultants and regulators did not identify any warnings that the pipeline had a corrosion problem or other issues that could lead to its failure. Company subsidiaries believe that the explosion was not reasonably foreseeable, and was not within the reasonable control of Company’s subsidiaries or able to be reasonably prevented by Company subsidiaries.

     On January 9, 2009, the governments of Western Australia and the Commonwealth of Australia announced a joint inquiry to consider the effectiveness of the regulatory regime for occupational health and safety and integrity that applied to operations and facilities at Varanus Island and the role of DoIR, NOPSA and the Western Australian Department of Consumer and Employment Protection (DoCEP). The joint inquiry’s report was published in June 2009.

     On May 8, 2009, the government of Western Australia announced that its Department of Mines and Petroleum (DMP) will carry out “the final stage of investigations into the Varanus Island gas explosion.” Inspectors were appointed under the Petroleum Pipelines Act to coordinate the final stage of the investigations. Their report has been delivered to the Minister for Mines and Petroleum, but neither the report nor its contents have been made available to Company subsidiaries for their review and comment.

     On May 28, 2009, the DMP filed a prosecution notice in the Magistrates Court of Western Australia, charging Apache Northwest Pty Ltd and its co-licensees with failure to maintain a pipeline in good condition and repair under the Petroleum Pipelines Act 1969, Section 38(b). The maximum fine associated with the alleged offense is $50,000 AUD. The Company subsidiary does not believe that the charge has merit and plans to vigorously pursue its defenses.

 Seismic License

     In December 1996 the Company and Fairfield Industries Incorporated entered into a Master Licensing Agreement for the licensing of seismic data relating to certain blocks in the Gulf of Mexico. The Company and Fairfield also entered into supplemental agreements specifying the data to be licensed to the Company as well as the consideration due Fairfield. In February 2009 the Company filed an action in Texas state court seeking a declaration of the parties’ contractual obligations. The Company and its subsidiary, GOM Shelf LLC, have also asserted a claim to recover damages for certain overpayments to Fairfield under the parties’ agreements. Fairfield and a related entity, Fairfield Royalty Corporation, counterclaimed. As a result of a nonbinding mediation in July 2010, the parties have resolved the matter amicably, which resolution did not have a material affect on the Company.

 Mariner Stockholder Lawsuits

     In connection with the Merger, two shareholder lawsuits styled as class actions have been filed against Mariner and its board of directors. The lawsuits are entitled City of Livonia Employees’ Retirement System, Individually and on Behalf of All Others Similarly Situated vs. Mariner Energy, Inc, et al., (filed April 16, 2010, in the District Court of Harris County, Texas), and Southeastern Pennsylvania Transportation Authority, individually, and on behalf of all those similarly situated, vs. Scott D. Josey, et.al., (filed April 21, 2010, in the Court of Chancery in the State of Delaware). The Southeastern Pennsylvania Transportation Authority lawsuit also names Apache and its wholly owned subsidiary, ZMZ Acquisitions LLC (the Merger Sub) as defendants. The complaints generally allege that (1) Mariner’s directors breached their fiduciary duties in negotiating and approving the Merger and by administering a sale process that failed to maximize shareholder value and (2) Mariner, and in the case of the Southeastern Pennsylvania Transportation Authority complaint, Apache and the Merger Sub, aided and abetted Mariner’s directors in breaching their fiduciary duties. The City of Livonia Employees’ Retirement System complaint also alleges that Mariner’s directors and executives stand to receive substantial financial benefits if the transaction is consummated on its current terms. Pending court approval, these lawsuits have been settled in principle and are not expected to have a material impact on Apache.

 Marbob Energy Corporation and Concho Resources Lawsuits

     Marbob Energy Corporation, Concho Resources and other parties have filed lawsuits against BP America Inc, BP America Production Company (“BP”), and ZPZ Delaware I LLC (“ZPZ”), Apache’s wholly owned subsidiary, in New Mexico seeking a declaratory judgment that Plaintiffs are entitled to receive preferential purchase rights (“PPR”) notices on certain of the properties that are included in the Purchase and Sale Agreement between BP and ZPZ and injunctive relief to force BP promptly to issue to Plaintiffs PPR notices on those properties. Plaintiffs do not seek monetary damages, other than fees and costs incurred in bringing these actions. Apache agreed to indemnify BP for these actions. On October 15, 2010, the parties settled the dispute on commercial terms. Apache’s subsidiary acquired a 50-percent interest in the subject acreage in its previously announced acquisition of BP’s oil and gas operations, acreage and infrastructure in the Permian Basin of West Texas and New Mexico. The subsidiary acquired an additional 10-percent interest and became operator as a result of the settlement of the dispute with Marbob Energy Corporation and Concho Resources. As a result of the settlement, Concho will own approximately 40 percent of the subject acreage.

 Escheat Audits

     The State of Delaware, Department of Finance, Division of Revenue (Unclaimed Property), has notified numerous companies, including Apache Corporation, that the State intends to examine its books and records and those of its subsidiaries and related entities to determine compliance with the Delaware Escheat Laws. The review will be conducted by Kelmar Associates on behalf of the State. At least 30 other states have retained their own consultants and have sent similar notifications. The scope of each state’s audit varies. The State of Delaware advises, for example, that the scope of its examination will be for the period 1981 through the present. It is possible that one or more of the State audits could extend to all 50 states.

 NAL GP Ltd Lawsuit

     In a lawsuit commenced on September 23, 2010, and styled as NAL GP Ltd., Applicant, and BP Canada Energy Company, BP Canada Energy, and Apache Corporation, Respondents, Action No. 1001-14115, in the Court of Queen’s Bench of Alberta, Judicial District of Calgary, NAL GP Ltd. (“NAL”) seeks, among other things, interim injunctive relief to freeze the 15-day notice period concerning NAL’s rights of first refusal relating to certain of the Canadian assets involved in the transaction between BP and Apache announced July 20, 2010, and further a hearing concerning the allocated values associated with such assets (approximately $1.6 billion USD in the aggregate). Apache Corporation was wrongly named as a respondent in the proceeding, and so Apache Canada Ltd. has appeared in the proceeding. A hearing on NAL’s application was held on September 27, 2010. On September 28, 2010, the Court dismissed NAL’s application in its entirety. NAL has filed an appeal. Along with BP, Apache Canada Ltd. intends to continue to defend against NAL’s claims vigorously.

Environmental Matters

     As of September 30, 2010, the Company had an undiscounted reserve for environmental remediation of approximately $23 million. The Company is not aware of any environmental claims existing as of September 30, 2010, which have not been provided for or would otherwise have a material impact on its financial position or results of operations. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.

10. FAIR VALUE MEASUREMENTS

     ASC 820, “Fair Value Measurements and Disclosures,” provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.

     The valuation techniques that may be used to measure fair value include a market approach, an income approach, and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     Certain assets and liabilities are reported at fair value on a recurring basis in Apache’s consolidated balance sheet. The following methods and assumptions were used to estimate the fair values:

 Cash, Cash Equivalents, Short-Term Investments, Accounts Receivable and Accounts Payable

     The carrying amounts approximate fair value because of the short-term nature or maturity of these instruments.

 Commodity Derivative Instruments

     Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps and options. The Company uses a market approach to estimate the fair values of derivative instruments, utilizing published commodity futures price strips for the underlying commodities as of the date of the estimate. The fair values of the Company’s derivative instruments are not actively quoted in the open market and are valued using forward commodity price curves provided by a reputable third party. These valuations are Level 2 inputs. For further information regarding Apache’s derivative instruments and hedging activities, please see Note 3 — Derivative Instruments and Hedging Activities of this Form 10-Q.

     The following table presents the Company’s material assets and liabilities measured at fair value on a recurring basis for each hierarchy level:

		Fair Value Measurements Using
		Quoted
		Price in				Significant				Significant
		Active				Other				Unobservable				Total
		Markets				Inputs				Inputs				Fair								Carrying
		(Level 1)				(Level 2)				(Level 3)				Value				Netting(1)				Amount
		(In millions)
September 30, 2010
Assets:
Commodity Derivative Instruments		$	—			$	459			$	—			$	459			$	(82	)		$	377
Liabilities:
Commodity Derivative Instruments			—				231				—				231				(82	)			149
December 31, 2009
Assets:
Commodity Derivative Instruments		$	—			$	75			$	—			$	75			$	(11	)		$	64
Liabilities:
Commodity Derivative Instruments			—				341				—				341				(11	)			330

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

     Certain assets and liabilities are reported at fair value on a nonrecurring basis in Apache’s consolidated balance sheet. The following methods and assumptions were used to estimate the fair values:

Asset Retirement Obligations Incurred in Current Period

     Apache uses an income approach to estimate the fair value of AROs based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO; estimated probabilities; amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates. AROs incurred in the current period were Level 3 fair value measurements. A summary of changes in the ARO liability is provided in Note 5 — Asset Retirement Obligation of this Form 10-Q.

Debt

     The Company’s debt is recorded at the carrying amount on its consolidated balance sheet. In accordance with ASC 825, “Financial Instruments,” disclosure of the fair value of total debt is required for interim reporting. Apache uses a market approach to determine the fair value of Apache’s fixed-rate debt using estimates provided by an independent financial data services firm, which is a Level 2 fair value measurement. The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates. The following table presents the carrying amounts and estimated fair values of the Company’s debt at September 30, 2010 and December 31, 2009:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In millions)
Total Debt, Net of Unamortized Discount		$	6,516			$	7,482			$	5,067			$	5,635