UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended September 30, 2008

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

For the Transition Period from                      to                     

APACHE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		41-0747868
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Suite 100, One Post Oak Central
2000 Post Oak Boulevard, Houston, TX		77056-4400
(Address of principal executive offices)		(Zip Code)

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 is a large accelerated filer, an accelerated filer, 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		Smaller reporting company o
		(Do not check if a smaller reporting company)

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

 

 

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,
		2008				2007				2008				2007
		(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues		$	3,368,882			$	2,498,594			$	10,450,949			$	6,965,692
Other			(3,998	)			6,364				1,867				14,685
			3,364,884				2,504,958				10,452,816				6,980,377
OPERATING EXPENSES:
Depreciation, depletion and amortization			600,887				600,796				1,849,044				1,722,816
Asset retirement obligation accretion			24,970				24,436				77,146				72,634
Lease operating expenses			488,166				409,528				1,389,542				1,198,302
Gathering and transportation			42,375				34,887				123,118				100,585
Taxes other than income			304,280				139,461				845,406				393,222
General and administrative			57,561				61,405				218,856				200,065
Financing costs, net			33,291				60,367				116,594				165,788
			1,551,530				1,330,880				4,619,706				3,853,412
INCOME BEFORE INCOME TAXES:			1,813,354				1,174,078				5,833,110				3,126,965
Current income tax provision			305,735				200,878				1,495,641				684,458
Deferred income tax provision			316,794				359,852				679,902				702,672
NET INCOME:			1,190,825				613,348				3,657,567				1,739,835
Preferred stock dividends			1,420				1,420				4,260				4,260
INCOME ATTRIBUTABLE TO COMMON STOCK:		$	1,189,405			$	611,928			$	3,653,307			$	1,735,575
NET INCOME PER COMMON SHARE:
Basic		$	3.55			$	1.84			$	10.93			$	5.23
Diluted		$	3.52			$	1.83			$	10.84			$	5.19

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,
		2008				2007
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,657,567			$	1,739,835
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			1,849,044				1,722,816
Asset retirement obligation accretion			77,146				72,634
Provision for deferred income taxes			679,902				702,672
Unrealized loss on derivatives			35,586				—
Other			(11,231	)			39,502
Changes in operating assets and liabilities:
(Increase) decrease in receivables			251,920				(30,595	)
(Increase) decrease in drilling advances and other			27,891				(36,324	)
(Increase) decrease in inventories			(7,729	)			30,621
(Increase) decrease in deferred charges and other			(200,038	)			(53,464	)
Increase (decrease) in accounts payable			71,188				(12,799	)
Increase (decrease) in accrued expenses			(367,553	)			(231,327	)
Increase (decrease) in deferred credits and noncurrent liabilities			(35,125	)			(66,099	)
Net cash provided by operating activities			6,028,568				3,877,472
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas property			(4,062,975	)			(3,405,682	)
Acquisition of U.S. Permian Basin properties			—				(1,004,581	)
Additions to gas gathering, transmission and processing facilities			(420,850	)			(301,226	)
Restricted cash			(13,844	)			—
Proceeds from sale of oil and gas properties			306,701				11,074
Other, net			(42,509	)			(131,780	)
Net cash used in investing activities			(4,233,477	)			(4,832,195	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper and money market borrowings, net			(169,042	)			(947,989	)
Fixed-rate debt borrowings			—				1,992,027
Payments on fixed-rate debt			(353	)			(3,000	)
Dividends paid			(187,735	)			(153,421	)
Common stock activity			31,207				22,707
Treasury stock activity, net			4,171				12,474
Cost of debt and equity transactions			(1,224	)			(18,000	)
Other			46,666				20,823
Net cash provided by (used in) financing activities			(276,310	)			925,621
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,518,781				(29,102	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			125,823				140,524
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,644,604			$	111,422
SUPPLEMENTARY CASH FLOW DATA:
Interest paid, net of capitalized interest		$	137,106			$	124,913
Income taxes paid, net of refunds			1,512,864				604,862

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,
		2008				2007
		(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	1,644,604			$	125,823
Receivables, net of allowance			1,680,031				1,936,977
Inventories			479,723				461,211
Drilling advances			83,444				112,840
Derivative instruments			12,929				20,889
Prepaid assets and other			271,561				94,511
			4,172,292				2,752,251
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties			38,673,437				34,645,710
Unproved properties and properties under development, not being amortized			1,698,471				1,439,726
Gas gathering, transmission and processing facilities			2,627,304				2,206,453
Other			441,339				416,149
			43,440,551				38,708,038
Less: Accumulated depreciation, depletion and amortization			(15,321,733	)			(13,476,445	)
			28,118,818				25,231,593
OTHER ASSETS:
Restricted cash			13,844				—
Goodwill, net			189,252				189,252
Deferred charges and other			498,226				461,555
		$	32,992,432			$	28,634,651

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,
		2008				2007
		(In thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	702,143			$	617,937
Accrued operating expense			110,036				112,453
Accrued exploration and development			787,129				600,165
Accrued compensation and benefits			129,998				172,542
Accrued interest			73,175				78,187
Accrued income taxes			137,157				73,184
Current debt			140,514				215,074
Asset retirement obligation			359,975				309,777
Derivative instruments			264,309				286,226
United Kingdom Petroleum Revenue Tax			153,805				117,028
Other			58,065				82,443
			2,916,306				2,665,016
LONG-TERM DEBT			3,917,327				4,011,605
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes			4,512,418				3,924,983
Asset retirement obligation			1,462,309				1,556,909
Derivative instruments			681,782				381,791
Other			739,184				716,368
			7,395,693				6,580,051
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized — Series B, 5.68% Cumulative, $100 million aggregate liquidation value, 100,000 shares issued and outstanding			98,387				98,387
Common stock, $0.625 par, 430,000,000 shares authorized, 342,738,124 and 341,322,088 shares issued, respectively			214,211				213,326
Paid-in capital			4,445,511				4,367,149
Retained earnings			14,927,178				11,457,592
Treasury stock, at cost, 8,067,897 and 8,394,945 shares, respectively			(228,981	)			(238,264	)
Accumulated other comprehensive loss			(693,200	)			(520,211	)
			18,763,106				15,377,979
		$	32,992,432			$	28,634,651

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 B																				Other				Total
		Comprehensive					Preferred				Common				Paid-In				Retained				Treasury				Comprehensive				Shareholders’
		Income					Stock				Stock				Capital				Earnings				Stock				Income (Loss)				Equity
		(In thousands)
BALANCE AT DECEMBER 31, 2006							$	98,387			$	212,365			$	4,269,795			$	8,898,577			$	(256,739	)		$	(31,332	)		$	13,191,053
Comprehensive income (loss):
Net income		$	1,739,835					—				—				—				1,739,835				—				—				1,739,835
Commodity hedges, net of income tax expense of $82,848			(145,509	)				—				—				—				—				—				(145,509	)			(145,509	)
Comprehensive income		$	1,594,326
Dividends:
Preferred								—				—				—				(4,260	)			—				—				(4,260	)
Common ($.45 per share)								—				—				—				(149,433	)			—				—				(149,433	)
Common shares issued								—				834				38,154				—				—				—				38,988
Treasury shares issued, net								—				—				972				—				16,321				—				17,293
Compensation expense								—				—				34,571				—				—				—				34,571
FIN 48 Adoption								—				—				—				(48,502	)			—				—				(48,502	)
Other								—				—				(1,483	)			241				—				—				(1,242	)
BALANCE AT SEPTEMBER 30, 2007							$	98,387			$	213,199			$	4,342,009			$	10,436,458			$	(240,418	)		$	(176,841	)		$	14,672,794
BALANCE AT DECEMBER 31, 2007							$	98,387			$	213,326			$	4,367,149			$	11,457,592			$	(238,264	)		$	(520,211	)		$	15,377,979
Comprehensive income (loss):
Net income		$	3,657,567					—				—				—				3,657,567				—				—				3,657,567
Commodity hedges, net of income tax benefit of $89,376			(172,989	)				—				—				—				—				—				(172,989	)			(172,989	)
Comprehensive income		$	3,484,578
Dividends:
Preferred								—				—				—				(4,260	)			—				—				(4,260	)
Common ($.55 per share)								—				—				—				(183,735	)			—				—				(183,735	)
Common shares issued								—				885				36,109				—				—				—				36,994
Treasury shares issued, net								—				—				247				—				9,283				—				9,530
Compensation expense								—				—				65,645				—				—				—				65,645
FIN 48								—				—				(23,770	)							—				—				(23,770	)
Other								—				—				131				14				—				—				145
BALANCE AT SEPTEMBER 30, 2008							$	98,387			$	214,211			$	4,445,511			$	14,927,178			$	(228,981	)		$	(693,200	)		$	18,763,106

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), and reflect all adjustments which 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 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. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included in the Company’s most recent annual report on Form 10-K.

Reclassifications

     Certain prior-period amounts have been reclassified to conform with current-year presentations.

1. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

     Cash Flow Hedges We periodically use derivative instruments in connection with anticipated crude oil and natural gas sales to mitigate the variability of cash flows associated with commodity price fluctuations. While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits from future increases in commodity prices. We account for derivative instruments and hedging activities in accordance with Statement of Financial Accounting Standards (SFAS) 133 and typically elect to designate our commodity derivatives instruments as cash flow hedges. No new hedges were entered into during the third quarter of 2008.

     As of September 30, 2008, we had entered into the following crude oil derivative instruments:

		Fixed-Price Swaps								Call Options								Collars
						Weighted								Weighted								Weighted				Weighted
Production						Average								Average								Average				Average
Period		Mbbls				Fixed Price(1)				Mbbls				Strike Price(1)				Mbbls				Floor Price(1)				Ceiling Price(1)
2008			1,104			$	69.21				—			$	—				3,450			$	65.51			$	81.43
2009			368				67.95				—				—				9,321				63.39				80.14
2010			2,018				70.87				368				129.50				6,016				62.11				77.44
2011			3,285				71.16				1,095				134.17				4,377				65.83				84.41
2012			2,926				71.34				364				138.00				1,456				66.88				85.52
2013			1,086				71.34				—				—				—				—				—

     As of September 30, 2008, we had entered into the following natural gas derivative instruments:

Put Options										Collars
						Weighted																Weighted				Weighted
Production		MMBtu				Average				Production				MMBtu				GJ				Average				Average
Period		(in 000’s)				Strike Price(1)				Period				(in 000’s)				(in 000’s)				Floor Price(1)				Ceiling Price(1)
2008			1,840			$	8.75				2008				23,460				—			$	7.27			$	10.31
2009			—				—				2008				—				8,280				6.22				9.74
2010			—				—				2009				18,250				—				7.35				10.19
2011			—				—				2009				—				29,200				6.13				9.53
2012			—				—				2010				1,350				—				7.17				10.58

     Receivables/Payables Related to Crude Oil and Natural Gas Derivative Instruments The fair market value of the Company’s derivative assets and liabilities, including derivatives no longer qualifying for hedge accounting, are as follows:

		September 30,				December 31,
		2008				2007
		(In millions)
Current asset		$	13			$	21
Long-term asset			—				7
Current liability			264				286
Long-term liability			682				382

     Commodity Derivative Activity in Accumulated Other Comprehensive Income (OCI) Based on market prices as of September 30, 2008, the Company’s net unrealized loss in accumulated OCI for commodity derivatives designated as cash flow hedges totaled $901 million ($585 million after tax). Gains and losses on these hedges will be realized in future earnings contemporaneously with the related sales of natural gas and crude oil production applicable to specific hedges, which will occur through mid-2013. A reconciliation of the components of accumulated OCI in the Statement of Consolidated Shareholders’ Equity related to Apache’s cash flow hedges is presented in the table below:

		Before tax				After tax
		(In millions)
Unrealized loss on derivatives at December 31, 2007		$	(639	)		$	(412	)
Realized amounts reclassified into earnings			516				334
Unrealized amounts reclassified into earnings			36				23
Net change in derivative fair value			(814	)			(530	)
Unrealized loss on derivatives at September 30, 2008		$	(901	)		$	(585	)

2. DEBT

  Credit Facilities

     As of September 30, 2008, the Company had committed revolving credit facilities totaling $2.3 billion. The facilities consist of 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. There were no outstanding loans under these facilities as of September 30, 2008.

     During March and April 2008, the Company amended its $1.5 billion U.S. five-year revolving credit facility to (a) extend the maturity date one year to May 28, 2013 and (b) remove certain restrictions on our Australian entities including their ability to incur liens and issue guarantees. The Company also amended its $450 million U.S. credit facility, $150 million Australian credit facility and $150 million Canadian credit facility to (a) extend the maturity date one year to May 12, 2013, (b) remove certain restrictions on our Australian entities including their ability to incur liens and issue guarantees, and (c) specific to the Australian credit facility, give the Company the option of increasing the size of the facility up to a maximum amount of $400 million from the current limit of $300 million by adding commitments from new or existing lenders. In April 2008, the Company increased the Australian credit facility by $50 million to $200 million.

Subsequent Events

     On October 1, 2008, the Company issued $400 million principal amount, $398 million net of discount, of senior unsecured 6.0-percent notes maturing September 15, 2013, and $400 million principal amount, $398 million net of discount, of senior unsecured 6.9-percent notes maturing September 15, 2018. The notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium. The proceeds are presently invested in U.S. Treasury Notes and will be used for general corporate purposes.

  Financing Costs, Net

     Financing costs incurred during the periods noted are composed of the following:

		For the Quarter Ended								For the Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands)
Interest expense		$	66,055			$	82,939			$	201,690			$	230,487
Amortization of deferred loan costs			818				875				2,498				2,421
Capitalized interest			(24,032	)			(18,880	)			(68,419	)			(56,554	)
Interest income			(9,550	)			(4,567	)			(19,175	)			(10,566	)
Financing costs, net		$	33,291			$	60,367			$	116,594			$	165,788

3. 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, settlements with taxing authorities and other infrequent or unusual items are recognized as discrete items in the quarter in which they occur.

     Apache and its subsidiaries are subject to U.S. federal income tax as well as income tax 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.

     During the third quarter of 2008, the Company was in Administrative Appeals with the United States Internal Revenue Service (IRS) regarding the 2002 through 2005 tax years and under IRS audit for the 2006 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.

     During the third quarter of 2008, the Company recorded a $22 million reduction in income taxes following completion of an income tax audit. This reduced tax contingency reserves established in accordance with Financial Accounting Standards Board Interpretation No. 48 (FIN 48), “Accounting for Uncertainty of Income Taxes — an Interpretation of SFAS No. 109.”

  Subsequent Event

     During the fourth quarter of 2008, the Company received notification from the Appeals Division of the Internal Revenue Service that the appeals process for the years 2002 and 2003 has been completed. As a result of the completion of this process, we expect a reduction in our deferred income taxes and FIN 48 tax reserves in the fourth quarter of 2008.

4. CAPITAL STOCK

  Net Income per Common Share

     A reconciliation of the components of basic and diluted net income per common share is presented in the table below:

		For the Quarter Ended September 30,
		2008												2007
						Weighted												Weighted
						Average												Average
						Common												Common
						Shares												Shares
		Income				Outstanding				Per Share				Income				Outstanding				Per Share
		(In thousands, except per share amounts)
Basic:
Income attributable to common stock		$	1,189,405				334,825			$	3.55			$	611,928				332,668			$	1.84
Effect of Dilutive Securities:
Stock options and other			—				3,069								—				2,449
Diluted:
Income attributable to common stock, including assumed conversions		$	1,189,405				337,894			$	3.52			$	611,928				335,117			$	1.83

		For the Nine Months Ended September 30,
		2008												2007
						Weighted												Weighted
						Average												Average
						Common												Common
						Shares												Shares
		Income				Outstanding				Per Share				Income				Outstanding				Per Share
		(In thousands, except per share amounts)
Basic:
Income attributable to common stock		$	3,653,307				334,145			$	10.93			$	1,735,575				331,903			$	5.23
Effect of Dilutive Securities:
Stock options and other			—				3,006								—				2,183
Diluted:
Income attributable to common stock, including assumed conversions		$	3,653,307				337,151			$	10.84			$	1,735,575				334,086			$	5.19

     The diluted earnings per share calculations above exclude 357,884 and 4,000 shares of common stock that were anti-dilutive at September 30, 2008 and September 30, 2007, respectively.

  Common and Preferred Stock Dividends

     During the third quarter of 2008 and 2007, Apache paid $50 million in dividends on its common stock. For the nine-month periods ended September 30, 2008 and 2007, the Company paid $183 million and $149 million, respectively. Dividends paid during the 2008 nine-month period included a special cash dividend of 10 cents per common share, paid March 18, 2008. In addition, for the three-month and nine-month periods ended September 30, 2008 and 2007, Apache paid a total of $1.4 million and $4.3 million, respectively, in dividends on its Series B Preferred Stock.

  Stock-Based Compensation

     2005 Share Appreciation Plan On May 5, 2005, the Company’s stockholders approved the 2005 Share Appreciation Plan that provided incentives for employees to double Apache’s share price to $108 by the end of 2008, with an interim goal of $81 to be achieved by the end of 2007. To achieve the trigger price, the Company’s stock price had to close at or above the stated threshold for 10 days out of any 30 consecutive trading days by the end of the stated period.

     On June 14, 2007, Apache’s share price exceeded the interim $81 threshold for the required 10-day period. As such, Apache will issue approximately one million shares of its common stock, after minimum tax withholding requirements, in four equal annual installments. The first and second installments have already been issued. Subsequent installments will be issued in 2009 and 2010 to eligible employees remaining with the Company during that period.

     On February 29, 2008, Apache’s share price exceeded the $108 threshold for the required 10-day period. As such, Apache will issue approximately two million shares of its common stock, after minimum tax withholding requirements, in four equal annual installments. The first installment was issued in March 2008. Subsequent installments will be issued in 2009, 2010 and 2011 to eligible employees remaining with the Company during that period.

     2008 Share Appreciation Program 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 (the “Program”) that provides incentives for employees to double Apache’s share price to $216 by the end of 2012, with an interim goal of $162 to be achieved by the end of 2010. To achieve the payout, the Company’s stock price must close at or above the stated threshold for 10 out of any 30 consecutive trading days before the end of the stated period. Under the Program, if the first threshold is achieved, approximately 1.1 million shares would be awarded at an intrinsic cost of approximately $180 million. Achieving the second threshold would result in awards of approximately 1.7 million shares at an intrinsic cost of approximately $359 million. Shares issued to employees would be reduced by the required minimum tax withholding. Awards under the Program are payable in five equal annual installments, beginning on a date not more than 30 days after a threshold is attained for the required measurement period and on the four succeeding anniversaries of the attainment date. Over 90 percent of the value would benefit non-executive employees.

     Current accounting practices dictate that, regardless of whether these thresholds are ultimately achieved, the Company will recognize, over time, the fair value cost determined at the grant date based on numerous assumptions, including an estimate of the likelihood that Apache’s stock price will achieve these thresholds and the expected forfeiture rate. As a result, the Company will recognize expense and capitalized costs of approximately $193 million over the expected service life of the Program.

     The weighted-average fair value, based on a Monte Carlo Simulation Model, was $84.32 per share, determined by using expected volatility of 27.35 percent, an expected dividend yield of 0.52 percent, and a risk free interest rate of 3.03 percent.

     On May 7, 2008, the Stock Option Plan Committee of Apache’s Board of Directors awarded its Chief Executive Officer 250,000 restricted stock units, 50,000 of which will vest on July 1, 2009. The remaining 200,000 shares will vest ratably on the first business day of the years 2010, 2011, 2012 and 2013. Upon vesting, the Company will issue one share of the Company’s common stock as settlement for each restricted stock unit. Thirty thousand of the shares vesting each year will not be eligible for sale by the executive until such time as he retires or otherwise terminates employment with the Company. This award was made under the terms of the Company’s 2007 Omnibus Equity Compensation Plan.

     In August 2008, the Company established, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan, the Non-Employee Directors’ Restricted Stock Units Program (the “RSU Program”). Each non-employee director was awarded 1,500 restricted stock units on August 14, 2008 under the RSU Program, with half of the restricted stock units vesting thirty days after the grant, and the other half vesting on the one-year anniversary date of the grant. Each year, all non-employee directors will be eligible to receive grants of restricted stock units comparable in value to the 2008 grant. Non-employee directors are required to choose, at the time of each award, whether such award will vest as 100 percent common stock or a combination of 40 percent cash and 60 percent common stock.

5. ASSET RETIREMENT OBLIGATIONS

     The following table describes changes to the Company’s asset retirement obligation (ARO) liability for the nine months ended September 30, 2008:

		2008
		(In thousands)
Asset retirement obligation at December 31, 2007		$	1,866,686
Liabilities incurred			267,308
Liabilities settled			(471,923	)
Accretion expense			77,146
Revisions in estimated liabilities			83,067
Asset retirement obligation at September 30, 2008		$	1,822,284
Current portion		$	359,975
Long-term portion			1,462,309

     ARO reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with our 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 make 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.

     Liabilities settled primarily relate to individual properties plugged and abandoned during the period. Most of the current year abandonment activity was in the Gulf of Mexico, a portion of which relates to the continued abandonment of platforms destroyed in 2005 during Hurricanes Katrina and Rita.

     During the third quarter, four of the Company’s operated platforms and two non-operated platforms were destroyed as a result of Hurricane Ike. Upon completing an initial assessment of hurricane related damages, the Company increased the discounted ARO liability on the affected properties by $83 million. The revision reflects the increased costs and acceleration in expected timing to abandon the toppled or destroyed platforms.

6. COMMITMENTS AND CONTINGENCIES

Legal Matters

     Grynberg As more fully described in Note 9 of the financial statements in our annual report on Form 10-K for our 2007 fiscal year, in 2003, Jack J. Grynberg added Apache to lawsuits he began filing in 1997 against other natural gas producers, gatherers, and pipelines claiming that the defendants have underpaid royalty to the federal government and Indian tribes by mismeasurement of the volume and heating content of natural gas and are responsible for acts of others who mismeasured natural gas. The claims against Apache were dismissed, though Mr. Grynberg has appealed the dismissal. No material changes in this matter have occurred since the filing of our most recent annual report on Form 10-K.

     Argentine Environmental Claims In connection with the Pioneer acquisition 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 relating to various environmental and remediation claims. All of these matters are more fully described in Note 9 of the financial statements in our annual report on Form 10-K for our 2007 fiscal year. No material change in the status of these matters has occurred since the filing of our most recent annual report on Form 10-K.

     Louisiana Restoration As more fully described in Note 9 of the financial statements in our annual report on Form 10-K for our 2007 fiscal year, 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 for contamination and cleanup. No material change in the status of these matters has occurred since the filing of our most recent annual report on Form 10-K.

     Hurricane Related Litigation As more fully described in Note 9 of the financial statements in our annual report on Form 10-K for our 2007 fiscal year, 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). No material change in the status of this matter has occurred since the filing of our most recent annual report on Form 10-K.

     Australia Gas Pipeline Force Majeure As more fully described in Item 2 of this quarterly report on Form 10-Q, Company subsidiaries reported a pipeline explosion that interrupted deliveries of natural gas to customers under various long-term contracts. The subsidiaries and their joint venture participants have declared force majeure under those contracts. Although no litigation has been filed other than pre-action discovery proceedings by a single customer, a few 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. If there were to be a successful challenge of the declaration of force majeure, approximately 90 percent of the natural gas volumes were sold by Company subsidiaries under long-term contracts that have liquidated damages provisions. Contractual liquidated damages under the long-term contracts with such provisions would not be expected to exceed $200 million AUD. No assurance can be given that customers would not assert claims in excess of contractual liquidated damages. 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 such claims is not currently determinable. Company subsidiaries believe that the event was a force majeure. 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 the long-term contracts with such provisions.

     By November 13, 2008, the Senate Economics Committee of the Parliament of Australia is expected to release its findings from public hearings to determine the economic impact of the gas shortage following the explosion on Varanus Island and the government’s response. The report will consist 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” 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” sales gas pipeline; and (3) ineffective inspection and monitoring by Company subsidiaries of the beach crossing and shallow water section of the 12” sales gas pipeline. NOPSA further concluded that the investigation identified that Apache Northwest Pty Ltd and its co-licensees may have committed offences 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 an unforeseeable event, and will work thoroughly and methodically to determine the root cause of the explosion.

     Other Matters The Company is involved in other litigation and is subject to government and regulatory controls in the normal course of business. The Company has an accrued liability of approximately $14 million for other legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. It is management’s opinion that the loss for any such other litigation matters and claims that are reasonably possible to occur will not have a material adverse affect on the Company’s financial position or results of operations.

Environmental Matters

     As of September 30, 2008, the Company had an undiscounted reserve for environmental remediation of approximately $25 million. The Company is not aware of any environmental claims existing as of September 30, 2008, 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 that past non-compliance with environmental laws will not be discovered on the Company’s properties.

Other Commitments

     In January 2008, Apache, BP plc and Chevron Corporation entered into a contract with Wild Well Control, Inc., to decommission certain downed platforms and related well facilities located offshore Louisiana in the Gulf of Mexico for a fixed fee of $750 million. Apache’s portion is 37.5 percent, or $281 million, which is included as part of the Company’s accrued ARO. We have spent $63 million of the $281 million as of September 30, 2008.

     Subsequent to the end of the third quarter, we extended the term of a drilling rig currently in use in our Australian drilling program representing a commitment of $328 million over a two-year period.

7. FAIR VALUE

  Fair Value Measurements

     The Company adopted SFAS No. 157, “Fair Value Measurements,” as of the beginning of 2008. SFAS No. 157 defines fair value and establishes disclosure requirements for assets and liabilities presented at fair value on the consolidated balance sheet. Fair value is the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants. A liability is quantified at the price it would take to transfer the liability to a new obligor, not at the amount that would be paid to settle the liability with the creditor.

     To better quantify fair value, SFAS No. 157 establishes a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. Level 1 inputs 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 which are significant and unobservable, and have the lowest priority.

     The following table presents the Company’s material assets and liabilities measured at fair value for each hierarchy level as of September 30, 2008:

		As of September 30, 2008
						Fair Value Measurements Using
						Quoted Price								Significant
						in Active				Significant				Unobservable
		Total Fair				Markets				Other Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Assets:
Crude Oil and Natural Gas Options		$	13			$	—			$	13			$	—
Liabilities:
Oil and Gas Collars		$	604			$	—			$	604			$	—
Fixed-Price Oil Swaps			342				—				342				—

     Derivative instruments are valued using forward commodity price curves provided by reputable third-party brokers. The fair value of derivative instruments are not actively quoted in the open market, and are valued using Level 2 inputs.

8. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

     In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities.” The statement amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the provisions of SFAS No. 161 and assessing the impact, if any, it may have on the Company.

     In December 2007, the FASB issued a revision to SFAS No. 141 “Business Combinations” (SFAS No. 141 (R)). The revision broadens the definition of a business combination to include all transactions or other events in which control of one or more businesses is obtained. Further, the statement establishes principles and requirements for how an acquirer recognizes assets acquired, liabilities assumed and any non-controlling interests acquired. SFAS No. 141 (R) is effective for business combination transactions for which the acquisition date is on or after the beginning of the first reporting period beginning on or after December 15, 2008. Early adoption is prohibited. Apache is currently evaluating the provisions of SFAS No. 141 (R) and assessing the impact, if any, it may have on the Company.

     Also in December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements.” This statement amends Accounting Research Bulletin No. 51 “Consolidated Financial Statements.” SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, sometimes called a minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, the amounts of consolidated net income attributable to both the parent and the noncontrolling interest must be reported separately on the face of the income statement. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. We are currently evaluating the provisions of SFAS No. 160 and assessing the impact, if any, it may have on the Company.

9. BUSINESS SEGMENT INFORMATION

     Apache has producing operations in six countries: the United States (Gulf Coast and Central regions), Canada, Egypt, Australia, offshore the United Kingdom (U.K.) in the North Sea, and Argentina. Early in the second quarter of 2008, we finalized contracts for two exploration blocks in Chile (reflected under “Other International”). Financial information by country is presented below:

		United																U.K.								Other
		States				Canada				Egypt				Australia				North Sea				Argentina				International				Total
														(In thousands)
For the Quarter Ended September 30, 2008
Oil and Gas Production Revenues		$	1,311,052			$	462,470			$	778,124			$	76,817			$	642,563			$	97,856			$	—			$	3,368,882
Operating Income(1)		$	734,907			$	245,126			$	606,142			$	20,297			$	286,704			$	15,028			$	—			$	1,908,204
Other Income (Expense)
Other																															(3,998	)
General and administrative																															(57,561	)
Financing costs, net																															(33,291	)
Income Before Income Taxes																														$	1,813,354
For the Nine Months Ended September 30, 2008
Oil and Gas Production Revenues		$	4,345,687			$	1,384,790			$	2,328,440			$	328,415			$	1,787,367			$	276,250			$	—			$	10,450,949
Operating Income(1)		$	2,587,714			$	721,435			$	1,870,362			$	134,398			$	806,239			$	46,545			$	—			$	6,166,693
Other Income (Expense)
Other																															1,867
General and administrative																															(218,856	)
Financing costs, net																															(116,594	)
Income Before Income Taxes																														$	5,833,110
Total Assets		$	13,689,943			$	7,824,649			$	4,481,858			$	2,443,667			$	2,736,426			$	1,792,951			$	22,938			$	32,992,432
For the Quarter Ended September 30, 2007
Oil and Gas Production Revenues		$	1,101,328			$	330,804			$	516,536			$	138,016			$	331,827			$	80,083			$	—			$	2,498,594
Operating Income(1)		$	563,395			$	107,753			$	391,307			$	61,236			$	152,708			$	13,087			$	—			$	1,289,486
Other Income (Expense)
Other																															6,364
General and administrative																															(61,405	)
Financing costs, net																															(60,367	)
Income Before Income Taxes																														$	1,174,078
For the Nine Months Ended September 30, 2007
Oil and Gas Production Revenues		$	3,023,617			$	1,009,517			$	1,382,778			$	383,820			$	942,334			$	223,626			$	—			$	6,965,692
Operating Income(1)		$	1,457,952			$	388,366			$	1,014,256			$	163,819			$	419,470			$	34,270			$	—			$	3,478,133
Other Income (Expense)
Other																															14,685
General and administrative																															(200,065	)
Financing costs, net																															(165,788	)
Income Before Income Taxes																														$	3,126,965
Total Assets		$	12,121,829			$	7,087,271			$	3,085,358			$	1,649,165			$	2,144,419			$	1,551,516			$	11,360			$	27,650,918