Apache Corporation, a Delaware corporation formed in 1954, together with its subsidiaries (collectively, Apache) is one of the world's largest independent oil and gas companies. We have exploration and production interests in the United States, Canada, Egypt, offshore Australia, offshore the United Kingdom (U.K.) in the North Sea (North Sea) and Argentina. We also have exploration interests on the Chilean side of the island of Tierra del Fuego.
This discussion relates to Apache Corporation and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.
OPERATING HIGHLIGHTS
Apache produced a record 607,118 barrels of oil equivalent (boe) per day in the third quarter of 2009, up three percent from the second quarter of 2009 and 19 percent from the third quarter of 2008. Year-to-date 2009 production increased eight percent over the comparable 2008 period. Our diverse asset base contains a balance of near-term investment opportunities and a pipeline of longer-term, individually significant impactive projects. This platform, coupled with production restoration from the 2008 hurricanes and fire at Varanus Island, enabled us to deliver production growth for the year (despite curtailed capital spending, which was 37 percent below the first nine months of 2008) and is the foundation for solid long-term growth.
Operational highlights for the third quarter of 2009 and growth drivers for 2010 and beyond are as follows:
Third-quarter 2009 operational highlights
• Our Egypt Region achieved a new quarterly record for gross production of 290,452 boe per day, up six percent from the second quarter of 2009 and 27 percent from the third quarter of 2008. The increase was driven by higher gas output primarily from Apache's Qasr field through two new processing trains at the Salam Gas Plant and additional oil production from several discoveries in the Faghur Basin in the Khalda Offset Concession.

• In Australia, net gas production averaged a record 225 million cubic feet of gas per day (MMcf/d) following completion of repairs at the Varanus Island gas processing facility in the second quarter of 2009. While the facility was undergoing repairs for damage caused by a June 2008 explosion, gross compression capacity was expanded to 460 terajoules per day (TJ/d). As a result, average net gas production for the third quarter of 2009 was approximately 15 percent higher than pre-incident levels.

• At the Forties Field in the North Sea, we set a record for monthly production since acquiring the property in 2003. Net production for July 2009 averaged 71,472 boe per day and contributed to the second-highest quarterly production posted since Apache took over operations. Third-quarter 2009 oil output increased 13 percent from the second quarter of 2009 and 11 percent from the third quarter of 2008, on strong drilling results and increased field efficiency.

• We had our first full quarter of production from our deepwater Geauxpher Field discovery in the Gulf of Mexico. The field produced 98 MMcf/d gross, adding 39MMcf/d net to Apache during the third quarter of 2009.

• Continued restorations from the 2008 hurricanes returned nearly 900 barrels of oil per day (b/d) (net) and 26 MMcf/d (net) to production during the third quarter.

Growth drivers for 2010 and beyond
• In Australia, our Van Gogh field is projected to add 20,000 b/d net to Apache when it is fully operational. The Ningaloo Vision floating production, storage and offloading vessel (FPSO) is scheduled to arrive at the Van Gogh field in the Exmouth Basin in December 2009, with first production projected for early 2010.

Pyrenees, a second oil project in the Exmouth Basin, is scheduled to begin producing late in the first quarter of 2010. Production is projected to build to a peak of 20,000 b/d net to Apache in 2010.

• In Canada, at Apache's Horn River Basin shale development in northeast British Columbia, Apache and its joint venture partner are scheduled to bring an additional 27 horizontal wells (gross) on production by the end of the first half of the 2010.

• We recently announced the results of our first operated horizontal Granite Wash well drilled in our Central Region. The Hostetter #1-23H in Washita County, Oklahoma is producing 17 MMcf/d and 800 b/d after approximately six weeks of production. Apache owns a 72-percent working interest in the well. The Granite Wash has long been a core stacked play for our Central Region, where we have drilled hundreds of vertical wells over the past decade. As a result, we now control over 200,000 gross acres in the play, most held by production. Horizontal multi-fracture technology has vastly improved the potential recoveries. The wells generally have a high associated liquid yield and produce higher rates of return than wells in gas-only resource plays during periods of low gas prices. We expect to utilize four horizontal rigs throughout 2010 to drill at least 20 new horizontal wells. We have hundreds of additional potential locations across this play, adding opportunities beyond 2010.

• In Egypt, production from the Phiops area in the Faghur basin is presently facilities constrained to 6,500 b/d. Expansion to 8,000 b/d is planned by year-end 2009, and expansion to 20,000 b/d is targeted for the second half of 2010.

• On October 22, 2009, Apache and Kuwait Foreign Petroleum Exploration Co. (KUFPEC) signed an exclusive agreement to supply gas from the Julimar and Brunello discoveries and become foundation equity partners in Chevron's Wheatstone liquefied natural gas (LNG) hub in Western Australia, opening up new markets for gas reserves from two of Apache's largest discoveries. Apache holds a 65-percent interest in the discoveries. Apache's projected net sales would approximate 190 MMcf/d and 5,100 b/d with a projected 15-year production plateau when the multi-year project is fully operational.

Chevron, which has a 100-percent interest in the Wheatstone field, will operate the LNG facilities with a 75-percent project interest. Apache and KUFPEC will own the remaining 25-percent project interest. Wheatstone's first phase will consist of an offshore processing platform and pipeline to shore, along with two LNG processing trains and associated off-take facilities with a combined capacity of approximately 8.6 million tons per year. Our net capital for the project is currently estimated to be $1.2 billion for upstream development of the Julimar and Brunello fields and $3.0 billion in the Wheatstone facilities. The investment will be funded as the multi-year project is developed.

• In September 2009, we broke ground at our Devil Creek Domestic Gas Hub in Western Australia. Natural gas from our Reindeer field will be delivered to the mainland via pipeline. First production is currently scheduled for the third quarter of 2011 and is projected to add 60 MMcf/d (gross) at realized prices substantially higher than we currently realize in Australia. We operate and own a 55-percent interest in the Reindeer field.

• In Argentina, Apache was given approval to supply up to 50 MMcf/d from two fields in Argentina's Neuquιn and Rio Negro provinces at a price of $5 per MMBtu. Delivery under the program - the first approved by the Secretary of Energy under the government's Gas Plus program - is scheduled to commence in January 2011, although the customer, a power plant operator, has indicated it may begin taking gas in mid-2010. Apache has submitted five additional development projects for approval under the Gas Plus program, which is designed to bring new supplies to market. In the third quarter of 2009, Argentina's realized gas prices averaged $1.89 per thousand cubic feet of gas (Mcf).

COMMODITY PRICES
Third-quarter 2009 earnings and net cash provided by operating activities (operating cash flows or cash flows) benefited from strengthening oil prices:
average prices for the quarter were the highest realized since the third quarter of 2008. While liquids accounted for 49 percent of our oil and gas production during the third quarter of 2009, they generated 75 percent of our oil and gas revenues, a reflection of the benefit of our balanced commodity production portfolio. However, commodity prices remain lower than a year ago, which resulted in cash flows lower than 2008 record levels. North American gas prices remained relatively weak in the third quarter of 2009, and, in the face of increasing North American gas supplies, we believe they will likely remain depressed in the near-term.
In order to manage the variability in cash flows on an additional portion of our 2010 gas and crude oil production, we increased our commodity hedge position during the third quarter of 2009. As of the date of this filing, we had hedged an average of just over 410,000 million British thermal units (MMBtu) per day of our projected 2010 North American natural gas production, utilizing a combination of swaps and collars. Approximately 90 percent of the hedged volume was swapped at an average price of just over $5.60 per MMBtu. The balance was hedged using collars with average floor and ceiling prices of approximately $5.65 and $7.55 per MMBtu, respectively. For perspective, these 2010 hedges represent approximately 21 percent of our 2009 third-quarter worldwide daily gas volumes and approximately 36 percent of our 2009 third-quarter North American daily gas production. For comparative purposes, our average realized North American gas prices were $3.86 and $4.10 per Mcf for the third quarter and the first nine months of 2009, respectively.
On the oil side, we have currently hedged an average of just over 35,000 b/d for 2010, primarily utilizing collars with average floor and ceiling prices of approximately $65.70 and $78.58 per barrel, respectively. For perspective, these 2010 hedges represent approximately 12 percent of our third-quarter 2009 worldwide daily oil production. For comparative purposes, our average realized oil prices were $64.89 and $55.52 per barrel for the third quarter and the first nine months of 2009, respectively. See Note 2 - Derivative Instruments and Hedging Activities in Part I, Item 1 of this Form 10-Q for additional information regarding our derivative contracts.
FINANCIAL POSITION
We believe our strong balance sheet will continue to provide us with the financial flexibility to take advantage of exceptional investment opportunities that may materialize. We exited the third quarter of 2009 with approximately $1.4 billion in cash, up $586 million from the second quarter of 2009. This compares to approximately $2 billion of cash and short-term investments at December 31, 2008. We have $2.3 billion of available committed borrowing capacity and a debt-to-capitalization ratio of 25 percent. In addition, we have the ability to access debt and equity capital markets, options supported by our investment-grade credit ratings. Apache's current debt ratings are A-, A3, and A- from Standard & Poor's, Moody's Investor Service and Fitch Ratings, respectively.
EARNINGS AND CASH FLOW
Our third-quarter 2009 earnings of $441 million ($1.30 per diluted common share), as compared to third-quarter 2008 earnings of $1.2 billion ($3.52 per share), were negatively impacted by significantly lower crude oil and natural gas price realizations. Oil and gas revenues for the third quarter of 2009 were 31 percent, or $1 billion, lower than the third quarter of 2008, driven by a 36 percent drop in average crude oil realizations and a 53 percent drop in natural gas realizations. Equivalent daily production increased 19 percent from the third quarter of 2008, with gains in five of our six producing countries. Total operating expenses were six percent lower than the third quarter of 2008 on an absolute dollar basis, and 21 percent lower on a per unit basis. Service costs have trended downward since the third quarter of 2008; however, we continue to monitor service costs very closely and actively pursue further cost reductions. We make adjustments to drilling and development schedules as warranted.
Our nine-month period earnings in 2009, relative to 2008, were also negatively impacted by lower crude oil and natural gas price realizations and by a $1.98 billion non-cash after-tax write-down of the carrying value of our U.S. and Canadian proved oil and gas properties in the first quarter of 2009. This write-down contributed to a loss of $2.61 per share for the 2009 nine-month period compared to earnings of $10.84 per share in the 2008 period. Operating cash flows for the 2009 nine-month period totaled $2.7 billion, compared to $6 billion in the comparable 2008 period.

RESULTS OF OPERATIONS
Revenues
              Changes in Oil and Gas Production Revenues - Quarter

                                               Crude Oil         Natural Gas           NGL's             Total
                                                                        (In thousands)
Revenues for the quarter ended
September 30, 2007                            $ 1,627,467        $    819,351        $  51,776        $  2,498,594

Volume increase (decrease)                       (115,470 )          (167,640 )        (12,974 )          (296,084 )
Price increase                                    870,081             458,763           19,770           1,348,614
Impact of hedges (decrease)                      (128,808 )           (53,434 )              -            (182,242 )

Increase in 2008                              $   625,803        $    237,689        $   6,796        $    870,288

Revenues for the quarter ended
September 30, 2008                            $ 2,253,270        $  1,057,040        $  58,572        $  3,368,882


Contribution to total third-quarter 2008
revenues                                               67 %                31 %              2 %               100 %

Volume increase                                   257,060              96,027            4,927             358,014
Price decrease                                   (977,432 )          (627,690 )        (32,559 )        (1,637,681 )
Impact of hedges increase                         171,567              64,923                -             236,490

Decrease in 2009                              $  (548,805 )      $   (466,740 )      $ (27,632 )      $ (1,043,177 )

Revenues for the quarter ended
September 30, 2009                            $ 1,704,465        $    590,300        $  30,940        $  2,325,705


Contribution to total third-quarter 2009
revenues                                               73 %                26 %              1 %               100 %

            Changes in Oil and Gas Production Revenues - Nine Months

                                               Crude Oil          Natural Gas           NGL's              Total
                                                                          (In thousands)
Revenues for the nine months ended
September 30, 2007                            $  4,261,017        $  2,568,847        $  135,828        $  6,965,692

Volume increase (decrease)                         315,047            (294,882 )         (15,940 )             4,225
Price increase                                   2,845,712           1,087,197            60,825           3,993,734
Impact of hedges (decrease)                       (441,882 )           (70,820 )               -            (512,702 )

Increase in 2008                              $  2,718,877        $    721,495        $   44,885        $  3,485,257

Revenues for the nine months ended
September 30, 2008                            $  6,979,894        $  3,290,342        $  180,713        $ 10,450,949


Contribution to total year-to-date 2008
revenues                                                67 %                31 %               2 %               100 %

Volume increase (decrease)                         353,417             102,895            (3,327 )           452,985
Price decrease                                  (3,641,227 )        (1,812,566 )        (104,330 )        (5,558,123 )
Impact of hedges increase                          526,409             131,443                 -             657,852

Decrease in 2009                              $ (2,761,401 )      $ (1,578,228 )      $ (107,657 )      $ (4,447,286 )

Revenues for the nine months ended
September 30, 2009                            $  4,218,493        $  1,712,114        $   73,056        $  6,003,663


Contribution to total 2009 year-to-date
revenues                                                70 %                29 %               1 %               100 %

Production and Pricing

                                                      For the Quarter Ended September 30,                              For the Nine Months Ended September 30,
                                                                                         Increase                                                             Increase
                                                  2009                  2008            (Decrease)                 2009                    2008              (Decrease)
Oil Volume - b/d:
United States                                         88,213              80,284                 10 %                  87,835                  93,622                 (6 )%
Canada                                                14,595              16,655                (12 )%                 15,586                  17,247                (10 )%

North America                                        102,808              96,939                  6 %                 103,421                 110,869                 (7 )%

Egypt                                                 93,550              64,803                 44 %                  90,848                  64,082                 42 %
Australia                                             10,849               7,083                 53 %                   9,732                   8,286                 17 %
North Sea                                             67,288              60,856                 11 %                  62,515                  58,740                  6 %
Argentina                                             11,026              12,729                (13 )%                 11,799                  12,342                 (4 )%

International                                        182,713             145,471                 26 %                 174,894                 143,450                 22 %

Total (1)                                            285,521             242,410                 18 %                 278,315                 254,319                  9 %


Average Oil price - Per barrel:
United States                                $         64.57        $      93.69                (31 )%       $          54.89        $          91.48                (40 )%
Canada                                                 63.79              111.81                (43 )%                  51.95                  108.10                (52 )%
North America                                          64.46               96.80                (33 )%                  54.45                   94.07                (42 )%
Egypt                                                  65.64              105.60                (38 )%                  56.67                  110.01                (48 )%
Australia                                              73.70               99.66                (26 )%                  58.74                  111.86                (47 )%
North Sea                                              65.76              113.56                (42 )%                  56.68                  110.08                (49 )%
Argentina                                              48.53               50.95                 (5 )%                  47.29                   48.76                 (3 )%
International                                          65.13              103.86                (37 )%                  56.15                  104.88                (46 )%
Total (2)                                              64.89              101.04                (36 )%                  55.52                  100.17                (45 )%

Natural Gas Volume - Mcf/d:
United States                                        699,062             635,891                 10 %                 658,507                 712,529                 (8 )%
Canada                                               371,516             349,000                  6 %                 367,562                 355,834                  3 %

North America                                      1,070,578             984,891                  9 %               1,026,069               1,068,363                 (4 )%

Egypt                                                372,312             287,231                 30 %                 355,824                 254,786                 40 %
Australia                                            225,349              54,726                312 %                 176,457                 124,888                 41 %
North Sea                                              2,983               2,697                 11 %                   2,771                   2,604                  6 %
Argentina                                            183,504             217,091                (15 )%                189,303                 193,257                 (2 )%

International                                        784,148             561,745                 40 %                 724,355                 575,535                 26 %

Total (3)                                          1,854,726           1,546,636                 20 %               1,750,424               1,643,898                  6 %


Average Natural Gas price - Per Mcf:
United States                                $          3.99        $       9.96                (60 )%       $           4.13        $           9.64                (57 )%
Canada                                                  3.61                8.70                (59 )%                   4.04                    8.63                (53 )%
North America                                           3.86                9.51                (59 )%                   4.10                    9.30                (56 )%
Egypt                                                   3.86                5.62                (31 )%                   3.78                    5.68                (33 )%
Australia                                               2.04                2.36                (14 )%                   1.85                    2.18                (15 )%
North Sea                                              14.89               27.17                (45 )%                  11.66                   21.88                (47 )%
Argentina                                               1.89                1.41                 34 %                    1.92                    1.53                 25 %
International                                           2.92                3.78                (23 )%                   2.85                    3.60                (21 )%
Total (4)                                               3.46                7.43                (53 )%                   3.58                    7.30                (51 )%

Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States                                          7,019               5,450                 29 %                   5,812                   6,636                (12 )%
Canada                                                 2,166               2,034                  6 %                   2,110                   2,046                  3 %

North America                                          9,185               7,484                 23 %                   7,922                   8,682                 (9 )%
Argentina                                              3,291               3,005                 10 %                   3,174                   2,877                 10 %

Total                                                 12,476              10,489                 19 %                  11,096                  11,559                 (4 )%


Average NGL Price - Per barrel:
United States                                $         33.20        $      72.82                (54 )%       $          28.87        $          64.49                (55 )%
Canada                                                 24.22               63.77                (62 )%                  23.03                   58.62                (61 )%
North America                                          31.08               70.36                (56 )%                  27.32                   63.11                (57 )%
Argentina                                              15.44               36.63                (58 )%                  16.13                   38.81                (58 )%
Total                                                  26.96               60.70                (56 )%                  24.12                   57.06                (58 )%

(1) Approximately 12 percent and nine percent of oil production was subject to financial derivative hedges for the 2009 third quarter and nine-month period, respectively; 20 percent and 19 percent for the 2008 third quarter and nine-month period, respectively.

(2) Reflects a per barrel increase of $.13 and $.72 from financial derivative hedging activities for the 2009 third quarter and nine-month period, respectively, and a decrease of $7.54 and $6.77 from financial derivative hedging activities for the 2008 third quarter and nine-month period, respectively.

(3) Approximately eight percent of natural gas production was subject to financial derivative hedges for the 2009 third quarter and nine-month period, respectively; 22 percent and 20 percent for the 2008 third quarter and nine-month period, respectively.

(4) Reflects a per Mcf increase of $.27 and $.21 from financial derivative hedging activities for the 2009 third quarter and nine-month period, respectively, and a decrease of $.13 and $.06 from financial derivative hedging activities for the 2008 third quarter and nine-month period, respectively.

Third-Quarter 2009 compared to Third-Quarter 2008 Crude Oil Revenues Crude oil accounted for 47 percent of our equivalent production and 73 percent of our oil and gas production revenues during the third quarter of 2009, compared to 47 and 67 percent, respectively, for the same period last year. Third-quarter 2009 crude oil revenues of $1.7 billion were $549 million lower than the 2008 period. The impact of a 36 percent decrease in average realized price more than offset additional revenues provided by increased production.
Worldwide production increased 18 percent; with growth in four of our six producing countries. Egypt's gross oil production increased 26 percent on successful new wells and recompletions at our East Bahariya Extension, South Umbarka, West Kalabsha and Matruh concessions. Egypt's net production to Apache increased 44 percent with the additional benefit of an increased allocation of gross production for cost recovery, a function of lower prices and the mechanics of our production-sharing contracts. In the U.S., production increased . . .