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APACHE OFFSHORE INVESTMENT PARTNERSHIP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

This discussion relates to Apache Offshore Investment Partnership (the Partnership) and should be read in conjunction with the Partnership's consolidated financial statements and accompanying notes included under Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q, as well as its consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.



The Partnership's business is participation in oil and gas exploration, development and production activities on federal lease tracts in the Gulf of Mexico, offshore Louisiana and Texas.

Financial Overview

The Partnership reported net income of $206,131 for the second quarter of 2014, down from $268,888 in the second quarter of 2013. Net income per Investing Partner Unit decreased to $134 per Unit in the second quarter of 2014, down from $175 per Unit in the second quarter of 2013. Lower oil and gas production in 2014 contributed to the decrease in earnings and net income per Investing Partner Unit from 2013. The lower production reflected Matagorda Island 681/682 being taken off production during the third quarter of 2013 as being uneconomical and significant production declines at Ship Shoal 258/259. Net income for the six months ending June 30, 2014, totaled $335,362 compared to $552,462 for the six months ending June 30, 2013. Net income per Investing Partner Unit of $209 in the six-month period ending June 30, 2014 was down from $358 per Unit in the first six months of 2013. The decline in earnings and net income per Investing Partner Unit from 2013 reflected lower oil and gas production in 2014.



Results of Operations

Total revenues decreased 22 percent from the second quarter of 2013 to the second quarter of 2014 and year-to-date revenues in 2014 decreased 25 percent from the first six months of 2013 on lower oil and gas production.

The Partnership's oil, gas and natural gas liquids (NGL) production volume and price information is summarized in the following table (gas volumes are presented in thousand cubic feet (Mcf) per day):

For the Quarter Ended June 30, For the Six Months Ended June 30, Increase Increase 2014 2013 (Decrease) 2014 2013 (Decrease) Gas volume - Mcf per day 254 755 (66 )% 292 890 (67 )% Average gas price - per Mcf $ 6.06$ 4.34 40 % $ 5.24$ 3.89 35 % Oil volume - barrels per day 55 64 (14 )% 58 64 (9 )%



Average oil price - per barrel $ 113.25$ 107.46

5 % $ 107.08$ 109.85 (3 )% NGL volume - barrels per day 7 7 - % 9 10 (10 )%



Average NGL price - per barrel $ 47.60$ 45.27

5 % $ 38.94$ 37.72 3 % Oil and Gas Sales Natural gas sales totaled $139,996 in the second quarter of 2014, decreasing $158,344 or 53 percent from the same period in 2013. Natural gas volumes declined 66 percent from the second quarter of 2013, decreasing sales by $276,067. The decline in the Partnership's production from 2013 was attributable to the shut-in of Matagorda Island 681/682 (381 Mcf per day) and declines at Ship Shoal 258/259. Matagorda Island 681/682 ceased production in August 2013 and is awaiting plugging operations. The Partnership's average realized natural gas price for the quarter increased $1.72 per Mcf, or 40 percent, from the second quarter of 2013, increasing sales by $117,723 from a year ago. The Partnership's crude oil sales for the second quarter of 2014 totaled $570,991 compared to $625,739 of crude oil sales in the second quarter of 2013. Crude oil volumes on a per day basis fell from 64 barrels per day in 2013 to 55 barrels per day in 2014, reducing sales by $88,446. The decrease in volumes in 2014 was attributable to natural depletion at South Timbalier 295. The Partnership's average realized price in the second quarter of 2014 increased $5.79 per barrel from the second quarter of 2013. 6 -------------------------------------------------------------------------------- During the second quarter of 2014, the Partnership sold 7 barrels per day of natural gas liquids, flat with the second quarter of 2013. The Partnership's average NGL price for the current quarter increased five percent from a year ago to $47.60 per barrel. Natural gas sales for the first six months of 2014 decreased 56 percent from a year ago, dropping to $277,169 in the current period from $626,482 during the first six months of 2013. A 67 percent decrease in natural gas volumes during the first six months of 2014 from the same period a year ago reduced sales by $566,675. The Partnership's decline in gas production in 2014 was primarily impacted by the shut-in of Matagorda Island 681/682 (336 Mcf per day) and declines in production at Ship Shoal 258/259 (164 Mcf per day) and North Padre Island 969/976 (110 Mcf per day). The Partnership's average realized gas prices increased from $3.89 per Mcf in the first six months of 2013 to $5.24 per Mcf in 2014, increasing sales by $217,362. Crude oil sales for the six months of 2014 totaled $1.1 million, down 12 percent from the same period in 2013. The Partnership's crude oil volumes decreased from 64 barrels per day during the first six months of 2013 to 58 barrels per day during the same period of 2014 as a result of natural depletion impacting production at South Timbalier 295. The Partnership's average realized oil price for the first six months of 2014 decreased three percent from the first six months of 2013, dropping to $107.08 per barrel in 2014. The Partnership sold 9 barrels per day of natural gas liquids in the first six months of 2014, down from 10 barrels per day in the first six months of 2013. The decrease reflected lower processed volumes at Ship Shoal 258/259 in 2014. NGL prices for the first six months increased three percent from a year ago, rising to $38.94 per barrel. Since the Partnership does not anticipate acquiring additional acreage or conducting exploratory drilling on leases in which it currently holds an interest, declines in oil and gas production can be expected in future periods as a result of natural depletion. Also, given the small number of producing wells owned by the Partnership and exposure to inclement weather in the Gulf of Mexico, the Partnership's production during the remainder of 2014 and beyond may be subject to more volatility than those companies with a larger or more diversified property portfolio.



Operating Expenses

The Partnership's depreciation, depletion and amortization (DD&A) rate, expressed as a percentage of oil and gas sales, was approximately 20 percent for the second quarter of 2014 and 21 percent for the second quarter of 2013. DD&A, expressed as a percentage of oil and gas sales, for the first six months of 2014 and 2013 was 20 percent and 21 percent, respectively. The dollar amount of DD&A expense for the first six months of 2014 decreased from the comparable periods a year ago as a result of lower oil and gas sales in 2014. The Partnership recognized $31,801 in asset retirement obligation accretion for the second quarter of 2014 compared to $31,786 for the second quarter of 2013. For the six months ending June 30, 2014, and 2013, the Partnership recognized asset retirement obligation accretion of $64,369 and $63,504, respectively. Lease operating expenses (LOE) for the second quarter of 2014 of $233,762 decreased 29 percent from the second quarter of 2013 on lower repair costs and the reduced cost resulting from shutting-in Matagorda Island 681/682. LOE for the first six months of 2014 was down 22 percent from the same period a year ago, decreasing to $540,520 in the first six months of 2014. The decline in costs for the first six months reflected lower repair and workover costs in 2014, and lower costs on the shut-in of Matagorda Island 681/682. LOE for the first six months of 2013 included repair costs on platforms at South Timbalier 295 and Ship Shoal 258/259, and costs to re-stage a compressor at Ship Shoal 258/259. In the second quarter of 2014, gathering and transportation costs for the delivery of oil and gas totaled $27,405. Gathering and transportation costs during the first six months of 2014 of $48,875 decreased 11 percent from the same period in 2013. The year-to-date decrease was the result of lower oil and gas volumes from a year ago. 7



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Capital Resources and Liquidity

The Partnership's primary capital resource is net cash provided by operating activities, which totaled $0.4 million for the first six months of 2014, down from $0.7 million in the comparable period in 2013 as a result of lower oil and gas production which negatively impacted the Partnership's 2014 earnings. At June 30, 2014, the Partnership had approximately $4.6 million in cash and cash equivalents, up from approximately $4.3 million at December 31, 2013. The Partnership's goal is to maintain cash and cash equivalents at least sufficient to cover the undiscounted value of its future asset retirement obligation liability. The Partnership also plans to reserve funds for anticipated repairs which may disrupt the Partnership's production. The Partnership's future financial condition, results of operations and cash from operating activities will largely depend upon prices received for its oil and natural gas production. A substantial portion of the Partnership's production is sold under market-sensitive contracts. Prices for oil and natural gas are subject to fluctuations in response to changes in supply, market uncertainty and a variety of factors beyond the Partnership's control. These factors include worldwide political instability (especially in the Middle East), the foreign supply of oil and natural gas, the price of foreign imports, the level of consumer demand, and the price and availability of alternative fuels. The Partnership's oil and gas reserves and production will also significantly impact future results of operations and cash from operating activities. The Partnership's production is subject to fluctuations in response to remaining quantities of oil and gas reserves, weather, pipeline capacity, consumer demand, mechanical performance and workover, recompletion and drilling activities. Declines in oil and gas production can be expected in future years as a result of normal depletion and the non-participation in acquisition or exploration activities by the Partnership. Based on production estimates from independent engineers and current market conditions, the Partnership forecasts it will be able to meet its liquidity needs for routine operations in the foreseeable future. The Partnership will reduce capital expenditures and distributions to partners as cash from operating activities declines.



In the event that future short-term operating cash requirements are greater than the Partnership's financial resources, the Partnership may seek short-term, interest-bearing advances from the Managing Partner as needed. The Managing Partner, however, is not obligated to make loans to the Partnership.

On an ongoing basis, the Partnership reviews the possible sale of lower value properties prior to incurring associated dismantlement and abandonment costs.

Capital Commitments

The Partnership's primary needs for cash are for operating expenses, drilling and recompletion expenditures, future dismantlement and abandonment costs, distributions to Investing Partners, and the purchase of Units offered by Investing Partners under the right of presentment. To the extent there is discretion, the Partnership allocates available capital to investment in the Partnership's properties so as to maximize production and resultant cash flow. The Partnership had no outstanding debt or lease commitments at June 30, 2014. The Partnership did not have any contractual obligations as of June 30, 2014, other than the liability for dismantlement and abandonment costs of its oil and gas properties. The Partnership has recorded a separate liability for the present value of this asset retirement obligation as discussed in the notes to the financial statements included in the Partnership's latest annual report on Form 10-K. During the first six months of 2014 the Partnership had no outlays for capital expenditures for additions to oil and gas properties as it did not commence any new drilling or recompletion projects during the period. The Partnership's cash outlays for capital expenditures during the first six months of 2013 were also minimal as the Partnership did not participate in any new drilling or recompletion projects in 2013. During the first six months of 2014, the Partnership spent $84,817 on abandonment costs at North Padre Island 969/976. Based on information supplied by the operators of the properties, the Partnership anticipates capital expenditures of less than $0.2 million during the remainder of 2014 as no new drilling projects are currently planned for 2014. Capital estimates may change based on realized prices, changes by the operator to the development plan, pipeline construction or modifications, or changes in government regulations. 8 -------------------------------------------------------------------------------- Because of declining oil and gas production during the first six months of 2014 and the need to reserve cash for future asset retirement obligations, no distributions were made to Investing Partners during the first six months of 2014. The Partnership also made no distribution to Investing Partners during the first six months of 2013 as a result of the large amount of plugging costs funded by the Partnership during 2013. The amount of future distributions will be dependent on actual and expected production levels, realized and anticipated oil and gas prices, expected drilling and recompletion expenditures, and prudent cash reserves for future dismantlement and abandonment costs that will be incurred after the Partnership's reserves are depleted. The Partnership's goal is to maintain cash and cash equivalents in the Partnership at least sufficient to cover the undiscounted value of its future asset retirement obligations. During the second half of 2014, the Partnership will review available cash balances and the factors noted above to determine whether there are sufficient funds to make a distribution to Investing Partners during the second half of 2014. As provided in the Partnership Agreement, as amended (the "Amended Partnership Agreement"), a first right of presentment valuation was computed during the first quarter of 2014. The per-unit value was determined to be $16,020 based on the valuation date of December 31, 2013. The Partnership did not repurchase any Investing Partner Units (Units) during the first six months of 2014, as a result of the Partnership's limited amount of cash available for discretionary purposes. The per-unit right of presentment value computed during the first quarter of 2013 was determined to be $15,412 based on the valuation date of December 31, 2012. The Partnership did not repurchase any Units during the first six months of 2013. Pursuant to the Amended Partnership Agreement, the Partnership has no obligation to repurchase any Units presented to the extent it determines that it has insufficient funds for such purchases. 9



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Source: Edgar Glimpses


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