High Operating Costs Lead to Decrease in Apco's Net Income

Apco Argentina Inc. announced 2007 net income of $31.3 million, compared with 2006 net income of $40.1 million. The decrease is primarily due to higher operating costs and expenses and lower equity income from Argentine investments.

The higher costs and expenses were driven by increases in operating expense, depreciation, depletion and amortization, and greater Argentine taxes other than income due to export taxes related to Apco's interests on the island of Tierra del Fuego. These variances more than offset the favorable effects of increased oil sales volumes and higher natural gas and LPG sales prices for 2007 compared with 2006.

"Although we were able to increase oil production volumes year-to-year, increases in oil price realizations in Argentina did not keep pace with increases in the international market. The trend of increasing unit costs coupled with a flattening of oil price realizations affected our operating margins in 2007," said Ralph Hill, Apco's chairman and chief executive officer.

"Despite these factors, our 2007 results represent the second highest we've ever reported. This speaks to the quality of our assets that together with our excellent financial health should help position us to take advantage of future growth opportunities that present themselves both in and outside of Argentina," Hill added.

Operating expense increased by $4 million compared with 2006. The increase is due to a combination of factors. Oil and total fluid volumes lifted and the number of wells in operation have continued to grow as a result of drilling activities. This factor has resulted in greater costs associated with rod pump operations.

In addition, the company performed more well workovers in 2007 than the prior year and incurred higher costs associated with facility maintenance and upgrades. Unit costs rose as a result of wage increases negotiated with labor unions and higher rates charged by field service companies.

Depreciation, depletion and amortization rose by $1.3 million compared with 2006. The increase is due to higher production volumes combined with increased capital additions.

Argentine taxes other than income increased significantly compared with 2006 due to a new law that imposed export taxes on hydrocarbon exports from Tierra del Fuego. This tax began to impact the company in late 2006.

Equity income from Argentine investments decreased by $5 million compared with 2006. The decrease in equity income is due to a decrease in the net income of Petrolera Entre Lomas S.A. (Petrolera), the company's equity investee.

Petrolera's decrease in net income is primarily a result of higher costs and expenses attributable to operations in Entre Lomas. Additionally, Petrolera had expenses in 2007 for new operations that did not exist in prior periods that include exploration expenses related to Agua Amarga and Bajada del Palo, and interest expense from a bank line of credit opened in 2007.

Compared with 2006, Apco's operating revenues increased by $3.7 million primarily from increased oil and natural gas sales volumes attributable solely to its consolidated interests.

Oil, natural gas and LPG sales volumes for the combined consolidated and equity interests totaled 2.488 million barrels, 6.7 bcf and 18.5 thousand tons, compared with 2.403 million barrels, 6.7 bcf and 20 thousand tons during 2006.

Crude oil, natural gas and liquefied petroleum gas (LPG) sales prices for the combined consolidated and equity interests averaged $43.16 per barrel, $1.50 per mcf and $448.47 per ton, compared with $43.29 per barrel, $1.36 per mcf and $411.92 per ton during 2006.

The company ended the year with $47.1 million in cash, cash equivalents and short-term investments and without long-term debt.


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