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URL:  http://boards.fool.com/apache-part-1-20217406.aspx

Subject:  Apache, part 1 Date:  1/26/2004  3:08 PM
Author:  HamletsMill Number:  28029 of 46837

Since there was some interest in examining Apache here, and it presently is one of my larger long term holdings (I first bought APA in 1995), I thought I would start this research thread.

Historical background:

Apache Corporation is one of the largest independent oil and gas exploration and development companies with operations in the United States, Canada, Egypt, Australia, the United Kingdom North Sea, China and Argentina.
It is, in the energy industry, a "pure-play". That is, its revenue stream derives principly from it production of oil and gas -- it doesn not refine or retail to any extent.

One of the distinctive features of Apache is its relative youth, compared to its peers It was started 50 years ago in Minneapolis, Minn. Raymond Plank, the current chair, was one of the three co-founders. It started its oil operations with a small production of 800 barrels per day in Oklahoma and Kansas. Presently it produces 800 barrels of oil equivalent in about three minutes – with operations in seven countries.
For several decades it was a diversified company, itMi> “grew oranges and sold auto parts in California, manufactured walnut rifle and shotgun stocks in Iowa and vehicle doors in New York and owned a Nebraska radio station, a Wyoming cattle company and dude ranch, shopping centers and telephone exchanges.” But oil and gas was always the key operation.
It went public as an IPO in 1969. In 1987, it moved its corporate headquarters to Denver – also in that year it sold its last no oil-related business – agricultural property in California. In 1992, it shifted again, this time to Houston.
During the 1990's, Apache increasingly focused on and became the premiere "acquire and exploit" company in the industry; acquiring hundreds of “mature” oil fields from the major producers and through a highly capable workforce and management often enhancing the production of those fields beyond what their former owners were able to get out them – and thereby reaping profits.
Unlike most of its peers, this aggressive strategy of growth through acquisition – funded in considerable part by secondary offering of stock and successful reinvestment of the proceeds – makes it almost unique in its industry.

Resources:

“As of December 31, 2002, the Company had total estimated proved reserves of 637 million barrels of crude oil, condensate and natural gas liquids (NGLs) and 4.1 trillion cubic feet (Tcf) of natural gas. Combined, these total estimated proved reserves are equivalent to 1.3 billion barrels of oil or 7.9 Tcf of gas.”

In North America, Apache fields are in the Gulf of Mexico (inner and outer continental shelf), the Permian Basin (West Texas, USA), the Anadarko Basin (West central Oklahoma), and the Western Sedimentary Basin (Canada).
These fields are the greatest source of income for APA, and account for the bulk of estimated proven reserves.
Egyptian operations are a significant part of Apache, providing 22% of production revenues and having 10% of total proved reserves ( December 31, 2002).
In Australia, APA 18.2 Mmboe (million barrels of oil equivalent), about 15% of Apache's total production for 2002. Estimated proved reserves in Australia are currently 11% of Apache's total.
China is a relatively new base of operations for Apache – they have been there since 1994. Currently they are the operators and have a 24.5% interest in the Zhao Dong offshore field. They anticipate peak production to be about 22,000 barrels per day. Their share should be about 20 Mmboe per year.
Apache has small interests in Poland and Argentina – the latter may be a springboard for further investments in Latin America (In 2002, the Argentine production was 7.3 MCF of natural gas and 617 barrels of oil per day).
In the Spring of 2003, Apache acquired the North Sea “Forties” field from British Petroleum. The “Forties” is the largest field in the UK zone of the North Sea. This field has estimated proven reserves of 147.6 Mmboe and an anticipated 2003 net production of 45,000 barrels of oil per day – making a major part of Apache's operations.

Side note:
On the downside, because so much of its reserves are concentrated in North America, almost ¾'s (a situation it is, again aggressively, moving to alter), its cost basis is high – and as such more dependent on high oil prices. However since it is likely (in my thoughts) that oil will remain above $15 per barrel and gas over $2.2 per TCF (thousand cubic feet), the chance of Apache running a negative margin are slight. Nevertheless, profits are and are likely to be volatile.

General observation:
When looking at any energy company, one should always keep in mind that the bottom line is that they are all engaged in a commodity driven industry, albeit a very special case – the classical assumptions about price inevitably dropping to the least amount over production cost, and that therefore only the most efficient producers thrive, aren't true in regards to Oil.
As was said of another, truly repugnant situation, It is a Peculiar Institution. These are the two major reasons why:

1. It is an skewed distributed, exhaustable, finite commodity. Oil isn't distributed evenly across the world; concentrations of major fields makes it both possible for producers to have greater pricing power and at the same time puts a time constraint on them.
Along with the distribution/exhaustion issue is the larger one of how finite this resource is. Even if you chose to disagree with the Hubert's Peak hypothesis (see: http://www.princeton.edu/hubbert/the-peak.html), there is little doubt that over the next several decades, there will be a strain on production versus demand.

2. The price elasticity of demand is affected by politics, and perhaps even more so by its critical role as the energy underpinning of modern civilization (see: http://www.quickmba.com/econ/micro/elas/ped.shtml for a nice, clear explanation of elasticity of demand). This is a condition that is very unlikely to change.

Well, that is it to start. If there still is interest I will post more -- and hope that others (in the collective spirit) will also take up this thread.


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