No. of Recommendations: 9
Management of Apache is what I am supposed to be researching, arbitrarily I will toss in a bit about Anadarko, a competitor. Aggressive independent exploration and production companies such as Apache and Devon Energy were well-positioned take advantage of improving prices. Turns out that James T. Hess, former CEO of Devon for only a matter of months, has jumped to Anadarko. Interesting finding to me is that there are very few interviews with oil Executives, as is easily found with other industries. Maybe it is because they are mostly engineers of one sort or another and action speaks louder than words, I don't know.

A recurring theme with the Oil Industry Execs is that Execs frequently jump companies. Probably not unique to Oil but the hopping is quite awesome IMHO.

Overview
Apache is a leading independent oil and gas exploration and development company with operations in the U.S., Canada, the United Kingdom North Sea, Egypt and Western Australia. Apache is most well known for its ability to purchase major E&P companies' (such as British Petroleum) underperforming assets and to invest in these assets to boost output. Because of Apache's success and because the majors are motivated to place these assets in the hands of a strong company, they are the purchaser of choice for many of the majors, and many of the purchases that they make do not even go out to bid with their competitors. The company's track record and its strong balance sheet (Apache has the highest credit ratings among any of the independents) have led to its preferred status. While the company will continue focusing most of its attention on its traditional business, a number of exploration projects in Egypt, in particular, have been fruitful recently, and we would expect these discoveries to continue to add to reserves and production in the future. http://www.thornburginvestments.com/funds/growth/growth_comm.asp

The shares are currently trading at their top 96 percent of all values posted this year. In fact, the equity has retreated from an all-time high of 81.40 (stock split and decline). The shares have outperformed the AMEX Oil &Gas Index (XOI) as well as the AMEX Natural Gas Index (XNG) according to Bernie Schaeffer.
XOI, Apache, and Anadarko http://bigcharts.marketwatch.com/intchart/frames/frames.asp?symb=xoi&time=8&freq=1
XNG, Apache, and Anadarko http://bigcharts.marketwatch.com/intchart/frames/frames.asp?symb=xoi&time=8&freq=1Chart
Big Charts: OIE, Apache and Anadarko 3 year (Neither APA or APAC are in OIE) http://tinyurl.com/3fpvq
From Yahoo, list of Oil and Gas Operations companies and a few metrics to get a flavor for the Industry should you want one. http://biz.yahoo.com/p/oilprdconameu.html

In 2001, U.S. E&P companies, most of them anxious to get their hands on natural gas assets in Canada's highly-rated Western Canadian Sedimentary Basin and Arctic, have spent an estimated C$14 billion on takeovers and property acquisitions in the past three years.

In the space of 15 months, Apache paid C$761 million for Shell Canada's conventional properties in Western Canada, C$912 million for Fletcher Challenge's assets and C$745 million for Phillips Petroleum's coveted properties in northwestern Alberta. The net result is a Canadian production of 98,000 barrels of oil equivalent per day and 338 million barrels of reserves which cost an average U.S.$5.66 per barrel.

Mark Meyers, of the Houston investment firm of Simmons & Co., said the Canadian assets represent a “simpler business model for Apache. They like to acquire under-performing assets and harvest the low-hanging fruit.” He praised Apache's skill at expanding in a high-priced, competitive market. “They said they were going to do it efficiently and that's what they did while a lot of their competitors were standing on the sidelines saying deals couldn't be done because of commodity prices,” he said. http://www.petroleumnews.com/pnarch/010128-30.

On January 29, 2004, Apache Corporation reported full-year 2003 earnings of $1.1 billion, or $3.43 per diluted common share, on strong commodity prices and record production, up 105 percent from $544 million, or $1.80 per share in 2002. All per-share amounts reflect the Company's recent two-for-one stock split. And the stock declined, most likely from the decrease in commodity prices.

North American Oil and Gas Industry
Fitch Ratings (the international rating agency) says in a recent report that the outlook is stable for all elements of the North American oil and gas industry for the first quarter, pricing then becomes moderate. Upstream companies will always have to replace their reserves. Non-OPEC are still in shortfall. NG is constrained by import capacity limitations, cost is up for finding NG. Drilling restrictions exist in force. Apache's investment-grade credit ratings from all three major rating agencies are the highest in the independent E&P sector and allow the best borrowing interest rates.

"The mission to survive is driving the North American E&P sector into the acquisition arena because, simply, the exploration effort is not yielding enough success," says Art Smith, chairman and chief executive officer of Norwalk, Connecticut-based Herold, an independent E&P research and analysis firm.
"There are only two [methods] when you get down to it: you have to drill for it, or you have to acquire it," says Geoff Roberts, executive vice president, business development, Centurion Exploration Co., Houston.

The problem: development and operating costs are surging, but increased spending in these categories does not add new reserves. As pointed out by HamletsMill, distribution of oil is not even across the globe.

<A Few Forces in the Market Place
LNG - LNG operations face building an infrastructure and stern environmental opposition to offshore facilities. However, the last 20 years have brought meaningful cost reductions to much of the liquefied natural gas (LNG) supply chain which, when coupled with today's dramatically higher domestic natural gas prices, is positioning LNG to be the right fuel at virtually the right time in the U.S. So says Stuart J. Wagner, analyst with Petrie Parkman & Co. in Denver.
Says Wagner, "Price will decide who gets the LNG and U.S. prices will need at least a $0.55-per-MMBtu premium to divert supplies away from Europe." Eric A. Williams, Trinidad and Tobago's Minister of Energy and Energy Industries notes that last year, about 1% of U.S. natural gas demand was supplied by LNG imports, and that 68% of those imports came from the Atlantic LNG Co. project in Trinidad, making the twin-island Caribbean republic the #1 supplier of LNG to the U.S. http://www.oilandgasinvestor.com/comment/1062777001.html

Assett Trading is foreign to me. - Apache Corp., Houston, and Unocal Corp. have traded some Gulf of Mexico-area assets. Unocal received Apache's 13% working interest in the Unocal-operated Ship Shoal 208 Field and an undisclosed amount of cash in exchange for Unocal's majority interest in the Lake Pagie Field in Terrebonne Parish, La. http://www.oilandgasinvestor.com/previous/1203/briefs.htm

Federal Energy Regulatory Commission (FERC), the government agency charged with overseeing the interstate commerce of wholesale energy commodities. Inventories of ng and oil have government officials chewing their nails at times. OPEC can be disturbing when the hawk off a meeting. John Felmy, Political Economist, said we had the "perfect storm" with blackouts, weather, war and so on. Lobbying for ng and oil is alive and well.

The big question is drilling for black gold with results. So for me it is very hard to figure out what is going on with the "asset trading" and looking forward to more partnering and or consolidation with divestures and acquisitions, let alone the government's tinkering. I know HamletsMill will be able to expand with his thoughts on this.

Apache
Corporate Strategy -
Throughout its 47 years, Apache has grown through exploratory drilling and development activities as well as strategic acquisitions. Apache's portfolio approach provides diversity in terms of hydrocarbon product (oil or gas), geologic risk and geographic location. In each of six core producing areas, Apache has built teams that have the technical knowledge, sense of urgency and desire to wring more from Apache's assets. And there, also is a description of corporate culture. Building local expertise also provides a platform to compete and expand in core areas through operations and acquisitions.

A Couple Execs
CEO - Steve Farris was named Chief Executive Officer of Apache Corporation in May 2002, having served as President and Chief Operating Officer of Apache Corporation since May 1994. He joined Apache in June 1988 as Vice President of Domestic Exploration and Production. He was promoted to Senior Vice President in May 1991. Prior to joining Apache, Farris was with Terra Resources where he served as Vice President and Treasurer from 1983 to 1988. From 1978 to 1983, he was Executive Vice President of Robert W. Berry, Inc., an independent exploration and production company with real estate activities. Farris holds bachelor's degrees in history and accounting from Oklahoma State University.

Chairman of the Board - Following his World War II military service, Raymond Plank returned to his hometown of Minneapolis and with two partners formed an accounting, tax and small business advisory service. Through this enterprise, he became familiar with the types of investments then being offered in oil and gas exploration and production and recognized that investors' interests in this field could be better served through a different concept. He formed Apache Corporation, which offered its first oil and gas investment program in 1956. Under Plank's leadership, Apache has evolved from a company which raised investor funds for drilling into an international oil and gas exploration and production corporation which funds its drilling with internally generated cash flow. Under Plank's leadership, Apache has grown to be one of the nation's largest independent oil and gas exploration and production companies.

Apache Corporation announced the following promotions:
 John Christmann has been named vice president, business development.
 Kregg Olson has been named vice president, corporate reservoir engineering.
Christmann joined Apache in 1997 and has served in various positions of increasing responsibility in business development and, most recently, as production manager for the Gulf Coast Region. Previously, he was employed by Vastar Resources/ARCO Oil and Gas Company. He holds a bachelor's degree in petroleum engineering from Colorado School of Mines and an M.B.A. from Southern Methodist University's Cox School of Business.

Olson joined Apache in 1992, serving in various positions of increasing responsibility in corporate reservoir engineering. He has been director of technical services, which includes corporate reservoir engineering, since 1995. Olson previously was associated with Grace Petroleum Corporation. He holds a bachelor's degree in petroleum engineering from Texas A&M University and is a member of the Society of Professional Well Log Analysts and the Society of Petroleum Engineers.

Apache also announced that Lisa Stewart, executive vice president, business development and exploration and production services, has resigned in order to join El Paso Corporation as president of production and non-regulated operations. http://biz.yahoo.com/prnews/040112/dam009_1.html

Apache's Corporate structure has VP's covering geographic regions with appropriate knowledge and skills.

Apache is Mr. Plank's “baby” that has done well through the years. As COB, I have confidence in his watchful eye. He is sitting in a controlling, decision-making seat for the company. It is another vote of confidence that the CEO and COB resides in two different people, a check and balance philosophy.

From Forbes January 12, 2004, "We've never been interested in quick hits on the quarterly side," says Raymond Plank, Apache Corp.'s famously frank founder and chairman. "That's where you fall on your can." Maybe he's just knocking wood: Last year the Houston-based exploration and production company was on track to net $1 billion on revenues of $4 billion, up 84% and 56%, respectively, over the previous year.

Apache created the windfall by continuing to work over Gulf of Mexico fields without pouring money into expensive deepwater technology, and by aggressively boosting production in Australia and Egypt. A decade in the Middle East taught Plank and G. Steven Farris, his chief executive, that they needed not only access to the fields but also control of operations (over half its production is outside the U.S.). Apache's benchmark is a 12% aftertax return on every well. In Egypt the company's state-owned partner Repsol was not operating the Western Desert's Khalda concession aggressively enough. Since Plank & Co. took over in 2001, production is up 39%. The company bought $1.5 billion worth of juicy prospects in the North Sea and the Gulf of Mexico from BPand Royal Dutch/Shell in 2003, upping its reserves to 1.5 billion barrels of oil equivalent.

The expansion hasn't crumpled the balance sheet. Apache's debt-to-capital ratio is a rock-bottom 28.5%. Nor has it hurt the stock: In the last 12 months the company's share price rose 39% to $78.
Note the chart that displays Oil & Gas OPerations, 5yr annualized total return by per cent. http://www.forbes.com/forbes/2004/0112/162a_print.html

Return on Capital from Forbes and other metrics. http://www.forbes.com/finance/lists/88/2004/enumerateJava.jhtml?passListId=88&passYear=2004&passListType=Company&passInd=1200

Under terms of the agreement with Egypt, Apache will supply some 400 million cubic feet of gas per day to the Egyptian market for five years and 375 MMcf per day for another 20 years, Steven Farris, CEO of Apache, said in a statement.


Insiders hold about 20% of stock according to Thompson Financials. There has not been any buy activity, only sell.

E&P companies which have a consistent track record of exploration success share a common denominator. This is: a) outstanding people; b) a focused strategy leveraged by a competitive advantage; and c) an aggressive commitment to the exploration process. We use the modifier "consistent" because even fools are sometimes blessed by luck. When we talk about "success", we mean a long term track record of finding new petroleum deposits.

So how do we 'grade' the management at Apache? The consistent reference to 'teams' enhances my confidence in my pass/fail grade. Here is my assessment and I stand ready to be corrected in a industry in which I am a novice.
Experienced explorationists with a minimum of 15-20 years broad experience in a number of different basins with diverse stratigraphic and structural play types.
· Proven and successful "oil finders" in own right.
· Proven management and leadership experience.
· Have a thorough understanding of risk management and economics.
· Not risk adverse; must understand that dry holes are an integral part of the exploration process.
· Think positively. Oil is not found by nay sayers!
· Able to prioritize and stay focused.
· Must have an open mind without a bias against particular regions or plays.
· Able to nurture creativity of exploration staff.
· Able to identify and hire successful oil finders.
· Able to delegate.
· Excellent communicators.
· Patient.
Geoscience Staff (This is where the team approach is most significant.)
· Must be the very best you can identify for their particular area of expertise.
· Only employ proven oil finders for key staff positions. 10 to 20 years experience in diverse structural and stratigraphic play types with the last five years in primary play area.
· Must be creative and have good visualization skills.
· All geoscience employees must be computer literate.
· Staff must appreciate the economics of their play concepts.
· Must be good communicators.
· Supplement staff with expert contractors and consultants on an "as needed basis

They receive a passing grade from my reading of their web and the other research I have done. Here is an article on what I consider to be a very important technological addition. “Apache has committed a sizeable acquisition program to Trace in which I/O's VectorSeis System Four land imaging system will be used exclusively. The program focuses on Apache's 2004 acquisition initiatives for North America and involves commitments to acquire seismic data on several hundred square kilometers of acreage. Delivery of I/O equipment to Trace is underway and should be completed by the end of the year.” http://www.stockhouse.com/news/news.asp?tick=APA&newsid=2073705

Corporate Governance
The Board of Directors is impressive from a variety of business backgrounds, head of an university, previous government appointments, retired brokers, private investors, retired BP Amoco Middle East/Caspian/Egypt/India and business unit leader, most with industry experience. The point is that the directors know how read financial statements and understand the business. They also would be aware of any CEO funny business.

Of interest to me, I find the retired surgeon on the board as the one who did surgery on my husband. His claim to fame was that of being on the Board of Regents for the University. He sits on the Audit Committee along with a couple former investment bankers who are well versed in energy. Investors should care about the independence of the audit committee.
Two Board members have previous experience with stock options and it is interesting to note that a committee exists to determine stock options at Apache. No, I am not going there, I am getting exhausted.

Growing evidence suggests that good corporate governance measures are linked to stock performance and shareholder return.

In reviewing companies, one should look to competitors. I chose just one, Anadarko, because of change in the Exec rank and the ability to do a comparison of sorts about management.

Anadarko - From "Oil & Gas Investor"
"As rumors of a possible sale die down, analysts are taking another look at Anadarko Petroleum Corp. (NYSE: APC) and some like what they see.

In a recent report titled "What's so bad about Anadarko?" U.K.-based research firm Wood Mackenzie's Derek Butter said 2003 has been a mixed year for the Houston super-independent. Strong earnings recorded in the first three quarters offset a share price that has fallen to the low $40s from a 2001 high of more than $71.

Rising finding and development costs and slowing reserve growth have tarnished the company's formerly stellar performance. To be fair, many of the industry's most respected players also have reported rising F&D costs this year and greater challenges replacing reserves and delivering production growth to meet investor expectations. . . .

Although the company is in some good international plays, "it is time to refocus and not be so spread all over the map," V.P. Mark Emme said. "In some areas we need to finish our evaluation and proceed, or get out. This year and next you'll see us exit some areas." http://www.oilandgasinvestor.com/previous/1203/briefs.htm

The New CEO at Anadarko
Usually one can find speeches, interviews, articles on Executives. This seems to be quite difficult in the Oil Industry to get a handle on their thinking or the metaphors in their speech which can reveal corporate culture for a company.

James "Jim" T. Hackett - Early years with Duke Energy and Pan Energy a division of Dynergy.
Ocean Energy merges with Seagull Energy where Hackett was CEO. Hackett is elected president and CEO. Hackett joined Devon in April 2003 in conjunction with Devon's merger with Ocean Energy, Inc. He had been Ocean's chairman and chief executive officer and was instrumental in integrating the two companies following the merger. Anadarko announces in December 2003, Hackett will be President and CEO, jumping ship to run the Oklahoma company's Houston-based rival Anadarko Petroleum last month.
October, 1999, Hackert says, "We merged two companies (Ocean Energy and Seagull Energy) together at the end of March of this year to form one of the top 10 independent oil and gas companies in the country. So we are a living example of the consolidation that is occurring in the exploration and production industry. . . . In our industry, you tend to be either a consolidator or a consolidatee." http://www.findarticles.com/cf_dls/m4PRN/1999_Oct_27/56954697/p1/article.jhtml

Hackett's bold but strategically focused leadership of Ocean Energy is regarded by many analysts as just what Anadarko needs to revive its lagging performance. . . . .Hackett has demonstrated an interest in pursuing high-profile, high-risk impact projects, such as Ocean Energy's forays in offshore West Africa, Mobley points out. In 2001, that company's share price surged 50 percent in less than three months, reflecting a successful drilling project off Equatorial Guinea.
With a new CFO to be named as well, there is anticipation for a greater focus on returns and better operating efficiency -- something Anadarko has been criticized for lacking. Its cost of finding reserves has ballooned over the last few years from among the lowest to the highest in the industry. http://www.bizjournals.com/houston/stories/2003/12/08/story6.html

Some industry observers are now speculating that Hackett's plan is to clean up Anadarko and then sell it back to Devon.

Robert J. Allison retired in 2001, but he returned to the top post in March after his hand-picked successor resigned under board pressure in March. A legal fight and a rash of takeover rumors have surrounded the company since then.

Anadarko announced that Executive Vice President and Chief Financial Officer Michael Rose and Executive Vice President, Administration Charles Manley will retire at the end of the year (2003), so there will be more appointments to be made.

Comparison of Apache and Anadarko
The Houston Business Journal offers an article written in August comparing performances of these two companies and discusses management issues. It is a well done comparison and contract of the two companies.
http://www.bizjournals.com/houston/stories/2003/08/11/story2.html?t=printable

In closing, the article supports my judgment that the management at Apache is competant focused on the business at hand with a track record to support it. In the words so popular today, "bring it on." Comments welcome, this was one of the most difficult ones that I have encountered.

Ro

Selected References:
American Petroleum Institute http://api-ec.api.org/frontpage.cfm
Statement John Felmy http://api-ec.api.org/filelibrary/Felmy%20Statement%20Dec%2003.pdf
Fitch Ratings http://www.fitchratings.com/corporate/include/2004_outlook.cfm
Strategies for succes in oil & gas exploration http://www.ammoniteresources.com/articles.htm
News about Oil http://wn.com/s/oilprices/index.html
Zack's top stocks in oil http://quotes.freerealtime.com/dl/frt/N?art=C2004013000030b9227&SA=Latest%20News
Apache Reserve Summary http://media.corporate-ir.net/media_files/NYS/APA/reports/2003Reserves.pdf




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