Apache Case
What are the major risks Apache faces?
As an independent oil and gas exploration and production company, Apache is exposed to a myriad of risks stemming from price fluctuations in oil and gas markets. As we see in the case, Apache has 80 percent of its proven resources in the United States, which puts the company at a disadvantage should oil prices rise significantly. When oil prices rise, production tends to shift away from domestic sources, as oil is relatively expensive to extract in the US as compared to elsewhere in the world. Apache has also purchased a number of mature oil fields from larger producers, and these fields tend to be more expensive to extract from, since production falls and extraction costs rise as fields mature.
Since Apache is a larger independent company, they have continued to grow and expand their holdings and reserves. As stated in the case, their strategy has been to maximize production and minimize cost through increasing exploration, development and acquisitions. The company has also attempted to increase its non-domestic holdings through acquiring new international holdings. While these holdings might be less costly to develop, they are riskier in the respect that the reserves are not as proven and they bring additional risk in the form of political uncertainty. However, we see in the case that Apache made acquisitions in 2001 of over a billion dollars, and also anticipated spending an addition $1 billion in capital expenditures in the form of exploration. At the same time, Apache had also implemented a new, limited hedging program centered around these new acquisitions. The company was evaluating the success of the hedging program, and attempting to determine whether the hedging should be extended to other activities within the company.
With these additional risks come several questions. Is risk management valuable to Apache? Should Apache manage risk, and how should they go about doing so? Apache made their
As an independent oil and gas exploration and production company, Apache is exposed to a myriad of risks stemming from price fluctuations in oil and gas markets. As we see in the case, Apache has 80 percent of its proven resources in the United States, which puts the company at a disadvantage should oil prices rise significantly. When oil prices rise, production tends to shift away from domestic sources, as oil is relatively expensive to extract in the US as compared to elsewhere in the world. Apache has also purchased a number of mature oil fields from larger producers, and these fields tend to be more expensive to extract from, since production falls and extraction costs rise as fields mature.
Since Apache is a larger independent company, they have continued to grow and expand their holdings and reserves. As stated in the case, their strategy has been to maximize production and minimize cost through increasing exploration, development and acquisitions. The company has also attempted to increase its non-domestic holdings through acquiring new international holdings. While these holdings might be less costly to develop, they are riskier in the respect that the reserves are not as proven and they bring additional risk in the form of political uncertainty. However, we see in the case that Apache made acquisitions in 2001 of over a billion dollars, and also anticipated spending an addition $1 billion in capital expenditures in the form of exploration. At the same time, Apache had also implemented a new, limited hedging program centered around these new acquisitions. The company was evaluating the success of the hedging program, and attempting to determine whether the hedging should be extended to other activities within the company.
With these additional risks come several questions. Is risk management valuable to Apache? Should Apache manage risk, and how should they go about doing so? Apache made their