Apache Corp. has evolved into a "super-independent" through a series of key acquisitions and major discoveries in recent years. So far this year, the company has announced or completed cash acquisitions totaling $860 million. Financial analysts say those deals have increased Apache's reserves, production, earnings and cash flow by at least 20%. Company officials report Apache's basic net income in the first half of this year exceeded all of 1999. The company is in the process of selling 7 million common shares to pay down debt. That transaction will give Apache the ability to complete another $1 billion in transactions, analysts said.
OGJ Online Senior Oil & Gas Writer Sam Fletcher interviewed Raymond Plank, chairman, chief executive, and founder of Apache, at the company's Houston headquarters on Aug. 17, when the company closed its latest acquisition�32 fields in the Gulf of Mexico bought from Occidental Petroleum Corp. for $385 million.
OGJ Online: Apache has forged a reputation for acquiring and exploiting oil and gas properties at a time when many of your peers complain there are no good bargains left. What makes Apache different?
Plank: It's terribly important to us that we're trying to build this company for the long term. So we think long-term. Our strategy tends to support what we think is best for the shareholders in the long term, even if we take it on the chin in the short term.
We're trying to grow this company for the lasting benefit of shareholders, and we're trying to do that within a pretty positive internal culture, although externally we don't much care whose toes we step on. That's our nature.
Our culture is very, very important to us. And because we're focusing on the long term, we tend to come across�even to ourselves�as pretty contrarian. We've 'zigged' when others have 'zagged.'
I don't think the world has caught up yet to the real change that has taken place in Apache between the two Shell acquisitions (in 1999) and the four acquisitions that we've made this year. This company is a very different animal than it was at the end of 1998 when prices were low and when Apache had sold down some of its production. We were doing very limited drilling then.
OGJ Online: Apache's acquisitions also are closely linked to its areas of expertise.
Plank: Our core-area strategy is very important in enabling us to curtail our costs. If we can increase volume, control costs, and the prices are okay, this damn thing is a money machine.
For example, when we bought Collins & Ware [Inc. in July for $320.3 million], those were pretty good size acquisitions [of gas producing properties in the Permian basin and South Texas]. Yet we cut one foreman and 23 pumpers. The rest of it just plops right into our core area.
Now if we went outside our core area to California, not only would we have to keep all of the field hands, but we'd probably have to add more supervisory capability, too.
We've got a team that knows our culture, knows the style, and is just gung-ho�they're driven to drive this company on.
OGJ Online: Financial analysts point to this company as being in an ideal position to capitalize on the current rebound. This didn't all come about accidentally. What sort of planning did it take to bring this about?
Plank: Back in 1998, while the industry was going another way, we were selling a little deeper in some of our properties to get our balance sheet in shape and were losing production to a modest degree because we had confidence in the second half of that ballgame in 1999.
Commodity prices bottomed in December 1998-January 1999. We had not made any significant acquisitions for a period of time, so we came into two large ones in 1999. [In May 1999, Apache acquired 22 producing fields in the Gulf of Mexico from Shell Exploration & Production Co. for $715 million.]
The timing on that was very good. Shell's strategy was to vacate the shallow-water Gulf of Mexico, and we were able to structure a transaction. Everybody at that point in time had a lower forecast of where prices were going to go.
We did think we were buying close to the bottom [of the price cycle]. We'd no sooner acquired those properties than that roller coaster started to rise. Within 7 months, our cash flow was $100 million more than we had forecast.
That was followed by the acquisition from them in Canada [Shell Canada Ltd.'s assets in Alberta, British Columbia, and Saskatchewan for $517 million US]. Some people didn't understand that. Although it appeared to be primarily an oil purchase, the real upside of that acquisition is in the gas.
The people who came from Shell to us, their energies and their ideals had been pent up. So it was just as though someone took the tape off their mouths and untied their hands. It's a very fast track for us up there right now, and they're getting some great results.
Shell had farmed out a prospect [the Ladyfern play in British Columbia near the Alberta border] to Murphy Oil, in which they retained a third interest. That thing became a significant discovery, with 100-150 bcf of gas, of which we've booked 80 bcf gross. That will probably go up substantially. That gas is now turning a little sour, but before, it was making 65 MMcfd of gas.
We will drill seven wells on that play this winter. Now the public will see why we really bought it.
Along with that, we drilled�on our own pre-Shell properties and on the new Shell properties�three pinnacle reef discoveries last winter in northwest Alberta.
A lot of that country is winter activity only. Our drilling activity was scheduled so that, if we did have discoveries, we could get them connected instead of screwing around and not getting them into the market for another year. By that sense of urgency, we captured the [marketing] year at price levels that we find very attractive.
When we bought the properties up there, they had a great big gas plant that was half-empty. Now we're looking at enlarging it.
Other people in the area had some short lines to it that they didn't have very much gas in. Our drilling activity was such that we went out and bought those lines, removed the bottleneck, and got the price down for transporting our own gas in there.
OGJ Online: What's your outlook for 2001?
Plank: We can't tell what prices are going to do next year. We can't tell what they'll do the remainder of this year. But what we can be very confident of is that our volumes are going to be substantially higher.
There's a [financial analyst] outfit out there that says Apache will have $10.07/share of cash flow this year and will have $10/share in 2001. We, on the present strip pricing, will be above $13/share cash flow this year.
So if you take the present strip pricing and if you have what we anticipate our volumes will be, I don't see any reason not to grow more than 10% in 2001, almost anyway you slice it.
OGJ Online: Many financial analysts now say that investors no longer are looking at just increased production from operators. They're concentrating more on the actual return on their investment.
Plank: We've looked at that [return on investment] all along, and we've been sick. We are doing everything we can to improve it. And the biggest way to improve it is to increase your production and make sure that your G&A [general and administrative expenses] don't go up.
If you can increase your volumes and you can perform better, you've got more commodities over which to spread your costs and the inflation that you do have in your costs. If you're growing fast and you're earning rapidly, the month that is the most important to you is the last one in the quarter, not the first one; the last one in the half year, not the first or even the average.
Our cash flow in the month of June was $1.12/share. On a year-to-date basis, the cash flow was $2.33/share, and in that one month it was $1.12/share. So is it unlikely, that $13/share cash flow, if you're looking at the month of June and July with the internal growth, plus a full month of Collins and Ware and the other day we paid Occidental $385 million?
While some people are talking about whether that [Oxy] was a good acquisition, [it] will pay out. They can make up their minds, and we're going to have our money back.
They say it's very short-lived production. What's wrong with short-lived production if your rate of return on an after-tax basis is up around 70%? If you get that kind of rate of return, you're going to improve your flow-cycle economics.
So, when we are in this part of the cycle, and we had income of 50�/share after taxes on a 30-day month in June, is it likely that we'll meet estimates in the $4/share range this year? Well, I would guess so, because in the second half, I would think we would earn over $3, with more [production] volumes.
Count the number of days in the second half of the year compared to the number of days in the first half of the year. You've got four 31-day months and two 30-day months [in the last half-year]. Now when your revenues are running $6 million/day, that may not be much money compared to big guys, but to us that's a [heck] of a lot of baking-powder biscuits!
OGJ Online: Although you've made some major acquisitions of US properties, Apache is shifting more of its emphasis to international operations.
Plank: We decided a number of years ago that, irrespective of the advance of technology�from which we've benefited as well as anybody has, particularly drilling technology�the Lower 48 is on a steep decline. Therefore, that leads directly to a strategy that, when service costs go up too high, we're going to curtail our drilling in North America onshore. And we're starting to see signs that they [service costs] will [go up].
This year 2000 was a $800 million budget. We could just lop $200 million out of that at a turn of a dime next year, unless these [service industry] guys are reasonable. If they cut our profitability by trying to get us to pay more, it would be stupid for us [to spend more] for a short-term benefit and to look good to investors on production growth.
We're in an enviable position because our production is going to grow anyway. We've got so much momentum for this year. We've purchased properties. We've bought them right. We're going to have strong production growth.
So we can take that money and do something different with it�either pay down debt or, if we should happen to see property prices go down, you could see us chasing properties again.
OGJ Online: Will Egypt be a major area of concentration and investment for Apache?
Plank: You bet! It already is. We are producing more oil in Egypt today and the revenues [from that one operation] were greater in 1999 than they were for the entire company in 1991. Even a [small] well in Egypt is likely to make a couple of million barrels.
We say this is the year of the drill bit. We got off to a pretty fast start in January-February when we made a slew of discoveries. Now it has been pretty slow on the evaluation side.
Once you get the wells and they look pretty good, then you have to go to the Egyptians and talk them into it. They have to review all of our engineering, and then we come up with a development plan.
But those discoveries made in Egypt in the first calendar quarter, I would guess we will have most of them on-line within a year�some of them maybe in the fourth quarter.
One of them was 45 MMcfd of gas and 3,500 b/d of liquids. We're trying to get the Egyptians to let us produce the gas into the line at 25 MMcfd and take around 3,000 b/d of liquids with it. The oil means more to the country at this point, with prices where they are, than the natural gas does. It's money out of their mouths to pay for the gas, but it's money into their pockets with the oil that's sold in international markets. So we should have their cooperation there.
In another area, there have been two additional discoveries on the West Mediterranean concession, which has got about 3 million acres on it...So we see things coming along in Egypt particularly well.
OGJ Online: How does that compare with Australia?
Plank: It's the same strategy we're applying in Australia. We get our infrastructure in. If you've got your infrastructure in, it can make a 35 million bbl well as profitable as one of 60-70 million bbl in another area where you can serve only one field. It's the fields around that help pay off.
When you are where there are good rocks in the first place, in a country where the size of the concession is large enough that your competitors can't come in and corner-shoot you and drain your reservoir, those conditions are strongly favorable to us.
Currently, in Australia, we own 66-68% of a prospect called Linda that has been all over the papers in that part of the world. We tend not to talk very much about these things until we've fully tested the wells.
The Australians haven't done much drilling for stratigraphically trapped oil and gas up against faults. So this was a high-risk prospect. We got it down about as far as we were going to get it, because they were trying to run pipe, and it started to blow out on us. They cemented it off and eventually drilled out the cement.
The well tested at the pipe's ability to carry hydrocarbons. It tested at 35 MMcfd, but I suppose if we had a larger aperture it would have gone over 100 MMcfd. On an electric log, the sand was 91 m thick�around 280 ft of pay.
So we don't have to go to the deep water of the Gulf of Mexico for large volume wells. This is a very large structure. They then drilled through a barrier and are in it again. They are 21 m into gas this morning in the second zone. God only knows what we have!
It will take a lot of evaluation, but the size and configuration, from what our seismic data show, says this has the potential of being a very large possible find. Well, you need a few of those to stay younger in attitude than one is in years.
OGJ Online: Where is this located?
Plank: On the North West Shelf only 14 km from Varanus Island, where we have a major hub. We are in the Carnarvon basin what Texaco is to Henry Hub. We�ve got a couple of plants there, and we ship over 200 MMcfd of gas through two different pipelines from there. Quite a bit of oil goes through it.
OGJ Online: What about China?
Plank: We're still fighting with them.
OGJ Online: I thought that was resolved. [Apache and PetroChina Ltd. jointly announced an agreement June 30 to proceed with development of the 49,000-acre Zhao Dong block in Bohai Bay. That agreement resolved issues from Apache's earlier lawsuit against PetroChina and other Chinese parties. It called for PetroChina and China National Petroleum Corp. to quickly obtain government approval for a phased development plan.]
Plank: They've agreed to what we want, and it will probably go forward. We have 82 pages of documents, every one of which has been initialed by their lead negotiator. But they're an interesting group. They want us to translate our money into theirs, and then they want to pay us in their money and advance their money as the project goes forward.
The reason we finally got someplace with the Chinese [is that] we started being us and stopped accommodating them. As a result [of the lawsuit], I think we have a little bit of a mutual understanding, and that will happen again if they're cute with us. Otherwise, how would a representative of 2.1 billion people deal with a little [company] like us? All we can do is be [tenacious].
But we like the Chinese.
Biography
Raymond Plank is widely recognized by his peers as one of the most colorful and hard-driving leaders of the upstream oil and gas industry. A 1944 graduate of Yale University, he served as a US Army bomber pilot in the South Pacific Theater during World War II. After the war, Plank returned to his hometown of Minneapolis where he formed an accounting, tax, and small business advisory service with two partners. Through that enterprise, he became familiar with oil and gas investments. He also developed a different concept of how investors could better be served. He formed Apache Corp. in 1954 and offered the company's first energy investment program in 1956. Apache has since evolved from raising drilling funds to become the largest US independent producer, with assets of $4 billion and reserves totaling 600 million boe.