1. A brief introduction of Apache and the issues under consideration.
Apache Corporation was conceived 50 years ago. Its gestation, with no small amount of planning, has yielded a company that is built to last. Apache was formed in 1954 with $250,000 of investor capital with the simple concept of becoming a significant and profitable oil company. Today, Apache Corporation is one of the world's top independent oil and gas exploration and production companies. The journey to this point was fueled by Apache's contrarian approach to business. Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. Apache’s mission is to grow a profitable global exploration
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They have shown (both in March 2001 and also subsequently) relatively high-risk tolerance when it comes to acquiring other firms based on their own estimates. The reason for us to believe they are high risk tolerance is because there is clear evidence that the oil industry on a whole was fairly risk averse and held back on their acquisitions during these indecisive oil price periods. The biggest risk that Apache faces from these acquisitions comes in two forms - the acquisition-value risk (which Apache hedges) and the intellectual risk of the know-how of the operation of the acquired firm in the loss of key personnel (that Apache cannot hedge directly). Apache’s strategy in 2001 was geared towards $1 billion acquisition of property and another $1billion in capital expenditure for exploration activity. It also financed $3.7 billion worth of acquisitions while maintaining a debt ratio of 40% and interest coverage of over 6 times. The short summary of this story is - Apache has taken a substantial initiative of investment/financing with its own view at the market.
Measuring this risk would be difficult since not everything can be termed into quantitative terms, although specific investment/financing on the properties and acquisitions can be measured clearly.
This is caused again due to Apache’s strategy and size as a firm. Apache had 80% of its proved reserves in the US. Oil exploration and