Apache Corporation Business Information, Profile, and History
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History of Apache Corporation
Apache Corporation is one of the leading independent crude oil and natural gas producers in the United States. The company, which has proven reserves of 613 million barrels of oil equivalent, maintains exploration and production efforts in the United States, Canada, Egypt, Australia, Poland, the People's Republic of China, and the Ivory Coast. Apache has had particular success in increasing the production at properties it has acquired from other companies.
Longtime chairman and CEO Raymond Plank, more than any other individual, is credited with creating and building Apache. Plank's first foray into the business world occurred at age nine, in 1931, when he started making and selling cider from his family's Minnesota orchard. 'It drove my mother crazy,' mused Plank in the January 3, 1994 issue of Forbes, 'But I was a gleaner.' Indeed, his unceasing entrepreneurial penchant was his earmark throughout most of his life.
Plank served as a bomber pilot during World War II before completing his education at Yale University in 1946. He and fellow alum and roommate W. Brooks Field, who was also a World War II veteran and Minneapolis native, headed back to their hometown with grandiose dreams of starting a business. They planned to begin publishing a magazine for Midwestern readers that would be patterned after Time or the Atlantic Monthly. It was this loosely formed plan that would lead to the creation of one of the nation's most prosperous independent oil companies.
After returning to Minnesota in their $400 army surplus jeep, Fields and Plank found that the printing house they had counted on to help finance and print their publication had just been purchased by a new owner. They quickly decided to start an accounting and tax assistance service, instead. Despite an absolute dearth of experience in their newly chosen profession, Plank and Fields opened Northwest Business Service in downtown Minneapolis. The partners' surplus jeep became the company car, and their first employee carried her own typewriter to work. After a rough start, Plank and Fields were able to pay themselves a meager monthly salary of $20. Of this early venture, Plank recalls, 'Failure back then was never a thought.'
Fields soon left the company to enter the grain brokerage business. Replacing him was Plank's childhood friend Charles Arnao, Jr., and Truman E. Anderson, a young and successful insurance salesman. Although its accounting and bookkeeping business continued to prosper in the early 1950s, the team formed a partnership called APA (for Anderson, Plank, and Arnao), a subsidiary meant to investigate new ventures. Through APA the partners discovered a lucrative, though risky, niche in investing in oil and gas exploration. Excited by the possibilities offered by the emerging industry, Plank and his friends decided to concentrate solely on oil and gas operations.
The three partners founded Apache Oil Corporation in 1954 to arrange and participate in investments related to oil and gas exploration. Three original principles continued to guide the company throughout most of the 20th century. First, rather than investing through a (potentially corrupt) third-party promoter, as was the common practice in Minneapolis, Apache would ensure that the drillers worked directly for the investors. Second, Apache would ensure that a professional staff managed the drilling and financial operations of each venture. Finally, Apache would spread its investors' resources over several drilling ventures, thus reducing their risk of losing all or most of their money from a single failed endeavor.
Apache Oil Corporation finished its first producing oil well in 1955 in Cushing, Oklahoma. Although the well only churned out a paltry seven barrels per day, Apache's second attempt resulted in a well that generated more than 30 barrels an hour. Plank and friends, who were sweating it out in a ramshackle Minneapolis office, were relieved--up to that point, the venture had been on very shaky ground. As a result of a few successful drilling ventures, the company was able to report a net profit of $12,535 in 1955 from sales of $190,000.
After surviving its first year--the company was even able to replace its card table and chairs with some real office furniture--Apache basked in a string of successes. The company generated revenues of $630,000 in 1956, wowing its investors with solid returns. By 1959 the enterprise had expanded into 23 states and two Canadian provinces. Its base of shareholders quickly grew from 1,000 in 1959 to more than 4,000 by the early 1960s. Furthermore, the company formed a second investment subsidiary, First Apache Realty Program (later named Apache Realty Corp.). It was formed as a limited partnership to invest in commercial real estate. Apache's first project was a 50-store shopping plaza in Minneapolis.
Apache's entrance into real estate was largely the result of Anderson's efforts. Anderson and Plank--Arnao left the company to form his own business--both agreed that increasing government regulation of the oil and gas exploration industry threatened to virtually extinguish their company. More diversification was needed in ventures such as telephone companies and steel. Plank, however, did not share Anderson's enthusiasm for emphasizing real estate investments. An escalating rift between the cofounders climaxed in 1963. Anderson, in a startling move, called a board meeting and asked its members to fire Plank because he was showing signs of 'overwork.' At the same meeting, the board accepted Anderson's resignation and transferred all management responsibilities to Plank.
With Plank solely in charge after ten years of operation, Apache posted 1964 sales of $9.2 million, net income of $661,000, and $9.3 million in new drilling capital from its investors. Confirming its commitment to continued growth through risk and innovation, Apache issued a corporate objective on its tenth anniversary. Written by Plank, it included these words: 'the capacity of the individual is infinite. Limitations are largely of habit, convention, acceptance of things as they are, fear, or lack of self confidence.'
Although other limitations, namely government price caps and regulation, battered its competitors, Apache remained profitable during the 1960s as the number of oil industry participants plummeted from 30,000 to 13,000. Besides its diversification into other businesses and its acquisition of several struggling competitors, Apache benefited from one of its most successful oil finds. In 1967 Apache drilled a well in the tiny town of Recluse, Wyoming, which immediately began delivering 50 barrels per hour. After drilling 11 more wells nearby, Apache was getting 2,800 barrels of oil each day from its Recluse operations. Analysts credited Apache's skilled management team with allowing the company to successfully exploit a sudden strike of that magnitude.
Late 1960s and 1970s: Diversifying, Then Refocusing on Petroleum
Despite this fortuitous discovery, Apache continued to diversify through acquisition during the late 1960s and early 1970s in an effort to minimize the effects of oil industry woes. By 1970, in fact, the company had established a network of 24 subsidiary firms ranging from engineering and electronics companies to farming and water supply operations. It continued to expand its holdings during the 1970s, evolving into a large conglomerate. Important contributors to Apache's success during that period included Jaye Dyer, John Black, John D. Hansen, Roland E. Menk, and John A. Kocur. In addition, Plank invited his old roommate Fields to join the company's board in 1973--Fields and Plank had remained good friends throughout the years. 'Who can turn down an invitation like that,' said Fields.
Recognizing a trend toward higher oil prices, which would hurt its non-oil and non-gas producing subsidiaries, Apache began formulating plans during the mid-1970s to sell many of its diversified holdings. In 1977 the company established a timetable for the sale of most of Apache's remaining subsidiaries, a move that would also increase funding for oil and gas development. Although Apache had received much criticism for its widespread diversification, company management credited its external investments with helping the company survive the 1960s and early 1970s.
Apache lost a large portion of its oil and gas operations in 1977 when it sold its Apexco subsidiary. Apexco had been created to handle Apache's energy endeavors. But Apache reemphasized its expertise in the gas and oil business in the late 1970s, and by the early 1980s had again established itself as a major player in the industry. Even by 1978 Apache was recognized as one of the leading deep drilling companies in the United States. Almost as though it was signaling an end to Apache's oil and gas adversity, the era of the late 1970s and early 1980s was punctuated by the largest blowout (oil well explosion) in the history of the petroleum industry. An Apache well in Texas erupted in a blaze that took 16 months and $42 million to extinguish.
1980s: Transition to Conventional Exploration and Production Company
After achieving notable success with its oil and gas ventures in the late 1970s, Apache formed the Apache Petroleum Company (APC) in 1981. APC, the first publicly traded master limited partnership to appear on the board of the New York Stock Exchange, was created as an innovative investment vehicle that would take advantage of favorable tax laws. As industry drilling activity vaulted to post-1950s highs in the early 1980s, APC attracted nearly 60,000 limited partners and Apache sales leapt to $221 million by 1984. Plank ranked the creation of APC as the most significant development in the company's history. Indeed, APC spawned an entirely new industry of publicly traded master limited partnerships (MLPs). The early 1980s were also marked by Apache's 1982 acquisition of oil and gas properties from Dow Chemical for $402 million.
Apache realized record income levels during the early and mid-1980s; net income fluctuated around $22 million during the early 1980s before slipping to a still healthy $9.4 million in 1985. In 1986, however, the oil and gas industries spiraled into a down cycle. After declining slowly throughout the early 1980s, prices, particularly for oil, plummeted in 1986 as the market became glutted. The downturn was magnified for Apache by the Tax Reform Act of 1986 (TRA), which Congress passed. The TRA effectively eliminated the tax advantages associated with limited partnerships, crushing one of the most lucrative sides of Apache's business. The company recorded its first full-year loss, of $10.9 million, in 1986. That year also saw Apache make another large acquisition of oil and gas fields, through a $440 million deal with Occidental Petroleum.
Undaunted by analyst's predictions of doom for Apache and its industry peers, Plank and his management team immediately began plotting a strategy for the future. In 1986, in fact, the company went out on a limb by investing a large portion of its available resources in new oil and gas reserves, which were selling at record low prices. Moreover, demonstrating his ability to adapt to change, Plank pioneered a complete reorganization of the company in 1987 and 1988. Surprising analysts, Plank changed the entire focus of the company from an organizer of limited partnerships and investment vehicles to a conventional exploration and production company relying on internal cash flow to fund operations.
Evidencing the significance of the change was the 1987 movement of company headquarters from Minneapolis to Denver, and a significant reduction of the Apache workforce. Distressed by both Apache's rapid transition out of its core business and its negative earnings--in 1987 Apache posted a $71 million net loss--investors registered their concerns on Wall Street. The company's stock price declined in 1988 as Apache continued to buy up new reserves, increase its debt burden, and restructure. 'Given what was happening in our industry, that wasn't surprising,' said Plank in the October 16, 1989, issue of the Denver Business Journal. 'We were changing our whole basis of doing business, so it's understandable that the market got a little pessimistic.'
Plank's arrival on the Denver business scene underscored the aggressive, no-holds-barred management style that had made Apache so successful in the past. Plank was irritated by both a lack of an intelligible U.S. energy policy and government intervention in the oil and gas industry, and he had been prodding his Denver peers to get organized and take action since 1985, when he invested in locally owned drilling operations. Not surprisingly, he clashed with many of the local industry elites. 'Frankly, they're entitled to their opinion, and I don't happen to care what it is,' stated Plank in the May 1989 issue of Corporate Report Minnesota. 'I was getting pretty tough on the independent sector of our industry, and I have no regrets whatever. They sat there and watched their butts melt and themselves go broke.'
Just as it had weathered the industry fallout of the 1960s, Apache began to emerge from its predicament in 1988, when it posted a positive net income of $9 million. Furthermore, after increasing its exploration and development expenditures to $45 million in 1988, it planned to more than double that figure to $92 million in 1989. Apache was conducting its oil and gas reserve acquisition and development program with the help of industry veteran Mick Merelli, who joined the Apache team in 1987 as president and chief operating officer. Apache's new strategy allowed it to discredit its detractors as sales shot up 74 percent in 1989, to $247 million, and net income lurched to $22.1 million. In 1990, moreover, sales and income reached a record $273 million and $40.3 million.
Steady 1990s Growth Through Acquisition
Despite his company's remarkable recovery and restored reputation, the 68-year-old Plank had no intention of slowing down going into the 1990s. Adhering to its strategy of growth through acquisition and development of oil and gas reserves, Apache doubled its reserves between 1990 and 1993 to more than 225 million barrels. A majority of this increase resulted from perhaps the most significant investment in the company's 37-year history. In 1991, Apache purchased oil and gas properties, which included 111 million barrels of reserves, from Amoco Production Company for $546 million. 'Shortly afterward, a cow leaned against one of the plugged wells and knocked out the plug,' jested Plank in the January 3, 1994, issue of Forbes. 'When crude flowed out, Apache put the well back into production and drilled more wells around it.'
Apache complemented its Amoco deal with an additional $350 million in acquisitions during 1992 and 1993, including its first outside of North America, the $98 million purchase of Hadson Energy Resources Corporation, which managed fields in Western Australia. As prices for oil stabilized and those for natural gas began a slow recovery, Apache continued to boost its production. Total output rose steadily from 17 million barrels of oil equivalent (MMboe), a measure that also applies to gas production, in 1989 to 31 MMboe in 1993. As a result, Apache's revenues grew from $247 million to $467 million during the same period, reflecting a jump of 90 percent. Net income hovered in the $35 million to $45 million range throughout the early 1990s. Importantly, despite its intense acquisition efforts, Apache had succeeded in reducing its ratio of debt-to-equity from 53 percent in 1991 to a healthier 37 percent in 1993. Meanwhile, the company relocated its headquarters again, this time settling in Houston, a city centrally located in relation to Apache's U.S. properties.
Augmenting rapid domestic expansion during the early 1990s were Apache operations overseas. Although they represented a negligible share of company receipts, foreign drilling ventures were becoming an increasingly important component of Apache's growth strategy. Western Australia represented the core of its international operations. In 1994, however, Apache agreed to purchase a one-third interest in an exploratory offshore venture in eastern China's Bohai Bay. The following year the company began selling oil in Egypt after discoveries were made in the Qarun Concession in the Western Desert, which was estimated to contain 70 million barrels of oil. Back in North America, Apache in late 1994 acquired the oil and gas production assets of Crystal Oil Co.--which were principally located along the Arkansas-Louisiana border and in southern Louisiana--for $101 million. In early 1995 Apache made its largest purchase to date, the $571 million acquisition from Texaco, Inc. of 315 oil and gas fields in Texas, Louisiana, and the Rocky Mountains. Also in early 1995 the company bought out Calgary-based DEKALB Energy Company in a $285 million stock swap. Through its early 1990s acquisitions spree, Apache increased its proven reserve base from 106.1 MMboe at the beginning of 1991 to 420.6 MMboe at the end of 1995.
In addition to its business exploits during the early 1990s, Apache--guided by Plank's affection for outdoor sports--was notable for its environmental awareness. This was reflected in efforts to restrict development of 20,000 acres of foothill grazing lands in Wyoming. In 1992 and 1993, moreover, Apache's Australian division received the West Australian 'Environmental Excellence' award for conducting drilling and pipeline rehabilitation operations with minimal disruption to sensitive wildlife habitats. 'The degree to which we're defiling this planet, it's a greater threat than nuclear annihilation,' Plank observed in the May 1989 issue of Corporate Report Minnesota.
Apache's overseas expansion continued in 1996 and 1997. The company became the largest independent oil operator in Egypt with the acquisition of the Phoenix Resource Companies in 1996. The following year, Apache and its partners in the Khalda Concession entered into a 25-year, $1.2 billion contract to supply natural gas to the Egyptian General Petroleum Corporation. China was also proving fertile for Apache, with a well in Bohai Bay delivering 15,400 barrels of oil per day in a 1997 test, making it China's largest discovery well. Apache obtained its first operations in Poland in April 1997 when it gained operatorship and a 50 percent interest in more than 5.5 million acres near Lublin, southeast of Warsaw.
Plank's decades-long experience with the boom-and-bust cycles of the petroleum industry was in evidence in the late 1990s. The Asian economic crisis, which began in 1997, was a major factor--along with the virtual collapse of OPEC--in an oil glut that forced down the price of a barrel of crude by late 1998 to about $11. When inflation was factored in, this was the cheapest price in history; just one year earlier, the price had been about $23. Plank had anticipated in mid-1997 that the industry was headed for another downturn (although not one as severe as actually took place), and began to take measures to survive the coming storm. He cut spending, reduced the company's debt load, and sold off nearly $200 million in assets. In 1998 Apache was also forced to take an after-tax charge of $158 million to write down the value of its U.S. assets. This led to a net loss of $129.4 million in 1998, a year in which revenues fell to $876.4 million, a 26 percent decline from the 1997 figure of $1.18 billion.
As he had done in the past, Plank next proceeded back to the acquisitions arena, before the industry had made a full recovery, making two large purchases in 1999. In May, Apache completed a $746 million cash-and-stock deal to obtain 22 oil and gas fields in the Gulf of Mexico from Shell Exploration & Production Company, a unit of Shell Oil Company. These properties had proven reserves of 127.3 MMboe. In early 1999 they were producing an average of 29,000 barrels of oil and 125 million cubic feet of gas per day, which translated into a significant increase from Apache's 1998 daily average of 73,000 barrels of oil and 590 million cubic feet of gas. In December Apache completed a purchase of oil and gas properties in the Canadian provinces of Alberta, British Columbia, and Saskatchewan from Shell Canada Limited for C$761 million (US$517 million). The properties had proven reserves of 87.5 MMboe and were producing about 12,500 barrels of oil and 64.8 million cubic feet of gas per day.
Apache's contrarian approach left it in a strong position at the end of the 20th century, despite intensifying industry competition and consolidation. In fact, the megamergers of the late 1990s--for example, the creation of Exxon Mobil Corporation from the merger of two industry giants--were welcomed by Plank. He told the Wall Street Journal in late 1999 that the top oil companies '[are] always going to need someone to take their second-hand clothes.' Apache had built its large reserve base by acquiring 'second-hand' properties, mainly during industry downturns when prices were low. It was then able to profitably exploit these supposedly inferior properties by boosting output through the drilling of additional wells. Apache was clearly one of the shrewdest competitors in the oil industry, with a proven knack for adapting to and exploiting its ups and downs.
Principal Subsidiaries: Apache Foundation; Apache Gathering Company; Apache Holdings, Inc.; Apache International, Inc.; Apache Overseas, Inc.; Nagasco, Inc.; Apache Oil Corporation; Burns Manufacturing Company; Apache Energy Limited (Australia); Apache West Australia Holdings Limited (Island of Guernsey); DEK Energy Company; Phoenix Exploration Resources, Ltd.; Apache Khalda Corporation LDC (Cayman Islands); Apache Qarun Exploration Company LDC (Cayman Islands); Apache North America, Inc.
Principal Competitors:Adams Resources & Energy, Inc.; Amerada Hess Corporation; Anadarko Petroleum Corporation; Atlantic Richfield Company; BP Amoco p.l.c.; Burlington Resources Inc.; Chesapeake Energy Corporation; Chevron Corporation; Conoco Inc.; Cross Timbers Oil Company; Devon Energy Corporation; EEX Corporation; El Paso Energy Corporation; EOG Resources, Inc.; Exxon Mobil Corporation; Forcenergy Inc.; Forest Oil Corporation; Helmerich & Payne, Inc.; HS Resources, Inc.; KCS Energy, Inc.; Kerr-McGee Corporation; Murphy Oil Corporation; Noble Affiliates, Inc.; Nuevo Energy Company; Ocean Energy, Inc.; Phillips Petroleum Company; Pioneer Natural Resources Company; Royal Dutch/Shell Group; Santos Ltd; Shell Oil Company; Texaco Inc.; TransTexas Gas Corporation; Ultramar Diamond Shamrock Corporation; Union Pacific Resources Group Inc.; Unocal Corporation.
- 1954: Apache Oil Corporation is founded in Minneapolis, Minnesota.
- 1955: The company's first well in Cushing, Oklahoma, produces seven barrels of oil per day.
- 1963: Cofounder Raymond Plank gains full management control of the company.
- 1967: Apache discovers the Recluse, Wyoming, field, which eventually yields 2,800 barrels per day.
- 1981: Apache Petroleum Company, the first publicly traded master limited partnership, is created as an investment vehicle.
- 1982: Company purchases oil and gas properties from Dow Chemical for $402 million.
- 1986: Apache purchases oil and gas properties from Occidental Petroleum for $440 million; company suffers first full-year loss as a result of plummeting oil prices and the enactment of the Tax Reform Act of 1986, which eliminates most limited partnership tax advantages.
- 1987: Plank begins to change the entire focus of the company from an organizer of limited partnerships and investment vehicles to a conventional exploration and production company; company relocates its headquarters to Denver.
- 1991: Apache purchases oil and gas properties, which include 111 million barrels of reserves, from Amoco Production Company for $546 million.
- 1992: Company moves its headquarters to Houston.
- 1993: Company ventures outside of North America for the first time with the acquisition of Hadson Energy Resources, in Western Australia.
- 1994: Apache acquires 315 oil and gas fields from Texaco for $571 million, and acquires Calgary-based DEKALB Energy Company for $285 million.
- 1997: Apache and its partners in the Khalda Concession in Egypt enter into a 25-year, $1.2 billion contract to supply gas to the Egyptian General Petroleum Corporation.
- 1999: Company purchases assets in the Gulf of Mexico from Shell Exploration & Production Company for $746 million, and properties in western Canada from Shell Canada Limited for $517 million.
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