APACHE CORPORATION Analysis of Recent Financial Performance

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APACHE CORPORATIONAnalysis of Recent Financial
Performance
University of Houston Energy Risk Management Bill
Ramsey, Teressa Barner, Scott Randall October
22, 2003
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AGENDA

• APACHE and Peers
• Global Economy
• Superindependent EP Industry
• APACHE/Peer Ratio Comparisons
• Going Forward

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APACHE and Peers

• APACHE
• Super Independent as defined by Herolds
• Financially successful over past several years
• Houston based
• Peers - Anadarko and Kerr-McGee
• Chosen based on similarity of 5 operating metrics
• Picked one larger company and one smaller
• Apache and Anadarko are Full Cost whereas
  Kerr-McGee is Successful Efforts
• Kerr-McGee has a chemicals segment that
  contributes 1 of earnings

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Global Economy

• Forecast turnaround in 2004 - led by U.S.
• Energy consumption highly correlated to growth -
  industrial feedstocks and fuel
• Oil prices expected to decrease due to production
  from non-OPEC countries
• NG prices expected to fluctuate between 4.50 and
  5.00 per MMBTU

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Superindependent EP

• Does very little green field development
• Lower cost structures
• Develop fields that are no longer economical for
  the majors
• Replaces reserves primarily through acquisition
• Requires strong balance sheet

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Reserve Replacement Ability

• Condition of balance sheet very significant in
  ability to acquire reserves
• Apache demonstrates ability to take quick
  advantage of opportunities
• Apache has no issues servicing debt and is in
  prime condition for taking on more

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Reserve Ratios

• Apache has had very consistent reserve
  replacement
• In 2002 Kerr-McGee sold reserves
• Apaches low reserves/well should indicate that
  they are not very efficient at lifting

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Cost Analysis

• Apache has advantage in Finding Costs- Peer Group
  benchmark for 5 year median is 5.99/BOE
• Apaches advantage in Lifting Costs seems to
  eroding

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Apaches Strategic Advantage

• Apaches stated strategy is value added growth as
  opposed to growth at all cost
• Flatter management structure yields lower SGA
  costs

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Strategy Results

• Yields higher ROCE and PM since they obtain
  greater value from each BOE
• PM and ROCE more constant due also to stable
  overhead cost control
• 2002 and 2003 metrics have dropped slightly due
  to lower gas prices

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Our Past Has Been Impressive

• Growth based on the following advantages
• Ability to execute on our strategy
• Exploit our Asset base
• Efficient Operations (low finding and development
  costs using proven technologies)
• Disciplined Acquisitions yielding high reserve
  value added ratios
• Geographic focus leading to cost control and
  purchasing power
• Strong Balance Sheet-evidenced by low debt/equity
  ratios

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Lower Oil and Gas Price Outlook Plays to Our
Strategy

• Short Term Crude and Natural Gas Futures Strip
  through Cal 04 is backwardated1
• Medium Term 3 different scenarios illustrate
  price declines 2

This will increase Acquisition Opportunities as
Competitors Shed their Assets to Survive!
1 10/21/03 Nymex- WTI Kushing and NG Henry
Hub 2 US Energy Information Administration,
Annual Energy Outlook 2003
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Our Future is Bright

• Our balance sheet and operational strengths allow
  us to execute by
• Increasingly Efficient Acquisitions
• Continuous exploitation of New Assets through
  extensions, discoveries and improved recovery
• Relentless Focus, Cost Control and Purchasing
  Power

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• Building to Last
• Apache Corporation