Apache Corporation is currently evaluating is risk management strategies in order to increase firm and shareholder value. To properly take into account all facets of their risk assessment and management program, several observations must be made and suggestions given.
Current Risks Faced by Apache
Apache is currently facing several forms of risk stemming from various sources. The first and most important of these is the inherent volatility of the oil industry with regard to price. Systematic, industry wide risk is very large and active within the industry. Prices are constantly fluctuating with varying degree. These fluctuations can often times be quite large, and constitute major changes in oil prices.
More specifically, Apache faces many risks ranging from political uncertainty of a region to geological uncertainty of a prospective drilling area. Generally, these risks are much lower within the North American markets. This is due to the maturity and stability of North American fields and reserves, as well as the expertise and experience that companies have with the area.
Apache is a mid to large size independent oil company. Independents deal with a different part of the extraction and production process than major oil companies do. Because of this, Apache faces some risks that larger oil companies do not. Namely, when a field has matured and is sold to an independent such as Apache, extraction becomes harder and more costly. This changing cost represents a significant risk to Apache in that it can fluctuate.
Apache’s operating strategy works on the mantra of “maximizing production and minimizing costs.” To be able to have control over its development and operations, Apache prefers to operate its own properties. Subsequently, Apache has roughly 80% of it proven reserves located within North America. Apache is exploratory as well, and is constantly searching out new reserves in developing markets. However, unlike the smaller oil...