Strategy

Apache’s mission is to grow a profitable upstream oil and gas company for the long-term benefit of our shareholders. Our strategy includes building a balanced portfolio of assets, maintaining financial flexibility, and maximizing earnings and cash flows by controlling costs.
 
We have a portfolio of core areas that provide long-term growth opportunities through drilling supplemented by strategic acquisitions. Two decades ago, recognizing that the United States was a mature oil and gas province, we launched an international exploration component to our portfolio approach. Our international locations provide additional diversity of geologic and geographic risk as well as exposure to larger reserve targets, which fuel production and reserve growth. We have exploration and production operations in six countries, comprising seven regions: the Gulf Coast and Central regions in the United States, Canada, Egypt, the North Sea, Australia and Argentina. We have exploration interests in Chile located adjacent to our Argentine operations in Tierra del Fuego. We have achieved a critical mass in each of our producing regions that support sustainable, lower-risk, repeatable drilling opportunities. This enables us to pursue higher-risk, higher-reward exploration primarily in our international regions, particularly our growth areas of Australia, Canada and Egypt. Our acreage positions, which include 39 million gross acres across the globe, also bring ample growth opportunities.

In 2008, we drilled or participated in 1,418 gross wells with an overall 93 percent success rate; 90 percent were developmental and 10 percent were exploratory. We carefully spread our risk among our regions. For instance, no single region contributed more than 23 percent of our production or reserves in 2008. Our multiple geological locations also provide us a mixture in reserve life, which translates into balance in the timing of returns on our investments. Reserve life (estimated reserves divided by annual production) in our regions ranges from as short as seven years to as long as 27 years.
 
In addition, our goal is to balance our mix of hydrocarbons, which provides some measure of protection against price deterioration in a given product while retaining upside potential through a significant increase in either commodity price. In 2008, crude oil and liquids provided 50 percent of our production and 68 percent of our revenue. We were well-positioned to realize the benefit of higher oil prices, which significantly outpaced natural gas price increases for much of the year, despite falling 70 percent from their June 2008 peak. Our year-end estimated proved reserves were balanced at 55 percent natural gas and 45 percent crude oil and liquids.
 
Preserving financial flexibility and a strong balance sheet are also key to our overall business philosophy. We ended 2008 with a debt-to-capitalization ratio of 23 percent, after current year capital investments of $6.3 billion, excluding asset retirement costs. We also had over $1.5 billion of cash and short-term investments. In tightening credit markets, we believe Apache’s single-A debt ratings provide a competitive advantage in accessing capital. Our 2008 return on capital employed and return on equity of four percent and five percent, respectively, was negatively impacted by a non-cash write-down (discussed in Item 7 of Form 10-K).
 
Another critical component of our overall strategy is maximization of earnings and cash flow. Both are significantly impacted by commodity prices, which fluctuate and are primarily influenced by factors beyond our control, including worldwide supply and demand, political stability and governmental actions and regulations. For example, demand for energy, once thought to be insatiable, waned, driving prices down. Prices began the year strong and soared to unprecedented levels in mid-2008, only to fall rapidly by year-end, as the financial markets and ultimately the world’s economies stalled.
 
We also strive to control costs of both adding and producing reserves. Operating regions are given the autonomy necessary to make drilling and operating decisions and to act quickly. Management and incentive systems underscore high cash flows and motivate appropriate risk taking to reach or exceed targeted hurdle rates of return. Results are measured monthly, reviewed with management quarterly and utilized to determine annual performance awards. We monitor capital allocations, at least quarterly, through a disciplined and focused process of analyzing current economic conditions in each of our regions, internally generated drilling prospects, opportunities for tactical acquisitions or, occasionally, new core areas which could enhance our portfolio. We also periodically evaluate our properties to determine whether sales of certain assets could provide opportunities to redeploy our capital resources to rebalance our portfolio and enhance prospective returns.
 
The global economic slowdown and decline in oil and gas prices create a difficult operating environment for 2009. In preparation, we have substantially reduced our capital budget for 2009 in an effort to keep our expenditures in line with our cash flow. In 2009, we plan to invest $3.5 to $4 billion on capital expenditures, which is 50 percent less than in 2008. Our plan includes investments for drilling and recompleting wells, development projects, waterflood projects, equipment upgrades, production enhancement projects and seismic acquisition. Also included is $300 million for gathering, transmission and processing assets and $500 million for plugging and abandonment work, of which $250 million is for damage caused by Hurricanes Katrina, Rita and Ike. As is our custom, we will review and revise our capital expenditure estimates throughout the year based on changing industry conditions and results-to-date. Additionally, we plan to step up our search for opportunities to acquire oil and gas properties where we believe we can add value and earn adequate rates of return.
 
During our 54 years in business and throughout the cycles of our industry, these strategies have underpinned our ability to deliver long-term production growth, increase proved reserves at a reasonable economic cost and achieve competitive investment rates of return for the benefit of our shareholders. We increased reserves 22 out of 23 years and increased production 28 out of the past 30 years, a testament to our longevity. While the business environment in 2009 is likely to be challenging, we believe we are in a strong financial position and are well-positioned to take advantage of what could be some of the most attractive acquisition opportunities in years.