Accelerating growth

1987

The Tax Reform Act of 1986, becoming effective in 1987, marked the beginning of the modern Apache. By lowering marginal tax rates and limiting the utility of passive losses, tax reform effectively brought to an end the limited-partnership, drilling-fund business Apache pioneered.

A lesser company, with its bread-and-butter activities legislated out of existence, might have folded. Wall Street expected as much as the stock hit a split-adjusted levels below $3.00. Yet Apache, demonstrating persistence, adaptability and a sense of urgency long before anyone recognized the concept, converted lemons to such great lemonade that one must wonder if it would have thrived as well had the regulatory environment for tax shelters remained unchanged.

When Apache was formed, the top marginal tax rate was 91 percent. In the mid-1960s it was reduced twice, first to 77 percent and then again to 70 percent. In the first year of the Reagan administration it reached 50 percent before the 1986 act dropped it to 28 percent, the lowest level since 1917. As the rates dropped, so too did investors’ after-tax rate of return. That, in turn, reduced the attractiveness of such investments to the high income taxpayers that comprised Apache’s clientele.

As a managing partner of the investment vehicles it created, Apache historically earned its income managing other peoples’ money. As those people deserted the business, Apache’s very survival became dependent upon its ability to manage its own money and to restructure its approach to the oil and gas.

Apache, as APC’s general partner, offered unit holders the option to exchange their APC units for shares in Apache Corporation or a newly created corporate entity, Key Production Company (now Cimarex). At the conclusion of the exchange offer, Apache assumed approximately 74 percent of the interests previously held by APC, and expanded its reserves almost 70 percent with the addition of 233 billion cubic feet of natural gas equivalent.

Apache moved its headquarters of 33 years from Minneapolis to Denver in 1987. The relocation, lasting less than five years, facilitated cultural change and planted the seeds of corporate restructuring, restaffing, revitalization and growth.

1988

By late June 1988, Apache had sold the last of its non-oil-and-gas subsidiaries, exited the business of managing oil-and-gas-related investments, and announced its intention to restructure as a pure exploration and production company.

As testimony to its resolve, Apache hired two people who it believed would help effect the transformation.

F.H. (Mick) Merelli, previously president of Terra Resources, was hired and elected president and chief operating officer. He assumed responsibility for the company’s domestic exploration and production activities.

Accompanying Merelli in the move from Terra was G. Steven Farris, who joined Apache as vice president of exploration and production. Merelli and Farris brought management and incentive systems – the Investment Management System (IMS), Production Management System (PMS) and Investment Tracking System (ITS) – that enable Apache employees throughout the company – from the field to the executive level – to understand the essential factors driving Apache’s business.

1991

Apache's 1991 acquisition of the MW Petroleum assets from Amoco was one of the most critical events in Apache’s history.

• At $545 million, it doubled the size of the company.
• It brought relative balance to Apache’s oil and gas reserves, a strategic equilibrium that acts as a hedge against price volatility.
• It shifted the center of Apache’s geographical mass to the Gulf coast and precipitated the move of Denver headquarters to Houston.
• It brought Apache a position in the Permian Basin of West Texas.
• It demonstrated that Apache, as a growing independent, could do business with the majors, opening the door to every major acquisition since.
• It gave life to the strategy of “acquire and exploit.”
• It underwrote Apache’s domestic growth from the early- to the middle-1990s and continues to be a valuable contributor to the bottom line.

MW presented such an opportunity, but not without a high degree of sweat equity in the negotiations. Amoco doubted the ability of the relatively small independent to perform and the initial asking price of $1 billion was perhaps beyond Apache’s ability to finance. When it became clear that most potential buyers were not displaying interest, Apache proposed that the sales package be reduced to only those properties that complemented Apache’s existing acreage. Amoco balked.

Further complicating the negotiations, oil prices during the period almost doubled from the mid-teens in response to the 1991 Gulf War. Amoco, as the seller, was naturally more optimistic about future pricing trends. The breakthrough came when the two sides negotiated a price support agreement that protected Apache on the downside in return for guaranteeing Amoco a portion of the upside.

1992

The MW acquisition was the catalyst for Apache's move to Houston, the center of the oil and gas industry.
 
The Roberto field, composed of Matagorda Island Blocks 681 and 682 in the federal waters of the Gulf of Mexico offshore Texas, was one of the original Shell Joint Venture prospects. As a result, Apache and its affiliates held an approximate seven percent interest in the field. The balance was held by Shell.

In September 1992, Shell notified Apache that it intended to sell its interest to a small Louisiana independent for $58 million. Under the terms of the governing joint-venture agreement, Apache had 30 days to make a decision: It could exercise its preferential right and match the offer to buy or it could waive the right and allow the transaction to proceed.

Apache’s technical teams proceeded to do their homework and, before the 30-day period expired, chose the exercise the preferential right to purchase. An agreement with Shell was signed in October and the acquisition closed that November. With this one transaction, Apache doubled its offshore gas production.
 

1993

The $98 million Hadson Energy Resources acquisition in 1993 propelled Apache to become one of the largest leaseholders offshore Western Australia.

Recognizing a favorable geologic, geographic, political and fiscal opportunity after learning-curve experiences in Argentina, Angola, Aruba, France, Gabon and Indonesia, Apache entered the waters of the Carnarvon Basin offshore Western Australia in 1991 with the acquisition of a small (nine wells, 500,000 undeveloped acres), non-operated interest near Airlie Island. Reserves approximated 500,000 barrels of oil.

Management also noticed that Apache had no operational control and no sales contracts against which to book most of the new reserves it was finding. The hunt for additional properties with associated operations, marketing infrastructure and local expertise began in earnest. When Hadson Corporation suggested that Apache purchase its subsidiary, the proposal fell on receptive ears.

The Hadson transaction brought Apache its Perth office and staff, operations in eight fields collectively known as Harriet and control of the strategically important Varanus Island production, processing and marketing hub. Overnight, Apache had equivalent year-end reserves of almost 12 million barrels of oil, 3.3 million net undeveloped acres and control over the exploration and development of its by now massive Carnarvon Basin acreage.

1995

In early 1995, Apache acquired Dekalb Energy Canada Ltd., marking Apache's return to Canada after a two-decade absence. The transaction also represented a redeployment of assets as the company exited the higher cost Rocky Mountain region.

Strategically, the newly acquired Canadian assets underscored Apache’s belief that the natural gas market would become more North American than domestic, that diversification in selected basins globally enhanced the potential for future growth and that a position in Canada’s Western Sedimentary Basin represented the greatest opportunity to capitalize on the voracious appetite for energy in the Lower 48 states.

Apache spent the period from 1995 to 1998 reacquainting itself with the Canadian market and in 1999 it commenced a three-year string of acquisitions from Shell, Phillips and Fletcher Challenge that multiplied the original Dekalb reserves nearly five-fold.

The 1995 Texaco acquisition, Apache’s then-largest at $567 million, added 110 million barrels of oil equivalent and increased Apache’s reserves by 40 percent at an average cost of $5.18 per barrel. The acquisition encompassed 315 oil and gas fields in the Permian Basin, the Texas-Louisiana Gulf Coast, western Oklahoma, East Texas, the Rocky Mountains and the Gulf of Mexico. 

Apache entered Egypt in 1994 by acquiring a 25 percent non-operated interest in the Qarun Concession alongside the Phoenix Resource Companies. While early discoveries were encouraging, Apache had no reserves on its Egyptian books by year-end 1995.

Eager to step up the pace of its Egyptian operations and increase its exposure to the country’s multiple producing basins, Apache merged which Phoenix in May 1996. Through the merger, Apache tripled its interest in the Qarun Concession and added a 40 percent interest in the Western Desert’s prolific Khalda Concession. By year-end 1996, the company held over 6 million net acres in Egypt, had booked reserves of nearly 59 MMBoe and had production of 60,000 barrels of oil per day.
 

1999

In early 1999, Apache's stock was trading at a split-adjusted range below $15. Commodity prices struggled to break $2 per mcf and $13 per barrel. Asset value approximated $4 billion on reserves of 613 million barrels of oil equivalent. Then, a long-term effort to develop a relationship with Royal Dutch/Shell bore fruit: A $688 million acquisition of Shell assets in the Gulf of Mexico with proved reserves of 123 MMboe.

Timed perfectly for the rebound in commodity prices, this transaction proved to be the spark that began a remarkable series of acquisitions that transformed Apache:

• 1999: Shell Canada, $518 million;
• 2001: Fletcher Challenge, Canada, $677 million;
• 2001: Repsol, Egypt, $447 million (which brought operatorship of Khalda);
• 2003: BP, UK North Sea, $650 million;
• 2003: BP, Gulf of Mexico, $650 million;
• 2003: Shell, Gulf of Mexico, $200 million;
• 2004: Anadarko, Gulf of Mexico, $525 million

2001

The $410 million Repsol acquisition in 2001 made Apache the largest producer of liquid hydrocarbons in Egypt’s Western Desert and the second largest producer of natural gas. Apache became the operator in seven Western Desert concessions, the most significant of which was and is the prolific Khalda/Khalda Offset. With increased contractor interests and a very active exploration and development program, Apache also became Egypt’s largest U.S. investor.

2002

Between May and December of 2002, Apache Corporation drilled its first deepwater wells, successfully exploring its West Mediterranean Concession offshore Egypt. Four exploratory wells and one appraisal well, drilled at water depths between 2,300 feet and 3,500 feet, provided sufficient evidence of 3 trillion cubic feet of potential natural gas reserves, allowing Apache and its partners to commence negotiations with the Egyptian government for the sales agreement necessary to commence development of the field.

2003

Apache acquired the Forties Field, the largest field ever discovered in the United Kingdom North Sea, from BP in April 2003. Adding 148 million barrels at a cost of $630 million, the field immediately became Apache’s largest single asset. Discovered by BP in 1970 and productive since 1975, the field still ranks eighth in production and reserves after having produced some 2.5 billion barrels.

Apache drilled the Qasr 1X, located in the south-central portion of Egypt’s Khalda Concession, in mid-2003. It was the largest discovery in the company's history. Logs identified a 670-foot hydrocarbon column. Reserves for the 13,000-acre structure, after the drilling of only three wells, are estimated to be 2 trillion cubic feet of natural gas and 20 million to 70 million barrels of condensate. Reacting quickly to meet rising domestic demand for natural gas, Apache executed in early 2004 a gas sales agreement through which it has committed to deliver 300 million cubic feet per day through 2030.