Apache Corporation Equity Valuation and Analysis. Analyst Group

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Apache Corporation Equity Valuation and

Analysis

Analyst Group

Dillon Blaine [email protected]

Rebecca Wood [email protected]

Ben Gergen [email protected]

Christopher Cotter [email protected]

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Executive Summary

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APA- NYSE(11/1/06): $99.18 52 Week Range: $63.01-$107.73 Revenue: $8868.994M Market Capitalization: $32.72B Shares Outstanding: 330.737M Percent Institutional Ownership: 82% Book Value per Share: $39.88 ROE: 18.60% ROA: 9.95%

Cost of Capital Est. R2 Beta Ke

Estimated: 3-month .19 1.6 4.01 6-month .19 1.6 4.22 2-year .19 1.6 4.03 5-year .19 1.59 4.22 7-year .19 .14 4.33 10-year .19 .14 4.52 Published Beta: .76 Kd(AT): 4.74% WACC(BT): 8.52% WACC(AT): 5.54% Altman’s Z-Score: 2002 2003 2004 2005 2006 3.51 3.97 2.72 3.13 3.32 Valuation Estimates: Actual Price (11/1/06): $99.18

Financial Based Valuations:

Trailing P/E: $82.02 Forward P/E: $93.41 P.E.G.: $59.88 P/B: $103.29 P/EBITDA: $75.65 P/FCF: N/A* EV/EBITDA: $97.24 Intrinsic Valuations: Discount Dividend: $6.62 Free Cash Flows: $126.84 Residual Income: $37.72 LR ROE: *N/A AEG: $19.23

*Irrelevant due to negative cash flows

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Industry Analysis

Apache was formed in 1954 in Minneapolis, Minnesota by Truman Anderson, Raymond Plank, and Charles Arnao. They have grown to be one of the leading independent oil and gas exploration companies in the United States. The company

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currently has 24.3 billion in assets and sold 10.6 billion dollars worth of oil and gas in 2006. Apache currently has operations on 37.6 million acres in 6 different countries around the globe.

Apache’s main competitors consist of Occidental Petroleum, Anadarko, XTO Energy, and Devon Energy. They compete in a very competitive industry where

commodities are sold. This means the products they sell are virtually identical, making price a deciding factor with their customers. In an industry with high entry barriers, it is impossible to build a corporation with 24.3 billion in assets overnight. Brand name and reputation are imperative in this industry since all products are identical.

The key success factors upon which firms compete are economies of scale, successful exploration, tight cost controls, and retention of employees. These key success factors are the building blocks to gaining market share, and maintaining

profitability and competitive advantages over their competitors. In an industry with low product differentiation and almost zero substitute products, these key success factors are all the more important to each company.

Accounting Analysis

Being successful in the oil and gas industry strongly relies on the key success factors relating to key accounting policies. Accounting policies are important to

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option to make financial statements appear more appealing than they really are.

Managers are motivated to do this because keeping shareholders around is important to their jobs.

Apache, when thoroughly looking over their financial statements, showed a high level of disclosure of their business practices and accounting policies. Any bit of

information was found in the company’s 10-K and annual report of various years with small amounts of searching.

Apache included much information about their operating leases, the full amounts owed and the discount rates used to value payments on the leases at future dates. Discount rates for pension liabilities and other long term liabilities were also revealed. Discount rates for these items are an area that flexibility is used a lot. However, when reviewing and performing the accounting analysis, no outlying ratios and numbers caught our eyes. Everything was pretty much with the industry norms. Overall, Apache did a good job of making transparent financial statements that disclose information desired by analysts and investors.

Financial Analysis, Forecast Financials, and Cost of Capital Estimation There are many financial ratios that analysts use to dissect a company’s financial statements so they are able to compare them to their competitors. These ratios look at the firm’s liquidity, profitability, and capital structure. These ratios are used to forecast

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out a firm’s financial statements so analysts can determine the value of a company, and see the changes in the firm through time. Analysts also run a regression of the

company to determine a beta, cost of equity, cost of debt and a weighted average cost of capital.

The liquidity ratios computed were the current ratio, quick asset ratio, inventory turnover, receivables turnover, and working capital turnover ratios. The ratios

determine the firm’s ability to have enough near-cash assets to meet their debts and obligations as fast as possible. These ratios show that Apache is in line with the industry. The profitability ratios determine a company’s operating efficiency, asset productivity, rate of return on assets, and rate of return on equity. Apache’s profitability ratios show that Apache is, again, in line with the industry. The only exception is the inventory turnover ratio, because not many of Oil Corporations in the industry have inventory, so Apache is unusually high. Finally, the capital structure ratios refer to the sources of financing used to acquire assets. This is shown by the owner’s equity and liabilities sections of the balance sheet. All of Apache’s ratios are in the same range as their competitors.

We then forecasted out Apache’s balance sheet, income statement, and

statement of cash flows for the next ten years. We forecasted using industry averages, Apache’s past growth rates, and ratios. We took into consideration recent asset

acquisitions and natural disasters when forecasting so the future numbers were realistic and reliable.

Valuations

Analysts have several tools when trying to value a company’s stock price per share. Before using these tools, analysts must have a good understanding of the company as well as its business environment. After completing an overall industry

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analysis, accounting strategies, and determining key success factors of the company, the analyst is familiar enough with the company to value it. The Method of

Comparables and the Intrinsic Valuation model are important in determining if a firm is overvalued, overvalued, or fairly valued.

The method of comparables is a measure of a company’s stock price per share. This model is unique because it is based on the competitors in the industry. The industry average does not include the company you are valuing. This can potentially create problems when trying to accurately value a stock. Under this model, many assumptions such as all companies in the industry are the same size and they operate in the same way. After the industry average is found, it is used in several calculations to determine the stock price per share. From here, it is clear if a firm is overvalued, undervalued, or fairly valued. Clearly, this model is not the most reliable or accurate because of the assumptions it makes. According to this valuation model, Apache’s stock price was overvalued based on all but two of the models. The Forwarding Price to Earnings and Enterprise Value to EBITDA ratios reported Apache as having a stock price as fairly valued. This should not be the only valuation measurement for a company, due to the inconsistency of the model.

The Intrinsic Valuation model is a more complete and detailed form of valuing a company’s stock price per share. In total there are five intrinsic valuation models that focus on different areas of the company. The Discount Dividend model is not the most reliable out of these valuations. Dividends must be forecasted out using a constant growth rates. It is not likely that a company’s dividends will grow at a constant rate for an indefinite period. According to this model, Apache’s stock price per share is

overvalued. The Free Cash Flow model is another valuation that is not always accurate. This model basis its valuations off of forecasted cash flows from operations and cash flows from investing. The result of this valuation was that Apache’s stock price per share was overvalued. Next, the Residual Income valuation is the most reliable

because the overall value of the firm includes a high percentage of the present value of residual income. Based on this model, again, Apache’s stock price per share is highly

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overvalued. Apache’s stock price valued using the Abnormal Growth Model and the Long Run Residual Income model was overvalued. Therefore, the valuation models support that Apache’s stock is overvalued.

Business & Industry Analysis

Overview of Firm

Apache Corporation is an independent oil and gas company that was created in 1954. The company’s interest is in exploration and production of crude oil, natural gas, and natural gas liquids. Apache is one of the largest independent oil and gas companies in the nation and has operations in six countries including the United States, Canada, Egypt, Australia, Argentina, and the United Kingdom. Apache has a variety of

operations ongoing on and offshore in these countries. The company went public in 1969 and its shares were first listed on the New York Stock Exchange under the symbol APA. Apache Corporation is headquartered in Houston, Texas.

Apache operates in an industry where acquisitions of property from other

exploration companies are the norm in the way of purchasing prospects for drilling and exploration. Seldom is land acquired that is undeveloped or not yet been looked over by other firms. Apache acquires prospective properties through buying other larger firms’ drilling interests and by bidding for offshore blocks of water from governments. These bids and purchases of other firm’s drilling rights initiate much competitiveness

throughout the industry. Consequently, firms with more capital to work with generally have a better chance of acquiring lands and deepwater blocks. Apache competes with vast numbers of companies that have more capital and resources to work with. In recent times, many major integrated oil companies have focused more on exploration worldwide instead of just on their home turf. This has left many opportunities for acquisitions for smaller independent oil and gas companies. “There are about 5000 independent oil and natural gas producers in the U.S. Independents drill 90 percent of

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the wells in the U.S. and produce 68 percent of America’s oil and 82 percent of domestic natural gas” (www.ipaa.org). Apache distributes its crude oil to larger integrated oil companies, refineries, and other purchasers. Natural gas products are sold to Local Distribution Companies, integrated oil companies, utilities, and certain end users. Apache focuses on distributing to markets that are most economically feasible for them to supply because they will bring the most revenue. Oil and natural gas are

commodities and that causes buyers of this industry’s product to always search for the cheapest product. Therefore, one of Apache’s main objectives is to maintain efficient and low cost production. Apache, like the industry, depends heavily on the current price of oil and gas for profits. Being commodities, oil and gas are subject to severe price volatility. This has lead firms in the industry to engage in hedging activities to protect themselves against price fluctuations, and also exchange rate risks when converting foreign money back to U.S. dollars. Being smart about hedging is very important to Apache because it can make the difference between losing money and/or missing out on additional profits. From the tables below, it is noticeable that Apache’s revenues and assets rose substantially in the past few years while the company kept its production of oil and gas at relatively the same level. This represents how dependent Apache and the industry’s profits are upon fluctuating prices worldwide.

Apache Corporation Annual Revenues

2002 2003 2004 2005 2006 $2,560 Million $4,190 Million $5,333 Million $7,584 Million $8,289 Million

Apache Corporation Total Assets

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$9,460 M $12,416 M $15,502 M $19,272 M $24,308 M

Apache Oil and Gas Produced Daily Worldwide (avg.)

2004 2005 2006

Oil 231,519 barrels 234,070 barrels 224,577 barrels

Natural Gas 1,235,108 Mcf 1,263,823 Mcf 1,589,065 Mcf

In the past 5 years, Apache, along with the industry, has grown significantly due to elevated global oil prices. High prices mean larger profit margins, and this has given many companies the capital and additional boost to explore in more places and indulge in more high-risk/high-return ventures.

Since 2002, the company has made many acquisitions in several different countries, adding to their assets and assisting revenues. In 2003, Apache acquired the Forties Field from British Petroleum for $630 million. The Forties Field is one of Apache’s largest assets and continues to be a top producer of oil in the world. Also in 2003, a natural gas well discovered in Egypt proved to be the largest discovery in the

company’s history. In 2003 and 2004, several large acquisitions in the Gulf of Mexico from BP, Anadarko, and Shell Oil provided oil producing properties, facilities, and prospects. In 2004 and 2005, Apache signed two separate farm-in agreements with Exxon-Mobil totaling over 1 million acres of promising, undeveloped land in Alberta, Canada. Apache has acquired many lands in Egypt on and offshore in the past few years producing $1.66 billion in revenue, accounting for nearly half of the company’s international revenue. (2006 Apache 10-K)

The company also tries to strategize by not only acquiring new prospects, but by selling off current properties and land interests that produce that the company feels the

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proceeds from would benefit the company more elsewhere. These sell offs, known as divestitures, occur often and become acquisitions of other firms in the industry.

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Since September of 2002, Apache’s stock has risen significantly to a price of $83.19 in September 2007 from an adjusted split price of around $28 per share accounting for 2 stock splits in those five years. The industry on average is doing just as well and some of Apache’s immediate competitors’ stock performances have done reasonably better. This could partially be due to Apache having a smaller market capitalization than some industry competitors such as Devon Energy and Occidental Petroleum, and therefore less capital and funds to work with in competing for drilling and exploration rights.

Other competitors have a slightly smaller market capitalization, an example being XTO Energy, and the stock is outperforming Apache’s. Anadarko Petroleum Company is a competitor whose market capitalization is slightly smaller than Apache’s and their stock

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has been running right below Apache’s. Occidental has a market cap of $50.77 billion, Devon with $35.48 billion, Anadarko with $23.7 billion, and XTO Energy with $23.37 billion. Each company’s reserves also play a big role in adding value to the company and influencing the stock price. Reserves are an asset that has a value that is always subject to change. A change in the price of oil will cause an asset change and affect future cash flows to the company. Competition in oil and gas is very strong.

Understanding the nature of this industry and the way in which Apache operates is crucial to being able to evaluate and value Apache in this analysis.

Five Forces Model

Porter’s Five Forces model is a business tool used to assess the competitiveness and value drivers in any given industry. The model gives outside analysts the ability to analyze the industries that certain companies operate in and therefore can better understand significant market share builders. The five forces used to analyze any industry are rivalry among existing firms, the threat of new entrants, the threat of substitute products, the bargaining power of suppliers, and the bargaining power of customers. Each aspect of the model differs from one industry to the next and will affect the industries in varying degrees. Understanding the degree of competition in a given industry is imperative when analyzing how effective a company is at operating in the industry.

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Rivalry Among Existing Firms High

Threat of New Entrants Low

Threat of Substitute Products Moderate

Bargaining Power of Buyers Low

Bargaining Power of Suppliers Low

Rivalry among Existing Firms

The independent oil and natural gas production and exploration industry operates in a highly competitive environment. Many factors affect the degree that companies are forced to compete within the industry. These factors include the industry growth rate, concentration and balance of competitors, switching costs, differentiation, excess capacity, and exit barriers. Each company must confront these factors in order to stay competitive and profitable in the market. The companies that are able to deal with these factors effectively will have the best chance of success.

Industry Growth Rate

Oil and natural gas production growth began to slow over the past two years. In 2006 the world produced only 0.04% more oil than it had in 2005. This decline can be attributed to the discovery of most of the conventional sources of oil. The relative stagnant growth in the industry will force companies in the industry to compete more aggressively for the remaining known oil reserves. As the discovery of “easy” oil begins to decline companies in the industry will be forced to compete to find sources of oil which are considered unconventional, such as heavy crude oil, tar sands, and oil shale.

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The cost associated with producing oil from such sources is substantially higher than production of conventional sources. Also, as production growth begins to slow the market price of oil and natural gas rises. This increase in price increases the cost of acquiring new properties for the production of these resources.

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Concentration and Balance of Competitors

The level of concentration in the industry has risen over the past few years as major integrated companies such as Exxon and Mobil have merged. The increase in concentration gives larger companies the ability to set and enforce the rules of competition. It also gives the leaders more of an opportunity to influence worldwide prices which are set by the market. The leaders in the industry have access to much larger financial and other resources which puts them at a comparable advantage to the rest of the industry. The advantaged leaders have made it more difficult for the rest of the industry to acquire drilling rights and land especially in countries where they have established strong relationships with the government. These events have made it much more difficult for the independent companies in the industry to compete directly with the major integrated companies. Yet, independents drill 90 percent of our nation’s wells, produce 68 percent of the United States’ oil and 82 percent of America's natural gas. (Independent Petroleum Association of America, ipaa.com)

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Differentiation in the oil and natural gas production and exploration industry does not exist. All companies in the market are producing the same commodities, crude oil and natural gas. The difference comes from how efficient a company is at producing these resources. The costs incurred by buyers when switching suppliers is low in the oil and gas industry. This is directly affected by the fact that oil and natural gas prices are set by the world markets.

Excess Capacity and Exit Barriers

The world demand for oil and natural gas is very high and is expected to

increase in the future. World oil consumption increased by more than 817,000 barrels from 2005 to 2006. From the graph below we can see that the Energy Information Administration forecasts show that the demand for oil will continue to grow at a steady pace for the near future. Since there is such a high demand on oil exiting such a profitable industry should not be very difficult. If a company wanted to leave the

industry they should be able to sell their assets to competing firms or private investors. Competing firms in the industry are always looking to buy oil reserves and rights from known sources currently held by other companies.

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Threat of Substitute Products

The threat of substitute products in the oil industry has only become a problem in recent years. Since gas prices are a necessity and also very expensive, a substitute seems ideal. Potential substitutes include ethanol fuel, solar powered vehicles, electric powered vehicles, and hybrid vehicles. The most direct substitute for gasoline is ethanol fuel. Though technology has not yet perfected its uses, in the future, the oil industry will have a potentially large threat of substitution. The other substitutes are only available to replace gasoline in cars. Technology has not developed energy

storage as a use of power for larger machinery, such as planes or semi-trucks. This has an effect on the oil industry, but not enough to cause permanent harm.

Buyers Willingness to Switch

With the constant rise of gasoline prices, drivers often hope for a cheaper

substitution. The current substitutions for gasoline are not perfected and not practical. Ethanol appears to be a great substitute for the high gas prices customers’ deal with

everyday. The reason ethanol is not a huge threat to oil companies is because of its major drawbacks. In order for a car to run on pure ethanol fuel (E100), a new engine is required. Also, in order for an engine using ethanol to produce the same amount of energy as an engine using gasoline, the engine would require a substantially larger amount of ethanol than gasoline. Another drawback to using ethanol instead of gasoline is, depending on where you are located, it is hard to find. “Because E85 is primarily sold in the upper Midwest, most drivers in the country have no access to the fuel, even if they want it” (www.ConsumerReports.org). This does not allow drivers in

certain areas to even have the option of switching.

A substitution for gasoline that is only available for cars is solar power. “A solar car is an electric vehicle powered by solar energy obtained from solar panels on the surface of the car” (www.Wikipedia.com). Technology has not developed far enough for the use of solar cars to be practical for daily use. In order for a solar car to meet the safety standards and comfort level of standard gasoline powered cars, it would

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require the vehicles to be much heavier and larger than standard solar powered cars to reach the same speeds. Technology has not yet perfected the use of solar power to run cars efficiently and effectively. This is why solar powered cars might become a potentially large threat of substitution of gasoline, but currently is only a small portion of the oil business that will be taken away.

Another substitution for gasoline only available for cars is electricity. “The electric car, EV, or simply electric vehicle is a battery electric vehicle (BEV) that utilizes chemical energy stored in rechargeable battery packs. Electric vehicles use electric motors and motor controllers instead of internal combustion engines” (www.Wikipedia.com). The electric car has many benefits, such as it is more energy efficient, gives off less

pollution, and is quieter than conventional gasoline powered vehicles. Although electric powered cars may seem more beneficial, there are drawbacks as well. Some problems include, “high battery costs, limited travel distance between battery recharging,

charging time, and battery lifespan, which have limited widespread adoption”

(www.Wikipedia.com). Also, “ownership costs for battery electric cars are higher than for their petrol or diesel equivalents, primarily because their purchase price is higher to begin with. Typically for a new car, or a small van, the price is increased by up to 80%” (www.Wikipedia.com). While electric cars have benefits and could potentially replace gasoline powered cars, the likelihood of the entire driving population to purchase an entirely new vehicle is not foreseeable, and as of now does, not post a large threat to the oil industry.

The hybrid vehicle is partially a substitution for gasoline, because it is still required to use a smaller amount to power a car. “A hybrid vehicle (HV) is a vehicle that uses two or more distinct power sources to propel the vehicle” (www.Wikipedia.com). These power sources include gasoline and stored energy, such as solar power, or battery power. The threat of substitution with hybrid vehicles is existent, but not threatening to the oil industry. Although hybrid vehicles significantly cut down on the use of gasoline, gasoline is still used. Hybrid vehicles would only become a large threat if the entire driving population purchased hybrid vehicles, which due to their high cost is not

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likely to happen.

Relative Price and Performance

The performance of gasoline and ethanol fuel is relatively the same, although the prices of gasoline and ethanol fuel are not. Ethanol fuel is much more expensive than current gasoline prices. “With the retail pump price of E85 averaging $2.91 per gallon in August, according to the Oil Price Information Service, which tracks petroleum and other fuel prices, a 27 percent fuel-economy penalty means drivers would have paid an average of $3.99 for the energy equivalent of a gallon of gasoline”

(www.ConsumerReports.org). Also, ethanol fuel requires a different kind of engine than standard cars already have, which is another required expense.

The performance of gasoline and solar power are only interchangeable when it comes to cars. Solar powered cars can be a direct substitution of gasoline powered cars, but require extra money and effort. The drawbacks to solar powered vehicles have not been corrected and also cost a lot more money than filling up a tank on a standard gasoline powered car. The relative performance of solar cars can be compared to gasoline powered cars, but cannot directly be switched without extra investments. Prices of solar power and gasoline are also substantially different, because a new vehicle is required in order to run solely on solar power.

Similarly to solar power, using electricity as a substitute for gasoline can only be used for small vehicles. There is really no price similarity between gasoline and

electricity because to be able to switch to electricity, a new car is required. The performance of electricity compared to gasoline has many drawbacks as well.

Finally, a hybrid vehicle reduces the amount of gasoline required, but does not completely replace it. The performance of a hybrid car can be compared to the

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are much more expensive than standard gasoline powered cars, so they cannot directly substitute it; just minimize the amount of gasoline required.

Conclusion

Although there are potentially many threats of substitution of gasoline, the likelihood of being able to completely stop using gasoline is slim to none. The

substitutes are too expensive and not easily accessible to the entire driving population. Also, technology has not yet perfected the uses of substitute products for day to day use. Currently, the oil industry is not posed with a major threat of substitution. Some day, when technology has developed these gasoline alternatives more, the threat will become very great and the oil industry will greatly suffer. Fortunately that day is far into the future and the only readily available, accessible, and affordable fuel is

gasoline.

Threat of New Entrants

The oil and gas industry is comprised of a handful of large corporations as well as several smaller, more competitive firms. The large oil and gas corporations have found ways to stay on the cutting edge of new technology which enables them to produce oil and gas more efficiently. Newer and smaller firms entering the market will have several obstacles to overcome because they have considerably less market share and initial capital. For example, Apache oil Corporation has been operation for 54 years and has the experience and knowledge necessary to remain a dominate player in the oil and gas industry. A few of the hurdles that new competitors might face include

economies of scale, establishing relationships with customers, and legal barriers to name a few. New firm survival is not likely in this industry due to several dominate companies already in existence.

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Economies of Scale

New firms that generate enough start up capital to enter the industry still face many challenges. The survival of these firms is still minimal because of major

corporations’ ability to purchase large quantities of resources and land at one particular time. This leaves the smaller firms to fend for themselves which in many cases leads to their extinction. Another reason many new firms cannot survive the industry is because existing corporations have established often exclusive relationships with long time clients and distributors. Another key factor in the oil and gas industry is a firm’s location, because it has a direct impact on the quality and quantity of resources acquired. “The oil and gas industry is highly competitive. As an independent oil and gas company, the Company frequently competes for reserve acquisitions, exploration leases, licenses, concessions and marketing agreements against companies having substantially larger financial and other resources than the Company possesses. To the extent the Company's capital budget is lower than that of certain of its competitors, the Company may be disadvantaged in effectively competing for certain reserves, leases, license, and concession” (www.secinfo.com/dsvRu.9266.htm). Also, competitive pricing among established firms is almost impossible for new firms to compete.

The factors listed above give existing firms a clear cut advantage in the industry. It has been proven in the oil and gas industry that larger, more dominate firms have an advantage. The chart below shows some of the leading oil and gas exploration companies and their total assets per year. “A market dominated by a few large corporations, such as the oil refining market, can be particularly difficult for small companies to enter. It can be difficult because larger companies benefit from

economies of scale and can conduct such a competitive pricing policy that it is

impossible for a new entrant to make a profit” (www.encyclopedia.farlex.com). In the chart below, it demonstrates how volatile oil companies’ assets are as a result of

fluctuating oil prices. In recent years, many of these companies’ total assets have more than tripled, not being necessarily due to an increase in quantity of assets, but value of assets. Total assets in this industry are often difficult to correctly value because most

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of a company’s long term assets are reserves. The reserves are estimated by outside private companies as to the total amount of oil in each reservoir that is able to be extracted in the future. Because there are millions of acres of reserves and the price is constantly changing, often total assets are grossly over or understated.

Total Assets

2002 2003 2004 2005 2006

Apache Oil Corporation 9,459 12,416 15,502 19,272 24,308

Anadarko Petroleum Corporation 18,248 20,546 20,192 22,588 58,844 Devon Energy 16,225 27,162 30,025 30,273 35,063 Occidental Petroleum Corporation 16,548 18,168 21,391 26,108 32,355 XTO Energy 1,118 1,252 2,043 9,857 12,885 *in millions

Distribution Access and Supplier Relationships

One of the biggest problems facing relatively new firms entering the oil and gas industry is loyalty among customers. Large firms in this industry have established relationships with customers. Keeping customers satisfied is a major consideration of large companies. Customer base is difficult to establish and often contracts are drawn to insure customer loyalty. Both the oil company and the customer use this to their advantage when it comes to distribution and supplier terms and conditions. Since, Apache Oil Corporation is the supplier to many firms there is no direct supplier

relationship between Apache Oil Corporation and any other firm. However, Apache Oil Corporation and other firms must establish and maintain relationships with distributors.

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“Apache Corporation sells its natural gas to local distribution companies, utilities, end-users, integrated major oil and gas companies, and marketers; and crude oil to integrated oil companies, purchasers, transporters, and

refiners”(www.investing.businessweek.com). So, a good relationship with distributors is a invaluable tool when it comes to the success of a firm.

Legal Barriers

The oil exploration industry has many barriers for entry. New or existing corporations must gain approval from many agencies, including regulation from state and federal governments. In order to begin the often lengthy exploration process drilling must be regulated by state and federal environmental laws. When looking for new exploration sites, firms can often receive criticism from groups like the Energy and Natural Resources Committee, which is extremely influential. Obstacles such as this can completely halt all operations of a firm. Firms can also face opposition from

conversationalists who fight against the negative effects oil and oil spills can have on the environment. Drilling in Alaska has been a hot topic for some time now.

Established exploration companies have faced harsh criticism among opponents of oil exploration in the western Artic Ocean. “Climate change, caused by burning oil, coal and gas, is causing the western Arctic to warm three times faster than any other part of the globe. The survival of many species; such as polar bears, walrus, and reindeer, is currently threatened by retreating ice and unseasonably warm weather”

(www.cnn.com). Firms who wish to get out of the oil and gas industry face little barriers to exit. They simply sell their equipment and supplies to another firm wishing to acquire more assets. However, oil and gas exploration is a global effort, so firms must keep in mind international laws and regulations.

Conclusion

The oil and gas exploration industry is highly competitive. This makes it extremely difficult for new firms to enter the industry and be successful. In order to enjoy economies of scale, firms must properly manage their resources and other assets. Relationships with distributors are also a key factor in keeping or establishing a

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successful firm. There are many legal barriers to entry such as state and federal

environmental laws, and resistance from conversationalists groups. These factors make new entry extremely hard, and most of the time the attempts to enter are not

successful.

Bargaining Power of Buyers

In the oil industry, consumers do not have much say. The only bargaining power that consumers have is if the product is not necessary to their daily lives, or if

consumers have the power to force the price down. Nearly everyone in the United Stated needs oil and the prices are predetermined, so US consumers are forced to live with the standards the oil industry set.

Price Sensitivity

Price sensitivity results from the customers’ willingness to negotiate on price. The majority of people in the United States are drivers. “Overall, there were an

estimated 243,023,485 registered passenger vehicles in the United States according to a 2004 DOT study” (www.Wikipedia.com). Because most of the US population does drive a car, gasoline is a commodity. In a commodity market, the only possibility of straying away from that commodity is to switch. The likelihood for drivers to spend extra funds to change to a gasoline alternative is very small, because the extra funds necessary are very large.

Relative Bargaining Power

Relative bargaining power is the success that a consumer can achieve when trying to force the price down. In the oil industry, consumers do not have the

advantage of relative bargaining power because the price of oil is preset. Gas prices are “determined largely by the Organization of Petroleum Exporting Countries, or OPEC. The amount of crude oil produced by OPEC determines the price of a barrel of oil” (www.cnn.com). Relative bargaining power depends on the cost of not doing business with the other party. Since oil is a commodity and the majority of US citizen cannot live

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without it, there is no option of not doing business with the oil industry. In 2004, the total crude oil and petroleum products sold in the United States were 7,587,601,000 barrels. The likelihood for all consumers of oil products to put in extra funds and switch is not expected.

Conclusion

Although US consumers would be much happier given the power to refuse to buy gasoline or to force the prices down, the probability of that happening is slim to none. The oil industry has a strong grip on consumers because oil is a commodity. Until the day oil is no longer market determined in the US economy, the market will continue to sell and set the price of oil.

Bargaining Power of Suppliers

The amount of bargaining power suppliers have can have a huge impact on the market as a whole. Bargaining power is where the firm has the ability to set prices. The oil and gas industry is unique in the since that there is no close substitute for their product. In an industry with low bargaining power, the firm has little to no say when it comes to setting prices for the market. The firm also has no bargaining power when it comes to the terms and conditions set by suppliers. In contrast, a firm in an industry with high bargaining power has more control over price setting in that particular

market. Firms are also in control of terms and conditions because the supplier wants to create and maintain a long relationship with the firm. For example, firms in the oil and gas industry have low bargaining power since each firm is extracting the same product. However, in an industry with a lot of competition, such as the oil and gas industry, no one firm can set the market price.

In the oil and gas exploration industry, the oil and gas companies are the actual suppliers. Since oil does not have a direct substitute, the companies in this

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industry have a lot of power, even though their bargaining power is low. The companies in the industry may have a lot of power, but since there is so much

competition the firms must keep their prices, term and conditions, etc. similar to their competitors.

Price Sensitivity

One of the most important aspects to consider when choosing a supplier is price. Firms mainly compete on low cost and quality, making suppliers who can meet those demands stand out among the rest. The degree of switching power among firms varies based on their sensitivity to price. In an industry with low switching costs, firms have little or no bargaining power. This is because firms are able to switch suppliers frequently to find the lowest price and best quality. In this type of industry, there is no customer loyalty which makes developing relationships with suppliers difficult.

However, in an industry with high switching costs, firms stay with suppliers due to the high cost of switching. In this industry, customer loyalty and relationships with

suppliers are formed. Given that the oil and gas industry is so competitive, and each firm is creating basically the same product, switching costs are rather low. A firm is able to find the same product from any of the other firms within the oil and gas industry.

Relative Bargaining Power

Relative bargaining power is what sets one product apart from another. If a product is extremely unique and there are no close substitutes, then that firm has a high level of relative bargaining power. If a product has many close substitutes, then that firm has little to no relative bargaining power.

The companies in the oil and gas industry extract the same product and there is little differentiation among firms. This means, suppliers in this industry have a low amount of relative bargaining power. Competitors in the industry such as Anadarko Petroleum Corporation, Devon Energy, Occidental Petroleum Corporation, and XTO Energy all extract and supply the same product. For example, when a customer wants

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oil or gas and contacts Anadarko Petroleum Corporation, if they are not satisfied with the price or service, they can easily switch to Apache Oil Corporation and receive the same product.

The oil and gas industry is not an industry that competes based on differentiation. The industry competes with other firms on the basis of price and

availability of resources. Firms in the industry are always looking to expand and acquire new land for exploration. This is where the competition is found in this particular

industry, not on differentiation of products. Conclusion

Bargaining power of suppliers in the industry can have a huge effect not only on customers, but on the market as a whole. Firms in the oil and gas industry have low bargaining power because all the firms are extracting the same resource. Price

sensitivity is a major factor when a customer selects an initial supplier. Firms in the oil and gas industry compete mainly on low price. Switching costs are relatively low, considering competitors produce products that are the same. Firms in this industry try and differentiate themselves by acquiring more land and reserves. For example, a firm that is drilling in several parts of the world is going to be more powerful than a firm that is concentrated in only one region. Most of the suppliers in this industry can supply the same product. This is why the overall bargaining power of suppliers is considerably low, even though there is no close substitute for oil.

Creating value in the Oil and Natural Gas Industry

In order to gain value and market share in the oil and natural gas industry there are a few important qualities or in some cases imperfections in an organization’s

corporate strategy which can have a big effect on the company’s value and long term success. Like most corporations in the industry, Apache’s mission is to “profit from our growing business that unites our (Apache’s) employees, partners, suppliers and

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shareholders in the fulfillment of our long term mission” (www.api.org). In common terms the goal is to increase profit and shareholder wealth. Creating value in this

industry relies on exploration, transportation costs, mergers/acquisitions, and complying with the ever changing global environmental regulations to combat global warming.

This industry is one with low bargaining power as there is no current substitute for oil and gas and as a result no one firm in the industry can set and establish the market price. What this creates is a rush by all the competing firms to most effectively manage the costs of exploration, licensing, and complying with environmental

regulations in order to get the product to the customers at a cheaper price. In this industry the costs of switching from one supplier to the next are non-existent. What Apache has, Devon Energy (a main competitor), can supply at a cheaper price of pennies to the dollar and as a result force Apache to either lower prices or lose customers and the millions of dollars that come with it.

While the U.S. is the 2nd largest oil producer in the world, it is no longer able to supply its own needs for crude oil. What this means to the industry is that the key to gaining value and market share is to find the large oil reservoirs. After a firm spends money on exploring and finding the reservoirs they need to determine who owns the mineral rights to the reserves. If privately owned, these reserves are acquired by a lump sum of money and in most cases a percentage of the royalties from the gas or oil pumped from the reserve. In the US, if mineral rights are owned by the federal

government, they are put on the auction block and sold to the highest bidder. A key component of this system is that these auctions involved sealed envelopes with each companies bid. After opening all of the bids, the government gives the reserves to the highest bidder. This can make it very hard for an emerging corporation to gain market share as companies with already established markets can outbid and increase their reserves.

Unlike companies that are integrated refiners, a corporation that owns both a refinery and a branded presence in the gasoline retail market (Exxon, Shell, BP),

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Apache and its competitors have the most risk due to the vast majority of their revenue coming from acquiring, drilling, and refining. These non-integrated refiners ultimate desire is to get its product to market, “from the refinery, through a pipeline, or other method of transportation, to a terminal, via truck to a station, and then sold to a customer” (www.api.org). As a result the incentives are clear for the companies, the more efficient the distribution, the lower the end cost of gasoline distribution.

Apart from lowering the end costs of distribution, marketing and managing a companies brand name is also very important in gaining value in the industry. “In economic terms, the value of a brand is represented by the amount consumers are willing to pay producers for an implicit promise of value. The promise of value deals with goods whose quality is not obvious upon inspection. The branding of a product also implies product consistency—that the product will have the same quality each and every time it is purchased by a consumer” (www.api.org). Establishing a respected brand name in the industry creates almost as much value as the competition for reserves. To establish a brand you have to sell quality services and substances for an extended period of time which builds a positive reputation in the consumers mind. This makes it difficult for other firms to try and enter this market. Furthermore it makes it more expensive to advertise against competitors and establish the most trusted brand name in the industry.

C o n c l u s i o n

As this is a highly competitive industry with very little bargaining power, gaining value and maintaining and expanding market share are even more important. The corporate strategies which create value and competitive advantages are in advertising and maintaining brand reputation. Also it is very important to find reservoirs before the competitors and be able to afford the high level of risk involved in drilling and

exploration. Lastly the most important factor in value creation which creates the greatest competitive advantage is to go from reserve to the end consumer most efficiently and as a result be able to provide the cheapest product on the market.

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Firm Competitive Advantage Analysis

Since 1954, the goal of Apache Oil Corporation has been to acquire resources and get the most out of remaining reserves. For example, in 2006, Apache Oil took over Exxon’s shares of the North Sea, which is 20% of the known Mineral licenses of the United Kingdom. In the past, it has been difficult for Apache to acquire lands because the industry was primarily dominated by major integrated oil companies. They made a successful move in 1980, by engaging in a joint venture with Shell Oil Company in the Gulf of Mexico. This got their foot in the door and helped establish their

credibility among the industry. In the years following, the major companies began to leave the United States in search of international success. Independent oil companies began acquiring major oil companies’ U.S. assets. Presently, Apache Oil Corporation is the largest held by production lease holder, and fourth largest producer on the off shore continental Shelf in the Gulf of Mexico. Apache has also made several key acquisitions world wide in countries such as Egypt, Canada, The North Sea, United States, and Argentina. Apache is known for their ability to acquire lands, and this is a definite competitive advantage over competing firms. As long as they continue this trend, they should be successful in the future.

Proven acquisitions are coupled with Apache’s ability to successfully find

promising prospects. For example, in 2006, 87% of new wells drilled were producers. Apache does a good job of exploration by hiring exceptionally skilled geologists and petroleum engineers. They maintain employee retention by paying competitive salaries. Employee retention is important because of the diminishing number of qualified

employees in the industry. For the past 21 years, Apache’s reserves have been steadily increasing, creating a need for more qualified employees.

Since Apache went public in 1969, stock prices have increased and split multiple times. This is a reflection of the company’s reputation as well as its success. In an industry where you can not tell one product from another, brand name is vital to a

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companies continued success. Apache established their name years ago, and has continued to maintain it through normal operations. Their reputable name will continue to ensure their future sales to customers.

Accounting Analysis

Shareholders and investors rely on a company’s financial statements to give them a more in-depth look into the company. Financial statements are important in determining the value of a company. They are beneficial in identifying problems within the company and identifying areas of improvement. The information contained in the income statement, balance sheet, and statement of cash flows helps investors

determine whether or not to invest in the company. Generally Accepted Accounting Policies (GAAP) are the standards of accounting in the United States. These standards make comparing financial statements more efficient due to the consistency GAAP creates. However, GAAP allows choice, or more than one way in reporting of the same transaction. GAAP allows for firms to disclose their true economic circumstances rather than a strict universal code of reporting. Because of GAAP’s flexibility, accounting analysts need to be conservative when determining the value of a company because it can result in overstating and/or understating account balances. Management is given the responsibility of using their own judgment when it comes to the valuation of their company. This can potentially lead to overestimations to make the company and themselves look better. One job of financial analysts is to correct management’s over or underestimation of business valuations. Shareholders and investors rely on

accounting analysts to determine the true value of the business.

Accounting analysis evaluates the quality of the firm’s accounting. The first step in the accounting analysis is to identify principal accounting policies. This step is crucial because it measures critical factors and risks. The second step is assessing accounting flexibility. Not every firm has the same accounting flexibility because of conventions and accounting standards. Because GAAP allows for some flexibility, the third step is to evaluate the accounting strategy implemented under GAAP by the firm. Managers with

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accounting flexibility have the ability to disclose as much or as little information as they would like. This can be problematic because managers can abuse this privilege by hiding the firm’s true performance. The next step is to evaluate the quality of disclosure. Due to the power that managers hold when it comes to releasing

information, this step focuses on the quality of information released. The fifth step is to identify potential red flags. This step is implemented when unexplained or odd

accounting entries are made in financial statements. The analyst should examine these entries extremely closely. The last step is to undo accounting distortions. In the event that the firm’s numbers in the financial statements are deceptive, it is the analyst’s job to correct these numbers to the best of their ability.

Key Accounting Policies

When deciding a company’s key accounting policies to use, it is important to base these off of the key success factors of the firm. The key success factors of Apache are economies of scale, industry growth and importance of product, derivative instruments and hedging activities. Competition in the oil exploration industry is high because it is basically impossible to differentiate their product. Companies in the oil industry try to achieve a competitive advantage through price and quality of product. By maintaining low costs, Apache achieves its biggest competitive advantage. GAAP allows flexibility as far as the information that managers can disclose, leaving room for misleading information being disclosed to shareholders and investors. This limited disclosure can make a company more appealing to these shareholders and investors and therefore lead to higher profit and overstated net income.

Constant Growth

Cash flow from operating activities increased but was offset by higher production costs due to increasing commodity prices, as well as Hurricanes Katrina and Rita, and increasing exchange rates with Canada. Fluctuating commodity prices are very common and are historically the primary reason for short-term changes in cash flow from operating activities. Sales volume changes also pose an effect to short-term cash

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flow, but are obviously not as volatile as the fluctuating commodity price. “Apache’s long term cash flow from operating activities is not only dependent on commodity prices, but on reserve replacement and the level of costs and expenses required for continued operations. (Apache’s 10-K, March 1, 2007)”

Constant growth relates to Apache’s first key success factor, economies of scale, which in layman’s terms means as the firm increases its scale of operations, long run costs per unit decline. By using the full cost method and therefore overstating yearly net income, it not only increases outside investment, but allows for the products costs to remain lower. This in turn keeps Apache competitive with the competition which helps ensure not only higher profitability in the future, but also a firm hold on their current market share with room to expand operations.

By expanding operations at their current rate, the company is maximizing the benefits that come with economies of scale. Internal costs from years 2004-2006 have been capitalized in order to extend the costs over a longer period of time. “Apache capitalized $146 million, $141 million and $107 million of these internal costs in 2006, 2005, and 2004 respectively” (Apache Oil Corporation 2006 10-K). Apache uses funds from sales of proven reserves to reduce the balance left on capitalized assets. “Unless a significant portion of the Company’s proved reserve quantities in a particular country are sold (greater than 25 percent), proceeds from the sale of oil and gas properties are accounted for as a reduction to capitalized costs, and gains and losses are not

recognized” (Apache Oil Corporation 2006 10-K).

Apache calculates depreciation, depletion, and amortization using the unit of production method every quarter. This depreciation method is useful because it calculates the amount of reserves used with a fixed rate, over the useful life of the reserve. “The costs to be amortized include estimated future expenditures to be incurred in developing proved reserves as well as estimated dismantlement and abandonment costs, net of salvage value, that have not yet been capitalized as asset retirement costs” (Apache Oil Corporation 2006 10-K).

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Derivative Instruments and Hedging Activities

Apache enters into derivative contracts to manage exposure to foreign currency and commodity price risk. Apache normally hedges around 10% of its operations and these derivatives take the form of contracts, future contracts, swaps or options. “The oil and gas reference prices, on which the commodity derivative contracts are based, reflect various market indices that have a high degree of historical correlation with actual prices received by the Company for its oil and gas production” (p. F-10, Apache 10-K, March 1, 2007). After tax, as a result of hedging activities, Apache gained an after-tax net of 83.5 million dollars. This acts as an insurance policy that is used to ensure that the company receives a certain price for a commodity and is extremely effective in creating stability within the firm and adding value.

This accounting policy is relevant to Apache’s key success factors because derivative instruments and hedging are necessary to ensure that even only 10% of the commodity will be sold at a certain price, locking in profit. Everyone is dependent upon oil, so there is always a demand, and with fluctuating demand comes the need for companies to likewise protect themselves from the resulting fluctuation in prices. Foreign Currency Risk

As an American based company dealing with billions of dollars in assets overseas, it is important to note that the cash flow streaming to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign countries. “The functional currency is determined country by country based on relevant facts and circumstances of the cash flows, commodity pricing environment, and

financing arrangements in each country” (Apache Oil Corporation 2006 10-K). For example, in Australia, oil production is sold under U.S. dollar contracts while gas

production is sold under fixed-price Australian dollar contracts. In Canada, the majority of oil and gas production is sold under Canadian dollar contracts, and the majority of costs incurred are paid in Canadian dollars. The North Sea production is sold under U.S. dollar contracts and the majority of costs incurred are paid in British pounds.

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However, in Egypt all oil and gas production is sold for U.S. dollars and the majority of costs incurred are denominated in U.S. dollars. In Argentina revenues and

expenditures are denominated in U.S. dollars but translated into Argentinean pesos at the then current exchange rate. No matter the unit of currency, whether the British pound, or Australian and Canadian dollars, it is very important to note that they are all converted into U.S. dollar equivalents based on the exchange rates on the day that the transaction takes place.

An example of how volatile these translations affect the income statement, “A 10 percent strengthening or weakening of the Australian dollar, Canadian dollar, British pound…as of December 31, 2006, would result in a foreign currency net loss or gain of approximately 112 million (p. 44, Apache’s 10-K, March 1, 2007).” This statistic helps illustrate the importance of the “insurance” provided by hedging activities, as the 83.5 million dollars gained as a result of hedging would help negate the net loss resulting from a 10 percent weakening of the U.S. dollar.

Use of Estimates

The oil and gas industry is required by GAAP to have reliability among financial statements. This is important because an overestimation of reserves can increase the present value of long term cash flows coming from sales of petroleum products. This is something that could drive up the stock price if Apache knowingly overestimated their reserves. This is why reservoir sizes and contents are estimated by outside companies to ensure these numbers remain unbiased and not grossly overestimated.

Post-Retirement Benefit Plans

There are many retirement and deferred compensation plans offered by Apache. These include a 401(k) savings plan, a money purchase retirement plan, a non-qualified retirement/savings plan, pension plan, and postretirement benefit plan. “In Apache’s 410(k) plan, employees are given the option to contribute as much as 25% of their salaries, and Apache will match the contributions up to 6% of the employee’s salary”

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(Apache Oil Corporation 2006 10-K). In 2006, Apache had 90 million dollars in benefit obligations for the pension plan. 4.7% is the discount rate that is applied to the pension benefits in 2006. Post-retirement benefits are discounted at a rate of 5.5%. Apache plans on contributing 6 million dollars to its pension plan and 402,000 dollars to its post-retirement benefits plan in 2007. In contrast, in 2007 Apache expects to pay out 822,000 dollars in pension benefits and 402,000 dollars in post retirement benefits to employees. Government restrictions are accounted for annually to adjust how much employee input is allowed. “The non-qualified retirement/savings plan permits the delay of up to 50% of each employee’s salary, and which accepts employee

contributions and the Company’s matching contributions in excess of the above

referenced restrictions on the 401(k) savings plan” (Apache Oil Corporation 2006 10-K). Apache’s pension plan is not offered to recently hired employees and offers specific benefits based on their average salary and total years of service. “The postretirement benefit plan provides medical benefits up to the age of 65, it is contributory with

participant’s contributions adjusted annually, and covers substantially all of Apache’s US employees” (Apache Oil Corporation 2006 10-K).

Goodwill

Goodwill is recorded as an intangible asset on the balance sheet. It usually comes from mergers and acquisitions when the buying company pays in excess of the book value of the company being bought out. It is an asset that does not contribute to helping the company receive cash flow. Having a large amount of assets being goodwill is not to a company’s advantage even though it boosts their assets. Apache has

goodwill on their books recorded at 189 million dollars. This is not a significant amount in comparison with their total assets of 24 billion. This is less than 1 percent of their total assets.

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Conclusion

With more firms manipulating numbers to make a company more attractive to investors, knowing how firms use accounting policies to dress their books is becoming more and more important. As with most firms, these accounting policies are chosen because they are the ones that help the firm better achieve their key success factors. Apache provides investors with relatively high levels of disclosure as compared with the rest of the industry. The level of disclosure in Apache’s annual reports is helpful to the investor because it gives them a snapshot of the company and highlights the

progression of many of the company’s key success factors such as economies of scale and derivative instruments and hedging.

Potential Accounting Flexibility

Financial statements provide investors with the information needed to determine the value of a company. Investors need to be able to rely on the information given in the statements in order to make a more informed decision. There is a certain amount of flexibility within the GAAP system, giving companies room to stretch the truth to make the firm more attractive to investors. Below are the ways that Apache can be flexible while staying in line with GAAP regulations.

Full Cost vs. Successful Efforts Methods

Apache Oil Corporation uses the full cost accounting method when valuing their assets. Under this method, all costs are capitalized when drilling wells, successful or not. As opposed to operating expenses where expenses used to run a business are entered as they are incurred, capitalization is used to acquire long-term assets which results in the depreciation of the asset over its useful life. To better understand the upside to the full cost method, it is important to also understand the successful efforts method. Unlike the full cost method, the successful efforts method chooses to only amortize successful projects in contrast to expensing all successful and unsuccessful projects. According to Apache’s most recent 10-K, “The company capitalizes all

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acquisition, exploration, and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits, and other internal costs directly

attributable to these activities” (Apache Oil Corporation 2006 10-K). Why capitalizing is so important is because instead of taking out of the company’s bottom line at one time, they are gradually expensed. This leads to a more inflated bottom line and resulting higher net profits on the income statement, which in turn makes the company more attractive to investors.

Capital and Operating Leases

Operating leases are contracts that allow a company to use an asset for a segment of its useful life. Operating leases do not transfer the title of an asset to another company, and is not capitalized. It is recognized on the income statement as an operating expense. No obligations are recognized on financial statements though. The operating lease is shown off the balance sheet not viewable to someone looking purely at financial statements. In a capital lease, the lease is recorded on the balance sheet as a liability similar to a mortgage. The lessee has benefits of ownership such as depreciation and tax write offs.

Apache has operating and international leases. The company leases from governments, plots of land offshore controlled by the governments of different countries. “The Company, through its subsidiaries, has acquired or has been conditionally granted exploration rights in Egypt, Australia, the North Sea and

Argentina. In order to comply with the contracts and agreements granting these rights, the Company, through various wholly-owned subsidiaries, is committed to expend approximately $240 million through 2010” (Apache Oil Corporation 2006 10-K).

Through operating leases, Apache has the right to explore for new oil acquisitions, and is not in contract for the next 3 years. In 2006, Apache paid 1.36 billion dollars in lease operating costs. This number has been steadily increasing from 865 million in 2004 to 1 billion roughly in 2005 and more in 2006 as stated above. This is due to all the

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acquisitions that Apache has made in the past couple years. Apache has rented these areas to search for new oil and potentially expand their business. “Apache also has leases for buildings, facilities, and equipment with various expiration dates through 2035, and has purchase commitments in Egypt for pipeline and gas plant construction totaling $390 million through 2008” (Apache Oil Corporation 2006 10-K).

Conclusion

Apache uses the flexibility within GAAP to give investors the most effective information needed to value the company. This flexibility allows managers to estimate the assets and liabilities, as well as chose what type of lease to use. This allows Apache to provide the most effective and accurate financial statements with good disclosure within.

Actual Accounting Strategy

Generally accepted accounting strategies allow companies to choose whether to make their financial statements appear aggressive, conservative, or both. Aggressive accounting overstates the company’s net income, whereas conservative accounting understates net income. Firms will often use a mixture of both accounting strategies, however, after examining Apache’s financial statements, it shows they use a mixture of both aggressive and conservative accounting.

An example of Apache’s aggressive accounting strategy would be their use of the full cost method. As aforementioned, this expenses all drilling projects gradually rather than letting the full brunt of their force affect net income. All projects, successful or unsuccessful are depreciated which is more aggressive because not only are they

gradually taken out of net income, but also make it harder to see the ratio of successful to unsuccessful projects. This use of the full cost method is aggressive because it

Apache Corporation Equity Valuation and Analysis. Analyst Group