|
| Even in a strongly cyclical business such as oil and gas, growth is a priority for consistent success. That's the formula at Apache Corp. (APA
) and promulgated by Raymond Plank, the company's 77-year-old chairman and CEO. In line with that philosophy, Apache has just completed acquiring $1 billion worth of assets in Canada and Egypt.
This strategy, Plank says, contributed to Apache's performance -- a showing that earned it the No. 8 spot in the fifth annual BW 50 report, ranking the 50 best-performing companies in the Standard & Poor's 500-stock index.
Plank expects the price of oil to remain below the high point of $37 a barrel this year, barring war, and sees a good year for Apache in 2001. As a side issue, he reflects that Apache's stock might be at least double where it is now had the market not fallen.
The Apache CEO was the guest in a live chat presented by BusinessWeek Online on Mar. 29. Following are edited excerpts from his answers to questions from the audience and from Robert Barker and Joseph Weber of BusinessWeek and Jack Dierdorff of BW Online.
Q: Ray, congratulations on being so high on our BW 50 list. Can you share with us any of the secrets of your success at Apache Corp.?
A: First, we're honored to hear that the prestigious magazine, BW, selected us in the top 50, let along the top 10! We thank you! Well, the first [secret] is you can't grow a business without values. And of those values, integrity is foremost. And the second, we feel, is a sense of urgency. We insist on growth -- we're in a cyclical business
so we need to grow when it's good and bad.
Q: What is your outlook for crude oil prices, and, if energy prices weaken, do you think Apache's performance will suffer?
A: In response to your first question, I'll begin with some background. Crude prices, for the last two years, have seen a low below $12 a barrel and have reached $37. Currently, they are around $25.
That price is the price that major exporting nations feel would allow them a fair return on their investment. So they try to govern the supply of crude oil into the markets in order to realize a price around $25. That's very difficult for them to do, with so many factors on the prices.
But they've been more successful lately in matching the supply of crude oil to the world oil demand, which is a total of around 75 million barrels a day -- of which, the U.S., with 5% of the world's population, uses 25%. Probably, prices won't sink as low as $12 in the near future, and chances are that they will stay below $37 for most of the year, barring war.
As for the second question, many companies will suffer, but our gas and oil production is growing rapidly. So, we feel that we're in a strong position to have excellent results in 2001.
Q: How badly will the current economic slowdown -- or even recession -- affect the macro market and Apache's business?
A: The demand for gas and oil in the U.S. is relatively fixed. As a consequence, it doesn't have the same variables in demand -- meaning the demand is relatively fixed. That's unlike other industries. We feel that at Apache we're a pretty safe haven for people looking to invest. We sell at a low multiple of earnings, we're a growth company, and we sell at very low ratio of cash flow to our market price per share.
The average company in the Dow Jones [industrial average] sells at about 20 times earnings, and we're selling at about eight times earnings, and yet our growth is in a high ratio. And we've got a sense of urgency to continue to grow. The other factor: cash flow. Last year, our cash flow was $1.6 billion. It's very likely to reach $2.5 billion this year. That's because of active and successful drilling, and last week we completed the purchase of assets in Canada and Egypt for $1 billion. That ensures substantial growth, over and above internal growth, during the balance of 2001 and well into 2002.
Q: Several oil and gas companies have grown by acquisition. Is there a danger that some of the acquirers have overpaid?
A: With respect to acquisitions, Apache is more inclined to acquire the assets of larger companies than it is to buy the companies. As a consequence, we aren't involved in going to auctions in which people bid up the art. We pay a fair price for the assets that we're acquiring, and then we go about our business of adding value to them immediately. We are also contrarian. So when others zig, we're zagging.
Q: Care to comment on gas supply problems in California?
A: I'd be happy to. The problems in California go back about 10 years, and California has systematically increased its use of electricity and gas -- and hasn't made provisions for increasing supply. So, they got caught, and it will take them a long time to turn that around.
Q: Ray, how will the Fed's rate cuts affect you? Obviously, if the economy picks up as a result, that's good, but do you use borrowed money and benefit there?
A: Well, in the immediate future, lower rates reduce our cost of money. We try to keep our total debt in our ratio of capital employed relatively low. Even after spending $1 billion this week, our debt-to-capital ratio is 40%. Now, we'll pay for the two acquisitions out of cash flow in six months. And our debt-to-cap ratio will again be considerably lower than it is at present.
Q: How might Apache's results have been different if the market hadn't slipped?
A: Well, that's hard to say. Personally, I'd guess that if the market hadn't slipped, we'd be selling at over $100 a share -- double what it is today. Our EPS and our growth rate would seem to warrant that. So we've suffered in the marketplace along with the companies that sold at 100 times volume. We sell at a low multiple of earnings with a high growth ratio. I think that investors are a little scared across the board.
Q: What do you think of the course of events in the Middle East, of our government's approach there now -- and the impact on the energy industry?
A: The situation in the Middle East remains sensitive, but the current Administration will be much more predictable and consistent in its relations with those countries. And personally, having had contact with the president of Egypt, we're aware of the important position Egypt has in the Near East, and we have confidence in his dealings with the U.S. President and Vice-President, and in the Middle East. He isn't a jack-in-the-box.
Q: Ray, why have you adopted the risky policy of embracing an acquisition strategy while the price of commodities is rising so fast?
A: First of all, to grow an oil and gas company, you have to do it through drilling and acquisitions. While prices have been going up, we haven't been paying more than a higher price per barrel-equivalent than we were two years ago. In fact, the last two acquisitions we closed this week, we think, were the best we've made in the past five years. So, if the price per barrel we had to pay went up, chances are, we would do more drilling. As I said before, we tend to be contrarian.
Q: Do you have any comment on the independent power producers and utilities on the BW 50 list, such as AES, Calpine, Duke Energy. They might be among your customers.
A: Only to note that the independent power producers will be playing a larger role and will be growing rapidly. All are playing a larger role, given the terrible management of energy in the state of California. As we close, thank you, very, very much. We appreciate your people, your analysis, and your publication. And thanks to the audience, too. We are honored. |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version