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BW 50: The Fastest Drill In The West


It has been a good year for most companies that pull oil out of the ground, with crude at $60-plus a barrel. But it has been an especially rewarding time for Apache Corp. (), which is reaping the benefits of one of the most aggressive strategies in the industry. The Houston company is expected to earn $2.7 billion this year on revenues of $7.4 billion, more than tripling its earnings since 2000. Its net margin, 31.5%, is one of the highest among its exploration-company peers. Numbers like that landed it the No. 10 spot on the BusinessWeek 50 list of top corporate performers.

Apache is emblematic of the so-called independent oil companies. Larger, more cautious majors, such as Exxon Mobil Corp. (), look for huge fields that can take a long time to develop but will then go on to produce steady returns for years. By contrast, independents often drill smaller prospects in mature fields that produce the fastest possible payback. "Exxon is interested in assets that last a decade-plus," says Paul Ziff, founder of Calgary consultant Ziff Energy Group Ltd. "Apache is interested in real-time returns."

As a result, the Apaches of the world are playing a crucial role in global energy markets by quickly ramping up drilling budgets to boost output. According to energy research firm John S. Herold Inc., independent oil companies boosted their worldwide oil-and-gas production by 38% over the past five years, to 2.6 million barrels a day. The majors increased their output at less than half that rate, to 12.6 million barrels.

SHARING THE WEALTH

Apache has been able to outperform its peers by creating a culture that values quick decision-making and risk-taking. It starts with new hires: The company looks for people who have shown initiative in getting projects done at other companies. And its employees are amply rewarded. Field managers can earn bonuses equal to 50% of their annual salaries by meeting yearly profit and production goals. And every worker, from the mailroom up, shares in a stock award program pegged to aggressive share price targets. Says CEO G. Steven Farris: "Everybody's a part of the action."

For years, Apache followed an "acquire and exploit" strategy, buying older fields from larger companies and drilling the heck out of them. By mid-2004, though, Farris decided that the acquisition market had gotten too pricey. So that year he orchestrated a novel deal with ExxonMobil. Apache traded access to some deep, hard-to-drill prospects in Louisiana for the right to drill on 1.2 million acres of shallower ExxonMobil property in central Canada. The transaction lets Apache focus only on the prospects it finds the most attractive. And rather than acquire the Canadian property outright, which would have cost hundreds of millions of dollars, Apache is giving ExxonMobil a royalty of 37%.

Once the pact was signed, Apache's unique approach to drilling let it hit the ground running. Many energy producers focus on the largest fields first. Once they strike oil or gas, they start building the pipelines and compressor stations to bring it to market. Not Apache. It takes the opposite approach -- looking for the nearest infrastructure, then drilling the prospects closest to it.

Apache has also devised a variety of strategies to speed oil recovery. Often it will start drilling before it has finished the seismic work on a particular field -- as many as four wells at a time. It also uses flexible drilling pipe rather than the rigid sections of pipe many operators still use. Not having to stop to attach the pipe sections makes Apache's drilling process more continuous. Brian Schmidt, president of Apache's Canadian operations, says his average well takes 61 days to bring online -- twice as fast as others on similar terrain. Schmidt originally planned to drill 125 wells on the Exxon land in the first year of the deal. Instead, Apache drilled 260.

The company has hustled right from the start. Raymond Plank, who founded Apache in 1954 with two partners, vowed to produce profits that first year. He did, earning $12,500 on revenues of $190,000. Plank, who at 83 is still chairman, and Farris have learned to react quickly to changing times. They hiked Apache's drilling budget from $890 million in 2002 to $3.4 billion this year to take advantage of rising prices.

Of course, drilling like crazy has its risks. "One of the problems with prices where they are today," Farris observes, "is the tendency to do things you might otherwise not do because you have a lot of cash." No doubt -- but it's a problem most companies would love to have.

By Christopher Palmeri in Los Angeles


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