Refocusing on energy

1973

In October 1973, the Organization of the Petroleum Exporting Countries (OPEC) began to reduce exports of oil to the western nations, and the United States in particular, that supported Israel. Eventually, and in addition to the production cuts, most members declared their intent to stop selling oil to the U.S. until it abandoned Israel.

The impact was immediate, dramatic and traumatic. Oil prices quadrupled and gasoline prices climbed from $0.25 to over $1.00. Never had the price of an essential commodity multiplied so quickly. The embargo lasted less than two months and, gas lines and closed gas stations notwithstanding, history suggests that there was no real supply shortage.

The 1973 Oil Embargo, and the higher pricing environment it spawned, convinced Apache’s management that oil and gas could finally support long-term growth and profitability. With its original business resurgent by the middle of the decade, Apache decided the time had come to refocus primarily on energy.

Apache gave birth to the oil and gas drilling fund business and blazed many innovative, shareholder-friendly and -protective trails within that business before tax-law reform brought it to an end in 1987. Program 1973-II is notable for many things, principal among them its designation as the single most successful limited-partnership drilling fund in the history of the business.

Because of the tax-incentivized nature of drilling funds, the measure of their success was their after-tax return on investment. Most of the partnerships formed by Apache and the industry failed to reach a before-tax multiple while many achieved that threshold after-tax.

For an original one-unit investment of $15,000, Program 1973-II achieved before-tax payout in its first year of operations. By the time it was liquidated in 1993, it had returned over $300,000 per unit, delivering a before-tax return in excess of 20:1.

1977

By 1977, Apexco stock was trading near $28 per share, more than double the value of its parent, and Raymond Plank and Apache President John Kocur were particularly concerned that a hostile market could gain control of the subsidiary simply by buying the parent. When Natomas North America offered to purchase the subsidiary for $127 million, or $31.50 per share, Apache jumped at the opportunity.

Following the sale, Apache, as a 60-percent owner of Apexco, was flush with cash from its share of the proceeds. Anticipating the sale, it had begun negotiations with GHK, a mid-continent independent which controlled a large swath of acreage in Oklahoma but which didn’t have the capital to develop it. Apache and GHK reached an agreement under which Apache would commence a drilling program and fund GHK’s share of expenses.

The North Block Acquisition gave Apache the opportunity to start over in oil and gas.

Apache was soon to sit atop prime acreage in the Anadarko Basin, an area that few could have foreseen was to become one of the greatest natural gas plays in the mid-continent. The North Block acreage gave running room to all of Apache’s public drilling funds for the next decade and provided the company the breathing room necessary to survive.

1980

In 1980, the Gulf of Mexico was on the cusp of becoming the most productive hydrocarbon province in the United States. Controlled primarily by the majors, it was largely inaccessible to the independent sector. Although Apache had participated in a few wells, its presence in the waters offshore Texas and Louisiana was negligible, defined primarily by scattered, non-operated interests.

The non-operated interests Apache acquired in 1980 through participation in the Shell Joint Venture proved to be the gateway to Apache’s present position as the largest held-by-production leaseholder and fourth-largest producer on the Offshore Continental Shelf.

1981

The measure of a company is not so much its success as it is its response to crisis. The Key #1 well in Wheeler County, Texas represented such a test.

In October 1981, while completed and waiting on pipeline connection, segments of the Key’s tubing, casing and Christmas tree “took flight like a Saturn 5.” The resultant uncontrolled gas flow from a formation below 16,000 feet was estimated at 35 million cubic feet per day. It may have been higher. It was described as “the world’s biggest gas leak.”

Personnel from Apache and the industry worked ceaselessly over the next 16 months to control and kill the blowout, one of the largest ever recorded in the United States. Two additional wells, one designed to kill the first and the other to replace it, were drilled from surface locations several hundred feet away from the original. In February 1983, the kill well, using the most sophisticated sensing equipment Apache could find, penetrated the 7 5/8-inch casing of the number one, poured in cement and eliminated the gas flow.

In 1981, Apache created Apache Petroleum Company (APC), the country’s first master limited partnership (MLP). APC will always be one of the single most formative events in Apache's first half-century, providing significant earnings to the corporate parent and an unheard of degree of flexibility for its investors.

Prior to the formation of APC, Apache Corporation’s oil and gas assets were defined, for the most part, by its general- and limited-partner interests in the drilling funds it sponsored. By definition, those interests were scattered and piecemeal, governed by the structure of the individual oil and gas programs through which they accrued. Difficult to aggregate, Apache could not capitalize on any synergy or critical mass those interests might represent.

APC, with Apache Corporation as its general partner, was a consolidation of interests in 33 of Apache Corporation’s oil and gas programs formed between 1959 and 1978. Thanks to the trail blazed by Apexco, APC’s units were traded on the New York and Midwest Stock Exchanges, giving unit holders liquidity while preserving the tax advantages of their original limited partnership interests.

1986

The 1986 Oxy acquisition, at $428 million, set a record for size, beating that of the Dow acquisition four years earlier. It marked Apache’s entry to the Gulf of Mexico as an operator, the logical next step following the large, non-operated participation in the Shell Joint Venture. And it gave the company a large mid-continent acreage position that blended well with the previously acquired North Block interests. Both of these developments are noteworthy, but they are not what made this acquisition meaningful to Apache and its shareholders.

Next: Critical Mass