Introduction

The Apache Corporation is an independent oil a gas exploration production company. Towards the late nineteen nineties and early twenty first century, Apache had completed several acquisitions. They included the following: Repsol which is in Egypt’s Western desert, Shell Overseas Holdings a partner of Repsol and Fletcher Challenge Energy. They combined for a total cost of $1billion. In an effort to minimize the volatility of the price of gas, Apache began a limited hedging program. The management team was aware of the underlying risks associated with hedging and they ultimately had to determine if they should continue hedging long term. If so, should they extend their current program beyond hedging the revenues from acquisitions. Within this case study, we will discuss major risks, how Apache Corporation is managing risks and whether or not they should be. We will also discuss how Apache could manage their risk as well as define what is the goal of hedging.

Major Risks

The biggest risk within this industry is the price of oil and gas. History has proven how volatile prices can be. Exhibit 9 indicated approximately a 70% range of price fluctuation between 1996 and 2000. The equation is relatively straight forward. When the prices are up, the industry is making money and is traditionally eager to hire new employees. When the prices are down, the industry is losing money and there is a strong likelihood that layoffs will follow.

Apache, along with other independent oil and gas companies had become quite efficient at capitalizing on the leftover wells that became uneconomical for the larger companies to manage. However, because oil exploration and production in the U.S. and Canada had gone longer than most areas of the world, their maturity had caused many large companies to focus more on natural gas exploration and production.