Apache Corporation - CFO Interview

Check out the futures this morning. You are looking at the Dow futures indicating an open about 60 points higher than where they were before. So take a look at this. We could see quite a bit activity. A lot of this coming because of the drop in oil prices we are watching this morning too, down about $1.30 today. Well, the BP (BP) pipeline closure and the health of the Gulf of Mexico production at the forefront of course. That is why we are seeing those lower oil prices today. But our next guest says it is not the hurricane season that really poses the biggest threat to production in the Gulf. He says it is the higher rates producers will have to pay to lease rigs. Roger Plank is the CFO of Apache, he joins us from Denver where he is attending ENERCOM`s annual conference.

Good morning, Mr. Plank. It is good to see you.

ROGER PLANK, CFO, APACHE CORPORATION: Good morning, Becky. Good to see you.

QUICK: Well, tell us a little bit about these rig rates. Why do you think that this is going to have such an impact on drilling in the Gulf?

PLANK: Well, obviously as prices have gone higher, the cost of drilling has gone higher in the Gulf of Mexico and elsewhere in the country. And so everybody needs to constantly check their economics and make sure that they work.

QUICK: Are you saying that.

PLANK: So we do that on a regular basis.

QUICK: Are you saying that it is actually not profitable to drill in the Gulf right now?

PLANK: Oh, no, it is still very profitable to drill in the Gulf of Mexico.

QUICK: But the problem becomes with the rig availability?

PLANK: That could be a problem. At this point we aren`t, ourselves as a company, seeing an issue. We are getting as many rigs as we need, but there are some rigs that are moving out of the Gulf of Mexico. So we will keep an eye on that. But I don`t anticipate that to be the -- to be a real problem.

QUICK: How much higher are the prices that you are paying?

PLANK: Pardon?

QUICK: How much higher are the prices you are paying for rigs right now versus maybe a year ago?

PLANK: Well, versus the low of a couple of years ago -- two, three years ago, they have doubled and, in some instances, tripled. The price has too, however, so our margins are very strong as a company. And we are still at or near record levels of profitability.

QUICK: OK. Mr. Plank, we are watching oil prices this morning. And we have seen them drop significantly. Do you think this is more a factor of what is happening in the Middle East with the cease-fire, or is it something that is more important from what we are hearing from BP?

PLANK: Oh, I don`t know, Becky. It is hard to tell any given day. A little bit of news will cause the price to spike up or down. It is probably in this instance a combination of both. It is reassuring that BP is going to be able to, it appears, leave half of their production from Prudhoe Bay on-line, because we need that production.

QUICK: Mm-hmm.

PLANK: And even though prices are low, $70 oil is historically very high.

QUICK: After that news we have seen from Prudhoe Bay though with BP, did that increase the immediate demand for your domestic drilling products?

PLANK: Well, I think -- I don`t think that necessarily increases the immediate demand. I think there is a constant demand. The fact of the matter is, Becky, that over the last -- well, the 25 years that I have been in the business, for the most part, during that period, there has been underinvestment in the oil and gas industry, and as a result it has manifested itself in very tight supply/demand fundamentals. And that is what is keeping sort of a constant pressure under prices of both oil and natural gas.

QUICK: Has Apache been investing more in this as well as you have seen prices tick up?

PLANK: I`m sorry, I didn`t hear you.

QUICK: Has Apache been investing more? You say it is the under-investment in the oil industry. Has Apache been increasing its investments since we have seen prices increase?

PLANK: Very definitely. And this year in drilling we will invest somewhere between $3.5 billion and $4 billion in acquisitions. So far we are at about $1.7 billion, $1.8 billion. So that is equivalent to about one quarter of our entire market cap of our company. So we are making very significant investments. And as a result we expect to see our production increase some 10 to 15 percent this year.

QUICK: Well, you mentioned how many acquisitions you have made. Are you on the hunt for other acquisitions?

PLANK: We are always in the hunt for other acquisitions. The nice thing about where this company is today, we have got a portfolio of countries around the world where we can grow through the drill bit. We are not just U.S.-bound where it is hard to find opportunities to grow through drilling alone. And as a result of that, we can be selective about the types of acquisitions that we might make and when we make them. And we try to find some properties that we can add value to. And this year has been a darn good year for that.

MICHAEL HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Mr. Plank, it is Mike Holland. Becky just mentioned acquisitions. You a second ago mentioned natural gas. Natural gas prices in the stocks of the companies are at discount to the crude world. Is there more opportunity for you now in natural gas than there has been in a while?

PLANK: I think there is tremendous opportunity in both natural gas and oil. One thing about Apache, Mike, is that relative to our competitors, we are -- we have got more oil in our mix. We are about 50 percent gas and 50 percent oil. And as a result, our financial results remain very consistent. So if you noticed from the peak of about $15 in Mcf sometime late last year, gas prices dropped to almost a third of that while oil prices actually went up.

HOLLAND: Right.

PLANK: And so in the second quarter we had our second best quarter ever, $770 million of earnings. We had about half our production from oil and yet two-thirds of the revenue came from that. So we don`t try to guess which product will outperform the other. We just believe in a balance.

QUICK: Mr. Plank, thank you very much for joining us today. We appreciate it.

PLANK: Thank you very much, Becky.

QUICK: Roger Plank, again, is the CFO of Apache.

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