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Risk Management at Apache

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Question :

 

Write an assignment on Risk Management at Apache 

 

Answer :

 

Introduction

The report will represent the key aspects of the companies operating in the oil and gas sectors, in terms to strategic planning, considering the valuable and relevant decision for the varying risk portion of inherent risk in the available assets investments options. Here the report will be primarily based on Apache corporation a pioneering company on oil and gas exploration sector, organizing its business from North America. In the continuation of the report, the report will uphold or unveils some important part related to oil and gas industries, its risk, the current stratagem of Apache corporation (Tahir and Mushtaq, 2016). In addition to that, the reason for the risk management, and value of risk management in a company's perspective, especially in the case of oil ad gas exploring companies. However, in the contents, the discussion will not develop a knowledge of the risk of oil and gas business rather it will be focusing on the various sectors such as financial risk, deviation risk, Foreign currency translation risk and risk hedging technic. Based on the discussions, the potential hazards of the company and the process to manage them will be recommended before forming the conclusion statement.

 

The major risk of Apache 

Irrespective of the country of origin and operations the companies engaged in oil and gas operations faces some of the major risk and uncertainties. Some of them are directly proportional to the financial factors, and some are indirectly affecting the financials of the company. Both the direct and indirect factors will entail in the discussion. Some of the major economic risks of the Apache corporation is as follows (Daryakin and Khafizova, 2016).

 

Price Risk:

The price of the commodity is a crucial factor as the pricing of the oil and gas are primarily depended upon the economic feasibility of the oil and gas reserves. In actual the company Apache's explorations site are facing the geological barriers to easy extraction of the mining resources, this is resulting in high price risks. The pricing of the oil and gas substantially depends upon the cost of explorations and cost of availing the price. In the given case, the unconventional extraction of the mining resources is the exploring it from the sea sore sea bed, will cost more than a vertical drill down to the mines (Chikunov et al, 2019). This is directly relevant to the pricing of the product cost more in other sites then the OPEC countries, as the OPEC countries are availing the mining resources at a lower cost from directly vertical drilling. Further, the OPEC countries are having the advantage of no natural calamities and leakage into there products as they are operating is a suitable environment.

Further, as many of the oiling reserves of the Apache is situated abroad, therefore the company is facing a certain amount of risk of foreign price exchanges. Based on the past results, it is observed that the price of the gas ware highly volatile 1996 to 1999, however after that, the pricing of the oil has grown to a significant margin. Further, the price volatility of the company remains very high (Diaz and de Gracia, 2017). 

 

Supply and Demand risk:

This is the most vital aspects of the companies engaged in the Oil and the energy resource sectors. The demand for the energies is getting higher by every passing day and cope up with the needs is the real task. However, demand and supply are highly volatile. The supplies of the Apache are fixed to an extent, as the company can reduce the production or make no production but could not increase the product more than a certain limit. However, the investment of the Apache corporation or any companies engaged in the oil and gas sector is very high. Therefore the company or business cannot stop the production presumptively. Further, the uneven nature of production is the key part which makes the price of the oil and gas so volatile. The factors such as financial crises and macroeconomic factors can make a potential impact in drying the capital or industry independently against the usual price risk (Teti, Dallocchio and De Sanctis, 2020). 

 

Cost Risks:

Along with the above-discussed factors, the operational cost is one of the most significant factors that is effecting the companies financial risk assumptions. By the increase of the Onerous regulation and difficulty in drilling are making the project expensive. Further, the complication of the global price changes is of the major factors in associating with the real cost, as a single company cannot control the global price. In addition to that in Boom situation, the scarcity of the qualified labours and payroll cost gets higher which is effecting the cost as the company can not reduce the payroll cost all at a time if the demand decreases (Laing, Lucey and Leutkemeyer, 2017).

 

Non-financial factors:

Though these factors are termed as non-financial, they do play a significant role in the financial planning of the company engaged in the oil and gas exploring business.

Political risk:

The most significant and sincere process of politics can play in the oil and gas sector in a regulatory sense. The companies engaged in the oil and gas exploration sector are abided by the rang or regulation of exploration limit, who to explore and when to explore are demanding upon a large pool of regulations. Therefore the Apache corporation cannot explore more in high demand time. This is encrypting a certain rise in oil prices. Further, the political risk increases in incase of abroad exploration and reserves (Choi and Kim, 2018).

 

Geological Risk:

As in the last century, due to huge energy demand, larges wells of oil reserves are emptied, which has enforced the companies to move in uncertain condition of exploring the oils. This is increasing the price of the commodity.

Current Risk Management procedure

 The company has worked a bit different in managing its risk. The Apache is focusing on high production to make it low in managing the cost of production. Instead of deepening on the foreign and associate contracts, the company is proposing and practising to do the oil and gas exploration business on its properties. The company's business is more exploration oriented. The company is trying to acquire more companies engaged in the oil and gas exploration business to make a stay able production and production-related decisions. In addition to that, Apache is considering its international operations risker due to political and greater geological uncertainties (Leopizzi et al., 2020). However, the increase in the personal and occupied reserve is giving an ample amount of chance to control the varies risk discussed above, such as price risk, demand and supply related to risk, and others. In the individual and occupied mining reserves of the company is giving them to take whatever production-related decision and restricting the political and pricing factors influence in the production price. Apache Corporation has the right to switch off its foreign assets if the demand decreases to a certain level. In addition to that, the company is targeting to lower the debt investment to increase its sustainability and to have great control and shareholder value. The low debt investment will provide a clear hand to the company to operate in an adverse situation, as they don't have to pay huge in the form of interest cost. In addition to that, the company is performing high on incentive program as it is giving various incentives to its employees such as acquiring management assets of $ 1 billion or excess by controlling the desired debt controlling ratio (Croci,  Del Giudice and Jankensgård, 2017). The company is making unusual numbers of acquisition in 2000, in Oklahoma, Texas from Repsol, acquiring Canadian properties from Philips Petroleum and others. The company is planning to acquire a billion amounts of investment in 2001. These are enforcing the company to have a large pool of mining assets, and it can control a section of production and a bit of price (Lambrechts and Blomquist, 2017).

 

Reasons for managing the risk and its value

There are plenty of risk measures which are required for any company engaged in the oil and exploration business. The reasoning of controlling the risk and its value in operations are discussed hereunder:

 

Control:

The companies do risk management so that they can control their nerves in high tide situations. The oil and gas mining reserves are largely depending on the external forces such as demand, price, product inflation and others. Thus proper risk management enhances as key to the Apache to control the company from such issued. The risk management process starts from investigating the business and identifying its best practices.

 

Risk Reduction:

 The risk reduction is a costly element, as it consumes management time and resources, for the companies uses the production forward might results into potential loss if the prices are increased, or vice versa (Zhong and Bazilian, 2018) 

 

Competitive advantage:

By the use of the derivative risk management strategy, the company, can earn additional value if focusing the management issues as they are confident on how they will be paid for it. This decreases the business-related risk.

 

Transferring the risk:

For the sectors in which the company do not have the proper expertise or the other companies is having a competitive advantage, the company can transfer those risk to other players such as transferring the foreign exchange risk to bank and others.

Irrespective of the above facts, by proper risk management and high-value acquisition, the company can create a high value of its shares, which will give them ample and enormous funding resources. Further, a greater share valuation will provide a sustainable development procedure of the company (Hertina and Hidayat, 2019).

 

Potential hazards 

There are some potential chances of mismanagement of the resources and hazards for the Apache corporations. This is including operating in the highly secured ways. If the company is focusing on high security of its assets such as controlling the foreign exchanges through forwarding contracts. The company has to pay a significant portion of its earning to secure them Further the company can not enjoy any speculative benefits in case favourable position. The oil markets are depending upon the OPEC countries are they are the large scale produces of the oil and gas. If  Apache works in a highly secured process, then they cannot enjoy the high earnings chances for the sudden increase in the prices, as the company is engaged in the forward production process (Eccles and Krzus, 2018). 

 

How could the apache manage risk?

The company Apache is highly resistant to the market risk as the company is operating its is own acquired mining reserves. Further, the cumulative purchases in increasing its assets base. However, if the company is making purchases recklessly, then the operational cost of the company can be increased, and this will be beyond control. The company may shut down its product but have to incur the fixed costs associated with it. Further, the company is exercising the option based hedging as this provides lower liquidity and high spreads. Further, the company has to bear high commissions and complicated process in managing the option based hedging. Further apache can not dispose of all assets in case of option hedging it can sell only a portion of the stocks (Shaeri, Adaoglu and Katircioglu, 2016). 

 

The goal of Hedging:

In actual scenario, hedging is a risk management strategy, objectifying to cut or reduce the effects of losing money by making relative investments (Laing, Lucey and Leutkemeyer, 2017). In the current case scenario, the Apache corporation has begun in practising in hedging activities for its upcoming purchases. In certain cases,  the future prices are exceeding the overall value of the assets. Therefore the company should hedge its self in case of buying in high time as the future value of mining assets becomes low (Kim and Choi, 2019). In the recent hedging practices, Apache has acquired the Occidental Petroleum reveres in a selling a call, buying a put.

Further, the company has locked the proceeds from the call to pay the put option. This is a good strategy in dealing with the best and worst-case scenarios.  However, some assumes the practice of the company to be bullish as the price of the oil and natural gases tend to be higher in future as the global supply is getting limited. In addition to that, the Apache is planning to continue with collars as these are providing high securing in a potential downturn (Choi and Kim, 2018). 

 

Conclusion: 

Based on the given case, and sorting all relevant factors that are affecting the future viability of the company and dealing with the portal, financial and non-financial risk are penned. In addition to that, the current risk management tactics of the company and its influence in the current business process is described. The company is more focus in future acquisition of the mining assets than the exploration activities. Therefore they are shouldering the unethical risk of high assets managements. In addition to that, the company is not maturing its mining assets. However, the share and the profitability of the company are increasing the company should be focusing more on the exploration job instead of acquiring more assets.

 

References:

Chikunov, S.O., Pankratov, V.V., Sokolov, A.A., Pozdnyaev, A.S., Osinovskaya, I.V. and Ivleva, M.I., 2019. Financial risks of Russian oil companies in conditions of volatility of global oil prices. International Journal of Energy Economics and Policy, 9(3), p.18.

Choi, B. and Kim, S.T., 2018. Price volatility and risk management of oil and gas companies: Evidence from oil and gas project finance deals. Energy Economics, 76, pp.594-605.

Choi, B. and Kim, S.T., 2018. Price volatility and risk management of oil and gas companies: Evidence from oil and gas project finance deals. Energy Economics, 76, pp.594-605.

Croci, E., Del Giudice, A. and Jankensgård, H., 2017. CEO age, risk incentives, and hedging strategy. Financial Management, 46(3), pp.687-716.

Daryakin, A.A. and Khafizova, G.R., 2016. Financial risk management instruments for petro-chemical industry. Academy of Strategic Management Journal, 15, pp.32-38.

Diaz, E.M. and de Gracia, F.P., 2017. Oil price shocks and stock returns of oil and gas corporations. Finance Research Letters, 20, pp.75-80.

Eccles, R.G. and Krzus, M.P., 2018. Why companies should report financial risks from climate change. MIT Sloan Management Review, 59(3), pp.1-6.

Hertina, D. and Hidayat, M.B.H., 2019. Financial Performance and Systemic Risk Effect on Stock Return: Case Study on Oil and Gas Companies Listed in IDX Year 2011-2016. Global Business and Management Research, 11(1), pp.45-54.

Kim, S.T. and Choi, B., 2019. Price risk management and capital structure of oil and gas project companies: Difference between upstream and downstream industries. Energy Economics, 83, pp.361-374.

Laing, E., Lucey, B.M. and Leutkemeyer, T., 2017. Commodity exposure, financial and operational hedging of us oil and gas companies. Financial and Operational Hedging of US Oil and Gas Companies (February 16, 2017).

Laing, E., Lucey, B.M. and Leutkemeyer, T., 2017. Commodity exposure, financial and operational hedging of us oil and gas companies. Financial and Operational Hedging of US Oil and Gas Companies (February 16, 2017).

Lambrechts, D. and Blomquist, L.B., 2017. Political–security risk in the oil and gas industry: the impact of terrorism on risk management and mitigation. Journal of Risk Research, 20(10), pp.1320-1337.

Leopizzi, R., Iazzi, A., Venturelli, A. and Principale, S., 2020. Nonfinancial risk disclosure: The “state of the art” of Italian companies. Corporate Social Responsibility and Environmental Management, 27(1), pp.358-368.

Shaeri, K., Adaoglu, C. and Katircioglu, S.T., 2016. Oil price risk exposure: A comparison of financial and non-financial subsectors. Energy, 109, pp.712-723.

Tahir, M. and Mushtaq, M., 2016. Determinants of dividend payout: evidence from listed oil and gas companies of Pakistan. The Journal of Asian Finance, Economics and Business (JAFEB), 3(4), pp.25-37.

Teti, E., Dallocchio, M. and De Sanctis, D., 2020. Effects of oil price fall on the betas in the Unconventional Oil & Gas Industry. Energy Policy, 144, p.111673.

Zhong, M. and Bazilian, M.D., 2018. Contours of the energy transition: Investment by international oil and gas companies in renewable energy. The Electricity Journal, 31(1), pp.82-91.

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