III CRITICAL MASS: Apache at 50 Apache at 50 CRITICAL MASS: ©2004ApacheCorporation.Allrightsreserved.Nopartofthisbookmaybereproducedortransmittedinanyformorbyanyelectronicormechanicalmeans includinginformationstorageandretrievalsystemswithoutpermissioninwritingfromthepublisher,exceptbyareviewerwhomayquotebriefpassagesinareview. FOREWORD RaymondPlank,ChairmanandFounder Apache Corporation was conceived 50 years ago. Its gestation, with no small amount of planning, has yielded a company that is Built to Last. When I, the surviving member of Apache’s three founders, returned from World War II serving as a combat pilot in the South Pacific and finished my college stint at Yale University in 1946, an early motto was “beaten paths are for beaten men.” It fit then because I wanted to start a business rather than join one. Brooks Fields, a fellow Yale classmate from Minnesota, used his several remaining months at Yale to research potential opportunities for us to combine our aspirations by working together. Our rationale, albeit questionable at the time, was simple and straightforward. We believed that pent-up demand both from the war and the Depression, plus the prospective baby boom, would unleash the energy of returning veterans and women desiring to enter the workforce. Many of our generation felt urgency, confidence and commitment. 3 C R I T I C A L M A S S : A P A C H E A T 5 0 We believed that the formation of new small businesses would be a significant accompaniment to rebuilding America. We also believed that the requirements of the bureaucracy in the fields of keeping records, filing tax returns and deducting withholding and Social Security taxes were challenges to provide for and endure but not to relish. We struck our claim. I went to night school, supplementing college economics courses with the study of accounting and income tax. Brooks and I hustled up customers. While growing, our tiny business was anything but lucrative. Brooks ultimately headed for the grain business and higher take-home pay. I borrowed the funds to buy him out and lived at home a bit longer. Another opportunity paralleled the cessation of the war. History has often correctly reported that America floated to victory on a sea of oil. America’s oil fields contributed the energy not only for the American military, but also for the British and our allies in the Far East, principally Australia. Needing to rejuvenate its domestic reserve base, the United States created tax incentives (the highest marginal rate was then 91 percent) to stimulate war-delayed development and exploration. American industry and individuals responded, and the market for energy investment blossomed. I remember exposing the princely sum of $350 for my first direct investment in oil, and the well produced in commercial quantities. My primary interest, however, was in handling the accounting and associated tax work for local investors. Malfeasance on the part of early oil promoters in Minnesota was rampant. Local investors threw them out and asked that my associates and I assume managerial responsibility. Faced with this opportunity, I needed a long-term vision and a planning concept. The latter would contain four principal elements: First, rather than sell highly taxed individuals and privately held corporations interests in individual prospects, we would offer them an interest in the form of units in an annual multi-property drilling program. 4 F O R E W O R D Second, we would form a small and initially privately held company staffed by professional geologists, engineers and landmen working for the investor and against the sweeping variety of conflicts of interest which were then prevalent and which I held to be in contempt of integrity. Third, our commission on investors’ dollars would be fair and transparent to provide a competitive edge. We would cover our costs for general and administrative overhead and assume responsibility for drilling, completing and producing the oil and natural gas. We would profit by retaining a percentage of the oil and natural gas sales revenue after the investors recovered their costs. Fourth, we would develop a professional sales force to sell our programs across the country. Sales persons would receive a five percent commission and the program would retain the remaining 95 percent of funds raised. Thus armed, Apache was born on December 6, 1954. Our concept quickly revolutionized the sale of oil and gas programs. Our first loyal investors coughed up $250,000 at $10.00 per share to capitalize the young company. I borrowed $5,000 to own 500 shares. There were no promotional or free founders’ shares. As I write, Apache’s shares are trading on the New York Stock Exchange at levels in excess of $50 per share. That relates to an original cost, adjusted for stock splits and stock dividends, of but 4.4 cents per share. Fifty years ago, and upon its formation, the market value of Apache was $250,000. Today it stands above $16 billion. There have been many speed bumps along the way. Yet over our half century Apache has been and remains a growth company in the world’s largest industry. We began our run for the roses with the simple concept of becoming a significant and profitable oil company for the benefit of our shareowners, co-workers, society and the United States of America. 5 C R I T I C A L M A S S : A P A C H E A T 5 0 Our long-term values have proven integral to Building to Last. While words such as integrity, morality, strong work ethic, sense of urgency and focus may appear trite to some, they hold depth of meaning to fellow Apaches casting shadows into the future. A former president of Apache and now, years later, a fellow director, Mick Merelli, once said, “Plank, say what you will, but Apache has been highly successful in having the right people in the right place at the right time.” One such person is Steve Farris, who joined Apache in 1988 and succeeded me as CEO in 2000. With that succession in place, he’s leading a great Apache team. John Kocur, who climbed from staff attorney to general counsel to president, points to the strategic significance of the era of Apache’s diversification — when we owned and operated 58 separate businesses. How well he knew that when state regulations constrained oil production by 90 percent, our program business was on the death list. Our company refused to die, however, because we searched for and found another way to maintain and add value. We utilized our common stock to acquire successful, entrepreneurially driven small businesses to keep Apache growing. John points to those years of diversification as the key to Apache’s survival. The individualentrepreneurswereMinuteMendrivingApache’sgrowthuntiloilandgasdisplayedlong-term viability for us. Many of these heroes survive today as wealthy Americans. John knew the strategy and the conflicts along the way. “Apache,” he said, “never left the oil business. When the industry cycle changed, we were prepared and had the capital, the people, the will andthedisciplinetodeveloptheApachelegacyinoilandgas.Weorganizedtobuildthebusinessthrough the interests retained in the program wells drilled. When the road was blocked, we detoured around the avalanche and accelerated our tempo of growth.” DavidHigginshasturnedhisfinemind,recollectionandstudytotellingthatstoryofaccomplishment and legacy on the pages which follow. RaymondPlank,October15,2004 6