Risk Management at Apache Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Risk Management at Apache Case Solution

1. Risks that Apache bears.

By analyzing the overall case, it is identified that the company is bearing four different types of risk that are listed and summarized below:

Political Risk
Price Risk
Systematic Risk
Hedging Risk

Type of Risk

Explanation

a) Political Risk

By investing internationally, the company is bearing the political risk as the foreign policy associated with the different countries is different which results in uncertainty.

a) Price Risk

With the increasing fluctuation in the price levels of oil and gas in the market if the company is selling the un-hedge oil and gas, there is a strong uncertainty about the occurrence of future profits and losses.

a) Systematic Risk

The operating activities of the company such as product delivery and oil drilling as well as the financing activities such as the issuance of shares and bonds are creating strong insecurity because of the prevailing market conditions.

a) Hedging Risk

There is a strong probability of foregoing the additional profits if prices in the market increased dramatically under the option of collar strategy.

2. Effects of oil and gas prices on the Apache’s operations, cash flow and the investment strategy

Apache’s entire business is dependent on the prices of oil and gas therefore, when the prices are high, the firm would be able to generate the higher income which would result in larger cash flows that can be directed towards the operating as well as the investing activities. However, the reverse is true for when the prices of oil and gas fall in the market, which would result in lower or even negative income. On the other hand, the company’s financing activities are due to the good debt-to-capital ratio was kept fairly stable.Moreover, the fluctuation in the prices of oil and gas also affects the amount of taxes that the Apache pays in a way that when the prices are low, the company can defer its taxes whereas, Apache is required to pay when the prices are high.

With the prime objective of maximizing the revenues and minimizing cost, the operating activities of the Apache are affected in such a way that when the prices are high, the management hires a number of employees and specialists to generate more profit whereas, Apache dismisses the excess employees to reduce their losses when the prices are low.

The risk of fluctuation of the prices of oil and gas also affects the Apache’s investment strategy of acquisition and development of current assets in the firm. The company in an event of low price may force cutbacks on the technology and shut down its certain drilling operations that are only to be re-drilled when they are back up whereas, the reverse is true when the prices are high.

With the help of below given exhibit, it can be analyzed that how the price increases in the given two variables has affected the overall income statement of the company.

3. Potential sources of value to Apache from managing price risk.

Having said the effects of the fluctuation in the prices of oil and gas, the three potential sources of value with Apache for managing the oil and gas price risk are:

Potential Sources	Explanation
Hedging price risk	It helps the company in reducing overall cost of capital by lowering the amount of equity from the capital structure and simultaneously increasing the amount of debt with more confidence. This source can help the company in creating value by gaining access to the capital market and substantially improving the terms of raising the capital.
Reducing price volatility	Managers are the key personnel who can help the company win or lose. With the help of this source, the company will be able to assess the efficiency of each manager. In addition to this, it also helps in ensuring the effective distribution of the incentives to which they belong. Investors with the help of this will get better understanding regarding the overall performance of the firm which helps them in decision making.
Stabilizing the price	This will help the firm in improving the credit rating which would create value as it would allow the firm to borrow at a lower interest rates and to attract even risk-averse investors to invest and to help the firm in saving cash on its borrowing.

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