Risk management at Apache, Case Study Solution
Introduction: The following memo states the details regarding the most important risks faced by Apache, and the action plan of Apache's management in order to minimize the impact of these risks. It also includes an assessment of the consequences of hedging arrangement on the future financial and operational performance along with appropriate recommendation.
Most Important risks facing by Apache:
As a company operating in the energy sector, it is assumed that Apache is confronted with many risks which could have very negative consequences on the financial and operational performance of the company. The main risks which the company is facing are as follows:
The price of oil is very volatile, the economic world has seen some quick drastic increase and decrease in the prices of oil in recent times which represents the most significant risk for Apache. The volatility in the prices can be favorable or can be unfavorable on some occasions. The profitability of Apache will be greatly affected due to the changes in oil prices.
Risk management at Apache, Harvard Case Solution & Analysis
On the other hand, the political risk is another important risk. Apache is operating in more than one country, if the relations between the governments of these countries deteriorates it is highly likely that the profits of Apache will be affected. Moreover, the operational performance of Apache is also expected to be affected as the government might place barriers on trading with these countries.
In addition to this, the legal risk is also very important for Apache, the regulatory authorities impose several strict rules and regulations on the companies which are operating in the energy sectors. Employees’ safety laws and environmental laws are the most important laws which have to be followed by Apache.
Various other risks differ from country to country for example the risk of damage to the oil fields because of terrorism is higher in Egypt as compared to North America. Competition and technological risks are higher in North America as compared to Egypt because of the latest developments in North America. Furthermore, Apache is facing some risks due to the operational strategies of the company, the reduction in the value of property arises just because of the business model and operational policies of Apache. Political risks and price volatility risk is being faced by all major integrated oil companies.While some risks are specifically faced by Apache due to its policies.
Current strategies of Apache and its competitors:
It can be said that both Apache and its competitors are developing many strategies to cope with the risks they are facing. In order to reduce the earnings and price volatility the management of both Apache and its competitors are engaging heavily in the hedging transactions. Different types of derivatives are being used by the companies in order to protect themselves against the fluctuation in prices of oil.
In addition to this, the senior management of Apache and its competitors also established risk management committee within the organization whose work is only to analyze the risks to which the company is exposed to. On the other hand, the management of all the companies are considering to make the revenue stream more diverse and dispersed which is also an effective way to manage risks. Even if any risk materializes the company will not be affected entirely as all the eggs would not beplaced in a single bucket.
Value added by hedging:
It can be argued that the management of Apache can add great value by hedging in its operations. Firstly, Apache would protect itself against adverse fluctuations in the oil prices, it is anticipated that the oil prices would be reduced by a heavy margin which can have very adverse consequences on the profits of Apache. By hedging the management can fix the price of oil at which they will trade in future, and Apache will not be affected either by favorable or unfavorable changes in the oil prices.
As the future oil prices will be locked, the management of Apache doesn’t have to give their time in developing the strategies that could protect the company against negative movements in the fair value of oil. It will allow the management to focus on core areas of business. Furthermore, the management will develop the strategies that could increase the sales only without being threatened from reduction in the prices of oil...................
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