Apache Fights Investor Suit Over Failed Drilling Project

Feb 2022 // Law360

Apache says a pension group accusing it of lying about the prospects of a massive oil and gas extraction project in the Permian Basin has failed to identify actual false or misleading statements it made and wants the suit tossed.

The oil and gas developer told a Texas federal court that it was upfront with investors about the potential precarity of the project at the core of the suit filed by Massachusetts-based pension fund Plymouth County Retirement System. While the proposed class may have suffered after a stock price drop — which Apache largely blamed on a volatile energy market — the company said that it had been forthcoming about its various testing results, exploration approach and the risk at the project in West Texas and New Mexico.

“The [complaint] postures itself as challenging certain ‘untrue statements of material fact,’ and attempts to bolster that claim with allegations of ‘fudged’ data and the other seemingly stark manipulations,” Apache said. “But an examination of the [complaint] reveals no well-pleaded allegation of an affirmative misrepresentation, and its principal challenge involving the omission of discrete facts ignores relevant context.”

The proposed class, a group that potentially includes about 11,500 pension participants who are or were employed by municipalities, housing authorities and schools, launched its suit in February 2021, seeking compensatory damages from the oil company and its investors over an 83% stock price drop in 2019. The proposed class said the stock drop was the end result of several years of false hope perpetuated by enthusiastic statements from Apache executives based on “unrealistic assumptions” about the amount of available oil and gas in the proposed drilling area.

Prior to the decline, the class said that the company had begun transitioning away from extracting oil and natural gas from established fields to acquiring lands and making new oil discoveries in response to lagging production in the established fields during the mid-2010s, according to the complaint.

One such acquisition was Alpine High, the Permian Basin project at the core of the suit. Apache CEO John Christmann and then-Senior Vice President of Worldwide Exploration Steven Keenan began touting Alpine High’s potential for “repeatable, high-value drilling opportunities” as early as 2016, according to the complaint.

Beginning in 2018, oil and gas industry trade publications began noting a disappointing return on Apache’s investment and reporting that “already, there are signs the wells may not live up to Apache’s early hopes and pressure has been growing from Wall Street to stop pouring money into huge infrastructure projects based on risky assumptions,” according to the complaint.

Christmann continued to insist on the potential of the region, claiming that “the value of this infrastructure [at Alpine High] is going to grow significantly over the next 5, 6, 7, 8 years,” the suit said, and Apache press releases and quarterly reports continued to support this assertion.

Plymouth, however, claimed those press releases and quarterly reports were based on “unrealistic assumptions regarding the amount and composition of available oil and gas in Alpine High” and that Apache continued to issue misleading statements about its infrastructure in the region in order to artificially inflate the company’s stock.

In April 2019, a press release from Apache validated some of the concerns raised earlier by industry observers. The company announced that it would begin deferring natural gas production at Alpine High, a move Bloomberg called “another blow to the Apache project.”

Keenan — who had overseen the discovery and development of Alpine High — abruptly left Apache in October 2019, dealing another blow to investor confidence in the project and adding to the now-consistent drop in Apache’s stock price.

Apache abandoned the Alpine High project through a $3 billion write-down in February 2020, leading Christmann to state that a “number of factors were problematic at Alpine High” and that the projected productivity improvements would not “materialize.”

By March, the company’s board of directors approved a dividend reduction from $0.25 to $0.025 — a move that hit the portfolios of common stockholders like Plymouth’s participants. As the problems with the project surfaced, Apache’s stock fell from a high of $37.09 per share in April 2019 to $7.76 a share after the write-down, according to Plymouth.

The proposed class would include anyone who acquired Apache common stock between Sept. 7, 2016, and March 13, 2020.

Counsel for the proposed class action didn’t immediately respond to a request for comment Thursday.

Plymouth is represented by Thomas R. Ajamie, Dona Szak and John S. “Jack” Edwards Jr. of Ajamie LLP; Naumon A. Amjed, Darren J. Check, Ryan T. Degnan and Karissa J. Sauder of Kessler Topaz Meltzer & Check LLP; and Steven B. Singer and David R. Kaplan of Saxena White PA.

Apache is represented by David D. Sterling, Amy Pharr Hefley, Anthony J. Lucisano and C. Frank Mace of Baker Botts LLP.

The case is Plymouth County Retirement System v. Apache Corp. et al., case number 4:21-cv-00575, in the U.S. District Court for the Southern District of Texas.

–Additional reporting by Ethan Beberness. Editing by Alyssa Miller.