Q1 2020 Earnings Call
[music].
Good day, ladies and gentlemen, thank you for standing by and welcome to the Apache Corporation first quarter 2020 earnings announcement webcast. At this time, all participants' lines are in listen only mode.
The speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press Star then one on your telephone.
Please be advised that today's conference maybe recorded if you require any further assistance. Please press star then zero.
I'd now like to handle conference over to your speaker today, Mr., Gary Clark Vice President of Investor Relations, Sir you may begin.
Good morning, and thank you for joining us on Apache Corporation's first quarter financial and operational results conference call.
We will begin the call with an overview by CEO and President John Christmas, Steve Riney, Executive Vice President and CFO will then summarize our first quarter financial performance.
Clay branches executive Vice President of operations and date Purcell Executive Vice President of development planning reserves and fundamentals will also be available on the call to answer questions.
Our prepared remarks will be approximately 15 minutes in links with the remainder of the hour allotted for Q and eight in conjunction with yesterday's press release I Hope you have had the opportunity to review, our first quarter financial and operational supplement which can be found on our investor relations website at Investor doubt Apache Corp. dotcom.
Please note that we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.
Consistent with previous reporting practices adjusted production numbers cited in today's call our adjusted to exclude non controlling interest in Egypt, and Egypt tax barrels.
Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discussed today.
A full disclaimer is located with the supplemental information on our website.
And with that I will turn the call over to John.
Good morning, Thank you for joining us as we review our first quarter results today, many Apache employees around the world. We're continuing to work remotely is part of our Cobot 19 response.
I would like to wish all of them and those of you who are doing the same good health as we work through a very trying time.
I also want to acknowledge and thank the Apache team for their dedication and hard work in the face of a very challenging economic and operational environment.
There are successfully and safely delivering day to day business activities in the face of a sudden an unprecedented change to life is we knew it.
My heartfelt appreciation goes out to every one of our great Apache employees and contractors as well as our partners and stakeholders to.
The global economy, and the energy industry had been deeply impacted by cobot 90.
As we navigate this crisis Apache's primary priorities are keeping the health and safety of our employees and the communities in which we operate paramount in our decision, making and preserving the inherent value and optionality of our diverse asset base for the long term.
Thus far our efforts have been successful and we're very fortunate to have seen only a few isolated cobot 19 cases throughout the organization.
Reacted quickly to close offices and implement work from home processes as well as stringent operational protocols in the field.
We also have in place contingency plans to ensure continuity in the event Apache incurs, a more widespread or sustained impact.
In the rest of my prepared remarks, I will discuss the primary actions, we're taking to preserve the value of our assets and protect our balance sheet.
Summarize our long term objectives, which have not changed and lastly comment on our outlook for the remainder of 2020.
While the current prices is much more severe and complex. Some key lessons learned from the 2014 oil price collapse or informing the decisions, we're making today.
In late February we communicated our initial 2020 budget at an assumed WT oil price of $50 per barrel.
This seemed appropriate given prevailing supply and demand fundamentals and strip pricing at the time.
In early March OPEC, plus failed to reach consensus on supply cuts and it became apparent that coded light team would cause an unprecedented amount of demand destruction.
Apache responded to the oil price drop associated with these events quickly and decisively.
On March 12, we announced a plan to reduce activity in Egypt in the north sea into eliminate all us drilling and completion activity.
This resulted in a 650 million dollar decrease in our 2020 upstream capital budget, which is now down nearly 55% from 2019.
We also announced a 90% reduction to our dividend, thus preserving $340 million of cash flow on an annualized basis and strengthening our liquidity.
To protect cash flow from further downside price dislocation, we entered into substantial oil hedge positions, primarily for the second and third quarters, which we believe had the most volatility risk we implemented deeper cost cutting measures announcing on April 1st an increase in our estimated annualized cost.
Savings to $300 million up from $150 million a month earlier.
Apache benefited from the significant progress already made on our organizational redesign which commenced in the third quarter of 2019. This enabled us to make the incremental cost reduction decisions confidently without compromising safety asset integrity or our ability to resume act.
Tivity when warranted.
Finally, we have conducted a thorough price sensitivity analysis and operational evaluation of all producing wells across the company, which is now in forming the methodical and integrated approach, we're taking to rolling production shut ins and curtailments. This process will enable us to preserve cash flow in this distressed involve.
Total price environment and protect our assets all of these actions were carefully planned and none were taken lightly.
While very difficult there were necessary to preserve liquidity and ensure ample runway to return to a more sustainable and profitable price environment.
Next I would like to reiterate our longer term objectives, which still hold true. Despite some of the short term impacts of the current situation.
First Apache will budget conservatively aggressively manage our cost structure to ensure free cash flow generation and prioritize debt reduction to strengthen our balance sheet.
We will maintain a balanced and diversified portfolio and continue to invest for long term returns rather than production growth.
In the Permian, we will continue building economic inventory and maintain optionality.
And in Egypt, and the North Sea, we will flex activity to preserve free cash flow generation.
Lastly, we will continue to enhance our portfolio through exploration.
Our recent success offshore Suriname is a prime example of this strategy.
And block 58 remains a clear priority for Apache.
As we look to the remainder of 2020, there are a number of fundamental uncertainties. The most important of these is the timing and magnitude of a recovery in demand for oil is supply response alone cannot solve this problem in the short term.
For Apache the best course of action is too aggressively reduce our cost structure protect our balance sheet and manage operations to preserve cash flow.
Our diversified global portfolio gives us the ability to optimize capital allocations as market conditions change just as we did following the oil price crash in 2014, we have left intact, a higher proportion of international capital investment, which offers better returns than the us in a lower price environment.
Yeah.
To wrap up Apache is taking the necessary steps to manage cash flow and protect our balance sheet.
We have ample liquidity and a long runway to carries through to a better price environment, and we'll maintain the flexibility and capacity to increase activity at a thoughtful manner as conditions warrant.
And with that I will turn the call over to Steve Riney, who will provide additional details, but our first quarter in 2020 outlook.
Thank you John.
My remarks. This morning, we'll provide a few more details on first quarter 2020 results and our outlook for the remainder of the year.
I will also comment on the strength of apache's liquidity position, which is more than sufficient to bridge, the significant and potentially prolong downturn.
As noted in our news release issued yesterday under generally accepted accounting principles Apache reported a first quarter 2020, consolidated net loss of $4.5 billion or $11.86 per diluted common share.
These results include items that are outside of core earnings.
The most significant of which are noncash impairments totaling $4.5 billion.
Impairments were driven primarily by the impact of weak oil prices on the carrying value of our proved properties.
Most of these impairments were in legacy vertical developments in the Permian Basin.
Excluding these and other smaller items adjusted earnings for the quarter, where a loss of $51 million or 13 cents per share.
DNA expense in the quarter was $68 million, which was considerably below our guidance of $120 million.
Some of our stock award programs, our cash settled in each quarter accounting rules require us to mark to market. The accrued liability for these awards based on changes in our share price.
Typically this has not been material, but it resulted in more than a $30 million reduction in DNA expense for the first quarter due to the significant drop in the share price during the quarter.
Capital investment and operating costs in first quarter are also below guidance as a result of the spending reduction efforts we have instituted.
As with DNA costs, there will be more significant impacts in future quarters.
Apache's adjusted production for the quarter was below our most recent guidance.
Reported gas production in the Permian basin was materially impacted by commercial arrangements at some gas processing plants, where the operator take volume in kind as reimbursement for power costs.
In lower gas price environments like in the first quarter the impact on reported volumes can be significant in this case, approximately 24 million cubic feet per day.
Permian oil volumes were also below guidance caused by the rapid reduction in activity due to the oil price downturn.
As we look to the remainder of 2020, our full year upstream capital investment program will be around $1.1 billion.
Approximately 60% of which will be in our international businesses.
For the second quarter upstream capital investment will be approximately $230 million, a sharp reduction from the first quarter.
With respect to other typical guidance items. There are many uncertainties on a forward looking basis as such we're not providing second quarter guidance and we're removing the full year 2020 guidance, which we provided in February.
In terms of production volumes, we are in the process of implementing a shut in curtailment program, which is already impacting second quarter volumes the size and duration of this program will depend on many factors and is therefore difficult forecast at this time.
In closing I'd like to touch on our substantial liquidity position our efforts to protect that position and how we will put it to use.
When this downturn began we quickly implemented actions to match spending reductions with the deteriorating oil price environment.
As a result of those actions Apache can achieve free cash flow neutrality for all of 2020 at an average WT oil price in the low thirtys.
The original plan for 2020 required as they BTI oil price closer to $50.
Our goal is to achieve cash flow neutrality in order to minimize drawing on liquidity to fund our day to day operations.
We entered this downturn with a tremendous liquidity backstop, we have a $4 billion revolving credit facility, which matures in March 2024, with a one year extension option.
Following our credit downgrade by S&P, we posted letters of credit for North Sea abandonment obligations utilizing a settlement in the credit facility, specifically established for such purposes.
This currently reduces the availability on the credit facility by $800 million.
In terms of debt one of our key financial goals for the year, let's to generate free cash flow to reduce leverage through debt repurchases.
This remains a longer term priority, but as more challenging for the near term given the price environment.
Over the last two years, we eliminated $1.6 billion of dead in the near term maturity windows through Paydown in refinancing efforts, leaving only $937 million a bond maturities over the next three years.
Absent refinancing or retaining free cash flow to retire these bonds, we will use the revolver to pay them down.
Conservatively, assuming all three years of debt maturities go on the revolver, we would still have $2.3 billion of remaining liquidity to manage through this downturn.
In summary, we have taken significant and decisive actions to preserve liquidity protect the balance sheet and retain asset value for the future.
These recent stats combined with those of the last few years give us sufficient capacity to bridge to more sustainable and profitable price environment.
And with that I'll turn the call back to John for some closing remarks.
Before we go to Q today, I'd like to make a few comments regarding the durability of our production base and reduce spending environment.
At planned 2020 capital investment levels, our adjusted International production should be roughly sustainable from 2019 to 2020 on an exit rate basis, assuming no material curtailments or shut ins.
In the Permian, where we have eliminated activity for the remainder of the year, the unknown magnitude timing and duration of our curtailment and shut it in program makes it premature to provide a high confidence near term outlook.
I would note however to approximately one third of our Permian oil production comes from legacy vertical wells that have a base decline rate of around 10%.
Hence our overall Permian oil decline rate is significantly.
Based on average.
As we look ahead to 2021, our Permian decline rates will moderate in the capital investment required to sustain year over year production volumes will fall significantly.
We will provide more details around future production is price volatility receipts, we have more visibility.
I will now turn the call over to the operator for questions.
Thank you.
Ladies and gentlemen, if you have a question at the time. Please press the star followed by the number one key on year Touchstone telephone. If your question happened and certainly which are moving from the Q. Please press the pound team once again to ask a question. Please press Star then one now.
And our first question comes from Bob Brackett from Bernstein Research. Your line is open.
Hi, Good morning, guys I appreciate that you can't talk in a great specificity around the trajectory for Permian production, but can you kind of frame it in terms of.
What it could look like if you split out the legacy vertical versus kind of the shale, let me just very wide.
Goalposts as it were.
And Bob Hope things are going well I'd say in general you know, we've got two pieces there and.
Our conventional is a third of our oil production in the Permian and as I said there at the end, it's got to kind of a 10% decline rate.
The other two thirds is unconventional then I will say that we have been running a pretty flat pace, if anything we moderated our activity pace in 20.
Team it was down from 2018 so.
We're going to be it a little lower unconventional decline rate just because of the pace relative to our percentage.
As compared to most so hopefully that gives you a little bit more color on that.
And on on that legacy vertical are there any what's the inventory of wells that have just gotten to the point, where they're not economic in sort of a two to three year recovery window. When would you abandoned those or do you does not have that many of the portfolio.
Yeah, I think in now and I'm going to let Dave talked a few minutes on the process. We've gone through on the shutdowns because it's something we've really put some time and effort into.
But I think the important thing to know is is it to you know we've taken a very very methodical approach I think we've shut in around 2500 wells.
Produced an average of about three barrels a day at about 150 barrels of water today.
We've done this in a way that to you know, we can kind of roll the wells.
And preserve.
The asset integrity, so we feel pretty good about being able to bring those back.
Cost structures coming down.
But we're going to manage near term you know for free cash flow and will lead thing shut in as long as it makes sense, but Dave why don't you give some color and coin maybe on the shut in process that we've gone through sure. Thanks, Shannon and Bob. Thanks for the question and Clay will jump in here and second but as John said.
It's a pretty robust process and adding it involves operations. It involves our production in reservoir engineers or land team to understand they lease obligations marketing to understand existing contracts and then our planning group an asset teams to really really stress some of the economic.
Parameters on the wells.
John gave you some numbers on wells that are currently shut in we would anticipate is we go through Maine energy in those numbers likely increase but you can see that kind of wells that we're we're we're shutting in there is another bucket.
Wells.
Is that that when they break were.
Opting not to fix I mean, we've dropped or workover rig count by 80% since beginning of the year and really tightened up the economic criteria in this market for those to justify working those wells over and so.
So the bucket that John talked about most of those wells are wells that were overly shut in but some of those are wells that we've opted not to repair.
I think when you think about it would any of these wells be permanently shut in that's a function of longer term price.
But because we have a methodical process because we ever reservoir production facility engineers involved in the process.
We're shutting these wells in in a it with the anticipation that they'll ultimately ultimately be brought back online. So we generate kind of chemical treatments before we shut them in and clay can talk about that.
In this in a second.
Yes, some of the other considerations when you're thinking about the economics here well sit produce a little more gas and others like they get a benefit in today's gas market.
And then when we think about our Permian exposure, we have some marketing agreements, where a meaningful percentage of our Permian production goes to corpus on the ethic pipe.
In our exposed to to Brent link pricing. So we'll have a number considerations there and finally from me the other thing that.
We're doing our subsurface teams of engineers and geologists have taken this opportunity to do some interference testing in some of our unconventional plays.
As we're deferring some production.
We found historically that interference testing is one of the best ways to really understand well spacing and well placement in these three dimensional unconventional plays.
We're doing some of that starting imminently.
Again, we feel very confident that when things get better we're going to come out of this.
A whole lot smarter than didnt than we were going into it.
It probably longer answer than you wanted that that nominate pass over to play to to add some color.
Yes, sure Dave This clay branches, and let me pile on a little bit with what Dave was saying and actually add some color.
Dave was talking about the said in wells in the reduction in Workover activity and that is all true and that's all something did is temporary until we bring those wells back on.
In the meantime, while we do that we have to make sure that we focus on preservation and so we make sure that we preserve and pick all the wells to reduce as much corrosion as as possible. We also have to preserve the surface facilities and make sure that our tanks are preserved properly that are rotating equipment is preserved so that when we do.
Come back in and flip that switch and it's time to produce again all of that production can come back on.
And one of the things that we talked about John has alluded to this many times lead times and you said in wells, especially prolonged period of time, you have a lot of surprises when you turn it back on some of them are good and some of them are bad.
The bad side and what can happen as you can end up with a lot of corrosion. If you have not done everything in your power to make sure that you preserve those when you set the men. So we're taking great pains make sure that preservation is going correctly.
Thanks, I wanted to talk about is cost structure.
And in the opening remarks, John mentioned that we're looking at 300 million dollar reduction, which is up two fold from $150 million that we did now announced a month earlier and so I wanted to give some color on that because of but most of this is permanent cost.
Reduction in a change of the cost structure you heard Steve talk about how we could operate as we go forward from what prior to this great reduction in oil prices was at $50 oil World. We can go now to $30 per barrel oil world and so.
A lot of this has to do with the Ines does that we were already engaged in.
About $150 million worth, which was announced step to the ended the year $150 million was largely gionee associated with our headquarters functions and with our various technical functions.
In our our offices in our in our Houston in Cairo in Aberdeen Midland offices.
But with the reduction in oil price, we had to take a lot of action to find other permanent cost reductions and we did.
So what we see now are these permanent cost reductions a lie that has to do with field employee reductions contractor reductions in the field lot of supply chain initiatives. Our supply chain group has been doing a great deal of work in order to get new contracts and these contracts are more long live than what.
We believe to be a this temporary reduction in prices and so we've been able to get some really good contracts renegotiate those contracts and take advantage of the the price environment that we're in right now.
And then the last thing I would mention and I think this is really really important because this is a bottoms up approach, but we went to our offshore installation managers the winter area operations managers in the in the field in the onshore and we asked them for their initiatives and how they could reduce costs now they can reduce cost in a meeting.
For way and it has a very thoughtful process and a lot of work has been done to identify areas, where we can reduce costs, whether it means reducing redundant activities reducing field offices.
Automating processes that here to four were more manual in nature.
Those are the actions that we're taking in its led to this significant increase in these permanent cost reductions that were now pushing up to 300 plus million dollars. So I'll turn it back over to John.
I appreciate that long thorough response, thank you.
Thank you.
Our next question comes from trials need from Johnson Rice. Your line is open.
Good morning, John to you and your whole team there.
Good morning, Charles Yes I.
I appreciate that you guys, probably aren't wont don't want to speak about this up and don't that from my pronunciation. The cost quasi I think the one thats currently drilling but I wanted if you could if there's anything that you could that you could offer about maybe what you guys have have continued to learn.
From your first two discoveries there offshore Suriname, Mako and Sop car west as you've continued to analyze the when it whether it be the.
The cores or the or the fluid samples or whatever else you might care share.
Yes Charles.
Thanks for the question, we remain very excited about Suriname.
Yes, I think most importantly, now that were two for two on both the Mako and Saccaro from the wells and actually two for two in both the campaigning and and the San Antonio and formations. We've proven we've got an active hydrocarbon system is oil.
You know with some gas condensate and some of the shallower campaigning zones at both saw Paccar and Mako.
But we're we're very excited.
You look at the distance between the wells are separate to features we're now drilling cost quasi is you mentioned it is another separate feature it's actually in between the two and then we will be moving back to cast Kasey for the fourth well, which is on the other side of Saccaro. So yeah I think it just shows.
The you know there's not to just one feature out there. We've got 1.44 million acres. The block is highly perspective, you know we're only into of water now a play types.
Bill and things are going very well. So we're we're excited about to.
What's in front of US. We're currently working the plans with our partner total all in the appraisal program for Maka were due to submit that to the government of Sirona him later this month, which we will do.
So we're anxious to kind of pushed forward. There were also working on the plans, it's up a car and.
It will follow sometime later this summer. So we're very encouraged things remain kind of on track and it's turning out to be everything that we hope that could be so a very.
Strong petroleum hydrocarbon system, that's got a lot of charge.
Got it. Thanks, Thanks for all that detail John and then and then going back to your prepared comments I'd like you guys. Just gave a really a lengthy detailed answer about these up about these the shut ins, but I just want to clarify something when you when you talked about the rolling curtailments in your prepared comments was that specific just to these 2500.
Vertical Permian wells or is that also happening.
And in other parts of your portfolio, whether it be horizontal Permian or.
Our international.
I think that today, Charles we have around 2500 wells shut in.
All of the fields are going to be.
You know handled on a rolling way and or they're going to be pickled and done very methodically. So we're working through that based on what we think is the best way to operate those.
And so it's a very methodical approach as Dave mentioned one of the things. We're also doing as we really thought through what data we can collect.
And how we can do it I mean, you don't have the luxury when you're running a program sometimes of taking the time and doing the interference tests in the things that really help you understand spacing and pattern alignment and so forth on your unconventional side. So.
It was as Dave mentioned that as we get into June the number is going to grow a little bit.
But to a lot of the may stuff kind of already cast but to you know, we're taking a very bottoms up very detailed approach and it will be designed to.
Hi Tech the wells and also learn as much as we can because I think that will help drive our capital efficiency. When we do kind of get back to work.
Thank you John.
Thank you.
Thank you Sir our next question comes from Bad Rebate from Bank of America. Your line open.
So.
Certainly thank you good morning, everybody health I hope everyone has done well either.
John I got a couple of follow ups I guess.
Maybe will kick off with Suriname.
My understanding is you've got 120 days from when you.
Disclose the discovery to the governments and I would put you actually right around now so I'm interested to know.
I will be really ended the month or we eminent and can you give us some scope as to what you are looking to do in the appraisal plan in terms of drilling or further interpretation of seismic or whatever that might look like.
Yeah actually we've got to we have though the obligations or we have 24 hours to make a discovery notice.
And then we have 30 days to submit the official discovery report and then that clock starts so.
We actually are going to be the into this month, Doug when we when we do submit the first plan. So there is actually the 30 day window between discovery in the official discovery notice.
It's probably the 30 days it you're missing in there yeah. We're you know our partner analysts are both continuing to lots of things as you know with the with now to penetrations down on the seismic.
Theres a lot of work, we're doing which I think we'll be informative.
A lot of reprocessing and things will continue to do throughout the process and really that's some of the work. We're we're putting into the appraisal program is how we designed it to gain as much information as we need to make the proper decision. So.
Yeah, we'll be able position to submit something later this month.
To the government.
And then they've got a 30 day period to respond back to us.
So it's it's all all systems go.
Well. Thank you for closing the gap for me the 30 days I wasn't lead missing, but I guess, if I could just pricing a little bit on this.
Our view at least as that Youre sitting on the Depositional Center here can you at least give us some idea feature looks like.
Relative to what we've seen next store because I think there's still some debate as to whether theres a viable development here. So anything any color you can offer not they'll get on to the yeah. I would just say that the features are very large.
It's always said.
You know and.
That's why we're working on the appraisal plans on how we want appraisal but.
But I stay is is the their large a new got obviously stacked pays.
Both the that we've already the discovered thus far in both the campaign in and the San Antonio and so.
What.
It's not disappointing in any way on that front and we're excited about it.
My last one if I may is just changing geography is completely to Egypt.
In one of the things that I guess continues to not get a lot of attention is extraordinary exploration success rate, you're having no 94% I guess this loss loss cooler and can you just walk us through what the go forward plan is in this little oil price environment and May actually be a question for Steve.
Because I'm on real interested to know how did the PSC allows you to hold up your volumes in this very low oil price environment in the context of cost recovery followed in the legacy cost recovery.
In type and then see Hobbs lend any kind of color on the go forward plan on the vote. Yes, you can get the PSC would be helpful. Thanks.
Yes were you look at that program I think what you're saying is the early fruit from the acreage we picked up the seismic we shot we spent the last several years effect, we are still shooting.
I'm very very large acreage, we reshot a lot of our old existing seismic the probably the previous shoot was done to think in 2013, so lots change on that front and you're seeing the fruits with some of the discoveries that we've announced this year.
Where we have infrastructure tie and we have some very very impactful targets yet to drill there were excited about this year on exploration front and so what you're seeing is we have high graded the capital we ratcheted back a little bit in Egypt.
The area Weve ratcheted back the lease, though as we said on the international side.
It's also an area that will want to put capital in kind of first as you start to put capital back because we've just its which you've got as you've got 6 million acres, you've got multiple basins in the difference between it in an area like the Permian you've got as much stack pay.
But you got conventional rock and.
And so that's what differentiates it the second thing I'll say and Steve May want to add some color, but the these PSC is were designed and created in a much much lower price environment and so the way they work.
Things worked very well and you know in the price environment, we're at today and so.
Thats right, that's how and that's why Egypt continues to be an area that we can lean on and that's really what are the advantages to having to an international portfolio you got Brent pricing.
You got the PSC structure, and it's not just the to the loan unconventional treadmill.
But you have in the Permian, So anything Steve you want to add on the PSC.
Yes, I just.
Doug what I, what I did that maybe put it to the supplement we've got a page in their own Egypt volumes that breaks it out pretty clearly.
What you'll see is that when you compare gross production volume to the net production volume that goes to the concession holders us.
Hi Tech.
Yes, the vast majority of the barrels actually still go to to Egypt.
Which is the way it ought to be when.
He's got a drilling program as John was talking about that is highly economically you can.
We can drill.
For the cost of these vertical wells and you get the types of oil rates that you can get out of Egypt stage. It does end up with the vast majority of the volume.
So what that does allow is that when you're in a very low oil price environment like today.
We did get first call on cost recovery barrels so those barrels.
Some of the barrels moved from Egypt over to the concession holders in order to get cost recovery and cost recovery it'll vary we've got 25 26, some odd concessions there.
Different PSC contracts and all of them are slightly different from each other but they're pretty similar.
And the way cost recovery works is during the period, which is a quarter.
You will get you will get full recovery through oil volumes.
Our gas volumes for all of your in period expense costs.
And then you also get a quarterly share of amortization and depreciation if you will and historic capital.
And the PSC is do vary slightly but most of them.
Our either a four year or a five year amortization of the capital spend so.
So every quarter you do have a pretty significant.
Hedging.
Benefit from the PSC effect, if you will have a built in hedge and so thats why you see.
All right adjusted barrels went up to the first quarter from fourth quarter because of the price role.
You'll see that again, most likely in the second quarter food first.
That does but I was getting on Steve.
Could you put some order magnitude on the bump given the oil price.
Can you give some order of magnitude to the but given that the oil price.
Well, we were not going to we're not going to give that at this point in time I think you could you compare to what we do a rough calculation of from fourth quarter to.
To first quarter.
With your assumptions on what prices will be in the second quarter.
It seems to those is a pretty big number that's why I was trying to get it from you about guys. Thanks. So it's a very nice benefit to the PSC structure does.
Hi, oil price environment that cuts the other way, obviously, it's a double edged sword, but.
But in a low oil price environment. It does provide a very nice natural hedge.
Thanks Fellas.
Thanks, Doug.
Thank you Sir our next question comes from Gail Nicholson from Stephens Your line open.
Good morning.
Other.
Reductions that you guys just earlier in the call can you talk about what the split between those if you ask first international and then that savings achieved to date in the permanent cost reductions have they been more due to one region than the other.
So I'll start out Gail a lot of those you know we started I mean, we were fortunate in that we started kind of an operational redesign last September.
So we were six to seven months into.
Total revamping of our operating model, where we were closing some offices and really centralizing a lot of functions you know what this enabled us to do.
In mid March was just take a much much deeper cuts and so a lot of those cost savings are going to be DNA related.
They are kind of across the board.
A lot of but even on the corporate side, so a big chunk of that.
Is geared.
Towards the the overhead side in the DNA side.
Secondly, the cost saving efforts have been kind of across the board and.
I can let clay give a little bit of an idea on the operational split, but you've got a lot in the Permian is we're probably the lion's share that is and then other things we're doing in the north Sea in Egypt.
I will say one thing.
With some of the Cobot protocol that we put in place we're doing a lot more screening we've kind of reduced down to critical.
Folks that we need on the platform. So we're actually adding some things in some areas too is we've gone to a very specific.
Approach, but any color clay you want to give on the splits.
No I think you nailed it John is floor is that the order and where we're seeing the biggest cost savings us being the largest.
We saw a significant savings with the permanent closure of the San Antonio Office and a lot of the reduction in expenses that we had in the M&A you are region, but we also also seen a lot of reduction in expenses in the Permian basin.
Excluding any you are so we're seeing good reductions there same thing in the North Sea. We've had some some reductions there as far as both headcount and contract your head count that's that's been substantial and ongoing and then in Egypt.
We're really starting to pull the covers back on Egypt and understand that better. So we think that there's some low hanging fruit there that we can go after an attack. So we're not through cutting cost at this point, we think that there is there other cost initiatives that that we can gain from and we're working on that right now.
Gail.
Steve if I can give it a little bit more color on that as well, we talk about 300 million as identified sustainable cost reductions so far.
And that's both in DNA and Opex as John said, we had started the.
The Gionee focus last year and so we're ahead of where ahead of the the Opex side. The Opex started.
Really interferes with the with the oil price downturn.
On the DNA side DNA reduction so far are more than two thirds of the 300 million identified DNA will include costs in the corporate center, obviously, but also DNA related costs in the in the regions.
And not to confuse things too much but the DNA goes to three different buckets on our financial reports a portion of it will show up in DNA expense on the piano some of that shows up in Ela OE because its allocated that way and then some of it will go to the capital program.
So it'll show up in Capex, but it's all dollars of reductions in spend.
Regardless of where where it goes and then in addition to to the to the sustainable reductions, which as I said are approaching about 300 million identified.
There will be some cost that we've identified and began the process of just deferring the things that can you just wait until a later point in time.
Great. Thank you for that incremental clarity and then looking at the in the quarter you guys had a solid profit on target oil and gas.
Think about this going forward.
Yes. So this is this this is the first quarter, where we have separated out the.
Purchase.
The sale of purchase oil and gas and the the purchase costs of.
Purchased oil and gas and the reason for that is.
The because this is the first time that it's become material to our peer now and thats become because of the pipeline the long haul pipeline transport contracts that we've entered into it. It's just gets down to the basics of how we run the business we.
The product that we produce we sell in basin, just as a general overall, we sell all of the hydrocarbons in the basin.
We have a marketing organization who.
Yes, there are many other things that they do one of the things they do as they help us keep.
Based pricing connected to the larger broader market and we obviously had some events over the last few years that were disconnecting.
While high in El Paso, Permian pricing from from.
Nymex Henry hub, Houston ship channel type of pricing and so the marketing organization recommended and we took him up on it.
Helping pipelines like Gcs and Phd go from concept to to F. I'd and into two reality with TCX now.
So we actually entered into contracts on those pipes and we help them get to get across the line of course, we also took an equity option whichever altice midstream is now in those pipelines, but getting those contracts hitting those contracts in place help that help the pipelines get built it into marketing organization now manages Rx.
Closure to those transport contracts and what you see.
Is the.
On our PNM now is the.
Effects of marketing organization purchasing product in the basin or along the pipeline is it's not necessarily at wahoo or El Paso Permian it could be anywhere along the pipeline or at where they have access to the pipeline and then selling at that the other end of the pipeline or in other.
Our fluid locations will along that pipeline. So they basically manage that exposure through purchasing in selling product and since it is becoming material now we need to separate that out deals you see that the marketing organization made $22 million in first quarter on that primarily because of the.
The differential.
For most of the quarter between Wahab in Houston ship channel.
Great. Thank you.
Thank you Sir our next question comes from Michael Fiala from Stifel. Your line is open.
Good morning, Thank you start thinking.
Yes, definitely yammer, depending from Mike.
Correct me if I follow up of previous question on that 24 million cubic feet per day impact.
From our presence in contract than maybe you could provide anything on color into what I mean look like going forward.
Yes, so the most important thing to understand on that is that it has it has a new economic impact. So we've got a contract where we have to have gas process to make it to get it to pipeline spec.
And we.
We have a contract with a third party.
And the third party charges. This a fee plus power costs and this is this is Rick typical of these types of arrangements because power can be.
A pretty variable costs and in order to.
Not to take the the risk of of fluctuations and volatility in power cost I just pass it on as a means of the pricing the contract.
And so what this.
What this gas processor does.
With us and that did with many other parties to because like I say this is a very typical.
Term in these types of contracts they they take in kind.
Portion of the gas that flows through the plant.
And in a they effectively take the revenue from Nat gas as payment of the power costs.
And because of accounting rules, we can't report that as produced volume because it doesn't belong to us it effectively belongs to some winners soon so.
That's the only reason why it's just if we didnt have this this contract. This term in this contract. We would report more volume report more revenue than we would have an equal amount of more.
Processing costs some of the PNNT as a zero financial impact.
Okay.
And to continue about the same amount going forward.
It will it fluctuates with gas pricing and so.
It will.
If you can predict gas prices than you'd be able to predict the volumes. It's it's because gas prices got so low this quarter that that the volume was so high.
Yes. This is this will this may it occurred last year also in the Permian area, and certainly will occur in the future most likely but it's something that's not a norm.
Thank you what kind of take our next question comes anyway from Barclays. Your line is open.
Hi, good morning, everyone. Thanks for taking your questions.
My first question is on activity and maybe trigger points for pricing the operating cash margin and the U.S. continues to lag the north sea and he just pretty pretty meaningfully and I know the U.S. is kind of a mixed bag of operating some areas, but at what oil price would you consider reactivating activity.
The Permian and we're just asking because today the trigger price might be a little different for you than others, given Apache strong international portfolio, and you're really wanting to maximize cash flows because you've got to continue to fund sorry.
So that that that maturity coming down.
And then you actually answered your own question, but.
We will I mean, if you think about our priorities. The first thing I'll say is.
We will be slower to go back to work and we were shutting things down and.
We're going to be very methodical, where that our priorities are going to be one debt to would be dividend as you start to think about capital we're going to continue to maintain the exploration in the appraisal program in Suriname.
Egypt would sit next and then you kind of get into the Ducs in the Permian.
North Sea and then we'd start thinking about the rig lines and Permian the nice thing about our unconventional acreages.
Most of it we don't have any lease obligations is not going anywhere we're not losing anything on that option.
So it's all just a function of timing and I think for US we want to be very methodical. If you look back to how we kind of went back to work post the 15 16 shutdown.
We've kind of been through this drill before as we went from 93 rigs before.
By second quarter of 16 that Tom time period.
We started the latter part of 17 ratcheting back up.
And you know went to an eight.
Rig program and.
On the unconventional Permian side, and we've been scaling back a little bit so.
I think we'd want to see higher a longer.
Deck and definitely the advantages we have is the portfolio and we're going to be managing cash flow. So.
That's it.
Okay.
Really appreciate the detail. This answer that's very helpful. My second question. The follow up is regarding the debt maturities and.
Gentlemen over the next three years do you have an estimate of what price oil needs. The average in order to pay those off.
Strictly out of free cash flow and maybe we're just getting a little too cute here I know it depends on a kind of different factors that may not be known today. So maybe an impossible question, but any commentary you might have around the free cash flow on trajectory for Apache would be would be helpful. I know that you can pay debt maturities and revolver handing the call back.
On that but that might not be ideal.
Yes Janine.
Yes.
We're not going to give a lot of.
Guidance or insights into.
Free cash flow in the out years, so I'd say is.
In 2020.
We are we're basically running free cash flow neutral with the current capital program.
If you were running at about $30 WT.
If you take the dividend reduction the capital spending where on right now.
The pace of capital spending around right now the cost reductions of 300 million of cost reductions.
And we're at worried about a cash flow neutral.
Debbie Ittai price of about 30 $30.
John indicated that.
Reducing debt is certainly one of our highest priorities for for future.
Free cash flows.
We've indicated in the past that.
Our sensitivity to a dollar movement in oil prices is somewhere in the 50 to 60 million range.
So you could.
Probably use those and.
And get to.
It to a solution point on what the.
What it might take to be able to pay down 937 million of that over the next three years.
Great. That's that's actually really helpful. Thank you very much.
Thank you. Our next question from Neal Dingmann from Suntrust. Your line open.
Morning.
Just another when you guys talked a little and Egypt and that question, it's more just on Egypt, and North Sea specifically.
Just wondering how do you guys think about maintenance cap say or I know thats, you, probably spending more there in Egypt, and the maintenance cap, but I'm. Just wondering can you talk about how you view that now as those become more efficient and potential free cash flow of each at the let's just use sort of the strip prices.
Well no nail when we look at those two areas, we've typically needed seven to eight.
Third million dollars, so to kind of holding flat.
You know combined and those when Thats net the our net portion of the.
For the JV in Egypt with Sinopec.
So when you think about that were were slightly under that level.
This year with reductions Weve shaved a little bit of that back, but as I mentioned, we really high graded the inventory in Egypt, and we're seeing some strong results coming out of there. So that's going to help us with that number.
And then secondly, we we've got the luxury of some some really nice tie ends and the timing of those that came on.
With our garden to well and so forth and we've we've curtailed that well a little bit.
Given price volatility and things there so.
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No slightly under but in a kind of an improving picture in terms of what it takes to to maintain those two areas.
Okay, and then just quickly move over the term you all mentioned the release. It you thought you'd have about 70 Ducs Im just wondering is there a sort of level that you are comfortable taking this down two or just before you bring rigs back or just wondering how you think about that count.
No that number is just the result of where we were in the program and when we kind of picked up the range I mean, we it was easier to shut down the completion crews. So as the first thing we did was shut the cruise down.
You know it took a little bit of noticed time on the rig as we mentioned I think we're on our last well on the Permian as we speak.
And so that was purely just a result of kind of where we were is more than we typically would carry because of the shutting the completion crews down first which is going to give us a little bit to the.
Ducs to bring on when we decide to put the come back to them.
I'll have about 15 and alpine high.
In the restaurant, our Midland basin, unconventional and and pull those are three mile laterals. So.
Yeah, It will give us some uplift when it's time to put some capital back to work.
Great details thanks, Jeff.
Right.
Thank you.
Next question comes from Scott Hanold from RBC capital markets. Your line is open.
Thanks, I appreciate all the color and I know you've given a lot of bookends in terms of how to think about Apache you're going for budget, just so I'm understanding it I mean the goal as you kind of go through 2020 to 2021 at this point.
Based on your current activity level, it seems like you're not spending in at maintenance levels.
When you talk about that $30 per barrel price sort of resiliency to and Im just curious like if you brought yourself do more of a maintenance production mode in each of the areas what does that.
Price price indicator look like.
Well I mean, you've got the brackets you know there Scott because we were going to grow slightly with where our budget originally was.
You know, which was geared around a $50 WT I.
As we've said now we can make kind of.
Cash.
You know flow.
30, but we are going to decline were below maintenance levels, you know in the Permian and so that will come down and international is going to be kind of flat.
A relatively flat so it's somewhere in between there in terms of if you were going to call. It a.
Generate free cash flow and actually keep a volumes flat.
Okay.
Okay fair enough and it obviously.
In Suriname, you've got your your.
Things are submitting to the government at this point in time, what could we expect from Apache over the course. This next year in terms of like how we're going to hear new information and what the plan is leading into potential appraisals that once you get the government response back you'll you'll have a press release or can you give us a sense.
Of how you're going to report the new information to us over the balance of this year.
Well I mean, that's something we'll work through with our JV partner I mean, typically we you know you submit the appraisal program. It's a it's kind of a work plan.
And then we'll go execute that so we're not in a position right now with our partner, where we're announcing what that entails.
We've got a couple of years to do the appraisal program and do before we have to make a decision on if I'd.
And so we want to go about that.
You know as quickly as possible, but we've kind of balanced you've got to have to balance that as you get into back half of this year early next year with when you start.
Does the current oil price environment impact the F.I.D. decision at all much.
But right now the good news is as you look at CERN I'm you look at the timing of it you are four to five years realistically from discovery to when you'd have production online.
I think that to you know all of US would look through to seeing a better price environment.
I don't know with a recovery shapes going to look like more near term, but I think as we get out you know the timeframe, we're sort of comes into play and we've seen no wavering from a from our partner and work we're fully committed as well. So I think it's something that stays on track. It has actually something we can fund and our JV is bit.
Official to our capital profile.
Spending.
Thank you.
Thank you and the answer first time, we're going to take our final question from Bryan singer with Goldman Sachs. Your line is open.
Thank you and good morning.
First quarter Brian.
Good morning.
Got a bit of earnings improvement in expectations for natural gas prices into 2021, and I just wondered.
What it would take natural gas price wise, if anything to either shift toward increased capital in the gassier parts of the Permian Alpine high or other areas within the portfolio.
Well you know what I'll say brought is it really balls back down to economics in the portfolio right. So.
It just goes to show you.
A year ago, we were talking about curtailing gas in here, we are now curtailing oil in the basin. So it just shows you how quickly things can change we like having a portfolio, we like having a commodity mix that gives us levers are where we can put capital have options, whereas if you're saddle to being a pure play in one commodity strip.
And Thats, what you are tied to so I'll, just say it'll it'll the projects a lot to compete as we start to put capital back to work and a lot will hinge on how the products are trading relative and what the view of them longer term is at that time, So right now you're gassier wells and things have higher.
You know are more economic right now than the straight all wells, which is a total flip from where we were.
Great. Thanks, and then my follow up is with regards to a hedging strategy.
Apache was on hedged in 2019 and into 2020, and I didn't think it and maybe I missed characterizing but that it had been more than a preference to depend on the movement in capital spending versus the pluses or minuses in hedging.
I've been some hedges that had been added recently and I just wondered if you can talk more philosophically about if there's been any changes to how we should think about your hedging strategy going forward.
I mean, I think philosophically no and we came into this on edge.
We saw a lot our short term volatility.
And so we really put too you know the hedges in place funeral swaps Q2, callers and three and four of a few swaption in Q3, we put those in as protection.
To the downside scenario as you work through it was a shutdown.
But not a philosophical change I don't know, Steve if there's anything you want to add.
On the on the hedging yeah sure John I'll always take the opportunity to talk about our philosophy on hedging so no it hasn't it hasn't changed Brian.
We we believe that the best hedge is the ability to have flexibility in here in your activity.
I think that crude price environment proves that.
So we think the best hedge is the ability to ramp down activity, which is what the industry needs to do right now and associated with that too to get cost levels down as low as possible.
There are there are times when when we do believe we need do we need to engage in hedging activity.
We had one of those in the past when we had commitments that couldn't be avoided where we had to build out the midstream alpine high.
We've got one now where you've got a period, where oil prices are getting into a range where.
Cost just can't be cut low enough to.
Maintain.
Free cash flow and so that's why we entered into the hedges as we saw what was happening we knew second quarter was going to be very very painful you could see that coming.
And that's why we we hedged the vast majority of our volumes for second quarter, mostly with swaps all with swaps.
And then we we've hedged a little bit less for Threeq, you and even less still for Fourq.
And those have been a combination of swaps and collars.
So we just we generally just believe that.
We have preference to refrain from financial hedging, we as I spoke about earlier with the Egypt and coming in the future with Suriname, We did some natural hedges already in the portfolio.
And.
It's a I'll just point out that nobody ever asks us why we didnt hedge after prices run up.
Let me ask when the prices of run down.
We just I'm sure just one of those oddities as the of the environment that we're in right now.
Thank you.
Thank you and that does conclude the question and answer session I called conference and I turn the call back over to John Christner for any closing remarks.
Thank you operator in closing I would like to wish all of your good health as we work through this cobot 19 pandemic.
We're looking forward to getting the economy back on its feet, ensuring our progress in future calls.
Now back to the operator to close.
Ladies and gentlemen, thank you for participating on today's conference. If that's probably the program you may also.
Everyone have a wonderful day.
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