Q3 2021 APA Corp (US) Earnings Call

November 4, 2021

Good day, Thank you for standing by and welcome to the a P Corporation's third quarter 2021 or so.

Its conference call at this time, all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session to ask a question during that session you will need to press star one on your telephone keypad if require any further assistance. Please press star zero.

I would now like to hand, the conference over to your Speaker today, Mr. Gary Clark Vice President of Investor Relations the floor is yours.

Yeah.

Good morning, and thank you for joining us on corporations third quarter, 2021 financial and operational results conference call.

We will begin the call with an overview by CEO and President John Christmann.

Steve Riney Executive Vice President and CFO will then provide further color on our results in 2021 outlook.

Also on the call and available to answer questions are Dave Pursell Executive Vice President of development.

Tracy Henderson senior Vice President of exploration and clay branches executive Vice President of operations.

Our prepared remarks will be approximately 18 minutes in length with the remainder of the hour allotted for Q&A.

In conjunction with yesterday's press release I Hope you have had the opportunity to review, our third quarter financial and operational supplement which can be found on our investor relations website at Investor <unk> <unk>.

Corp Dot com.

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 are adjusted to exclude Noncontrolling interest in Egypt, and Egypt tax barrels.

Finally, I'd like to remind everyone that today's discussion 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 discuss 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, and thank you for joining us.

Our top priority coming into 2021 was to continue strengthening the balance sheet through debt reduction with.

With the significant recent strides in that regard and a favorable outlook for continued free cash flow generation. We are in a position today to announce a material changes in our capital investment plans and use of free cash flow.

First we are moving toward a capital budget that will sustain or slightly grow global production volumes.

This is being accomplished through a gradual ramp in activity over the next few quarters, primarily in Egypt, where we are anticipating PSC modernization terms will be approved by year end, but also in the onshore U S.

Second we are committing to a significant increase in cash return to shareholders.

While a stronger commodity price environment has accelerated progress on the balance sheet is the quality and cash flow generating capacity of our core operating areas through a range of commodity price environments that are enabling our new capital return framework.

We have a substantial inventory of quality drilling opportunities throughout our portfolio.

In addition to Egypt, which now has the deepest inventory in more than a decade. We also have significant potential in our onshore U S portfolio.

Primarily in the southern Midland Basin, Alpine high and Austin chalk.

In this price environment. There are many compelling drilling opportunities that should be funded and we anticipate adding a fourth onshore U S rig in 2022.

With regard to our new capital return framework, we are committed to returning a minimum of 60% of our free cash flow to shareholders.

This begins with our base dividend, which in September we announced would increase to an annualized rate of 25 cents per share.

Yesterday, we announced a doubling of that rate to <unk> 50 per share.

In early October we took the more significant step of initiating a share repurchase program.

Through October 31, we have repurchased 14 7 million shares and expect to continue returning capital in this manner through the fourth quarter and into 2022.

Our commitment is to return at least 60% of free cash flow to shareholders and we will exceed this amount in the current quarter.

We believe that a P. A currently offers one of the highest free cash flow yields of our peer group and that this framework delivers an attractive and highly competitive return to our shareholders.

Turning now to the third quarter results and highlights through a combination of strong commodity prices capital and cost discipline and good well performance, we generated nearly $1 $2 billion of adjusted EBITDA, making it our strongest quarter of the year thus far.

We anticipate fourth quarter will be even stronger.

U S production exceeded guidance in the third quarter as we continued to see good performance in the Permian oil plays Alpine high and the Austin chalk.

Internationally production was a bit below guidance as we experienced some extended maintenance turnarounds and compressor outages in the north sea.

Lower volumes in Egypt associated with the impact of strengthening oil prices on our production sharing contracts.

We expect gross production in both the UK and Egypt will increase in the fourth quarter.

In the U S. We placed a total of 10 wells online during the quarter. This included nine wells in the southern Midland Basin.

Three of which were three miles in length.

At Alpine high no new wells were placed on production during the quarter, but performance from this year's DUC completions as well as the underlying base production volumes continued to exceed expectations.

In the East, Texas, Austin Chalk, we drove four operated wells earlier this year two of which are on production.

We recently added a third rig in the U S, which will be used to continue the delineation of our Austin chalk acreage position.

We've now gathered a substantial amount of data in this play that indicates returns we will compete with other quality portfolio opportunities.

They purcell can provide more details around the Austin chalk during the Q&A.

Turning to international operations in Egypt gross production has begun to turn higher putting us on a good trajectory as we enter 2022 and.

In anticipation of modernized PSC terms, we recently increased our rig count to 11, we will likely add more rigs in 2022 is modernized terms would return Egypt being the most attractive investment opportunity within our portfolio.

In the North Sea, we continue to operate one floating rig in one platform crude.

As expected production was up modestly in the third quarter compared to the second quarter as we continued to work through both planned and unplanned maintenance downtime.

On the drilling front, we recently TD the store two development, well, which we plan to place online in January.

While one of the primary objectives in this well was wet we encountered more than 300 feet of net pay and other targets, which we are projecting will IP around 20 million cubic feet per day of gas in 2500 barrels per day of condensate.

Our 59% working interest in this well provides good leverage to what should be robust north sea natural gas and condensate prices over the coming months.

And block 58 offshore Suriname.

Partner total was currently running two rigs one of which is conducting a flow test at Sop, a car sale and the other is drilling the bond Bonnie exploration well in the northern portion of the block.

These operations are still ongoing and the data we collect will help inform the next steps in the block 58 appraisal and exploration programs.

Our block 53, we are finalizing plans for our next exploration well location with partners Petronas and steps up.

The noble Jerry D'souza Drillship is scheduled to commence drilling this well in the first quarter.

The plan is to drill one well in block 53 in 2022, but we have an option on the drillship for two additional wells if warranted.

Before closing I want to comment on the charge. We took this quarter related to the Gulf of Mexico properties, we sold the field would in 2013.

Since field would emerge from bankruptcy in August we are independently assess the situation and have elected to book the contingent liability that you saw in our press release Steve.

Steve will walk you through some of the details.

In closing I'd like to make a few remarks about the progress we're making on the ESG front.

We recently announced that we have eliminated all routine flaring and U S operations.

This was an ambitious goal that we set at the beginning of the year and achieved three months ahead of schedule.

Additionally, through the end of the third quarter flaring intensity in the U S was only three 8% significantly below our target of less than 1%.

Our global safety performance has also been strong we have delivered a 35% improvement in our total recordable incident rate compared to this time last year.

Have also progressed a number of important initiatives that foster diversity and inclusion within the organization and then enhance the health and wellbeing of our employees.

In October we published our 2021 sustainability report, which I hope you over you for a more in depth look at our ESG philosophy performance initiatives.

And success stories.

Finally, we are in the process of establishing some very rigorous short medium and long term ESG goals, which will include further efforts on ghd and methane emissions and we look forward to discussing these in the near future.

And with that I will turn the call over to Steve Riney, who will provide additional details on our third quarter results and outlook.

Thank you John and my prepared remarks. This morning, I'll make some additional comments on our third quarter performance provide a bit more color on the field wood related contingent liability.

Aspects of Altus Midstream recently announced combination with Eagle claw and provide some more context around our free cash flow outlook and capital framework.

As noted in our news release yesterday under generally accepted accounting principles <unk> Corporation reported a third quarter 2021 consolidated loss of $113 million or <unk> 30 per diluted common share.

These results include a number of items that are outside of core earnings excluding the impact of the field wood related contingent liability and loss on extinguishment of debt charge for tax related valuation allowance and some other smaller items adjusted net income for the third quarter was 372 million.

Or <unk> 98 per share.

Most of our financial results were in line with or better than guidance this quarter.

Upstream capital investment was considerably below guidance, primarily due to the timing of infrastructure spending in Egypt, and lower exploration costs in Suriname.

Our teams have done a good job holding the line on capital and low despite.

Despite service cost inflation, and we expect these will finish the year at or below our original 2021 guidance.

G&A was also below guidance this quarter, mostly due to the timing of some costs, which we now expect to be incurred in the fourth quarter.

I'd like to provide a bit more color now on the field with our situation.

Through field Woods. Most recent bankruptcy process, we had to rely on third party estimates of the remaining net abandonment obligations related to our legacy properties.

Since field would emerge from bankruptcy in August we have conducted our own evaluations.

Based on that work it appears the combination of the various financial security packages and the anticipated future net cash flows from the properties will not be sufficient to fund all of the remaining abandonment obligations.

Accounting rules require that the entire undiscovered contingent obligation.

And the offsetting under discounted value of the financial security will be brought onto our books.

These are recorded independently as a liability and an asset without netting them against one another.

Accordingly in the third quarter, we brought onto our books the anticipated net aro obligation of $1 2 billion.

We also recorded the offsetting value of the financial security and the amount of $740 million.

As a reminder, the financial security includes a funded abandonment trust letters of credit and surety bonds.

As abandonment activity occurs it will be funded first by the free cash flows currently being generated by the legacy properties.

To the extent these cash flows are insufficient Apache Corporation will be required to fund the activity and will be reimbursed through the financial security.

Only after the operating cash flows and financial security packages are fully depleted with Apache Corporation be obligated to fund the activity without a source of reimbursement.

The undiscovered net liability is $446 million and we anticipate it will be at least 2026 before Apache incurs costs in excess of the available financial security.

A few weeks ago, our majority owned midstream company Altus announced that it will combine with the parent company of Eagle cloud midstream to form the largest integrated midstream company in the Delaware Basin.

We considered a wide range of strategic options for altice for more than a year. Ultimately we determined that this transaction would allow all altice shareholders to reposition equity holdings into a pro forma company with the best combination of scale.

Synergies asset quality and attractive growth opportunities.

The transaction would also preserve the $6 per share annual cash dividend for the public shareholders and provide near term optionality for <unk>.

To monetize a meaningful portion of our current position.

Such a secondary sale would benefit the combined company by improving the public float.

It would also provide API with cash flow a portion of which would be deployed into alpine high activity, thereby enhancing dedicated sources of revenue for the company.

Reducing our ownership interest in altice to a minority position provides a number of benefits for <unk> as well.

Including.

Simplification of our financial reporting.

Increased comparability with our upstream only peers and.

An improved leverage metrics upon deconsolidation of $1 $3 billion of debt and preferred equity as of September 30th.

As we proceed towards closing which is anticipated in the first quarter of 2022, we will provide further detail around the accounting treatment and the financial statement impacts of this transaction.

With respect to portfolio management more generally as we build the capital investment program to a level capable of sustaining or slightly growing production you will see increasing activity in our core asset areas, primarily in the U S onshore and in Egypt.

This will demonstrate both the quality and running room in our core assets.

As well as the need for a more accelerated pace of noncore asset divestments.

As part of that in 2022, we anticipate a minimum of $500 million.

Further noncore U S onshore asset divestments.

I'd like to close by reiterating some of John's comments regarding Apa's free cash flow generation capacity and its anticipated uses.

As always there can be some confusion around the term like free cash flow. So.

So we want to be clear what it means at API.

You will find our definition of free cash flow and our financial and operational supplement, which we published with every quarterly earnings report.

In the fourth quarter of this year at current strip pricing, we expect to generate free cash flow in excess of $600 million.

Which would result in full year 2021 free cash flow of around $2 billion.

Under our new capital return framework, a minimum of 60% of this free cash flow will go to ordinary dividends and share repurchases.

And as John indicated we expect to exceed the 60% framework in the current quarter.

Looking ahead to next year, we currently contemplate a capital budget of around $1 5 billion.

This would consist of roughly $1 $3 billion for development and $200 million for exploration and appraisal activities, mostly in Suriname.

As we've indicated we believe the planned level of activity would put our global total Boe production on a sustaining to slightly growing long term trajectory.

This excludes any future production contribution from certain on.

The near term allocation of capital would likely be bias to increasing oil production, which would offset declining gas and NGL production.

That said the commodity price environment is very active and we have considerable flexibility within our portfolio to redirect capital as appropriate.

Based on this investment level, we anticipate free cash flow in 2022, but again be in the neighborhood of $2 billion.

Prior to any benefits of Egypt PSC modernization.

Finally, I would like to caveat all of this with as is customary.

Final planned for 2022 will be reviewed in the fourth quarter call in February.

And with that I will turn the call over to the operator for Q&A.

As a reminder to ask a question you will need to press star one on your telephone keypad again, Debbie style one on your telephone keypad.

You have your first question coming from the line of Doug Leggate from Bank of America. Your line is now open.

Thanks, Good morning, everybody just checking John can you hear me okay.

Good morning, Doug.

[laughter] food companies can give me some problems.

John I'm going to start with Egypt, If I may I'm sure you saw the report.

A month or so ago, one of your smaller peers.

But a little bit more transparent on the potential changes on in terms from the PSC modernization.

So I wonder just conceptually.

You could walk us through.

How do you see the moving parts.

It relates to increased corporate oil unimportant cooler.

Potential for legacy stranded capital cost recovery, if you could put some maybe a range of potential impacts on your assuming similar Tom's applied.

Well, Doug it's a great question.

And you know from our perspective, we're the largest onshore producer in Egypt.

You've hit on some of the key points.

We've made the decision not to give more color on that until it's finalized.

I will tell you that.

The modernized PSC has recently been approved by the cabinet and it has moved on to Parliament. So we're getting close.

And we expect that everything is on track for a year and approval.

But in terms of any more color you have done a good piece of work out there.

And I'll, let Steve comment on a couple of things.

Yes, Doug.

The thing I would add to that.

Based on your work you've demonstrated you understand how the <unk> work.

The backlog, while we haven't.

Indicated exactly how much that is.

The mechanism to recover that is that it is the backlog would be and we've shared this publicly already the backlog would be recovered over a five year period.

On a quarterly basis and that backlog would roll into the other cost for cost recovery. So it is all subject to some of all of that is subject to the 40% limit on cost recovery barrels.

The benefit the real benefit as you've noted in your write up is that.

By aggregating all of these into a single bucket for cost recovery purposes.

You don't end up with stranded costs and indeed any of the smaller buckets and that will allow us to get this backlog of costs recovered as well, especially in this price environment.

Steve I know you don't want to give specifics but.

I did suggest the potential impact could be several hundred million dollars cost reduce.

Back on that or give some affirmation that we are in the ballpark.

Yes, Doug.

I need to be really careful about that so I think we won't comment on it at this point in time.

Okay Ion Stan let me move on very quickly to my second question, which is.

Understandably Suriname.

You've got a well test I guess you drilled out the talks about two five weeks ago.

John I guess im a little surprised that youre not ready to give us some updates there or onboarding Bonnie where.

Guys on the ground are suggesting that you are already in the formation. There. So I'm just wondering if you can offer any color around those two pieces of potential useful that we expect I guess.

In the coming months and I'll leave it there. Thank you.

No great question, Doug and all <unk>.

Address <unk> itself first.

Number one you can appreciate that.

There's multiple phases of a flow test that you go through and.

Sometimes even more important than the flow period as the buildup in the pressure response in all of those things so.

It's early I'll just tell you save your question.

I am not in a position to reveal anything on it today.

But hold your question.

We will be able to respond in.

In the near future so.

Yes.

It has returned to bond Bonnie.

So <unk> got two rigs the developers at <unk> South.

<unk> is it bahmani I'll remind everybody, it's a 45 kilometers step out.

To the north.

It is a key well and.

I think the prosper activity up there we will inform the northern portion of the block as well as have some implications on block 53. So.

Once again I am not in a position to provide any any update but.

I'd, just say stay tuned right. So.

It will be in a position to update you when we can.

Awesome. Thanks, so much guys.

Your next question comes from the line of Neal Dingmann Hunter with Securities You May ask your question.

Good morning, John.

Nice update on the shareholder return and I was just going to ask one thing around that.

Just your thoughts I don't know either you or the company sort of personal thoughts on something about doing more of a variable versus that.

Buyback then obviously your stock appears to me on many levels quite cheap here. So I'm just wondering how you think about the two alternatives.

Yes, Neil I mean, I guess I'll start out and just on the framework I'll just give a few.

<unk> here.

It really should not come as a surprise.

Anybody that's engage with us over the last several years.

We've been on the road and in our ratings, Steve and I have been really clear that our quality E&P needs to have a strong balance sheet.

Need to have a sustaining the low growth profile.

Four years of inventory, but not too many years of inventory.

And we should be throwing off the majority of our free cash flow to shareholders.

We've had a lot of work to do that the volatile pricing environment has at times impacted but we're in a position where we're finally here.

If you look at the framework, we believe you want to do a nice mix you need a competitive dividend.

We're not big fans of the variable dividend.

In terms of how that works and.

And I think with where our share prices, especially today is as cheap as it is that that would be the primary means of how we'd look at it.

Steve any more specifics you want to provide.

Yes.

Okay.

Sorry about that.

Thanks for the question because I think it is important to share some some of the context around the.

The framework that we rolled out today and I think John John framed it exactly right in terms of the the history of where we've been.

I think if you just step back and think about the industry. It wasn't too long ago. The industry was all about growth.

Really little or no returns to shareholders more recently, we've finally gotten to where it's about moderated growth ambitions.

And really starting to rollout these returns frameworks.

I think the big step right now is to figure out what's.

What's the what's the right return framework.

It's kind of early days for the industry in general and we're all kind of figuring that out now that returns frameworks right now are.

We are migrating towards a percent of free cash flow.

And I think that's probably good.

Ranges out there a pretty broad IC ranges from 25% of all the way up to 75%.

We're probably going to find the sweet spot in there I think it's starting to migrate towards somewhere around 50% as an industry.

For <unk>, specifically I mean, we just we just took a significant step in improving the capital structure of the company with the debt tender.

Fall and that was 100% focused on debt reduction.

We know there is more to do on the balance sheet, and we'll get to that but.

And to be clear, we still want to get to investment grade, but that can take some time and that's okay. We do have to just recognize that shareholders are pretty important to us.

And we need to find a balance and returns to shareholders. While at the same time continuing to improve the balance sheet.

The industry has chosen and 50%.

Because they are kind of migrating towards that we chose 60%.

We think this is the right balance for HCA.

We have a quality diversified portfolio.

Posed to a good range of commodity price and geographic mix.

It is capable of sustaining free cash flow for many many years and remember free cash flow the basis for the returns calculation.

Is after capital spending.

Yes.

So we've been improving the balance sheet, we can still continue to strengthen the balance sheet up to 40%.

Still available for other uses including debt reduction, but I would say in the near term, we certainly have a bias for.

For dividends and buybacks.

And remember also we did talk about in my prepared remarks, we talked about the fact that we're going to do.

We're going to probably pick up the pace on noncore asset sales and that's also a source of funds for.

We're continuing to strengthen the balance sheet, but also for potentially for more more returns to shareholders as well. So we feel pretty good about that balance and the 60% level.

John indicated we don't we're not particular fans of the variable dividends at this point in time, we will consider that we'll keep we'll continue to look at that for the future.

And consider how the market reacts to those.

The variable dividend needs to be in general a smaller piece.

And just in terms of balancing dividends versus buybacks.

Now, we're just happy to lean into buybacks, we believe our share price is is too low.

We've been discounting for several months now greater than 25% free cash flow yield is one of the highest in the peer group.

We don't believe our base cash flow generating capacity is actually fully appreciated by the market.

We need to continue to work on that we know that.

But for now the share price is just too low so we will continue with.

Leaning in on the buybacks.

We need to have.

<unk> ordinary dividend yield.

And it needs to be competitive against other e&ps as well as the as the broader market.

That's probably higher than what we see is the typical 2% ordinary dividend yield we see today and we will figure that out and it's about getting to a balance around.

Whats the right strength the balance sheet.

Certainly as pending to something stronger, but also what price are we going to base all of that on.

Because I think it's a valid question as to what we all think mid cycle prices now.

So we'll get on with with raising the dividend as well.

Just need to be thoughtful about that it was only 18 months ago that we cut the dividend by 90% and that was a pretty painful process. We got to make sure. We don't put ourselves in a situation, where we have to do something like that again.

Probably more than you add up for but I wanted to take the opportunity to lay out a lot of context around the the returns framework.

No I appreciate it I think what you said about the bulk set about the total return makes a lot of sort of that the share buyback makes sense and then just quick follow ups, John just thoughts on future I'd say near term medium term alpine high activity given not only the strong natural gas prices post the altice deal and even that Cheniere long term supply contract agreed.

It seems to be getting closer to fruition. So given all of that maybe what you could say about alpine high.

Yes.

When you look at our U S program.

Neal we've got two rigs in the southern Midland Basin, we picked up another one that's in the chalk now.

We've indicated we will be adding another rig probably middle of next year, which would put us three that will go to Permian and quite frankly than we envision those rigs kind of working those assets in tandem.

We're in pad drilling you'll be seeing those move and what the time. It takes on the unconventional side to mobilize a rig drill pads and see production.

Youre short term windows, where kind of we are benefiting from those right now at alpine high where the ducks that we did earlier right.

So I think youre going to see a very well thought out.

Efficient capital program in the U S, where we're moving those rigs around those plays based on the how we've laid the inventory out in the infrastructure. So we can maximize those returns but.

There is a portion of.

The out this piece if we sell the sell down of those shares that we do put in there, but it will all fit into our framework. So it's nice to have quality inventory and options. Because then we can just really pointed out and be thoughtful, but youll see activity.

<unk> are a Permian next year in a very thoughtful way.

Got it. Thank you all so much for the time.

You bet. Thank you Neil.

Your next question comes from the line of Michael CLO from Stifel. You May ask your question.

Yes, good morning, everybody.

The next steps would be at <unk> caused the.

The issue with both appraisals.

Or just lack of reservoir quality sands.

Just stepped out did you just.

Step out too far on the edge. So you need to move back towards the discoveries with the next appraisals or is it more complicated than that.

No Mike it's a good question.

I will tell you that Cassie.

A big step out.

We knew it looked a little different.

In terms of the signature so we knew there was more risk to it.

But there is work to do at cash Cassie and closer, but I think from a priorities. It will all be kind of put into as you're working across all the discoveries and the appraisal program, we're kind of integrating data we've prioritized with the appraisal things that you would be what I'll call <unk>.

Lower GOR black oil that you could.

Essentially fast track and so we're working those in a Q based on our learnings and kind of integrate everything in.

Some of that will come to one of the reasons why crab to go as the next exploration well.

It's in the neighborhood and we like the way it looks.

So I think it's all part of.

An integrated plan.

Okay helpful.

Maybe just to follow up on Neil's question.

Can you talk about the decision to put the third rig in the chalk versus the Midland or Alpine high Steve.

Steve mentioned, a plan to add a fourth rig next year any early preview on where that might land.

<unk>.

I guess any possibility of going beyond four rigs in the U S next year.

Yes. This is Dave first of all it's good question. So remember on the chart.

You talked about drilling a handful of wells in our Brazos County acreage position when because we're trying to maintain optionality.

Had significant experience so a bit to the west and the Washington County area and.

We had decent acreage position put together and wanted to hold it together and we liked what we've seen so far it's consistent with.

With the geology, we have seen in Washington County, and well results.

And so.

Really just wanted to leverage that experience we liked what we saw and felt like it was time to put a rig there and continue to progress.

Progress that.

That position the thing to remember.

It's near infrastructure.

There's a lot of pipe in infrastructure in the area, it's less than 100 miles from Houston ship channel. So we're getting Henry hub pricing in LLS pricing for the crude the geo ours are a little bit higher than what you typically see in the Permian, So theres a little bit of a gap.

Gas component, there too, which we like in these markets. So.

For us it was a pretty easy decision on the chalk.

The extra rig we talked about the incremental rig in the middle of 2022, I think it is important to point out first of all that as we think about adding another rig.

It's harder to stand up a rig quickly.

A couple of quarters to from the time, you make that decision until the time, you're you are turning to the right just because of long lead items and supply chain issues and to make sure that we have everything we need to keep that rig running.

I think John.

Highlighted that there is a lot to do in the Permian, we have two rigs in the southern Midland Basin, we have a lot of <unk>.

Development inventory that we're not getting too which includes alpine high and we have a lot of good opportunities.

For that rig and we'll we'll postpone those in February that you can you can imagine that that alpine would be on that list of places we'd be we'd be looking to drill next year.

And to be clear there will be new fifth rig in the onshore U S. Next year, yes, yes. Thank you Steve.

Okay.

Thanks, guys.

Thank you Mike.

Your next.

Next question comes from the line of Bob Brackett from Bernstein Research. Your line is now open.

Good morning, all just a question following up on the Austin chalk in the Alpine high how do you think longer term about the balance of gas directed drilling versus oil directed drilling any thoughts there.

Yes, Bob I think the beauty of the diverse purpose.

Folio is we have the ability to flex that and so I'm going to give you.

Non answer because it really depends on where commodity markets go we're.

We're obviously.

We've got a very constructive crude market and the gas market is becoming more constructive.

We'd like to see the backend of the gas curve strengthen a little bit from here, but.

Again with a diverse portfolio both.

Diverse in the Permian and diverse globally, we have the ability to flex in.

And move and take advantage of.

Commodity markets across the globe, So I'll leave it at that but we are we're getting we're watching the forward curve on gas, let's just leave it at that okay perfectly.

Perfectly clear if we're traveling the globe can you talk about inflation and sort of what you're baking in domestically, where you might be seeing something a bit higher versus maybe some of the international assets, what's baked into that sort of Capex guide in terms of inflation.

Yes, Bob.

If you look today and Thats the commodities right I mean steel is up here, we've got fuel.

Your power costs are people costs, I mean, but it's really.

Steel and people is how we frame it and we have.

<unk> factored some of that into the capital number as we look at our programs I mean, we try to get ahead on the purchases and so you get into the middle of 'twenty two it is.

It is baked into our capital numbers.

Any difference domestically versus internationally is there are a number you'd hazard to throw out.

No I mean.

I think you can look at those numbers and the easily.

You get into the.

I mean, 15%, 20% number easily in some places even higher but.

Not a lot.

Difference between the two you just don't have I mean, the nice thing about.

Places like Egypt.

Not as much competition.

For rig adds and things and so it's probably easier to pick up rigs in Egypt, and I would say.

The U S.

Just because I take you back to 2014, we were running 28 rigs there. So it's not like we're going up to a level, where we've got to bring new equipment and in those sorts of things.

I don't know Dave any more specific you want to say the only thing I'd add is.

Think about the type of drilling that we do in Egypt, it's vertical wells.

It's more commodity drilling compared to what we're doing in the Permian, where a lot of the well cost is really on the completion side. So just just less I think John hit it theres less inflation in Egypt, and it's really just because of the type of wells that were we tend to drill kind of day in and day out.

The other thing I would add.

Bob has some of the targeted divestments have been on our higher water cuts.

Cut central basin platform properties.

Sure.

Born in more energy and moving more fluid and those types of things are helping our numbers too right in terms of what we're targeting so we're trying to be really smart about the portfolio and factoring all those in.

Great that makes sense. Thanks, so much.

Yes.

Your next question is from Leo Mariani from Keybanc. Please go ahead.

Hey, guys just wanted to follow up on the stock buyback program here I guess high level you guys talked about.

Roughly I guess 2 billion free cash flow.

Dividend here, but 60%.

It is a buyback I mean that certainly could imply kind of north of one.

$1 billion on the buyback I guess.

Our math that certainly seems to be a very large percentage of your shares outstanding currently.

Approaching 15%.

Upwards of that maybe in one year next year I just wanted to get a sense is.

Do you think that is the number.

<unk>.

Correct and is it feasible to buyback that much stock.

Yes.

If the share price stays.

Where it is then that'll be the outcome yet.

And if oil prices stay where they are.

Alright, okay.

Yes, I think it's I think it is reasonable yes.

Okay.

And then just wanted to follow up on the Austin chalk here. So obviously looks like at this point.

<unk> is a rig I guess in your slide deck, you kind of talk about one well result.

Strong presumably there is public.

Probably more than that in terms of results that maybe you guys have had seen out there I was hoping maybe you could.

Give us a little bit more color in terms of inventory.

Inventory kind of aerial extent of where you guys have have drilled is there kind of an acreage number you think is a.

Sweet spot out there for you that would kind of give you just a number of years of inventory and maybe just more color about what that rig is doing is it all development work because theyre going to be a mix of some exploration in there can you maybe just provide a little bit more color about what the run rate is doing and what you've seen so far.

One comment from for me is.

Not only do we have the operated rig, but we're also a non op.

Magnolia is operation so there is quite a bit of data.

Dave.

To jump in yeah.

Good question the way on the Brazos County side, we Havent really.

Talked yet about the size of this but.

There's some I wouldn't call it exploration, but theres some additional delineation work, we're doing to see kind of how.

How big this could be but when we look at it theres easily over five rig years worth of.

Of development.

To do in this in this one spot so again.

We're leveraging a lot of our our knowledge on the work we've done on over in the Washington County area as operator, and as John suggested a fairly significant non op position. So.

Well, we will leave it at that.

Okay. Thanks, guys.

Next is from John Freeman from Raymond James. Please go ahead.

Hi, guys. Thanks for taking my question.

You bet John.

I wanted to follow up on on Alpine high, which I'm sure you would have.

A couple of quarters ago, I don't think we would have realized we havent multiple questions on alpine high, but obviously a lot of things have changed and so I guess when I sort of look at alpine high and.

With gas NGL prices have gone and then following up on the <unk>.

Recent altice Eagle claw deal with it as best processing gathering right Scott.

A lot more attractive.

And then I know that you have done some stuff on sort of wider spacing than you are used to do there.

I'm just I'm curious as it sounds pretty likelihood that that fourth rig will go to alpine high.

If we might there might be some plan to get an update on sort of the.

<unk>.

Models Alpine high can it has been quite a while some tools.

<unk> seen it.

Yes, John this is Dave.

Look for look for that as we get into 2022, and really kind of hone in on where that that additional rigs.

Going to focus but you are right I mean, it's not just gas price and cost structure, we've done some things on performance.

On some of the docs with with spacing as well as Frac design and some of those wells are in the public domain.

The results are.

We are very very good.

Certainly exceeded our expectations. So there's a number of factors that would.

Drive us to.

It really focus on alpine as well as some of the other opportunities out there.

Okay and then just.

Follow up question on Egypt.

If I heard you right John it sounded like 11 rigs was going to go.

Post.

Modernization getting getting completed if I, if I heard that right.

And obviously, it's been a while since we've been at this sort of in.

Activities, so Egypt sort of until at least get to a point, where it's first of all I'll, Egypt kind of it comes back.

A growth driver for the company and I'm just.

I guess I'm, just sort of curious when we think historically and again sort of like.

An eight rig program are solid kind of keep production roughly flat if we do 11 rigs plus.

Is this sort of like a double digit type growing asset just I guess any additional color how youre thinking about.

Yet.

Yes, I mean, clearly we've been gradually ramping right. We went from fiber we started the year around five rigs we went to eight now we're at 11.

The plan would be to go up another another step.

I don't see us going back maybe to go back to where we once were.

Yeah.

Mid 20 range, but.

It will just kind of.

Turning the corner, we've been under slightly under investing in Egypt for quite a number of years.

Definitely.

They will turn.

Victory the.

The other way, which is what Egypt launched and.

Quite frankly part of the overall win win that's in this for Egypt.

And API.

Got it thanks I appreciate it.

Thank you.

Again to ask a question. Please press star one on your telephone keypad.

Your next question is from Mike LC yellow from Stifel. Your line is now open.

Actually John just ask my two questions, but I'll ask one more.

<unk>.

Asset retirement.

<unk> ability.

Being put back to you.

With those Gulf of Mexico assets does field would continue to operate there and do you have any input on what they do there.

No those assets came out of field would so the legacy field Wood company is now a company called quarter noticed.

<unk>.

And they don't they don't own the old field with assets that debt that Apache and sold to them those came out and went into.

An entity that we've now called <unk>.

Shelf.

There is a person that's kind.

Of contract managing those assets because there are assets that are.

That are still producing.

The contract today is in place with quarter North field with organization to operate those assets for us.

We will continue to evaluate whether that's the best long term situation.

Is there any thought on just taken over or could you potentially take over operations. There would you want I mean, if you've got the.

Like all the liability would it make sense to operate it yourself.

Well, we'd have to ask the lawyers that of weather, whether we can operate those assets or not I believe there is some issues with us being able to operate them.

But.

Yes.

Now that we would take over operator ship of those assets at this point in time.

They are.

So there are.

The nature of the assets there.

A large inventory of properties that came out of field wood.

A number of them are in abandonment activity today in a number of them are smaller number of them are operating and still generating free cash flow.

And.

I won't go I won't go through the details unless somebody wants me to but.

We booked the <unk>.

Net $1 $2 billion liability on our balance sheet.

That's the gross abandonment obligation less the free cash flows that we see.

Coming out of those assets for their remaining life.

And then we also booked on the asset side of our balance sheet $740 million of.

Various forms of financial security that we have in place and that abandonment obligations. So.

Net.

Liability on our part of net obligation of about $450 million.

Matt.

Net obligation won't we won't we won't actually start funding anything on that obligations until two.

<unk> 26 at the soonest in terms of costs that could be incurred that.

That we wouldn't that we wouldn't have any form of reimbursement for <unk>.

And then that would carry over for about five or six years.

After 2026 in terms of that situation.

Present value of all of those today are about $250 million.

Because we had to we had to book on discounted number of $450 million.

The other thing I'll just comment on is that.

The way we went about doing the work because we only got access to the raw data.

And all of this in August and we've been pouring through that since we got that.

We've looked hard at the abandonment costs.

And we've looked the second priority was to look at the the operating assets and the cash flow from the PDP is on those.

Then the third priority was to look at the capital investment opportunities because any assets like these are going to have.

Cole re completion opportunities and things like that.

That was the third priority and we really haven't gotten through all of those are literally hundreds of capital investment opportunities. We got to the ones that we think we thought where the.

Were the highest priorities seem like the best opportunities and so those are included in the in the free cash flows, but we think there are more.

We think that there are opportunities to reduce the operating and overhead costs.

Yeah.

And in the PDP and we believe they are probably more opportunities.

Investment side that we just haven't been able to get to yet so we'll be we should be watching for those over the coming quarters.

Net.

<unk> has a decent chance of possibly bringing that.

$450 million liability down overtime and that would also decrease obviously the present value of that.

Thanks for the detail on that Steve.

One more you mentioned, Steve that the divestitures you planned next year.

I know you guys don't want to give.

Detail on that but Im just curious can you speak broadly as to what assets might be put in that divestiture bucket or I'm assuming.

They are on the domestic side and outside of your kind of three core areas.

Core area.

Mike actually you know we sold some central basin platform properties earlier this year that were higher costs.

Higher water cut later lifeline things we've had in the portfolio for a long long time, unlike perhaps some of the legacy.

And anticipate.

More of those types of assets.

It's probably what would make sense.

Okay.

Very good thank you guys. Thank.

Thank you.

You have your last question comes from the line of Doug Leggate from Bank of America. Please go ahead.

Hey, guys, sorry for double dipping today, but on a couple of things one clarification on.

Alright, I queued up again.

First one is on.

On the buyback I think I missed the comment on I'll ask a question like this when you take disposals potentially into account.

As well as I guess, we've already dealt with Egypt thing as it relates to cash flow is at an upward limit.

How aggressive you would expect to be with the buybacks.

In absolute terms.

No.

Okay simple enough.

My follow up.

Yeah.

Just to get a bit of color on that Doug I think again I think our.

Our our shares are trading at a pretty.

Pretty meaningful discount today.

They have improved over the last month, or so and that no doubt and as part of the.

Purpose of the buyback.

But we believe there is still trading at a meaningful discount relative to the price environment, we find ourselves in.

And we just think thats for long term shareholders. That's one of the better investment opportunities we can make.

So we will continue doing that.

As long as the free cash flow holdup.

So that's why we say, it's a minimum of 60%.

These are the $500 million in does that go to the balance sheet or does that go to buybacks as well because that's more technically operating cash flow.

Yes, we are.

We're just going to remain non-committal on.

What the buyback.

Buybacks and for that matter the other 40% can go to.

I mean, the disposal proceeds and the other 40% of free cash flow because.

We'll deal with that as it occurs.

It could go to balance sheet strengthening could go to more buybacks.

We could raise the dividend quicker.

We've got we've got a number of things on the horizon with Egypt modernization also occurring.

So we've got we've got a lot of things still ahead of us here.

I don't want to labor the point, but credit agencies do they have a view on the buyback confused on this pass them to get their opinion.

We haven't spoken to them, yet, but we will be speaking with them shortly.

And my last one we will we will we will reassure them of the same thing.

We've talked about here today, but we're still going to have plenty of free cash flow to do further balance sheet improvement.

Cash flow from from asset disposals, if we if.

If we need to do that and if we feel like that's the best thing to do at that point in time.

Thank you my follow ups real quick one for quantification Cheniere highs your contract kicking in.

<unk> passu with their third Corpus Christi development, which is not <unk> yet.

My understanding was that that contract could become effective middle of next year can you just talk with some clarification on the timing and maybe what you would expect that the ultimate tolling cost to be for you guys.

Yes.

Can certainly comment on the first part of that.

<unk>.

Our contract is while it was in the context of <unk>. Another project, it's not contractually tied to any project.

And so it's just a contract that starts in 2023.

And runs for 15 years.

140 million cubic feet, a day and Cheniere has an option.

Two.

That forward one year to started in mid 2022 July of 2022.

We.

We were waiting to see if they will exercise that option.

Alright, Thanks Fellows.

Thank you Doug.

That ends our question and answer session I will turn the call back over to John Christmann for closing remarks.

Thank you.

Before ending today's call.

I'd like to leave you with the three following points.

First we.

We are taking prudent and appropriate steps now to increase our capital investment to a level that will enable us to sustain production.

On a global basis for many years.

Our portfolio offers considerable depth and flexibility to do this efficiently.

Second we are generating substantial free cash flow in this environment.

Which we currently estimate will be around $2 billion for the full year 2021, and again in 2022.

And lastly, we are committed to returning a minimum of 60% of our free cash flow.

Dividends and share buybacks.

And we are demonstrating our commitment to this process right now in the fourth quarter.

Thank you for participating in our call today.

Operator, I'll turn it over to you.

That concludes today's conference call. Thank you all for participating you may now disconnect.

[music].

Hi.

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Yes.

Okay.

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Yes.

Hum.

[music].

Good day, Thank you for standing by and welcome to the a P. A corporation's third quarter 2021.

Its conference call at this time, all participants are in a listen only mode.

I would now like to hand, the conference over to your Speaker today, Mr. Gary Clark Vice President of Investor Relations the floor is yours.

Good morning, and thank you for joining us on a P. A corporation's third quarter 2021 financial and operational results conference call.

We will begin the call with an overview by CEO and President John Christmann, Steve.

Steve Riney Executive Vice President and CFO will then provide further color on our results in 2021 outlook.

Also on the call and available to answer questions are Dave Pursell Executive Vice President of development.

Tracy Henderson senior Vice President of exploration and claim branches executive Vice President of operations.

Our prepared remarks will be approximately 18 minutes in length with the remainder of the hour allotted for Q&A.

In conjunction with yesterday's press release, I Hope you've had the opportunity to review, our third quarter financial and operational supplement which can be found on our investor Relations website at Investor Dot Corp Dot com.

Consistent with previous reporting practices adjusted production numbers cited in today's call are adjusted to exclude Noncontrolling interest in Egypt, and Egypt tax barrels.

Finally, I'd like to remind everyone that today's discussion 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, and thank you for joining us.

Our top priority coming into 2021 was to continue strengthening the balance sheet through debt reduction.

With the significant recent strides in that regard and a favorable outlook for continued free cash flow generation. We are in a position today to announce some material changes in our capital investment plans and use of free cash flow.

First we are moving toward a capital budget that will sustain or slightly grow global production volumes.

Second we are committing to a significant increase in cash return to shareholders.

While a stronger commodity price environment has accelerated progress on the balance sheet.

The quality and cash flow generating capacity of our core operating areas through a range of commodity price environments that are enabling our new capital return framework.

We have a substantial inventory of quality drilling opportunities throughout our portfolio.

In addition to Egypt, which now has the deepest inventory in more than a decade. We also have significant potential in our onshore U S portfolio.

Primarily in the southern Midland Basin, Alpine high and Austin chalk.

In this price environment. There are many compelling drilling opportunities that should be funded and we anticipate adding a fourth onshore U S rig in 2022.

With regard to our new capital return framework, we are committed to returning a minimum of 60% of our free cash flow to shareholders.

This begins with our base dividend, which in September we announced would increase to an annualized rate of $25 per share.

Yesterday, we announced a doubling of that rate to <unk> 50 per share.

In early October we took the more significant step of initiating a share repurchase program.

Through October 31, we have repurchased 14 7 million shares and expect to continue returning capital in this manner through the fourth quarter and into 2022.

Our commitment is to return at least 60% of free cash flow to shareholders and we will exceed this amount in the current quarter we.

We believe that API currently offers one of the highest free cash flow yields at our peer group and that this framework delivers an attractive and highly competitive return to our shareholders.

We anticipate fourth quarter will be even stronger.

U S production exceeded guidance in the third quarter as we continued to see good performance in the Permian oil plays Alpine high and the Austin chalk.

Internationally production was a bit below guidance as we experienced some extended maintenance turnarounds and compressor outages in the north sea.

Lower volumes in Egypt associated with the impact of strengthening oil prices on our production sharing contracts.

We expect gross production in both the UK and Egypt will increase in the fourth quarter.

In the U S. We placed a total of 10 wells online during the quarter. This included nine wells in the southern Midland Basin.

Three of which were three miles in length.

In the East, Texas, Austin Chalk, we drilled four operated wells earlier this year two of which are on production.

We recently added a third rig in the U S, which will be used to continue the delineation of our Austin chalk acreage position.

We have now gathered a substantial amount of data in this play that indicates returns will compete with other quality portfolio opportunities.

Dave Purcell can provide more details around the Austin chalk during the Q&A.

Turning to international operations.

Gross production has begun to turn higher putting us on a good trajectory as we enter 2022 and.

In anticipation of modernized PSC terms, we recently increased our rig count to 11, we will likely add more rigs in 2022 is modernized terms would return Egypt to being the most attractive investment opportunity within our portfolio.

In the North Sea, we continue to operate one floating rig in one platform crude.

As expected production was up modestly in the third quarter compared to the second quarter as we continued to work through both planned and unplanned maintenance downtime.

On the drilling front, we recently TD the store two development, well, which we plan to place online in January.

While one of the primary objectives in this well was wet we encountered more than 300 feet of net pay and other targets, which we are projecting or IP around 20 million cubic feet per day of gas in 2500 barrels per day of condensate.

Our 59% working interest in this well provides good leverage to what should be robust north sea natural gas and condensate prices over the coming months.

And block 58 offshore Suriname, our partner total was currently running two rigs one of which is conducting a flow test at <unk> and the other is drilling the bond Bonnie exploration well in the northern portion of the block.

These operations are still ongoing and the data we collect will help inform the next steps in the block 58 appraisal and exploration programs.

Our block 53, we are finalizing plans for our next exploration well location with partners Petro <unk> and steps up.

The noble Jerry D'souza Drillship is scheduled to commence drilling this well in the first quarter.

The plan is to drill one well in block 53 in 2022, but we have an option on the drillship for two additional wells if warranted.

Before closing I want to comment on the charge. We took this quarter related to the Gulf of Mexico properties, we sold the field would in 2013.

Since field would emerge from bankruptcy in August we are independently assess the situation and have elected to book the contingent liability that you saw in our press release Steve.

Steve will walk you through some of the details.

In closing I'd like to make a few remarks about the progress we're making on the ESG front.

We recently announced that we have eliminated all routine flaring and U S operations.

This was an ambitious goal that we set at the beginning of the year and achieved three months ahead of schedule.

Additionally, through the end of the third quarter flaring intensity in the U S was only three 8% significantly below our target of less than 1%.

Our global safety performance has also been strong we've delivered a 35% improvement in our total recordable incident rate compared to this time last year. We have also progressed a number of important initiatives that foster diversity and inclusion within the organization and then enhanced the hell.

And well being of our employees.

In October we published our 2021 sustainability report, which I hope you overview for a more in depth look at our ESG philosophy performance initiatives.

And success stories.

And with that I will turn the call over to Steve Riney, who will provide additional details on our third quarter results and outlook.

Thank you John.

My prepared remarks, this morning, I'll make some additional comments on our third quarter performance provide a bit more color on the field wood related contingent liability.

[laughter] aspects of Altus Midstream recently announced combination with Eagle club and provide some more context around our free cash flow outlook and capital framework.

As noted in our news release yesterday under generally accepted accounting principles API Corporation reported a third quarter 2021 consolidated loss of $113 million.

Or <unk> 30 per diluted common share.

These results include a number of items that are outside of core earnings excluding the impacts of the field wood related contingent liability.

On extinguishment of debt.

Charge for tax related valuation allowance and some other smaller items adjusted net income for the third quarter was $372 million or <unk> 98 per share.

Most of our financial results were in line with or better than guidance this quarter.

Upstream capital investment was considerably below guidance, primarily due to the timing of infrastructure spending in Egypt, and lower exploration costs in Suriname.

Our teams have done a good job holding the line on capital and LOE.

Despite service cost inflation and.

And we expect these will finish the year at or below our original 2021 guidance.

G&A was also below guidance this quarter.

Due to the timing of some costs, which we now expect to be incurred in the fourth quarter.

I'd like to provide a bit more color now on the field wood situation.

<unk> most recent bankruptcy process, we had to rely on third party estimates of the remaining net abandonment obligations related to our legacy properties.

Since field would emerge from bankruptcy in August.

We have conducted our own evaluations.

Accounting rules require that the entire undiscovered contingent obligation.

And the offsetting and discounted value of the financial security will be brought onto our books.

These are recorded independently as a liability and an asset without netting them against one another.

Accordingly in the third quarter, we brought onto our books the anticipated net aro obligation of $1 $2 billion.

We also recorded the offsetting value of the financial security and the amount of $740 million.

As a reminder, the financial security includes a funded abandonment trust.

Letters of credit and surety bonds.

As abandonment activity occurs it will be funded first by the free cash flows currently being generated by the legacy properties too.

To the extent these cash flows are insufficient Apache Corporation will be required to fund the activity and we will be reimbursed through the financial security.

Only after the operating cash flows and financial security packages are fully depleted while Apache corporation be obligated to fund the activity without a source of reimbursement.

The undiscovered net liability is $446 million and we anticipate it will be at least 2026 before Apache incurs costs in excess of the available financial security.

The transaction would also preserved the $6 per share annual cash dividend for the public shareholders and provide near term optionality for API to monetize a meaningful portion of our current position.

Such a secondary sale would benefit the combined company by improving the public float.

It would also provide API with cash flow a portion of which would be deployed into alpine high activity, thereby enhancing dedicated sources of revenue for the company.

Reducing our ownership interest in <unk> to a minority position provides a number of benefits for API as well.

Including.

Simplification of our financial reporting.

Increased comparability with our upstream only peers and.

An improved leverage metrics upon deconsolidation of $1 3 billion of debt and preferred equity as of September 30th.

This will demonstrate both the quality and running room in our core assets as well as the need for a more accelerated pace of noncore asset divestments.