APA Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

There are 15 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to APA Corporation's Third Quarter 2022 Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer It is now my pleasure to introduce Vice President of Investor Relations, Gary Clark.

Speaker 1

Good morning and thank you for joining us on APA Corporation's Q3 2022 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 and outlook. Also on the call and available to answer questions are Dave Purcell, Executive Vice President of Development Tracy Henderson, Senior Vice President of Exploration and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be less than 15 minutes in length, with the remainder of the hour allotted for Q and A.

Speaker 1

In conjunction with yesterday's press release, I hope you have had the opportunity to review our Q3 financial and operational supplement, which can be found on our Investor Relations website at investor. Apacorp.com. Please note that we may discuss certain non GAAP financial measures. A reconciliation of the differences between these non GAAP financial measures and most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. Consistent with the previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude non controlling interest in Egypt and Egypt Tax Barrels.

Speaker 1

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.

Speaker 2

Good morning and thank you for joining us. On the call today, I will review highlights from the Q3, provide commentary on our Q4 outlook and conclude with an early look at our 2023 plan. APA continues to enjoy a robust free cash flow profile provided by our unhedged exposure to a globally diversified product price mix. With activity in Egypt and the Permian Basin Now at levels capable of driving sustainable corporate production growth, our free cash flow is also expected to grow, Assuming flat year over year oil and gas prices, orders of free cash flow purchased nearly 10,000,000 shares of APA common stock at an average price of $33.85 per share and announced a doubling of our annual dividend rate. In Suriname, we advanced our exploration and appraisal program with the first oil discovery on Block 53 at Baja and a successful flow test to reduce flaring in Egypt.

Speaker 2

Today, new projects are reducing routine upstream flaring by 40%, enabling us to compress the gas into sales lines and deliver to Egyptian consumers for cleaner burning affordable fuel. More information on our Q3 results can be found in the operational supplement posted on our website. Turning now to our Q4 outlook. Capital investment is projected to be around $450,000,000 and our full year guidance of $1,725,000,000 remains unchanged. We expect adjusted production will increase by around 5 percent from the Q3 driven primarily by an increase in new well connections and recompletion activity in Egypt and a rebound from planned and unplanned platform maintenance downtime in the North Sea.

Speaker 2

Given the age of the North Sea facilities, we expect Facility run times will generally be lower and more variable than in the past. As a result, we are now providing a production guidance range to accommodate a broader spectrum of potential future outcomes. In Suriname on Block 58, we are currently participating and the drilling of 2 wells, a second appraisal well at Sapacara South and an exploration well at Awari. Results will be provided as they become available. Despite a few challenges during 2022, We will exit the year in a strong position financially and operationally.

Speaker 2

We are on track to we estimate APA's free cash flow will grow in 2023. Note, this excludes any uplift from our Cheniere gas supply contract commencing in the second half of the year. Steve will provide more details on this contract, which gives us access to premium natural gas price points in Europe and Asia. Following 3 years of production decline since the beginning of the COVID pandemic, We look forward to returning to growth in 2023. At the corporate level, we are targeting mid single digit year over year growth, driven primarily by higher oil production across all assets.

Speaker 2

In the Q3, our Permian Basin results We're particularly strong due to a variety of factors, including good underlying base production and new well performance. The timing and number of new completions and relatively minimal maintenance, midstream and weather related downtime. As we look into the Q4 of 2022 and the Q1 of 2023, we expect Permian production will be flat to down as we experience a low in new well connections and reflect the potential for winter weather related downtime in our outlook. Planning for next year continues and we will have much more detail to provide with our 4th quarter results in February. In closing, we have a constructive outlook on the long term demand for natural gas and oil.

Speaker 2

This hasn't changed despite the potential Near term demand impacts of a recession and the ongoing debate over the pace of global de carbonization trends. We continue to plan our business using relatively conservative commodity price scenarios, allocate capital to our highest return projects and target long term single digit sustainable production growth. APA will continue to return 60% of free cash flow to shareholders through buybacks and dividends, while also continuing to strengthen the balance sheet. Lastly, we remain committed to reducing emissions within our operational footprint and we will be introducing specific CO2 equivalent emissions intensity goals around this objective in the near future. And with that, I will turn the call over to Steve Ryding.

Speaker 3

Thank you, John. For the Q3 of 2022, APA Corporation reported consolidated net income of $422,000,000 or $1.28 per diluted common share. Our quarterly results include items that are outside of APA's core earnings. The most significant of these was a $275,000,000 charge for the impact of the UK Energy Profits Levy. This was partially offset by a $93,000,000 release of tax valuation allowance due to the use of tax loss carry forwards during the quarter.

Speaker 3

Excluding these and other smaller items, adjusted net income for the 3rd quarter was $651,000,000 or $1.97 per diluted common share. Most of our financial results in the The quarter were in line or better than guidance. For the quarter, we reported a net gain of $12,000,000 on the sale of oil and gas purchased for resale. This was better than the guidance we provided in August of a $10,000,000 loss. As a reminder, we sell our gas in basin at Waha Hub or El Paso Permian based pricing.

Speaker 3

Our marketing organization fulfills obligations on various commercial agreements, including our long haul transport contracts using purchased product. The reported gain or loss The sale of oil and gas purchased for resale is a result of this latter activity. In the Q4, based on recent strip pricing, We expect this activity to result in a net gain of approximately $70,000,000 GPT expense, which is costs incurred for gathering, processing and transmission was above guidance for the Q3. This has been a trend for much of 2022 and is primarily a result of the higher natural gas prices in the U. S.

Speaker 3

GPT expense increases with gas price because some of our gas processing contracts are based on the percentage of proceeds and accounting for such contracts results in costs going up and down with movements in gas price. G and A of $69,000,000 was considerably below our guidance. As with prior quarters, This was primarily the result of the required quarterly mark to market of our cash settled stock based compensation plans. Underlying G and A for the quarter was around $90,000,000 a little lower than average. Turning to the balance sheet, you will notice that our total debt increased $244,000,000 to $5,500,000,000 in the 3rd quarter as we utilize the revolver to partially fund the closing of the Texas Delaware Basin acquisition at the end of July.

Speaker 3

As we've discussed on prior calls, the revolving credit facility is an asset that can be utilized when attractive opportunities arise. We've demonstrated this over the past 2 years using the revolver to fund timely debt tenders, share repurchases and asset acquisitions. Over time, we will look to pay down the revolver with available free cash flow that is not committed under the capital return framework. A few other things before we turn to Q and A. Please refer to our financial and operational supplement, which includes additional information related to our Q3 results, as well as our updated guidance for the Q4 of 2022.

Speaker 3

This can be found on our website. 2022

Speaker 4

will be

Speaker 3

a very strong year for free cash flow at APA. As John mentioned previously, At comparable prices, we expect to see increasing free cash flow in 2023. This excludes any financial benefit from our Cheniere gas Supply contract. At recent strip pricing, the anticipated benefit to 2023 would be around $570,000,000 assuming the latest possible start date of August 1, which is a slightly later date than we have spoken of previously. One final note on U.

Speaker 3

S. Income taxes. At this time, barring any contrary guidance that may be issued by tax authorities, We do not expect to be subject to the new 15% corporate alternative minimum tax until 2024. Thus, we currently anticipate no U. S.

Speaker 3

Cash income taxes for 2023 as accumulated NOLs should more than offset projected taxable income. As always, please follow-up with Gary and his team with any questions or if you need any other help related to our updated guidance. And with that, I will turn the call over to the operator for Q and A. Thank

Operator

on your telephone. And due to time constraints, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Doug Leggate with Bank of America.

Speaker 5

Okay. Good morning, John. I got one on Suriname to kick us off and then I'll go to one of the financial questions, if that's okay. John, I realize that you've got a couple of wells drilling right now. And but I'm also aware that Hess and Shell, I guess Kjell, as the operator, had a discovery that looks on trend, if I'm not mistaken, ZanderEye, with your Awari prospect.

Speaker 5

So I'm wondering if you can characterize Awari, what your expectations are, what the current status is and whether I'm reading that right that there might be some read through from Confirmation of a working hydrocarbon system and I guess Hess has not really given any details as to whether that was a success or not, but it Looks like they are reviewing as we speak.

Speaker 2

No, Doug, the well we're drilling in the kind of the northwest portion of our block is Owari. You will remember Bon Bonney, it's 25 kilometers west of Bon Bonney where we found an active or working hydrocarbon system. It appears that they have a working hydrocarbon system north of us as well. So I think that's all good news. The big thing here will be TRAP And but Tracy Henderson is here and I'll let Tracy provide a little bit more color.

Speaker 6

Good morning, Doug. I think your comments are really Spot on. We are sort of up dip and trend from the Zanderi well. We know as much as you do in terms of what's been in the But it sounds like a positive result at least with respect to the petroleum system. So what this does do, as John mentioned, we had Seeing Bon Bonney in the upper or oil in the upper part of Bon Bonney previously.

Speaker 6

So what this does is basically push the mature proven kitchen Further north into Block 42, so well north of our Block 58 northern boundary, which is good news for the petroleum system. And I would say it also increases the fetch area in the Block 58, where the Block 58 Northern Prospects. I would counter that though with saying with these deepwater fans, all along sort of that entire margin, the biggest critical risk factor is Trap. So we will still need to be very focused on what our trap and geometries are, but from a petroleum system standpoint, If you have a working trap, this is good and it increases your confidence that you can charge them.

Speaker 5

I hate to do a kind of part 1b, but just while we're on the topic of Suriname, do you have any color on Cara South at this point, as it relates to whether that can help inform an FID in 2023?

Speaker 2

Well, a couple of things I'd say, Doug, on Sophocar South. Number 1, it's strongly supported from seismic perspective And it's an updip test of Sophocar South. Our operations are ongoing and I'll So it could be a very material add to that area. So we're very excited about it. In terms of FID and so forth, we've got the appraisal at Sapa Car South, which is ongoing.

Speaker 2

We also got appraisal at Crabdagou, which will Follow sometime early next year. So we're excited about that and we'll just have to get with you when we're ready.

Speaker 5

Thank you for that. My follow-up is for Steve. And I guess there's Steve, I'm going to try and You know, layering a couple of things to this, I guess. But obviously, Cheniere doesn't want to start this contract as soon as it as early as you would like it to start. I think that's pretty clear given LNG prices.

Speaker 5

But I guess what I'm really trying to get to is your comments about free cash flow usage. You said, If I'm not mistaken, the free cash flow the cash flow would be higher next year, similar price deck, excluding Cheniere, if I heard that correct. You've also flipped this WAHA trading contract or gathering contract to kind of almost a $300,000,000 run rate On revenues, so when you wrap all that together, it looks like the free cash flow could be up even at a substantially lower commodity deck. So can you help me understand if I am reading that correctly?

Speaker 3

Yes. Doug, I think we're just going to have to be probably be patient to finish the planning process for 2023 And to we'll get to that in February and we'll give all the details on that. But as John indicated, If we have if we end up with a capital program that's kind of similar to where we've been running for the last 2 years or 2 years, 2 quarters, which would be the $2,000,000,000 to $2,100,000,000 If we allocate that similarly to the way we've been Allocating and delivering activity for those last two quarters, if we end up in a price environment similar to 2022, then we will be up on free cash flow for next year. There have been some things that Have changed a bit since the last time we talked about 23, which was in February. We've got A little bit more activity that's leading to that increase in capital spending, as we do have an extra rig In the Permian, we've got a couple of extra rigs going into 2023 in Egypt.

Speaker 3

There is some there are some new taxes, in particular the energy profits levy In the UK, and there's talk now about possibly increasing the rate on that, That we did say we don't believe we're going to be subject to the U. S. Alternative minimum tax in 2023 and that would certainly be good if we can defer that until 2024. So there are and we've talked about the North Sea perhaps being a little less predictable in terms of Production volumes are having a wider range of possibilities and we know that Egypt has gotten off to a little slower start In 2022 than we had hoped for and therefore that will carry over a bit into 2023. So we've tried to be really transparent about where we are going into 2023 relative to the last time we talked about it in February.

Speaker 3

But we think we've got very good momentum. We're fixing some of the issues that we had in the Q2 certainly looks better in Q3 results and going into Q4 better. And I think we'll go into 2023 better. So A long winded way of saying, let's wait until February for the details on the capital program and the capital allocation and what that means for production volume. But we feel very good.

Speaker 3

We feel like the plan that we laid out last February is still very much intact With the transparency of the few things that have changed since then.

Speaker 5

We're into February. Thank you, fellows and most. We'll see you next month or next week.

Operator

Thank you. And our next question comes from the line of John Freeman with Raymond James.

Speaker 7

Good morning.

Speaker 2

Good morning, John.

Speaker 7

Just a follow-up on the last line of questioning. We definitely appreciate the early look on 2023, understanding that there's still some moving parts. But if I just wanted to Kind of tack on to what you're saying, Steve, where if you're running kind of an aggregate in the U. S. And Egypt, it looks like on a year over year basis, Maybe an incremental 4.5 rigs versus what you did this year.

Speaker 7

Is there a way to sort of parse out of the $2,000,000,000 to $2,100,000,000 CapEx number, How much of that kind of year over year increase is kind of activity driven versus cost inflation?

Speaker 3

Yes, I'd say that and John might have some comments on this as well. But I'd say look at the last two quarters where we've especially Q4, we're going to be running basically at what we're planning for 2023 Preliminarily, most of that was the same in Q3. We did have a bit of time where we didn't have the Ocean Patriot in The North Sea in the Q3. But on the last two quarters, we've been running just a little under This last quarter and next quarter, we're running a little under $500,000,000 a quarter and that would give you $2,000,000,000 on an annualized spend rate. And that's so that's a preliminary view with maybe a little bit of inflation built into that, go into possibly 2.1 And that's just that's the preliminary view.

Speaker 3

We are still early days on the planning process and I'd just caveat that with that could change. So let's wait and see in February. But I'd characterize it broadly as the bulk Of the change in capital spending is because of the change in activity.

Speaker 7

Okay, great. And then my follow-up question And on Egypt, you all did a really good job of playing catch up, getting the completion cadence here in the second half of the year Back up pretty meaningfully after the growing pains in the Q2. But John, you mentioned that it's not totally behind us in terms of some of the What you all are going through in Egypt, can you just sort of maybe give a little bit more color to what you're speaking to? Because at least on a completion cadence, It looks really good. We all are going to exit the year in Egypt.

Speaker 2

Yes. We're in pretty darn good shape, but we worked hard to get here in a A short time period and a lot of it's just addressing manpower issues and training. And So we're in pretty good shape, John, and I think we're close to where we wanted to be, but you're Still working through some things there, but we're in pretty good shape.

Speaker 7

Great. Thanks guys. I appreciate it.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from the line of Neal Dingmann with Truist.

Speaker 8

Good morning, all. Thanks for the time, John. First question is a little bit on what Frim was just asking, Jim. My first question is on production growth, specifically, You all I think characterize 23 as potentially seen, I think what you deem is kind of moderate growth. But to me looking at your 2023 domestic and Egyptian It seems like production could be even maybe a bit better than moderate.

Speaker 8

I know you don't have 23 guide yet, but I guess what I'm wondering Is how you view sort of next year's contributions incrementally when you think about Egypt versus domestically given To me, all the domestic opportunities including the new play there.

Speaker 2

Yes, I would just say and Steve went into pretty good detail on An update of the early look on the 3 year plan and it's very dynamic and we're working that and we'll come back in February. But in general, You're still looking at mid single digits on a Boe basis at the corporate level is what we're looking at. And that's going to be driven by oil in Egypt. We should have cleaner run Next year in the North Sea, although we're going to have a range. And then obviously, we've had really good performance in the U.

Speaker 2

S, specifically in the Permian.

Speaker 8

Okay, great details, John. And then secondly, just on shareholder return, I'm just wondering, would you all say you're still leaning in the stock Buybacks, I guess what I'm trying to get a sense of that 1.6 buyback plan, what remains year to date?

Speaker 2

I would just say, I'll underscore we're committed to the returns framework and we will deliver a minimum of the 60%.

Operator

And our next question comes from the line of Bob Brackett with Bernstein.

Speaker 2

Good morning.

Speaker 9

I had a question on the Cheniere gas supply contract. You mentioned The scale of a $570,000,000 opportunity, could you break that down for us in terms of the volume implied and maybe The price differential between Henry Hub and whether you think about TTF or JKM?

Speaker 3

Yes, Bob. That So the contract is $140,000,000 a day and the $570,000,000 I won't recall exactly what day, but it's based on strip pricing for And we assumed an 80% PTF, 20% JKM mix, which we have the Right to elect and that was versus the same period strip for Houston Ship Channel And then it has all of the deducts that we get from that contract for liquefaction, for shipping, for shrinkage and for re gas And things like

Speaker 9

that. Very clear. And that's sort of starting up in September through that $140,000,000 a day is 4 months or 5?

Speaker 3

It would be 5 months. By contract, the latest that Contract can start is August 1st. It could start earlier. I'm not holding my breath. Got it.

Speaker 3

Thanks much.

Operator

Thank you. And our next question comes from the line of Jeanine Wai with Barclays.

Speaker 10

Hi, good morning everyone. Thanks for taking our questions.

Speaker 2

You bet, Janine.

Speaker 10

Good morning, John. Maybe we just go to the North Sea here. You mentioned in your prepared remarks lower and more variable run times just kind of given the age of the asset. Now we potentially have some higher EPL kind of Overhanging here. The current 2023 outlook as it stands today is you said the North Sea activity should be consistent with 2022, but we're just wondering What the potential range of outcomes could be there, whether it's related to changes in the regulatory environment or by your choice?

Speaker 10

And

Speaker 11

Yes. Janine, this is Dave Purcell. I don't have the numbers in front of me, but think about The 2 different assets, we have Forties, which is mature waterflood, that's going to be on a the base decline there is going to be on a high single digit Annual decline, these are high water cut, low decline wells. Barrel is a bit different. There's water There's pressure maintenance through water injection in many of those assets, but there you'll see more conventional type declines In barrel, so there will be higher than 40s and so we can circle back and get to the blended number, but

Speaker 8

It's going to be somewhere

Speaker 11

in the mid to high teens just based on memory, but we can we'll tighten that up.

Speaker 10

Okay, great. Thank you. And then maybe turning to the revolver, I think Steve, you said you consider it to be an Asset to utilize and there's attractive opportunities, you'll look to pay it down over time. I guess our question is How much is too much on the revolver and how does this really factor into your appetite for future bolt ons? Thank you.

Speaker 3

Yes. And I know our controller won't like me calling that an asset, but we view it as such in the non accounting sense. And for that it's for that very reason. We used it for The bolt on acquisition in July in the Delaware Basin, we use it for debt tenders, we've used it for Share buybacks, in particular, we use it during periods where we have a period where we have no material non public information and we can use it for open market repurchases of shares and periods where we can be a little more selective at the pace at which We buy back shares during those periods of time. So the revolver comes in very handy at those times.

Speaker 3

We especially with the price environment that we're in, we're pretty comfortable with the revolver where we've got it now and where it's been for most of the year. But we do need to get that paid down and preserve it longer term for that optionality around No potential bolt on acquisitions if we find the good opportunities.

Speaker 10

Great. Thank you for the detail.

Operator

Thank you. And our next question comes from the line of Charles Meade with Johnson Rice.

Speaker 4

Good morning, John and Steve and the rest of the team.

Speaker 2

Good morning, Charles.

Speaker 4

John, I'm hoping to get you to elaborate a little bit more your thinking on Sopacar South 2 and what kind of piece of the puzzle this might be. I mean, my understanding is You could drill appraisal wells in many locations, but you pick the location you do because you're hoping it will answer Some questions for you and move you towards sanctioning the project. So can you talk about What the goals were with this location? I think you mentioned it's up dip And how that could play into the moving the project forward in 2023?

Speaker 2

Yes. The thing I would say, if you look at South Acara South, it was a very, very high quality discovery. You had 30 meters of pay, actually 32 meters full to base, low GOR around 1100. And you had really, really high perm, 1.3 to 1.5 Darcy Rock. At the time of that, we announced a connected volume, which We later updated to more than 400,000,000 barrels.

Speaker 2

So, Sapa Car South is really world class rock. We also said at the time that We believe there was additional resource there that needed to be appraised and that's exactly what this well is doing. It's moved up dip And we are appraising and we've got really, really good seismic support. We think the seismic is working and it could add materially to that Sapacara South discovery.

Speaker 4

Okay. Got it. Well, it will be interesting to Catch up whenever you guys have the information to share there. And second question, I think this is perhaps for Steve, but maybe for you, John. And I think Neil was Just going at this a little bit earlier, putting the pieces together in your press release, you guys say that you're going to return at least $1,600,000,000 of cash in the form of dividends and buybacks.

Speaker 4

And then you guys had a helpful slide in your presentation where you say you're at Kind of 1.1 right now and you've got another 130 or actually you're at 1 right now and you've got maybe another 130 of dividends are going to come in 4Q. So that if I'm doing the math right, that's about $450,000,000 For the last or actually maybe you did $80,000,000 in but it's on the order of $400,000,000 for November December. That's a big chunk. Are you guys going to be able to are you guys going to have to enter in some kind of a tender to get those shares in? Or is this something you think you can do Just participating in the regular daily bid.

Speaker 3

Yes. Charles, let me I'll just run quickly through the similar math that you were going through. We do Expect now at recent strip prices that free cash flow this year will be $2,700,000,000 as John said. So that would imply a minimum committed returns of $1,600,000,000 Year to date, we have done 1 $127,000,000 of dividends. We have bought back 26,000,000 shares at $34 so that's 884 $1,000,000 of buyback and as you said that's just over $1,000,000,000 so far this year.

Speaker 3

Since inception by the way, that's 15% of the company that we bought back at a little over $31 a share. So At $2,700,000,000 of free cash flow that would imply for the Q4 total returns of 600,000,000 The dividends will be about $80,000,000 and It implies buybacks of $520,000,000 and we have done right around $80,000,000 of that in October. So your math was pretty darn close that would all of that if you landed right on 60% It would be about $440,000,000 of additional share buybacks. Historically, we've delivered those buybacks through 10b5-1 programs and through OMRs. As I said, we use OMR is when we don't have material non public information.

Speaker 3

We are drilling 2 wells in Suriname, so we do understand that situation and The risk associated with that, as John said, we are committed to that program. So you should assume that we have plans in place make sure that that will be delivered and because it will be delivered by the end of December.

Speaker 4

So I appreciate you correcting my math, Steve, and it's kind of wait and see, but you guys have a plan to get there, if I'm understanding correctly.

Speaker 3

That's correct. We will get that.

Speaker 2

Thank you.

Speaker 4

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Paul Cheng with Scotiabank.

Speaker 12

Hey guys, good morning. Two questions, Pete. The first one is a little bit of a clarification. John, when you're talking about Mid single digit oil production growth on NextE, is it based on the 4th quarter level or based on full year Because if it is based on full year 2022 level, that suggests that Your next year oil production may be lower than the 4th quarter level. And with the increased activities, And is there any reason why that the average production will be lower on the oil growth for next year than the 4th quarter level?

Speaker 12

That's the first question. And second one is really simple. On the Permian, you say you're going to run 5 rigs, but do you include anything in the Alpine High? And then what's your view given the current commodity prices between the gas well and the oil weighted well? Thank you.

Speaker 2

So number 1, it's 'twenty three is a work in progress. So we're working on that. We said we'd come back in February. But in general, we said BOEs will be up mid single digit. It's going to be driven by oil.

Speaker 2

And that is year over year is, but we'll come back with that in details. That's really Pretty much the shape of the 3 year plan that we'd put out last February. When we look at the Permian, 5 rigs, yes, Today, we've got 2 in the Midland Basin, 3 in the Delaware. There will be activity at Alpine High and we do like the mix. We think those wells compete very well today with where the gas price deck is and the oil price deck.

Speaker 12

John, should we assume you're going to have at least one rate in FII or that is not necessary? It may be

Speaker 2

I would say Today, just assume there's likely 3 in the Delaware and Alpine High will be part of that program.

Speaker 12

Okay. Thank you.

Speaker 2

You bet. Thank you.

Operator

Thank you. And our next question comes from the line of Leo Mariani with MKM Partners.

Speaker 13

Hey, guys. I was hoping to jump back to the North Sea here real quick. Just kind of looking at the production over the last couple of years, certainly you guys have been hit with a lot of downtime there. You're forecasting higher production here in the Q4. Just wanted to get a sense if there's like some things you're doing different operationally, Were you kind of feeling more comfortable that you're going to be able to kind of deliver maybe some higher rates here going forward

Speaker 5

in North Sea?

Speaker 2

Just say a lot of it's the we're coming out of our maintenance turnaround season and we've had to play catch up In 2022 for 2020 2021, the COVID years hit pretty hard there and we are limited on what we could do on the TARs. And you've just got aging infrastructure and when things go down, it takes a little longer to get things back up. But I think we've got a lot of that behind us and we will be guiding with wider ranges in the future. But right now we've got good momentum and things are running fairly smooth.

Speaker 13

Okay. And just jumping over to Egypt here, Just looking at your kind of gross oil volumes, it looks like those were down a little bit here in 3Q versus 2Q. Can you just give us some Communications as we get into kind of 4Q and early next year, you think 3Q is the low point on those gross oil volumes and we start to have some nice growth into kind of the end of the year? And then, do you see kind of what type of growth do you see in Egypt next year? Do you see that driving a lot of the overall production growth of the company?

Speaker 2

Yes, I think some of that's just timing of the well connections we had this quarter and we've got good momentum really across Whole portfolio going into the 4th quarter, we're off to a good start and we've had some wells that have come on and things. So We do think Egypt is going to be one of the big drivers in 2023 and beyond.

Speaker 5

Okay. Thanks guys.

Speaker 2

You bet.

Operator

Thank you. And our next question comes from the line of David Deckelbaum with Cowen.

Speaker 14

Thanks for taking my question, guys. Just wanted to ask, if I could, Following up quickly just on North Sea. John, I think your comments were just on the aging infrastructure. Is there sort of a More of an outsized maintenance CapEx spends that goes into North Sea in 2023. Is there an imminent need to upgrade facilities?

Speaker 14

And how does that sort of square with where production would be in the Q4? Are we back to a more sustained level ex downtime heading into next year?

Speaker 2

I don't think it's any outsized. I think we really played catch up In 2022 and 2023, there are always decisions that you make as you get into later years like at 40s on Equipment and those are decisions we make routinely going forward, but those are all things you're constantly weighing the pros and cons of as you're looking at Operating facilities as they get later in their life, but don't anticipate anything significantly outsized from normal. And we should be in a period today with most of that behind us, where things are going to run a little smoother.

Speaker 14

Appreciate that. And maybe if I could just ask for a little bit more color on the Cheniere contract. I think you all had marked today based on the strip pricing. Can you give us a sense on just how those netbacks work? Are the costs that are coming out of Those LNG contracts on a fixed or variable basis and what's a good ballpark to apply on sort of an MMBtu basis for costs relative where the headline TTF price might be?

Speaker 3

Yes. Unfortunately, it's difficult to give a kind of A generic approach to figuring it out because some of the costs like shrinkage and Fuel and things like that will come out effectively at it's a loss of volume, so it comes out at the TTF and JKM price And some of them are contractual dollar amount costs that do have some provision for inflation over time. So a good example of that would be the liquefaction fee. So it's not that easy to give a Kind of a generic rule of how it will work through different prices of LNG or Houston Ship Channel for that matter. So we that's why we just give it as a margin over Houston Ship Channel.

Speaker 3

As I mentioned earlier in my We actually sell all of our product that we produce in basin in the Permian And we enter into pipeline contracts and things like that, primarily as a participant in the industry to keep Less liquid markers like Waha Hub more attached to the bigger more liquid markets. And then we have a marketing organization that manages those contractual obligations. And We for that reason, we look at the Cheniere contract as a margin over purchased product because We will purchase product on the Gulf Coast and deliver that to Cheniere. The pricing that we get is that net And they buy the product, they take title to it at their plant inlet. So we don't have any title to Product as it goes through their plant or the liquefied product as it comes out.

Speaker 3

We don't manage shipping or anything like that. We don't do the selling. They do all of that for us.

Speaker 14

Thanks for the color there.

Operator

Thank you. And our next question is a follow-up from Doug Leggate with Bank of America.

Speaker 5

I'm sorry guys for lining up again. But John, I guess I'm listening to all the questions about the North Sea. I'm listening to the higher windfall tax risk, the less predictability, the life expectancy of the field, etcetera, And I guess the obvious question to me seems to be, is this a core asset for Apache? Is there a point at which Whether it be, you know, you get another, code area in Suriname perhaps at some point, does the North See becomes surplus to requirements basically as it for sale?

Speaker 2

Yes. I mean, the thing I would say Doug is that today North Sea is a Core asset for us. Obviously, you've had some factors out there today that impact the ability to invest future And you have to continually weigh in that. We benefit from the Brent pricing and the high netbacks and the free cash flow. But we also have a portfolio that is dynamic.

Speaker 2

And so you're always looking to expand your ability to invest in other assets. And as things change, sometimes out of your control, it shrinks some of that. So, but today, it is core, But it's something we're always taking into account as we're laying our future plans.

Speaker 5

Appreciate it, John. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to President and CEO, John Christmann for any closing remarks.

Speaker 2

Thank you for joining us on our call today. We started the Q4 with strong momentum across our global operations, which will carry into 2023. In Suriname, we're drilling an appraisal well at Sapa Cara South In an exploration well at Owari, we will share results when they are available. We remain on track to deliver on our capital returns framework. We will deliver at least 60% of 2022 free cash flow to our shareholders through dividends and buybacks.

Speaker 2

Our teams continue to work on our plans for the 2023 program and longer, and we look forward to providing more details to you in February. Operator, I will now turn the call back to you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
APA Q3 2022
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