APA Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2022

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the APA Corporation First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to Gary Clark, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Good morning and thank you for joining us on APA Corporation's Q1 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, we'll 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 around 20 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've had the opportunity to review our Q1 financial and operational supplement, which can be found on our Investor Relations website at investor. Apacorp.com. Please note that we may discuss from what we discuss today. A full disclaimer is located with the supplemental information on our website. And with that, I'll turn the call over to John.

Speaker 2

Good morning and thank you for joining us. The Q1 brought a strengthening in both oil and gas prices to levels unseen since 2014. This quickly shifted the prevailing energy narrative to questions about spare capacity, energy security and whether producers could realistically deliver more reliable and affordable oil and natural gas. These are all very good questions and hopefully represent a more thoughtful outlook for our Energy Dialogue. At APA, we significantly increased our capital activity coming out of 2021 we will remain squarely focused on executing on our 3 year plan, generating strong free cash flow, delivering on our shareholder return framework and continuing to deleverage our balance sheet.

Speaker 2

Since the beginning of 2021, we have made tremendous progress with debt reduction, which enabled the initiation of our capital return framework. In that timeframe, we have reduced our outstanding bond debt by $3,000,000,000 repurchased $1,100,000,000 of APA stock we're roughly 10% of shares outstanding and increased the annualized dividend to $0.50 per share. At current strip prices, we expect to generate approximately $2,900,000,000 of free cash flow in 2022. Based on our capital return framework, this would imply a minimum of $1,800,000,000 for return to shareholders. Thus if commodity prices sustain at these levels, you should expect an acceleration in the pace of share buybacks through the rest of the year.

Speaker 2

With regard to our operational strategy and 3 year capital activity plan, we anticipate no material changes at this time. In Egypt, we have been increasing our rig count over the past year, investing in shorter cycle projects designed to deliver 8% to 10% compounded gross oil production growth over the next 3 years. In the U. S, a 4th rig which was contracted in September recently arrived and has begun operations. This should help return U.

Speaker 2

S. Oil production to a modest rate of growth as planned. Given the substantial supply chain bottlenecks and scarcity of oil service equipment and field personnel, any attempt to increase activity in the U. S. Would be logistically challenging and capital inefficient.

Speaker 2

In the North Sea, our plan calls for a stable drilling program with 1 floater and 1 platform rig, we should be capable of broadly sustaining production over the next 3 years. And lastly, we continue to explore and appraise our 2 large blocks offshore Suriname, which we believe have the potential to deliver a significant new source of lower carbon intensity oil production. Of equal importance to this investment activity is continuing to reduce emissions throughout our global operations and improving the health and welfare of our employees and the people in the communities where we operate. Turning now to some details of the Q1. Our results continue to demonstrate the power of our unhedged diversified global upstream oil and gas portfolio.

Speaker 2

Some of the key highlights for the quarter include free cash flow generation of $675,000,000 up 39% compared with $485,000,000 in the preceding quarter. In addition to strong operational cash flows, we realized approximately $1,000,000,000 in proceeds from the sale of selected minerals acreage in the Delaware Basin and the monetization of a portion of our shares in Kinetic. We continue to return cash to shareholders through the dividend and ongoing share buybacks. During the first quarter, we repurchased $261,000,000 of APA shares. Since initiating the buyback last October, we have repurchased more than 10% of the company's shares through the end of March at an average price of $29 we believe our stock is a compelling value and remain committed to this program as an important part of our returns framework.

Speaker 2

We also took another significant step forward in strengthening the balance sheet with $1,300,000,000 of bond debt reductions during the quarter. In terms of operational highlights, we exceeded our oil production target in the Permian Basin and continue to deliver significant productivity improvements in both the Delaware and Southern Midland Basins. We also announced an exploration discovery at Crabdagou on Block 58 in Suriname. Upstream capital investment in the quarter was approximately $360,000,000 or $30,000,000 below guidance, which was mostly driven by the delay of some activity into the Q2. Despite the lower first quarter spend, we are increasing full year capital investment guidance by about 8% to $1,725,000,000 approximately half of this increase is associated with Suriname as we now plan to keep the Noble Jerry D'Souza drillship in country following conclusion of operations at the Raspur well in Block 53.

Speaker 2

Non operated spending as well as some changes in our U. S. Activity mix account for most of the remaining capital increase. Total adjusted production in the Q1 was 322,000 BOE per day, which was down about 3% from the 4th quarter and in line with expectations. Total U.

Speaker 2

S. Volumes decreased 7% from the 4th quarter, driven primarily by well completion timing and the Delaware Basin Minerals divestiture in early March. U. S. Oil production was nearly 70,000 barrels per day and continues to exceed expectations with Permian Basin wells demonstrating excellent performance.

Speaker 2

This offset some softness in natural gas and NGL production caused by weather events and unplanned third party downtime. We have been consistent in noting that U. S. Production will bottom in the second quarter as an increase in the number of wells placed on production in the second half of the year an incremental activity from a 4th rig should drive volumes higher. That 4th rig is now running in the Delaware Basin Wirt is drilling out a previously unfinished 6 well pad at DXL in Reeves County.

Speaker 2

Following this, the rig will mobilize to Alpine High to resume gas and NGL development drilling in the summer. Outside the Permian Basin, one rig is currently delineating the Austin Chalk in Brazos County where we are in the early stages of flowback on the first three well pad. Moving to international, 1st quarter adjusted volumes increased 8% compared to the 4th quarter driven by the positive impacts of our recently modernized PSC terms in Egypt. Adjusted production in Egypt was just over 68,000 BOEs per day consisting of 57% oil. We deferred a number of high rate uphold recompletions from the Q1 into the 2nd quarter as the producing zones in these targeted wells we're still delivering at economic rates.

Speaker 2

As a result, Q1 Egypt oil production was a bit below expectations. However, we are now seeing a significant uptick as this recompletion work is performed. We are in the process of adding our 13th rig in the Western Desert with the 14th 15th rigs expected by mid year as planned. Dave Purcell can provide more color on our Egypt operations during Q and A. In the North Sea, production of 43,000 BOE per day was impacted by unplanned downtime at the Forties Echo platform.

Speaker 2

This resulted in the loss of 2,300 barrels of oil per day for approximately half of the first quarter we expect required repair work will keep these volumes offline through the end of the second quarter. Scheduled turnaround repair and maintenance work we'll also be conducted at both Beryl and Forties through the summer. So we expect North Sea production to decrease for the next two quarters before rebounding in the Q4. Moving on to Suriname. In Block 53, we spread the RASPER exploration well in late March and are drilling above the target zones at this time.

Speaker 2

We will update the status of this prospect at the appropriate time. In Block 58, we are focused on drilling a prioritized list of exploration and appraisal wells in the central portion of the block to assess and appraise resource scope and scale to underpin and optimize a potential first development. At the previously announced Crabdagoo discovery, flow testing is complete and we are now in the buildup stage in both tested zones. After we have obtained and analyzed this data, we will provide more details. Following conclusion of operations at Crabbegou, the Maersk valiant will mobilize to the nearby Dickhoff exploration prospect.

Speaker 2

Before turning the call over to Steve, I'd like to make a few remarks about our ESG progress. We have multiple initiatives underway within our focus areas of air, we are piloting and investing in a number of technologies to support the measurement, understanding and reduction of our emissions footprint. In Egypt, we recently completed 2 projects that are making an immediate and material contribution toward our goal this year of reducing upstream flaring in our Western Desert operations by 40%. I will close by commenting on a frequent question that E and P companies are receiving from industry watchers. That is how will capital investment programs and capital return frameworks change in the context we have sustained higher oil and gas prices.

Speaker 2

As I noted at the beginning of the call, we do not currently anticipate any significant changes to the activity level set forth in our 3 year program. APA remains committed to safe, steady we are confident in our operations and returning a minimum of 60% of our free cash flow we will be conducting a call to shareholders through dividends and share repurchases. And with that, I will turn the call over Steve Riney.

Speaker 3

Thanks, John. For the Q1 of 2022, under generally accepted accounting we are now at $0.43 per diluted common share. As is commonly the case, our results include several items that are outside of APA's core earnings. The most significant of these was $1,100,000,000 of after tax gains on the divestments of Altus Midstream in the Delaware Basin Minerals Package. Other material items included a $187,000,000 benefit related to a release of tax valuation allowance to offset deferred U.

Speaker 3

S. Income tax expense and a $53,000,000 charge for early extinguishment of debt associated with our March bond tender. Excluding these and some other smaller items, adjusted net income for the Q1 was $668,000,000 or $1.92 per diluted common share. In our financial and operations supplement, you can find detailed tables for all of our non GAAP financial measures, including one for adjusted earnings. Our Q1 results underscore APA's strong free cash flow generating capacity.

Speaker 3

The impact of the Egypt PSC monetization on production volumes combined with the higher commodity price environment has become a popular topic in quarterly earnings calls and for good reason. We embedded a good amount of cost pressure into the budgets we laid out in February and for the most part, costs are tracking close to that plan. However, one cost issue in the Q1 that was not fully captured in guidance is related to equity linked compensation. So let me go through a few details on that with you. You may recall that we have multiple equity linked compensation plans that are denominated in APA shares.

Speaker 3

As these plans vest, some are paid out in actual shares and some are paid out in cash. We accrue the anticipated cost of these plans each calendar quarter we are now ready to go through

Speaker 4

their various vesting periods.

Speaker 3

For the plans that payout in cash, the accounting is a little more complicated. In the Q4 of 2021 and now again in the Q1 of 2022, these plans had a significant impact on our results for three key reasons, all related to improved underlying business performance and share price performance over the last several months. First, since we accrued the cost of these plans at the quarter end share price, our quarterly cost accrual has been increasing substantially with the mere doubling of our share price since the beginning of October. Second, the cumulative number of shares that are accrued but not yet paid out must be mark to market at the end of each quarter. The Q1 results include a large mark to market impact, again, due to the significant share price increase since January 1.

Speaker 3

3rd, as a result of the improved business performance and relative share price, the variable payout plans now appear likely to pay out at a higher level than previously anticipated, so we are increasing the accrual levels accordingly. These stock plans apply to nearly the entire employee base. So some costs will flow to LOE and some to CapEx, but most will flow through G and A. As a result, G and A is notably above our previous guidance and market expectations. We have revised our G and A guidance for the remainder of this year accordingly.

Speaker 3

That said, stock price movement due to its unpredictable nature, will continue to impact quarterly results beyond our revised guidance. We achieved a significant milestone during the Q1 with the closing of the Altus Midstream EagleClaw business combination we are pleased to announce that we are in the position of our ownership in the resulting entity, QinetiQ Holdings. Accounting rules require that we consolidate Altus' this is profit and loss through the February 22 merger date, so you will see a partial quarter for these items reflected on our income statement. From a balance sheet perspective, upon closing of the transaction and reduction of our ownership to a minority interest, we will no longer consolidate Altus' balance sheet. As a result, dollars 1,400,000,000 this could have a significant positive impact on various APA debt metrics depending on how you calculate them.

Speaker 3

Subsequent to the completion of the transaction, APA sold 4,000,000 shares of our Kinetic common stock holdings in March for net proceeds of $224,000,000 At quarter end, the market value of APA's remaining 8 9,000,000 Kinetic shares was approximately $580,000,000 At this point, we view Kinetic as a non core holding and following the expiry of our lockup period in February of 2023, we will evaluate the potential for further monetization of our position. In the meantime, we continue to see this as an attractive investment with a leading Delaware Basin footprint, stable cash flows, a strong dividend and attractive near term growth potential. Turning now to the progress we've made during the quarter on our balance sheet. In addition to the deconsolidation of QinetiQ, APA completed 2 important steps on the path to reducing leverage and maintaining strong liquidity. First, we initiated a tender offer in March for $500,000,000 of outstanding bonds.

Speaker 3

We upsized the tender to $1,100,000,000 with a focus on repurchasing shorter maturity bonds. This extended our average maturity to approximately 16 years and reduced our annual bond interest expense by approximately $50,000,000 To accommodate the upsized tender, we temporarily drew on our revolver, which ended the quarter with a balance of $880,000,000 by the end of April, however, we reduced the revolver balance to $680,000,000 By the end of the year, we plan to use a portion of free cash flow to pay off the revolver and to call at par $123,000,000 of bonds maturing in January 2023. We also recently refinanced Apache Corporation's revolving credit facility. The new facilities, which have been moved up to the APA Corporation level and have 5 year primary terms, consist of a $1,800,000,000 revolving credit facility and a 1,500,000,000 pound sterling letter of credit facility, which will be used for LC postings related to the abandonment obligations in the North Sea. These efforts, along with our robust cash flow generation and deconsolidation of QinetiQ have already been recognized by one rating agency.

Speaker 3

Fitch recently upgraded Apache to investment grade with a BBB- rating and a stable outlook. I would like to close by discussing some changes to our 2022 production guidance, which can be seen in our financial and operational supplement. Our full year U. S. Production guidance is unchanged at this time with oil volumes continuing to perform well.

Speaker 3

Reported production guidance for Egypt is down roughly 4%, the majority of which is associated with the impact of higher oil prices on our PSC cost recovery volumes. In the North Sea, we have reduced our full year production outlook by 1,000 BOEs per day, primarily to reflect first half unplanned downtime. Outside of these production impacts and the activity changes that John spoke of, the only other material change to our full year guidance is an $85,000,000 increase in G and A expense, which reflects the equity linked compensation related accrual impacts previously discussed. Please refer to our financial and operational supplement I'll follow-up with Gary and his team for any questions related to our updated guidance. And with that, I will turn the call over to the operator for Q and A.

Operator

Thank you, sir. Your first question comes from the line of Doug Leggate from Bank of America. Your line is open. Please go ahead.

Speaker 5

I think that's me. Good morning, everybody.

Speaker 2

Good morning, Derek. So,

Speaker 5

John, I'm going to start with maybe I'll try for a 2fer here on Suriname and the buyback, the 60% of free cash flow, you obviously fell quite a bit below that in the Q1. But my understanding is when you have non public information on the well test that you can't actually be in the market. So I wonder my 2 thirds, I wonder if you could give us a more fulsome update as to whether you feel like you are still making progress towards a development in FID this year and whether at this point you are able to be back in the market taking advantage of, for example, today's share price weakness. And I've got a follow-up, please.

Speaker 2

Okay. Now Doug, great question. First off, I'll say we are committed to the return framework of a minimum of 60% of our free cash flow to shareholders and we are committed to that and we are committed to that for the calendar year of 2022, we do have periods where you have material non public and we have to use other vehicles and that plan to head with 10b5-1s and so forth. So there are periods where we have to rely on those and think ahead. We have completed the flow test at Krabbegdu.

Speaker 2

We are now in the important buildup stage. And as you know, Doug and appreciate, sometimes the buildup can be as important as a flow test or more important. So we're excited about where we are. At this point, we're not going to dribble information out on Crabdagou. We'll wait and come back with a we report at the appropriate time, but I would say there have been no surprises.

Speaker 2

As we think about a path to FID in Suriname, we're kind of moving more towards what I'll call a central area hub concept. It's something that we're excited about and starting to think about with Total. You've got a foundational piece at Sapacara South. We think Crabbe Diagou can also be a foundational piece, but I'm going to hold comments there until we're ready to talk about that. We prioritized a list of both exploration and appraisal targets that we need to drill.

Speaker 2

Obviously the appraisal targets are helping us find connected volumes which are critical to scope and scale and the Exploration targets that are sizable, we also need to drill to make sure you would get the scope and scale right of that potential first FID. Things are on track. We're excited about how things are progressing. We did say the Maersk valiant will be moving to an exploration target next, which is Dick Hop. So we're excited about that.

Speaker 2

And Quite frankly, things are progressing nicely. In Block 53, while I'm on Suriname, we're drilling RASPER. As we said in the prepared remarks, we're above the target zones, but we are excited about RASPER And we'll come back on it when we can talk about it. And we also said we will be retaining the Noble Jerry D'Souza in country and Suriname, which is one of the reasons why the CapEx is going up.

Speaker 3

And Doug, this is Steve. If I could weigh in on the 2nd part of your question about the pace of buybacks and uses of cash. So as John said in his prepared remarks, we anticipate at strip about $2,900,000,000 of free cash flow this year, that would imply at least $1,800,000,000 as we said in returns to shareholders. In the Q1, we between dividends and share buybacks, we did just a little over 300,000,000 so we're a little bit above a 15% payout at that implied pace And I think there was some activity that may have been limited due to MMPI. I think also you don't start the year with guns blazing.

Speaker 3

You start probably on a conservative pace. We also, as you know, chose to do something on the debt side. But as John said, we absolutely remain committed to the full year payout of 60% of free cash flow. We actively plan around periods of MMPI. So we understand what that does to us.

Speaker 3

And there are other mechanisms we can use from time to time to be able to be in the market and buying back shares.

Speaker 5

I think there's 2 tests going on, so I'm sure others will get into that. But I want to ask you about the trajectory in Egypt. This is the Q1 since the normalization. There's a few mixed changes in there I think it might have surprised some people, so something surprised me a little bit more gas. What is the trajectory to how you see your adjusted volumes after minorities and tax files or tax molecules.

Speaker 5

Can you give us an idea what that looks like?

Speaker 4

And

Speaker 5

I'll leave it there. Thanks.

Speaker 2

Yes. And I think if you step back big picture in Egypt, Doug, we've been declining gross operated production for a number of years. And the key to modernization was it facilitates the investment levels. And so you've seen us really ramp the rig count really in the back half of last year second half, we went from 5 to 11 rigs. We're at 12 today.

Speaker 2

We're in the process of picking up a 13th and 14th rig fairly Soon, it will likely go 1 or 2 higher than that. I think when you look at modernization, you have to look at the net. So despite a rising oil price, our net production was up 13% in Q1, and that's really the benefits modernization, and that's with growth staying relatively flat as you're now starting to see that curve turn. April production is moving up quite a bit and I'll let Mr. Purcell jump in and provide some more details here.

Speaker 6

Yes. And Doug, so we'll get to your mix we'll answer the mix question, but it's important to give you the preamble before that. And as John said, April production is moving higher. We're up to we're up 8% as we've exited April here relative to the Q1, so we've got the oil production trajectory the way we like it. And really that's driven by a couple of things, continue to increase drilling rig count.

Speaker 6

We talked about we'll be up to 15 rigs by the middle of the year. Those drilling rigs really focused on oil, have an oil focus, it's both exploration and production. We We've had a couple of nice exploration successes at Pita and Hazem Northwest or Pita West and Hazem Northwest. Our development drilling is on track. We did have some delays on recompletions in the Q1 moved into the Q2, but we're We think we're on track to continue to grow oil production in that.

Speaker 6

So the oil production mix we'll continue to improve or increase over time relative to gas. I think and I'll let Gary kind of offline walk you through the blood, guts and feathers of this, but when you think about the modernized terms, it's also a simplified structure, and so we think over going forward that the adjusted and reported mix should mimic and track the gross mix very closely. So there won't be that ambiguity in how you roll up into the adjusted and reported numbers. So we think gross is what you should focus on and that gross oil mix is going to improve as we continue to focus on oil development here over the next several years.

Speaker 5

Thank you very much indeed.

Speaker 2

Thank you, Doug.

Operator

Thank you. Your next question comes from the line of John Freeman from Raymond James. Your line is open. Please go ahead.

Speaker 7

Hi, guys.

Speaker 2

Hello, John.

Speaker 7

The first question I had, when you mentioned that the about half the CapEx increase was related to the increased activity in Suriname with the decision to keep the DSUZO drillship, it started on following RASPER. And I'm just wondering if there's a way to maybe give a little bit more color on how exactly you all go about estimating the incremental CapEx there given obviously, your CapEx obligations are materially different, whether it's appraisal or exploration related activity in Block 58 as well as under that rig Yes, Joel should be split time between Block 58 and Block 53. Obviously, it's just a lot of different scenarios and I'm just wondering kind of how you all kind of came up with some risk kind of CapEx number?

Speaker 2

Well, John, we're going to keep the D'Souza. There's you could think about an exploration well in Block 58 where we've got 50% or another well in Block 53 where we've got 45%, pretty similar. Obviously, if it's appraisal wells in Block 58, they're going to be less because of the carry. So and there's also the ability to keep the Sousa for maybe more than one well. So I'll just leave it at that.

Speaker 2

It will stay in country and we're still working through details, but we felt like we ought to at least move it up from the amount we've moved it up and we think it's a good number.

Speaker 7

So is it not to try and put words in your mouth, John, but is it fair to say that if all of the incremental activity with DSUZA ended up being appraisal that that CapEx number might come down some?

Speaker 2

It potentially could, but I would anticipate we've got risked exploration and appraisal wells. So it's going to be both.

Speaker 7

Okay. And then just my follow-up, kind of sticking with the CapEx side. So on the U. S. Where It was due to the increased non op activity.

Speaker 7

I mean, you mentioned the mix change in your activity or some higher working interest. Is it possible at all to sort of say of the incremental CapEx associated in the U. S, kind of a split between it being due to kind of increased activityhigher working interest stuff versus just cost inflation that we've been hearing about on these calls

Speaker 4

these last few days?

Speaker 2

Yes, John, I think as you know, we built in quite a bit of inflation into our capital numbers with what we laid out Q1. So the majority of this is we do have some wells that are going to be higher working interest than what we had originally planned and that's just a function of Shifting some pads and moving some pads forward. So there will be some higher working interest. And then we do have some increased non op capital. Some of that could be increased activity and then some of that could be some inflation on the other operators too.

Speaker 2

It's hard to dig in and understand that, but it's really what we're just seeing on the non op side moving up. And so those two factors kind of come into play together there on that. I think we've done a pretty good job of anticipating the inflation and the increases in our 2022 plan. I think that's playing out kind of as we had as we budgeted and forecasted.

Speaker 7

That's what I was looking for. Thanks, John. I appreciate it.

Speaker 2

Thank you.

Operator

Thank you. And your next question comes from the line of Arun Jayaram from JPMorgan Chase, your line is open. Please go ahead.

Speaker 8

Yes. Good morning. John, I was wondering if you could give us an update on your marketing agreement with Cheniere on Stage 3. I believe you have the ability to sell 140 doesn't MMBtu to them, obviously, a very, very good pricing environment. So I was wondering if you could give us some details on the timing of when that could kick in and perhaps the operating leverage there between your leverage to this and the North Sea exposure to global gas?

Speaker 2

Yes, I'll let Steve dive in. I wish it was a bigger contract, but I'll let Steve dive in on the details.

Speaker 3

Yes. We wish it was bigger and we wish it was sooner. So that contract, that's a 15 year contract. You got the basic Terms right, Arun. And that one contractually begins on July 1, 2023, at any point in time now, Cheniere does have the option with 30 days notice or 90 days notice, sorry, to elect to start that contract early.

Speaker 3

They haven't given us that notice. So we would like to obviously get that one At any point in time. But if we do, we'll start it 90 days later or any other timeframe that we might agree with them within that. So it's a fair option to be able to do that. And we obviously can't disclose the terms of that contract, but suffice it to say what we do is we select a mix of Asian versus European pricing, and we effectively sell our gas.

Speaker 3

We deliver gas on the Gulf Coast, we sell it at this mix for a full year, a mix of Asian and European pricing. And then we net back through liquefaction fees, transport fees and a marketing fee that we pay. So we're in effect fully exposed to the European and Asian LNG market pricing for that 15 year period.

Speaker 8

Great. And that starts So mid of next year unless Cheniere likes to early stress that.

Speaker 3

Exactly.

Speaker 8

Okay, Great. And just my follow-up is on Egypt. John, you guys have highlighted your the expectation to grow your oil volumes there by 8% to 10% kind of per annum. So wondered if you could maybe talk a little bit about how your early results are trending. It does sound like things are when you got the recompletions going that you are starting to see some growth there.

Speaker 8

But I was wondering if you can maybe dig down and give us a sense of the trajectory of growth, any supply chain headwinds in country? Obviously, you guys are rapidly expanding But give us a sense of what you're seeing on the ground in Egypt?

Speaker 2

No, it's number 1, it's good to get back to work and kind of move our Activity levels up to where we can grow that production base. I think we've got a couple of key discoveries to build on. I think the Piton West in between Petal and Bearanese is a nice early win. It's going to give us some things that we can get on fairly quickly. We did get some of the recompletions underway.

Speaker 2

And as Dave mentioned, I think we're up about 8% in April over the first quarter already. So it just takes a little bit of time, but things are progressing. And then there's a couple of other discoveries that have been nice. So we're going to be focused on oil drilling. We're kind of prioritizing that.

Speaker 2

We've got the Northwest Resoc concession that we're we shot seismic on and it's kind of a new frontier for us. So we've got some nice exploration wells that we're also excited about, but lots of inventory Arun and we feel good about the plans that we've laid out and we're kind of getting our feet under us and getting going. So anything you want to pile on Dave?

Speaker 6

John answered the supply question really well, the trajectory. We're very We're still confident in the path that we laid out. I think on the supply chain questions, remember in Egypt, we're drilling relatively conventional. These are conventional wells or vertical. We don't have much of any hydraulic fracturing activity in country, so these are I would call it kind of commodity sort of wells.

Speaker 6

But that said, our supply chain team is all over it. They're making sure that we're not waiting on parts. So we've As we ramp up, one of the nice things about having a visibility on a plan is it gives the supply chain folks lead time to really make sure that we have all the equipment necessary to keep the program moving forward. And so far, that's been the case.

Speaker 8

Great. Thanks a lot, Dave.

Operator

Thank you. Your next question comes from the line of Michael Scialla from Stifel, your line is open. Please go ahead.

Speaker 9

Hi, good morning, everybody. You're getting close to one times debt leverage now. And Steve, you said one of the agencies upgraded their debt rating to investment grade. Stock has also done well this year, but it sounds like you're still focused on debt reduction and share buybacks. So I guess with that in mind, I want to see how you view the intrinsic value of the company relative to the current stock price and how you weigh that versus potentially increasing the dividend?

Speaker 3

Yes, Michael, hey, how are you? So, yes, a number of questions in there. I think that the key answer to your question would be or the key part of your question would be that we still see our share price as undervalued And we like the buyback program and we like it quite a bit. But your reference to the amount of debt reduction that we've done, just to step back In the last 9 months, we've done $3,000,000,000 of bond elimination, which is just phenomenal compared to what you think we might have been able to do just 12 months to 18 months ago. Certainly, the balance sheet is much, much stronger today and Fitch was the first one to recognize that and acknowledge it.

Speaker 3

We are in conversations with all 3 rating agencies and we continue to work the debt rating hard with all 3 of them. I think we'll continue along the lines of balance sheet strengthening, But I think it's unlikely that you're going to see the large chunks of debt tender activity, the $1,000,000,000 plus. We're as long as we stay in this price environment, we're going to have a significant amount of free cash flow over the next 3 years.

Speaker 2

And there

Speaker 3

will be continued balance sheet strengthening, but there will be a significant focus on share buybacks as well as long as the share price in our view stays undervalued, which is what it is now. And we talk about the dividend All the time, we talk about it often and we've raised it twice in the back half of last year and we'll continue to look at that. As the balance sheet gets stronger, as prices continue to play out the way they are and as share price improves on an absolute and relative basis, then we'll certainly think more seriously about the dividend, but for right now, we're quite happy with the buyback program.

Speaker 9

Great. That helps. Second question was a marketing question. I guess with the the consolidation of Altus, I believe you retained your firm transportation for gas out of the Permian. I want to see if you plan to use all of that or if you have thoughts on monetizing any excess capacity there?

Speaker 3

Well, as you know, we did monetize some of that in prior years. And we have about in round numbers, we have a little over $670,000,000 a day of transport capacity on PHP and Gulf Coast Express. We have over the as we look forward to the next the remainder of this year and into next year, we have On average, somewhere in the $200,000,000 to $225,000,000 a day of excess capacity. Would we be open to potentially marketing some of that, yes, I mean, we would entertain a conversation on that for sure. But at the same time, the differentials look good for the 2 years and as you'll probably see in our results, in our postings that we have actually gone And we've now locked in those differentials on about 90% of that excess capacity all the way through the end of 2023.

Speaker 3

And in doing so, there's a mixture. We put in some hedges in earlier time periods that were not Quite as attractive as they are these days, but we've put in quite a bit just recently and we've locked in about a little under $50,000,000 of cash margin on that transport capacity. And then the rest of the capacity will be used We use all of it and effectively it gets Gulf Coast pricing On our equity volumes, but that we sell all of our equity volumes in basin and then our marketing group buys $670,000,000 a day and transports it and then resells it on the Gulf Coast.

Speaker 4

Appreciate that, Steve.

Operator

Thank you. Moving on, your next question comes from the line of Charles Meade

Speaker 7

John, I mentioned this is

Speaker 2

a question for you or perhaps for Tracy. Can you give us the kind of the background and the provenance of this DICOP, I don't know exactly the way to pronounce it, the new DICOP prospect and perhaps wrap into it whether it kind of rise into the top of the pile here is connected to your central area hub Development concept? Yes, Charles, I will tell you, it is something that would fall in that area. It's an exploration well and I'm happy to have Tracy, say a few things about it.

Speaker 10

Sure. Good morning, Charles. As John mentioned in the original comments, we're going to be testing sort of a range of different prospects different attributes in the list in support of, looking at appraisal and exploration prospects. So I would say the Dickup well is at the front of the schedule. It's a well that Total really likes, with some potential meaningful reserves.

Speaker 10

So we see it, I think, as a bit higher risk, higher reward because it does have some different seismic attributes than we've tested, But it has the potential to unlock, I would say, some additional follow on prospectivity, that could incrementally and substantially but more reserves. So I think it's one we're anxious to see, but it is a bit of a different beast than what we've seen before, but has potential to be meaningful for the appraisal.

Speaker 2

Great. That's helpful detail. Thanks. Thanks and that's it

Speaker 4

for me.

Speaker 2

Thank you, Charles. Thank you.

Operator

Your next question comes from the line of Scott Hanold from RBC Capital Markets, your line is open. Please go ahead.

Speaker 11

Yes, thanks. A quick question on the DSUZO rig that's in Block 53. If stays in country, it sounds like it's going to move to Block 58. Would you all continue to be the operator of that rigor? Would you hand that over to Tal?

Speaker 2

Scott, it could stay in Block 53 or we could move it to 58 and let Total take it. So There is optionality there and I'll just I'll leave it at that for now.

Speaker 11

Okay. But just to clarify, if it did go to 58, they would take over operatorship, is that right?

Speaker 2

They are the operator in 58 and we're the operator in 53. So there's a lot of things you can work out, but we're not going to wouldn't be changing they've got the valiant working. So

Speaker 11

Okay, understood. And then Alpine High, obviously, with where gas prices are, looks a lot more interesting. You guys are moving a rig you know there and going to resuscitate those volumes. Can you think about big picture? Obviously, Steve talked about the potential excess capacity you all have With your Feet, and I know in past in the beginning of the Alpine High history, I guess, you all talked about Mexico being an option there too to descend gas, but like as you think about gas prices optionality between LNG, maybe Mexico still yet, how do you think about that longer term?

Speaker 11

Are you guys going to keep a rig there? Could you move more on there? Does it do the economics really warrant ramping up much? Just give a little bit color on that, that would be great.

Speaker 2

No, we've we started last September picking up a rig in the U. S. It's going to be a Delaware Basin focused rig. It's now working in our DXL area. We had a pad there that was partially drilled.

Speaker 2

And so we wanted to drill that out first and then it will be moving to Alpine High. We're excited about what those economics look like, right? If you look back at the Willow well, we had some details on our supplement there. It was one of the best wells we brought on last year of all of our DUCs. I think it's cumed over 9 Bcf and Been on since really January of 2021.

Speaker 2

So we are excited about those economics. I think they compete well. We're anxious to get a rig back to work as there's plenty of infrastructure.

Operator

Thank you. Your next question comes from the line of Bob Brockett from Bernstein Research, your line is open. Please go ahead.

Speaker 3

Good morning. I'll try fishing off Suriname a bit. In terms of the Jerry D'Souza, when did the decision to keep that rig occur? Did it occur after you'd spudded rasper? And a related question, is there an obvious sidetrack to Rasper?

Speaker 2

We're above target zones It's Raspur, Bob. So I'll just leave it at that.

Speaker 3

Faheel, there how about a follow-up? If we talk about the The fact that you went on to the next step of a buildup suggests that you flowed oil through a sufficiently permeable reservoir that it makes sense to do a longer term test. Am I getting the engineering right on that?

Speaker 2

We're doing a buildup. So we're in the buildup phase and I said there were no surprises. So I'll leave it at that.

Speaker 3

And a final question would just be the restricted flow test Saphacara South flowed 4,800 barrels of oil, I think. So that is that in the realm of no surprises?

Speaker 2

I'll just say there were no surprises and we may not have expected there to be a restricted flow test, but I'll leave it at that.

Speaker 5

Thank you much.

Speaker 2

Thank you. Your questions are always fun, Bob. Thank you And creative.

Operator

Your next question comes from Paul Cheng from Scotiabank. Your line is open. Please go ahead.

Speaker 4

Hey, guys. Good morning. Good morning, Paul. Two quick questions. John, two quick questions.

Speaker 4

Can you tell us that how many wells do you That to grow in Alpine High this year. And secondly that I know it's really early, given the inflationary environment and the activity level, what is your preliminary give and take if some Poland in the 2023 budget may look like, any direction that you can point to? Thank you.

Speaker 6

In terms of number of wells, Dave? Yes, Paul, this is Dave Purcell. Number of wells at Alpine later this year, it will just be a handful As John said, we're finishing up an undrilled, uncompleted pad at DXL, then we'll move to Alpine. These are all going to be longer laterals with relatively large stimulation treatment. So it will be a handful of wells that are we are ready to come online at the end of

Speaker 2

the year. And your second part of your question, Paul, it was hard to hear.

Speaker 4

I was saying that I know it's early, but for 2023, any kind of direction you can point to on the preliminary budget and activity levels.

Speaker 2

Yes, I mean, I would say today as we look at 2023, our 3 year plan we laid out this year looks pretty darn good to us, right? We've added the 4th rig in the U. S. We'll be at 15 rigs in Egypt. So right now, we're not envisioning any increases to the 3 year plan that we laid out at the start of this year.

Speaker 4

Okay. We do. And how about in the budget, given the inflation, I mean, how much additional cost that we should taking into consideration?

Speaker 2

Yes, we will wait till next February to come out with a hard number 423, but we did have an increase dialed in for additional inflation in 2023, but I'm not in a position to really give you that number right now.

Speaker 4

Okay. Thank you. A little early. Thank you.

Speaker 2

You bet.

Operator

Your next question comes from Neil Mehta from Goldman Sachs. Your line is open. Please go ahead.

Speaker 12

Good morning, John and team. The first question is around the North Sea. And just want to get your perspective on the production cadence there as you've already indicated, it's going to be a heavy turnaround schedule through the summer. And but how are you feeling about the exit rate of 50,000 BOE a day and just any update around activity plans there? Thank you.

Speaker 2

Yes, Neal, we're still with the North We've got a heavy turnaround period coming up that we're anxious to get on and get through. I think it's executing that's going to be key. I think we've got good news that the Ocean Patriot is back in the field or arriving today. So that's been one of the other items that we basically lost an entire quarter with the drilling of the Ocean Patriot, which when we're only running 1 floater and you lose it for a quarter, it had to go in, it had a large anchor chain that had broke and had to be repaired. So I think we feel good The prospects that are on that rig line and the work that's ahead of us and the repair works.

Speaker 2

We feel good about the exit rate, which It should be around $50,000 so.

Speaker 12

All right. And then the thanks, John. And then the follow-up is, you operate a global portfolio here. Talk about the inflationary forces that you're seeing in the U. S.

Speaker 12

Relative to international. I I think it's fair to say thus far a lot of your peers have reported more inflation in their U. S. Business relative international, but how do you see that playing out over the next 12 months?

Speaker 2

Well, I mean, I think we do operate a global portfolio. I think it's function of staying ahead, we had a lot of our 2022 program under contract. And so we had cranked a lot of that into last quarter when we announced the budget. So we feel good about what we dialed in and where that sits. I think a lot of it just depends on where you are and what the demand for that equipment is.

Speaker 2

And you typically do see higher increases in the U. S. And then more volatility and more stable prices internationally. But I think the thing that's a little bit different this time is we're not all just fighting over rig count rigs and which drives that hyperinflation. So but there's no doubt commodities are going up, fuel is going up, steel, So as you look out, costs are going up.

Speaker 2

And then the other thing, if you look back over the last few years, there's not been a lot of And so a lot of the parts that were needed to keep rigs running and frac crews running have been cannibalized off of older equipment. So there's no doubt as you look out over the next couple of years, if the price deck holds, you're going to see some higher prices.

Speaker 12

Makes no sense. Thanks, John.

Speaker 2

Dave, anything you want to

Speaker 6

add to Yes, I think when you look at inflation, it's people, steel, chemicals and diesel. You can't I mean, that's Ubiquitous around the world. When you look at the Permian relative to the rest of the global portfolio, you're running higher spec And kind of higher end equipment in the Permian, which will have and there's more competition for that equipment. Both those things create more pressure And you've got the pressure pumping and big frac component of the wells in the Permian that is can be in Fairly or significantly inflationary, which we don't see in either Egypt or the North Sea. So I think that's The real kind of categorical breakdown.

Speaker 12

Yes, makes total sense. Thanks guys.

Operator

Thank you. Your next question comes from the line of Leo Mariani from KeyBanc. Your line is open. Please go ahead.

Speaker 13

Hey, guys. Just wanted to follow-up on some of the prepared comments here. You all kind of described South Pokrara South is a potential kind of foundational part of a project and instead kind of stay tuned on Krabbegau. I mean, I think there's a plan for Total as Ken talked about maybe hitting FID at the end of the year, but my reading some pretty good confidence out of you guys in terms of what you've seen so far that you think there's certainly a sizable viable economic project here?

Speaker 2

At this point, Leo, we have not announced a project or an FID. I think we've Said from the get go that Sapa Car South is a foundational piece. We've shown it's gotten bigger with the extended build up time as we raise that original estimate from the connected volume just to the one well and I want to emphasize again that's just the one initial well was 325000000 to 375000000 barrels. We raised that to greater than 400 And that area continues to get bigger and there's more appraisal to do at Sapacara South. I think we have confidence in what we have found and we like the program, but there's still more work to do.

Speaker 13

Okay. And then just on the North Sea, you all certainly said you've got confidence on this 50,000 BOE per day exit rate. I guess, are there some particular wells that you all need to kind of tie in? I know there's a bunch of downtime and turnarounds here this summer, but are there a project or 2 that are kind of chunky that you guys are going to be bringing on the well side that gives you confidence in that number?

Speaker 2

Yes, there's a garden well that the Ocean Patriot was scheduled to drill and we've had to slide that back, but Those Garten wells have been high rate and it's a very, very good location.

Speaker 4

Okay, thanks. Thank you.

Operator

Thank you. And there are no further questions over the phone line. I'd like now to hand the call over to John Kreizmann, CEO. Please go ahead, sir.

Speaker 2

Yes. Thank you for participating on our call today. I'd like to leave you with the following closing thoughts. Financially, we have become a much stronger company. We will remain disciplined both financially and operationally.

Speaker 2

Lastly, we are committed to our shareholder returns framework, returning a minimum of 60% of our free cash flow to shareholders through dividends and buybacks. Operator, I will now turn the call over to you. Thank you.

Operator

Thank you, sir. Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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APA Q1 2022
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