John J. Christmann
Chief Executive Officer and President at APA
Good morning, and thank you for joining us. At the beginning of each year, I like to look back and reflect on our progress, and 2021 marked an important turning point for APA Corporation. While there is clearly much more to accomplish, I believe we made outstanding progress on six specific fronts last year. First, we demonstrated the robust cash flow capacity of our base business. We entered 2021 with a plan to generate around $350 million of free cash flow assuming $45 WTI. By being mostly unhedged and with the benefit of a $68 average WTI price tailwind, free cash flow exceeded our plan by nearly $1.5 billion and came in at $1.8 billion for the year. This represents the highest annual free cash flow in more than a decade and is one of the highest in the company's 67-year history. Keep in mind these results do not include any free cash flow uplift that will come following the Egypt PSC modernization we completed in late December. The free cash flow capacity of our base business has significantly improved over the past few years. We have accomplished this improvement through multiple initiatives focused on portfolio enhancement, improved capital allocation and capital productivity, per barrel margin expansion, and relentless overhead cost rationalization. Although we are getting some traction in the market, we believe our free cash flow capacity is still not fully appreciated. Second, we strengthened the company financially by maintaining capital discipline and investing in a level slightly below our plan, we let the strengthening oil price flow directly through to the balance sheet reducing upstream net debt in 2021 by $1.2 billion. In one year we accomplished what we thought would take multiple years and made great progress toward our goal of returning to investment grade status. Third, we initiated a capital return framework for our shareholders. In the fourth quarter on the back of a strengthening balance sheet, we implemented a robust, long-term framework for returning capital to shareholders. Reducing debt was and continues to be important. However, we reached a point in 2021 where it became appropriate for equity holders to participate more directly and materially in cash returns. We feel our 60% return framework is a good balance, providing near term cash returns to shareholders while still recognizing the importance of longer-term balance sheet strengthening. Thus far we have returned capital under the new framework primarily through share repurchases as we bought back nearly 8.5% of outstanding shares during the fourth quarter. We felt this was appropriate given the sizable gap in the free cash flow yield at which our stock was trading relative to our peer group. We are committed to returning capital under the 60% framework for the long term and anticipate a progressively larger dividend component as we see improvement in our relative share price performance, further strengthening of our balance sheet and reduced oil and gas price volatility. Fourth, we refreshed the economic foundation for our business in Egypt. At the end of December, we finalized our agreement to modernize the terms of our production sharing contracts in Egypt. We have a long history with Egypt, and this agreement sets the foundation for many years of a mutually beneficial partnership. The improved PSC terms returned Egypt to the best long-term investment opportunity in our portfolio. In turn, this incentivizes increased capital spending and returned a long-term production growth. This is a tremendous outcome for both Egypt and for APA. Fifth, we continue to streamline our Permian portfolio. In 2021, we sold $256 million of non-core assets in the Permian Basin, and we plan to close on the sale of an $805 million Minerals rights package in the Delaware Basin within the next week. You should anticipate continued non-core Permian asset sales. And finally, we made good progress toward a potential FID in Suriname. In November, we announced a successful flow test and pressure buildup at our Sapakara South appraisal well. With further information and analysis, we are increasing our estimate of the connected resource in place in a single zone and Sapakara South One to more than 400 million barrels. We look forward to additional appraisal that should further increase the estimated resource in place at Sapakara South. We also announced a follow on discovery at Krabdagu which lies approximately 18km to the east of Sapakara South. We will initiate flow testing at Krabdagu in the coming days and we'll share more details at the appropriate time.
2021 was also a transformational year for Altus. This week, we plan to close the previously announced merger with privately held EagleClaw Midstream, which will significantly scale the business and reduce APA's ownership to a minority interest. The combination creates the largest and best-in-class gathering, processing and transportation company in the Delaware Basin with capacity for product delivery to the Gulf Coast. The outlook for the new company is strong and their plan is to maintain and ultimately grow to $6 per share dividend. For APA, this transaction enables deconsolidation of the Midstream business and its associated debt. It also provides APA an opportunity for near-term liquidity of almost one-third of our $12.9 million Altus shares. 2021 was also a year of significant progress on our ESG initiatives and safety performance. We firmly believe that being proactive with respect to ESG is one of the most important strategic imperatives facing our industry. Our collective ability to meet much needed energy demand while also reducing emissions will determine our long-term success and viability. APA is committed to being part of the solution and part of the future, and we plan to demonstrate that commitment through our strong bias for near-term actions that will make a real difference. In 2021 we set an ambitious goal of eliminating routine flaring in the Permian Basin by year-end, which we accomplished three months ahead of schedule. APA is the first amongst its publicly traded peers in the Permian to end routine flaring, and we applaud the numerous companies that are now taking measures to do the same. APA also seeks continuous improvement in our safety performance and protocols. In 2021, we achieved a significant improvement in the three key safety indicators that impact the annual incentive compensation of every employee in the company. I'm proud of our teams for delivering these results. The task now is to build on these successes in the future. In summary, 2021 was a year of outstanding progress for APA. The achievements I just highlighted along with several important ongoing initiatives will improve our operational and financial performance and sustainability for years to come.
Turning now to the fourth quarter results. APA generated $1.3 billion of adjusted EBITDAX, making it our best quarter of the year. Upstream capital spending was $334 million for the quarter and $1.06 billion for the full year, both of which were below guidance. US production exceeded guidance again in the fourth quarter as we continued to deliver good performance from our Permian oil plays and at Alpine High. Our focus was on increasing efficiencies through longer laterals, optimized well spacing, and enhanced completion design. The success of these initiatives was recently recognized by JP Morgan analyst Arun Jayaram who named APA as a top performer in his analysis of 2021 Midland Basin well performance. As we noted in prior calls, US well connections in the second half of 2021 were significantly lower than in the first half due to the timing of our DUC completion program. Accordingly, we placed only 13 wells online in the US during the fourth quarter, 11 of which were in the Southern Midland Basin. The remaining two completions were in the East Texas Austin Chalk. In October, a dedicated rig arrived in the Austin Chalk and initiated a drilling program that is expected to run through 2022. Internationally, gross production was up in the fourth quarter. However, adjusted volumes were below guidance due to unplanned downtime in the North Sea during the month of December. On the cost side, LOE increased again in the fourth quarter and was higher than our guidance. We have begun to see the impacts of inflation, particularly in fuel, chemicals labor and steel costs. These pressures are showing up in all areas of spend.
In yesterday's earnings materials we set forth some high-level guidance on APA's three-year outlook, which I would now like to provide a bit more color around. With the onset of the pandemic at the beginning of 2020 and the resulting oil price collapse, we cut capital investment to protect the balance sheet. As a result, our base production levels have been in decline for the last two years. With the stronger oil price environment and an improved financial situation, our overarching goal for the next few years is to return to pre-pandemic production levels and then invest at a pace that will sustain or modestly grow those production volumes. Our capital program for 2022 will be approximately $1.6 billion, a slight increase from our prior view. This includes some small changes to the timing of the rig count increases in Egypt and in the US as well as an updated view of inflation. This amount also includes $200 million for exploration and appraisal activities mostly in Suriname. In 2023 and 2024 capital increases a little further despite a mostly unchanged activity set as we expect continued inflationary pressures. Over the three-year period we're planning on an aggregate capital investment of around $5 billion. Based on this planned level of capital activity we should exit 2024 at production levels similar to 2019 after adjusting 2019 for divestments. Most of the growth will come from Egypt with some modest improvement in the US and declining volumes in the North Sea. At current strip pricing, we expect to generate approximately $6.5 billion of free cash flow over the next three years. By any measure, this is a strong free cash flow yield relative to market cap or enterprise value, and it would be even stronger if not for the heavily backwardated strip pricing. I would remind everyone that these numbers assume no production volumes from Suriname but do include continued capital investment for exploration and appraisal. If we FID any discoveries on Block 58 during the next thee years, planned capex would increase modestly since 75% of our appraisal and development spend will be funded by our partner. Additionally, this outlook does take into account the pending Delaware Basin minerals package sale but assumes no further portfolio changes. Finally, our commitment to return capital to shareholders over the next three years will remain unchanged. We will return a minimum of 60% of our free cash flow to shareholders through dividends and share repurchases.
Before turning the call over to Steve, I'd like to wrap up with a few remarks about our ESG goals and initiatives. We have established several rigorous goals for 2022 which are designed to move the ESG needle as quickly as possible. We remain focused on our key pillars of air, water, and communities and people. Our short-term incentive compensation plan for 2022 includes three specific ESG related goals. We will reduce upstream routine flaring in Egypt by 40%. We will initiate new programs to promote and deliver increased supplier diversity, and we will implement a new workplace ecosystem that recognizes the changing dynamics of technology and work schedules for our employees. We have also established rigorous new safety compliance protocols and metrics as we pursue continuous improvement in the health and well-being of our workforce and for the communities in which we operate. As we look to the longer term, we will invest a minimum of $100 million over the next three years in ESG initiatives, much of which will be focused on global emissions reductions programs. To underscore our commitment to these efforts, for the first time we have added an emissions related goal to our long-term incentive compensation plan. By the end of 2024, our goal is to deliver emissions focused projects that eliminate at least 1 million tons of CO2 emissions per year. To provide added transparency, we plan to have these projects and their associated CO2 reductions externally verified. And with that, I will turn the call over to Steve Riney.
