John J. Christmann
Chief Executive Officer and President at APA
Good morning, and thank you for joining us. The first quarter 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, and 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. Since the beginning of 2021, we have made tremendous progress with debt reduction, which enabled the initiation of our capital return framework. In that time frame, we have reduced our outstanding bond debt by $3 billion, repurchased $1.1 billion of APA stock or roughly 10% of shares outstanding and increased annualized dividend to $0.50 per share. At current strip prices, we expect to generate approximately $2.9 billion of free cash flow in 2022. Based on our capital return framework, this would imply a minimum of $1.8 billion of 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.
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 three years. In the U.S., a fourth rig, which was contracted in September, recently arrived and has begun operations. This should help return U.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. In the North Sea, our plan calls for a stable drilling program with one floater and one platform rig, which should be capable of broadly sustaining production over the next three years. And lastly, we continue to explore and appraise our two 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 first quarter. Our results continue to demonstrate the power of our unhedged diversified global upstream oil and gas portfolio. Some of the key highlights for the quarter include: free cash flow generation of $675 million, up 39% compared with $485 million in the preceding quarter. In addition to strong operational cash flows, we realized approximately $1 billion in proceeds from the sale of selected minerals acreage in the Delaware Basin and the monetization of a portion of our shares in Kinetik. We continue to return cash to shareholders through the dividend and ongoing share buybacks. During the first quarter, we repurchased $261 million 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. We also took another significant step forward in strengthening the balance sheet with $1.3 billion 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 Krabdagu on Block 58 in Suriname. Upstream capital investment in the quarter was approximately $360 million or $30 million below guidance, which was mostly driven by the delay of some activity into the second quarter.
Despite the lower first quarter spend, we are increasing full year capital investment guidance by about 8% to $1.725 billion. Approximately half of this increase is associated with Suriname as we now plan to keep the Noble Gerry de Souza drillship in country following conclusion of operations at the Rasper well in Block 53. 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 first quarter was 322,000 BOE per day, which was down about 3% from the fourth quarter and in line with expectations. Total U.S. volumes decreased 7% from the fourth quarter, driven primarily by well completion timing in 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. 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 and incremental activity from a fourth rig should drive volumes higher. That fourth rig is now running in the Delaware Basin, where it is drilling out a previously unfinished 6-well pad at DXL in Reeves County. 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 3-well pad.
Moving to international. First quarter adjusted volumes increased 8% compared to the fourth 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 uphole recompletions from the first quarter into the second quarter as the producing zones in these targeted wells were still delivering at economic rates. As a result, first quarter 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 and 15th rigs expected by midyear as planned. Dave Pursell can provide more color on our Egypt operations during Q&A. In the North Sea, production of 43,000 BOE per day was impacted by unplanned downtime at the Forties Echo platform. This resulted in the loss of 2,300 barrels of oil per day for approximately half of the first quarter, and we expect required repair work will keep these volumes offline through the end of the second quarter. Scheduled turnaround repair and maintenance work will 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 fourth quarter. 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. 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 Krabdagu discovery, flow testing is complete and we are now in the buildup stage in both tested zones.
After we have obtained and analyze this data, we will provide more details. Following conclusion of operations at Krabdagu, the Maersk Valiant will mobilize to the nearby Dico exploration prospect. 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, water and people, and 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 two 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&P companies are receiving from industry watchers. That is how will capital investment programs and capital return frameworks change in the context of sustained higher oil and gas prices. As I noted at the beginning of the call, we do not currently anticipate any significant changes to the activity levels set forth in our 3-year program. APA remains committed to safe and steady and efficient operations in all of our regions and to returning a minimum of 60% of our free cash flow to shareholders through dividends and share repurchases.
And with that, I will turn the call over to Steve Riney.
