APA - NASDAQ

Good day and welcome to the APA Corporation Second Quarter 2023 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 session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Gary Clark, Vice President of Investor Relations. The floor is your sir.

Good morning and thank you for joining us on APA Corporation’s Second Quarter 2023 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 Pursell, Executive Vice President of Development; Tracey Henderson, Executive 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&A. In conjunction with yesterday’s press release, I hope you have had the opportunity to review our 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 today. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. Consistent with previous reporting practices, adjusted production numbers cited in today’s call are adjusted to exclude non-controlling interest in Egypt and Egypt tax barrels. I’d like to remind everyone that today’s discussion will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the supplemental information on our website. And with that, I will turn the call over to John.

Good morning, and thank you for joining us. On today's call, we will review second quarter highlights and discuss our outlook for the rest of the year. APA delivered strong results and made notable progress on a number of fronts during the quarter, most specifically with regard to drilling and completion efficiencies in the US and Egypt. A reduction in year-over-year per unit LOE and G&A costs, working capital improvements in Egypt and the appraisal of Krabdagu in Suriname. We also delivered on our production goals with total adjusted production of 325,000 BOE per day coming in at the high-end of our guidance range. This was driven by good Permian Basin in Egypt oil performance, partially offset by price-related dry gas curtailments in the Permian and unscheduled compressor downtime in the North Sea. Total adjusted oil production of 154,000 barrels per day exceeded our guidance by 4,000 barrels per day, driven mostly by the US. Capital investment during the period was in line with guidance as our average operated drilling rig count remained steady at 17% in Egypt, five in the Permian Basin and one semisubmersible in the North Sea. As previously planned, we released the Ocean Patriot in the North Sea at the end of June. US oil production increased by 6% compared to the first quarter and we are projecting a similar percentage increase in the third quarter. Our steady drilling program in the Permian is delivering substantial efficiencies and oil production increases, which we expect will continue, though the timing and size of pad completions can result in a lumpy production profile. APA's Permian rig activity is directed towards oil development in the Southern Midland Basin, where we currently have two rigs operating and oil-weighted development in the Delaware Basin, where we currently have three rigs operating. As we noted on our last call, we are deferring additional drilling and completion activity at Alpine High until natural gas and NGL prices improve. That said, the most recent wells placed online at Alpine High are performing in line with expectations, and we look forward to returning to work there in the future. Turning now to Egypt. Gross oil production of 141,000 barrels per day was in line with our guidance, drilling efficiencies, new well connections, completions and exploration success were all consistent with our expectations for the quarter. As a result, we are projecting gross oil production will be up 5% in the third quarter to 148,000 barrels per day and we are making good progress toward our fourth quarter guide of 154,000 barrels per day. In the North Sea, second quarter production of 42,000 BOEs per day was well below our guidance due to the previously mentioned compressor downtime. We expect volumes to increase in the third quarter to a range of 46,000 to 48,000 BOE per day, driven by higher operating efficiency and the positive impact of our store North well which went on production in late June. In Suriname, Block 58, we are currently focused on appraising last year's Krabdagu discovery. As previously noted, we have completed testing at Krabdagu 2 and results were consistent with our predrill expectations. At Krabdagu 3, we are in the pressure buildup phase, and data collected thus far is very encouraging. The DD3 semisubmersible rig is still on location and will be released upon completion of operations. We believe that no additional appraisal or exploratory drilling is necessary in the Sapakara and Krabdagu area at this time. Looking ahead to the second half of the year, we expect drilling programs to remain constant in both the US and Egypt. As a steady operational cadence in these areas enables more efficient operations. That said, we have reduced our full year upstream capital investment outlook to reflect previously noted North Sea platform drilling reductions, no additional drilling in Suriname this year and some minor service cost declines. We are also reducing our full year LOE outlook from $1.5 billion to $1.4 billion, which reflects our ongoing success in actively managing these costs down, as well as some price decreases associated with shorter-cycle items such as diesel and chemicals. APA remains committed to returning at least 60% of our free cash flow this calendar year to shareholders. During the first half of the year, we generated $366 million of free cash flow, 94% of which we return to shareholders via dividends and stock buybacks. Since the commencement of our share repurchase program in October of 2021, we have repurchased nearly 20% of total shares outstanding at an average price of just under $34 per share. In closing, we believe the investment case for APA and the E&P industry is strong and that the longer term outlook for hydrocarbon prices is very constructive. APA has a diversified portfolio and the operational flexibility to quickly respond to commodity price volatility and other externalities. We are committed to our shareholder returns framework into allocating capital for the long-term benefit of investors. APA seeks to produce oil and gas safely and to reduce the environmental impact of our operations. Last month, we issued our 2023 sustainability report, which highlights recent achievements on these fronts, as well as our current ESG goals and initiatives. I encourage all of you to review this report, which you can find on our website. And with that, I will turn the call over to Steve Riney.

Yes, Doug, the nice thing being early August, we have the luxury of seeing a lot of the wells we've got coming on in the near future. And if you look and you won't see it. But our July volumes have actually averaged 145,000 barrels a day on the oil side were up already in July. Over the second quarter, and we've got good line of sight on what's coming, and it's going to be a good back half of the year. And I'll let Dave Pursell jump in with a little bit more detail.

I mean at this point, a couple of things, Doug. Number one, we still have the rig on location, so it's early. Number two, we came into this year with the primary objective being appraising the Krabdagu Fairway. And you had the original discovery well -- if I flip over, it's a totally different set of partners in Block 53, but we -- when we announced the Baja discovery, we said it was a down dip low above that fairway. So yes, it does stretch from there all the way now back to Krabdagu 3. Krabdagu 3 was 14 kilometers from the discovery well. And as we've said, the results are very, very encouraging. We do -- we can confirm its oil, but it's early for me to comment or say anything at this point. We've got a lot of technical work to do. It's a very large fairway and there will be resource in there that you're not going to see from the flow test. So there's just a lot of technical work that we need to do, and we'll come back in due course with information in the relatively near future.

Thank you. One moment for our next question and that will come from the line of John Freeman with Raymond James. Your line is open.

Hi, guys.

Good morning, John.

Yeah. The first topic I wanted to address was on the shareholder returns. You returned the 131% of free cash flow this quarter. Last quarter, you did 81%. So I'd just be curious kind of your thought process and kind of how you'll determine when it's the appropriate time to kind of really lean into to shareholder returns, like you did, obviously, that was more than double the minimum 60% target that you'll have. So just sort of how you all think about when it's an appropriate time to kind of lean into these things.

Yeah, John, this is Steve. If I just -- if I step back and take a look at the year, we always plan that the second half free cash flow would be greater than the first half. And that's going to come from production growth. It's going to come from the Cheniere contract. It's going to come from a lower amount of capital spending that we'll have in the second half. And now as we look at the actual prices for the first half and anticipated prices for the second half price will also be a bit of factor there. So to address one potential concern that maybe we've done most of our share buybacks in the first half, I'd say the second half -- there's still plenty of buybacks to do, plenty of capacity to do that. We've always said the 60% is a minimum. And I think every time period that we would look at, we've exceeded that minimum. We did in that fourth quarter of '21, we did it for the full year of '22 and certainly doing it first half of '23 and I'd just say we did front end, we chose to, obviously, to front-end load the buyback program in 2023. I'd just say that we're very happy with the share prices that we got, especially in the second quarter and we'll see what the second half of the year brings for us.

Okay. And then my follow-up, just kind of following on to Doug's questions on Egypt. Just sort of what you all identified in terms of the you got the mature natural gas field that's declining so that oil mix as we've seen now for the last three quarters just keeps inching up. It looks like just ballpark that for 2024, like something in that like 65% kind of oil mix would be possible. Just sort of any commentary about how you all see that oil mix sort of continue to evolve as it continues to ramp up.

John, that's a great point. I mean as cost continues to decline, you're going you will see our oil mix and need to rise. And if you go back is a legacy large field 3 Ts. It's been on decline and it is declining. And so as costs continue to decline and our programs are in the more oily driven areas, you'll see that mix rise. And so it's early. I don't want to get into '24, but it wouldn't surprise me, and I would probably anticipate that the oil mix will be higher in '24 than it did in '23.

Thank you. One moment for our next question. That will come from the line of Neal Dingmann with Truist Securities. Your line is open.

I mean, I would say right now, the plans would be to take the program and let the program dictate because five rigs, we're working 1.5 frac crews, a pretty good cadence there. It's hard to just add incrementally without going up in stair step function. So I would anticipate that the service side, whatever benefits there would come to free cash flow and the program will be pretty stable. We do try to go in every year with a pretty set framework on the capital side. And so a lot of what's going on this fall will dictate what our service costs will look like for the portions that we will try to lock down for next year. So we'll just have to wait and see how things play out. And clearly, you've had a little bit of softening in some areas right now, but I think everybody is waiting to kind of see what prices do in the back half of the year. to really steer next year's capital.

Thank you. That will come from the line of Charles Meade with Johnson Rice. Your line is open.

Good morning, John, to you and your whole team there.

Good morning, Charles.

John, I have to say I'm as I'm sure you guys all are to see all the -- or to learn about all the appraisal results at Krabdagu, but I recognize we're going to have to wait a little bit. So I want to instead ask about Waha. And specifically, what your plans are or what the considerations are for appraisal there? I recognize that you guys said it's in the same deposition system as a Krabdagu. And perhaps as part of talking about your plan for appraisal, can you also address it, is it also one of these shelf slope kind of targets, or has it is -- are you maybe starting to hit the transition into the basin four fans out there?

I can let Tracey in a second, get in a little bit to the geology, but what I'll just tell you first on Waha, it is a discovery that we discovered the discovery well is in Block 53, where we have a separate set of partners as opposed to Block 58, it's in Total. We are the operator of Block 53. And so I can't say a lot at this point other than we've got a lot of work to do in terms of does Waha potentially flow into an oil hub in Block 58, or does it make up its own project in Block 53. So at this point, I can't sell a lot there other than, obviously, there's a lot of work being done, a lot of different angles looked at. And Tracey, I'll have you chime in a little bit on the geology.

Sure. Good morning, Charles. I think great question on the fairway and your initial assessment there about in a system what we've discussed in the past. So what we're describing is a fair way. And as John mentioned in his remarks, something we've defined now that's roughly 25 kilometers from Waha to Krabdagu 3. So you've got a very robust system that's coming through here in a series of slope channels that you call from our original release at Krabdagu 1, which are stacked systems. So correct in your assessment, we're seeing slope channel systems, as John said, we've got more technical work to do. We still got a well on location and a lot of work to integrate going forward.

Thank you, Tracey, thank you, John. That’s it for me.

You bet.

Thank you. One moment for our next question. That will come from the line of Roger Read with Wells Fargo. Your line is open

Thank you. Good morning.

Good morning, Roger

John Just like to ask about Egypt and not from an operational standpoint, but it's been more financial, I don't know if I'd call it risk or just it's Egypt being Egypt. But I was just curious how things are going in terms of your ability to from the operations in the country, return capital out of the country as needed or as desired and anything else we should be watching there?

No. I mean, as Steve mentioned in his prepared remarks that Egypt in a lot of places around the world right now are going through some difficult times. There is stress in the system. If you look at wheat prices and things, but from a standpoint of our business, it's been pretty much normal course in terms of movements and things like that. And you've seen us working constructively with Egypt to make progress, and you're seeing that. So.

Okay. I'll take that as a good answer. And then my other question is just as you look at operations in the Permian, what would be the broader description of sort of productivity and efficiency gains you're seeing sort of leaving any service cost inflation or deflation aside, but just what you're seeing in terms of performance on the drilling side, on the completion stages, things like that.

Yes, Roger, this is Dave. So on the drilling side, we continue to improve our drilling performance. Again, there's any number of metrics, which I won't bore you with. But the drilling team is doing a good job of getting our wells down in a very efficient manner where I think you might be going is on the productivity side. Lateral lengths, as I talked about earlier, getting a little bit longer and that helps. But on a lateral length adjusted basis, relaxed spacing and bigger fracs have been a benefit to us in getting those lateral length adjusted productivity numbers to continue to improve. And it's always hard to forecast or we're going to keep getting better, but we're happy with the program so far, 2023 looks pretty good compared to 2022. And the team -- we have a pretty good or very good subsurface team that continues to try to push the envelope productivity per foot, and we're striving to continue to move that into 2024.

Thank you. One moment for our next question. And that will come from the line of Arun Jayaram with JPMorgan Securities. Your line is open.

John, good morning. I wanted to get your thoughts on how the process you think will move once you fully evaluated the Krabdagu 3 results towards the declaration of commerciality and perhaps an FID decision?

Yes. I mean, Arun, first of all, it's -- like we said, we're rigs still on location, and so we've got a lot of technical work to do. But we'll come back at some point with more data. That is exactly what you just mentioned would be the steps you'd take. And we've got a lot of work to do to be in a position to do that. And obviously, we'll be working with our partner in Total. So.

Thank you. One moment for our next question. And that will come from the line of Paul Cheng with Scotiabank. Your line is open.

Thank you. Good morning guys. John, maybe guiding, but I think at one point that's a number talking about your Suriname so far, the discovery, say, around 800 million barrels. Just wanted to clarify if that is the right number, and that's in pace or are we comparable way and whether -- I assume that's not including the Krabdagu-3 lastest appraisal. And just want to see, is that the geologies that to make what kind of reasonable recoverable weighting pace that we should assume any reason that you won't recover more than 50% of the resourcing pace? That's the first question.

Yeah. So Paul, the -- you get to the 800 million as we've disclosed at Sapakara from the original well, the second well, we had more than 600 million barrels of connected resource. So that's where six of it comes from. And then the original 200 was from the discovery well from the flow test we did there at Krabdagu. So the 800 million number is -- would be a connected resource in place, and it's not a recoverable number, but it also does not include Krabdagu-2 or Krabdagu-3 and the integration work that's going on now that will move forward. So -- and Dave, you might reference just it's really high-quality rock, and it'd be early to talk about actual recovery factors, but you can give some insights there.

Yeah. Paul, I think if you can just look at historical recovery factors in big deepwater discoveries to put a range on it, the recovery factors are a function of the field development plans that you have. We're going to have gas injection here. And again, there'll be a lot of pressure maintenance. These are high-quality reservoirs. So I think you'd expect high recovery factors. But at this point, it's way premature to try to put a number on that.

Do you have a rough estimate, what's the gas cut in that content there?

Yeah. You're talking about gas cut, Paul?

Yeah, yeah. What's the gas percentage, or what's the oil percentage either way?

Yeah. I don't have that at the tip of my fingers, but we've put the GORs in the prior press releases on the Sapakara and the Krabdagu discovery, and we've not disclosed anything yet on Krabdagu-2 or 3.

Yeah. Sapakara was 1,100 GOR, roughly. And the discovery well at Krabdagu had a couple of different ranges from around the high-teens to the high 2000s.

I mean, I think, in general, you've seen a couple of deals take place in the Permian. They've traded at what we viewed as pretty high valuations. You look obviously focused organically. But you've always got to be on the lookout for things that could make sense. And obviously, that's where we are and what we do. We come in every day to try to make this company more valuable and more attractive. So….

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. John Christmann for any closing remarks.

Yes. Thank you for participating on our call today. I want to close with the following thoughts. Our asset teams are executing at a high level, and we have a high number of quality wells scheduled for the back half of the year which gives us confidence in achieving our full year production guidance. We're progressing in a positive direction in Suriname, and we remain committed to our capital return program. We look forward to keeping you apprised of our progress. Thank you.