Good day, and thank you for standing by. Welcome to the APA Corporation's Fourth Quarter 2021 Earnings Announcement. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to Gary Clark, Vice President of Investor Relations. Please go ahead..

Good morning, and thank you for joining us on APA Corporation's Fourth Quarter 2021 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 2022 outlook.

Also on the call and available to answer questions are Dave Pursell, Executive Vice President of Development; Tracey Henderson, Senior Vice President of Exploration; and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be approximately 25 minutes in length, with the remainder of the hour allotted for Q&A.

In conjunction with yesterday's press release, I hope you've had the opportunity to review our fourth quarter financial and operational supplement, which can be found on our Investor Relations website at investor.apacorp.com. Please note that we may discuss certain non-GAAP financial measures.

A reconciliation of the difference 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 noncontrolling interest in Egypt and Egypt's 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. At the beginning of each year, I'd 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 6 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 at 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 1 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 return Egypt to the best long-term investment opportunity in our portfolio. In turn, this incentivizes increased capital spending and a return to 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 noncore 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 noncore 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 build-up 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 at Sapakara South-1 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 18 kilometers 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 the $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 1/3 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 1 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 a 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 3 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 3 key safety indicators that impact the annual incentive compensation of every employee in the company. I am 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. U.S. production exceeded guidance again in the fourth quarter as we continue to deliver good performance from our Permian oil plays and at Alpine High.

Our focus was on increasing efficiencies through longer laterals, optimize well spacing and enhanced completion design. The success of these initiatives was recently recognized by JPMorgan 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, U.S.

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 U.S. during the fourth quarter, 11 of which were in the Southern Midland Basin. The remaining 2 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 3-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 2 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 U.S. 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 3-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 U.S. 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 3 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 3 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 3 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 3 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 3 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..

Thank you, John. So let me start with further details related to our fourth quarter results. As noted in our news release yesterday, under generally accepted accounting principles, APA Corporation reported fourth quarter 2021 consolidated net income of $382 million or $1.05 per diluted common share.

These results include several items that are outside of APA's core earnings, the largest of which was associated with noncash impairments, primarily on Altus Midstream's interest in the EPIC Crude Pipeline. Net of tax and noncontrolling interest, this reduced APA earnings by $123 million.

The partial reversal of prior tax valuation allowances and other tax adjustments had a $42 million benefit to earnings. Please see our detailed table of non-GAAP financial measures in our financial and operations supplement for a full reconciliation of adjusted earnings.

Excluding these and other smaller items, adjusted net income for the fourth quarter was $468 million or $1.29 per diluted common share. Lease operating expense in the quarter was above guidance as a result of increasing inflationary pressures and higher-than-expected emissions costs in the North Sea.

In the U.K., the price of emission credits has nearly doubled since credit auctions were initiated in May of 2021. G&A expense was also significantly above guidance, primarily due to the fourth quarter strength in our stock price and the resulting impact on noncash stock-related compensation expense.

Costs were also impacted by a higher-than-planned incremental incentive compensation accrual in the quarter. Due to these higher costs as well as lower oil, gas and NGL prices in November and December, free cash flow for the quarter was $485 million below our guidance of $600 million, which we provided in early November.

As John noted, the modernized production sharing contract in Egypt was ratified in late December. If you haven't already done so, please refer to the Egypt PSC Modernization Investor Presentation on our website for more details related to the updated terms and their anticipated impacts. The new agreement became effective on April 1, 2021.

From that date to the end of 2021, the true-up of revenue sharing net of some small closing-related costs was $245 million benefit to the APA, Sinopec joint venture. The agreement also included a signature bonus payable to EGPC of $100 million, half of the signature bonus was payable upon signing and was offset against outstanding receivables.

The other half of the signature bonus is payable to EGPC over the next 5 years. Given the timing of the PSC signing late in December, our fourth quarter operational results include no impact from the PSC modernization. Turning to Altus Midstream. The business combination with EagleClaw Midstream is expected to close shortly.

As a result, fourth quarter 2021 should be the final quarter for APA to consolidate Altus Midstream's balance sheet. This will eliminate the consolidation of approximately $1.4 billion of Altus' debt and redeemable preferred equity.

Depending on how you model them, this could have a significant impact on APA debt metrics and multiples related to enterprise value. Now I would like to turn to the outlook for 2022. We are planning for a capital program of around $1.6 billion with $1.4 billion in development capital and $200 million of exploration and appraisal, mostly in Suriname.

This level of activity should deliver company-wide annual adjusted production similar to that of 2021. In Egypt, increased drilling activity in 2021 has already halted the decline in gross production volumes. With more drilling activity being added in 2022, gross production will turn to a growth trajectory through the year and into 2023.

On an adjusted basis, you will see an immediate uplift in production in the first quarter given the revised terms of the modernized PSC. From that point, adjusted production should grow in line with gross production, excluding PSC-related impacts from changes in Brent oil price.

In the North Sea, we anticipate a similar production level compared to 2021 as we will again have another lengthy turnaround season at Beryl. Additionally, the Ocean Patriot drilling rig is expected to be offline for approximately 3 months to repair damage incurred to its anchor system during a recent weather event.

Production volumes in 2022 will be impacted by the reduced amount of rig activity. In the U.S., average production this year will be modestly below 2021 after adjusting for asset sales. However, we will exit 2022 in a position of sustaining to slightly growing U.S. production. There are 3 reasons for the decline compared to 2021.

First, about 7,000 BOE per day of production is lost due to the Delaware minerals package sale that John mentioned earlier. Second, the DUC program largely completed in the first half of 2021 provided a significant production boost that will not be replicated in 2022. Finally, the underlying drilling program in the U.S.

will only get to a maintenance level of activity around midyear after we have added the fourth drilling rig. On the cost side, inflationary pressures are real in our sector, and we are seeing that across many forms of cost. In particular, LOE is rising with everything from labor and trucking to fuels and chemicals under pressure.

Our guidance for 2022 costs include these impacts. That said, we see risks of further pressures on these and other costs as we look to 2022 and beyond, especially if the current price environment prevails. All of the details around our 2022 full year and first quarter guidance can be found in our quarterly supplement on our website.

Our 2022 guidance around certain costs may be difficult to reconcile to 2021 actuals due to the impact of the Altus deconsolidation. Please reach out to Gary and his team for further support. From a free cash flow perspective, 2022 looks very robust. At current strip prices, we anticipate free cash flow well in excess of $2 billion.

In addition to strong cash flow from operations, we also expect $805 million in cash proceeds from the Delaware Basin mineral rights sale, and we anticipate a sell-down of up to 4 million shares of our ownership in Altus Midstream during the 3-month period following the closing of its combination with EagleClaw.

All of that should provide a significant amount of available cash in the next few months. First priority for that cash will be to pay off the revolver. Beyond that, remaining available cash will be used in some combination to buy back shares, further reduce debt and to fund the dividend.

I would note that in January we utilized the early call option feature on the $214 million of bonds that mature in April. So that debt effectively sits on the revolver today. Finally, I'd like to make a few remarks about steps taken on our new capital returns framework.

In the fourth quarter, we returned well in excess of 100% of our free cash flow to shareholders, mostly through stock buybacks. We had to fund a portion of this on our revolver and had the confidence to do so given the robust price environment coupled with our expectation of significant near-term divestment proceeds.

Obviously, we cannot repurchase shares this aggressively every quarter, but we feel it was a good decision at that time. While relative valuation for APA has improved, we continue to believe our stock is a good value on both a relative and absolute basis. We are committed to our capital returns framework, so the share buybacks will continue in 2022.

And with that, I will turn the call over to the operator for Q&A..

[Operator Instructions] Our first question comes from Doug Leggate with Bank of America..

John, I wonder if I could ask you first on Suriname. Obviously, Krabdagu was announced before your earnings.

When you and I last spoke, I guess, at our conference in November and multiple times since then, it seems to me that Krabdagu was kind of a gating item for -- not to put words in your mouth but what if there will be a Board or what the size of the Board will be.

So I'm just wondering if you could give us an update on your thoughts there because it seems to me at least that the press release was somewhat right down the middle.

What are you -- is there anything concern you here? Can you talk about was this multiple sands? Is there a flow test gating item you want to get past? What are you thinking? Maybe just frame for us what you think the next steps are?.

Thanks for the question. I mean, first of all, we made it clear that Krabdagu was the next well we needed to drill. It was technically an exploration well but it was a well we had fairly high confidence in because we're really starting to get an understanding of what is working and what we can image and so forth.

So I think coming in and finding 90 meters of light oil pay and good quality rock which is predominantly just -- we did only drill down through the Campanian is a fantastic outcome. I mean we're very excited about it. We're gaining confidence on what's working.

I think the key next step here is because it is an exploration well, is moving on to the flow test and the pressure build-ups and the beauty of this is, is we can do that now, and we are anxious to get on with it. So I think we just need time to confirm and get some more information.

And then obviously, we'll be back to you with a lot more color once we validated that..

You still see Sapakara Keskesi Krabdagu as a combination development?.

I mean the nice thing is at Sapakara South and in my prepared remarks, we stated that the connected volume to the Sapakara South-1 well has increased, and it's a good sign because with time and the build-up, things like -- fields get bigger and so forth. And so that has happened there. There is more appraisal to do at Sapakara South.

The nice thing is with where it is connected or the distance, it could be connected. But I won't say that it has to be connected. So there's a lot of optionality there. We need to do the flow test at Krabdagu and then we'll come back to the game plan.

And the nice thing is, while we're doing the flow test, there's optionality with where we send the rig next. Do we go ahead and appraise Krabdagu? Do we appraise the second well at Sapakara South1? Or there's also some nice-looking prospects in between here that we have confidence in.

So there's a lot of optionality, Doug here, a lot to work with, and we just need time to collect more data and keep working the data..

Okay. My follow-up, hopefully, a quick one, Steve. On the last call, you talked about a strip pricing before the modernization of Egypt, the PSC, more than $2 billion of free cash flow in 2022. And I guess that was back in the third quarter call. You've put out the same number today, which I think might be 1 of the reasons your stock is lagging.

So can you walk us through what -- why is that number not been reset higher. And again, usual question for me.

What do you think the duration of the free cash flow capacity of the portfolio is today?.

Yes, Doug.

So I think I'd probably refer to the -- I think we put out a chart in our supplement that will give you a good view to the 3 years, and that will I think answer the last question you had there around the duration of cash flows and what should be happening to production volume and what that cash flow looks like under, I wouldn't say, a current strip, the February 7 strip, which we're above today and then an $86 flat WTI price environment, which was the '22 strip on that February 7 date.

You can see in my script, I said it will be more than $2 billion of free cash flow. You can see from the chart, it's closer to around $2.2 billion. What would be any difference in that versus maybe some expectations, I'm not sure what the strip price environment was when I said it would be $2 billion. We can go back and maybe reconcile that.

But I think, number one, we've divested the minerals package. So that's probably somewhere in the neighborhood of $100 million of cash flow that will come out of 2022 on a free cash flow basis. We're also using the 2 -- the February 7 strip, which is a little bit below where we are actually today.

And again, I'm not sure exactly how that compares to the strip I used last time and the costs that we talked about, John and I both talked about what's going on with cost environment.

You see it in some of the assumptions that we've made in our guidance which is also in our supplement around LOE going up, G&A going up, and we can talk about some of those things, if you'd like. So costs are going up. and it's also affecting the capital program.

So we -- and I noted in my comments that we've built some inflation into the capital program, and that's why it's a little bit higher. Part of the reason why it's a little bit higher now than what we were talking about back in November. So I think it's a number of things that kind of accumulate there.

Some of those are probably maybe us being a little bit conservative, especially on the cost side as we have built a reasonable amount of inflation into here. We're not saying that it's inappropriate, especially in this price environment, but costs are kind of moving quickly these days.

And we just wanted to make sure that we've built an appropriate view into the plan at this point. And so we'll continue to monitor this as we go through the year..

Okay. I'll let someone ask about the use of proceeds..

Our next question comes from John Freeman with Raymond James..

The first question I had, I guess, piggybacking on Doug's questions related to Suriname. So the $200 million of -- roughly $200 million of capital rose from maybe not Suriname but close enough. $200 million that's allocated towards Suriname.

It seems like maybe in the comments, John, you haven't necessarily decided the exact mix of the plan this year in terms of what's going to be appraisal versus exploration.

So is the $200 million roughly, I don't know, sort of a conservative kind of placeholder until you have a better idea of the mix of appraisal versus exploration because obviously, what you're on the hook for is quite a bit different if it's exploration versus appraisal..

No, John, it's a great question. I think we've got some optionality and flexibility in there. And I think we've tried to just conservatively handle the $200 million out of covered, both between Block 53 and 58, right? So I think it's a good estimate. And there's very important to a well or 2 to swing either way..

Okay. Yes. I just look like last year. You ended up coming in a good bit below the initial budget you'll put out on Suriname last year. So that's what I ask. And then the other question related to the mineral sales. So last quarter, you all said you were targeting in 2022 $500 million of noncore U.S. sales that were mainly going to come out of the Permian.

Is this 805 -- the divestiture you did on the minerals should we think of this as just that's -- that was in addition to whatever you were contemplating. I think previously, you all kind of contemplated additional deals in the Central Basin Platform.

So just trying to get an idea of how to think about the minerals deal you all did that was a good bit more on proceeds than what you all contemplated doing for all of '22?.

No. I would just say, John, we said we'd sell a minimum of $500 million. Clearly, we've met that through the sale. But as I said in my prepared remarks, there's still opportunity out there for some potential additional pruning if we choose to do so. But I mean, we view it as we've met that goal and we've exceeded that goal..

Next question comes from Michael Scialla with Stifel..

I want to follow up on Suriname as well. You said the discovery derisks some additional prospects. So is Krabdagu a different play type than the prior 4 discoveries? And thinking in particular, are you feeling like you're able to identify black oil versus higher GOR prospects at this point? Just looking for more color there..

Mike, it's a great question. And even with your background, I think you probably have some insights into what we're getting a handle with. But I think from the geophysical side and the geologic model side, it's derisking and becoming a lot more predictive, which gives us confidence. And it's the same play type.

I mean we're in Maastrichtian and Campanian. We did not drill on down to the San Antonio in here. So this was really just the upper 2 targets. But I think it's just confidence in what we're being able to see an image and put into the models. So it's a positive from that perspective..

Very good. I wanted to see, Steve, you mentioned, I think, previously that you plan to retire another $337 million of long-term debt this year at par. I think you mentioned in your prepared remarks, but I missed it. There may be some plans to go beyond that.

Anything you can talk about there?.

Yes. So the $337 million is a combination of the April '22 bonds and the January of '23 bonds. And both of those -- the April '22 bonds were called early in January of this year. And as I said in my prepared remarks, that $214 million of debt sits on the revolver effectively today.

And the remaining amount, which is the January maturities, we will call those in the fourth quarter of this year at par. They just have a 3-month early call option. That's all. And we generally exercise that. So we'll pay down at least those amounts of debt.

And again, what I said in the -- in my prepared remarks is that we will -- with the cash coming in, in the first quarter, we will pay down the revolver, which at the end of last year, the revolver had $542 million on it. And again, we did add that $215 million -- $214 million from the April maturities to that.

So there have been some other ins and outs on the revolver during the quarter, but the revolver will end the quarter at zero. So that will be the first use of cash. At the end of the quarter or through the quarter, I should say, we -- between the operating free cash flow, the royalty package sale, which we should close before the quarter ends.

If you exclude any sale of Altus shares during the quarter, if you use all of that cash from operating cash flow and the royalty package sale to pay off the revolver, you'd still be left over somewhere in the neighborhood of $500 million to $600 million of cash, which we may have already or may use to buy back shares or repurchase other debt further reduced debt.

And we'll talk about what we've chosen to do with any excess cash with each quarterly results instead of getting into a process of just ad hoc conversations whenever we're on conference calls or anything like that..

Our next question comes from Charles Meade with Johnson Rice..

I wanted to go back to the Sapakara South1. So obviously, that's a positive result from the flow test, 400 million barrels in place. But should what should we be thinking about in terms of recoverable there? And can you frame or refresh for us? I know this is maybe overly simplistic.

But what do you need to get to in terms of total recoverable resources before you're within striking distance across the finish line on FID..

Well, a couple of different questions there, Charles, and I'll give a little bit of insight, and then I'll let Dave Pursell jump in here as well. But I think the things to know on Sapakara South. Number one, 1 continue -- kind of contiguous thick blocky sand; 1.4 Darcy rock. So you're going to have very efficient reservoir and high recovery.

And then the second thing is with one of the keys after you do a flow test is you collect the data on the build-up and the characteristics there. And it's from most characteristics of the build-up that really showed us and demonstrated that there's even more resource there than we had mapped in Sapakara South.

So it points you to more appraisal, and it's a really good sign. So Dave, I'll let you jump in on the second part of that question..

Yes. Thanks, John. Charles, good question. John is right on the build-up test.

Remember those -- that we floated for a few days and then shut in for a long-term build-up and the longer -- that longer-dated pressure really allows us to start to hone in on recoverable volumes, and that's where the original range of that initial range of 325 to 375 that's moving higher as we continue to analyze the longer shut-in data.

On recovery factor, again, that's going to be a function of what the development scheme looks like if we get there. But in 1.4 Darcy Rock that's world-class reservoir.

It's 1.4 Darcy, as John pointed out, it's thick and blocky to any range of recovery factors that you might be using, you want to look at the high end of that range because this is some of the best rock you'll see. So we're very comfortable and excited about what kind of recoveries we could get, it's just too premature to throw a number out there..

And Dave, any comment or just kind of a guidepost on what to think about as far as recoverable to meet the FID threshold?.

It's a good question. I suspect other folks will try to ask that. We'll work with our partner to try to get to development, and there's a number of factors, including recoverable resource that factor into that. So I'll just leave it there..

Got it. Yes, I know it's a simple way to ask on a complex some. But 1 other question on the Delaware Basin mineral sale.

Was that a piece of -- or was that a piece of that original BP acquisition -- BP Permian acquisition that's where those assets came from?.

Some of it came from that, Charles. It's just a Delaware Basin package, and there's a few different pieces of it that came in there, but some of that was part of the old [indiscernible] BP..

Our next question comes from Bob Brackett with Bernstein Research..

A 2 parter. One is, I think in the verbal comments I heard light oil at Krabdagu versus not seeing that in the press release.

Could you kind of confirm the quality of the oil?.

Yes, Bob, it's a great question. It's early. We've got samples and they're on their way to lab. But we can confirm it's light oil in all 90 meters of pay that we released..

Perfect. And the second 1 might be a bit pick and knits, but you've mentioned in the release and in your words a minute ago, the world-class reservoir quality sitting there at Sapakara South1. And I think the language in the release on the reservoir quality of Krabdagu was middle of the fairway.

Anything there? Or is that just you're being vague until you actually get core sample and get some real measurements?.

Yes, Bob, this is Dave Pursell. We want to see the flow test. I think before we flow tested Sapakara, we were probably using the same language. We want to see the data and whether it's the core data and/or the flow test. We're going to wait to see what the results are from those before we get out of the fairway on that..

Perfect. I'll stop asking lawyerly questions..

Our next question comes from Jeanine Wai with Barclays..

Maybe our first question is just on cash returns, our favourite subject. In your prepared remarks, John or Steve, I think you mentioned a progressively larger dividend. And I think also your prior commentary on that was that your base dividend needs to be just meaningfully higher on a yield basis versus the S&P.

So we're just wondering how you're thinking about where the base dividend can grow, whether it's a yield or some of your peers have, for example, a cap on the post-breakeven dividend or they have like a maximum percentage of CFO that the base dividend will be at some mid-single price?.

Yes. Jeanine, and I can let Steve jump in here as well. But I think in general, just over the 3-year period, we are laying out with the amount of free cash flow that we're going to generate, you could see us progressively increase that dividend. I think we're a believer in, want as much in the base dividend.

And today, by our actions you've seen, we've had a desire to buy back more shares because of where we trade on a free cash flow yield.

But I think we're just laying a framework there that over time, we do anticipate we will be able to raise the dividend Steve, anything you want to add?.

Yes. I think. And we've said this in the past here in the recent past, Jeanine. I think the best thing for APA to be doing right now is buybacks, leaning into the buybacks with any excess cash flow because of the discount that we still see ourselves trading at. That said, I think the base dividend needs to be competitive.

It needs to be competitive not just with our peers but with the broader market. We recognize that. And I think that means in the long term, in our sector, dividend yields need to go higher than where they are today, which averages somewhere in the neighborhood of 2%.

As a perspective, if you take our 60% capital returns framework, if that was all in dividends, we'd be yielding in excess of 10% on our dividend today. But we're not paying that all-in dividends. It is in buybacks -- a lot of it in buybacks, the vast majority in buybacks.

And John spoke a little bit in his prepared remarks about what would cause us to raise the base dividend. And I think the most important thing around the base dividend and improving that and increasing that over time is that we want to be confident that that's resilient.

We've commented before on the amount of pain that we endured when we cut the dividend by 90% in early 2020, anticipating what was ahead of us at that point in time. And so we want that dividend to be resilient when we raise it.

But really, the things that are going to raise the dividend is some sustained improvement in relative share trading, some more strengthening of the balance sheet and possibly not required, but possibly a less volatile price environment than we've endured over the last few years.

And really, any combination of those types of things are going to give you the confidence to be able to raise the dividend and do so and feel like it's going to be resilient through time. And so that's our approach to the dividend. We definitely need to raise it, and we will do that over time..

Okay. Great. Our second question is just maybe heading back to the 3-year outlook, which we appreciate you all given us. Can we maybe dig in a little bit more on some of the assumptions? For example, I think you clarified.

Can you just clarify whether the plan is only valid at certain price outlook? We know you showed free cash flow estimates at the strip and higher. You also mentioned that inflation was built into the outlook. So maybe any commentary on what level of inflation you've assumed along with anything on U.S. cash taxes..

Jeanine, I think in general, we've set the activity levels and have confidence in those. We've been planning around those. And I think that's why there's a lot of confidence in this year's plan. In terms of inflation, we're seeing more right now probably in the U.S. than we are in the international market. But those would be the 2 factors.

But I think we've got a lot of confidence in the plan. It's a relatively stable plan over the next 3 years, and we are going to be growing oil, I think, at about 5%, driven primarily by Egypt..

Yes. And just a little further color on that. I think the capital program is robust through a pretty wide price range. If prices go up, the capital -- the activity set isn't going to change from what we have planned. The cost of that activity could possibly go up with some further inflation if we found ourselves in a much higher price environment.

But it's also a robust activity set even in a lower price environment. And as a matter of fact, I think it's probably a robust program all the way down to $50 WTI because it's the sustaining capital program that we want to have in place. And we can certainly afford that and still be generating free cash flow even below -- well below $50 WTI.

So we'll stay with the capital program, and that is a good one and a robust one and won't move with pretty broad movements in price. The tax question that you had, we do not anticipate paying -- being a U.S. cash taxpayer for quite some time. If we found ourselves in an extremely high price environment for a few years, we could.

We have 2 forms of tax loss carry forwards, but we have multiple forms. But the 2 big ones are what you would call grandfathered tax losses that are that can be used 100% to offset taxable income.

And then we have some other tax losses that are not grandfathered under the recent tax changes and would be subject to an 80% limit that could be used to offset up to 80% of taxable income.

And so when you get into -- you go through the first the grandfathered losses first and when you get into the non-grandfathered loss, you could find yourselves in a situation where you'd be paying taxes on 20% of your taxable income, but that would be quite some time at the current price environment that we're in..

Our next question comes from Neal Dingmann with Truist Securities..

My first question is on the, John, really just on the ease of activity. You all have laid out nice plans to increase the rig count. It's about 15% by midyear this year given the high economics of the place.

So I'm just wondering when you look on a go forward, what are the limiting factors on how much further you could push the activity of this play? Just wanted obviously given the great economics there..

No, Neal, you're spot on to kind of what the plan is. We're currently at 12 rigs today. I think we had the 13th rig next month, and then we'll be at 15 midyear. We think that's a good place. I think one of the keys with Egypt is while we were working the modernization, we've been building inventory and putting together a pretty robust drilling line.

So we're excited about the program there. I just was over in Egypt, and I can tell you, Egypt is excited about it as well. And we've got a lot of work to do in terms of merging the concessions and the JVs while executing but we're off to a good start and a lot of momentum and a lot of anticipation. We're excited about it..

I'd say really look forward to activity there. And then secondly, just on domestic pressures, I notice you've continued to mention even on this call, the domestic OFS inflation along with some difficulty, maybe procuring pipe and other equipment. I'm just wondering do you see the same challenges on this.

I'm just wondering how much long do you think this to go forward? Or do you anticipate this mitigating a bit in the coming quarters?.

No. I mean I think the key with us is in the luxury we've had is we set our activity sets and we plan those. I mean we've been planning to add the fourth rig in the U.S. since last fall. And so I think we've got good line of sight on our services and activities. Supply chain is working several quarters out, and we find ourselves in a pretty good place.

But I also say it takes time, right? I mean that fourth rig will come in midyear, and we couldn't have added it any sooner in the U.S. So it just takes a lot of rigor and a lot of planning and a lot of stability in the activity sets. And I think that's where we've landed everything in a place where we've got a lot of confidence around those.

But let's not kid ourselves, there are pressures in the system. Truck drivers out in West Texas. Chemicals, fuel, there are pressures in the system and steel and everything else that's going up, especially on some of our longer-dated things..

Our next question comes from Scott Gruber with Citigroup..

Circling back on the balance sheet, I may have missed this, but is there a leverage target at some normalized crude price that you'll target over the medium-to-longer term, gross debt level that you'll target over the medium term post the Altus deconsolidation? How are you guys thinking about targets for the balance sheet from here?.

Yes. We don't have a specific target in mind. We have -- what we have in mind is getting back to investment grade. And while that's important, it's not urgent that we get it done right away. It is important that we get that done now. And so we don't have any specific target for long-term debt.

In the end, it's -- the rating agencies will decide what level of long-term debt, what type of debt-to-EBITDA metrics would allow us to get back to investment grade. And so we're targeting whatever it takes to get back to investment grade.

I think it's probably going to require a debt-to-EBITDA ratio of 1 or below, especially in this price environment. We've made pretty good progress on that in 2021. We're going to make more progress on that in 2022.

If we do -- if we pay down no more debt this year other than what we have planned and the debt that's sitting on the revolver at the end of '21, if we use all remaining free cash flow for share buybacks we would end the year at the current strip with a debt-to-EBITDA ratio of 1.1.

So we're getting into the right ballpark and we'll see what the rating agencies will do with that..

Got it. And then just a quick 1 on Alpine High. The 4 million share early sell-down option associated with Altus EagleClaw combo, I believe it came with the stipulation that you invest the first $75 million in new Alpine High development activities over the subsequent 18 months.

Is that spend in the budget for '22? And can you talk about the plan for Alpine High at these commodity prices within the multiyear plan?.

Yes, Scott, this is Dave Pursell. Yes, that's -- it's in the budget. We have the fourth rig in the U.S. We're adding. Think about that as a Delaware Basin focused rigs. It will do some drilling in Alpine and also do some drilling at our DXL field, which flows into the Altus Midstream assets.

And so there's a -- it will move around in the basin over the next couple of years. But it will do a fair amount of drilling at Alpine specific..

Our next question comes from Paul Cheng with Scotiabank..

Just curious that can you talk about that, the CapEx how that is going to spread throughout the quarters? Are they going to be pretty ratable or that 1 particular quarter is going to be heavier than usual?.

No. I mean I think you've got a little gradual build in the schedules with the Egypt rigs ramping. By midyear, we'll be at 15, we're at 12 now. We're going to add a rig in the Permian midyear, so it'll be a little bit heavier back half.

And then the only shift you've got right now is with the Ocean Patriot needing to go in for some repairs that were addressed in the prepared remarks. But beyond that, nothing -- it's going to be pretty steady given the way we've geared our program..

Yes. And the second question is that, I think previously, when you guys use complete PSC modernization, talking about this year will be a mid-teen type of growth in the oil production.

If we're looking at 2023 and forward, with a 15-rig program, what kind of growth that you would be able to generate over there on the [indiscernible] basis?.

Egypt is going to drive the primary growth in the portfolio of oil over the next 3 years. And so I think we've outlined approximately 5% for Apache total to get us back to kind of the pre-COVID levels. And Egypt is going to be the driver. So that's probably going to put that more in the 10% range..

Okay. And that I just curious that is that extend, I presume that more than 2024. So if we look a bit longer term, is that 10% is kind of target for you guys or --.

I mean we really just laid out, Paul, a 3-year look on that. But clearly, the plan is to continue investing at the same rate or potentially higher in Egypt as we move on..

Our next question comes from Scott Hanold with RBC Capital Markets..

I'm just kind of curious on maybe following up that question from Paul. Like when I look at the chart on Page 9 of the outlook through 2024, you do have a nice step-up in oil '21, '22 and '23. But '23, '24 looks a little flatter with gas going up a lot more.

Can you give us a sense of the dynamic around there because I know the Qasr field in Egypt is on probably a pretty good decline at this point? So like where does the gas pick up in '23 and '24 in your outlook?.

Yes, Dave, are you --.

Yes. I think if you look at the portfolio wide, the growth in Egypt is going to be really driven by oil. There will be obviously gas growth as well, but it will be oil. The gas growth in the portfolio will likely come from the Delaware Basin and Alpine..

Okay. So it's more of Alpine High, great. Okay. And then as my follow-up, turning to the Permian and ex-Alpine High. Can you give us a sense of where you think your depth of your core Tier 1 inventory is so when you think about your outlook over the 3 years and maybe a little beyond what kind of depth do you see there at a, say, 3 to 4-rig cadence..

Yes, we're well beyond the 3-year program. We get out towards the end of the decade easily..

Okay.

And is that sort of Delaware or Midland? Or just kind of a combination of both?.

It's a combination of both, Scott. It will -- our SMB program has been the driver, and that's where we'd see the core, but we're adding an extra rig into the Delaware because we have confidence that we have longer-term inventory there as well..

Our next question comes from Leo Mariani with KeyBanc..

I wanted to ask a little bit on the North Sea here. I know that you clearly have been plagued with some unplanned downtime. And of course, you have turnarounds in that area. But as I'm just looking at the production, you guys were around 62,000 BOE per day in the fourth quarter of '20. It looks like it's down about 30% to the fourth quarter of '21.

It sounds like a lot of that was maintenance downtime related. I just wanted to get a sense. You have a comment in here that you can get back close to 50,000 by the end of 2022. In terms of how you view that asset.

Do you see that 50 is kind of being little bit more stable in that outlook? Or do you see the 50 probably continuing to trend down? And is it just kind of always anticipation of that kind of 2-rig program in the North Sea?.

No, it's a good observation. I mean I think the key with the North Sea when you look at -- we've got 2 different assets there, Forties and Beryl. And Forties, we've got the Ocean Patriot up there. We're working. We're doing subsea tiebacks. We've had that rig working for a long time.

And we did have 2 rig breakdowns that we typically haven't seen that have just kind of slid the schedule back. One was some things with the BOP. And then as we mentioned, this had some really rough weather and had 1 of the anchors break on one of the tie down lines, and we've still got to get that rig into the shipyard to have that repaired.

So when you're running 1 floater and then you have something like this, which is kind of a very unusual event, it slides back a key well like Garten 4, which was scheduled to come on until the back half of this year. So I mean, I think we have confidence in getting back to the 50.

But if you look at Forties and how we're starting to operate it, we've got 1 platform rig. We've been working between Beryl and Forties. We're definitely starting to move into the wind down in terms of how we look at Forties from a capital investment perspective. And we will be kind of modifying how we're going to operate that.

We've historically run a drilling campaign, and we won't be doing that in the future. When we bought that asset from BP in 2003, it was scheduled to be abandoned in 2012.

Here, we are a decade later, we see that still being another decade from now, but we will be starting to think about the twilight years on Forties as opposed to investing capital in Beryl and continuing to expand and adding subsea tiebacks..

Okay. Very helpful color for sure. And maybe just jumping over to Suriname here. So I think there was a point in time where all maybe talked about kind of a 2-rig program on Block 58. But it seems like maybe it's just -- it's kind of gone to 1 rig.

Has there just been any shift in the thinking of the partnership here in terms of how you view the asset or maybe you just think it's a little better to go a little slower, kind of still early in the appraisal program and if you guys have continued success appraising and you get to FID, do you envision this as maybe going back to a couple of rigs as you look out in the 3-year plan?.

Yes. I think it's a function of equipment and timing. There were -- Total brought in 2 rigs. The developer was scheduled to leave and it did leave. We still got the Valiant. I think if you read some of their comments that committed to drilling 3 more wells this year in Block 58.

And that would imply that there's probably more activity needed to get that accomplished. But we've got options on the rig that's coming, the Gerry de Souza that's coming to Block 53. We've got additional options there. So there's some flexibility in terms of how we approach it..

That concludes today's question-and-answer session. I'd like to turn the call back to John Christmann for closing remarks..

Thank you, operator. I'd like to close with the following comments. We've outlined a 3-year overview based on a heavily backwardated strip that delivers much stronger production and free cash flow than currently modeled by the Street.

With $6.5 billion of projected free cash flow, we will return $4 billion to shareholders under our current framework that leaves $2.5 billion for debt reduction or additional shareholder returns through buybacks and/or dividend increases. Clearly, we will make material returns to shareholders, and we will continue to strengthen the balance sheet.

Lastly, we are very pleased with how Suriname is progressing and look forward to the data that is coming from the flow test at Krabdagu. Operator, back to you..

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