APA Corporation

Good morning, my name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Apache Corporation 4th Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press the star, then the number 1 on your telephone keypad. If you would like to withdraw your question, you may press the pound key. Thank you. Mr. Gary Clark, Vice President of Investor Relations, you may begin your conference.

Good morning and thank you for joining us on Apache Corporation's fourth quarter and full year 2018 financial and operational results conference call. We will begin the call with an overview by Apache's CEO and President, John Christmann. Tim Sullivan, Executive Vice President of Operations Support, will then provide additional operational color and Steve Riney, Executive Vice President and CFO, will summarize our fourth quarter and full year financial performance. Also available on the call to answer questions are Apache Executive Vice Presidents Mark Meyer, Energy Technology, Data Analytics and Commercial Intelligence, and Dave Purcell, Planning, Reserves and Fundamentals. Our prepared remarks will be approximately 30 minutes in length with the remainder of the hour allotted for Q&A. Thank you for joining us. 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 discussions 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 discussed today. A full disclaimer is located with the supplemental data 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, I will review Apache's fourth quarter production results, recap our key accomplishments in 2018, update and provide color on the 2019 outlook we issued a few weeks ago, and conclude with some high-level direction out to 2021. Our fourth quarter total adjusted production of 421,000 barrels of oil equivalent per day for the quarter was in line with guidance. Strong international volumes offset slightly lower than expected U.S. production. New wells in the North Sea at Caliber and Garden drove international outperformance, while production in Egypt was generally in line with our expectations. In the U.S., Permian oil production continued its trend of strong performance and sequential growth, significantly exceeding our guidance for the quarter. Natural gas and NGL volumes were lower than expected for several reasons, which Tim will outline in a few moments. Our fourth quarter momentum has carried over into the current quarter, prompting an increase in the lower end of our full year 2019 production guidance range, as noted in yesterday's press release. Before moving on to discuss our outlook for this year, I would like to briefly recap some of our key accomplishments in 2018. Each of our regions made great progress last year and contributed to Apache's strong growth, returns, and financial performance. Operationally, we grew total adjusted production 13% and Permian oil production 18% over 2017, increased well productivity throughout the Permian Basin, and reduced drilling and completion costs, offsetting much of the inflationary pressures that built in 2018. formed Altus Midstream Company, an entity capable of independently funding ongoing midstream investments at Alpine High, discovered and commissioned the Garten Field, which increased our daily North Sea production to its highest level in two years, received three concession awards in Egypt over the prior 18 months, comprising 2.2 million acres adjacent to our existing footprint, Made tremendous progress on our large-scale, high-density 3D seismic acquisition and new prospect identification program in Egypt and completed a comprehensive petroleum system assessment offshore Suriname and mapped numerous large, drill-ready prospects on Block 58. 2018 was also an excellent year financially for Apache as we increased cash flow from operations 56% year-over-year, delivered an approximate 22% cash return on invested capital, generated robust cash flow from our international operations of $2.4 billion, and returned nearly $1 billion, or 25% of our cash flow from operations, to investors through dividends, share repurchases, and debt reduction. Overall, 2018 was a very good year. As we turn to 2019, the lower price environment has prompted us to reduce our capital investment program. We will focus investment on projects that balance near-term cash flow generation with long-term returns and value enhancement. In 2019, we are planning upstream capital investment of approximately $2.4 billion, which represents a 22% reduction year-over-year. Despite this decrease, our production growth will remain resilient. As disclosed in our press release on February 7th, we are projecting fourth quarter 2018 to fourth quarter 2019 production growth of 6% to 10% on a total company adjusted basis, 12% to 16% in the U.S., and 5% for Permian Oil. Internationally, we are projecting a decline of 2-4% over the same time period. This, however, is heavily skewed by the strong fourth quarter 2018 volumes we reported in the North Sea due to the timing of new wells at Calder and Garton. Comparing what we laid out for 2019 a year ago to our current outlook, our capital program has been reduced, our production outlook has moved to the top half of our previous guidance range, and our Permian Basin oil production has been and will continue to be significantly higher. Overall, we can deliver attractive and sustainable growth under a reduced activity set due to our high-quality diversified portfolio, relatively low base production decline rate and continuously improving capital investment efficiency. It is important to note, however, that growth at Apache is an outcome of our returns-focused investment approach and not the overarching objective. The changes required to deliver this plan are already being implemented. Following the oil price downturn late last year, we have decreased our operated Permian rig count to 13. This compares to a range of 16 to 18 rigs that we had been running since mid-2017. With this and other activity reductions, We are projecting first quarter upstream capital in the low $600 million range. This is approximately $200 million below our fourth quarter 2018 upstream spend and puts us on a level pace to achieve our full year 2019 target of $2.4 billion. Let's now look into some of the regional dynamics underpinning 2019. Our U.S. capital program is heavily concentrated in the Permian Basin, with a focus on rich gas at Alpine High and oil in the Midland and other Delaware. We plan to run an average of 12 rigs and four frack crews in the Permian this year, with roughly half the activity allocated to Alpine High and the other half predominantly to the Midland Basin. Maintaining critical mass and proper rigged to frack crew ratios in these two key areas will enable us to deliver a very efficient capital program given the reduced budget. Apache's U.S. oil production comes primarily from the Permian, including the Midland Basin, the Delaware Basin, and Alpine High. This year we will continue to develop all three, but at an appropriately reduced pace. Our oil drilling will focus primarily in the wildfire, pile, and azalea areas which comprise only a small percentage of our total prospective acreage in the Midland Basin. Investment in these areas will continue to leverage the tremendous productivity gains over the last three years as well as the existing infrastructure. To date, we have drilled fewer than 25% of our known drilling locations at wildfire, pile, and azalea So there is still a tremendous amount of running room in these areas alone. We have also initiated delineation activities in the nearby Benidum and Hartgrove areas in Upton and Reagan counties. This work enables us to begin planning and installing the facilities to efficiently develop these assets. The strong well results to date indicate the potential for significant additions to future core drilling inventory. In the Delaware Basin and Alpine High, we are deferring oil-focused activities, however substantial future opportunity remains. Apache's Permian Basin program has improved tremendously over the last three years. We are now producing at record levels both in terms of total production and oil volumes. We have accomplished this with far fewer rigs and significantly less capital deployed than our prior production peak in late 2014. Moving on to our rich gas development program at Alpine High. Our focus this year will be on multi-well pad development drilling, primarily in the northern flank of the field. With 600 million cubic feet per day of nameplate cryogenic processing capacity scheduled to come online in the second half of the year, we should realize a significant uplift in cash margins and cash flow generation. We are decreasing our activity this year at Alpine High to five rigs and one frack crew. We are de-emphasizing dry gas drilling, which will no longer be needed for blending purposes to meet pipeline specs following cryoprocessing installation. This will naturally result in lower volume growth than previously projected, but will increase our percentage of NGLs. Apache's new 2019 Alpine Hive Production Volume Outlook is 85,000 to 90,000 BOEs per day for the year. with a targeted year-end exit rate in excess of 100,000 BOEs per day. Our projected year-end NGL mix will approach 40% of net alpine high volumes, up significantly from the previous guidance of 30%, which we provided a year ago. Internationally, Egypt and the North Sea continue to play important roles in our diversified portfolios. Despite the lower commodity price environment, both regions will continue generating significant free cash flow. This year, we will maintain our activity set in the North Sea, which consists of one floating rig and two platform rigs. In the barrel area, we plan to bring our store discovery online in the second half of the year and spud a second well at Gartner. In the 40s field, we will focus on our water flood and base decline management program, Thank you for watching. We have completed a substantial geologic and geophysical evaluation of Block 58 and have a large number of high-quality prospects across multiple different play concepts. We recently contracted a drill ship and anticipate sputting our first well around mid-year. Block 58, which Apache owns 100%, is truly a world-class opportunity. This block is adjacent to the ExxonMobil-operated Stabrook block in neighboring Guyana and is on trend with numerous oil discoveries. To wrap up our view of 2019, I want to emphasize that we are committed to returning to investors at least 50% of any free cash flow, inclusive of asset sale proceeds, before increasing planned activity levels. While we have a deep drilling inventory and a long list of projects we would like to accelerate, As we have done in the past, Apache will remain disciplined and flex the program subject to available cash flow. Should we encounter a further downturn in commodity prices, we have the flexibility to reduce our capital program. Importantly, with the benefits of a diversified portfolio, Apache is capable of breaking even at WTI oil prices in the mid-$40 while continuing to fund its dividends. We have included a slide in our supplement if you would like to review our assumptions behind this metric in further detail. I will conclude my remarks today by outlining our longer-term view to 2021. Assuming WTI oil prices in the $50 to $55 per barrel range, we envision an annual upstream capital program of $2.5 to $2.8 billion. While the overall capital allocation and activity set will likely be similar to 2019, the specifics of the program will remain fluid as we incorporate learnings. We believe this investment level is capable of generating continued attractive production growth and returns with the US as the primary driver and international flat to slightly down. As in 2019, We will continue to manage for cash flow neutrality and return 50% or more of any free cash flow to investors. Permian Basin Oil and Alpine High Rich Gas will be the primary drivers of U.S. production growth over this time frame, with NGLs comprising the fastest growing product stream. In the U.S., a deep inventory of development opportunities will continue to drive production growth, lower F&D costs, and increasing returns for the long term. This will be supplemented by our continuing organic exploration programs in the lower 48. Our longer term international production outlook is characterized by a modest decline in the North Sea and flat to potential growth in Egypt. Our new concessions and seismic imaging in Egypt help establish the foundation for an appropriately paced long term exploration and development program. This is good for the country of Egypt and for Apache, as we believe our operations are capable of growing both production and free cash flow. In closing, 2018 was a year of strong execution across the portfolio, which translated into our best financial performance in four years. We are off to a good start in 2019 and have a disciplined plan to deliver long-term returns and growth. Good morning.