APA Corporation

Good day. Thank you for standing by. And welcome to the APA Corporation's third quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Mr. Gary Clark, Vice President of Investor Relations. The floor is yours.

Good morning, and thank you for joining us on APA Corporation's Third Quarter 2021 Financial and Operational Results Conference Call. We will begin the call with an overview by CEO and President John Chrisman, Steve Reine, Executive Vice President and CFO, We'll then provide further color on our results and 2021 outlook. Also on the call and available to answer questions are Dave Purcell, Executive Vice President of Development, Tracy Henderson, Senior Vice President of Exploration, and Clay Breches, Executive Vice President of Operations. Our prepared remarks will be approximately 18 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 third 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 differences between these non-GAAP financial measures is 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. Finally, 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 discussed 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. Our top priority coming into 2021 was to continue strengthening the balance sheet through debt reductions. With the significant recent strides in that regard and a favorable outlook for continued free cash flow generation, we are in a position today to announce some material changes in our capital investment plans and use of free cash flow. First, we are moving toward a capital budget that will sustain or slightly grow global production volumes. This is being accomplished through a gradual ramp in activity over the next few quarters primarily in Egypt, where we are anticipating PSC modernization terms will be approved by year-end, but also in the onshore U.S. Second, we are committing to a significant increase in cash return to shareholders. While a stronger commodity price environment has accelerated progress on the balance sheet, it's the quality and cash flow generating capacity of our core operating areas that through a range of commodity price environments that are enabling our new capital return framework. We have a substantial inventory of quality drilling opportunities throughout our portfolio. In addition to Egypt, which now has the deepest inventory in more than a decade, we also have significant potential in our onshore U.S. portfolio, primarily in the Southern Midland Basin, Alpine High, and Austin Chalk. In this price environment, there are many compelling drilling opportunities that should be funded, and we anticipate adding a fourth onshore U.S. rig in 2022. With regard to our new capital return framework, we are committed to returning a minimum of 60% of our free cash flow to shareholders. This begins with our base dividend, which in September we announced would increase by to an annualized rate of 25 cents per share. Yesterday, we announced a doubling of that rate to 50 cents per share. In early October, we took the more significant step of initiating a share repurchase program. Through October 31st, we have repurchased 14.7 million shares and expect to continue returning capital in this manner through the fourth quarter and into 2022. Our commitment is to return at least 60% of free cash flow to shareholders, and we will exceed this amount in the current quarter. We believe that APA currently offers one of the highest free cash flow yields in our peer group, and that this framework delivers an attractive and highly competitive return to our shareholders. Turning now to the third quarter results and highlights. Through a combination of strong commodity prices, capital and cost discipline, and good well performance, we generated nearly $1.2 billion of adjusted EBITDA, making it our strongest quarter of the year thus far. We anticipate fourth quarter will be even stronger. U.S. production exceeded guidance in the third quarter as we continue to see good performance in the Permian oil plays, Alpine High, and the Austin Chalk. Internationally, production was a bit below guidance as we experienced some extended maintenance turnarounds and compressor outages in the North Sea and lower volumes in Egypt associated with the impact of strengthening oil prices on our production sharing contracts. We expect gross production in both the UK and Egypt will increase in the fourth quarter. In the U.S., we placed a This included nine wells in the southern Midland Basin, three of which were three miles in length. At Alpine High, no new wells were placed on production during the quarter, but performance from this year's duct completions, as well as the underlying base production volumes, continue to exceed expectations. In the East Texas Austin Chalk, we drilled four operated wells earlier this year, two of which are on production. We recently added a third rig in the U.S., which will be used to continue the delineation of our Austin Chalk acreage position. We have now gathered a substantial amount of data in this play that indicates returns will compete with other quality portfolio opportunities. Dave Purcell can provide more details around the Austin Chalk during the Q&A. Turning to international operations. In Egypt, gross production has begun to turn higher. putting us on a good trajectory as we enter 2022. In anticipation of modernized PSC terms, we recently increased our rig count to 11. We will likely add more rigs in 2022 as modernized terms would return Egypt to being the most attractive investment opportunity within our portfolio. In the North Sea, we continue to operate one floating rig and one platform crew. As expected, production was up modestly in the third quarter compared to the second quarter as we continued to work through both planned and unplanned maintenance downtime. On the drilling front, we recently TD'd the Store 2 development well, which we plan to place online in January. While one of the primary objectives in this well was wet, we encountered more than 300 feet of net pay in other targets which we are projecting will IP around 20 million cubic feet per day of gas and 2,500 barrels per day of condensate. Our 59% working interest in this well provides good leverage to what should be robust North Sea natural gas and condensate prices over the coming months. In Block 58, offshore Suriname, our partner Total is currently running two rigs, one of which is conducting a flow test at Sapakara South, and the other is drilling the Bonboni Exploration Well in the northern portion of the block. These operations are still ongoing, and the data we collect will help inform the next steps in the Block 58 appraisal and exploration programs. On Block 53, we are finalizing plans for our next exploration well location with partners Petronas and SEPSA. The Noble Jerry D'Souza Drill Ship is scheduled to commence drilling this well in the first quarter. The plan is to drill one well in Block 53 in 2022, but we have an option on the drill ship for two additional wells if warranted. Before closing, I want to comment on the charge we took this quarter related to the Gulf of Mexico properties we sold to Fieldwood in 2013. Since Fieldwood emerged from bankruptcy in August, we have independently assessed the situation and have elected to book the contingent liability that you saw in our press release. Steve will walk you through some of the details. In closing, I'd like to make a few remarks about the progress we are making on the ESG front. We recently announced that we have eliminated all routine flaring in U.S. operations. This was an ambitious goal that we set at the beginning of the year and achieved three months ahead of schedule. Additionally, through the end of the third quarter, flaring intensity in the U.S. was only 0.38%, significantly below our target of less than 1%. Our global safety performance has also been strong. We have delivered a 35% improvement in our total recordable incident rate compared to this time last year. We have also progressed a number of important initiatives that foster diversity and inclusion within the organization and that enhance the health and well-being of our employees. In October, we published our 2021 Sustainability Report, which I hope you will review for a more in-depth look at our ESG philosophy, performance, initiatives, and success stories. Finally, we are in the process of establishing some very rigorous short, medium, and long-term ESG goals, which will include further efforts on GHG and methane emissions, and we look forward to discussing these in the near future. And with that, I will turn the call over to Steve Riney, who will provide additional details on our third quarter results and outlook.

Thank you, John. In my prepared remarks this morning, I'll make some additional comments on our third quarter performance, provide a bit more color on the Fieldwood-related contingent liability, review aspects of Altus Midstream's recently announced combination with Eagle Claw, and provide some more context around our free cash flow outlook and capital framework. As noted in our news release yesterday, under generally accepted accounting principles, APA Corporation reported a third quarter 2021 consolidated loss of $113 million, or 30 cents per diluted common share. These results include a number of items that are outside of core earnings, excluding the impacts of the Fieldwood-related contingent liability, a loss on extinguishment of debt, a charge for tax-related valuation allowance, and some other smaller items, adjusted net income for the third quarter was $372 million, or 98 cents per share. Most of our financial results were in line with or better than guidance this quarter. Upstream capital investment was considerably below guidance, primarily due to the timing of infrastructure spending in Egypt and lower exploration costs in Suriname. Our teams have done a good job holding the line on capital and LOE despite service cost inflation. and we expect these will finish the year at or below our original 2021 guidance. GNA was also below guidance this quarter, mostly due to the timing of some costs, which we now expect to be incurred in the fourth quarter. I'd like to provide a bit more color now on the Fieldwood ARO situation. Through Fieldwood's most recent bankruptcy process, we had to rely on third-party estimates of the remaining net abandonment obligations related to our legacy properties. Since Fieldwood emerged from bankruptcy in August, we have conducted our own evaluations. Based on that work, it appears the combination of the various financial security packages and the anticipated future net cash flows from the properties will not be sufficient to fund all of the remaining abandonment obligations. Accounting rules require that the entire undiscounted contingent obligation and the offsetting undiscounted value of the financial security will be brought onto our books. These are recorded independently as a liability and an asset without netting them against one another. Accordingly, in the third quarter, we brought onto our books the anticipated net ARO obligation of $1.2 billion. We also recorded the offsetting value of the financial security in the amount of $740 million. As a reminder, the financial security includes a funded abandonment trust, letters of credit, and surety bonds. As abandonment activity occurs, it will be funded first by the free cash flows currently being generated by the legacy properties. To the extent these cash flows are insufficient, Apache Corporation will be required to fund the activity and will be reimbursed through the financial security. Only after the operating cash flows and financial security packages are fully depleted will Apache Corporation be obligated to fund the activity without a source of reimbursement. The undiscounted net liability is $446 million, and we anticipate it will be at least 2026 before Apache incurs costs in excess of the available financial security. A few weeks ago, our majority-owned midstream company, Altus, announced that it will combine with a parent company of Eagle Claw Midstream to form the largest integrated midstream company in the Delaware Basin. We considered a wide range of strategic options for Altus for more than a year. Ultimately, we determined that this transaction would allow all Altus shareholders to reposition equity holdings into a pro forma company with the best combination of scale, synergies, asset quality, and attractive growth opportunities. The transaction would also preserve the $6 per share annual cash dividend for the public shareholders and provide near-term optionality for APA to monetize a meaningful portion of our current position. Such a secondary sale would benefit the combined company by improving the public float. It would also provide APA with cash flow, a portion of which would be deployed into Alpine High activity, thereby enhancing dedicated sources of revenue for the company. Reducing our ownership interest in Altus to a minority position provides a number of benefits for APA as well, including simplification of our financial reporting, increased comparability with our upstream-only peers, and improved leverage metrics upon deconsolidation of $1.3 billion of debt and preferred equity as of September 30th. As we proceed toward closing, which is anticipated in the first quarter of 2022, we will provide further detail around the accounting treatment and the financial statement impacts of this transaction. With respect to portfolio management more generally, as we build the capital investment program to a level capable of sustaining or slightly growing production, you will see increasing activity in our core asset areas, primarily in the U.S. onshore and in Egypt. This will demonstrate both the quality and running room in our core assets, as well as the need for a more accelerated pace of noncore asset divestments. As part of that, in 2022, we anticipate a minimum of $500 million of further noncore U.S. onshore asset divestments. I'd like to close by reiterating some of John's comments regarding APA's free cash flow generation capacity and its anticipated uses. As always, there can be some confusion around a term like free cash flow, so we want to be clear what it means at APA. You will find our definition of free cash flow in our financial and operational supplement, which we publish with every quarterly earnings report. In the fourth quarter of this year, at current strip pricing, we expect to generate free cash flow in excess of $600 million. which would result in full-year 2021 free cash flow of around $2 billion. Under our new capital return framework, a minimum of 60% of this free cash flow would go to ordinary dividends and share repurchases. And as John indicated, we expect to exceed this 60% framework in the current quarter. Looking ahead to next year, we currently contemplate a capital budget of around $1.5 billion. This would consist of roughly $1.3 billion for development and $200 million for exploration and appraisal activities, mostly in Suriname. As we've indicated, we believe the planned level of activity would put our global total BOE production on a sustaining to slightly growing long-term trajectory. This excludes any future production contribution from Suriname. The near-term allocation of capital would likely be biased to increasing oil production, which would offset declining gas and NGL production. That said, the commodity price environment is very active, and we have considerable flexibility within our portfolio to redirect capital as appropriate. Based on this investment level, we anticipate free cash flow in 2022 would again be in the neighborhood of $2 billion. Prior to any benefits, of Egypt PSC modernization. Finally, I would like to caveat all of this with, as is customary, the final plan for 2022 will be reviewed in the fourth quarter call in February. And with that, I will turn the call over to the operator for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone keypad Again, that is star 1 on your telephone keypad. You have your first question coming from the line of Doug Leggett from Bank of America. Your line is now open.

Thanks. Good morning, everybody. Just checking, John, can you hear me okay? Yes, good morning, Doug. Phone company has been giving me some problems. John, I'm going to start with Egypt, if I may. I'm sure you saw the report we put out a month or so ago. One of your smaller peers has been a little bit more transparent on the potential changes in terms from the PSC modernization. So I wonder if, conceptually, you could walk us through how you see the moving parts as it relates to increased profit oil and, in particular, the potential for legacy stranded capital cost recovery. If you could put some, maybe a range of potential impacts on you, assuming similar terms applied.

Well, Doug, it's a great question. And, you know, from our perspective, we're the largest onshore producer in Egypt. You know, you've hit on some of the key points. You know, we've made the decision not to give more color on that until it's finalized. Um, you know, I will tell you that the, uh, the modernized PSC, you know, has recently been approved by the cabinet and it has moved on to parliament. So we're, we're getting close, um, you know, and we expect it to everything's on track for a year end approval. Uh, but in terms of any more color, you know, you've done a good piece of work out there. Um, and you know, I'll let Steve comment on a couple of things.

Yeah, Doug, um, The thing I would add to that, based on your work, you've demonstrated you understand how the PSCs work. The backlog, while we haven't indicated exactly how much that is, the mechanism to recover that is that it is, the backlog would be, and we've shared this publicly already, the backlog would be recovered over a five-year period. on a quarterly basis, and that backlog would roll into the other costs for cost recovery. So it is all subject, the sum of all of that is subject to the 40 percent limit on cost recovery barrels. The benefit, the real benefit, as you've noted in your write-up, is that by aggregating all of these into a single bucket for cost recovery purposes, you don't end up with stranded costs in any of the smaller buckets, and that will allow us to get this backlog of costs recovered as well, especially in this price environment.

Steve, I know you don't want to give specifics, but in my note, I did suggest the potential that the impact could be several hundred million dollars plus. Would you push back on that or give some affirmation that we're in the ballpark?

Yeah, Doug, I think I need to be really careful about that, so I think we won't comment on it at this point in time.

Okay, I understand. Let me move on very quickly to my second question, which is understandably Suriname. You've got a well test. I guess you drilled out the plugs about three and a half weeks ago. John, I guess I'm a little surprised that you're not ready to give us some updates there or on Bonboni where Our guys on the ground are suggesting that you're already in the formation there. So I'm just wondering if you can offer any color around those two pieces of, you know, potential news flow that we expect, I guess, in the coming months. And I'll leave it there. Thank you.

Great question, Doug. And I'll address Sapa South first. Number one, you can appreciate that there's multiple phases of a flow test that you go through. you know, sometimes even more important than the flow period is the buildup and the pressure response and all of those things. So it's early. I'll just tell you, save your question. I'm not in a position to reveal anything on it today, but hold your question and, you know, we'll be able to respond in, you know, in the near future. So... As we turn to Bombani, yes, you know, Total's got two rigs. The developer's at Sopicar South. The Valiant is at Bombani. I'll remind everybody it's a 45-kilometer step out to the north. It is a key well. And, you know, I think the prospectivity up there will inform the northern portion of the block as well as have some implications on Block 53. So... You know, once again, I'm not in a position to provide any update, but, you know, I just say stay tuned, right? So, and, you know, we'll be in a position to update you when we can.

Awesome. Thanks so much, guys.

Your next question comes from the line of Neil Dingman from TrueList Securities. You may ask your question now.

Well, John, nice update on the shareholder return. I was just going to ask one thing around that. Just your thoughts, I don't know, either you or the company, sort of personal thoughts on, you know, something about doing more of a variable versus a buyback. I mean, obviously your stock appears to me on many levels quite cheap here, so I'm just wondering how you think about the two alternatives.

Yeah, Neil, I mean, I guess I'll start out and just on the framework, I'll just give a few, you know, comments here. It really should not come as a surprise that, you know, anybody that's engaged with us over the last several years, you know, when we've been on the road and in our meetings, Steve and I have been really clear that, you know, a quality EMP needs to have a strong balance sheet. You need to have a sustaining to low growth profile, you know, multiple years of inventory but not too many years of inventory. And we should be throwing off the majority of our free cash flow to shareholders. You know, we've had a lot of work to do that the volatile pricing environment has at times, you know, impacted. But we're in a position where we're finally here. You know, if you look at the framework, we believe you want to do a nice mix. You need a competitive dividend. You know, we're not big fans of the variable dividend. I mean, in terms of how that works. And I think with where our share price is, especially today, as cheap as it is, that that would be the primary means of how we'd look at it. Steve, any more specifics you want to provide?

Sorry about that. Thanks for the question, because I think it is important to share some of the context around the framework that we rolled out today. And I think John John framed it exactly right in terms of the history of where we've been. I think if you just step back and think about the industry, it wasn't too long ago that the industry was all about growth and really little or no returns to shareholders. More recently, we've finally gotten to where it's about moderated growth ambitions and really starting to roll out these returns frameworks. And I think the big step right now is to figure out, well, what's the right return framework? And I'd say it's kind of early days for the industry in general, and we're all kind of figuring that out now. The returns frameworks right now are migrating towards a percent of free cash flow, and I think that's probably good. The range is out there pretty broad. I see ranges from 25% all the way up to 75%. We're probably going to find a sweet spot in there, and I think it's starting to migrate towards somewhere around 50% as an industry. For APA specifically, I mean, we just took a significant step in improving the capital structure of the company with the debt tender this fall, and that was 100% focused on debt reduction. We know there's more to do on the balance sheet, and we'll get to that, but And to be clear, we still want to get to investment grade, but that can take some time and that's okay. We do have to just recognize that shareholders are pretty important too. And we need to find a balance in returns to shareholders while at the same time continuing to improve the balance sheet. And, you know, the industry's chosen 50% because they're kind of migrating toward that. We chose 60%. You know, we think this is the right balance for ACA. We have a quality, diversified portfolio. It's exposed to a good range of commodity price and geographic mix. It's capable of sustaining free cash flow for many, many years. And remember, free cash flow, the basis for the returns calculation, is after capital spending. So, you know, we've been improving the balance sheet. We can still continue to strengthen the balance sheet. Up to 40 percent still available for other uses, including debt reduction. But I'd say in the near term, we certainly have a bias for dividends and buybacks. And remember, also, we did talk about, in my prepared remarks, we talked about the fact that we're going to probably pick up the pace on non-core asset sales. And that's also a source of funds for for continuing to strengthen the balance sheet, but also for potentially for more returns to shareholders as well. So we feel pretty good about that balance and the 60 percent level. As John indicated, you know, we're not particular fans of the variable dividends at this point in time. We'll continue to look at that for the future and consider how the market reacts to those. I think the variable dividend needs to be in general, a smaller piece. And just in terms of balancing dividends versus buybacks, for now, we're just happy to lean into buybacks. We believe our share price is too low. We've been discounting for several months now, greater than 25% free cash flow yield. It's one of the highest in the peer group. We don't believe our base cash flow generating capacity is actually fully appreciated by the markets. We need to continue to work on that. We know that. But for now, the share price is just too low. So we'll continue with leaning in on the buybacks. We know we need to have a competitive ordinary dividend yield, and it needs to be competitive against other EMPs as well as the broader market. I think that's probably higher than what we see as the typical 2% ordinary dividend yield we see today. And we'll figure that out. It's about getting to a balance around what's the right strength of balance sheet. That certainly is trending to something stronger. But also, you know, what price are we going to base all of that on? Because I think it's a valid question as to what we all think mid-cycle price is now. So we'll get on with raising the dividend as well. We just need to be thoughtful about that. It was only 18 months ago that we cut the dividend by 90%. That was a pretty painful process. We're going to make sure we don't put ourselves in a situation where we have to do something like that again. Probably more than you asked for, but I wanted to take the opportunity to lay out a lot of context around the returns framework.

No, I appreciate it. I think what you both said about the shared buyback makes sense. And just a quick follow-up, John, just thoughts on future or I'd say near-term, medium-term alpine high activity given not only the strong natural gas prices post the Altus deal and even that near long-term supply contract agreement seems to be getting closer to fruition. So given all that, maybe what you could say about alpine high.

Yeah, I mean, when you look at our U.S. program, you know, we've got two rigs in the southern Midland Basin. We've picked up another one that's in the chalk now. You know, we've indicated we will be adding another rig probably middle of next year, which would put us three. That will go to Permian. And quite frankly, then, we envision those rigs kind of working those assets in tandem. You know, we're in pad drilling now. you'll be seeing those move. And with the time it takes on the unconventional side to mobilize a rig, drill pads, and see production, you know, your short-term windows are kind of, you know, we're benefiting from those right now at Alpine, with the ducks that we did earlier, right? So I think you're going to see a very well-thought-out, efficient capital program in the U.S. where we're moving those rigs around those plays based on the how we've laid the inventory out and the infrastructure so we can maximize those returns. But, you know, there is a portion of the altus piece if we sell down all the shares that we do put in there, but it'll all fit into our framework. So, you know, it's nice to have quality inventory and options because then we can just really plan it out and be thoughtful. But you'll see activity, you know, across our Permian next year in a very thoughtful way. I don't know.

Got it. Thank you all so much for the time.

You bet. Thank you, Neil.

Your next question comes from the line of Michael Ciala from Stiefel. You may ask your question. Yeah.

Good morning, everybody. Um, see what the, uh, the next steps would be at Keskesi and Kwas Kwasi. Um, is the issue with both appraisals, uh, they're just lack of reservoir quality sands, um, as you stepped out, did you just step out too far on the edge? So you need to move back toward the discoveries with the next appraisals or is it more complicated than that?

No, Mike, it's a good question. I, you know, I will tell you that it, uh, it cast Cassie. Uh, it was a, you know, a big step out. Uh, you know, we knew it looked a little different, uh, you know, in terms of the signature. So we knew there was more risk to it. Um, But there is work to do at Keskesi and closer. But I think from the priorities, you know, it will all be kind of put into is you're working across all the discoveries and the appraisal program. We're kind of integrating data. We've prioritized with the appraisal, you know, things that would be, you know, what I'll call lower GOR, you know, black oil that you could, you know, potentially fast track. And so, you know, we're working those in a queue based on the learnings and kind of integrating everything in. You know, some of that will come to one of the reasons why Crab to Go is the next exploration well. You know, it's in the neighborhood, and we like the way it looks. So I think it's all part of a, you know, an integrated plan.

Okay, helpful. And maybe just to follow up on Neil's question earlier, can you talk about that decision to put the third rig in the chalk versus the Midland or Alpine high? And Steve mentioned a plan to add a fourth rig next year, any early preview on where that might land and I guess any possibility of going beyond four rigs in the U S next year?

Yeah, this is a Dave Purcell. It's a good question. So remember on the chalk, we, We talked about drilling a handful of wells in our Brazos County acreage position. One, because we're trying to maintain optionality. We've had significant experience a little bit to the west in the Washington County area. And we had a decent acreage position put together and wanted to hold it together. And we like what we've seen so far. It's consistent with the geology we've seen in Washington County and well results. We really just want to leverage that experience. We liked what we saw and felt like it was time to put a rig there and continue to progress that position. The thing to remember, it's near infrastructure. There's a lot of pipe infrastructure in the area. It's less than 100 miles from Houston Ship Channel, so we're getting Henry Hub pricing and LLS pricing for the crude. The GORs are a little bit higher than what you typically see in the Permian. So there's a little bit of a gas component there too, which we like in these markets. So for us, it was a pretty easy decision on the chalk. The extra rig we talked about, the incremental rig in the middle of 2022, I think it's important to point out, first of all, that as we think about adding another rig, it's harder to stand up a rig quickly. It's a couple quarters from the time you make that decision to the time you're turning to the right just because of long lead items and supply chain issues and to make sure that we have everything we need to keep that rig running. I think John highlighted that there's a lot to do in the Permian. We have two rigs in the southern Midland Basin. We have a lot of development inventory that we're not getting to which includes Alpine High, and we have a lot of good opportunities for that rig, and we'll post you on those in February, but you can imagine that Alpine would be on that list of places we'd be looking to drill next year.

And to be clear, there will be no fifth rig in the onshore U.S. next year. Yes. Yes. Thank you, Steve.

Okay. Thanks, guys. Thank you, Mike.

Your next question comes from the line of Bob Brackett from Bernstein Research. Your line is now open.

Good morning, all. Just a question following up on the Austin shock and the Alpine high. How do you think longer term about the balance of gas-directed drilling versus oil-directed drilling? Any thoughts there?

Yeah, Bob, I think the beauty of a diverse portfolio is we have the ability to flex that. And so I'm going to give you a non-answer because it really depends on where commodity markets go. We're obviously, you know, we've got a very constructive crude market and a gas market that's becoming more constructive. We'd like to see the back end of the gas curve strengthen a little bit from here, but Again, with a diverse portfolio, both diverse in the permanent and diverse globally, we have the ability to flex and move and take advantage of commodity markets across the globe. So I'll leave it at that, but we're watching the forward curve on gas. Let's just leave it at that.

Okay, perfectly clear. If we're traveling the globe, can you talk about inflation? and sort of what you're baking in domestically where you might be seeing something a bit higher versus maybe some of the international assets. What's baked into that sort of CapEx guide in terms of inflation?

Yeah, Bob, I mean, you know, you look today and it's the commodities, right? I mean, steel is up where we've got fuel, your power costs, your people costs. I mean, but it's really steel and people is how we frame it. And we have factored some of that into that capital number as we look at our programs. I mean, we try to get ahead on the purchases. And so you get into the middle of 22, it is, you know, it is baked into our capital numbers.

Any difference domestically versus internationally? And is there a number you'd hazard to throw out?

No, I mean, you know, I think you can look at those numbers and easily, you know, you get into the, you know, I mean, 15%, 20% number easily and some places even higher. But, you know, not a lot of difference between the two. You just don't have – I mean, the nice thing about a place like Egypt, there's not as much competition, you know, for rig ads and things. And so it's probably easier to pick up rigs in Egypt than I would say – You know, in the U.S., just because, you know, I take you back to 2014, you know, we were running 28 rigs there. So it's not like we're going up to a level where we've got to bring new equipment in and those sorts of things. I don't know, Dave, any more specific you want to say?

Yeah, the only thing I'd ask, if you think about the type of drilling that we do in Egypt, it's vertical wells. It's more commodity drilling. compared to what we're doing in the Permian where a lot of the well cost is really on the completion side. So just less, I think John hit it, there's less inflation in Egypt, and it's really just because of the type of wells that we tend to drill kind of day in and day out.

The other thing I would add, Bob, is some of the targeted divestments have been on our higher water cut central basin platform properties. where we're, you know, burning more energy and moving more fluid. And those types of things are helping our numbers too, right, in terms of what we're targeting. So, you know, we're trying to be really smart about the portfolio and factoring all those in.

Great. That makes sense. Thanks much.

Your next question is from Leo Mariani from KeyBank. Please go ahead.

Hey, guys, just wanted to follow up on the stock buyback, you know, program here. I guess, you know, high level you guys talked about, you know, roughly, I guess, $2 billion of free cash flow. I know there's some dividend here, but, you know, 60%, you know, to the buyback. I mean, that certainly could imply kind of north of, you know, a billion dollars on the buyback. And just in our math, that certainly seems to be a very large percentage of your shares outstanding currently, kind of approaching, you know, you know, 15%, you know, upwards of that, maybe in one year, next year. Just wanted to get a sense of, you know, do you guys think that a number that size is roughly correct, and is it feasible to buy back that much stock?

Well, if the share price stays roughly where it is, then that'll be the outcome, yeah. And if oil prices stay where they are.

Right, okay.

Yes, I think it is feasible, yes.

Okay. And then just wanted to follow up on the Austin chalk here. So obviously at this point you've dedicated a rig. I guess in your slide deck you kind of talked about one well result, you know, looked very strong. Presumably there's probably more than that in terms of results that maybe you guys have seen out there. I was hoping maybe you could, you know, give us a little bit more color in terms of, you know inventory kind of aerial extent of where you guys have have drilled you know is there kind of an acreage number you think is a sweet spot out there for you that would kind of give you just a number of years of inventory and maybe just more color about what that rig is doing is it all development work is there going to be you know a mix of some exploration in there can maybe just provide a little bit more color about the what the run rig is doing and what you've seen so far

Yeah, one comment from me is, you know, not only do we have the operated rig, but we're also a non-op and, you know, some of Magnolia's operations. So there's quite a bit of data. Dave, I'll let you jump in.

Yeah, Leo, it's a good question. The way on the Brazos County side, we haven't really talked yet about the size of this, but There's some, I wouldn't call it exploration, but there's some additional delineation work we're doing to see kind of how big this could be. But when we look at it, there's easily over five rig years' worth of development to do in this one spot. So, again, we're leveraging a lot of our knowledge on this. on the work we've done over in the Washington County area as operator, and as John suggested, a fairly significant non-op position. So we'll leave it at that.

Okay. Thanks, guys.

Next is from John Freeman from Raymond James. Please go ahead.

Hi, guys. Thanks for taking my question.

You bet, John.

I wanted to follow up on Alpine High, which I'm sure you would have a couple of quarters ago. I don't think we would have realized we'd be having multiple questions on Alpine High, but obviously a lot of things have changed. And so I guess when I sort of look at Alpine High and, you know, what gas and oil prices have done and then, you know, following up on the recent Altus Eagle Claw deal where those processing gathering rates got a heck of a lot more attractive. And then I know that y'all have done some stuff on sort of wider spacing than y'all used to do there as well. I'm curious, as it sounds pretty likely, that that fourth range will go to Alpine High if there might be some plan to get an update on sort of the economic model for Alpine High because it has been quite a while since we've seen it.

Yeah, John, this is Dave. Look for that as we get into 2022 and really kind of hone in on where that additional rig's going to focus. But you're right. I mean, it's not just gas price and cost structure. We've done some things on performance on some of the ducts with spacing as well as frac design. And some of those wells are in the public domain. And the results are very, very good. It certainly exceeded our expectations. So there's a number of factors that would kind of drive us to really focus on alpine as well as some of the other opportunities out there.

Okay. And then just the follow-up question on Egypt. So if I heard you right, John, it sounded like that the 11 rigs was going to go higher post the modernization getting completed, if I heard that right. And obviously, it's been a while since we've been at this sort of an activity set. So, you know, Egypt sort of, until at least Cernam gets to a point where it's at first oil, Egypt kind of becomes the growth driver for the company. And I'm just, I guess I'm just sort of curious when we think historically it had been sort of like, you know, an eight rig program or so would kind of keep production roughly flat if we go 11 rigs, you know, plus, is this sort of like a double-digit type growing asset? Just, I guess, any additional color, how you're thinking about Egypt?

Yeah, I mean, clearly, we've been gradually ramping, right? We went from five, we started the year around five rigs, we went to eight, now we're at 11. The plan would be to go up another, you know, another step. You know, I don't see us going back, needing to go back to where we once were, you know, in the, you know, the mid-20 range, but it's going to turn the corner. We've been slightly under-investing in Egypt for quite a number of years, and it definitely will turn the trajectory the other way, which is what Egypt wants, and quite frankly, part of the overall win-win that's in this for Egypt and APA.

Got it. Thanks. I appreciate it.

Thank you.

Again, to ask a question, please press star 1 on your telephone keypad. Your next question is from Michael Ciala from Stiefel. Your line is now open.

Actually, John just asked my two follow-up questions, but I'll ask one more. The asset retirement liability being put back to you with those Gulf of Mexico assets. Does Fieldwood continue to operate there? And do you have any input on, on what they do there?

No, those assets came out of Fieldwood. So the legacy Fieldwood company is now a company called quarter North. And, um, and, and they, they don't, they don't own the, the, the old Fieldwood assets that, that, uh, that Apache had sold to them. Those came out and went into, uh, an entity that we now call ComShelf. There is a person that's kind of contract managing those assets because there are assets that are still producing. The contract today is in place with Quarter North, the old Fieldwood organization, to operate those assets for us, and we'll continue to evaluate whether that's the best long-term situation.

is there any thought on just taking over or could you potentially take over operations there? Would you want, I mean, if you've got the light, all the liability, um, would it make sense to, uh, to operate it yourself?

Well, we'd have to ask the lawyers that of whether, whether we can operate those assets or not. I believe there's some issues with us being able to operate them, but, um, but, uh, I doubt that we would take over operatorship of those assets at this point in time. The nature of the assets there, there's a large inventory of properties that came out of Fieldwood. A number of them are in abandonment activity today, and a smaller number of them are operating and still generating free cash flows. And I won't go through the details unless somebody wants me to, but we booked a net $1.2 billion liability on our balance sheet. That's the gross abandonment obligation, less the free cash flows that we see coming out of those assets for their remaining life. And then we also booked on the asset side of our balance sheet $740 million of various forms of financial security that we have in place to fund that abandonment obligation. So a net liability on our part, a net obligation of about $450 million, that obligation won't, we won't actually start funding anything on that obligation until 2026 at the soonest in terms of costs that could be incurred. that we wouldn't have any form of reimbursement for. And then that would carry over for about five or six years after 2026 in terms of that situation. The present value of all of those costs today are about $250 million because we had to book an undiscounted number of the $450 million. The other thing I just might comment on is that... the way we went about doing the work, because we only got access to the raw data behind all of this in August, and we've been pouring through that since we got that. We've looked hard at the abandonment costs, and we've looked, you know, the second priority was to look at the operating assets and the cash flow from the PDPs on those. And then the third priority was to look at the capital investment opportunities because any assets like these are going to have a pull re-completion opportunities and things like that. That was the third priority. And we really haven't gotten through all of those. There are literally hundreds of capital investment opportunities. We got to the ones that we thought were the highest priorities, seemed like the best opportunities. And so those are included in the free cash flows. But we think there are more. We think that there are opportunities to reduce the operating and overhead costs in the PDPs, and we believe there are probably more opportunities on the investment side that we just haven't been able to get to yet. So we'll be – you should be watching for those over the coming quarters. And that has a decent chance of possibly bringing that $450 million liability down over time and that would also decrease, obviously, the present value of that opportunity.

Thanks for the detail on that, Steve. One more. You had mentioned, Steve, about the divestitures you plan next year. I know you guys don't want to give detail on that, but I'm just curious, can you speak broadly as to what assets might be put in that divestiture bucket? I'm assuming... They're on the domestic side and outside of your kind of three core areas.

Mike, actually, you know, we sold some central basin platform properties earlier this year that were higher cost, you know, higher water cut, later life things, things we've had in the portfolio for a long, long time, what I call some of the legacy. You know, you can anticipate, you know, more of those types of assets is probably what would make sense.

Yep. Okay. Very good. Thank you, guys. Thank you.

You have your last question coming from the line of Doug Leggett from Bank of America. Please go ahead.

Hey, guys. Sorry for double-dipping today, but I had a couple of things I wanted some clarification on after I queued up again. First one is on the buyback, I think I missed the comment, and I'll ask a question like this. When you take disposals potentially into account, as well as, I guess we've already dealt with the Egyptian thing, as it relates to cash flow, is it an upward limit on how aggressive you would expect to be with the buybacks in absolute terms?

No.

Okay, simple enough.

And my follow-up is just to give a bit of color on that, Doug. Again, I think our shares are trading at a pretty meaningful discount today. They have improved over the last month or so, and that no doubt is part of the purpose of the buyback. But we believe they're still trading at a meaningful discount relative to the price environment we find ourselves in. And we just think that's, for long-term shareholders, that's one of the better investment opportunities we can make. And so we'll continue doing that as long as the free cash flow holds up. So that's why we say it's a minimum of 60%.

Steve, the 500 million, does that go to the balance sheet or does that go to buybacks as well? Because that's not technically operating cash flow.

Yeah, we're just going to remain noncommittal on what the buybacks and, for that matter, the other 40% can go to. I mean, the disposal proceeds and the other 40% of free cash flow because we'll deal with that as it occurs. could go to balance sheet strengthening, could go to more buybacks, could raise the dividend quicker. You know, we've got a number of things on the horizon with Egypt modernization also occurring. So we've got a lot of things still ahead of us here.

I don't want to labor the point, but credit agencies, do they have a view on the buyback? Have you run this past them to get their opinion?

We haven't spoken to them yet, but we will be speaking with them shortly.

Okay.

My last one is... We will reassure them of the same thing that we've talked about here today. We're still going to have plenty of free cash flow to do further balance sheet improvement and cash flow from asset disposals if we need to do that and if we feel like that's the best thing to do at the point in time.

Thank you. My follow-up is a really quick one for clarification. Chenier has your contract kicking in Paris-Passu with their third Corpus Christi development, which is not even FID'd yet. My understanding was that that contract could become effective middle of next year. Can you just offer some clarification on the timing and maybe what you would expect the ultimate tolling cost to be for you guys?

Yeah, I can certainly comment on the first part of that. Our contract is while it was in the context of FIDing another project, it's not contractually tied to any project. And so it's just a contract that starts in 2023 and runs for 15 years, 140 million cubic feet a day, and Chenier has an option to bring that forward one year, to start it in mid-2022, July of 2022. And we're waiting to see if they will exercise that option.

All right. Thanks, fellas.

Thank you, Doug.

That ends our question and answer session. I'll turn the call back over to John Christman for closing remarks.

Thank you. Before ending today's call, I'd like to leave you with the three following points. First, We are taking prudent and appropriate steps now to increase our capital investment to a level that will enable us to sustain production on a global basis for many years. Our portfolio offers considerable depth and flexibility to do this efficiently. Second, we are generating substantial free cash flow in this environment, which we currently estimate will be around $2 billion for the full year 2021 and again in 2022. And lastly, we are committed to returning a minimum of 60% of our free cash flow via dividends and share buybacks. And we are demonstrating our commitment to this process right now in the fourth quarter. Thank you for participating in our call today. Operator, I'll turn it over to you.

That concludes this conference call. Thank you all for participating. You may now disconnect.