APA Corporation

Thank you for standing by. Welcome to the APA Corporation's fourth quarter 2021 earnings announcement. At this time, all participants are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star, then 1 on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star, then 0. 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 Chrisman. Steve Reine, 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 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 25 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 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 calls are adjusted to exclude non-controlling interest in Egypt and Egypt tax barrels. I'd like to remind everyone that today's discussion will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we 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. At the beginning of each year, I 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 six 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 one 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 returned 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 continued to streamline our Permian portfolio. In 2021, we sold $256 million of of non-core 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 non-core 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 buildup 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 Crab Dagoo which lies approximately 18 kilometers to the east of Sapakara South. We will initiate flow testing at Crab Dago in the coming days and will 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 Eagle Claw 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 is enables deconsolidation of the midstream business and its associated debt. It also provides APA an opportunity for near-term liquidity of almost one-third of our 12.9 million ALTA 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 one 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 three 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 and our safety performance and protocols. In 2021, we achieved a significant improvement in the three 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 continued to deliver good performance from our Permian oil plays and at Alpine High. Our focus was on increasing efficiencies through longer laterals, optimized well spacing, and enhanced completion design. The success of these initiatives was recently recognized by J.P. Morgan analyst Arun Jayram, 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 duct 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 two 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 three-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 two 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 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 three-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 three 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 backward-dated 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 three 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 three 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 three 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 three 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 Reine.

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 non-cash impairments, primarily on ALTA's midstream interest in the epic crude pipeline. Net of tax and non-controlling 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 UK, 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 non-cash 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 1st of 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 five 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 Eagle Claw 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 ALTA's 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 Barrel. Additionally, the Ocean Patriot drilling rig is expected to be offline for approximately three 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 three 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 duck 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 websites. 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 three-month period following the closing of its combination with Eagle Claw. All of that should provide a significant amount of available cash in the next few months. A 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 percent of our free cash flow to shareholders, mostly through stock buybacks. We had to fund a portion of this on a 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.

If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Doug Leggett with Bank of America.

Thanks. Good morning, everybody. Joanne, I wonder if I could ask you first on Suriname. Obviously, Crab to Go 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 Crab to Go was kind of a gating item for, not to put words in your mouth, but not whether there will be a boat, but what the size of the boat 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. Is anything concerning 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.

No, thanks for the question. I mean, you know, first of all, you know, we made it clear that Crab Dagu 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, you know, we only drilled 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, you know, because it is an exploration well, is moving on to the flow test and the pressure buildups. 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, you know, with a lot more color once we've validated that.

You still see Sapicara, Kiskezi, Crabdigo as a combination development?

I mean, the nice thing is... At Sapakara South, in my prepared remarks, we stated that the connected volume to the Sapakara South one has increased, and it's a good sign because with time and the buildup, good 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 is but I won't say that it has to be connected. So, you know, there's a lot of optionality there. We need to do the flow test at Crab Dago, and then we'll come back with a game plan. And the nice thing is, is while we're doing the flow test, there's optionality with where we send the rig next. Do we go ahead and, you know, appraise Crab Dago? Do we appraise the second well at Sopicar South? 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 and a lot to work with, and we just need time to collect more data and keep working the data.

Okay, thanks for that. My follow-up, hopefully a quick one, Steve. On the last call, you talked about at strict prices 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 um you've you've put out the same number today which i think might be one of the reasons your stock is lagging um so can you walk us through what uh 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

Yeah, Doug, so, you know, I think I'd probably refer to the, I think we put out a chart in our supplement that'll give you a good view to the three years, and that'll, 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 a I wouldn't say a current strip, the February 7th strip, which we're above today, and then an $86 flat WTI price environment, which was the 22 strip on that February 7th date. The, you know, and you can see, you know, in my script I said, you know, it'll be more than $2 billion of free cash flow. You can see from the chart it's closer to around $2.2 billion. You know, 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 could 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 February 7th 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, GNA going up, and we can talk about some of those things if you'd like. So costs are going up, and and it's also affecting the capital program. So 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 that we have built you know, 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 had 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, but thanks for the answer.

Our next question comes from John Freeman with Raymond James.

Good morning, guys.

Good morning, John.

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, some maybe not Suriname, but close enough, 200 million that's allocated towards Suriname It seems like maybe in the comments, John, y'all haven't necessarily decided the exact mix of the plan this year in terms of what's going to be appraisal versus expiration. 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 expiration? Because obviously what you're on the hook for is quite a bit different if it's expiration versus appraisal.

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

Okay. Yeah, it just looked like last year you all ended up coming in a good bit below the – initial budget y'all put out on CERN on last year. So that's the reason I ask. And then the other question related to the mineral sales. So last quarter, y'all had said you were targeting in 2022, 500 million of non-core 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 y'all kind of contemplated additional deals in the central basin platform. So just trying to get an idea of how to think about the mineral deal that y'all did that was a good bit more on proceeds than what y'all contemplated doing for the 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 this 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.

Thanks, John. I appreciate it.

Thank you.

Our next question comes from Michael Ciala with Stifel.

Yeah, good morning. I want to follow up on Surnam as well. You said the discovery de-risks some additional prospects. So is Crab Dagu a different play type than the prior four 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, you know, even with your background, I think you probably have some insights into, you know, what we're getting to handle with. But I think from the geophysical side and the geologic model side, it's de-risking and becoming a lot more predictive, which gives us confidence and confidence You know, it's the same play type. I mean, we're in Maastrichtian and Campanian. We did not drill on down to the San Antonio here, so this was really just the upper two targets. But I think it's just confidence in what we're being able to see and image and put into the models. So it's a positive from that perspective.

Very good. Steve, you mentioned 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?

Yeah, so the 337 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 three-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 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. And 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'll be the first use of cash. At the end of the quarter, or through the quarter, I should say, 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 reduce 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.

Understood. Great. Thank you.

Our next question comes from Charles Mead with Johnson Rice.

Good morning, John and Steve, and to the rest of the team there.

Good morning, Charles.

John, I wanted to go back to the Sopicar South. So obviously that's a positive result from the flow test, 400 million barrels in place. But what should we be thinking about in terms of recoverable there? And can you frame or refresh for us? I know this may be overly simplistic, but what do you need to get to in terms of total recovery? recoverable resources before you're, you know, within striking distance or across the finish line on FID?

Well, a couple different questions there, Charles, and I'll, you know, I'll give a little bit of insight and then I'll let Dave Purcell jump in here as well. But, yeah, I think the things to know on Sapa Car South, you know, number one, one, you know, kind of continuous thick blocky sand and 1.4 Darcy Rock. So you're going to have very efficient reservoir and high recovery. And then the second thing is one of the keys after you do a flow test is you collect the data on the buildup and the characteristics there. And, you know, it's from those characteristics of the buildup that really showed us and demonstrated that there's even more resource there than, you know, than we had mapped in Sapa Car South. So it points you to more appraisal, and, you know, it's a really good sign. So, Dave, I'll let you jump in on the second part of that question.

Yeah, thanks, John. Charles, good question. John's right on the buildup test. Remember those that we floated for a few days and then shut in for a long-term buildup, and that longer-dated pressure really allows us to start to hone in on recoverable volumes, and that's where the original range or 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. So any range of recovery factors that you might be using, you'll 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 guideposts 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 a development, and, you know, there's a number of factors, including, you know, recoverable resource that factor into that. So I'll just leave it there.

Got it. Yeah, I know it's a simple way to ask complex topics. But one other question on the Delaware Basin mineral sale. Was that – Was that a piece of that original BP acquisition, BP Permian acquisition? Is that where those assets came from?

Some of it came from that, Charles. You know, it's just a Delaware Basin package, and, you know, there's a few different pieces of it that came in there, but, you know, some of that was part of the old ZPZ BP.

Thank you, John.

Thank you.

Our next question comes from Bob Brackett with Bernstein research.

Great, thanks for taking my question. Got a two parter. One is I think in the verbal comments I heard light oil and crab to go versus not seeing that in the press release. Could you kind of confirm the quality of the oil?

Yeah, Bob, it's a, you know, great question. It's early. You know, we've got samples and they're on their way to the lab. But, you know, we can confirm it's light oil in, you know, all 90 meters of hay that we released.

Perfect. And the second one might be a bit pick and nitz, but You've mentioned in the release and in your words a minute ago, the world-class reservoir quality sitting there at Safakar South. And I think the language in the release on the reservoir quality of Crab Degout 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?

Yeah, Bob, this is Dave Purcell. We want to see the flow test. I think Before we flow tested SAPACARA, we were probably using the same language. We want to see the data, 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.

Okay.

Our next question comes from Janine Y with Barclays.

Hi, good morning, everyone. Thanks for taking our questions.

Good morning, Janine.

Good morning. Maybe our first question is just on cash returns, our favorite 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 corporate post-break-even dividend, or they have like a maximum percent of CFO that the base dividend will be at some mid-cycle price.

Yeah, Janine, and I can let Steve jump in here as well, but I think in general, just over the three-year period we were 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 you 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 the framework there that over time we do anticipate we will be able to raise the dividend. Steve, anything you want to add?

Yeah, I think, you know, and we've said this in the past here in the recent past, Janine, 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. You know, that said, I think the 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%. You know, 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 percent on our dividend today. But we're not paying that all in dividends. It is in buybacks, a lot of it in buybacks, most of 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, you know, some sustained improvement in relative share trading, some more strengthening of the balance sheet, and possibly, you know, not required, but possibly a less volatile price environment than we've endured over the last few years. And, you know, 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. Thank you for all that color. Our second question is just maybe heading back to the three-year outlook, which we appreciate you all giving 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 outlooks, 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? Thank you.

Janine, 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, you know, those would be the two factors. But I think we've got a lot of confidence in the plan. It's, you know, a relatively stable plan over the next three years. And we are going to be growing oil, I think, at about 5 percent, driven primarily by Egypt.

Yeah. And just a little further color on that. You know, I think the capital program is robust through a pretty wide price range. If prices go up, 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 two forms of tax loss carry-forwards, but we have multiple forms. But the two big ones are what you would call grandfathered tax losses that can be used 100 percent 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 percent limit. They could be used to offset up to 80 percent 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 losses, 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.

Great. Thank you very much.

Our next question comes from Neil Dingman with Truist Securities.

Morning, gentlemen. My first question is on the ease of activity. You all have laid out nice plans to increase the rig count. I believe it's about 15 by mid-year this year, given the high economics of the play. So I'm just wondering, you know, when you look on a go forward, what are the limiting factors on how much further you can push activity of this play? I'm just, you know, obviously given the great economics there.

No, Neil, you're spot on on kind of what the plan is. We're currently at 12 rigs today. I think we have the 13th rig next month, and then we'll be at 15 mid-year next 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's excited about it as well. And we've got a lot of work to do in terms of, you know, merging the concessions and the JVs, you know, while executing. But, you know, we're off to a good start and a lot of momentum and a lot of anticipation. We're excited about it.

Yeah, same. Really look forward to activity there. And then secondly... Just on domestic pressures, I know strictly you continue 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? You know, I'm just wondering how much longer you think this could go forward, or do you anticipate this mitigating a bit in the coming quarters?

No, I mean, I think the key with us is, you know, the luxury we've had is we set our activity sets for, And we've planned 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. You know, supply chain is working, you know, several quarters out, and we find ourselves in a pretty good place. but I also say it takes time, right? I mean, that fourth wriggle is coming mid-year, and, you know, 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, you know, let's not kid ourselves. There are pressures in the system. You know, truck drivers out in West Texas, chemicals, fuel, you know, there are pressures in the system and, you know, steel and everything else that's going up, especially on some of our longer dated things.

Very good. Thanks for the details, John. You bet.

Our next question comes from Scott Gruber with Citigroup.

Yes, good morning. 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, a 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?

Yeah, we don't have a specific target in mind. What we have in mind is getting back to investment grade And, you know, while that's important, it's not urgent that we get it done right away. It is important that we get that done, though. And so we don't have any specific target for long-term debt. In the end, it's the, you know, 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 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 one 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 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 one on Alpine High. The $4 million share early sell-down option associated with Altus Eagle Claw Combo, I believe, 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 multi-year plan?

Yeah, Scott, this is Dave Purcell. Yeah, 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 rig, so it'll do some drilling in Alpine and also do some drilling at our DXL field, which flows into the Altus midstream assets. And so it'll move around... in the basin over the next couple years, but it'll do a fair amount of drilling at Alpine Pacific.

Got it. Thanks for the cover.

Our next question comes from Paul Chang with Scotiabank.

Hi. Good morning, guys.

Good morning, Paul.

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 variable or that one particular quarter is going to be heavier than usual?

No, I mean, I think you've got a little gradual, you know, build in the schedules with the Egypt rigs ramping by mid-year. We'll be at 15, we're at 12 now. We're going to add a rig in the Permian mid-year, so, you know, it'll be a little bit heavier back half. And then the only shift you've got right now is, you know, with the Ocean Patriot, you know, needing to go in for some repairs that were addressed in the prepared remarks. So, but beyond that, nothing, you know, it's going to be pretty steady given the way we've geared our program.

Yeah, and the second question is that I think previously when you guys first completed the PSC modernization, talking about this year will be meeting kind of growth in the oil production. If we're looking at 2023 and forward with a 15-week program, what kind of growth that you will be able to generate over there on the long-term basis?

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

Okay. And I'm just curious, is that extent, I presume, that more than 2024? So if we look a little bit longer term, is that 10% is kind of target for you guys?

I mean, we've really just laid out, Paul, a three-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.

Perfect. All right. Thank you.

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

Yeah. Hey, how are you all doing? Good, Scott. Good. I'm just kind of curious on maybe following up that question from Paul. When I look at the chart on page 9 of the outlook through 2024, you do have a nice step up in oil in 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 consular field in Egypt is on probably a pretty good decline at this point. So where does the gas pick up in 23 and 24 in your outlook?

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

Okay, so it's more of an Alpine, I think. Great. Okay. And then... It is my follow-up, you know, turning to the Permian and ex-Alpine high. Can you give us a sense of, you know, where you think your depth of your core Tier 1 inventory is? So, you know, when you think about your outlook over the three years and maybe a little beyond it, you know, what kind of depth do you see there at a, say, three-rig, three- to four-rig cadence?

Yeah, we're well beyond the three-year program. We get out towards the end of the decade easily, so...

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

It's a combination of both, Scott. 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.

Got it. Thank you.

Our next question comes from Leo Mariani with KeyBank.

Hey, guys. I wanted to ask a little bit on the North Sea here. I know that you clearly have been plagued, you know, with some unplanned downtime, and, of course, you have turnarounds in that area. But as I'm just looking at the production, you guys are 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, you know, 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 $50,000 as kind of being a little bit more stable in that outlook, or do you see the $50,000 probably continuing to trend down, and is it just kind of always anticipation of that kind of two-rig program in the North Sea?

No, it's a good observation. I mean, I think the key with the North Sea, you know, when you look at it, we've got two different assets there, 40s and barrel. And, you know, 40s, we've got the Ocean Patriot up there. We're working. We're doing subsea tiebacks. You know, we've had that rig working for a long time, and we did have two, you know, two rig breakdowns that we typically haven't seen that have just kind of slid the – The schedule back, one was some things with the BOP, and then as we mentioned this, had some really rough weather and had one of the anchors say, 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, you know, when you're running one floater and then you have something like this, which is kind of a very unusual event, it slides back a key well like Garden 4, which was scheduled to come on, you know, 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 40s, and how we're starting to operate it. We've got one platform rig. We've been working between barrel and 40s. We're definitely starting to move into the wind down in terms of how we look at 40s 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. You know, when we bought that asset from BP in 2003, it was scheduled to be abandoned in 2012. You know, 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 40s as opposed to, you know, investing capital in barrel and continuing to expand and adding subsea tiebacks.

Okay, very helpful caller for sure. Maybe just jumping over to Sir and Ann here. So I think there was a point in time where you all maybe talked about, you know, kind of a two-rig program on Block 58, but it seems like maybe it's just, it's kind of gone to one rig. Is 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, you know, 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 rigs as you look out in the three-year plan?

I think it's a function of equipment and timing. Total brought in two 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, they've committed to drilling three more rigs. 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 Jerry D'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. Okay. Thanks, guys.

Thank you.

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

Thank you, Operator. I'd like to close with the following comments. We've outlined a three-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. at least $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 Crab Dagu. Operator, back to you.

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