APA Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the APA Corporation's second quarter 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. It is now my pleasure to introduce Vice President of Investor Relations, Gary Clark.

Good morning and thank you for joining us on APA Corporation's second quarter 2022 financial and operational results conference call. We will begin the call with an overview by CEO and President John Christman. Steve Riney, Executive Vice President and CFO, will then provide further color on our results and outlook. Also on the call and available to answer questions are Dave 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 around 20 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 second 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 and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. Consistent with previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude non-controlling interest in Egypt and Egypt tax barrels. I'd like to remind everyone that today's discussion will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discussed today. A full disclaimer is located with the supplemental information on our website. And with that, I'll turn the call over to John.

Good morning and thank you for joining us. On the call today, I will review our second quarter highlights and discuss key trends and performance in each of our core operational areas. Following that, I will provide some color on the 2022 guidance, which we updated last night in our earnings release and supplement. Over the past few months, fears of economic recession, a new wave of coronavirus outbreaks, and concern about potential demand destruction have have created substantial volatility in commodity prices and the value of energy equities. However, the pullback in oil prices from the second quarter peak is healthy for both consumers and producers. We continue to have a positive outlook on the long-term fundamentals for natural gas and oil and view APA stock as a compelling value today. As I look at our second quarter results, I see several key highlights. APA generated record free cash flow of $814 million. We repurchased 7 million shares of APA common stock, followed by an additional 6.9 million of share repurchases in July. Gross oil production in Egypt increased by more than 7,000 barrels per day versus the prior quarter, which was our first material quarterly increase in Egypt oil production since 2018. Our 40s field maintenance turnaround in the North Sea was executed safely and on budget. We advanced our program in Suriname with the successful flow tests at Crab Dago, and we made excellent progress on upstream flaring reductions in Egypt and are on track to achieve our 40% reduction target by year end. The second quarter was very good in many ways as our diversified, unhedged portfolio benefited from rising oil and gas prices and high margins. However, we have encountered a few challenges. In Egypt, although we delivered strong oil production growth in the quarter, we are experiencing some delays and inefficiencies as we scale our active rig count from 5 to 15. These include supply chain, equipment, and infrastructure-related delays, longer-than-expected time to staff and reactivate cold-stacked rigs, extended drill times, which are primarily a function of new rig and new crew inefficiencies, and increased regional competition for experienced national employees. Well performance in Egypt has been in line with expectations. so these are mostly short-term, above-ground challenges. We have identified and are swiftly taking appropriate actions that will bring us back up to pace. In the Austin Chalk, our delineation program has generated mixed results thus far, so we have chosen to pause most of our planned drilling and completion activities. I will talk more about the impact of these items on our second half guidance in a few minutes. Turning now to some of the details of our second quarter results. Our largest spend categories, capital investment, operating costs, and GNA were in line or less than expected for the quarter, despite a challenging overall supply chain and cost environment. Total adjusted production of 305,000 BOE per day was down compared to the first quarter, primarily driven by our early March Permian Basin minerals divestiture, the impact of high oil prices on our Egypt PSC volumes, the timing of well connections across the portfolio, and seasonal maintenance in the North Sea. We continue to expect our global adjusted production volumes will return to a growth path this year as our activity has now reached a level that we have not seen since 2019 prior to the COVID pandemic. In the U.S., we continue to run a steady two-rig program in the southern Midland Basin and recently initiated drilling at Alpine High with a third rig. In Egypt, we averaged 12 rigs, brought online a number of quality wells, and achieved a high drilling success rate. Our strong oil production growth in the quarter was partially offset by a decline in lower-margin natural gas production. In the North Sea, we were in the midst of summer turnaround season. We completed the maintenance turnaround at 40s on schedule and on budget and have brought that field back into production. At Beryl, we are wrapping up a platform turnaround and will return to production in the near future. On Block 58 in Suriname, our partner's hotel is drilling the Dickop Exploration Prospect, which sits roughly 8 kilometers northwest of our Sapakara South Discovery. On the adjacent Block 53, we are drilling the Baja exploration prospect with our partners Petronas and SEPSA. On July 29th, we closed on an acquisition of properties around our active development areas in the Texas-Delaware Basin. This is an attractively valued tuck-in acquisition that comes with PDPs, a number of wells in the drilling and completion process, and a nice inventory of undrilled locations. It also brings a high quality drilling rig and experienced crew to continue development in this very tight service environment. There are currently two rigs running on the new acreage. One will be released in the fourth quarter and we will retain the other as our fourth U.S. development rig. These assets compete well within our portfolio and integrate nicely into our Permian operations. Turning now to our outlook for the second half of the year, which we included in our financial and operations supplement last night. Our CapEx program of $1.725 billion remains unchanged for the year. Steve will have some comments on a few minor changes in other P&L guidance items. In terms of adjusted production, our new four-year guidance range for Egypt is 63,000 to 65,000 BOEs per day, which is down about 7% from prior expectations. More than half of this decrease is a result of fewer wells being drilled and completed due to the operational challenges I spoke of earlier. The remainder is attributable to the PSC impact of higher oil prices. In the U.S., we have a number of moving parts affecting our outlet for the remainder of the year. First, we have removed roughly 8,000 BOEs a day of Austin chalk production from the second half of the year following the decision to defer most of our near-term drilling incompletions. Second, we expect the Texas Delaware Basin acquisition properties will average 12,000 to 14,000 BOEs per day of production for the remaining five months of the year. We've also encountered some completion delays on Permian-operated and non-operated wells and recently divested a small package of Permian properties. The net effect of these items is a slight downward revision to our four-year 2022 U.S. production guidance. In the U.K., our near-term activity plan and four-year 2022 production guidance remains unchanged. Later this month, the Garten 3 development well will commence production, which should generate a significant volume uplift in the fourth quarter. I will note that the new energy profits levy recently became effective in the UK. This reduces our free cash flow outlook going forward, and while it won't affect our 2022 drilling program, we are evaluating the longer-term impacts of the tax on our planned investment in the UK. But in general, new taxes are not effective incentives for increased investment. Steve will share more details about the tax impact in his remarks. Turning now to an update on our ESG initiatives. APA's top priorities are reducing GHG emissions throughout our global operations and supporting our employees and the people in the communities where we operate. We have completed several projects across the portfolio, most notably in Egypt, that enable us to compress and direct previously flared gas to sales, thereby increasing revenue and improving our emissions profile. This puts us well on our way to achieving our goal of reducing upstream routine flaring in Egypt by 40% by year-end. I am very pleased with our progress on this and many other fronts, and there is much more to come. Also, in late July, we issued our 2022 sustainability report. I hope you will take a moment to review the report and learn more about our strategy and initiatives to provide affordable, reliable energy to the world, while also delivering on rigorous near and medium-term ESG goals. In closing, APA remains committed to returning 60% of free cash flow through buybacks and dividends, as well as strengthening our balance sheet, including paying down debt as it matures. At current strip prices, we expect to generate approximately $3 billion of free cash flow in 2022, of which at least $1.8 billion would be returned to shareholders through dividends and share buybacks. Through July, we have returned just under 50% of this amount. And finally, I would like to extend a personal thank you to John Lowe, APA's chairman, who recently announced his retirement after serving nine years on the board. John has been a great friend and colleague. We have benefited greatly from his experience and insights, and we wish him all the best. Lamar McKay has been elected to serve as APA's new board chairman and will formally take over for John in September. Lamar has a wealth of experience that I know will be a tremendous asset to the boardroom and my leadership team. We are all looking forward to working with him and welcome him into his new role. And with that, I will turn the call over to Steve Reine.