Apache 4Q16 Earnings Call Notes

John J. Christmann

Stephen Riney

Hedged oil price at $50

“Over the past several weeks, we have entered into put option contracts providing a floor of $50 WTI and $51 Brent for most of our second half 2017 oil production. With this protection in place, we will move forward with our Permian Basin capital program knowing that any price weakness will not cause a funding shortfall. We chose to use put options to mitigate the risk, while maintaining full exposure to upside price potential.”

Apache 3Q16 Earnings Call Notes

Apache (APA) Q3 2016 Results
John Christmann

Alpine High

“Now I would like to spend a few minutes discussing our Alpine High play. The Alpine High is an immense resource and a transformational discovery for Apache. We have invested a significant amount of human and financial capital through two years of extensive geologic and geophysical work and reservoir and fluid analysis. This was accompanied by concept testing an initial round of verification wells, the results of which we disclosed in early September. We are now engaged in a methodical appraisal and delineation program to confirm the geographic and stratigraphic extent of the play and to formulate our long-term infrastructure plan. This work will continue for the next several quarters before transitioning to an active development program once gas processing and transportation infrastructure is in place.”

Egypt is doing the right things

“In regards to Egypt, Brian, having just gotten back from there the week before last, and my third trip over there, I’ve actually seen President Al-Sisi twice this year. I’ve got to give them a lot of credit. They’re on the right path. They’re doing the right things. They’re in the process of securing a loan from the IMF. This is all part of a process to go through and start to take some of the subsidies out and do the things to put the country onto the right track. So I actually feel very good about where things are. Our relationship is good. I think they understand how important Apache is. So we feel very good about that aspect of it. They’ve just got to go through a reset. And the good news is they’re taking this head on and they’re working on doing that.”

Capital plan depends on what price we’re going to use

“What I would say is Alpine is going to get its capital. We’re going to invest to sustain North Sea and Egypt. Permian is going to get a big chunk of its capital. And then how that pie changes is going to be a function of what price deck we’re comfortable running with and how much capital we pour. So we’ve seen a lot of volatility. We’ve gone from the low $50s to the mid-$40s. And so obviously every $5 of oil price and the movement of gas price means a lot to us in terms of that. So as we start out 2017, a lot of that’s just going to hinge on what price we’ve got we feel comfortable using.”

Stephen Riney

Egypt going through a tough time

“And then, just as a general rule, on a day-to-day basis, we generally hold a pretty minimal amount of Egyptian pounds at any one point in time. And just as an example, at September 30 we had a little over $50,000 worth of Egyptian pounds on hand. So the actual exposure to the Egyptian pound in a direct financial basis is pretty minimal. Of course, the more macro issue is that Egypt is going through a very difficult time. They’re doing all of the right things, but it’s going to be very difficult, and it’s going to be tough on the economy, and we obviously keep a very close eye on that.”

Apache 2Q16 Earnings Call Notes

Apache (APA) John J. Christmann on Q2 2016 Results

I don’t see us departing from conservative budgeting approach in 17

“The first thing I would say is we’re going to be a member of the returns club, is the club we want to be focused in and focused on full cycle, full cost, fully burdened returns. And that’s the club we’re focused in. I think above $45 this year, you would have seen our volumes grow and been able to do that. So as I think about joining a $50 club, we probably already were in the $50 club. So we just haven’t planned accordingly. We budgeted $35 this year, and you’ve seen us let a little bit of capital out. So I think the market today is more constructive than it’s been, both on oil and natural gas. I think it got a little bit ahead of itself here in the last few months, and we’ve seen it come back as we went back and touched $40. I think we’ll see what kind of price band we look at as we get into 2017. I don’t see us departing from a conservative budgeting approach, gearing things to the low end of the band.”

Apache 1Q16 Earnings Call Notes

Apache (APA) John J. Christmann on Q1 2016 Results

Targeting cash flow neutrality at $35 oil

“Apache is targeting cash flow neutrality in 2016 under our current budget, which assumes flat $35 oil and $2.35 gas.”

Well costs are down 45-60% from 2014

” in key areas of North America where Apache was actively drilling, our average drilled and completed well costs were down approximately 45% in the first quarter compared to average 2014 levels. Notably in the Delaware Basin, our most recent well costs are now down approximately 60%.”

Ready to increase our capital program

“Recent improvements in oil prices are encouraging. We are now looking for a sustainably improved pricing structure that would generate the cash flow visibility for us to confidently increase our capital program. The potential timing and magnitude of this increase is the topic of significant planning and discussion right now at Apache and with our board.”

Well prepared to ramp up activity

“Apache has maintained the organizational capacity and personnel to operate a significantly higher number of rigs and we are well prepared to ramp-up activity when appropriate. ”

We’re going to want to see some cash flow accrue before we start putting things back to work

“If you go back a year ago, everybody started ramping up and adding rigs quickly and expecting prices to hold. And unfortunately, those that outspent significantly in anticipation of what I’ll call visibility into more flat, longer sustainable price environment, ended up having to go back to the debt markets or the equity markets, that sort of thing. So I mean we’re going to be cautious. We’re going to be very thoughtful and disciplined. And like I said, we’re going to want to see some cash flow accrue before we start putting things back to work.”

Stephen J. Riney – Chief Financial Officer & Executive Vice President

We will increase capital spending if oil stays at these levels

“if the current oil price environment prevails, it’s more likely that we will maintain or even increase drilling and completion activity from current levels, which would result in increased capital spending.”

Things are starting to look pretty darn attractive

“At this point, the environment’s getting much better. I mean, we like the direction on the cost, we like the direction on the oil price, so I think we’re at a point where things are starting to look pretty darn attractive. But right now, our best hit is we haven’t committed to a lot of rigs or a big program at this point. So it’s one of those things we will be discussing as we start to look at plans, but at this point, we’re not quite where I would feel good about locking in a scenario.”

Apache 4Q15 Earnings Call Notes

Apache (APA) John J. Christmann on Q4 2015 Results

Taken decisive action to position for an extended low price environment

“we have taken other decisive actions to position Apache for an extended low price environment, which included aligning our capital spending with cash flows, attacking the cost structure, continuing to high-grade and build an inventory of attractive opportunities that will deliver strong returns under a low oil price environment, and strengthening our financial position and liquidity.”

We are well positioned for whatever lies ahead

“Apache is now very well positioned for whatever lies ahead. We are living within our means and anticipate being cash flow neutral in 2016 and beyond, until such time that the price environment warrants higher investment levels. ”

Conservative $35 price deck

“Similar to our approach in 2015, we are using a conservative price deck for 2016 budgeting that reduces the risk of inadvertently putting ourselves in the position of a material outspend and helps to sustain our credit quality. Our capital allocation process for 2016 is built around four key themes: living within our means and achieving cash flow neutrality for the year at $35 oil, focusing capital spending on protecting the asset base and optimizing and building inventory, maintaining a relentless focus on both capital costs and operational expenses and remaining flexible, opportunistic and ready to react as conditions change.

80% decrease in capital budget from 2014

“With this in mind, we announced in this morning’s press release a 2016 capital budget of $1.4 billion to $1.8 billion, the midpoint of which represents over a 60% decrease from 2015 and over an 80% decrease from 2014 levels.”

Strategically designed organization for $50 plus world

“we strategically designed this organization for a $50 plus world. So, we do not envision needing to add a lot of staff to be able to flex back up. Clearly, I think if you get into a significantly lower time period where you’ve got lower prices, 24 months, 36 months out at that point you’d probably reduce further. But, we’ve maintained the flexibility so we can ramp up our capital programs when appropriate.”

We were very aggressive about cutting

“we took actions and we’re very aggressive last year. So you look back to 2015 and 2016, we’ve had a track record of reducing activity and really trying to gear our business and mirror our activities to the price environment we’re in.”

See costs coming down even further this year

“In terms of our Permian well cost, we see things coming down and even further this year. As a rule, we’re looking at mile-and-a-half laterals. We have seen the intensity of the frac concentrations going up. So those are the types of parameters we’re going to use or using in those estimates.”

Stephen J. Riney – Chief Financial Officer & Executive Vice President

Not having to cut dividend

“Yeah, this is Steve again. So you make very good points. We cut early, we took a lot of actions in 2015 that a lot of our peers didn’t. And I think for that reason, we feel like we’re very well positioned not to have to cut the dividend now. We’ve done all the things to strengthen the financial position, the liquidity position, our refinance risk on the debt portfolio.”

The opportunities to invest are going to be even better in the future than right now

“We’ve chosen to live 2015 and 2016 as close to cash flow neutral as possible. We’ve done that because we believe that, especially in North America, the opportunities for investment are going to be better in the future than they are now. There are some good ones now, but we believe they’re going to be even better. So we’ve chosen to be cash flow neutral. So we’ve added $1.5 billion of cash on the balance sheet, chosen to be cash flow neutral, we don’t really need to reduce the dividend at this point in time.”

Apache 3Q15 Earnings Call Notes

Getting balance sheet in order

“So far in 2015, we have paid down $2.5 billion of debt. Currently our net debt is less than two times annualized 2015 adjusted EBITDA. We have extended our nearest long-term debt maturity to 2018, with only $700 million maturing prior to 2021. We have restructured and refreshed our current credit facility at $3.5 billion, which now matures in June 2020. And we have retained $1.7 billion of cash liquidity.”

Repatriation has triggered tax payable

“I would like to remind everyone that as previously discussed, the repatriation of proceeds from some of our foreign asset sales has triggered a U.S. income tax payable of approximately $560 million. Actual cash payment of this liability will occur in the fourth quarter of this year, thus some might consider our net debt of $7.1 billion at the end of the third quarter as closer to $7.7 billion.”

Plan capital program to keep us cash flow neutral for 2016

“we will plan a capital program, which we believe will keep us cash flow neutral for the year. We will not attempt to balance cash flow within each quarter, but instead to level-load activity for the year. We will fund the capital program from operating cash flows; we will not use asset sales.”

We’re going to live within cash flow

“I think the best thing we can do given this price environment; the commodity price is going be a big driver. As Steve mentioned, we’re going to live within cash flow.”

Looking to purchase acreage that will require application of science and technology

“we are looking at some things that would be significantly lower than what I’d call the retail prices that are being paid. And it’s where we’re applying technology and science and we think we’ve got some things that could be material. It is new ventures acreage, so there’s always risk with that and that’s why we wouldn’t want to talk about it now. But we’re talking significant multiples lower in terms of what that acreage might be viewed as and what it potentially could be worth. And I think that’s the zip-code that we feel like makes the most sense in this price environment because we can pick it up and we can work the science and you can have something that could be material.”

Apache 1Q15 Earnings Call Notes

Decreased rig count by 77%

“we decreased our North American rig count by 77%, from 65 rigs on December 31 to 15 rigs by the end of the first quarter. We are highly focused on reducing all elements of our cost structure.”

Budgeted for $50 WTI

“We have budgeted conservatively at $50 WTI for the year. And while first quarter oil prices came in a little below that level, the second quarter is off to a good start. Should oil prices stabilize at these higher levels and cash flow increase accordingly, we are well-positioned to ramp up the drilling program in an efficient and cost-effective manner.’

New CFO

” It’s great to be a member of the Apache team. And I have to say, it’s everything I hoped it would be and more. In my three months in the role, I have spent most of my time getting to know the business and the people and understanding how we do things. I have been very impressed with our team.’

Now planning to stick with international operations

“he key objectives with us on our international portfolio were two. One, unload our LNG, which we have done, signed, closed. And then we announced the sale of Australia. I think that leaves us with a portfolio now that we plan to stick with, we’re excited to have. We’re 60% to 70% North America. If you look at our North Sea and our Egypt operations, we’ve got world-class people there as well as leading positions.”

Even through the Arab spring, never skipped a beat in Egypt

” I think clearly the investment area there is improving, and if you go back, even though the Arab Spring, we’ve never skipped a beat. So, it’s in general, the investment has always been good for us. We’ve got a great relationship with the Egyptian government, and we did set record times and bring in Ptah and Berenice on, but we’ve been that way in the past. So, lot of advantages. It’s, clearly the sentiment is turning, and like the rest of our business we’re excited about it, and that’s one of the options we’ll have on the table as we start to think about if we have incremental cash flow, where would we put it.”

Apache 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

New CEO

“Steve announced last month that he would be retiring from Apache following more than two decades of leadership. During his tenure he helped grow the Company to one of the largest and most successful independents in the world.”

Cannot predict length of oil price correction

“We cannot predict nor control the length or depth of this oil price correction, or the timing and extent of the rebound. We have therefore acted quickly and decisively regarding the things we can control. Our activity levels and cost structure”

>10% well cost reduction

“our competitors are talking about just seeing 10% well cost reductions that’s going to have to be more than that. We’re seeing more than that.'”

Not planning to rework the portfolio at these prices

“Right now in this price environment a lot changes a $100 price environment to $50, so right now as I stated in the prepared comments, we are not proceeding with anything on the spinoff of Egypt or North Sea. We are looking at possibly still monetizing or the non-LNG assets of Australia, but at this point in this price environment I think you’re seeing strength of our international assets complement our North American portfolio.”

It wont be hard to ramp back up

“o we are going be pretty prudent, in terms of what we do we will continue to look at what is the best organization for North America in terms of where things are going and do not worry about being over ramp up, I mean its easy to ramp up after you’ve been there before, I mean we’ve got great capabilities in the Permian and our other regions and it will not be hard to ramp up.”

There will be some opportunities for acquisition if things stay this way

” mean I think the point is we would be opportunistic. I mean we see a potentially if things stay where they are there’s a lot of folks that are significantly out spending. There is a lot of clocks on acreage. We’re seeing things pop-up right now and for drilling a well we can earn pretty big acreage blocks. I think there’s just a lot of opportunity that could surface and we would expect to surface.”

Apache 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Permian ahead of expectations

” through the first half of the year, the Permian region’s performance is ahead of our plan. In fact we surpassed the significant milestone earlier this year as we celebrated reaching 150,000 barrels of oil equivalent and a day net.”

Expect 15-18% north america growth, 2-4% sequentially

“As Steve said, we remain on track to deliver our production growth expectations for the year, consistent with our 15% to 18% North American onshore liquids growth expectations, and the third and fourth quarters we anticipate 2% to 4% sequential North American onshore liquids growth, driven by our horizontal development, programs continuing to build on their momentum.”

Open to selling international assets but not going to do it for less than the right price

” like Heidelberg and Lucius, we started selling that over a year and what we ended up selling it for, because we weren’t going to sell it at prices that don’t make sense. And that’s the way I feel about our international assets. But I do think there is a potential for a capital market solution for a number of these assets and we’re working on that, have been working on that for some time.”

North American assets take a different set of skills than the current international portfolio

” I see North American onshore sales as a different business than what we are doing internationally. They take different expertise, they take different time frames, they take different really scientific skill sets.

And I think that it is important for us to recognize that, and recognize if we’re going to be the best we can be, we need to concentrate on the things that we have the most of, and I think has the highest – the greatest growth future.”

Sounds like they’re more than just open to selling international–actively working on it

“Based on our work to-date, we believe that we can effect the separation of our international business in a tax efficient manner. We still have obviously significant work ahead of us as we move this forward. So based on everything that we have seen thus far, we believe we can get this done efficiently”

It’s going to happen

“we recognize and we have recognized that there really are two different businesses and I think how we accomplish that recognition in the end will probably end up a majority of those assets being in another vehicle, if you understand what I’m saying. What that vehicle is if it’s a capital structure solution or for an outright sale.”

Kitimat going away too

“if you look at where we are going on our base business and you think about the priority of capital and the time frame associated with LNG projects and specifically Kitimat frankly, it makes sense for someone else to own it that has a different time horizon than we do.”

We’re going to be North American onshore. That’s our case for why we’re divesting international

“in our opinion it makes sense that we continue to reduce the size of our international assets because we made a decision long time ago, we’re going to be North American onshore. So that’s, honestly that is and we’ve had some recent discussion about that, among lots of folks and I think it’s important that we state our case and that is our case.”

Apache at Sanford Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Analyst concern: Permian is a black box for APA

[Analyst question]

“Talk a little about the Permian, some people see it as a bit of a black box, whereas other operators might be focused on a key zone or a key county, you are kind of everywhere. How do we get an understanding of what you like best in the Permian, what’s working, how do you allocate capital out there?”

Apache answer, allocate to highest ROR

“we have got a tremendous acreage position and the way we allocate capital is based on the highest rate of return on projects we can find in each one of those basins.”

Costs of drilling are contained, partially because of company initiatives

“our cost pressure we are seeing, honestly we are seeing a little cost pressure on the rig side. On terms of the completion side which is at least 65% of the cost, actually we continued to bring costs down. Now that’s not necessarily costs haven’t gone up, it is the way that you go about recompleting wells. We self source of all our sand, we self source all our chemicals. So the only thing that you are really bringing out is hosepipe. And the faster you can do that we measure time in minutes, not in days. So the faster you can do that it’s lower that cost a bit.”

Feel like they have two really good assets in the North Sea

“Our runtime in North Sea on our platforms was 92%. The industry average was 60%. That says something about our people, but it also says something about the assets that we have. We have two of the best assets from the North Sea and Forties in barrels.”

Look at the business in terms of EUR vs. cost

“It’s EUR versus cost…it’s not just which ones are the best on the EURs that’s ones from the rate of return standpoint. And that’s basically how we look at our business.”

Can’t see natural gas getting above 4.50, even with LNG

“this morning with $4.47, I can’t see that really changing. Lot of people think that if we get all this LNG offshore, I think – they think it will change. We can plan awful lot of LNG and still supply gas to North America, $4.50 or thereabout.”

Very bullish on oil

“Oil is a world market. I mean, I am very bullish on oil. And I say the same thing today as I said three or four years ago. If you look at the world, I think in 2008, we were using 83 million barrels a day and everybody goes that’s we are using 93 million barrels today or thereabouts. And if you look at the cost that were putting all these barrels on a bookstore, I can’t never say never, because we could see so many thought overall for three or four months, but we are going to see long-term pressure, higher pressure on oil prices in my opinion.”