APA
#Good afternoon and thank you for joining us
On today's call, I will discuss third quarter results and accomplishments, comment on our Midland basin oil production and development program, recap some of the key Alpine High points from last month's webcast and provide an update on our 2018 planning process and current thinking around commodity price assumptions
Beginning with the third quarter, as anticipated, our average daily net production in the U<UNK> returned to a growth trajectory
We also grew net production in the North <UNK>ea and gross production in Egypt
Production was in line with our guidance with notably strong performance in Permian oil volumes
We stated in our webcast update last month that we expect this performance to carry through into the fourth quarter with Midland and Delaware oil production tracking at the high end of the guidance range, established back in February
As we also noted, the delayed start-up of two central processing facilities at Alpine High caused by Hurricane Harvey will defer some natural gas volumes into 2018. <UNK>o, our updated fourth quarter production guidance is unchanged
In the Midland and Delaware basins, we are benefiting today from the strategic testing, optimization and development planning initiatives that we implemented in 2015 and 2016, while running a very lean capital program
Going forward, we anticipate continued capital efficiency gains in both the Midland and Delaware basins
This is particularly true at Alpine High, as we move further into multi-well pad development, continue to extend average lateral length, utilize more smart completions and further optimize our landing zone targeting and well spacing
The majority of optimization benefits, which have been proven in other unconventional plays are still ahead of us at Alpine High
On the international side, cash flow generation during the third quarter was strong once again, as both Egypt and the North <UNK>ea benefited from improving Brent crude prices and production from our Callater startup in the North <UNK>ea
Overall, capital investment was in line with expectations and remains on track with our guidance for the full year
We have shifted some capital in the back half of 2017 from our international regions into the U<UNK> to take advantage of attractive portfolio opportunities in the Permian Basin
Finally, we continue to benefit from our cost structure focus with both LOE per BOE and G&A costs remaining low as a result of the significant rationalization efforts over the last two years
Apache also made some excellent progress this quarter with regard to its portfolio transition
<UNK>pecifically, the discovery of Alpine High enabled our strategic exit from Canada
In only one short year, we will have completely replaced our Canadian production and we will have done so with an asset that offers significant returns and is only just beginning to show its enormous long term potential
Value creation and returns accretion were challenged in Canada, given this low ratio of cash margins to F&D cost
Alpine High on the other hand will have significantly lower F&D costs, much more attractive cash margins and will transform Apache's long term return on capital employed profile
Organic portfolio transformations like this take time, but are much more accretive to returns than acquiring high priced proved acreage positions
I will now turn to the Midland Basin where activity is primarily focused on multi-well pad drilling to the Wolfcamp and <UNK>praberry formations
Our third quarter oil production was up approximately 5,500 barrels per day over the second quarter, as we are delivering excellent results from recent multi-well pads in our core areas
We will continue to progress our development efforts with two more pads coming online before year end
Our focus in the Midland basin is on multi-well pads and full field development
We believe the proper approach to an unconventional resource has developed each section in a way that optimizes long term value and returns
This requires a full understanding of intra-well dynamics and proper spacing in order to design development patterns that optimize costs and recovery
Additionally, Apache utilizes a fully burdened returns approach, which should give you confidence that the anticipated returns will result in a competitive return on capital employed at the corporate level
Tim will share more details on the impressive progress we have made in our Midland basin development efforts
Next I would like to move to Alpine High and reiterate a few of the key points made in last month's webcast
First, Alpine High consists of three primary plays, a highly economic wet gas play that contains the majority of our currently identified locations, a dry gas play that is smaller, but very economic and an emerging oil play with tremendous future potential
<UNK>econd, we increased our location count from 3000 to more than 5000, which consists of at least 3500 locations in the wet gas play, at least 1000 locations in the dry gas play and more than 500 locations in the oil play
As we have previously discussed, we believe there is significant upside potential to all of these location counts
Third, 90% of our currently disclosed locations are in the highly predictable and repeatable transgressive source interval, which consists of the Woodford, Barnett and Penn formations
Being a true source interval, there is minimal in situ water that will be produced with the hydrocarbons
Water handling and disposal costs are becoming a significant challenge across the Delaware Basin and this will only get more difficult in the future
We are fortunate to not have this problem in the transgressive source interval
Fourth, returns of Alpine High are driven by the combination of extremely low development costs with attractive cash margins
Recent wells have validated our assumptions on future drilling and completion costs
Cash margins will be attractive due to the high quality liquid content and the low operating costs
Lastly, we are very pleased with the performance of the wells of Alpine High, many of which have been producing now for several months
Cumulative production data is confirming our expectations for this high quality rock, which was predicated on extensive geologic, geophysical and reservoir engineering work
Our investment economics are robust for all three plays at current or lower commodity prices and are consistent with those presented more than a year ago
Next, I'd like to discuss the process we are undertaking as we finalize our 2018 plans
<UNK>ince the beginning of 2015, we have operated Apache with a fundamental belief that over a typical run of years, it is both possible and appropriate for an E&P company to live within operating cash flows
Within cash flow, a company should be capable of growing production volumes and delivering competitive rates of return above its cost of capital, while also increasing return of capital to shareholders through dividends and/or share buybacks
We have taken a number of transformative steps over the last three years, designed to enable this vision, irrespective of the oil and gas price environment
We streamlined our portfolio and strategically shifted our asset base, reset our overhead and operating cost structure, dramatically reduced our capital investment program from mid-2015 through 2016 to live within cash flow, implemented a rigorous capital allocation process based on fully burdened returns as opposed to fundamentally flawed half cycle economics and reduced debt and preserved our dividend without issuing equity and diluting our shareholders' future ownership
Recently, we have been on the road meeting with shareholders and other long term oriented potential investors
Encouragingly, the market sentiment is becoming more aligned with Apache's philosophy
For most of the last three years, the E&P industry has been engaged in excess spending to drive short term oil growth
Today, we are seeing a return to the fundamentals of capital discipline and focus on long term returns
We welcome this change and believe it is very constructive for the long term health of our industry
<UNK>o as Apache enters the 2018 planning season, we are experiencing some natural, but very positive short term budget tension
That is, do we continue investing in our attractive Permian upstream opportunities at what we consider to be the optimal pace for delivering the long term returns or do we pare back and manage the program for cash flow neutrality
That is a nice problem to have and as an expected outcome of discovering and bringing into development a large low cost new play
We believe Alpine High is a compelling world-class resource
Once ramped to its production potential, Apache will benefit for decades from high returns and free cash flow from a significant portion of our future capital employed
Given the dynamic nature of our opportunity set and the volatile commodity price environment, our 2018 capital budget is still being rigorously worked
Consistent with previous years, we will issue our 2018 budget and associated guidance in conjunction with our fourth quarter earnings results in February
As we have in each of the past three years, we will base our 2018 plan on benchmark pricing that is slightly on the conservative side of the prevailing strip
Given the recent volatility in oil prices, this means we are preparing for a number of possible scenarios
Fortunately, we have considerable portfolio flexibility
Our focus now is prioritizing next year's activity and identifying areas where the capital program could be pared back
While spending could be lower in 2019, the allocation of capital across the portfolio would likely be very similar to 2017 with Permian Basin investment representing the majority of Apache's capital program
Internationally, we will continue to invest to maintain current levels of free cash flow
At recent oil and gas prices, this spend is in the $700 million to $900 million range
In 2018, we will also continue to fund the Alpine High midstream buildout as this is strategically important to enable an optimized upstream development program
As we have stated previously, we believe this represents a very attractive investment opportunity and are continuing to review its monetization potential
Finally, like in 2017, we have begun a program of hedging for 2018 and '19. This activity is focused on protecting cash flows to support our near term capital program
<UNK>teve will talk more about the details in his prepared remarks
To sum up, the third quarter was important for Apache as it marked our strategic exit from Canada, the very early stage acceleration of production at Alpine High and a significant turn in our Permian Basin oil production
We're making excellent progress across the company
As the Permian region grows in relative scale with our portfolio, the quality of its returns and cash flows will improve those of Apache as a whole
Our teams have created a deep inventory of investment opportunities, both domestically and internationally
As we have over the past three years, we will fund these opportunities in a disciplined manner that in no way stresses our balance sheet
We look forward to discussing our plan further in February when we will provide a review of our operating cash flow, capital spending and production outlook for 2018, a higher level preliminary outlook for 2019 and potentially beyond, a longer term view into how the investments we're making today will improve long term corporate level returns and free cash flow and a more detailed view into Alpine High for both the upstream and the midstream
Now, I would like to turn the call over to Tim who will provide some operational highlights
<UNK>o on the pads, <UNK>, as you know we've been pretty vocal that you need to be developing all your areas on a section basis
<UNK>o these have been designed and we've got a couple more pads coming on between now and the end of year
They've been doing our adequate spacing and pattern tests
<UNK>o that's why there are no half sections, we're kind of doing a half section test pad
<UNK>o that's what you've had going on in the Midland and it's really defined tune exactly the pattern and the spacing between the various landing zones that we say
Hedging, I'll let <UNK>teve
And one thing I want to add to <UNK> is, we've done some things to protect the upside to because we like the exposure even on the oil where we've done some collars, we've also bought the coal as well
<UNK>o it's more geared towards protecting some downside and protecting the balance sheet over the short term than it is trying to make a price collar because we like actually the constructive nature, especially on the oil side
The good news is, is with the price movements has gotten very constructive lately
And we find ourselves and can see a price now where we could actually have some free cash flow next year pretty soon
<UNK>o I mean that puts you in a position to, you know, we've been a company that's maintained our dividend and actually continued to return something to the shareholders over the last three years
<UNK>o obviously dividend is an option if you look at in terms of - you could be in a position of accretion
Obviously share buybacks or some acceleration, but clearly we would look to find ways to return that to shareholders
Number one, the write-off is really legacy Anadarko Basin; it's not what we call a <UNK>COOP stack area
<UNK>o it's going to be more in the Texas panhandle, there's some hangover from the Cordillera transaction many, many years ago
<UNK>o it's really more just legacy Anadarko Basin acreage have some attractive things in the future, but it's not anything we're funding or planning to fund in the near term
<UNK>o that's where that is
And in the <UNK>COOP stack, actually it's in the <UNK>COOP area
We've got a section there that we needed to drill a well to hold, but rather than going in and drilling one well, we got in there and did seven wells because that's a proper way to do that
<UNK>o we're drilling those seven wells in the in the <UNK>COOP there to meet some lease obligations on a section that we really like
And it gives us the ability to test some spacing and things in the <UNK>COOP as well
<UNK>o kind of two birds with one stone
I mean I would say at this point we're looking at '18 hard
We're watching the commodity price view
We said we will come out with a plan that's kind of predicated on something slightly conservative to strip
<UNK>o we're watching that very carefully
I think the good news is there's flexibility
I mean we don't have to outspend to keep Alpine High up and running so to say is the way you phrased it
But we're also looking at what we think is the right thing to do in the right pace to develop Alpine High
That we're just going to really maximize long-term returns and that's really what we're trying to accomplish
Well, it's a little bit of flexibility on the international side, but we kind of laid out that range where we'd like to stay the $700,000 to $900,000. I think there's flexibility in both places
And I'd also remind you that Alpine High is part of Permian
But there's flexibility in both
I mean you wouldn't see us flex one or the other and we're not talking a massive change from what we've laid out in February of this year anyways
That plan was going to be neutral on the upstream spend at a $55 deck and we're not far from that right now
<UNK>o we're not talking about a lot that we'd have to pare back and it can be flexed into place
And so we'd look at what we thought made the most sense
And that's some of the exercises and scenarios we're running through right now
Well, I mean I think it's just different geology
I mean that's something we've gone to great lengths to explain in terms of a source interval versus a parasequence, which is what the Wolfcamp and the Bone <UNK>prings are in the Delaware Basin
<UNK>o actually if you look at the five wells we've drilled, we're very pleased with the results
<UNK>ince the disclosure on October 9, we've actually had another one well in there that's cleaned up very, very nicely
<UNK>o it's actually fairly predictable
We're just talking in terms of the geology
You have to get in and do your rigorous mapping
We have to do the inversion work with the seismic
I mean it's more going to be based on where the organics inside and what's really water wet rock and you have to do the detail work
But once you've done the detail work, it's going to be pretty predictable
It's just not a blanket you're going to lay across a large area
Most of the locations you know we'd came out with 500 was based on a couple of landing zones, we've in truthfulness we've added another one, so those location counts are going to go up even since the October 9 disclosure
<UNK>o we see it as a very prominent program
I can tell you most of those are in the northern trough
And the good news is, with every well we drill in Alpine High, we're looking at all those sections
<UNK>o we see it as a very viable and a very material play that we're going to continue to move forward
And you're going to see the number of landing zones and the location counts grow
There's two things I would say, Bob
Number one, we do have some very sophisticated land owners and we've been making great progress on our discussions with them as well
But it's not a matter of just trying to drill the shallow zones and not drill the deeper zones later
What you really want to do like anything is, you wanted to develop the sections properly and very systematically where we would develop the deeper zones and the shallow zones together where we need to do that
What you don't want to do is come back later and drill deeper after you have develop shallower or you're going to find yourself with some of the challenges that you're seeing in the other parts of the Permian
Where now they happen to run extra casing strings and things to deal with water flows because you've they're going to run extrication strange things to deal with water flows because you've because you've dealt in depletion and that sort of thing
<UNK>o contrary to that one of the advantages we have at Alpine High, we've done a lot of data analytics and been recently able to eliminate even a string of seven of 58s on our 14,000 foot TVD wells
<UNK>o you want to do this properly and I think the conversations we're having with the landowners are constructive and that you want to go about this in the right way where we can develop the wet gas and the oil zones and you want to do them where you don't have to go back in later
<UNK>o it's more or less of you know developing everything and then margin directionally than it is trying to develop bottom up or come in and develop all your shallow and then have to drill through your shallow to get your deep
If you look at '18 and I look at Alpine High and if I just if - even if we were to keep a six rig program, less than half of that would be necessary in terms of near term acreage
<UNK>o I mean, we're in a really good spot
I mean if you look today, I mean we've been making that shift
And as of the October 9 disclosure we had 34 wells online
And we said we're going to be virtually halfway there year end with I think another eight wells, we're going to bring on 42 by year end
<UNK>o as we move forward and start to shift into our pattern and spacing tests, you're going to continue to see us start to climb that curve
I'll give you a little bit of a feel for well camps that are necessary to do that
I think we're continuing looking at the portfolio and clearly we've got projects in Egypt and the North <UNK>ea that have, you know, that are Brent-weighted
We've got some brand new acreage that in Egypt that we just received through the award process
We're anxious to get our seismic shot and we'll actually be drilling wells there
<UNK>o I think it's more a function of the opportunities as we high grading things, there will be things that we will move up in the portfolio for sure
I think the thing you got to think about is, number one, we're not far off of that optimal from where we sit today anyway
<UNK>o and kind of what we laid out at the start of this year would have been what we thought was optimal
<UNK>o we're not, you know, we're pretty darn close to being that zip code as we sit today
The point is, you always want to balance and what's going to maximize our long-term returns and the pace
And I think the beauty of it is, as it has been alluded to we've got some flexibility, we've got some cash on the balance sheet
You're just trying to balance the right approach
And the good news is, we've got the ability to defer
<UNK>o those are just some of the trade-offs that you have to balance and that's some of that what I'll call good positive tension
As you find things and discover things, your goal is to always bring more things into the portfolio that give you opportunities to high grade and pull things forward
And so it's just a good healthy situation and tells you the quality of our portfolio
And the other piece I'll say to that is
you see we're in multi-well pads, we're not out one well here, one well there
And so I think the testing we've been doing in the Midland Basic, we've been building a lot of momentum there
The patterns and spacing tests and things were also moving toward Alpine High
Those are all building towards understanding and to finding that optimal pace because that's how you're going to maximize your long-term returns versus short-term things you can do to manage short term
Well these are half section type tests
And so, depending on the capital level that we decide to disband, you're going to see us moving more into full section development type mode
And you'll see more similar type things, but that will be hinged on the pace that we want to go
And the beauty of having a lot of inventory that's drill ready and the infrastructure that we put in place puts you in a great position to be able to move forward
But you'll see continued building on pad level type economics because fundamentally we think that's how you're going to create the most value
I mean, I'd let Tim go into details on Callater, but first two wells that gone on are performing quite well
Any color you want to add Tim to Callater
And I would say on the capital shift, <UNK>, it's pretty minor
But it's more geared towards some of the pad testing and things we're doing in the Midland basin
We're looking at all options
I mean our gas today is flowing into Mexico, but we're certainly not counting on the Mexican market to be the purchaser of all of our gas
We recognize that we've got to be able to move a substantial volume of gas to the Gulf Coast
We're certainly looking at all options associated with that
And for that matter the liquids as well
No, I mean, I think as I've answered, we're in a good place in both
I think we'll be able to move both programs forward
if you look at current rig count today as I mentioned less than half of the capital we'll be spending this year as we kind of roll forward into next year would be required in terms of how we need to meet lease obligations in the Alpine High
<UNK>o I think we're in a pretty good zone that we can materially move both programs forward, like we need to move them forward
I mean if we look at Alpine High today, I mean, you could see something similar very easily
Well, I mean I think the key there is, number one, I mean if you look at the portfolio today, we like the balance that we have across the entire portfolio
We like what we have internationally or like what Egypt and the North <UNK>ea bringing to the table with exposure to Brent, we think we've got world class operations there and we differentiate ourselves
And so we like having free cash flow that we can invest
We also like the running room and the exposure we have in those two areas
I think it's a very good compliment
When we look at North America, we're always looking at the portfolio and that's something we will continue to do and continue to do on a daily basis
I like right now we moved up and we've got a nice position in the <UNK>COOP
We could run a couple of rig program up there for several years
And we think it competes fairly nicely
<UNK>o that's where your rigs are now
But I'll tell you we continue to look at the portfolio, we continue to have those conversations with the board
And I think the nice thing is, with the, you know, those areas there's a lot of upside and there's very little to hold those positions
And so I think they really create options for us in the future because we can see to a point where we're going to be generating a lot of free cash flow coming out of Alpine High
First of all, if we just take a single rig at Alpine High, it's less than two years before its self-funding
<UNK>o, it really comes down to pace and how we want to scale that up
I mean that's the way you want to think about that
And that's fully burdened with infrastructure and midstream spend
And then secondly, when we do talk about our numbers, we've got our dividends dialed in
<UNK>o our dividend payment has been dialed into our capital programs
