APA Corporation
Q4 2011 Earnings Call Transcript

Published: 17 Feb 2012

[Operator:]

Good afternoon. My name is Kendra, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2011 Q4 and Year-End Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Patrick Cassidy. Sir, you may begin your conference.

[Patrick Cassidy:]

Thank you, Kendra. Good afternoon, everyone, and thank you for joining us for Apache Corp.'s Full Year and Fourth Quarter 2011 Earnings Conference Call. This morning, we reported earnings of $4.5 billion or $11.47 per diluted share. Adjusted earnings, which excluded certain items that impacted comparability of results, totaled $4.7 billion or $11.83 per diluted share. Cash flow from operations totaled $10 billion. On today's call, we will have 4 speakers making prepared remarks prior to taking questions. First we will hear from Steve Farris, our Chairman and Chief Executive Officer; followed by Rod Eichler, President and Chief Operating Officer; and Tom Chambers, Executive Vice President and Chief Financial Officer; and finally Roger Plank, our President and Chief Corporate Officer. We prepared our usual detailed supplemental data package for your use, which also includes a reconciliation of any non-GAAP numbers that we discuss such as adjusted earnings, cash flow from operations or pretax margin. The data package can be found on our website at www.apachecorp.com/financial data. Today's discussion may contain forward-looking estimates and assumptions, and no assurances can be given that those expectations will be realized. A full disclaimer is located with the supplemental data package on our website. With that, I'll turn the call over to Steve.

[G. Steven Farris:]

Thank you, Patrick, and good afternoon, everyone, and thank you for joining us today. Apache had an outstanding year in 2011. We had strong production growth, earnings and cash flow, all delivered with the financial and balance sheet discipline that has characterized our company for 57 years. Apache's global oil and gas production in 2011 was 748,000 barrels of oil equivalent a day, which is 14% growth over 2010 and a new record for us. The strong growth delivery is consistent with our performance over time compared with other companies. Whether it's over the last 5 years or 10 years, Apache gross production posted more than most of its peers, and we do this in a balanced and diversified manner, living within our means. Crude oil represented 45% of our 2011 production and if you add NGL, liquids represented 50% of our production. We already have the portfolio balance that most of our peers aspire to obtain at some point in the future. As we grow competitively, we do not sacrifice our balance. 2011 earnings, as Pat mentioned, was $4.5 billion, which was 50% up year-on-year or 36% per share. Our cash flow from operations before working capital items in 2011 stood at $10.2 billion, which was up 39% year-on-year. The driver of this financial performance is, truthfully saying, we focus on rate of return, and it shows. This financial performance will continue to fuel our growth as it continues to increase our investment capacity. Needless to say, 2011 was an excellent year for Apache. I'd like now to move to 2012 and talk a little bit about our capital program and our production growth forecast. Our initial exploration and development capital budget for 2012 is $9.5 billion, which is a 25% increase year-on-year on a cash basis, and we'll continue to ramp up our activity in the Permian, the Anadarko wash fairways and development projects in deepwater Gulf of Mexico and also our global exploration. We live within our means, and we do it consistently. I would say at strip prices, this initial 2012 capital program leaves us with well over $1 billion of operating cash flow surplus. As we always do, we will put our additional investment firepower to use as we go through the year. In the Permian alone, our initial budget increased from $1.1 billion in 2011, and I might add it was $500 million in 2010. In 2012, we'll spend $1.7 billion, and depending on commodity prices, we expect to at least double last year's price. We expect to grow production between 7% and 13% in 2012, which excludes operations divested in 2011. And we delivered this competitive growth with less than half of our capital. As Roger will outline in greater detail, over half of our 2012 capital program goes to projects to grow our production starting in 2013 and beyond. In 2012, we're also stepping up our global exploration activity, and I'd like to briefly list a number of our key exploration steps for 2012. In the deepwater Gulf of Mexico, we expect to participate in 6 oil prospects with a combined potential of well over 600 million barrels of oil equivalent, and we continue to grow our footprint and prospect pipeline there. In Alaska, we will grow our first wells in the Cook Inlet, which is a [indiscernible] oil exploration play, where we are the largest acreage holder with some over 800,000 acres. In the onshore North America, we're taking advantage of our premiere acreage positions to progress new liquids plays in which we have critical mass such as the Canyon Wash and the Texas Panhandle, where we were the first movers last year and are now shifting to the development phase with 14 wells in the play. A number of new plays in the Permian, including the Wolfcamp Shale play, where we're going to test our 25,000 acreage position there. Deepwater Kenya, we intend to drill our first major oil prospects in the third quarter for the potential of nearly 300 million barrels of oil equivalent and the opportunity to de-risk several additional prospects. In New Zealand, we expect to drill our first 4 wells targeting our new onshore unconventional play. We will also continue our exploration in Australia and Egypt, where we have built so much value through the exploration over the years, and we will continue to add new large-scale exploration positions, some of which we are not ready to announce. We also started increasing our dividend in 2012, as you've noticed. Steady dividend growth has been an important element of our financial strategy over time. We put this on hold as the world went through its turmoil over recent years, but we believe it is the right time to resume our dividend growth. Apache's mission is to build long-term value for our shareholders, and we remain confident that our fundamental value will be recognized. We're going to give some assistance from our portfolio evolution and more communication about our unbooked resource potential in the coming years. Over time, the market tends to recognize fundamental performance and in the long term, Apache share price has historically outperformed most of our peers, which is consistent with our leading growth and return delivery. I'd like to point out that over the last 24 months we have increased our North American proved reserves by almost 50%, which includes our latest acquisition in the Anadarko Basin. Further, our 18 million acres in the heart of the Permian, the Anadarko Basin, Canada's resource plays in the Gulf of Mexico hold a premiere position of unbooked upside in most new plays across those areas. And it's time we gained recognition for our North American asset base, and we intend to communicate more on our resource upside during this year. On the other hand, Egypt and the Gulf of Mexico shelf have caused concern over time based on the perceived overexposure for the company. Clearly, the events in Egypt have had an impact on our share price over the last year. However, in light of our enlarged portfolio, which includes our announced expansion in the Anadarko wash fairway, either of these regions now represent more than 10% of our proved reserves. Having said that, we remain bullish on both of them. We expect to continue to invest both in Egypt and Gulf of Mexico shelf for many years to come. The fact is with our enhanced portfolio balance, Apache continues to deliver strong growth without depending on any one region. And with that, I'd like to turn it over to our COO, Rod Eichler.

[Rodney J. Eichler:]

Thanks, Steve. I'll focus my remarks on our 2012 plans based on the initial allocation of capital and what this means in terms of production for each of our regions. The biggest drivers for our growth in exploration in the year ahead include the following

[Thomas P. Chambers:]

Thanks, Rod, and good afternoon, everyone. I'd like to reiterate what Steve mentioned earlier in that we had record results for the year across the board. Underpinning our 2011 financial results was record production, which averaged 748,000 barrels of oil a day, up 14% from the prior year. More importantly, we achieved record oil production of 340,000 barrels per day, allowing us to benefit from higher oil price realizations. For the year, we reported record earnings of $4.5 billion or $11.47 per diluted share, our first time to break the $10 threshold. When we remove items for comparability purposes, adjusted earnings were $11.83 per share, up 32% from the prior-year period. Record production and oil prices drove cash from operations before working capital items, up 39% to $10.2 billion, our best year ever. In a nutshell, it was a phenomenal year in all respects. Record cash flow enabled us to fund our largest E&D capital budget, acquired assets for another $2 billion in cash, which provide a future platform for continued long-term profitable growth, while we also paid down $925 million in debt. So we were able to end the year and reduce our debt-to-cap 20%. I want to highlight the importance of our portfolio's ability to consistently generate cash flow. For 2011, our $10 billion of operating cash flow enabled us to achieve many targeted goals and set the stage for continued growth into 2012. Without the constraint of having to pay down debt in 2012, the 2012 capital budget spending rises, as Steve indicated. However, I would emphasize that our disciplined approach reduced capital on a quarterly basis to ensure we do not outspend our cash flow or, if prices rise significantly, to potentially allocate any excess to the best projects available. These results speak volumes for our balanced portfolio strategy given the significant volatility seen in commodities. We've been able to benefit substantially from our oil portfolio and the fact that oil currently sells for over 40x the price of North American gas. Our oil balance also offers us a unique benefit when it comes to price. Dated Brent and sweet crude from the Gulf of Mexico and the Gulf Coast onshore areas continue to be priced at a significant premium to WTI-based prices. Approximately 75% of our total production receives Brent index or Brent comparable index pricing, realizing premiums of $10 to $15 a barrel to WTI. Our North American gas prices remain depressed. Our international portfolio is providing access to rising gas prices, particularly in Argentina and Australia, as you heard Rod just mention. Compared to the prior year, our international gas price realizations were up 27%. Higher realizations and a steady commitment to holding a line on costs allowed us to report solid cash margins of $45.60 per boe, up 30% over 2010 levels. Pretax margins, which includes DD&A, increased 37% to $29.64 per barrel of oil equivalent. These closely watched measures, combined with our focus on returns, drove our return on average capital employed to over 13% for 2011. We are very focused on margins and continue to monitor cost trends. Total cash costs during the year averaged $16.24 per boe, up $0.86 over last year. As with each year, our goal is to keep 2011 cash costs flat with the previous year. We ended up slightly at 6% higher, influenced by the impact of rising oil prices on cost and continued market pressures in nearly all of our regions. Absent taxes other than income, which are basically production taxes linked to prices, we are focused on keeping 2012 cash costs in the range of $13 to $13.50 per boe for the full year average. Our recurring DD&A was also up in 2011 from prior-year levels, as you might expect with our recent acquisition activity. Through our drilling program, we added more -- we more than replaced current production by adding 342 million barrels of oil equivalent to proved reserves during 2011. That's about 125% of what we've produced during the year. Including acquisitions, sales and revisions, we replaced 113% of production. We believe our exceptional cash flow provides a critical foundation as we head into 2012. With the confidence of continued strong future growth prospects and financial position, our Board of Directors, at their last meeting, increased the regular quarterly cash dividend 13% to $0.17 per share, as Steve already indicated. The board also indicated they will continue to review the dividend level annually as our progress -- as we progress further. To wrap up, we had a record year, one that provided our best financial results in the company's history, one that is ended with a considerable amount of momentum and one that sets the stage for continued growth and opportunity into 2012. With that, I'd like to turn the call over to Roger.

[Roger B. Plank:]

Thanks, Tom, and good afternoon, everyone. 2011 was, indeed, another year of growth and change for Apache, and I wanted to just take a moment to reflect on how the company's evolved over the last few years. In a deteriorating price environment for North American natural gas, in the last 2 years Apache turned $7.5 billion in cash flow to $17.5 billion. Through drilling and acquisitions, we've invested $25 million, expanding our production and rebalancing our portfolio in areas with considerable future growth prospects. To manage this change and maintain focus on executing and delivering consistent profitable growth, we've added hundreds of professionals and, importantly, 3 new growth regions

[Patrick Cassidy:]

That concludes our prepared remarks. Operator, we're ready to take questions.

[Operator:]

[Operator Instructions] And your first question is from Brian Singer of Goldman Sachs.

[Brian Singer:]

Two questions. First on the Cline shale, how does the Cline compete with other horizontal and vertical opportunities that you're pursuing in the Permian Basin? And can you talk to what your well cost expectations are there relative to the EURs that you mentioned earlier?

[G. Steven Farris:]

Well honestly, Brian, I think it's a little early to tell how they can be. But with our portfolio, we are going to test most of the plays and the horizontal plays out there, whether it be the Wolfcamp shale or the Cline. And frankly, we're looking for the highest rate of return. I think Rod mentioned 300,000 barrels of oil equivalent per day with a cost of what, Rod?

[Rodney J. Eichler:]

Completed well cost around $6.5 million.

[G. Steven Farris:]

Yes, completed well cost $6.5 million, so it will compete with most shale plays.

[Operator:]

And your next question is from Pearce Hammond of Simmons & Company.

[Pearce W. Hammond:]

You outlined your production growth for this year at 7% to 13%, and you made some smart acquisitions in the course of the last year, the North Sea acquisition and here recently, Cordillera. If we try to look at just the organic production growth rate without the acquisitions, what do you think it might break out to be?

[G. Steven Farris:]

Well honestly, we don't break that out. I will tell you probably in the high single digits.

[Operator:]

Your next question is from John Herrlin of Societe Generale.

[John P. Herrlin:]

Two quick ones. In terms of your CapEx budget, how much is actually exploration and how much is development, because you just depict it as E&D.

[G. Steven Farris:]

Well, whether it's in the regions or new ventures group, it's about $1 billion.

[John P. Herrlin:]

Okay, that's fine. Next one for me is on Egypt, Steve. Your reserves went down out a little bit year-over-year. Were there performance issues because you had negative revisions? Normally, you have positive revisions there. And that's it for me.

[G. Steven Farris:]

Actually, what we had is we had a negative revision, but it all has to do with price. John, you're aware of that concession agreement. What happens is you get more barrels for cost recovery, but you also have an adjustment on the reserve side. So that's counterintuitive. I mean, when you have more production, you have less reserves. And if you have less production, you have more reserves. I mean, it really is the way the concession agreement works.

[Roger B. Plank:]

So because we got to recover our costs, the higher the price per barrel, the lower the reserves you get to report. But the actual reserves performance has been just fine.

[Operator:]

And your next question is from Bob Brackett of Bernstein Research.

[Bob Brackett:]

One of your competitors has talked about a JV or a sale of kind of 1 million acres scale asset in the Permian Basin. What's your appetite for that sort of scale transaction?

[G. Steven Farris:]

Well, we don't really comment on that, number one. And the other one is I think we have a pretty good acreage position as it is. Actually we are never looking, but opportunities come in a lot of different ways.

[Operator:]

Your next question is from Leo Mariani from RBC.

[Leo P. Mariani:]

Just kind of 2 quick questions here for you. I guess first off, could you maybe elaborate a little bit on your progress there on Kitimat? You guys kind of advanced negotiations with potential buyers. And a quick question here on the Permian. Obviously, you're stepping up the capital pretty dramatically here in 2012. And if I heard you guys right, you talked about mid-single-digit production growth in the Permian in '12. It just seemed like a low number to me. Is there some infrastructure issues there? Or maybe I misheard you guys.

[G. Steven Farris:]

Yes, I'd answer the first one at Kitimat. Frankly, we're somewhat past the polite introductions and that kind of stuff with respect to buyers. We are now in throes of actual negotiations. And in terms of the Permian Basin, you understand we're the second or third largest producer out there, so you've got 93,000, 94,000 barrels of oil equivalent a day starting off with. So a higher single-digit growth is a pretty good number, especially with the kind of capital that we're putting in there.

[Rodney J. Eichler:]

There's also a lot of timing involved. We have a lot of wells that are being drilled throughout the year. All those wells probably won't make it out to production until the early parts of 2013.

[Operator:]

Your next question is from John Malone of Global Hunter Securities.

[John Malone:]

Just on Argentina, can you guys give us any color on the [indiscernible] well? The indication so far is gas. Have you seen any liquids in that? And really just overall, can you give us some thoughts on trends, what you're seeing in Argentina in terms of export and patriation, the politics down there?

[Rodney J. Eichler:]

Well, the exploration test we drilled at [indiscernible] in 2011 was specifically targeting the shales in the gas window. So it was a gas -- designed to be a gas test. That's what we have been evaluating. The subsequent wells we'll be drilling in 2012, as I mentioned, will be oil tests that are in the shale oil window as we currently mapped them adjacent to the recent discoveries announced by their operators.

[G. Steven Farris:]

With respect to your question about the politics down there, I think it's well to take a look at the circumstances that YPF, Repsol and the government of Argentina are in. I don't think there's any question that the Argentine government would like more money spent by YPF or Repsol in country. Personally, I think what you're seeing is a lot of discussion that really revolves around a specific issue. So we're truthfully not concerned about the wholesale expropriation of the oil industry down there.

[Rodney J. Eichler:]

In fact, Apache has been held up by the government in their recent press releases as one of several companies and an example of increasing the production and meeting or exceeding their production targets outlined in their concession agreements.

[Operator:]

And your next question is from Mario from Tuohy Brothers.

[Craig Shere:]

It's actually Craig Shere. Mario had to jump off, but we have a quick question as a follow-up on Argentine also. Can you remind us how large the acreage positions are and the gas fee and then the oil shale windows and if you're still looking to expand acreage in either of those? And remind us the details regarding the 2012 drilling effort in the oil shale.

[Rodney J. Eichler:]

Okay. So the first part of your question, we have about 1.7 million gross acres, about 900,000 net acres in the shale fairway. We do not break that out; I don't have a breakout of that by oil province or gas province in that fashion. So it's a simple part of the Neuquén Basin. The second part of your question was what was...

[Craig Shere:]

Capital.

[Rodney J. Eichler:]

Capital in 2011?

[Craig Shere:]

2012.

[Rodney J. Eichler:]

2012. All right, 2012. We're looking at about $250 million as a preliminary capital allocation for our Argentina projects.

[G. Steven Farris:]

Just so you know, that's not an opportunity number. That is more of a prudency with respect to staying within our cash flow down there. And we're really testing ideas. If you look at any of our areas, when we talk -- Brian asked a question about the Permian Basin. We have built meaningful acreage positions in some of the best hydrocarbon basins in the world. And what we are trying to do is build long-term value for our shareholders. So in the Permian, we're going to test a number of different shales in a number of different ways, horizontal, and the same we're doing in the Neuquén. And we are a legacy owner in the Anadarko Basin. So it's not surprising that new technology catches up with a lot of hydrocarbons.

[Operator:]

And there are no further questions at this time.

[Patrick Cassidy:]

Okay, thank you, Kendra, for those remarks, and thank you for participating in Apache's conference call this afternoon. A webcast replay will be available on our website after 4

[Operator:]

This concludes today's conference call. You may now disconnect.