Source: Seeking Alpha
Apache Corporation (NYSE:APA)
Q2 2014 Earnings Conference Call
July 31, 2014 2:00 PM ET
Castlen Kennedy – Director-Investor Relations
G. Steven Farris – Chairman, Chief Executive Officer and President
Alfonso Leon – Executive Vice President and Chief Financial Officer
John J. Christmann, IV – Executive Vice President and Chief Operating Officer-North America
Thomas E. Voytovich – Executive Vice President and Chief Operating Officer-International
Robert Brackett – Sanford C. Bernstein & Co., LLC
Michael Roe – PPH
Pearce W. Hammond – Simmons & Co.
Joseph David Allman – JPMorgan Securities LLC
John Herrlin – Societe Generale
Doug Leggate – Bank of America Merrill Lynch
Brian Singer – Goldman, Sachs & Co.
Michael Hall – Heikkinen Energy Advisors
Charles A. Meade – Johnson & Rice Company L.L.C.
Arun Jayaram – Credit Suisse
Jeffrey Campbell – Tuohy Brothers
Leo Mariani – RBC Capital Markets
Richard Tullis – Capital One
Joseph Patrick Magner – Macquarie Capital Inc.
Good afternoon. My name is Sia and I will be your conference operator today. At this time, I would like to welcome everyone to the Apache Corporation Second Quarter Earnings 2014 Conference. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)
Thank you, at this time I would like to turn the conference over to Ms. Castlen Kennedy. Please go ahead ma’am.
Thank you, Sia. Good afternoon, everyone and thank you for joining us for Apache Corporation’s second quarter 2014 earnings conference call. On today’s call, we will have three speakers making prepared remarks prior to taking questions.
I will start by giving a brief summary of results and then we will hear from Steve Farris, our Chairman and Chief Executive Officer and President; followed by Alfonso Leon, our Executive Vice President and Chief Financial Officer. In addition, joining us for the question-and-answer session are John Christmann, Executive Vice President and COO of North America; and Tom Voytovich, Executive Vice President and COO of International.
We prepared our quarterly financial supplement for your use, which includes the reconciliation of any non-GAAP numbers that we discuss such as adjusted earnings or cash flow from operations. In addition, we have prepared our quarterly operation supplement which summarizes our activities and includes detailed well highlights across the various Apache operating region. These can both be found on our website at apachecorp.com/financialdata.
Today’s discussion will contain forward-looking estimates and assumptions based on our current views and most reasonable expectations. However, a number of factors could cause actual results to defer materially from what we discuss today. A full disclaimer is located with the supplemental data on our website.
This morning we reported second quarter 2014 earnings from continuing operations of $505 million or $1.31per diluted share. Adjusted earnings which excludes certain items that impact the comparability of results, totaled $644 million or $1.67 per diluted share. Cash flow from operations before changes in working capital totaled $2.2 billion during the quarter.
Total reported net production averaged 635,814 barrels of oil equivalent per day, with liquids production constituting 59% of the total. On a pro forma basis, adjusting for recent sales and excluding the non-controlling interest and tax barrels from Egypt second quarter production was 550,357 barrels of oil equivalent per day, with liquids production constituting 60% of the total.
I’ll now turn the call over to Steve.
G. Steven Farris
Thank you, Castlen and good afternoon, everyone and thank you all for joining us. I want to apologize everyone, I’ve got somewhat of a summer cold, so I sound a little – my sounds a little deeper than it usually does I apologize.
Our second quarter results provided I think additional evidence of our strong North America position, and our ability to continue to profitability grow our production. And before I jump into the details of the quarter, I want to provide an update on Apache’s ongoing repositioning of profitable and repeatable North American onshore growth. Over the last five years Apache has greatly enlarged and enhanced its North American onshore resource base and I believe that it is capable of driving our growth and performance over the next several years.
During the last 18 months, we’ve been increasing the focus on our North American onshore business, by divesting of around $10 billion of property. In addition, we’ve launched an aggressive stock repurchase program and we’ve also made it clear there are no sacred cows and our efforts continue. There has been recent discussion regard Apache’s potential future steps and focusing our portfolio, and today’s call gives me an opportunity to provide an update to our shareholders on our direction and the work that it’s been underway.
First, let me state at the outset, the Apache’s future will be centered on our tremendous North American onshore resource base. Second, I’d like to make it clear, that Apache intends to completely access the Wheatstone and Kitimat LNG project.
And third, in light of our expanding opportunity set in North American onshore, we are evaluating our international assets and are exploring multiple opportunities including the potential for separation of some or all of them through the capital markets.
And one additional note regarding our North American onshore portfolio, over the past year, we deepened our understanding of our North American properties. We’ve elevated our capabilities in advanced emerging plays and in that regard this fall we intend to hold an update presentation on North American onshore highlighting our $1.7 million net acres in the Permian basin.
So, with that out of the way, let me move to the details of our performance in the second quarter. This morning we announced second quarter results of $644 million or $1.67 per share of adjusted earnings, and $2.2 billion of cash flow from operations before changes in working capital.
During the quarter our operational focus in extensive acreage position across our best hydrocarbon region rich basins allowed us to drive production growth in North American onshore liquids. On a pro forma basis, we averaged 201,000, 395,000 barrels of oil per day, which is up 18% year-over-year.
North American onshore liquids represented nearly 61% of our total worldwide liquids production and 37% of our overall production. A corner stone of our North American onshore success has been the outstanding performance in the Permian basin. And 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.
We have come a long way since we launched the regions just over four years ago. And have grown production nearly 200% since that time. In fact, we have grown production 17 out of the last 18 quarters, and the last 11 quarters consecutively.
Cash flow from the region is coming in ahead of plan. And we anticipate the region will fully fund its capital program for the year. We expect to deliver over 23% liquids growth and more than 20% Boe growth for the year. And this performance demonstrates our focus on operational excellence and are driving out of cost from the system. And it underscores Apache’s leading position in the Permian.
In the Anadarko Basin, our Central Region has experienced several challenges over the last couple of quarters. And as a result production growth has been disappointing. Our total wells drilled to-date for the year is 26% behind plan due to weather slowdowns as well as mechanical difficulties in both drilling and completion.
We’re retooling the region in addition to recently making personnel changes or scaling back the Anadarko Basin activity and reducing capital and rigs. We continue to believe in the growth opportunities in the Anadarko Basin, we just need to slowdown and assure our selves we’re making good investment decisions over the long term.
We do intend to ramp up our drilling activity in our Central Region Canyon mine play and Oldham and Potter County of Texas Panhandle. And I’ll touch on this in more detail a little later.
As we said in the past, we view North American onshore business as one large resource comprised of several different plays and we will allocate capital and resources to the best opportunities within that portfolio. Despite the challenges we had in the Anadarko Basin, I want to reiterate our 15% to 18% North American onshore liquids guidance. And I also want to reiterate our 5% to 8% increase in our production, overall production guidance. We have a significant opportunity before us in North American onshore and the ability and expertise to continue to execute and deliver growth in the years to come.
I’d like to specifically mention a few highlights from the quarter and share some of the results we are most excited about. I want to start in North American onshore Permian Basin, we have averaged 37 rigs, 24 of which were horizontal, and we grew production 4% over the previous quarter. Year-over-year we’re seeing total production growth of an impressive 26%.
We had a strong Wolfcamp shale results in Regan County in Southern Midland Basin. For example, our SRH 1335 had a 24-hour rates of 1,184 barrels of oil equivalent a day. We also had impressive results in the Bone Spring of the Delaware Basin, with several new wells coming on in Reeves and Loving County, including the Robin 8 with 24-hour rate of nearly 1,200 barrels of oil per day.
And our East Texas Eagle Ford play in Brazos and Burleson counties, we continue to be very excited about our opportunity in this emerging play. We’d recently added additional acreage and now hold over 2,000 net acres in the play.
We’re shifting to more of an appraisal mode in our drilling from pads to further reduce cost and enhance returns. We have spud 26 wells during the quarter, with most scheduled to come on line frankly in the third quarter, the Reveille 8H was completed during the second quarter in a 24-hour IP of 987 barrels of oil equivalent a day.
We also have early test on wells coming on in first part of the third quarter, including the nearby Reveille 10H and 14H which had 24-hour IPs of 906 barrels of oil equivalent per day and 1,220 barrels of oil equivalent per day, respectively. With these strong results and our tremendous land position we decided to further ramp our activity up and should be running 10 rigs by year-end in this play.
In the Canyon Lime play in the Texas Panhandle, we also have seen strong results, specifically our most recent well the Bivins 94-1H at a 30-day IP of 1,718 barrels of oil equivalent a day. We hold approximately 100,000 net contiguous acres in this play and are planning to drill a total of six wells this year to further delineate the play and we should have four rigs running active in this play by year end.
Turning to Canada, in our first quarter call, we disclosed that we had drilled the Duverney and Montney wells. The initial production rates has been encouraging. For an example, in the Duverney in the first quarter we completed well 24-hour rate of 1,963 barrels of oil equivalent a day. And in the Montney our first well was completed in the first quarter, had a 30 day IP of 926 barrels of oil equivalent a day.
And with these positive results, we’re looking to increase activities in these plays and plan to spud 10 wells in the Duverney and two wells in the Montney by year-end 2014. We’ve also been adding to our acreage position in both these plays, we now have 146,000 net acres in the Montney and 177,000 net acres in the Duverney.
I want to take a second and shift to our international region. Production was in line with expectations as we held it flat over the previous quarter. We remain on track to generate significant free cash flow for the year from our international regions.
In the North Sea second quarter production was up 7% quarter-over-quarter, as we recovered from a difficult winter. We drilled eight new wells during the second quarter including a new well in the Beryl field that achieved 30-day IP of 4,500 barrels of oil equivalent a day. And our (indiscernible) well that achieved an average 30-day IP of 1,500 barrels of oil per day.
During the quarter in Egypt, we had additional exploration success, we had notable tests in the AEB, Safa, and Paleozoic reservoirs as well as the horizontal test in Upper Bahariya.
Following Phase I of our (indiscernible) development project the field is now producing at peak productions and we’ve also seen record oil and gas production from successful work on the BP acquired call to two properties at Abu Gharadig and Razak.
And finally, in Australia we continue to make progress on several of our new projects. Our Balnaves project is expected to come online in the third quarter, in fact we expect first of all in the next few weeks.
I want to point out our Coniston development project which is originally scheduled for first oil during the third quarter of 2014 is now going to be delayed until early 2015. Our FPSO, the Ningaloo Vision were delivered to the shipyard in Singapore early part of this year to undergo process upgrades and capacity expansion, which will require to bring on our new Coniston wells.
During a deep hole inspection coincident with the upgrade, it was discovered that it had significant structural steel replacement problem that was necessary to ensure its long-term safety and integrity of production up time for this FPSO. The repair work is well underway; it should start up later than initially planned. However, and this delayed start up does not, but I want to point out this delayed start up does not impact our overall production guidance.
As I mentioned earlier, we are on track to deliver our production guidance for 15% to 18% North American onshore liquids growth and our global BOE expected growth of 5% to 18%, based on our 2013 production on a pro forma basis.
Finally, before I turn the call over to Alfonso, I want to briefly touch on our buyback program, utilizing proceeds primarily from divestments during the quarter Apache bought back an additional $780 million worth of stock. This brings our total expense the launch of our buyback program through the end of the second quarter to nearly $2.3 billion or 26 million shares.
As a reminder during the second quarter our Board increased our authorization by 10 million shares to 40 million shares. And we continue to be Apache shares at compelling value at current prices.
With that, I would like the turn the call over to Alfonso
Thank you, Steve. I’m going to cover some balance sheet highlights and provide production and financial expectations for the remainder of the year. First, with respect to our balance sheet, during the second quarter we completed three significant portfolio focusing steps. The monetization of our major deepwater development projects, the divestment of dry gas properties in Canada, and the focusing of our asset base in south Texas. These three things actions close during the quarter yielding $1.8 billion of cash proceeds.
This brings the total cash proceeds generate before portfolio focusing steps over the last year to $10 billion. As Steve mentioned, we continue to actively repurchase Apache common shares during the quarter. In the second quarter we bought back $780 million in stock. To put that number in context I should note that the $1.4 billion proceeds from our deepwater divestment were only received on the very last day of the quarter, 30th of June.
Our balance sheet remained strong, our total cash position as of June 30 is nearly $1.9 billion. Debt remains unchanged at $9 billion which puts us at 22% debt to cap.
Now I’m going to make some comments regarding your expectations for the remainder of the year, starting with production. 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.
In line with our 5% to 8% global BOE production growth, we anticipate our global gas production to drop 1% to 2% sequentially in the third quarter. And for global BOE production to be flat to 1% up sequentially for the quarter. This is driven primarily by our regularly scheduled third quarter maintenance turnaround in the North Sea, where production is expected to be 12% to 14% down sequentially in the third quarter with that production returning in the fourth quarter.
As a final production note we currently expect Australia production to rise 6,000 to 8,000 BOEs per day sequentially in each of the third and fourth quarters, driven by oil from Balnaves ramping up.
Going to turn now to realizations. We currently expect North American oil realization discounts to WTI of $5 to $8 barrel. On the international oil side we expect to shift to a realization discount to Brent of $1 to $2 per barrel as our mix of production evolves with Australia ramping up.
We continue to expect North American natural gas realization discounts to NYMEX for the full year in line with first quarter or a $0.40 per Mcf discount. And we now see global NGL realizations at 28% to 30% of WTI for the remainder of the year, which is slightly lower than our previous expectation, driven by North America now being expected to be at 25% to 27% of WTI.
Now I’m going to move to the expense side. Starting with LOE. Second quarter unit LOE was up sequentially to $10.59, this is in line with expectations we set out in our previous call, of an increase form first quarter levels by 10% through year-end, driven by the ongoing shift in our portfolio balance and general cost increases.
Going now to DD & A, unit recurring DD & A was up $0.70 sequentially in the second quarter. This is in line with our expectations to see it rise this year by as much $2 per BOE from first quarter numbers, as we focus our capital on liquids projects.
Going to taxes other than income, we expect an increase for the remainder of the year primarily driven by the initiation of Australia PRRT expense. Based on current strip prices, we currently expect taxes other than income to increase sequentially by $40 million to $70 million in the third quarter.
Going to G&A, second quarter G&A expense reflected the timing of third-party reimbursements, we expect a sequential increase of $20 million to $40 million in G&A expense in the third quarter.
And finally, on the Income Statement, going to income taxes, our adjusted income tax rate was 40.3% in the second quarter, which is in line with our expectations of 40% to 44% for the year. On an adjusted basis, our deferred tax percentage was 30% which is broadly in line with our previously stated expectations for the year.
Finally, capital for the first half of 2014 was in line with our plan for the year. We have updated the format of our capital table on Page 10 of financial supplement to facilitate the tracking of our investment.
This concludes our prepared remarks. I think we’re now ready for questions.
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