Apache Corporation (APA) Q3 2013 Earnings Call November 7, 2013 2:00 PM ET
Brady Parish – VP, IR
Steve Farris – Chairman and CEO
Tom Chambers – EVP and CFO
Rod Eichler – President and COO
Tom Voytovich – EVP, International Operations
John Christmann – Region VP, Permian
Roger Plank – President and Chief Corporate Officer
Arun Jayaram – Credit Suisse
Pearce Hammond – Simmons & Co.
Charles Meade – Johnson Rice
David Tameron – Wells Fargo Securities
Joe Magner – Macquarie Research
John Herrlin – Societe Generale
John Freeman – Raymond James
Matt Portillo – Tudor Pickering & Co.
Leo Mariani – RBC Capital Markets
John Malone – Global Hunter Securities
Jeffrey Campbell – Tuohy Brothers Investment Research
Michael Hall – Heikkinen Energy Advisors
Doug Leggate – Bank of America/Merrill Lynch
Good afternoon. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings -- 2013 Earnings Release Conference Call. 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.
I would now like to turn the call over to Mr. Brady Parish, Vice President of Investor Relations. Sir, you may begin your conference.
Thank you, Rachel. Good afternoon everyone, and thank you for joining us for Apache Corporation’s third quarter 2013 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 the third quarter results, and then we will hear from Steve Farris, our Chairman and Chief Executive Officer, followed by Tom Chambers, our Chief Financial Officer. In addition, joining us for the question and answer session which will follow the prepared remarks are Roger Plank, President and Chief Corporate Officer; Rod Eichler, President and Chief Operating Officer; Tom Voytovich, Executive Vice President for International Operations and John Christmann, Region Vice President for our Permian region.
We prepared our quarterly financial supplemental data package for your use, which also includes the reconciliation of any non-GAAP numbers that we discuss, such as adjusted earnings, cash flow from operations, pre-tax margins or cash margins. In addition, we have prepared an operations supplement which summarizes our activities, includes detailed well highlights across the various Apache operating regions. These can both be found on our website at www.apachecorp.com/financialinformation or financial info.
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 differ materially from what we discuss today. A full disclaimer is located with the supplemental data package on our website.
This morning we reported third quarter 2013 earnings of $300 million or $0.75 per diluted share, cash flow from operations before changes in working capital totaled over $2.7 billion. Adjusted earnings, which excludes certain items that impact the comparability of results, totaled $932 million or $2.32 per diluted share. During the third quarter, total net production averaged approximately 784,000 boe per day with liquids production constituting 54% of the total. This represents an increase over the 771,000 boe per day reported in the third quarter of 2012 and a decrease from the 790,000 boe per day reported in the second quarter of 2013.
Production in the third quarter of 2013 was negatively impacted by a decrease in North Sea production 6,100 boe per day predominantly due to a planned turnaround at 40s as well as natural field declines in the offshore Gulf of Mexico and Australia, all of which we guided to on our second quarter earnings call.
With that, I’ll turn the call over to Steve.
Thank you, Brady, and good afternoon, everyone. And thank you everybody for joining us. As Brady mentioned, we’re delighted to have Tom Voytovich and John Christmann, join Roger and Rod and Tom Chambers and me on the call. And although Tom and John are not officially assuming their new Co-COO positions until the beginning of 2014, in typical Apache fashion they’re burning the candle at both ends rapidly getting up to speed with respect to their new responsibilities.
As Brady pointed out, Apache reported another solid quarter generating $932 million of adjusted earnings and $2.7 billion of cash flow from operations before changes in working capital. On the operational results I’d highlight one number, Apache’s North America onshore liquids production grew by 49,000 barrels of oil a day or 35% from the third quarter of 2012 reaching nearly 190,000 barrels. Our North American onshore oil production grew by 26% during the same period to 129,000 barrels a day. During this time those regions made no acquisitions, so this is a 100% drill bit generated growth and it puts Apache in the top-tier of North America onshore liquids growth generators among all our peers. Apache continued to be most active US onshore driller in the third quarter running an average of 77 rigs and completing 306 gross wells.
Importantly, we coupled our production growth with a relentless focus on operation and cost efficiency to ensure that our wells are not only increasing production but doing so at attractive returns. In all our onshore regions, we continue to drive down drilling and completion costs. And I’ll give you a couple of examples. Year-to-date we reduced our drilling and completions costs by $1.5 million per well in Tonkawa play in the Anadarko Basin and over $1 million per well in the Wolfcamp and Cline Shale plays in the Permian Basin. And we expect to further reduce these well costs as we optimize our development activities in these plays.
You can read more details about our operational performance this quarter in our quarterly operation supplement which has been posted in the Investor Relations section of our website.
Commensurate with building a deep asset base in North America onshore and delivering leading liquids growth performance, we set about restructuring our portfolio to focus more around this North American onshore resource base. We’ve successfully completed the lion share of that portfolio review. We’ve already announced in excess of $7 billion of divestitures aimed at rebalancing our portfolio to include the right mix of assets capable of generating strong returns, driving more predictable growth and enhancing shareholder value.
As a result of these efforts North American onshore production was 56% of our production in the third quarter pro forma for the transactions we have announced year to date. That’s up from less than a third in 2019, the year before we embarked on our strategy to substantially bolster our North American onshore resource base. This was achieved through a number of key steps during the third quarter. We exited our production operations in the Gulf of Mexico Shelf. This transaction closed on September 30 and generated $3.6 billion in cash proceeds. We expect another $200 million of cash from prep [ph] properties to be received in the fourth quarter.
In addition, with this transaction, we removed $1.5 billion of P&A obligations and given the maturity of the Gulf of Mexico Shelf, this step strengthens the production growth profile and reserve life visibility of our portfolio. It also goes a long way in eliminating a significant historical volatility factor in our production profile, hurricanes and other Gulf of Mexico offshore weather events. Those of you who have followed us for many years will understand that this was a big step for Apache but it was a right time for us because of our expanded visible and profitable opportunity base in North American onshore.
We have retained half of the deep rights exploration across our divested properties. So while we have exited that production, we are still very much exposed to the value of the upside in hydrocarbon rich region, especially in the sub-salt play. The other thing that it’s done for us is it’s given us an opportunity to grow without the significant declines we have seen on the shale or the P&A liability.
The second major step in the quarter was our partnership with Sinopec in Egypt. We are taking a one-third interest in our Egypt business in exchange for $3.1 billion in cash. We are on track to close this transaction in the fourth quarter.
As we indicated for some time we have been looking for a way to validate the value of our business in Egypt and I think we delivered on that. The transaction allows us to continue grow at attractive rates of return in Egypt, without Egypt being excessively largely component of our portfolio.
In joining forces with Sinopec, we’ve gained a very well suited partner who will add value to our operations and positioning in Egypt, and we expect to pursue a number of future growth projects jointly in different geographies around the world.
A third component of our portfolio of focusing steps in the third quarter was high grading our Canada properties. We have divested in excess of $300 million of properties there, primarily consisting of maturing gas properties. Having captured a very large resource base there, we are turning Canada into our horizontal drilling growth region that we can expect, or we do expect to compete with the Permian and the Anadarko basin, and rationalizing some of our legacy assets has been an important step in that process.
With these strategic steps, we are now positioned to drive more predictable growth through our enlarged North America onshore resource base and we also have the financial strength to fund that growth from our international free cash flow, the diversity of opportunities to complement it with very profitable international projects. We are still actively pursuing additional divestitures. We continue to be disciplined in our approach and we will only execute transactions that contribute to our overall strategic and financial goals.
With respect to capital allocation, on prior calls, we stated we would use proceeds that we receive from these divestitures to reduce debt and repurchase shares under our 30 million share authorization from our board. Using a portion of the sales proceeds received, we paid down almost $2 billion of debt during the third quarter and have repurchased approximately $700 million of stock, putting us well on our way of achieving our stated use of proceeds objectives.
Regarding the remaining proceeds from the Gulf of Mexico Shelf and the expected proceeds to be received from the Egypt partnership, we have been evaluating the most tax efficient way to fund international capital investment, pay down additional debt, repurchase shares and fund capital investments in our onshore U.S. regions.
We are currently running an accelerated pace in our Permian and Central regions. At our current pace, we will drill over 800 wells in the Permian versus 700 originally planned and over 375 wells in the Central versus the 300 that were originally planned there. This will increase our capital investment in those two regions by a combined $700 million to $800 million this year. Based upon this increased drilling activity we would expect onshore North American liquids to grow nearly 35% during 2013 versus the 25% growth rate we previously guided.
With that, I would like to turn the call over to Tom Chambers.
Thanks, Steve. This morning we reported third quarter earnings of $300 million or $0.75 per share, adjusted earnings of $932 million or $2.32 per share. 784,000 barrels of equivalent of net daily production and over $2.7 billion of cash flow from operations before working capital items. Overall, our bottom-line results reflect another solid financial performance for this quarter.
Oil and gas revenues totaled $4.4 billion, a $300 million increase over the second quarter driven primarily by higher oil prices with oil comprising 80% of total revenues despite only accounting for 46% of our total production on a boe basis. Including the impact of hedging, third quarter oil prices averaged $107.50 per barrel, up $9.57 per barrel from the second quarter, while gas prices averaged $3.49 per mcf down $0.38 from the second quarter.
For the quarter, oil continued to sell for more than 30 times the price of North American natural gas. Our total cash operating expenses were down slightly for the quarter to $17.53 per barrel of oil equivalent, primarily as a result of lower lifting cost and G&A expenses as we continue to focus on reducing costs.
As a result of our commodity mix and reduced cash operating costs, Apache’s cash margin increased by over 7% versus the second quarter to a healthy $42.74 per boe.
Turning to earnings, we had several adjustments which impacted our results. Earnings for the quarter were negatively impacted by $478 million after-tax adjustment for non-cash property write-downs, including one in the US, predominantly related to our restructuring efforts, one in Argentina, relating to expiring concessions and one in Kenya, following our decision to exit the country.
These were offset somewhat by $28 million deferred tax benefit for foreign currency fluctuations and other deferred tax benefits totaling $31 million. In addition, we recorded an unrealized non-cash after-tax commodity derivative mark-to-market loss of $213 million primarily related to our 2014 oil hedges. We hedged 62,500 barrels per day of WTI accrued at almost $91 per barrel and 62,500 barrels a day of Brent crude at just over $100 per barrel versus realizations which were roughly $5 and $3 per barrel higher for WTI and Brent respectively as of the end of the third quarter.
When we remove these non-cash items for comparability purposes, we earn $932 million or $2.32 per share for the third quarter versus $2.16 a year ago and $2.01 in the second quarter of this year. In the third quarter Apache generated $2.7 billion of cash flow from operations before working capital items demonstrating our ability to generate consistent operating cash flows to support our robust drilling program and other planned capital expenditures.
Turning to taxes, the third quarter effective tax rate primarily reflects the impact of the adjustments just mentioned, excluding these items our effective tax rate would have been 42%. Similarly, these adjustments impacted our percentage of deferred taxes in the quarter. We would expect the deferred rate of approximately 28% for the year after these adjustments.
I would like to emphasize, as Steve just mentioned, we utilized a portion of the cash proceeds from the Gulf of Mexico Shelf sale and our first Canadian asset sale to reduce debt by $1.85 billion from the second quarter of this year. This decreased our debt-to-capitalization ratio to 25% at the end of the quarter from 28% at the end of the second quarter. We also utilized these proceeds to repurchase an additional $450 million of stock in October bringing the repurchased total to $700 million to date and nearly eight million shares.
Also, as Steve mentioned, regarding the remaining proceeds from the Gulf of Mexico Shelf sale and the expected proceeds to be received from the Egypt partnership, we are evaluating the most tax efficient way to fund international capital investments, pay down additional debt, repurchase shares and fund capital investments in our onshore US regions. Utilizing these proceeds will allow us to further enhance our debt maturity profile, preserve our balance sheet flexibility to fund operations and growth and enhance shareholder value.
This now concludes our prepared remarks and I will turn the call back over to Brady.
Thanks, Tom. Operator, we are now ready to open the call for questions.
Earnings Call Part 2: