Apache Corporation (APA) Q2 2013 Earnings Conference Call August 1, 2013 2:00 PM ET
Brady Parish - Vice President, Investor Relations
Steve Farris - Chairman and Chief Executive Officer
Rod Eichler - President and Chief Operating Officer
Arun Jayaram - Credit Suisse
Pearce Hammond - Simmons & Co. Int'l
Bob Morris - Citigroup
John Herrlin - Societe Generale
Bob Brackett - Sanford C. Bernstein
John Freeman - Raymond James
Doug Leggate - Bank of America/Merrill Lynch
Joseph Allman - JPMorgan
Charles Meade - Johnson Rice
Leo Mariani - RBC Capital Markets
Brian Singer - Goldman Sachs
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 2Q Earnings 2013 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s 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 second 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 second quarter results, and then we will hear from Steve Farris, our Chairman and Chief Executive Officer; followed by Rod Eichler, President and Chief Operating Officer; and finally, our CFO, Tom Chambers is out today so he has asked me to pinch it for him with respect to his remarks.
We've 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 or pre-tax margins. In addition, we have prepared an operations supplement to summarize our activities across the various Apache operating regions. These can both be found on our website at www apachecorp.com/financialinfo.
Today's discussions 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 package on our website.
This morning, we reported second quarter 2013 earnings of $1 billion or $2.54 per diluted share. Cash flow from operations before changes in working capital totaled $2.6 billion.
Adjusted earnings which exclude certain items that impact the comparability of results totaled $801 million or $2.01 per diluted share. In the second quarter total net production averaged approximately 790,000 boe per day with liquids production constituting 54% of the total. This represents an increase from the 782,000 boe per day reported in the first quarter and the 774,000 boe per day reported in the second quarter of 2013 was negatively impacted by a decrease in North Sea production of 6000 boe per day from the first quarter partially due to deferred production as a result of unplanned facility maintenance at the Forties Field as well as natural fuel decline in some of our other international regions.
One final item of note before I turn the call over to Steve. An effort to further provide transparency with respect to our disclosure of oil and gas production we’ve included within our quarterly financial and operation supplements say more detailed breakout of net production for our Egypt region. As you can see on the bottom of pages five through seven of the financial supplement. We have provided three separate line items for Egypt production.
Gross production, net production with tax which is gap and net production without tax. For the terms of our production sharing contracts the state owned petroleum company EGPC pays our Egyptian income taxes on our behalf using the share of it's profit oil.
As a result for accounting purposes we record income tax with an equal and offsetting increase in our oil and gas revenues. As you can see this accounting treatment is both earnings and cash flow neutral. However it does result in Apache recording additional production volumes what we call tax barrels, because the recording of the tax barrels is both earnings and cash flow neutral we’re disclosing Egypt net production with tax barrels which is GAAP and without tax barrels for completeness.
If you were to exclude tax barrels from total reported production, our second quarter 2013 net production would have been 751,000 boe per day versus 727,000 boe per day excluding tax barrels in the second quarter of 2012 which is a 3.3% increase. This compares to the 2% increase based upon our reported net production which includes tax barrels. We have included an illustration of our Apache’s production breakdown on page four of the operational supplement for your review because Egypt tax barrels introduce additional variability in our reported net production. We have included this additional disclosure in an effort to assist you and estimating production on a quarter-to-quarter basis. We will be posting a presentation at a later date that includes a detailed illustrative example of the mechanisms and accounting for a typical EPSC to help further enhance transparency.
With that I’ll turn the call over to Steve.
Thank you Brady and good afternoon everyone and thank you for joining us. As Brady said Apache reported a strong results for the quarter, we generated over a $1 billion of earnings and more importantly $2.6 billion of cash flow from operations. I think the most important thing about the last quarter is we are transitioned towards more North American onshore growth was evidenced again this quarter with each of our four onshore North American regions significantly increasing liquids production both year-over-year and quarter-over-quarter, which are at attractive rates of return. As a result, our onshore North American liquids production increased to 175,000 barrels of oil per day and that constitutes 41% of our total worldwide liquids production and over 22% of our total overall production. This represents an increase of over 6% quarter-to-quarter and nearly 42% from second quarter of 2012.
In addition, our onshore North American crude oil production increased to nearly 120,000 barrels a day, an increase of 26% versus second quarter of 2012 and now it comprises over 15% of our total production. Digging more, our U.S. onshore resource base continues to deliver sector leading performance. Apache is the most active U.S. onshore driller with 81 rigs currently running. During the second quarter, we averaged to combine production of 214,000 barrels of oil equivalent a day from our Permian and Central regions alone, or 27% of our total production. This represents more than a 34% increase over second quarter of 2012 and a 28% increase after adjusting for the Cordillera acquisition which we closed on April 30, 2012.
In the Permian, we are currently running 45 rigs. In the Anadarko Basin, we are running 35 rigs. And as a result of this drilling activity, we remain on track to achieve our guidance of greater than 25% North American onshore liquids growth during 2013.
I would like to turn to Egypt right now. During the second quarter and throughout the recent political unrest, our operations have remained uninterrupted. In fact, I traveled to Cairo, last Thursday night I was in Cairo Friday through Tuesday of turning our quarterly operational review at an opportunity meet with the new minister of petroleum in a number of new administrations who have reiterated the importance of Apache’s investment in Egypt. Frankly, it was business as usual. We are currently running 26 rigs in Egypt. This morning we announced several impressive discoveries across our vast position in Western Desert. These discoveries continued to highlight the prospectivity of our $9.7 million gross acreage position.
Now, moving from the second quarter results, I would like to provide a brief update with respect to our portfolio review process. I mentioned in our first quarter earnings call after significantly both during our onshore North American asset base over last 3.5 years. Last fall, we embarked on a strategic preview of our portfolio with the ultimate goal of keeping the right mix of assets that generates strong returns, drive a more predictable production growth and create shareholder value. Since the beginning of this year, we have begun executing on multiple processes with respect to a robust list of priority divestiture candidates. On July 18th, we announced our first divestiture when we sign an agreement to sell our Gulf of Mexico shelf operations to Fieldwood Energy for $3.75 billion on cash, net of $1.5 billion of P&A liability. We also retained 50% interest in deeper rights, including what we consider exciting subsalt plays.
We are moving forward on our other processes and we will keep you at price of our progress. We hope to have additional transactions announced before year end. Given the highly confidential and sensitive nature of these potential transactions, we are not going to provide any further details at this time, but we will update you as progress unfolds. At the end, we intend to use the net proceeds to be received from the disposition of these priority assets to reduce depth and repurchase shares under our 30 million share authorization from our Board. And through the end of the second quarter, we have repurchased 2.9 million shares. The share repurchase program combined with our recent increase in our dividends I hope demonstrates our continued commitment to deliver value to our shareholders and reflects confidence in the underlying value of our business. Please keep in mind all of these potential transactions and the use of the proceeds received or subject to market conditions and I want to rest assure we’re dead eye serious about rebalancing our portfolio and emerging from this process is even stronger company than we’re today.
We want to continue to do what we think we do best which is export our vast inventory of opportunities rigorously allocate capital to generate great attractive rates of return and profitably and more predictably grow our production and create long term value for our shareholders. I would now like to turn the call over to Rod Eichler.
Thank you Steve and good afternoon. We have once again compiled an operation supplement detailing our activities across all 10 of our regions. I would like to take a moment to highlight some of our activities in the Permian and Central region and in Egypt. As Steve mentioned we had an outstanding quarter drilling and completing wells across the globe and we continue to ratchet up production on our North America onshore liquid plays. During the second quarter we averaged a 116 rigs worldwide and completed 343 total gross wells with a 99% success rate, 248 of these wells or 72% were located onshore at North America. At our Permian and Central Regions alone we completed 215 gross wells or 63% of our total.
Our production in North America onshore liquids grew 42% over the prior year to a 175,000 barrels per day and was predominantly by our Permian and Central regions. Combined these two regions grew liquids production approximately 8000 barrels per day quarter-over-quarter or 6% to a 136,000 barrels per day which represented nearly 32% of total worldwide liquids production. Combined production of these regions was 214,000 boe per day representing 27% of total company production for the quarter.
In the Permian region we averaged a 123,000 boe per day 74% liquids constituting nearly 16% of our total production. This represents 18% production growth over the second quarter of 2012.
We continue to be the most active driller in the basin holding a record 41 rigs for the quarter. We spot 214 gross wells of which 58 were horizontal and completed a 128 gross wells during the quarter. Along with Deadwood, drilling at Barnhart is down leading the region in production growth along with three bar (ph) and a Yeso Play in New Mexico.
We continue to add strong results in our vertical drilling program and Deadwood and area acquired in the 2010 transaction we now have over 600 operating wells for this year in the field.
Second quarter drilling activity at Deadwood focused on the vertical (inaudible) play maintain a six rig vertical Wolfwood (ph) campaign and our Lower Cline Shale Development Program. The region continued it's successful (inaudible) program on four recent vertical wells in the play averaging IPs of approximately 300 barrels of oil per day, 70% oil.
The Lower Cline Shale program continues to increase inventory and results. Our 2013 11 wells have been drilled and there are 28 wells remaining for the year. Our 30 day average IP for 2013 Cline wells online through second quarter is 311 boe per day 81% oil.
Currently our lower Cline inventory is spread over more than nine sections. Well spacing for (inaudible) and for 3D seismic conversion interpretations are all being evaluated to optimize the development program.
Also during the quarter the Barnhart area was extremely active with key two production growing 32% on the second quarter of 2012 and averaging 4700 barrels oil per day and 13.5 million cubic feet of gas per day. We continue to run six horizontal rigs toward the upper and little Wolfcamp shale. By the end of the second quarter we had drilled 37 wells with a total 83 expected by year end. We now have a total of 26 Apache operated horizontal Wolfcamp wells producing in the field with average 30 day IP in excess of 600 boe per day. With respect to cost reductions one of our focus areas has been the conservation of water resources as frac operations have employed the use of 1.2 million barrels of recycled flow back water. After initial drill out of frac wells all flow back and produce water from the horizontal development is recycled for us in the future frac jobs thereby conserving the non-potable groundwater available in the area and reducing our overall water cost.
During the second quarter we also added two rigs to our Three Bar Shallow Unit with selling and development of the Wichita Albany reservoir. A total of 7 wells spud another successful horizontal completion was added to that field. One well of note was the Three Bar Shallow Unit 113H drilled to a measured depth of 13,200 feet with a 6,000 foot lateral section. After a 16-stage frac, the well began production on May 9 and recently tested at rates of 795 barrels of oil per day and 1.3 million cubic feet of gas per day. Six additional wells are in various stages of completions, flow back and tie-in. Two vertical and one horizontal rig continue to develop the Yeso play of New Mexico. For the second quarter, 27 new Yeso wells all verticals were brought on production. Gross production for the 2013 Yeso drilling program doubled from 1,500 barrels of oil per day and 3.2 million cubic feet of gas per day to about 3,000 barrels of oil per day and 6.3 million cubic feet of gas per day during the second quarter. Completion activity on 8 horizontal wells drilled to-date should commence later in the third quarter. Looking ahead to the third quarter of 2013, Permian expects to maintain an active rig count of 45 drilling rigs of which 20 will be horizontal.
Moving now to Anadarko Basin, we are in our central region we averaged 91,000 barrels of oil equivalent per day in the second quarter. This is approximately 4,700 barrel of oil equivalent per day, or 5% increase over first quarter 2013 production, and notably 100% of the quarterly growth came from oil and natural gas liquids. Our liquids production rose 12% quarter-over-quarter to 45,000 barrels per day. Liquids now represent nearly half of our total region production versus 29% in the second quarter of 2012. During the quarter, we accelerated activity in the Anadarko and Whittenburg basins. We further exploited our vast resource potential by running an average of 28 rigs of which 27 were horizontal and completed 87 gross wells. We are currently running 35 rigs in that region and remain on track to drill 300 wells during 2013. About a third of our program will target prolific liquids-rich Granite Wash with another third targeting the oilier Tonkawa. Rigs will also continue to work the Cleveland, Marmaton, Cottage Grove and Canyon Wash plays.
In our liquids-rich Granite Wash play, our wells continue to come on strong. Two recent well result highlights include the Ramp 26 #7H with an IP of 199 barrels of oil per day and 7.5 million cubic feet of gas per day the Ramp 27 #7H with an IP of 139 barrels of oil per day and 7.4 million cubic feet of gas per day. We still have many years of well locations and our resource inventory awaiting exploitation. In the oily Tonkawa play we had strong results in Roger Mills County with our three largest completions averaging over 500 barrels of oil per day and approximately 600 Mcf per day. Again, Apache has identified years of viable well locations in our resource inventory.
In Ochiltree County, Texas, we have a successful Cleveland program underway with our most recent four completions coming on with an average IP of 540 barrels of oil per day and 630 Mcf per day. The Marmaton formation is also showing strong results with recent completions averaging 400 barrels of oil per day and 4.9 million cubic feet of gas per day. We are also having tremendous success in our Cottage Grove play development and the Stiles #23-3H well came online at 790 barrels of oil equivalent per day, 82% oil.
In our Canyon Wash play in the Texas Panhandle, we brought on several strong vertical wells including the (indiscernible) with an IP of 1,237 barrels of oil per day and 1 million cubic feet of gas per day and the Boys Ranch 116 #10 at 984 barrels a day and 101.3 million cubic feet of gas per day. In addition, our two most recent wells are flowing back after frac at a combined rate in excess of 3,000 barrels of oil per day.
We are also continuing to drive down drilling and completion cost through detailed analysis of even smallest operations. In May, we reported $5 million of drilled and completed Tonkawa well. Thanks to the efforts of a number of Apache engineers, petrophysicists and geologists. We have lowered that number by nearly $1.5 million with production results equal to or better than before. During the second quarter, we also concentrated heavily in our Tonkawa bit, motor, torque, and drag combinations. Half of the 25 Tonkawa wells drilled in the quarter had significant rate of penetration increases with our last two wells drilled in under two weeks versus four weeks six months ago.
We mentioned on our last earnings call that we have lowered our average Granite Wash completing well cost by $1.3 million to $2 million per well. The same team that reduced our Tonkawa cost by nearly half is now focused on the Granite Wash, so we anticipate additional future cost savings by continuing to apply best practices we expect to reduce cost further and apply these technicians to our other plays. As Steve mentioned our operations in Egypt remain uninterrupted and we continue to find new oil and gas discoveries in the prolific Western Desert. In fact this morning we reported seven oil and gas discoveries across four basins at six concessions.
Our continued success highlights a geologic and geographic diversity across the company’s 9.7 million gross acres in Egypt’s Western Desert. The discoveries include the Riviera South West-1X on the Southern Plank of the Abu Gharadig Basin which test flowed 1500 barrels of oil per day and 2.8 million cubic feet gas per day for the Lower Bahariya sand.
And the Faghur basin we had four new discoveries including the Narmer-1X which encountered 85 feet of net pay in the middle of Jurassic Safa sand. The wells have flowed 1166 barrels of oil per day and 400 mcf of gas per day. Despite downtime in the North Sea we did have some positive news recently at our Bacchus field. Last month we completed our third successful development well Bacchus B1 which mobbed 257 feet of net oil pay along our horizontal wellbore and high quality Jurassic Fulmar sandstone.
Production commenced from the B1 during the fourth week of July adding 9400 barrels of oil per day of new rate taking the field to 17,600 barrels of oil per day with plants to further optimize the rates and operating conditions of the subsea infrastructure. During the third quarter we planned to acquire a new treaty seismic survey over Bacchus in order to identify further development opportunities. That concludes the operational highlights. I’ll now turn the call back over to Brady.
Thanks Rod. This morning we reported earnings of 1 billion or 254 per diluted share. Overall our bottomline results reflect an another solid quarter of financial performance driven by increased production. Our production this quarter averaged 790,000 barrels of oil equivalent per day.
Oil and gas revenues totaled $4.1 billion for the quarter flat with the first quarter; oil revenue was lower as higher production volumes were offset somewhat by a drop in the oil prices. Gas revenue was slightly higher than the first quarter as higher prices offset a slight decline in production. Oil accounted for 78% of total revenue. Including the impact at hedging second quarter oil prices averaged $97 and $0.93 per barrel down $3.79 from the first quarter our gas prices averaged to $3.87 up $0.15 per mcf for the first quarter. As a result we generated 2.6 billion of cash from operations before working capital items. We were able to consistently generate these cash flow levels given the fact that over 45% of our total production on a boe basis is oil which continues to sell for well over 20 times the price of North American natural gas. In addition our international gas portfolio is continued to bolster our realizations as our international realizations exceeded those in North America for the sixth consecutive quarter.
We head the portion of our 2014 production to secure prices in cash flows that will support our continued growth through our very active drilling program. We hedge 62,500 barrels per day at WTI crude oil at almost $91 per barrel and 62,500 at Brent crude at just over a $100 per barrel.
When you look at our income statement this quarter you will notice a new line item titled derivative instrument gains, losses, net. This line item represents the mark to market impact of our oil and gas commodity price financial derivatives and was segregated due to the magnitude of the amount of $247 million gain in the quarter. This line item will continue to appear each quarter as long as we have financial derivatives and be one of the components utilized to calculate adjusted earnings.
Our focused drilling program produced a 42% increase in liquids production in North America onshore properties from the prior quarter and 6% increase for the first quarter. This is primarily driven by continued strong results in the Permian and Anadarko Basins although as noted earlier each of our four North American onshore regions increased their liquids production from second quarter a year ago and sequentially versus the first quarter. Worldwide liquids production for the quarter averaged 426,000 boe per day an increase of 10% from the comparative 2012 quarter and 2% sequentially.
For Apache our liquids growth and drilling opportunities are primarily focused on crude oil. Over 84% of our second quarter liquids production is crude oil. Our production efforts directly translated into a pretax margin that exceeded 35%. Our operating costs for the quarter were up 5% sequentially driven by increased repair and maintenance and power and fuel costs. Typically repair and maintenance cost run higher in the second and third quarters each year as we compress this work into the favorable weather window. I also wanted to note that second quarter earnings were impacted by $59 million deferred tax expense for foreign currency fluctuations in addition to the after-tax commodity derivative mark-to-market gain of $156 million both of which are non-cash adjustments. Adjusting for these non-cash items, we were near $801 million or $2.01 per share versus $2.07 a year ago and $2.02 in the first quarter of 2013.
Turning to taxes, the second quarter effective tax rate of 37% primarily reflects the impact of foreign currency fluctuations on deferred taxes just mentioned. Absent this foreign exchange movement for the quarter, our effective tax rate would have been a more typical 40%. Similarly, this adjustment impact in our percentage of deferred taxes in the quarter. We would expect the deferred rate of approximately 25% for the year absent the adjustment. Detailed calculations for margins, adjusted earnings, adjusted tax rate, and cash from operations can be found in the financial supplement located on our website.
Looking at the balance sheet, our ability to generate consistent operating cash flows continues to support our robust drilling program and other planned capital expenditures. This quarter, our total debt balance increased slightly, but at the end of the quarter our debt to capitalization ratio was 28% the same as last quarter. However, as Steve mentioned earlier, we are working to rebalance our portfolio by actively pursuing asset sales to be completed in 2013. Proceeds from the first of these, the Gulf shelf sale for $3.75 billion will be used to reduce our debt including commercial paper balances and $400 million of debt maturing in September, and we purchased Apache common shares under a 30 million share repurchase program authorized by the board earlier this year. At the end of the second quarter, we took the opportunity to initiate the share repurchase program and buyback 2.9 million shares. The results of our efforts to rebalance our portfolio will enhance our debt maturity profile, preserve our balance sheet flexibility to fund operations and growth and enhance shareholder value.
This concludes our prepared remarks. Operator, we are now ready to open the line for questions.
Earnings Call Part 2: