APA Corporation (APA) — Q1 2021 Earnings Call Transcript

Good morning. And thank you for joining us on APA Corporation's first quarter 2021 financial and operational results conference call. We will begin the call with an overview by CEO and President, John Christmann. Steve Riney, Executive Vice President and CFO, will then provide further color on our results and 2021 outlook. Clay Bretches, Executive Vice President of Operations; and Dave Pursell, Executive Vice President, Development, will also be available on the call to answer questions. Our prepared remarks will be approximately 15 minutes in length with the remainder of the hour allotted for Q&A. In conjunction with yesterday's press release, I hope you have had the opportunity to review our first quarter financial and operational supplement, which can be found on our Investor Relations website at investor.apacorp.com. Please note that we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. This quarter, we have also introduced the term free cash flow, which is defined on page 20 in the glossary of our supplement. Consistent with previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude non-controlling interest in Egypt and Egypt tax barrels. Finally, I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current views and 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 information on our website. And with that, I'll turn the call over to John.

Good morning, and thank you for joining us today. In my prepared remarks, I will review APA Corporation's first quarter results and discuss our 2021 priorities. Despite some significant weather-related challenges, we delivered a strong first quarter. Specifically, our free cash flow generation was over $500 million. We performed well relative to our production and cost expectations, and our safety performance was excellent. Our total adjusted production exceeded guidance as Permian oil and gas volumes benefited from a faster-than-expected recovery from the February storm impacts. This more than offset lower international adjusted volumes resulting from the impact of higher oil prices on our Egypt PSC cost recovery barrels and some extended operational downtime in the North Sea. Upstream capital investment and LOE were considerably below guidance for the quarter. Together with strong price realizations, these factors contributed to an exceptional quarter of free cash flow generation, all of which is being designated for debt reduction. Looking ahead, the full year guidance we provided in February is unchanged, and we are clearly off to a good start. Turning now to operations in the United States. We reactivated a rig in the Permian Basin, which was previously on standby and picked up one additional rig to drill a four-well program in the Austin Chalk play of Texas in Brazos and Washington counties. We placed 22 wells online in the Permian, including two at Alpine High. Roughly 5,000 BOEs per day of lower-margin Permian production remains shut in at the end of the first quarter. We are very pleased with the early results and combined with the recovery from Winter Storm Uri are expecting a significant increase in second and third quarter production. On Tuesday, we announced an agreement in principle with the Ministry of Petroleum and the Egyptian General Petroleum Company to modernize the terms of our current production sharing contracts, which is the result of a process that has been underway for more than one year. The agreement is comprehensive, and when ratified by parliament, will result in increased activity, capital investment and oil-focused production growth over the next several years. Currently, we are running a five-rig program in Egypt and continue to build quality inventory across our expanded acreage footprint. In the first quarter, we had another significant oil discovery at our Hadid prospect, the details of which are in our financial and operational supplement. We are projecting Egypt gross production will bottom in the second quarter and trend up in the second half of the year. Debottlenecking of certain pipelines and facilities and the addition of compression capacity will enable us to connect roughly 35 wells in the second half of the year compared to only 20 wells during the first half. These and other 2021 guidance items do not include any potential changes associated with the pending PSC modernization, which we look forward to updating after the agreement is formally approved. In the North Sea, we have been operating one floating rig and one platform rig crew for just over a year. At this pace, we are capable of delivering annual production in the range of 55,000 to 60,000 BOE per day for the next several years. In 2021, we anticipate North Sea volumes will be a bit lower as we experienced unplanned compressor downtime in the 40s field during the first quarter and will incur extended pipeline downtime and platform maintenance turnarounds during the second and third quarters. Following this, however, we expect a sharp rebound in production during the fourth quarter 2021. In January, we announced a discovery at our fourth exploration well in Suriname. An appraisal plan for this well, Keskesi, is forthcoming. Total has now fully assumed operatorship of Block 58 and is running two rigs in the vicinity of the Sapakara discovery. Both rigs are capable of appraisal and exploration drilling, which provides ultimate flexibility as we execute our programs. We look forward to providing updates as appropriate in the future. Next, I would like to review our priorities for 2021, which we outlined previously on our February conference call. First, we are budgeting conservatively and focusing on free cash flow generation and debt reduction. This year, our reinvestment rate is currently tracking below 50%. Second, we are aggressively managing our cost structure, and we'll continue to do so regardless of the oil price environment. Third, we are preserving optionality within our portfolio, which will enable us to either develop or possibly monetize certain assets at the appropriate time. Fourth, we are advancing the exploration and appraisal programs in Suriname and are now beginning to benefit from our joint venture carry agreement, which is a very efficient funding source for our differential long-term opportunity in Block 58. Fifth, we are continuing to focus on value creation through organic exploration. We recently announced the hiring of Tracey Henderson to lead our exploration team, which concludes an extensive search that began prior to the COVID-19 pandemic. Tracey's experience and expertise are a great fit for the existing APA portfolio and we look forward to her leadership on future exploration strategy and ventures. And lastly, we are advancing ESG initiatives that are relevant, impactful and core to our business. Broadly defined, these fall into three areas of emphasis: air, water, and communities and people. In 2021, we have established goals that address routine flaring, freshwater consumption and diversity and inclusion programs. These goals are linked to the annual incentive compensation of not just management, but all employees. We made excellent progress in each of these areas during the first quarter, and I look forward to discussing them further as we progress these efforts through the year. In closing, I would like to thank all of our employees across the globe for their hard work in the first quarter and in particular, our field personnel and contractors on the front lines that did an excellent job safely navigating global pandemic protocols as well as some very extreme weather events. During the historic freeze in Texas, our teams worked around the clock to maintain and restore the hydrocarbon production systems that are vitally important to ensuring the safety and well-being of people and communities during events such as this. And with that, I will turn the call over to Steve Riney, who will provide additional details on the first quarter and our 2021 outlook.

Thanks, John. As noted in our news release issued yesterday, under generally accepted accounting principles, APA Corporation reported first quarter 2021 consolidated net income of $388 million or $1.02 per diluted common share. These results include items that are outside of core earnings, the most significant of which is a $43 million valuation allowance adjustment for deferred taxes in the quarter. Excluding this and other smaller items, the adjusted net income was $346 million or $0.91 per share. We had a very good first quarter with most financial results being in line or better than our previous guidance. Notable exceptions were North Sea production, which John addressed; and G&A expense, which was $83 million. While underlying spend was in line with our guidance of around $75 million, additional charges were recognized for the mark-to-market impact on certain stock compensation programs. First quarter results were significantly influenced by U.S. natural gas pricing volatility associated with Winter Storm Uri. The impacts of the storm appear in several places on the income statement. So let me take you through most of the significant items. Since it determines the reporting of results, I'll first remind everyone of how we handle Permian Basin gas production. We sell all of our gas production in basin, and then manage our long-haul transport obligations separately. We optimize those obligations through the purchase, transport and sale of gas from various receipt points in the Permian Basin and in the Gulf Coast areas. Our common practice as we contract for the purchase and sale of gas is to maintain a relatively balanced exposure between gas daily and first-of-month pricing. As the end of January approached, we had a portfolio of purchase and sales contracts that were heavily skewed to February first-of-month pricing. As we commonly do when this is the case, we use financial contracts to rebalance that exposure closer to 50-50. Given the unusually high gas price spike that occurred in mid-February, this impacted first quarter reporting results in three ways: first, our underlying sales contracts for produced gas determine the reporting of revenue and realizations. Since approximately half of our underlying sales contracts for February production were at gas daily pricing, you will see a significant increase in both natural gas revenues on the income statement and in the average realized price for U.S. gas for the quarter. Second, our underlying contracts also determine the reporting of revenues and costs associated with our activities to purchase, transport and sell gas to fulfill our transportation obligations. The results of these activities appear in the lines entitled, Purchased Oil and Gas Sales and Purchased Oil and Gas Costs on our P&L. Combined, we incurred a loss of $54 million on that activity in the first quarter, which includes the cost of the transport and the fuel associated with that transport. In a normal quarter, given current differentials, we would expect this loss to be in the $25 million to $35 million range. For the first quarter, this loss was compounded by a volume imbalance in our underlying purchase and sale contracts, which resulted in more gas being purchased at the higher February daily prices and more sales at the lower first-of-month pricing. Finally, since we used the financial swap to rebalance our underlying contract portfolio, a good portion of the price spike benefit appears in the $158 million derivative instrument gain on the income statement. If our underlying contract portfolio had been more balanced in the first place, we would not have used the derivative contract, and we would not have this gain. Instead, we would have reported higher gas revenues and a lower loss on sales of purchased gas. I know I went through that quickly, and it can be confusing. If you have further questions, please call Gary's team and they can take you through it in further detail. Free cash flow was also strong in the first quarter, exceeding $500 million. That cash is being used for debt reduction, initially, through the pay down of our revolver. Excluding the consolidated effects of Altus Midstream, we reduced net debt by $339 million in the quarter, mostly through the retention of cash. If the current price environment holds up, we anticipate at least $1 billion of net debt reduction in 2021. Turning now to some additional comments around our 2021 outlook. Our full year 2021 production, capital, LOE, and G&A guidance all remain unchanged. Assuming the recently announced PSC modernization in Egypt proceeds on course, we anticipate adding some capital activity in Egypt for the second half of 2021. We will update our guidance for Egypt as we proceed through that approval process. We have also expanded our guidance to include the anticipated effects of purchasing and selling gas in the U.S. to fulfill our transport obligations, which I discussed previously. Lastly, for the remainder of the year, we expect our U.S. natural gas realizations will closely approximate Waha and El Paso Permian pricing. You will find all of our current guidance items in the financial and operational supplement. In closing, we look forward to a very strong year of free cash flow generation of at least $1 billion. This should take us a good bit of the way toward our previously mentioned leverage target of around 1.5 times debt-to-EBITDA under a mid-cycle pricing scenario. You should understand, however, that our more relevant objective is to return to investment-grade credit status. To that end, we will continue to budget conservatively, focus on costs, free cash flow generation, and debt reduction and maintain close contact with the rating agencies to ensure that we are taking the appropriate steps to achieve that goal in a timely manner. And with that, I will turn the call over to the operator for Q&A.

Good morning, guys.

Good morning, John.

The first question I had was just on what Steve said there at the end about potentially looking when the new PSC has done in Egypt about adding some additional capital and activity in the second half of '21 in Egypt. And obviously, that's consistent with what you've said in the past, John, about eventually wanting to get the U.S. and Egypt, and 2022 and beyond is sort of more of a maintenance level activity at the least. And so I know in the past, the sort of the commentary around Egypt had been from the five rigs you're currently running, probably wanting to get to at least a couple of rigs more to at least get to that maintenance level. So until told otherwise by you all, is that a fair assumption to assume that, that's kind of where you want to get to in Egypt for the - by year-end?

Sure. I'll share some thoughts about Egypt, and then Dave will provide details on rig counts. We are finally able to publicly discuss an important step in modernizing our Production Sharing Contracts in Egypt. This effort began before the COVID-19 pandemic. We have been negotiating sincerely with Egypt for over a year. Today, after collaborating with the Minister of Petroleum and EGPC, we announced a framework that will shape the future of our operations in Egypt. We have been clear about maintaining our guidance this year. We need to go through the approval process, including parliamentary steps, before we can provide more details. Throughout the year, we will increase our activity. Many projects in Egypt had become less appealing due to current PSC terms, and this new framework will allow us to invest in those projects. I believe this will benefit both Egypt and Apache, strengthening our position beyond mere maintenance. Now, I'll let Dave elaborate further.

Thanks. Let's take a step back. John, you framed your question around our goal of maintaining the business. So regarding maintenance capital, we plan to spend approximately $900 million on development capital this year. In this context, production is experiencing a slight decline. We are looking at two key areas where we can invest capital to halt that decline: primarily in the U.S. Permian Basin and in Egypt. We have mentioned the need for a full or partial rig line in addition to the two rigs we'll operate in the second half of the year in the Permian to sustain production, along with more rigs in Egypt, where we estimate that seven to eight rigs are necessary to maintain production levels. Taking into account the rig line in the Permian and several rigs in Egypt, we expect an incremental investment of about $200 million. Thus, our maintenance capital totals around $1.1 billion. It's important to note that we are not aiming for significant growth but rather focusing on maintaining our production levels. This strategy provides flexibility in our portfolio on where we'll allocate this capital to support our global production efforts. With that, I'll pass it over to Steve for further insights.

Yeah. So we entered, I think, good context for this is that we entered the year as people will recall, it seems like years ago, but ended this year with a plan that was based on $45 WTI, and it had a - as Dave called it, the development capital, the $900 million of development capital, if we just set aside Suriname, was about a 60% reinvestment rate. And at current strip, that same amount of capital is less than a 40% reinvestment rate. So clearly, this is not a reinvestment rate that's going to sustain, and it's not a maintenance level of capital spending. And so we've got a continued slight decline in production volumes. And we've talked about this in the past, that the #1 priority coming into the year when it still looked like a pretty difficult year was that we needed to get debt paid down. We needed to get the balance sheet strengthened and we needed to start the process and that was the most important financial priority. But it is prudent to spend at a maintenance capital level and maintain the production volume going forward, and we probably need somewhere in the neighborhood of $100 million to $200 million more development capital in order to get into that neighborhood. And with price where they are, and if they hold up, I think we’re likely to start increasing capital in the second half in order to get that point, and most of that is, as Dave outlined, is going to be in the Permian and Egypt, especially Egypt with the modernization efforts as that proceeds and gets the final approval. And I just want to echo on that. The issue there was the old structure of the PSCs and how they work. These were very old vintage PSC structures. And it has nothing to do with the fact that Egypt actually has some very highly economic opportunities in quite a bit of them and just needed the PSC structure that enabled the capital investment in that. And I'll just echo once again John's point that none of this is in our guidance. It's not in the capital for guidance nor is it in the production volume or anything else for guidance. And just to reinforce what Dave said, I'd ask that we please don't throw us into the bucket of growth because this is not an aggressive growth spending plan. This is just about a prudent step towards getting to at least a maintenance level of capital spending.

I appreciate that. It makes sense. As a follow-up, I noticed the activity in Suriname during the first half of the year where Total decided to concentrate more on appraisal rather than immediately moving the second rig to Bonboni for the exploration program. We'll have to wait to see when we can get to Bonboni. However, it appears that since you hold a 12.5% share in appraisal compared to 50% in exploration, this may have introduced some flexibility in the budget, unless I'm misinterpreting it. There seems to be some budget flexibility because it looks like your Suriname budget is probably slightly lower than where you started the year, given the increased focus on appraisal over exploration at least for the first half of the year.

Yes. Regarding the Suriname budget, we haven't made any changes to it; it's purely a matter of timing. Bonboni will be the next exploration well, and we are eager to drill it. It is located 45 kilometers to the north, which gives you an idea of the scale and scope. We are not reallocating any funds there and have maintained the Suriname budget as it was. This is simply a timing issue, and we had a good understanding of their planned cadence as we began this year.

Great. Well, I appreciate it, guys.

Thank you.

Thank you. Good morning, everybody. I'm afraid I'm going to pound John a little bit on Egypt, just to round out the last John's questions. Steve, I wonder - I know you're going to give us details later on, but I just wonder if I could touch on a couple of aspects of why this could be a big deal for you guys. I think it's 10 years since we published our primer on this, believe it or not. The cost pool, the potential for extension and the implications of that seismic shoot you've been doing, particularly over the oil play in the Western Desert, can you offer any - can you quantify perhaps what no ring fencing can do to the cost recovery or the cost that you have outstanding there and whether you would get an extension on those concessions as part of this agreement?

No, I mean, Doug, great question. And you'll have to just wait until we get things finally approved for us to really dive in and give any - a lot of details on it. But I'll just say, we - stepping back, it's a holistic approach. This is something that will be good for Egypt. We've looked at things very carefully. This has been a process that has been very lengthy and very thorough and very comprehensive. And it really is in line with the minister's objective of modernizing the oilfield in Egypt. And I think it's going to have some benefits that's going to enable us to direct more dollars into the drilling programs and into the volumes, which are going to generate more revenue. And so we've got a deep inventory. We're seeing good early results off of the seismic with the Hadid announcement that we had this - within the supplement this go-around. So we're excited about Egypt. And quite frankly, this really puts us in a position where we can fund some projects that are ready to go.

Forgive me for getting technical on this, John, but I just want to make sure you understand my question. Do you have isolated cost recovery pools that you couldn't recover because they were ring-fenced? And I'm just trying to understand if you could - your share of production could go up sort of overnight as a consequence of being able to tap into those cost recovery pools without any incremental capital

I fully understood your question. I'll just say again, I can't get into a lot of details until we close. But this is going to be a win-win for both us and Egypt, and it's going to let us put more dollars in the ground and raise out investments. Steve, do you want to?

Yes. I'd just say, Doug, we applaud and respect the effort. We just can't get into details because it's still got quite a bit of process to go. But we've made a major milestone here with the agreement in principle, and so we're on our way. And I'd just like to reiterate, Egypt is a fantastic country to do business in and it's got some of the best underlying opportunity in our entire portfolio and long legs on that inventory as we're proving with the seismic and some of the activity going on, on the exploration side. And all we're accomplishing with this is getting rid of an old, outdated PSC structure that created artificial barriers to being able to access some of that really attractive opportunity. We'll give a lot more details as we get closer to this.

Okay. I don't want to hold the call guys. That was actually my first question. My second one, I won't go to Suriname this time, but I'd like to ask you, Steve, about free cash flow. Look, obviously, $500 million adjusting for working capital, $1 billion for the year that current. There is something not adding up there. I just wonder if you could just frame for us what you think the scale of the more than $1 billion could look like. And more importantly, in a relatively complex portfolio in some people's view, what's the longevity, ex Suriname, of sustaining that free cash flow from the current portfolio? And I'll leave it at that. Thanks.

Yes, great, Doug. I may have been a bit understated in my prepared remarks. My intention was to highlight how much progress we've made in just one quarter since we presented our plan in February. Initially, we estimated about $350 million in free cash flow based on a $45 WTI price. However, I want to clarify that it has now exceeded $1 billion, and at current prices, it will likely remain well over that amount. That said, we do not provide guidance on free cash flow, as we've avoided that in the past. There are many different definitions of free cash flow out there, and we are clear about our own definition. Therefore, we will continue our practice of not offering guidance on this. Additionally, when I refer to maintenance capital, if we set Suriname aside, we still need to invest another $100 million to $200 million to reach maintenance capital levels on the development side. We're close to this target. Essentially, it takes an additional $100 million to $200 million to sustainably access this projected free cash flow of over $1 billion in this price environment for a sustained period. We are confident we can maintain this for five to ten years and are always seeking ways to extend that timeframe even further.

Steve, that's really helpful. I mean Suriname's in the stock for free, and I appreciate the answer.

Thanks for the question. Gave me the opportunity to be a little less conservative on the free cash flow.

That’s appreciated, guys. Thanks so much.

Thank you, Doug.

Thanks. Good morning, everybody. John, you mentioned in your prepared remarks about potential non-core sales. I just wanted to see if you could talk about that anymore, maybe what assets might be included there and how far along in the process are you. Is there a formal data room planned for that? Or where are you in that process?

Mike, I appreciate your question. We usually hold off discussing portfolio transactions until after we announce them. However, it's not much of a secret that we have a small non-core package in the Permian market, which includes some higher-cost waterflood assets that we might consider selling. We're currently evaluating that. The important thing is that we have a rig operational in the chalk, and we're open to assessing our investment strategies. As we continue to make progress on our modernization efforts in Egypt, we view it as an ongoing process. There are many key developments taking place, and we are always exploring different options within our portfolio.

Okay. Thanks. And I wanted to ask on Suriname, just kind of a follow-up on the deeper test at Keskesi. You ran into the pressuring issues before you could test the Neocomian. I think you said in your release, it nevertheless helped validate your geologic model. I just want to see if you could add any color on that and what you saw in that process.

With Keskesi, several key developments occurred. First, we successfully went below the unconformity, and second, we confirmed the presence of hydrocarbons. This is the reason we had to halt the process. Additionally, at that depth, we demonstrated that a quality reservoir exists within those carbonates. Importantly, the hydrocarbons we encountered were very rich, rather than just dry gas, which is encouraging. This area is a prospect that will require further testing, and it will necessitate a different well design than we initially used. We were close to reaching the first target, which consists of two targets in total, but we decided to end operations early. We will collaborate with our partner, Total, to plan an exploration well aimed at testing the Neocomian targets at a later stage, as both of us were optimistic about our observations prior to nearing the first target.

Great. Thanks, John.

Hi. Good morning, everyone. Thanks for taking our questions.

Good morning, Jeanine.

Good morning. Thanks for the time. Maybe just two quick ones on the balance sheet. Can you talk about the medium-term plan for adjusting the balance sheet? You've got a ton of free cash flow on the horizon, so there's a lot of options there. Do you intend to retire debt as it comes due? Or are there opportunities to retire or further refinance at lower rates earlier?

Yes, we've mentioned that we're targeting a debt to EBITDA ratio of at least 1.5 times. We may need to aim even lower, as the trend has been moving in that direction over time. We believe achieving a ratio at or below that is necessary to return to investment grade. Our main goal is to regain that investment grade status, and we are committed to doing whatever it takes. We anticipate that by the end of this year, our net debt to EBITDA will be around 2.1 times, assuming current conditions hold. Even in a $55 price environment for 2022, we would still only be slightly above that, around 2.2 or 2.3. This indicates we are making significant progress this year if prices remain stable. As for our strategy, we haven't detailed our specific actions yet, but it will involve paying off some of our historical bonds. We plan to proceed as we have in the past using methods like open market repurchases, 10b5-1 programs, tender offers, and refinances. However, I don't foresee any significant refinances until we return to investment grade. We have just over $335 million of debt maturing in the next couple of years, which we will pay down as it matures.

And so maybe following up on, so the ultimate goal is to get back to investment-grade. How do you view that versus more meaningfully increasing the dividend? Or are those two things kind of mutually exclusive? Or do you think you can do both of them at the same time?

Yes. I - obviously, both of those are important. I think we have to get the balance sheet in order and get debt down and get at least at a minimum, get back closer to a point where we think achieve investment grade before we start looking at the dividend again. And as we've discussed before and I think we've talked with you specifically about it, we look at debt paydown as a return to shareholders because every dollar of debt that we can get off the balance sheet today will add more than $1 to the market cap of the company, we believe, because we think that the debt level is actually weighing on the share price. And so while it's not the same as a dividend and we recognize that, it does benefit shareholders directly with debt paydown. And we haven't made any specific plans as to what we're going to do. We've got quite a bit still to accomplish on the debt paydown effort. We - as I said, we'll accomplish quite a bit of that, hopefully, this year. We'll need to do more of it in 2022. And at an appropriate time, we'll reconsider whether we need to bring the dividend back or whether we want to start bringing the dividend back and we'll certainly hold out the option that we could start looking at the dividend prior to actually getting investment grade. That is clearly an option for us.

Thank you for all the detail. I appreciate it.

Good morning, John and to the rest of your team there.

Good morning, Charles.

I wonder if I could return to the topic of Egypt and ask a question. I believe I know the answer, but I understand you can't discuss the specifics at this time. In general, are we suggesting that there are clear opportunities for both you and Egypt, yet it's apparent that you're not pursuing them due to possibly low oil price thresholds in those PSCs, which benefits them? Am I understanding this correctly?

Yes. I would like to mention that there were some projects that the PSC was making less competitive. By modernizing the PSCs, there are projects that can be prioritized for funding, and we look forward to that. This is undoubtedly a crucial step. It's important to note that we've been in Egypt for over 25 years, and many of these fields have been in operation since the mid-90s. So, reflecting on this, it's just part of the necessary evolution in an oilfield.

Yes, that's correct. If you were to ask those who wrote them whether they would stand the test of time, they would likely say no. Regarding your second question about Tracey Henderson, who you mentioned in your prepared remarks and in the press release about her leading your exploration efforts, she has relevant experience drilling offshore Suriname. Could you elaborate on how she will contribute to your process both in the near term and long term? I believe you are still the operator of Block 53, which seems like an immediate opportunity. How do you foresee her fitting in and adding value?

Well, I mean, I think it's all about building the executive leadership team that we want for long-term. And Tracey brings a wealth of experience and a wonderful skill set. She's worked in small publicly traded companies, so she understands where they had to explore for a living. I think she'll bring a lot of expertise, a lot of experience. She's built exploration teams. I think we've got a lot of key pieces here that she'll be able to come in and hit the ground running and work with, and a portfolio that fits a lot of her expertise. So she was absolutely our #1 candidate, and we're thrilled to have her join us.

Thank you for that color, John.

You bet.

Good morning. We came in slightly below guide for 1Q. Can you talk about the drivers here and the ability to replicate any of those 1Q savings going forward?

Yeah, Gail, this is Clay Bretches. And with regard to the LOE, it was just a masterful performance by our operations folks in the field. They did a great job. They understood the task that was at hand. Last year, we went through some significant cost-cutting exercises. We identified the areas where we could cut cost. We knew that those needed to be sustainable, especially when we were looking at commodity prices in 2020. So we had an all-hands-on-deck approach to this. There were a lot of bottoms-up initiatives that led to this LOE reduction. It wasn't short term. It wasn't just deferral of expenditures, maintenance, et cetera. There was some of that, but it wasn't significant. The big issues here in LOE reduction had to do with those initiatives that took place. If you take a look at where we had the most significant reductions, it was in the Permian. A lot of that had to do with the wells that we shut-in. We have a lot of wells that are what we call frequent flyers, wells that go down a lot. We took those out of service, and those are still shut-in because they cost us a lot of money and they're not economic to run. Furthermore, a lot of our waterflood properties that just weren't providing the economics, we went through and looked at these on a well-by-well, field-by-field basis, there's a lot of water that's not being injected right now because it's really expensive to inject that water. We still have approximately 300,000 barrels a day of water that we don't inject, which saves us a lot on electricity, a lot on maintenance, a lot on personnel overall. So in general, it's just the approach that we took. We want to maintain that. That's something that we talk about as an operations group on a regular basis. How do we maintain this low LOE profile as we go forward? In light of the fact that commodity prices are increasing, we do have concern about inflation and service costs. So we focus on making sure that we keep that LOE down, continue to strive to find initiatives that are going to keep the LOE down and flat in light of the fact that we know that there's going to be some inflationary pressures going forward. So really, again, just kudos to our operations team for getting us to where we are and maintaining those levels.

Okay. I appreciate the clarity. And then just moving kind of on the ESG front. In regards to carbon capture, some of your North Sea peers are looking at carbon capture projects. Are you in the process of potentially doing anything in that vein? And/or do you see any potential for carbon capture of projects on your North Sea portfolio?

Yes, Gail, on the ESG front, we've highlighted three main areas of focus: air, water, and communities. We are concentrating on immediate projects that we believe will have an impact. Currently, our primary focus is on reducing flaring, particularly in the U.S., where we aim to eliminate routine flaring by the end of this year and maintain a flaring intensity of less than 1%. These are our key goals. We are also exploring opportunities in the North Sea, but for now, we are targeting some easy wins. Clay, would you like to add anything regarding carbon initiatives in the North Sea?

No. Just what you said, obviously, there's a price on carbon in the North Sea, which creates opportunities. Anytime you have a price on carbon, that creates some economic incentives to study carbon capture. So we will take a look at that anywhere that we see a price on carbon. It is something that we were paying attention to in the North Sea. But like John said, what we're focused on right now from an ESG standpoint are those areas that we have control and which are going to be impactful for Apache. So the really big initiative for us from an ESG standpoint is to end our routine flaring in the U.S. onshore by the end of 2021. And we think this is really significant. You hear a lot of ESG claims out there that talk about some type of initiative that's aimed at 2030, 2040, 2050. What we're doing is saying we're going to end routine flaring by the end of this year. And we think that's really significant. And it represents a significant commitment by Apache to do the right thing and to produce responsibly. And we've shown that over and over. If you take a look at the investment that we have made in midstream solutions to make sure that we were performing responsibly, not only with Altus Midstream with those gathering and processing assets that we have in the Delaware Basin but also our significant investment in the Gulf Coast Express pipeline, Permian Highway pipeline. Both of those are moving over four billion cubic feet of natural gas out of the Permian Basin that not only serves Apache, but it serves a basin in general. Getting that gas out of there and creating opportunities for others to get gas that otherwise would be flared out of the basin. So we've put a lot of investment in those pipes. We've put a lot of commitment in terms of firm transportation to anchor those pipes. So we feel like we're really doing a lot that impacts the gas flaring and ESG initiatives in real-time.

Great. Thank you. Great quarter, looking for the back half of the year.

Thanks, Gail.

Thank you. Good morning, guys.

Good morning, Paul.

Can you share your plans for Egypt and the Permian over the next several years? We understand you will likely increase activity levels to sustain those areas. Are you aiming to keep them flat or looking to grow in the coming years? Is this related in any way to your debt reduction goals, and how will that decision-making process work? Additionally, Total mentioned they will approve the first development this year with a target start in 2025. Can you provide any insights on which discovery will be targeted and whether you plan to use a smaller ship for early production, similar to what Exxon did, to familiarize yourself with the operation before scaling up?

Thank you for the questions. Regarding our portfolio, we are maintaining our guidance for 2021 for now. The modernization in Egypt is going to significantly benefit us, allowing us to grow volumes there. In the Permian area, we currently have one rig operating and plan to add a second rig by midyear. As David mentioned, adding another rig is essential for maintaining our volumes in the Permian; that's our goal. However, moving forward, we do not intend to ramp up activity aggressively. Instead, we aim for a more moderate investment strategy focused on wise and efficient use of capital. Concerning Suriname, we are working with Total as the operator, and they currently have two rigs near the Sapakara discovery. We haven't established any timelines yet, and I don't believe there is a fixed deadline for the FID of a project. The priority for us is to conduct the necessary appraisal work to gather data for making informed decisions about the FID. There are many options available, and we might consider potential FPSOs similar to what has been done nearby, but it’s too early to discuss specifics. I don’t see a strict timeline by year-end for first oil in 2025; that could easily extend into next year while still achieving our target. We want to ensure we do the necessary work correctly before moving ahead with FID.

John, can I revisit your initial response about not increasing activity for major growth? Is this related to your goal of reducing debt, which you haven't achieved yet, or do you believe the market doesn't require more oil despite strong commodity prices?

No, I believe that in the short term, it's about reducing debt. However, in the long term, it's about generating more cash flow for shareholders. We've understood for some time that pursuing growth solely for its own sake isn't beneficial. The primary focus of this business should be returning cash to investors. We need to address the balance sheet first to achieve this. As I mentioned earlier, we view debt reduction as a form of returning value to shareholders, albeit a different one. In the long run, once we've managed our debt effectively, we won't aim for double-digit growth, but will instead focus on returning cash to investors.

And Steve, I just want to reaffirm that. I think earlier, you mentioned that you're planning to add a rig in Egypt, which isn’t included in the current budget. Similarly, for the Permian, if you aim to maintain flat production. So if we're going to pursue those, that suggests your overall capital expenditures for this year will exceed $1.1 billion, correct?

Yes. Let us be clear one more time maybe. We are not changing our guidance at this point in time. We just said that if prices hold up and we continue to make progress on the Egypt modernization, we may be looking at some further capital spending or capital activity in the second half of the year. If we were committed to doing that, we would be looking at contracting rigs and we would be telling you we're changing guidance, but we're not doing that right now.

Yeah. Hey, guys. I just wanted to follow up a little bit on Egypt here. In terms of the Hadid discovery, can you maybe just give us a little bit more color around that? Is this something that rose out of the new concessions and new seismic that you folks shot? When do you see first production from that potential discovery here? And then additionally, do you think that this discovery unlocked a bunch of other drilling opportunities for you late this year and into 2022?

Yes, Leo, great question. It is a result of the new seismic. It was 2013 when we shot our last vintage, and then we started shooting this new seismic in really the '18, '19 still shooting process out there. It's given us more clarity where we can see things that are more subtle, and we're starting to move really from just drilling big bumps to things that have a stratigraphic element to them. This is a trend where it sets up multiple wells within the discovery area, but it also sets up very similar-looking prospects that look much like it. So it really gives you some insight into the lens we have now and the opportunity that we know sits out there that we now can start to crystallize as we continue to drill more wells off of the new seismic and refine that process. So on timing, I don't have that for you today. I can let - I think Clay can jump in on that on - actually on the Hadid well.

Yes, this is Clay Bretches. We are currently laying the pipeline for Hadid and ensuring that it is appropriately sized not only for Hadid but also for future growth opportunities, similar to what John mentioned regarding follow-on wells in the Hadid area. The pipeline installation is underway and is expected to be operational in the fourth quarter of this year.

Thanks for squeezing me in guys. Just my last question, I don't know if there's anything about this, but I'm just wondering. We've seen a nice run continue not only in oil, but in gas. Any thoughts on potential incremental activity in Alpine this year or early next?

Yes, this is Dave Pursell. Currently, we are completing five DUCs. We finished two earlier in the year and will be assessing their performance. Given the current oil prices and our constrained capital budget, it's challenging for Alpine to compete with projects in the Permian and Egypt. Our plan is to evaluate the performance of the DUCs before considering any potential third-party investment.

Sure. Makes a lot of sense. And then just lastly, quickly, are you seeing any just OFS, whether cost inflation, not only domestically, but I'm just curious, internationally, do you see much over on the two plays?

Yes. Regarding well capital, currently, the answer is no. We are searching for it and expect to find it. We are examining steel to determine if there is inflation in the OCTG sector. The inflation we are experiencing is more pronounced in the operating expenses and specifically in basic operating chemicals and diesel costs. Therefore, we are observing a slight increase in inflation at the operating expense level and less at the capital expenditure level right now.

Very helpful. Thanks again for squeezing me in.

You bet.

Thank you. I'd like to leave you with the following parting thoughts. Delivery was very good in the first quarter, and we have reiterated our full year guidance. Commodity prices continue to be constructive, and we have clear visibility into at least $1 billion in free cash flow this year. We are seeing the benefits of our diversified portfolio as increasing volumes in the Permian over the next two quarters will more than offset the seasonal planned maintenance downtime in the North Sea. Activity will also be picking up in Egypt as we move into the back half of the year. We have successfully transitioned operatorship on Block 58 to our partner, Total, with two rigs conducting very active appraisal and exploration programs for 2021. We look forward to updating you on our continued progress throughout the year. That concludes our call today.