APA Corporation (APA) — Q2 2024 Earnings Call Transcript

Good morning, and thank you for joining us on APA Corporation's second quarter 2024 Financial and Operational Results conference call. We will begin the call with an overview by CEO John Christmann. Steve Riney, President and CFO, will then provide further insight on our results and outlook. Also on the call and available to answer questions are Tracy Henderson, Executive Vice President of Exploration, and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be less than 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 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 measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. 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. I'd like to remind everyone that today's discussion 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 on today's call. A full disclaimer is located with the supplemental information on our website. Please note that the Callon acquisition closed on April 1st. Accordingly, our full year 2024 guidance reflects first quarter APA results on a standalone basis, plus three-quarters of APA and Callon combined. And with that, I will turn the call over to John.

Good morning, and thank you for joining us. On the call today, I will review APA's second quarter performance, discuss the Callon integration, and review our activity plan and production expectations for the remainder of 2024. Our second quarter results were strong across the board, with higher-than-expected production in all three operational areas. CapEx was lower than expected mostly due to timing of spend. In the U.S., oil volumes of 139,500 barrels per day were up 67% from the first quarter as we incorporated Callon into our operations. Production and costs were significantly better than expected on a BOE basis after adjusting for asset sales and discretionary natural gas and NGL curtailments. Our Permian Basin continues to perform at a high level and we marked our sixth quarter in a row of meeting or exceeding U.S. oil production guidance. On a BOE basis, oil now comprises 46% of our total U.S. production following the Callon transaction. With this increased exposure, APA's cash flow sensitivity to a $5 per barrel change in oil price is approximately $300 million annually. In Egypt, production also exceeded expectations. We saw a positive contribution from new wells, improved results from recompletions, and continued strong base production. Base production is particularly benefiting from the implementation of several new water injection projects. We are also beginning to see a decrease in offline oil volumes waiting on workover as we moderate the drilling rig count to free up workover rig resources. Turning to the North Sea, operations were relatively smooth in the second quarter with better than forecast facility runtime driving higher production. Our ongoing focus in the North Sea is right-sizing our cost structure for late life operations. In Suriname, our partner Total recently announced that it has secured the FPSO hole for our first offshore development and we remain on track for FID before year-end and first oil in 2028. And in Alaska, we are still working through options for the upcoming winter drilling season and look forward to returning to exploration activities. Turning now to the Callon acquisition, note that in last night’s release we increased our estimate of annual Callon cost synergies from $225 million to $250 million as we leverage economies of scale of the combined APA and Callon Permian businesses. Steve will speak in more detail about some of the specific initiatives driving these cost reductions. More importantly, we are just beginning to implement drilling unit design and operational changes that we expect will create substantial value on the Callon acreage via improved well performance and capital efficiency. Our preliminary estimate is that we can drill a standardized two-mile lateral for roughly $1 million less than Callon was spending in 2023. We recently spud our first APA-designed drilling unit on Callon acreage, the five-well Coleman unit in the Midland Basin and should begin to see initial flow-back results in the fourth quarter. Turning now to our activity plans and outlook for the second half of 2024. In yesterday's release, we provided guidance for the third and fourth quarters which contained some notable positives. In the U.S. we will average nine to 10 rigs for the remainder of this year consisting of approximately five rigs in the Delaware and four rigs in the Midland. We plan to run three to four frac crews and complete about 90 wells by year-end. This sets the stage for strong oil growth in the second half of the year. Accordingly, we are increasing our fourth-quarter U.S. oil guidance to 150,000 barrels per day which is up 1,500 barrels per day after adjusting for the impact of asset sales closed in June. This represents organic production growth of roughly 8% compared to the second quarter. We also expect an increase in natural gas and NGL production driven primarily by fewer discretionary curtailments than in the first half of the year. In Egypt, we expect a continuation of the operational progress that we made in our second quarter. There will be some volume impacts from the rig count decrease but this should be mitigated by strong base production performance and increased workover capacity to remediate wells offline. By year-end, we project that backlogged oil production will be closer to more normalized operating levels. On our May call, we said that adjusted production in Egypt would remain relatively flat in 2024, while gross oil production would be flat to slightly down through the remainder of the year. While there are a number of moving parts to the program in Egypt, we see no material variances to our May outlook, and therefore guidance is unchanged. Similarly, our full year production guidance in the North Sea is unchanged, though we now expect a slightly larger decrease in third-quarter volumes associated with maintenance and turnaround activity at Barrel, and a slightly larger subsequent rebound in the fourth quarter. In closing, the second quarter was an excellent quarter operationally, and we continue to execute at a high level in the Permian Basin. We are realizing greater than expected cost savings from the Callon acquisition and have a clear pathway and plan to improving capital efficiency on those assets. Egypt also had a very good quarter and is beginning to deliver significant capital efficiency improvements. Though our drilling rig count is coming down, continued strength in base production and the return of wells offline will help sustain volumes in the near term. At current strip pricing, the second half of the year is setting up to deliver a substantial increase in free cash flow compared to the first half. And lastly, I am very proud of our teams for delivering these results while remaining on track to achieve our safety and environmental goals for the year. For a detailed review of APA's safety and environmental performance, I encourage you to review our recently published 2024 Sustainability Report, which can be accessed via our website. And with that, I will turn the call over to Steve.

Thank you, John. For the second quarter, under Generally Accepted Accounting Principles, APA reported consolidated net income of $541 million, or $1.46 per diluted common share. As usual, these results include items that are outside of core earnings, the most significant of which were a $216 million after-tax gain on divestitures and $98 million of after-tax charges for transaction, reorganization, and separation costs, mostly associated with the Callon acquisition. Excluding these and other smaller items, adjusted net income for the second quarter was $434 million, or $1.17 per share. During the first half of the year, we generated roughly $200 million of free cash flow and returned $311 million to shareholders, nearly half of which consisted of share repurchases. That's a lot compared to the $200 million of free cash flow, but we liked buying at those share prices, and we anticipate free cash flow will be much higher in the second half of the year. That said, the balance sheet remains an important priority, and I will talk about plans for further debt reduction in a few minutes. Now let me turn to progress on the Callon integration. As John noted, we increased our estimate of annual synergies to $250 million. Since we announced the Callon acquisition, we have categorized synergies into three buckets: overhead, cost of capital, and operational. We are now increasing our estimate of expected annual overhead synergies to $90 million. Most of this was captured by the end of the quarter on a run rate basis, and the remainder will be completed by year-end. At this time, we anticipate that our quarterly core G&A run rate as we enter next year will be approximately $110 million. With that, we will have eliminated about 75% of Callon overhead cost, so no material further synergies are likely. Our cost of capital synergy estimate of $40 million annually assumed terming out Callon's $2 billion debt at APA's lower long-term cost of borrowing. At the closing, we used cash from the revolver and a $1.5 billion three-year term loan to refinance this debt. Instead of terming this debt out, our current intention is to use asset sales and free cash flow to simply pay off the loan before the end of its three-year term. This would represent a significant step forward in the goal to strengthen the balance sheet and to fully realize these synergies. Lastly, we are increasing our operational synergies to $120 million annually, approximately 60% of which is associated with capital savings and 40% attributable to LOE. To reiterate, these cost synergies do not include capital productivity benefits associated with uplifting type curves and improving well economics through spacing, landing zone optimization, and frac size. We believe this will be a source of material long-term value accretion. Turning to our 2024 outlook. John has already discussed our activity plans and production guidance, so I will just add a few items of note. We now expect that our original full-year capital guidance of $2.7 billion may start trending down a bit. A number of factors could contribute to this, including further synergy capture from the Callon combination, lower service costs, improving capital efficiency, and potential minor reductions in the planned activity set, mostly in the U.S. For purposes of third-quarter U.S. BOE production guidance, we are estimating further Permian gas curtailments of 90 million cubic feet per day. This would also result in the curtailment of 7,500 barrels per day of NGLs. As most of you are aware, our income from third-party oil and gas purchased and sold can change significantly from quarter-to-quarter. This is primarily driven by the volatility and differentials between Waha and Gulf Coast gas pricing regardless of the absolute pricing levels. It's important to note that APA's gas marketing and transportation activities are generally more profitable when Waha gas price differentials are wider. For example, the Waha differential was very wide in the second quarter. While Gulf Coast gas prices averaged around $1.65, Waha gas prices averaged closer to negative $0.34. Because of the nearly $2 differential, income from our third-party marketing and transportation activities was well above expectations. At current strip gas pricing, we expect a similar dynamic in the third quarter. Accordingly, we are raising our full-year estimate of income from third-party oil and gas purchased and sold by $120 million to around $350 million. Approximately half of the full-year estimate is attributable to the Cheniere gas supply contract and half is attributable to our marketing and transportation activities. Lastly, APA is now subject to the U.S. alternative minimum tax. And accordingly, we are introducing new guidance for current U.S. tax accruals of $95 million for the year. And with that, I will turn the call over to the operator for Q&A.

So I guess there are so many things on the quarter that I could go after. I'm going to just try a couple. But Steve, it looks to us that your CapEx run rate exit, call it, fourth quarter, it looks like you're going to be around $600 million, which would be about a 10% decline year-over-year if that held into 2025. Is the objective after you grow, you got the momentum from Callon, is your objective to hold that flat in which case should we be thinking something around 2.4, 2.5 for next year?

Yes, Doug, I'd be careful just using fourth quarter. We're probably going to have a little completion activity in the fourth quarter because a lot of that has been bunched into the second quarter and third quarter this year just because of the timing of availability of wells for completion. So I think the easier way to do that would be to look at full year spend, take out the first quarter, which is just APA, and then I would probably first adjust that for the exploration spend and then just divide it by three quarters because the quarter was high and the third quarter is going to be about average, and the fourth quarter is probably going to be a little low. And then I think you'll get a number of something close to around $700 per quarter.

Okay. All right. That's really helpful, guys. And then we'll get a chance to...

Sorry. If you take out the exploration, you'll probably get something closer to $675 million a quarter of capital spend on basically the U.S. onshore and Egypt. There's not a whole lot of capital activity, as you know, going on in the North Sea.

Okay. That's what I was trying to get a run rate. So that's really helpful. John, I wonder if you've not wanted to be drawn on inventory depth since the Callon deal, but I'm guessing you're getting your hands around that now. So when you look at the drilling pace with, I guess, you're going to be at nine rigs in the second half. What are you thinking with the up-spacing and so on? What are you thinking about your inventory depth looks like now in the lower 48, and I'll leave it there?

Yes, Doug, it's a great question. It's one we're working on every day. What I would say is if you look at the existing U.S. Permian run rate. We've always said kind of end of the decade with the rig rate we're at. And when we said we're bringing Callon in, pretty similar duration, I think there's one upside on the Callon is that we can drive the productivity improvements that we think we can and then there will be more inventory that comes into play that we did not pay for in our acquisition. So that's something we're currently working on. If you look at where we sit today, we've got a lot of flexibility going into next year. We're going to grow Permian at a very strong clip from second quarter to fourth quarter on 9 to 10 rigs, about 8%. And so it gives us a lot of flexibility going into next year in terms of the pace we want to go. And we've had plenty of inventory that we have visibility on that can carry us to the end of the decade. And we'll keep working on that.

Yes. Just to add on, Doug, to what John just said, just to enhance that a bit. When we were working on the acquisition, we were looking at a lot of outside service providers that look at inventory counts. Most of them probably would have said that Callon had more running room, more inventory, more years of inventory than we did based on our analysis, as John said, which is a fairly conservative view of the world. We said now it's probably more similar to ours in duration. And as John indicated, if we can get capital efficiency and capital productivity into the right place on the Callon acreage, the more that inventory quantum could grow back to what some of the other people thought it was, which is something that would extend beyond the end of this decade.

Thanks guys. See you next week.

Good morning, everyone. I want to follow up on some of Doug's questions. The performance in the Permian and Egypt has both exceeded our guidance, especially in Egypt where they've done a great job turning things around. I want to make sure I understand this correctly: in the first half of the year, you averaged 16 rigs, but you'll be reducing that to 11 rigs in the second half. Am I correct in thinking that even with this lower rig count in the second half, due to all the measures you've outlined regarding enhanced production management, addressing recompletions, and tackling the backlog of offline oil, the 11 rigs will be sufficient to maintain volumes? I'm just trying to grasp the various factors involved.

No, it's a great question, John, and you're on the right track. I'd say that the benefit we've had by dropping the rigs is that it's been able to free up the workover rig time, which is critical because we have a lot of recompletions. And really, we also have a lot of CTIs, which are conversion to injection projects that we've been able to get to. When we were running two workover rigs and 18 drilling rigs, there wasn't much slack by ratcheting that back, it's freeing up the time and it's letting us get to some very meaningful projects that are making a huge impact. Is 11 rigs this year, we kind of guided to flat to slightly down; is 11 the right number? It's early to tell on that front. But having gotten back from Egypt, there are also a lot of other projects that we're talking to Egypt about, for example, some gas drilling and other things, too, which could be pretty impactful as well. So there’s a lot of flexibility there, and we'll be working through that as we go through our planning sectors.

Great. As a follow-up, John, you mentioned that gas volumes on the U.S. side might see some growth, particularly due to the potential reduction in curtailed gas volumes in the fourth quarter. In your current guidance, does it include any assumptions about curtailments in the fourth quarter? Clearly, you experienced some in the second quarter and expected even more in the third quarter. I'm looking to clarify what's factored into the full-year guidance.

Today fourth quarter does not have any curtailments built in. But obviously, we had to up the third quarter with September with the Waha settings.

Yes. And just second quarter actuals, the amount that was curtailed, we had 78 million cubic feet per day of gas and 7,600 barrels of NGLs curtailed during the quarter on an average day; that's nearly 21,000 BOEs per day. Our forecast for the third quarter, what we've effectively left out of our guidance is 90 million cubic feet per day of gas and 7,500 barrels of NGLs. That's 22,500 BOEs per day. Those are really large numbers, as you might imagine.

Appreciate guys. Nice quarter.

Good morning, everyone. Great update. John, focusing on the Permian specifically regarding the Callon acreage development, I'm curious. You mentioned the possibility of adjusting spacing a bit. Aside from the future of spacing, are there any significant changes, either in completion or other areas, that you might be considering at this stage?

Yes. As I said in the prepared remarks that one of the advantages is we're seeing impacts on the combined business just from the supply chain; how we design the wells; we think we can drill a standard two-mile lateral for about $1 million less than what Callon was spending last year, which is about 20%. So we're eager to see those numbers start to come through. But I am excited about what we're seeing. And quite frankly, we're just now starting to spud some of the Apache plan pads on the Callon acreage, so I’m eager to see those results, but things are going extremely well on the integration side.

Yes. I would like to add that regarding the completion aspect, with the Callon drilled wells or Callon spud wells, since they were spaced more closely than we typically would, we haven't significantly altered the profit loading on those. We did make some changes, but not many. However, we have greatly increased the fluid loading for those fracs. As we progress with our drilled wells, both proppant and fluid loading will be considerably larger.

Great. Great. And then maybe Steve for you. Just a second question on shareholder returns. Specifically, your shareholder return continues to be quite active. I think it was down a little bit sequentially in this last quarter. I'm just wondering, can we anticipate a large step-up for many of the year? Or how would you like to think about the program for the remainder of '24 to '25?

I typically consider this on an annual basis, focusing on the calendar year; we anticipate at least 6% of free cash flow allocated to dividends and share buybacks. With the acquisition on April 1 using shares, our outlook for dividends and free cash flow has improved. However, our strategy remains unchanged: we aim for a minimum of 60%. We are ahead of that target in the first half of the year, and we'll evaluate the second half as it comes. Historically, we have shown that we are willing to exceed the 60% threshold. Nevertheless, we recognize the need for ongoing balance sheet strengthening following the acquisition. Therefore, we will make decisions on a quarterly and even daily basis and assess our position year to year.

Good morning, John and Steve, and the rest of the APA team. I'm wondering if you could share what is next, especially regarding the Central Basin platform, an area we haven't discussed much lately, and it seems you're not investing capital there.

No, Charles. I mean, we typically wait to talk about property sales. But there's a chance, there are other things that we're looking at that are not core to us in places that we're not putting capital, so you may have some decent intel out there.

I have a question about the shut-ins and marketing in the Permian. Considering your valuable firm transport to the coast, I'm wondering if that 90 million a day and 7,500 barrels of NGLs essentially represent all of your dry gas and some of your liquids-rich gas, or if there is more that you could reduce if that basis widened.

Yes, Charles. So yes, we can actually curtail quite a bit more than that; a little more than twice that amount. And so what that is, is that's an average for the quarter, but it's in anticipation of there being periods of time where we're curtailing quite a bit of gas and dipping into the rich gas well especially do that when the price is negative or significantly negative. When prices are just low, we'll typically just go with the lean gas and not dip into the richer gas. So we do that based on a price basis. We have specific prices where we move from one tranche to another. We've got four specific tranches of gas going from lean to richer gas that we can shut in at different pricing mechanisms. And so I just want to make sure that we're really clear about one fact, and that is that the curtailment of gas volumes in the Permian Basin and the Alpine High in particular, is totally independent of our marketing activities because marketing is something that we have to do because we have firm transport on two large pipelines, more pipelines now with Callon. We have to fulfill those transport obligations, and we do that with purchased gas in the Permian Basin, which we then sell on the Gulf Coast. We have various access points both in the Permian and on the Gulf Coast to be able to buy and sell that gas. So we don't have a choice of doing that. If we choose not to transport gas, we have to pay the transport fee anyway.

It's a nice piece of business. Thanks for that detail, Steve.

Hey, good morning. I'd like to maybe follow up on some of your discussions on Egypt, just to understand, where is the decision coming from on the switch from drilling to workovers? Is that all the partners? Is that your decision? Is it Egypt's decision? And then how should we think about that maybe reversing as we exit '24 into '25 to the extent you can offer any sort of guidance that way?

We have a joint venture with Sinopec, and we have no issues regarding the direction we believe is best for the project. We have full support, and the good news is that the performance has been strong. The projects are very impactful, and having the right balance of workover rigs and drilling rigs gives us increased flexibility. It's our decision whether to add more activity, and we have the ability to do so. I recently returned from Egypt, where I met with President Sisi and some members of his new cabinet. I was very impressed with the new minister and am excited to collaborate with him. We discussed potential frameworks for increasing volumes, and the meetings were very constructive. We'll consider this as we move into the planning process.

Okay. I appreciate that. Regarding the Callon integration, I understand the changes in the synergies. Could you give us an idea, using old baseball terms or football quarters, of where we are in the process of understanding what Callon really brings to the Apache family? Are we early, mid, or late in that process?

Yes. I think it's probably more like going through fall camp. There are phases that get ahead early and phases that you're still developing, right? But in terms of the organization and so forth, we've worked through that very quickly with the integration of the assets into the portfolio. We worked through that quickly. Obviously, the piece that's the most exciting is still to come, is what can we drive on the productivity improvements, and what does that do in terms of inventory locations. So we're just now getting to the first pads and spudding our first Apache plan wells. I'm obviously anxious to get on with those results.

Yes, I'd characterize it using the baseball analogy. I think going through the synergies and going through the headcount and all of that, getting the organization integrated, that's kind of the pre-game warm-up. And as John said, we've just drilled our first well out here on Callon acreage. So I would say that we're at back in the first inning, and we haven't taken the first pitch yet. So it's just starting. The game is just beginning.

I was wondering if we could pivot to Suriname. And what are your high-level thoughts on how you look at activity maybe spending in 2025? I know it may be a bit early, and your partner has an upcoming Analyst Day and that we're going to get more color there. But what is your understanding at this point?

We've been quite consistent since last year that after we complete the Krabdagu appraisal, we are confident about moving forward with a project. We plan to have a final investment decision by the end of 2024, and we are still on track for that. This aligns with the message Total has communicated as well. Once we reach that point, we can discuss it in more detail. Overall, things are progressing very well, with the teams collaborating effectively. At this moment, I would say we remain on target for a year-end investment decision and first oil by 2028, and they are working diligently to accelerate those timelines.

Okay. Understood. And my follow-up question is back to kind of the Permian inventory runway. You talked about being confident at the end of the decade at this point in time. Do you all think that's a strong enough position? And so what I'm trying to get to is like what is your appetite for further consolidation? Do you feel comfortable with that position now? Or are there other opportunities there for you?

Today, we are very comfortable with our current position. When we discuss inventory, we refer to long laterals with extremely high production indices, indicating high-quality inventory. As you know, we have a substantial acreage footprint in the Permian. We are continuously exploring ways to convert more acreage into drillable prospects, but this process takes time due to the extensive testing involved. Nevertheless, we are quite satisfied with our inventory and recognize that there is much more potential to develop, which we will address and enhance over time. Regarding transactions, it is essential to maintain a high standard. We have been patient and identified significant opportunities, such as our recent move on Callon. At this moment, we are content with our situation and believe there will be even more opportunities than we currently can see.

Good morning. A bit of a follow-up on Suriname. Two interesting things that I interpret from your update. One is you all have gone out and with the partner secured a state-of-the-art slot on FPSO from a leading contractor, that's about the most expensive long lead item I can think of. Does that tell for your conviction in FID or am I overreaching?

Bob, I think we've been really confident we'd have a project. But we still need to get to FID. It just tells you the seriousness of the timeline that they're looking to accelerate. But they did declare commerciality earlier this year. We just got a lot of work, technical work it takes to get to an FID decision. We've said year-end, and I wouldn't change that now. We just know we're trying to accelerate that.

And then the second issue is you've disclosed that the field development area is agreed upon for kind of a joint Sapakara Krabdagu development. If I sharpen my crayon and draw a ring fence around Sapakara through Krabdagu, I could capture the vast majority of all your discoveries out there, ring-fence that? And then under the PSE cost recover that and have a pretty good cost pool for future work? Am I thinking correctly there?

When we discuss Sapakara, it essentially represents the defined fine field as we currently understand it. In our conversations about appraising Krabdagu, we refer to evaluating a fairway, which is informed by seismic data. If you recall our previous announcements regarding the Krabdagu appraisal wells, we indicated that these efforts not only confirmed and evaluated Krabdagu but also reduced risk for many other prospects. At this stage, the next step will be a final investment decision, and we need to reach that point. However, it is clear that we are beginning to consider these matters in the right direction.

Good thing. And I'll just throw a last one in, which is to say, you guys increased your acreage in Alaska by 20%, that suggests that you see something interesting there or perhaps the option value of that acreage is pretty low. Is that a good way to think of it?

I would just say we're excited about Alaska. The King Street Discovery is proof of concept. It proves the play that we're chasing sits 80 to 90 miles east of where it's been proven. We're in a good area. We said it was a high-quality discovery, oil, high-quality sands. So we are anxious to get back and continue exploring in Alaska in the near future.

I wanted to quickly follow up here on Egypt. So I know you reiterated your comments from May where you thought that gross oil would be flat to slightly down. Egypt certainly noticed that gross oil in the second quarter was up a little bit versus the first quarter. Just trying to get a sense. I know that the rig count is coming down a little bit in the second half, but do you think you can maybe hold that second quarter gross oil run rate in Egypt? Or do you think it's more likely that it comes down by the end of the year with some of the lower rig activity?

Yes. I would just say we'll stick to what we said in the script. Clearly, the second quarter was strong. Things are going well in Egypt. But at this point, we didn't see any reason to alter our guidance.

Okay. Any update on the receivable situation there in Egypt that you guys can share?

I'd say it just got back from being over there. As I said, I had a good meeting with the President, got to meet some of his new cabinet. Things are going well in Egypt. I mean, I think if you step back and look at it, President Sisi has done a really good job of managing a fairly difficult situation. We've been impressed with that. We have been receiving some payments this year. So all in all, things are going well, and they continue to work through a difficult situation, but we see no reason to be concerned at this point and a lot of positive things on numerous fronts. Steve?

Yes. The only thing I would add to that, John, is that the new Minister of Petroleum has a set of priorities, and high on that list of priorities is just to get the oil companies paid off. We sit on all of that with him as well, and he's serious about his list; he's one of his priorities to get started on this.

Okay. That's really helpful. And you guys intimated in your comments that there could be some opportunities from additional gas there. I know Egypt has been short gas this summer. It sounds like they're a little desperate to get back at it. Would you anticipate some opportunities and then potentially that could be associated with the price change on some of the gas going forward?

Yes. I would just say, historically, we have explored for oil in the West Desert, and we're mainly focused on oil. We do produce a lot of gas. We had a very large discovery in case a couple of decades ago. There is gas in the Western Desert and we've had some conversations about what it would take to maybe go after some gas projects that could be helpful to the country. So it's something that we're discussing with them. But it's early. And obviously, you'd probably look at something that made more economic sense at the higher price for future gas exploration, but it's early, but definitely something that could come into play in the future.

Okay. Thank you.

Yes, good morning. I wanted to come back to the upside on the Callon acreage. So as we think about the productivity improvement potential from up-spacing and the completion redesign, will there be a material improvement in 30-day IPs? Or will the improvement to manifest more over time in the six and 12-month cubes? I'm just wondering if the shift in the completion design targets a shallower decline and what that means for the 30-day IP improvement potential versus the longer-term improvement potential.

Yes. Scott, we just need to get some down. But I mean, obviously, with the changes we'd be looking at, we're pumping a lot more fluid. I think you could see increases there, but also with a little wider spacing, you should see better longer-term performance. So we just need to get some wells down and talk from delivered results at this point, which we're currently getting on to and anxious to demonstrate.

Okay. And then just another follow-up on Egypt. So you guys spent about $135 million a quarter, running 16 rigs on average in the first half, and that will drop to 11 in the second half. Roughly how much will the fiber reduction drop Egyptian CapEx in FDU?

Yes. I don't have that number to hand. It should be relatively proportional, but we're running workover rigs and that some of that work is capital as well, and that doesn't change. So you could probably get with Gary; he could give you see some data on that.

Good morning. John and Steve, I wanted to get your thoughts on how should we start thinking about spending in 2025. You mentioned maybe a run rate of $675 million per quarter heading into next year. I was wondering, as we think about some of your exploration activities in Alaska as well as assuming an FID at Suriname, I was wondering if you could maybe help us think about maybe a placeholder for CapEx for areas outside of your base D&C program.

Yes. First, I want to clarify the $675 million mentioned earlier. This figure pertains to our capital spending for 2024 and relates to understanding our average spending rate, specifically focusing on the current structure of the company, including Callon, while excluding exploration activities. The $675 million represents our average spending between the second, third, and fourth quarters of 2024, excluding any exploration efforts in Suriname and Alaska. It's important to note that this does not indicate our run rate for 2025. As for our planning, we're currently in the midst of the process. Our portfolio has significant optionality, which makes capital allocation decisions complex. We usually begin this planning in the summer and continue through fall, and we have a forthcoming discussion with the Board regarding this strategy. Typically, we provide a high-level overview of what 2025 will entail in November, with more detailed information shared in February.

The other thing I was going to say, Arun, if you look at what Steve was saying on the $675 million, Permian is actually growing at about 8% in the back half of this year. So there's a lot of room in terms of moderating if we choose to what is the right plan going into next year, and that's a lot of what we'll put into the decision-making process.

Yes, that's an important point, John. Many people wonder what it takes to maintain stability heading into 2025. We had some discussion about this regarding Egypt. We are currently operating 11 rigs; the question is whether we can keep production steady in Egypt with that number. We've reduced the rig count to 11 to build workover capacity to address recompletions and workover backlogs. During this time, we are also converting some fields for water injection. Can 11 rigs keep production steady in Egypt? It might be a bit low, but we previously had 18 rigs operating this year, and maintaining production in Egypt is closer to 11 than to 18. The latter was clearly more than necessary. Additionally, as John mentioned, in the Permian we're running 9 to 10 rigs for the second half of the year, with an expected growth of 8% from the second to the fourth quarter. Clearly, the number of rigs needed to maintain stability in the Permian is below that.

Great. And just my follow-up. This year's financials are obviously benefiting from weak Waha prices and your ability to arbitrage that along the Gulf Coast. Steve, how do you think about maybe a more normalized earnings picture for that midstream piece when you have Matterhorn on and maybe some other pipes? So just wanted to think about how you think about the normalized earnings potential there.

Well, I don't know what normalized is anymore after the last several quarters. But in general, market dynamics would tell you that a balanced situation would be that differentials between Waha and Gulf Coast need to formalize. Over time, it should have been making money on the Permian and by buying something slightly below Waha pricing because we've got multiple receipt points and we can take the best price, and we typically do, but you're talking about pennies per Mcf. On the Gulf Coast side, multiple delivery points where you can sell for pennies maybe above Houston Ship Channel here or there. You can squeeze a few pennies out on both ends, but on 674 million cubic feet a day, that makes a difference over time. And it just pays for the transport and fuel costs. But in that oil and gas purchase for resale, remember that still includes the Cheniere contract, which, of course, has nothing to do with Waha differentials.

Okay. Thanks a lot.

Hey guys. Just wanted to get some clarification on the DMC savings you guys talked about. I mean, kind of $100 a foot for a Callon two-mile, I guess those are like $72 million of the total synergy. Just wondering if you can give me any more granularity about what's in there? And are there any service cost deflation numbers in that figure?

Yes. The $150 million in annualized synergies does not include the advantage of lower rig rates for fracking. We maintain some integrity regarding those synergies associated with the transaction, excluding any market synergies. While John mentioned a cost reduction of $1 million to drill a single well, that figure reflects market benefits, so we only accounted for about 70% of it, as 30% pertains to market factors like steel, rigs, and fracking. The $250 million includes approximately $60 million in annualized savings from reduced drilling costs for these wells. This $60 million is based on operating 9 to 10 rigs in the Permian Basin, which is the estimated number of Callon wells we would drill in a year. However, we’re not on track to drill 60 wells this year, so it's unlikely we'll realize the entire $60 million in benefits during calendar year 2024. If we continue operating at our current pace, we might see close to that amount in 2025.

Just a quick question. John, can you give us an update on the drilling trend in Alaska? How many wells do you plan to drill? Will it be entirely for exploration, or will there also be some appraisal work on King Street? Additionally, what kind of spending should we expect? Thank you.

Yes, Paul, it's early. I mean, we're working through plans with a partner. So at this point, no update on Alaska, specifically for plans other than that, we will be doing some more drilling up there.

Thank you, and to wrap up really, just a couple of points here. Number one, we're delivering strong results in the Permian and the Callon integration is going extremely well. Secondly, freeing up the workover rigs in Egypt is letting us to do two things: one, implementing some very impactful water flood initiatives; two, reducing the backlog of wells waiting for workover recompletion, and the results of both of those are very visible. Lastly, we are raising full-year oil production guidance while seeing a downward bias to our full-year capital. And with that, I'll turn it back to the operator. Thank you.