Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Apache Corporation First Quarter 2020 Earnings Announcement Webcast. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference maybe recorded.
I would now like to hand the conference over to your speaker today, Mr. Gary Clark, Vice President of Investor Relations. Sir, you may begin.
Good morning, and thank you for joining us on Apache Corporation's Q1 financial and operational results conference call. We will begin the call with an overview by CEO and President, John Christmann. Steve Ryani, Executive Vice President and CFO, will then summarize our first quarter financial performance. Clay Bretches, Executive Vice President of Operations and Dave Purcell, Executive Vice President of Development, Planning, Reserves and Fundamentals 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 and A.
In conjunction with yesterday's press release, I hope you have had the opportunity to review our Q1 financial and operational supplement, which can be found on our Investor Relations website at investor. Apachecorp.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. 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 will turn the call over to John.
Good morning, and thank you for joining us. As we review our Q1 results today, many Apache employees around the world are continuing to work remotely as part of our COVID-nineteen response. I would like to wish all of them and those of you who are doing the same good health as we work through a very trying time. I also want to acknowledge and thank the Apache team for their dedication and hard work in the face of a very challenging economic and operational environment. They are successfully and safely delivering day to day business activities in the face of a sudden and unprecedented change to life as we knew it.
My heartfelt appreciation goes out to every one of our great Apache employees and contractors, as well as our partners and stakeholders. The global economy and the energy industry have been deeply impacted by COVID-nineteen. As we navigate this crisis, Apache's primary priorities are keeping the health and safety of our employees and the communities in which we operate paramount in our decision making and preserving the inherent value and optionality of our diverse asset base for the long term. Thus far, our efforts have been successful, and we are very fortunate to have seen only a few isolated COVID-nineteen cases throughout the organization. We acted quickly to close offices and implement work from home processes as well as stringent operational protocols in the field.
We also have in place contingency plans to ensure continuity in the event Apache incurs a more widespread or sustained impact. In the rest of my prepared remarks, I will discuss the primary actions we are taking to preserve the value of our assets and protect our balance sheet, summarize our long term objectives, which have not changed, and lastly, comment on our outlook for the remainder of 2020. While the current crisis is much more severe and complex, some key lessons learned from the 2014 oil price collapse are informing the decisions we are making today. In late February, we communicated our initial 2020 budget at an assumed WTI oil price of $50 per barrel. This seemed appropriate given prevailing supply and demand fundamentals and strip pricing at the time.
In early March, OPEC Plus failed to reach consensus on supply cuts, and it became apparent that COVID-nineteen would cause an unprecedented amount of demand destruction. Apache responded to the oil price drop associated with these events quickly and decisively. On March 12, we announced a plan to reduce activity in Egypt and the North Sea and to eliminate all U. S. Drilling and completion activity.
This resulted in a $650,000,000 decrease in our 20 20 a 90% reduction to our dividend, thus preserving $340,000,000 of cash flow on an annualized basis and strengthening our liquidity. To protect cash flow from further downside price dislocation, we entered into substantial oil hedge positions, primarily for the 2nd and third quarters, which we believe have the most volatility risk. We implemented deeper cost cutting measures, announcing on April 1, an increase in our estimated annualized cost savings to $300,000,000 up from $150,000,000 a month earlier. Apache benefited from the significant progress already made on our organizational redesign, which commenced in the Q3 of 2019. This enabled us to make the incremental cost reduction decisions confidently without compromising safety, asset integrity or our ability to resume activity when warranted.
Finally, we have conducted a thorough price sensitivity analysis and operational evaluation of all producing wells across the company, which is now informing the methodical and integrated approach we are taking to rolling production shut ins and curtailments. This process will enable us to preserve cash flow in this distressed and volatile price environment and protect our assets. All of these actions were carefully planned and none were taken lightly. While very difficult, they were necessary to preserve liquidity and ensure ample runway to return to a more sustainable and profitable price environment. Next, I would like to reiterate our longer term objectives, which still hold true despite some of the short term impacts of the current situation.
First, Apache will budget conservatively, aggressively manage our cost structure to ensure free cash flow generation and prioritize debt reduction to strengthen our balance sheet. We will maintain a balanced and diversified portfolio and continue to invest for long term returns rather than production growth. In the Permian, we will continue building economic inventory and maintain optionality. And in Egypt and the North Sea, we will flex activity to preserve free cash flow generation. Lastly, we will continue to enhance our portfolio through exploration.
Our recent success offshore Suriname is a prime example of this strategy, and Block 58 remains a clear priority for Apache. As we look to the remainder of 2020, there are a number of fundamental uncertainties. The most important of these is the timing and magnitude of a recovery in demand for oil if supply response alone cannot solve this problem in the short term. For Apache, the best course of action is to aggressively reduce our cost structure, protect our balance sheet and manage operations to preserve cash flow. Our diversified global portfolio gives us the ability to optimize capital allocations as market conditions change.
Just as we did following the oil price crash in 2014, we have left intact a higher proportion of international capital investment, which offers better returns than the U. S. In a lower price environment. To wrap up, Apache is taking the necessary steps to manage cash flow and protect our balance sheet. We have ample liquidity and a long runway to carry us through to a better price environment, and we'll maintain the flexibility and capacity to increase activity in a thoughtful manner as conditions warrant.
And with that, I will turn the call over to Steve Riney, who will provide additional details on our Q1 2020 outlook.
Thank you, John. My remarks this morning will provide a few more details on Q1 2020 results and our outlook for the remainder of the year. I will also comment on the strength of Apache's liquidity position, which is more than sufficient to bridge this significant and potentially prolonged downturn. As noted in our news release issued yesterday, under generally accepted accounting principles, Apache reported a Q1 2020 consolidated net loss of $4,500,000,000 or $11.86 per diluted common share. These results include items that are outside of core earnings, the most significant of which are non cash impairments totaling $4,500,000,000 Impairments were driven primarily by the impact of weak oil prices on the carrying value of our proved properties.
Most of these impairments were in legacy vertical developments in the Permian Basin. Excluding these and other smaller items, adjusted earnings for the quarter were a loss of $51,000,000 or $0.13 per share. G and A expense in the quarter was $68,000,000 which was considerably below our guidance of $120,000,000 Some of our stock award programs are cash settled and each quarter accounting rules require us to mark to market the accrued liability for these awards based on changes in our share price. Typically, this has not been material, but it resulted in more than a $30,000,000 reduction in G and A expense for the Q1 due to the significant drop in the share price during the quarter. Capital investment and operating costs in Q1 were also below guidance as a result of the spending reduction efforts we have instituted.
As with G and A costs, there will be more significant impacts in future quarters. Apache's adjusted production for the quarter was below our most recent guidance. Reported gas production in the Permian Basin was materially impacted by commercial arrangements at some gas processing plants where the operator takes volume in kind as reimbursement for power costs. In lower gas price environments, like in the Q1, the impact on reported volumes can be significant, in this case approximately 24,000,000 cubic feet per day. Permian oil volumes were also below guidance caused by the rapid reduction in activity due to the oil price downturn.
As we look to the remainder of 2020, our full year upstream capital investment program will be around $1,100,000,000 approximately 60% of which will be in our international businesses. For the Q2, upstream capital investment will be approximately $230,000,000 a sharp reduction from the Q1. With respect to other typical guidance items, there are many uncertainties on a forward looking basis. As such, we are not providing 2nd quarter guidance and we are removing the full year 2020 guidance, which we provided in February. In terms of production volumes, we are in the process of implementing a shut in and curtailment program, which is already impacting 2nd quarter volumes.
The size and duration of this program will depend on many factors and is therefore difficult to forecast at this time. In closing, I would like to touch on our substantial liquidity position, our efforts to protect that position and how we will put it to use. When this downturn began, we quickly implemented actions to match spending reductions with the deteriorating oil price environment. As a result of those actions, Apache can achieve free cash flow neutrality for all of 2020 at an average WTI oil price in the low 30s. The original plan for 2020 required a WTI oil price closer to $50 Our goal is to achieve cash flow neutrality in order to minimize drawing on liquidity to fund our day to day operations.
We entered this downturn with a tremendous liquidity backstop. We have a $4,000,000,000 revolving credit facility, which matures in March 2024 with a 1 year extension option. Following our credit downgrade by S and T, we posted letters of credit for North Sea abandonment obligations, utilizing a sublimit in the credit facility specifically established for such purposes. This currently reduces the availability on the credit facility by $800,000,000 In terms of debt, one of our key financial goals for the year was to generate free cash flow to reduce leverage through debt repurchases. This remains a longer term priority, but is more challenging for the near term given the price environment.
Over the last 2 years, we eliminated $1,600,000,000 of debt in the near term maturity window through pay down and refinancing efforts, leaving only $937,000,000 of bond maturities over the next 3 years. Absent refinancing or retaining free cash flow to retire these bonds, we will use the revolver to pay them down. Conservatively assuming all 3 years of debt maturities go on the revolver, we would still have $2,300,000,000 of remaining liquidity to manage through this downturn. In summary, we have taken significant and decisive actions to preserve liquidity, protect the balance sheet and retain asset value for the future. These recent steps combined with those of the last few years give us sufficient capacity to bridge to a more sustainable and profitable price environment.
And with that, I will turn the call back to John for some closing remarks.
Before we go to Q and A, I'd like to make a few comments regarding the durability of our production base in a reduced spending environment. At planned 2020 capital investment levels, our adjusted international production should be roughly sustainable from 2019 to 2020 on an exit rate basis, assuming no material curtailments or shut ins. In the Permian, where we have eliminated activity for the remainder of the year, the unknown magnitude, timing and duration of our curtailment and shut in program makes it premature to provide a high confidence near term outlook. I would note, however, that approximately 1 third of our Permian oil production comes from legacy vertical wells that have a base decline rate of around 10%. Hence, our overall Permian oil decline rate is significantly below the base in average.
As we look ahead to 2021, our Permian decline rates will moderate and the capital investment required to sustain year over year production volumes will fall significantly. We will provide more details around future production as price volatility recedes and we have more visibility. I will now turn the call over to the operator for questions.
Thank And our first question comes from Bob Brackett from Bernstein Research. Your line is open.
Hi, good morning guys. I appreciate that you can't talk in great specificity around the trajectory for Permian production. But can you kind of frame it in terms of
what it could look like if
you split out the legacy vertical versus kind of the shale? I mean, just very wide goalposts
as it were?
Bob, hope things are going well. I'd say in general, we've got 2 pieces there. And our conventional is a third of our oil production in the Permian. And as I said at the end, it's got kind of a 10% decline rate. The other 2 thirds is unconventional.
And I will say that we have been running a pretty flat pace. If anything, we moderated our activity pace in 20 19. It was down from 2018. So, we're going to be at a little lower unconventional decline rate just because of the pace relative to our percentage as compared to most. So hopefully that gives you a little bit more color on that.
And on that legacy vertical, are there any what's the inventory of wells that have just gotten to the point where they're not economic in sort of 2 to 3 year recovery window. Would you abandon those or do you just not have that many in the portfolio?
Yes, I think and I'm going to let Dave talk a few minutes on the process we've gone through on the shut ins because it's something we've really put some time and effort into. But I think the important thing to know is that we've taken a very, very methodical approach. I think we've shut in around 2,500 wells, produce an average of about 3 barrels a day and about 150 barrels of water a day. We've done this in a way that we can kind of roll the wells and preserve the asset integrity. So we feel pretty good about being able to bring those back.
Cost structure is coming down, but we're going to manage near term for free cash flow and we'll leave things shut in as long as it makes sense. But Dave, why don't you give some color and Clay maybe on the shut in process that we've gone through? Sure. Thanks, John. And Bob, thanks for
the question. And Clay will jump in here in a second. But as John said, it's a pretty robust process and it involves operations, it involves our production and reservoir engineers, our land team to understand any lease obligations, marketing to understand existing contracts and then our planning group and asset teams to really stress some of the economic parameters on the wells. John gave you some numbers on wells that are currently shut in. We would anticipate as we go through May and into June, those numbers likely increase, but you can see the kind of wells that we're shutting in.
There's another bucket of wells that when they break, we're opting not to fix them. And we've dropped our workover rig count by 80% since the beginning of the year and really tightened up the economic criteria in this market for those to justify working those wells over. And so the bucket that John talked about, most of those wells are wells that were overtly shut in, but some of those are wells that we've opted not to repair. I think when you think about would any of these wells be permanently shut in, that's a function of longer term price. But because we have a methodical process, because we have a reservoir production facility engineers involved in the process, we're shutting these wells in, in a with the anticipation that they'll ultimately be brought back online.
So we're doing the right kind of chemical treatment before we shut them in. And Clay can talk about that in a second. Some of the other considerations when you're thinking about the economics here, wells that produce a little more gas than others likely get a benefit in today's gas market. And then when we think about our Permian exposure, we have some marketing agreements where a meaningful percentage of our Permian production goes to Corpus on the EPIC pipe and are exposed to Brent linked pricing. So we have a number of considerations there.
And finally for me, the other thing that we're doing, our subsurface teams of engineers and geologists have taken this opportunity to do some interference testing in some of our unconventional plays. As we're deferring some production, we found historically that interference testing is one of the best ways to really understand well spacing and well placement in these three-dimensional and conventional plays. We're doing some of that starting imminently. And again, we feel very confident that when things get better, we're going to come out of this a whole lot smarter than we were going into it. Probably longer answer than you wanted, but I'm going to pass it over to Clay to add some color.
Yes. Sure, Dave. This is Clay Bretches. And let me pile on a little bit with what Dave was saying and actually add some color. Dave was talking about the shut in wells and the reduction in workover activity, and that is all true.
And that's all something that is temporary until we bring those wells back on. In the meantime, while we do that, we have to make sure that we focus on preservation. And so we make sure that we preserve and pickle the wells to reduce as much corrosion as is possible. We also have to preserve the surface facilities and make sure that our tanks are preserved properly, that our rotating equipment is preserved so that when we do come back and flip that switch and it's time to produce again, all of that production can come back on. And one of the things that we talked about, and John has alluded to this many times,
lot of times when you
shut in wells, especially for a long period of time, you have a lot of surprises when you turn them back on. Some of them are good and some of them are bad. The bad side and what can happen is you can end up with a lot of corrosion if you have not done everything in your power to make sure that you preserve those when you shut them in. So we're taking great pains to make sure that preservation is going correctly. Now next thing I wanted to talk about is cost structure.
And in the opening remarks, John mentioned that we're looking at a $300,000,000 reduction, which is up twofold from the $150,000,000 that we had announced a month earlier. And so I wanted to give some color on that because most of this is permanent cost reduction and a change of the cost structure. You heard Steve talk about how we could operate as we go forward from what prior to this great reduction in oil prices was a $50 oil world, we can go now to a $30 per barrel oil world. And so a lot of this has to do with the initiatives that we were already engaged in, about $150,000,000 worth, which was announced after the end of the year. $150,000,000 was largely G and A associated with our headquarters functions and with our various technical functions in our offices, in our Houston and Cairo and Aberdeen, Midland offices.
But with the reduction in oil price, we had to take a lot of action to find other permanent cost reductions, and we did. And so what we see now are these permanent cost reductions. A lot of that has to do with field employee reductions, contractor reductions in the field, a lot of supply chain initiatives. Our supply chain group has been doing a great deal of work in order to get new contracts. And these contracts are more long lived than what we believe to be this temporary reduction in prices.
And so we've been able to get some really good contracts, renegotiate those contracts and take advantage of the price environment that we're in right now. And then the last thing I would mention, and I think this is really, really important because this is a bottoms up approach. But we went to our offshore initiatives and how they could reduce costs and how they can reduce costs in a meaningful way. And it was a very thoughtful process and a lot of work has been done to identify areas where we can reduce costs, whether it means reducing redundant activities, reducing field offices, automating processes that heretofore were more manual in nature. Those are the actions that we're taking.
And it's led to this significant increase in these permanent cost reductions that we're now pushing up to $300 plus 1,000,000 So I'll turn it back over to John.
I appreciate that long, thorough response. Thank you.
Thank you. Our next question comes from Charles Meade from Johnson Rice. Your line is open.
Good morning, John, to you and your whole team there.
Good morning, Charles.
Yes, I appreciate that you guys probably don't want to speak about this and don't laugh at my pronunciation, the Kwasi, I think, the one that's currently drilling. But I wondered if you could if there's anything that you could offer about maybe what you guys have continued to learn from your first two discoveries there offshore Suriname Makah and Sopkar West as you continue to analyze whether it be the cores or the fluid samples or whatever else you might care to share?
Yes, Charles, thanks for the question. We remain very excited about Suriname. I think most importantly, now that we're 2 for 2 on both Maca and Sapacaro from the wells and actually 2 for 2 in both the Campanian and the Santonian formations. We've proven we've got an active hydrocarbon system. It's oil with some gas condensate in some of the shallower campaign in zones at both Sapa Car and Maca.
But we're very excited. You look at the distance between the wells are separate features. We're now drilling Kwasquasi. As you mentioned, it is another separate feature. It's actually in between the 2.
And then we will be moving back to Kaskase for the 4th well, which is on the other side of Sophocara. So, I think it just shows there's not just one feature out there. We've got 1,440,000 acres. The block is highly perspective. We're only in 2 of what are now 8 play types.
And things are going very well. So we're excited about what's in front of us. We're currently working the plans with our partner Total on the appraisal program for Maca. We're due to submit that to the government of Suriname later this month, which we will do. So we're anxious to kind of push forward there.
We're also working on the plans at Sapacara and it will follow sometime later this summer. So we're very encouraged. Things remain kind of on track and it's turning out to be everything that we hoped it could be. So very strong petroleum hydrocarbon system that's got a lot of charge.
Got it. Thanks for all that detail, John. And then going back to your prepared comments, I know you guys just gave a really lengthy and detailed answer about these shut ins, but I just want to clarify something. When you talked about the rolling curtailments in your prepared comments, Was that specific just to these 2,500 vertical Permian wells? Or is that also happening in other parts of your portfolio, whether it be horizontal Permian or international?
I mean, I think today, Charles, we have around 2,500 wells shut in. All of the fields are going to be handled in a rolling way and or they're going to be pickled and done very methodically. So we're working through that based on what we think is the best way to operate those. And so it's a very methodical approach. As Dave mentioned, one of the things we're also doing is we've really thought through what data we can collect and how we can do it.
I mean, you don't have the luxury when you're running a program sometimes of taking the time and doing the interference tests, the things that really help you understand spacing and pattern alignment and so forth on the unconventional side. So as Dave mentioned, as we get into June, the number is going to grow a little bit,
but a
lot of the May stuff is kind of already cast, but we're taking a very bottoms up, very detailed approach and it will be designed to protect the wells and also learn as much as we can because I think that will help drive our capital efficiency when we do kind of get back to
work. Thank you, John.
Thank you.
Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is open.
Excuse me. Thank you. Good morning, everybody. Hope everyone's doing well out there. John, I got a couple of follow ups, I guess.
I may be able to kick off with Suriname. Your my understanding is you've got 120 days from when you disclosed the discovery to the government. So that put you actually right around now. So I'm interested to know, are we really end of the month? Are we imminent?
And can you give us some scope as to what you're looking to do in the appraisal plan in terms of drilling or further interpretation of seismic or whatever that might look like?
Yes. Actually, we've got the obligations or we have 24 hours to make a discovery notice and then we have 30 days to submit the official discovery report and then that clock starts. So we actually are going to be the end of this month, Doug, when we do submit the first plan. So there's actually the 30 day window between discovery and the official discovery notice is probably the 30 days that you're missing in there. Yes, our partner and us are both continuing to do lots of things.
As you know, with now 2 penetrations down on the seismic, there's a lot of work we're doing, which I think will be informative, a lot of reprocessing and things. We'll continue to do throughout the process and really that's some of the work we're putting into the appraisal program is how we design it to gain as much information as we need to make the proper decision. So, we'll be in a position to submit something later this month to the government and then they've got a 30 day period to respond back to us. So it's all systems go.
Well, thank you for closing the gap for me. The 30 days I was indeed missing. But I guess if I could just press you a little bit on this. Our view at least is that you're sitting on the depositional center here. Can you at least give us some idea what the feature looks like relative to what we've seen next door because I think there's still some debate as to whether there's a viable development here.
So anything any color you can offer on that? But I'll get on to the financials.
Yes, I would just say that the features are very large. That's all we've said. And that's why we're working on the appraisal plans on how we want to appraise them. But the nice thing is, they're large you've got obviously stacked pays, both that we've already discovered thus far in both the Campanian and the Santonian. So it's not disappointing in any way on that front and we're excited about it.
My last one, if I may, is just changing geographies completely to Egypt. One of the things that I guess continues to not get a lot of attention is the extraordinary exploration success rate you're having there, 94%, I guess, this last go around. Can you just walk us through what the go forward plan is in this lower oil price environment? And it might actually be a question for Steve, because I'm real interested to know how the PSC allows you to hold up your volumes in this very low oil price environment in the context of cost recovery barrel legacy cost recovery entitlements that you have? So any kind of color on the go forward plan and the volume support you can
get from the PSC
would be helpful. Thanks.
Well, Doug, thanks for noticing Egypt. Yes, we're you look at that program, I think what you're seeing is the early fruit from the acreage we picked up, the seismic we shot, we spent the last several years, in fact, we're still shooting a very, very large acreage. We re shot a lot of our old existing seismic. The previous shoot was done, I think, in 2013. So a lot's changed on that front and you're seeing the fruits with some of the discoveries that we've announced this year where we have infrastructure tie in.
We have some very, very impactful targets yet to drill that we're excited about this year on the exploration front. And so what you're seeing is we've high graded the capital. We've ratcheted it back a little bit in Egypt. It's the area we've ratched it back the least though, as we've said on the international side. It's also an area that we'll want to
put capital in kind of first as you start to put capital back,
because we in kind of first as you start to put capital back because we've just it's what you've got is you've got 6,000,000 acres, you've got multiple basins and the difference between it and an area like the Permian, you've got as much stack pay, but you've got conventional rock. And so that's what differentiates it. The second thing I'll say and Steve may want to add some color, but these PSCs were designed and created in a much, much lower price environment. And so the way they work, things work very well in the price environment we're at today. And so that's how and that's why Egypt continues to be an area that we can lean on.
And that's really one of the advantages to having an international portfolio. You've got Brent pricing, you've got the PSC structure and it's not just the loan unconventional treadmill that you have in the Permian. So anything, Steve, do you want to add on the PSC?
Yes. I just Doug what I'd do is I'd maybe point you to the supplement. We've got a page in there on Egypt volumes that breaks it out pretty clearly. And what you'll see is when you compare gross production volume to the net production volume that goes to the concession holders us and Sinotech, you'll find that the vast majority of the barrels actually still go to Egypt, which is the way it ought to be when you've got a drilling program, as John was talking about, that is just highly economic when you can we can drill for the cost of these vertical wells and get the types of oil rates that you can get out of Egypt. So Egypt does end up with the vast majority of the volume.
But what that does allow is that when you're in a very low oil price environment like today, we do get first call on cost recovery barrels. And so those barrels some of the barrels move from Egypt over to the concession holders in order to get cost recovery. And cost recovery, it will vary. We've got 25, 26 some odd concessions there, different PSC contracts and all of them are slightly different from each other, but they're pretty similar. And the way cost recovery works is during the period, which is a quarter, you will get full recovery through oil volumes or gas volumes for all of your in period expense costs.
And then you also get a quarterly share of amortization or depreciation, if you will, on historic capital. And the PSCs do vary slightly, but most of them are either a 4 year or a 5 year amortization of the capital spend. So every quarter, you do have a pretty significant hedging benefit from the PSC effect, if you will, a built in hedge. And so that's why you see our adjusted barrels went up in the Q1 from Q4 because of the price roll. And you'll see that again most likely in Q2 from 1st.
That's what I was getting at, Steve. You put some order of magnitude on the bump given the oil price?
Can you give some order of magnitude to the bump given the oil price?
No, we're not going to give that at this point in time. Think you could probably do a rough calculation of from Q4 to Q1 with your assumptions on what prices will be in the second quarter.
It seems those are a pretty big number. That's why I was trying to get it from you. But guys, thanks so much. Yes.
It's a very nice benefit of the PSC structure. It does in a high oil price environment, it cuts the other way. Obviously, it's a double edged sword. But in a low oil price environment, it does provide a very nice natural hedge.
Got it.
Thanks, fellas. Thanks, Doug.
Thank you. Our next question comes from Gail Nicholson from Stephens. Your line is open.
Good morning. Looking at the other permanent cost reductions that you guys discussed earlier in the call, can you just talk about what the split between those is U. S. Versus international? And then the savings that achieved to date in those permanent cost reductions, have they been more skewed to one region than the other?
I start out Gail. A lot of those, we started, I mean, we were fortunate in that we started kind of an operational redesign last September. So we were 6 to 7 months into a total revamping of our operating model where we were closing some offices and really centralizing a lot of functions. What this enabled us to do in mid March was just take a much, much deeper cut. And so a lot of those cost savings are going to be G and A related.
They're kind of across the board, a lot of it even on the corporate side. So a big chunk of that is geared towards the overhead side and the G and A side. Secondly, the cost saving efforts have been kind of across the board. And I can let Clay give a little bit of an idea on the operational split, but you've got a lot in the Permian is where probably the lion's share of that is. And then other things we're doing in the North Sea in Egypt.
I'll say one thing with some of the COVID protocol that we put in place, we're doing a lot more screening. We've kind of reduced down to critical folks that we need on the platform. So we're actually adding some things in some areas too as we've gone to a very specific approach. But any color Clay you want to give on the splits?
No, I think you nailed it, John, as far as the order and where we're seeing the biggest cost savings, U. S. Being the largest, we saw significant savings with the permanent closure of the San Antonio office and a lot of the reduction in expenses that we had in the NAUR region. But we also have seen a lot of reduction in expenses in the Permian Basin, excluding NAUR. So we're seeing good reductions there.
Same thing in the North Sea. We've had some reductions there as far as both headcount and contractor headcount. That's been substantial and ongoing. And then in Egypt, we're really starting to pull the covers back on Egypt and understand that better. So we think that there's some low hanging fruit there that we can go after an attack.
So we're not through cutting cost at this point. We think that there's there are other cost initiatives that we can gain from and we're working on that right now.
Gale, this is Steve. If I can give a little bit more color on that as well. We talk about $300,000,000 of identified sustainable cost reductions so far and that's both in G and A and OpEx. And as John said, we had started the G and A focus last year and so we're ahead of the OpEx side. The OpEx started really in earnest with the oil price downturn.
On the G and A side, G and A reduction so far are more than 2 thirds of the $300,000,000 identified. G and A will include costs in the corporate center obviously, but also G and A related costs in the regions. And not to confuse things too much, but G and A goes to 3 different buckets on our financial reports. A portion of it will show up in G and A expense on the P and L. Some of it shows up in LOE because it's allocated that way and then some of it will go to the capital program.
So it will show up in CapEx, but it's all dollars of reductions in spend regardless of where it goes. And then in addition to the sustainable reductions, which as I said are approaching about $300,000,000 identified, there will be some costs that we've identified and begun the process of just deferring things that can just wait until a later point in time.
Great. Thank you for that incremental clarity. And then looking at the in the quarter, you guys made a solid profit on purchased oil and gas. How should we think about this going forward?
Yes. So this is the Q1 where we have separated out the purchase the sale of purchased oil and gas and the purchase costs of a purchased oil and gas. And the reason for that is because this is the first time that it's become material to our P and L and it's become because of the pipeline, the long haul pipeline transport contracts that we've entered into. And this just gets down to the basics in basin. We have a marketing organization who amongst the many other things that they do, one of the things they do is they help us keep basin pricing connected to the larger broader market.
And we obviously had some events over the last few years that were disconnecting the And so the marketing organization recommended and we took them up on it, of helping pipelines like GCX and PHP go from concept to FID and to reality with GCX now. So we actually entered into contracts on those pipes and then we helped them get across the line. Of course, we also took an equity option, which Altus Midstream owns now in those pipelines. But getting those contracts in place help the pipelines get built. And then the marketing organization now manages our exposure to those transport contracts.
And what you see is the on our P and L now is the effects of the marketing organization purchasing product in basin or along the pipelines. It's not necessarily at Waha or El Paso Permian. It could be anywhere along the pipeline or at where they have pipeline. And so they basically manage that exposure through purchasing and selling product. And since it is becoming material now, we need to separate that out.
And you see that the marketing organization made $22,000,000 in the Q1 on that, primarily because of the differential for most of the quarter between Waha and Houston Ship Channel.
Great. Thank you.
Thank you. Our next question comes from Michael Scialla from Stifel. Your line is open.
Good morning and thank you for taking my call. This is actually Guillermo stepping in for Mike. My question is a follow-up of the previous question on that 24,000,000 cubic feet per day impact from a processing contract and if you could provide additional color on to what it may look like going forward?
Yes. So the most important thing to understand on that is that it has no economic impact. So we've got a contract where we have to have gas processed to make it to get it to pipelines back. And we have a contract with a 3rd party and then the 3rd party charges us a fee plus power costs. And this is very typical of these types of arrangements because power can be a pretty variable cost.
And in order to not take the risk of fluctuations and volatility and power costs, they just pass it on as a means of pricing the contract. And so what this gas processor does with us and they do it with many other parties too, because like I say, this is a very typical term in these types of contracts. They take in kind a portion of the gas that flows through the plant and then they effectively take the revenue from that gas as payment of the power costs. And because of accounting rules, we can't report that as produced volume because it doesn't belong to us. It effectively belongs to someone else.
And so that's the only reason why it's just if we didn't have this contract, this term in this contract, we would report more volume, report more revenue, but then we would have an equal amount of more processing costs on the P and L. It a zero financial impact.
Okay. So is this expected to continue about the same amount going forward?
It fluctuates with gas pricing. And so it'll if you can predict gas prices, then you'd be able to predict the volumes. It's because gas prices got so low this quarter that the volume went so high. This will this may it occurred last year also in the Permian area and it certainly will occur in the future most likely, but it's not a norm.
Thank you. We're going to take our next question from Jeanine Wai from Barclays. Your line is open.
Hi, good morning everyone. Thanks for taking our questions. My first question is on activity and maybe trigger points for pricing. The operating cash margin in the U. S.
Continues to lag the North Sea and Egypt pretty meaningfully. And I know the U. S. Is kind of a mixed bag of operating sub areas, but at what oil price would you consider reactivating activity in the Permian? And we're just asking because to us the trigger price might be a little different for you than others given Apache's strong international portfolio and maybe wanting to maximize cash flow because you've got to continue to fund Surname and then you've also got the debt maturity coming due?
Janine, you actually answered your own question, but we will. I mean, if you think about our priorities, first thing I'll say is, we will be slower to go back to work when we were shutting things down. And we're going to be very methodical with it. Our priorities are going to be 1 debt, 2 would be dividend. As you start to think about capital, we're going to continue to maintain the exploration and the appraisal program in Suriname.
Egypt would sit next and then you kind of get into the DUCs in the Permian, North Sea and then we'd start thinking about the rig lines in Permian. The nice thing about our unconventional acreage is most of it we don't have any lease obligations. It's not going anywhere. We're not losing anything in that option. So, it's all just a function of timing.
And I think for us, we want to be very methodical. If you look back to how we kind of went back to work post the 2015, 2016 shutdown and we've kind of been through this drill before as we went from 93 rigs before by Q2 of 2016 at that time period. We started latter part of 2017 ratcheting back up and went to an 8 rig program and on the unconventional Permian side and we've been scaling back a little bit. So I think we'd want to see higher, longer deck and definitely the advantages we have is the portfolio and we're going to be managing cash flow. So
that's it.
Okay. Well, really appreciate the detailed response there. That's very helpful. My second question, the follow-up is regarding the debt maturities and adjusting those over the next 3 years. Do you have an estimate of what price oil needs to average in order to pay those off strictly out of free cash flow?
And maybe we're just getting a little too cute here. I know it depends on a ton of different factors that may not be known today, so maybe an impossible question. But any commentary you might have around the free cash flow trajectory for Apache would be helpful. I know that you can pay the maturities of the revolver and you can fall back on that, but that might not be ideal.
Yes, Janine, yes, we're not going to give a lot of guidance or insights into free cash flow in the out years. All I'd say is, in 2020, we are basically running free cash flow neutral with the current capital program. If you we're running that at about $30 WTI. And so if you take the dividend, the reduction, the capital spending we're on right now, the pace of capital spending we're on right now, the cost reductions, the $300,000,000 of cost reductions. And we're worried about a cash flow neutral WTI price of about $30 John indicated that reducing debt is certainly one of our highest priorities for future free cash flows.
We've indicated in the past that our sensitivity to dollar movement in oil prices is somewhere in the $50,000,000 to $60,000,000 range. So you could probably use those and get to a solution point on what it might take to be able to pay down $937,000,000 of debt over the next 3 years.
Great. That's actually really helpful. Thank you very much.
Thank you. Our next question comes from Neal Dingmann from SunTrust. Your line is open.
Good morning. Just another one, you guys talked a little on Egypt. My question is more just on Egypt and North Sea specifically. Just wondering, John, how do you guys think about maintenance caps there? I know that's you're probably spending more there in Egypt than the maintenance cap.
But I'm just wondering, could you talk about how you view that now as those become more efficient and potential free cash flow of each, let's just use it sort
of the strip ish prices?
Neil, when we look at those two areas, we've typically needed $700,000,000 to $800,000,000 or so to kind of hold them flat combined and those are that's net our net portion of the for the JV in Egypt with SIOPEC. So when you think about that, we're slightly under that level this year with the reductions we've shaved a little bit of that back. But as I mentioned, we've really high graded the inventory in Egypt and we're seeing some strong results coming out of there. So that's going to help us with that number. And then secondly, we've got the luxury of some really nice tie ins and the timing of those that came on with our Garten 2 well and so forth.
And we've curtailed that well a little bit given price volatility and things there. So slightly under, but in kind of an improving picture in terms of what it takes to maintain those two areas.
Okay. And then just quickly move over to perm, you all mentioned in the release that you thought you'd have about 70 DUCs. I'm just wondering, is there a sort of level that you're comfortable taking this down to or just before you bring rigs back or just wondering how you think about that count?
No, that number is just the result of where we were in the program and when we kind of picked up the range. I mean, it was easier to shut down the completion crews. So that's the first thing we did was shut the crews down. It took a little bit of notice time on the rig. As we mentioned, I we're on our last well on the Permian as we speak.
And so that was purely just a result of kind of where we were. It's more than we typically would carry because of the shutting the completion crews down first, which is going to give us a little bit of ducks to bring on when we decide to put the come back to them. We'll have about 15 in Alpine High and the rest are in our Midland Basin unconventional and a handful of those are 3 mile laterals. So it will give us some uplift when it's time to put some capital back to work.
Great details. Thanks, John.
You bet.
Thank you. Our next question comes from Scott Hanold from RBC Capital Markets. Your line is open.
Thanks. Hey, I appreciate all the color. And I know you've given a lot of bookends in terms of how to think about Apache here going forward. But just so I'm understanding it, I mean, the goal is as you kind of go through 2020 into 2021 at this point, based on your current activity level, it seems like you're not spending in at maintenance levels when you talk about that $30 per barrel price sort of resiliency too. And I'm just curious like if you brought yourself to more of a maintenance production mode in each of the areas, what does that price indicator look like?
Well, I mean, you've got the brackets there, Scott, because we were going to grow slightly with where our budget originally was, which was geared around a $50 WTI. As we said now, we can remain kind of cash flow at 30, but we are going to decline. We're below maintenance levels in the Permian. And so that will come down. And international is going to be kind of flat, relatively flat.
So it's somewhere in between there in terms of if you were going to call it a generate free cash flow and actually keep our volumes flat.
Okay. Fair enough. And obviously, in Suriname, you've got your things that you're submitting to the government at this point in time. What can we expect from Apache over the course of this next year in terms of like how we're going to hear new information and what the plan is leading into potential appraisals that once you get the government response back, you'll have a press release? Or can you give us a sense of how you're going to report new information to us over the balance of this year?
Well, I mean, that's something we'll work through with our JV partner. I mean, typically, we you submit the appraisal program, it's kind of a work plan, and then we'll go execute that. So we're not in a position right now with our partner where we're announcing what that entails. We've got a couple of years to do the appraisal program before we have to make a decision on FID. And so we want to go about that as quickly as possible, but we've kind of balance you're going to have to balance that as you get into back half of this year, early next year with when you start.
Does the current oil price environment impact the FID decision at all much?
Right now the good news is, is that you look at Suriname, you look at the timing of it, you're 4 to 5 years realistically from discovery to when you'd have production online. I think that all of us would look through to seeing a better price environment. I don't know what the recovery shape is going to look like more near term, but I think as we get out the timeframe where Ceramic comes into play and we've seen no wavering from our partner and we're fully committed as well. So I think it's something that stays on track and it's actually something that we can fund and our JV is beneficial to our capital profile spending.
Thank you.
Thank you. And in the interest of time, we're going to take our final from Brian Singer with Goldman Sachs. Your line is open.
Thank you and good morning.
First on
Good morning, Brian.
Good morning. There's been a bit of an improvement in expectations for natural gas prices into 2021. And I just wondered what it would take natural gas price wise, if anything, to either shift or increase capital in the gassier parts of the Permian Alpine High or other areas within the portfolio?
Well, what I'll say, Brian, is it really boils back down to economics in the portfolio, right? So it just goes to show you, a year ago, we were talking about curtailing gas and here we are now curtailing oil in the basin. So it just shows you how quickly things can change. We like having a portfolio. We like having a commodity mix that gives us levers or where we can put capital and have options, whereas if you're saddled to being a pure play in one commodity stream, that's what you're tied to.
So, I'll just say it'll the projects will have to compete as we start to put capital back to work and a lot will hinge on how the products are trading relative and what the view of them longer term is at that time. So right now, your gassier wells and things have higher or more economic right now than the straight all wells, which is a total flip from where we were.
Great. Thanks. And then my follow-up is with regards to hedging strategy. Apache was unhedged in 2019 and into 2020. And I think there's maybe I'm mischaracterizing, but there's been more of a preference to depend on the movement in capital spending versus the pluses or minuses of hedging.
There have been some hedges that have been added recently. And I just wondered if you can talk more philosophically about if there's been any changes to how we should think about your hedging strategy going forward?
I mean, I think philosophically, no. We came into this unhedged. We saw a lot of short term volatility. And so we really put the hedges in place, swaps Q2, the collars in 3 and 4 of the few swaps in Q3, we put those in as protection to the downside scenario as you work through what was a shutdown, but not a philosophical change. I don't know, Steve, if there's anything you want to add on the hedging?
Yes, sure, John. I'll always take the opportunity to talk about our philosophy on hedging. So no, it hasn't changed, Brian. We believe that the best hedge is the ability to have flexibility in your activity. I think the current price environment proves that.
So we think the best hedge is the ability to ramp down activity, which is what the industry needs to do right now. And associated with that to get cost levels down as low as possible. There are times when we do believe we need to engage in hedging activity. We had one of those in the past when we had commitments that couldn't be avoided where we had to build out the midstream at Alpine High. We've got one now where you've got a period where oil prices are getting into a range where costs just can't be cut low enough to maintain free cash flow.
And so that's why we entered into the hedges as we saw what was happening. We knew Q2 was going to be very, very painful. You could see that coming. And that's why we hedged the vast majority of our volumes for Q2, mostly with swaps, all with swaps. And then we've hedged a little bit less for 3Q and even less still for 4Q.
And those have been a combination of swaps and some collars. So we just we generally just believe that we have a preference to refrain from financial hedging. We as I spoke about earlier with Egypt and coming in the future with Suriname, we do have some natural hedges already in the portfolio. And it's I'll just point out that nobody ever asks us why we didn't hedge after prices run up. They only ask when prices have run down.
So just I'm sure just one of those oddities of the environment that we're in right now.
Thank you.
Thank you. And that does conclude the question and answer session for today's conference. I'd now like to turn the call back over to John Christmann for any closing remarks.
Thank you, operator. In closing, I would like to wish all of you good health as we work through this COVID-nineteen pandemic. We're looking forward to getting the economy back on its feet and sharing our progress in future calls. Now back to the operator to close.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.