Good day and thank you for standing by and welcome to the APA First Quarter 2021 Earnings Announcement Webcast Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Gary Clark, Vice President for Investor Relations.
Sir, please go ahead.
Good morning and thank you for joining us on APA Corporation's Q1 2021 financial and operational results conference call. We will begin the call with an overview by CEO and President, John Christmann. Steve Riney, Executive Vice President and CFO, We'll then provide further color on our results and 2021 outlook. Clay Bretches, Executive Vice President of Operations And Dave Purcell, Executive Vice President, Development, will also be available on the call to answer questions. Our prepared remarks will be approximately 15 minutes in length with the remainder of the hour allotted for Q 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. Apacorp.com. Please note that we may discuss certain non GAAP financial measures. A reconciliation of the differences between these non GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. This quarter, we have also introduced the term free cash flow, which is defined on Page 20 in the glossary of our supplement.
Consistent with previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude non controlling interest in Egypt And Egypt Tax Barrels. Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discussed today. A full disclaimer is located with the supplemental information on our website. And with that, I'll turn the call over to John.
Good morning, and thank you for joining us today. In my prepared remarks, I will review APA Corporation's 1st quarter results and discuss our 2021 priorities. Despite some significant weather related challenges, We delivered a strong Q1. Specifically, our free cash flow generation was over $500,000,000 We performed well relative to our production and cost expectations, and our safety performance was excellent. Our total adjusted production exceeded guidance as Permian oil and gas volumes benefited from a faster than expected from the February storm impacts.
This more than offset lower international adjusted volumes, resulting from the impact of higher oil prices on our Egypt PSC cost recovery barrels And some extended operational downtime in the North Sea. Upstream capital investment and LOE were considerably below guidance for the quarter. Together with strong price realizations, These factors contributed to an exceptional quarter of free cash flow generation, all of which is being designated for debt reduction. Looking ahead, the full year guidance we provided in February is unchanged, and we are clearly off to a good start. Turning now to operations in the United States.
We reactivated a rig in the Permian Basin, which was previously on standby And picked up one additional rig to drill a 4 well program in the Austin Chalk play of Texas in Brazos and Washington Counties. We placed 22 wells online in the Permian, including 2 at Alpine High. Roughly 5,000 BOEs per day of Lower margin Permian production remained shut in at the end of the Q1. We are very pleased with the early results And combined with the recovery from winter storm Yuri are expecting a significant increase in second and third quarter production. On Tuesday, we announced an agreement in principle with the Ministry of Petroleum and the Egyptian General Petroleum Company To modernize the terms of our current production sharing contracts, which is the result of a process that has been underway for more than 1 year.
The agreement is comprehensive and when ratified by Parliament will result in increased activity, Capital Investment and Oil Focused Production Growth over the next several years. Currently, we are running a 5 rig program in Egypt And continue to build quality inventory across our expanded acreage footprint. In the Q1, we had another significant oil discovery At our Hadid prospect, the details of which are in our financial and operational supplement. We are projecting Egypt gross production will bottom in the second quarter and trend up in the second half of the year. Debottlenecking of certain pipelines of facilities and the addition of compression capacity will enable us to connect roughly 35 wells in the second half of the year compared to only 20 wells during the first half.
These and other 2021 guidance items do not include any potential changes associated with the pending PSC modernization, which we look forward to updating after the agreement is formally approved. In the North Sea, we have been operating 1 floating rig and 1 platform rig crew for just over a year. At this pace, we are capable of delivering annual production in the range of 55,000 to 60,000 BOE per day for the next several years. In 2021, we anticipate North Sea volumes will be a bit lower As we experienced unplanned compressor downtime in the 40s field during the Q1 and will incur extended pipeline downtime and platform maintenance turnarounds during the 2nd and third quarters. Following this, however, we expect a sharp rebound in production during the 4th Quarter 2021.
In January, we announced a discovery at our 4th exploration well in Suriname. An appraisal plan for this well, Kheskesi, is forthcoming. Total has now fully assumed operatorship of Block 58 It is running 2 rigs in the vicinity of the Sapa Cara discovery. Both rigs are capable of appraisal and exploration drilling, which provides ultimate flexibility as we execute our programs. We look forward to providing updates as appropriate in the future.
Next, I would like to review our priorities for 2021, which we outlined previously on our February conference call. First, we are budgeting conservatively and focusing on free cash flow generation and debt reduction. This year, our reinvestment rate is Currently tracking below 50%. 2nd, we are aggressively managing our cost structure and which will enable us to either develop or possibly monetize certain assets at the appropriate time. 4th, we are advancing the exploration and appraisal programs in Suriname and are now beginning to benefit from our joint venture carry agreement, which is a very efficient Funding source for our differential long term opportunity in Block 58.
5th, We are continuing to focus on value creation through organic exploration. We recently announced the hiring of Tracy Henderson to lead our exploration team, which concludes an extensive search that began prior to the COVID-nineteen pandemic. Tracy's experience and expertise are a great fit for the existing APA portfolio, and we look forward to her leadership on future exploration Strategy and Ventures. And lastly, we are advancing ESG initiatives that are relevant, impactful And core to our business, broadly defined, these fall into 3 areas of emphasis: air, Water and Communities and People. In 2021, we have established goals that address routine flaring, freshwater consumption And diversity and inclusion programs.
These goals are linked to the annual incentive compensation of not just management, All employees, we made excellent progress in each of these areas during the Q1, and I look forward to discussing them further as we progress these efforts through the year. In closing, I would like to thank all of our employees across the globe for their hard work in the Q1 And in particular, our field personnel and contractors on the front lines that did an excellent job of safely navigating Global pandemic protocols as well as some very extreme weather events. During the historic freeze in Texas, Our teams worked around the clock to maintain and restore the hydrocarbon production systems that are vitally important to And with that, I I will turn the call over to Steve Riney, who will provide additional details on the Q1 and our 2021 outlook.
Thanks, John. As noted in our news release issued yesterday, under Generally Accepted Accounting Principles, APA Corporation reported Q1 2021 consolidated net income of $388,000,000 or $1.02 per diluted common share. These results include items that are outside of core earnings, the most significant of which is a $43,000,000 valuation allowance adjustment for deferred taxes in the quarter. Excluding this and other smaller items, The adjusted net income was $346,000,000 or $0.91 per share. We had a very good Q1 with most financial results being in line or better than our previous guidance.
Notable exceptions were North Sea production, which John addressed and G and A expense, which was $83,000,000 while underlying spend was in line with our guidance of around $75,000,000 additional charges were recognized for the mark to market impact on certain stock compensation programs. 1st quarter results were significantly influenced by U. S. Natural gas pricing volatility associated with winter storm Yuri. The impacts of the storm appear in several places on the income statement.
So let me take you through most of the significant items. Since it determines the reporting of results, I'll first remind everyone of how we handle Permian Basin gas production. We sell all of our gas production in basin and then manage our long haul transport obligations separately. We optimize those obligations through the purchase, transport and sale of gas from various receipt points in the Permian Basin and in the Gulf Coast areas. Our common practice as we contract for the purchase and sale of gas is to maintain a relatively balanced exposure between Gas Daily and 1st of month pricing.
As the end of January approached, we had a portfolio of purchase and sales contracts that were heavily skewed to February 1st month pricing. As we commonly do when this is the case, We used financial contracts to rebalance that exposure closer to fifty-fifty. So given the unusually high gas price spike that occurred in mid February. This impacted 1st quarter reporting of results in 3 ways. First, our underlying sales contracts for produced gas determine the reporting of revenue and realizations.
Since approximately half of our underlying sales contracts for February production were at gas daily pricing, You will see a significant increase in both natural gas revenues on the income statement and in the average realized price for U. S. Gas for the quarter. 2nd, our underlying contracts also determine the reporting of revenues and costs associated with our activities to purchase, transport and sell gas to fulfill our transportation obligations. The results of these activities appear in the lines entitled Purchased Oil and Gas Sales And purchased oil and gas costs on our P and L.
Combined, we incurred a loss of $54,000,000 on that activity in the Q1, which includes the cost of the transport and the fuel associated with that transport. In a normal quarter, Given current differentials, we would expect this loss to be in the $25,000,000 to $35,000,000 range. For the Q1, This loss was compounded by a volume imbalance in our underlying purchase and sale contracts, which resulted in more gas purchased at the higher February daily prices and more sales at the lower 1st of month pricing. Finally, Since we used a financial swap to rebalance our underlying contract portfolio, a good portion of the price spike benefit in the $158,000,000 derivative instrument gain on the income statement. If our underlying contract portfolio had been more balanced in the first We would not have used the derivative contract and we would not have this gain.
Instead, we would have reported higher gas revenues And a lower loss on sales of purchased gas. I know I went through that quickly and it can be confusing. If you have further questions, please call Gary's team and they can take you through it in further detail. Free cash flow was also strong in the Q1, exceeding $500,000,000 That cash is being used for debt reduction initially through the pay down of our revolver. Excluding the consolidated effects of Altus Midstream, We reduced net debt by $339,000,000 in the quarter, mostly through the retention of cash.
If the current price environment holds up, we anticipate at least $1,000,000,000 of net debt reduction in 2021. Turning now to some additional comments around our 2021 outlook. Our full year 2021 production, capital, LOE and G and A guidance all remain unchanged. Assuming the recently announced PSC modernization in Egypt proceeds on course, We anticipate adding some capital activity in Egypt for the second half of twenty twenty one. We will update our guidance for Egypt as we proceed through that approval process.
We have also expanded our guidance to include the anticipated effects of purchasing and selling gas in the U. S. To fulfill our transport obligations, which I discussed previously. Lastly, for the remainder of the year, We expect our U. S.
Natural gas realizations will closely approximate Waha and El Paso Permian pricing. You will find all of our current guidance items in the financial and operational supplement. In closing, we look forward to a very strong year of free cash flow generation of at least $1,000,000,000 This should take us a good bit of the way toward our previously mentioned leverage target of around 1.5 times debt to EBITDA under a mid cycle pricing scenario. You should understand, however, that our more relevant objective is to return to investment grade credit status. To that end, we will continue to budget conservatively, focus on costs, Free cash flow generation and debt reduction and maintain close contact with the rating agencies to ensure that we are taking the appropriate steps to achieve that goal in a timely manner.
And with that, I will turn the call over to the operator for Q and A.
Thank you. Our first question comes from the line of John Freeman from Raymond James. Sir, your line is open.
Good morning, guys.
Good morning, John.
The first question I had was just on what Steve said there at the end about potentially And when the new PSC is done in Egypt about adding some additional capital and activity in the second half of twenty twenty one in Egypt and Obviously, that's consistent with what you've said in the past, John, about eventually wanting to get the U. S. And Egypt in 2022 and beyond is sort of more of a maintenance level And so, I know in the past that the sort of commentary around Egypt had been, from the 5 rigs you're currently running, probably wanting to get to at least A couple of rigs more to at least get to that maintenance level. So until told otherwise by you all, is that a fair assumption to assume that That's kind of where you want to get to on Egypt for the by year end.
Yes. I'll make a few comments on just in general on Egypt, Then I'll have Dave step in a little bit on in terms of just rig count and things. But I think what you've seen is finally, we can get out in the public about our real Important step in the process that we've been working through and modernizing our PSCs in Egypt. This is something that we Started really prior to the COVID-nineteen pandemic, but I will tell you, we've been negotiating in good faith and in earnest with Egypt Since for more than a year and we're at a point today where after working with the Minister of Petroleum As well as EGPC, we were able to announce this on Tuesday. It's really a framework that sets the future for Egypt.
We've been clear not To touch guidance this year, we now have to go through the approval process and there are some steps to go through The parliamentary process and ultimately get things ratified and then we'll be able to talk more about it. But as we go through the year, we will be picking up some activity. There is just a lot of projects in Egypt that had been become non competitive because of the terms of the PSC, And this is really going to open up some projects that we are ready to fund. I think this is going to be a win win for both The country of Egypt and Apache, and it's going to really put us on a much stronger than just maintenance curve for Egypt. So Dave, I'll let you jump in and add a little bit more to that.
Yes, thanks. Let's step back and I think John you had You framed your question on what we've said before around wanting to maintain the business. And so let's think about maintenance Capital, so right now we're going to spend this year roughly around these are going to be round numbers, dollars 900,000,000 of development capital and that's And in that mode, production is in a modest decline. So we think about 2 places we'd want to flex capital to Arrest that decline, that would be in the U. S.
And the Permian Basin primarily and in Egypt. If you think about a rig line, we've talked about needing potentially a full rig line or a partial rig line In addition to the 2, we'll have in the second half of this year in the Permian to sustain production and then more rigs in Egypt. And We've talked about 7 to 8 rigs needed to sustain or maintain production there. And so if you think about a rig line in the Permian and a handful of rigs in Egypt, that puts you roughly For rigs in Egypt, that puts you roughly $200,000,000 incremental dollars. So our maintenance capital is about $1,100,000,000 And the key here is we're not talking about material growth, but we're talking about maintaining production and that gives us some optionality in the portfolio To where we want to add that capital to maintain our global production.
And so that Frames the maintenance capital, and I'll throw it over to Steve to add some more color on that.
Yes. So we entered I think good context for this is that we entered the year as people will recall, seems years ago, but we ended this year with a plan that was based on $45 WTI and it had a, as Dave Called it the development capital, the $900,000,000 of development capital, if we just set aside Suriname, was about a 60% reinvestment rate. And at current strip, that same amount of capital is less than a 40% reinvestment rate. So clearly, This is not a reinvestment rate that's going to sustain. It is not a maintenance level of capital spending.
And so we've got a continued slight And we've talked about this in the past that the number one priority coming into the year when it still looked Like a pretty difficult year was that we needed to get debt paid down. We needed to get the balance sheet strengthened and we needed to start that process. And that was The most important financial priority. But it is prudent to spend at a maintenance capital level And to maintain the production volume going forward. And we probably need somewhere in the neighborhood of $100,000,000 to $200,000,000 more Development capital in order to get into that neighborhood.
And with prices where they are and if they hold up, I think we're likely to start increasing capital in the second half in order to get to that point. And most of that, As Dave outlined, it's going to be in the Permian and Egypt, especially Egypt with the modernization effort as that proceeds and gets the final approval. And I just want to echo on that. The issue there was the old structure of the PSCs and how they work. These were very old vintage PSC structures and it has nothing to do with the fact that Egypt actually has Some very highly economic opportunities and quite a bit of them and just needed the PSC structure that enabled the capital investment in that.
And I'll just echo once again John's point that none of this is in our guidance. It's not in the capital for guidance nor is it in the production volume Or anything else for guidance. And just to reinforce what Dave So I'd ask that you please don't throw us into the bucket of grocers because this is not an aggressive growth This is just about a prudent step towards getting to at least a maintenance level of capital spending.
I appreciate that. That makes a lot of sense. I just the follow-up related sort of tied to that is, I see what sort of the activity has been in Suriname through the first half of the year where Total made the decision to I'll focus more on appraisal here in the first half of the year as opposed to immediately taking that second rig up to Bon Bonney for the exploration program. And I guess we'll just wait to see when we ultimately get up to Bon Bonny. But at the very least, it seems like just given that you all are On the hook for 12.5% on appraisal versus 50% on exploration, it seems like that created a little bit of slack In the budget, unless I'm reading too much into, there's at least a little slack because just by definition, it seems like your Cernan budget from where you started the year is Probably a touch lower just given the little bit more of a skew toward appraisal versus expiration at least through the first half of the year.
Yes. I guess, John, we look at the Suriname budget, we really haven't touched that, right. I mean, it's just a timing thing. The Bon Bonney will be the next exploration well. We are obviously anxious to go drill it.
And it is 45 kilometers to the north, so it will give you an idea just to scale and scope. So we aren't shifting dollars there, consuming any of that. We have left the Sure, and I am budget kind of where it is. It's just a kind of timing. And quite frankly, we had a pretty good idea what their cadence was going to be As we entered this year anyways.
Thank you. Our next question comes from the line of Doug Leggate from Bank of America. Sir, your line is open.
Thank you. Good morning, everybody. I'm afraid I'm going to pound John a little bit on Egypt just to round out the last John's questions. Steve, I wonder, I know you're going to give us details later on, but I just wonder if I could touch on a couple of aspects of why this Should be a big deal for you guys. I think it's 10 years since we published our primer on this, believe it or not.
The cost pool, The potential for extension and the implications of that seismic shoot you've been doing, particularly over The oil play in the Western Desert, can you offer any quantify can you quantify perhaps what no ring fencing can do to the cost recovery or the cost You have that standing there and whether you would get an extension on those concessions as part of this agreement?
No, I mean, Doug, great question and you'll have to just wait until we get things finally approved for us To really dive in and give any a lot of details on it. But I'll just say, stepping back, it's a holistic approach. This is something that will be good for Egypt. We've looked at things very carefully. This has been a process that has been very lengthy and very thorough And very comprehensive.
And it really is in line with the minister's objective of modernizing the oil field in Egypt. And I think it's going to have some benefits that's going to enable us to direct more dollars Into the drilling programs and into the volumes, which are going to generate more revenue. And so we've got a deep inventory. We're seeing good early results off of the seismic with the Hadid announcement that we had within the Supplement this go around. So we are excited about Egypt.
And quite frankly, this This really puts us in a position where we can fund some projects that are ready to go.
Forgive me for getting technical on this, John Barr, I just want to make sure you understand my question. Do you have isolated cost recovery pools But you couldn't recover because they were ring fenced. And I'm just trying to understand if you could your share of production could go up Sort of overnight as a consequence of being able to tap into those cost recovery pools without any incremental capital.
I fully understood your question. I'll just say again, I can't get into a lot of details Until we close, but this is going to be a win win for both us and Egypt and it's going to let us put more dollars in the ground And raise out investments. Steve, you want to
Yes, I'd just say, Doug, we applaud and respect the effort. We just can't get into details because it's still got quite a bit of process to go, but we've made a major milestone here With the agreement in principle. And so we're on our way. And I'd just like to reiterate, Yes. Egypt is a fantastic country to do business in and it's got some of the best underlying opportunity in our entire portfolio And long legs on that inventory as we're proving with the seismic and some of the activity going on, on the Exploration side and all we're accomplishing through this is the is getting rid of An old outdated PSC structure that created artificial barriers to being able to access some of that really attractive opportunity.
We'll give a lot more details as we get closer to this.
Okay.
I don't want to hold the call guys. That was actually my first question. My second one, I won't go to Sune on this time, but I'd like to ask you, Steve, about free cash flow. Look, obviously, dollars 500,000,000 adjusting for working capital, dollars 1,000,000,000 for the year at the current strip. There's Something not adding up there.
I just wonder if you could just frame for us what you think the scale of the more than $1,000,000,000 could look like? And more importantly, In a relatively complex portfolio in some people's view, what's the longevity ex Suriname of sustaining that
I think that I was probably a bit too understated in my prepared remarks and the point of that was really just to highlight Where we've gotten to in 1 quarter from the plan that we laid out to all of you in February. Our original plan, as I said, we poured at $45 WTI. It had somewhere around $350,000,000 of free cash flow. And the point Of my prepared remarks was to just indicate that it's over $1,000,000,000 now. And maybe I could do a little bit better than that And say that at the current strip, it will be well over $1,000,000,000 We the only thing I would say about that though is We don't give guidance on free cash flow.
We haven't done that in the past. And I don't want to start that process On an iterative basis at this point, mainly because there are so many different Measures out there of what people call free cash flow and we've defined what ours is, so we're very clear about that. But we're going to continue not to give guidance on it. And the second thing I would say is if I go back to my comments earlier around maintenance capital. On the if you just set Suriname aside, we're somewhere and Yes, we continue to invest $200,000,000 in Suriname.
You only need about $100,000,000 somewhere between $100,000,000 $200,000,000 more to get to a maintenance level of capital on the development side. So we're not far from that. And then and so that's what your difference is. It requires $100,000,000 to $200,000,000 more In order to sustainably access this, what I would call, well over $1,000,000,000 of free cash flow in this price environment For an extended period of time and I think what we've shared in the past is that, we certainly are confident we can do that for 5 to 10 years And we're always looking for opportunities to be able to do that for an extended period of time beyond that.
Steve, that's really helpful. It means Suriname is in the stock for free and I appreciate the answer.
Thanks for the question. It gave me the opportunity to be a little less conservative
on the free cash flow. That's appreciated. Appreciate it, guys. Thanks so much. Thank you, Doug.
Thank you. Our next question comes from the line of Michael Scialla from Stifel. Sir, your line
is open. Thanks.
Good morning, everybody. John, you mentioned in your prepared remarks So about potential non core sales, I just wanted to see if you could talk about that anymore. Maybe what assets might You included there and how far along in the process are you? Is there a formal data room plan for that or Where are you in that process?
Mike, thanks for the question. We typically Wait to talk about portfolio transactions and things after we've announced them and so forth. So, But I don't think it's any big secret. We've had a pretty small package in the Permian that's in the market. It's non core, some higher cost Waterflood type stuff that we may be in a position to transact on, we'll see.
We're kind of working through that now. I think the point is, we've got the rig running in the chalk. We're open to looking at what we will and will not be investing in. And as we make progress on things like modernization in Egypt, It's a continual process for us. So, a lot of key things going on, but we're open and always looking at various Thanks with the portfolio.
Okay, thanks.
And I
wanted to ask on Suriname, just kind of a follow-up on The deeper test at KESI, you ran into the pressure issues before you could test the neocomial. I think you said in your release, it nevertheless helped validate your geologic model. I just want to see if you could add any color on that and what you saw in that process?
Well, with KES KESI, there were a couple of things that happened there that I think were key. Number 1, we got down below the Conformity, I think number and prove that we had charge in hydrocarbons. I mean, that's obviously why we had to stop. And then the other key fact that was important was that, that depth we proved that we could have quality reservoir in those carbonates. And so and it also was very, very rich hydrocarbon, not just a dry gas.
We are encouraged by that. It's a prospect and a play that's going to need to be tested, But it's also going to take a different well design than what we had. We were very close to getting down to the first target. There were 2 targets that we were going after, But we had to call it early and we did, but that's something we'll be working with our partner Total on to come back with an Well that we'll test those necomium targets at a later date, because both of us were encouraged by what we had seen Leading up to getting very close to the first target.
Great. Thanks, John.
Thank you. Our next question comes from the line of Jeanine Wai from Barclays. Ma'am, your line is open.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning, Janine.
Good morning. Thanks Maybe just two quick ones on the balance sheet. Can you talk about the medium term plan for adjusting the balance You've got a ton of free cash flow on the horizon, so there's a lot of options here. Do you intend to retire debt as it comes due? Or are
So this is Steve. Yes, we've talked about the fact that we are we've talked externally about We're targeting at least getting down to 1.5 times debt to EBITDA. We may need to move lower than that. Certainly the direction things have been moving in general over time. We believe Something at or below that number is going to be what's required to get back to investment grade.
And as I said in my prepared remarks, That's ultimately the real underlying goal is to get back to investment grade and we're going to do whatever it takes to do that. We're clearly making some tremendous progress this year. By our estimation, at the current strip, We'll have net debt to EBITDA down to approaching to about 2.1 times debt to EBITDA at the end of this year. Even if you adjusted that to what would happen if we were in a $55 price environment for 2022, We'd still only be slightly higher than the 2.1, maybe 2.2 or 2.3. So it doesn't move up considerably.
So we're We've made tremendous progress or will make tremendous progress this year if prices hold up. As far as how we're going to do that, We haven't gotten into the details of exactly how we're going to do that, but it obviously has to result in paying off some of the bonds Historically and what we've generally said is we're going to do it the same way we've done it in the past and we've done combinations Of open market repurchases, we've done 10b5-1s. We've done tender offers, refinances and we will do all of the above. I don't believe at this point in time, I don't believe you'll see a material amount of refinances going forward Until we get to back to investment grade. We've got about a little over $335,000,000 of debt maturing in the next couple of years And that will just be paid down as it matures.
And so maybe following up on, so the ultimate goal is to get back to investment Great. How do you view that versus more meaningfully increasing the dividend? Are those two things kind of mutually
I think we have to get the balance sheet in order and get debt down and get at least at a minimum get back Closer to a point where we think we can achieve investment grade before we start looking at the dividend again. And As we've discussed before and I think we've talked with you specifically about it, we look at debt pay down as A return to shareholders because every dollar of debt that we can get off the balance sheet today will add more than $1 To the market cap of the company, we believe, because we think that the debt level is actually weighing on the share price. And so while it's not the same as a dividend and we recognize that, it does benefit shareholders directly with debt pay down. And we haven't made any specific plans as to what we're going to do. We've got Quite a bit still to accomplish on the debt paydown effort.
As I said, we'll accomplish quite a bit of that hopefully this year. We'll need to do more of it in 2022. And at an appropriate time, we'll reconsider whether we need to bring the Dividend back or whether we want to start bringing the dividend back and we'll certainly hold out the option that we could start looking at the dividend Prior to actually getting investment grade, that's clearly an option for us.
Great. Thank you for all the detail. Appreciate
Thank you. Our next question comes from the line of Charles Meade from Johnson Rice. Your line is open.
Good morning, John, to you and the rest of your team there.
Good morning, Charles. I wondered if I
could go back to Egypt And just to ask a question, I think I know the answer, but in principle, I recognize you can't talk about the details yet, but in principle, are we talking about that there There are some opportunities that are obvious to you and obvious to Egypt, but it's also obvious to Egypt that you're not pursuing them because of Maybe some oil price thresholds that are quite low in those PSCs. And so that's the win for them. Do I have the right framework?
Yes. I'll just say that there were some projects that the PSC was making them less competitive, right? And by modernizing the PSCs, there's projects that move up the queue that we can fund and we'll be looking forward to fund. So there's no doubt, It's a critical step and this is not it's not uncommon. You got to understand these PSCs, we've been in Egypt for over two and a half Decades now, a lot of these fields have been operated since the mid-90s.
And so Stepping back and going through this, this is just the evolution that's required in an oilfield, right?
Yes, that's right. I imagine if you'd asked the people who'd written them if they were going to stand for all time, they would have said absolutely no. But if I can ask the second question about you mentioned in your prepared remarks and you guys put out a press release about bringing Tracy Henderson on to head up your exploration. So she has some experience drilling offshore Suriname. And I wonder if you could just talk a little bit about more a little more about where you see her getting rubber to the road or really Helping your process both in the near term and the long term.
I know that you're certainly operator of Block 53, if I'm not mistaken. So that's one obvious place in the near term. But Can you talk a little bit about how you expect her to fit in and contribute?
Well, I think it's all about building The executive leadership team that we want for long term and Tracy brings a wealth of experience And a wonderful skill set. She has worked in small publicly traded companies, so she understands where they had to explore for a living. I think she will bring a lot of expertise, a lot of experience. She has built exploration teams. I I think we've got a lot of key pieces here that she'll be able to come in, hit the ground running and work with, and a portfolio that fits a lot of her expertise.
She was absolutely our number one candidate and we're thrilled to have her join us.
Thank you
for that color, John. You bet.
Thank you. Our next question comes from the line of Gail Nicholson from Stephens. Ma'am, your line is open.
Good morning. LOE came in solid below guide for 1Q. Can you talk about the drivers here and the ability
Yes. Gail, this is Clay Bretches. And with regard to the LOE, it was just Masterful performance by our operations folks in the field. They did a great job. They understood the task that was at hand.
Last year, we went through some significant cost cutting exercises. We identified the areas where we could cut costs. We knew that those needed to be sustainable, Especially when we are looking at commodity prices in 2020. So, we had an all hands on deck approach to this. There was a lot of bottoms up initiatives that led to this LOE reduction.
It wasn't short term. It wasn't just deferral Of expenditures, maintenance, etcetera, there was some of that, but it wasn't significant. The big issues here And LOE reduction had to do with those initiatives that took place. If you take a look at where we had the most significant reductions, it was in the Permian. A lot of that had to do with the wells that we shut in.
We have a lot of wells that are what we call frequent flyers, wells that go down a lot. We took those out of service and those are still shut in because they cost us a lot of money and they're not economic to run. Furthermore, a lot of our water Flood properties that just weren't providing the economics, we went through and looked at these on a well by well, field by field basis. There's a lot of water that's not being injected right now because it's really expensive to inject that water. We still have approximately 300,000 barrels a day of water that we don't inject, which saves us a lot on electricity, a lot on maintenance, A lot on personnel overall.
So in general, it's just the approach that we took. We want to maintain that. That's something that we talk about As an operations group on a regular basis, how do we maintain this low LOE profile as we go forward? In light of the fact that commodity prices are increasing, we do have concern about inflation in service costs. So we focus on making sure that we keep that LOE down, continue to strive to find initiatives that are going to keep the LOE down and flat In light of the fact that we know that there's going to be some inflationary pressures going forward.
So really, again, just kudos to our operations team For getting us to where we are and maintaining those levels.
Great. I appreciate the clarity. And then just moving kind of on the ESG front, in regards to carbon capture, some of your North Sea peers are looking at carbon capture projects. Are you in the process of potentially doing anything in that vein? And or do you see any potential for carbon capture projects on your North Sea portfolio?
Dale, on the ESG front, we've emphasized there's really 3 areas. I mean, we're focused on Air, water, communities and people, right. And I think the key for us too is we're focused on near term projects that we can do that can make an impact. And I think the area we are focused on right now mainly is flaring and basically in the U. S.
We're committed to eliminating our routine flaring by year end this year as well as delivering less than 1% flaring intensity. So key goals there. We're looking at things in the North Sea, but as far as right now, the near term things, We are looking at some of the low hanging fruit that we can get after. I don't know, Clay, you want to add anything on the carbon side in the North Sea?
No. Just what you said, obviously, there's a price on carbon in the North Sea, which creates opportunities. Anytime you have a price on carbon, That creates some economic incentives to study carbon capture. So we will take a look at that anywhere that we see a price on carbon. It is something that we're paying attention to in the North Sea.
But like John said, what we're focused on right now from ESG standpoint are those areas that we have control and which are going to be impactful for Apache. So the really big initiative for us from an ESG stand Point is to end our routine flaring in the U. S. Onshore by the end of 2021. And we think this is really significant.
You hear a lot of ESG claims out there that talk about some type of initiative that's aimed at 2,030, 2,040, 2,050, What we're doing is saying we're going to end routine flaring by the end of this year and we think that's really significant and it represents A significant commitment by Apache to do the right thing and to produce responsibly. And we've shown that over and over. If you take a look at the Investment that we have made in Midstream Solutions to make sure that we are performing responsibly, not only with Altus Midstream with those gathering and Processing assets that we have in the Delaware Basin, but also our significant investment in the Gulf Coast Express Pipeline, Permian Highway Pipeline, both of those are moving over 4,000,000,000 cubic feet of natural gas out of the Permian Basin that not only serves Apache, but it serves as a basin in general, getting that gas out of there and creating opportunities for others To get gas that otherwise would be flared out of the basin. So we've put a lot of investment in those pipes. We've put a lot of commitment in terms of firm transportation Anchor those pipes.
So, we feel like we're really doing a lot that impacts the gas flaring and ESG initiatives in real time.
Great. Thank you. Great quarter and looking forward to the back half of
Thanks, Yale.
Thank you. Our next question comes from the line of Paul Cheng from Scotiabank. Sir, your line is open.
Thank you. Good morning, guys. Good morning, Paul. Good morning, Paul. Can I just get some maybe Your intention for EJEC and Permian over the next several years, I mean, we know that you most likely cannot That probably going to raise the spend activity level to maintain to the sustaining level for those two areas?
But over the next several years that are we going to trying to maintain them flat or that you were trying to grow a bit? And is that in any shape or form tied to your debt reduction target or that how that Decision making or what that process is going to be. That's the first question. The second question is in surname. Total have indicated they will sanction the first development this year coming on stream in 2025.
Any kind of cover you can provide that which discovery is going to be target And with that, you will be doing similar to what Exxon did in Liza-one using a smaller ship, sort of So, it's a early production system trying to learn the reservoir and learn the whole operation Before you go to the Fufeng operation. Thank you.
Well, thanks. Two good questions. I'd say, first of all, When we look at the portfolio, we've said for 2021 not to touch guidance or anything right now. Modernization in Egypt is going to have a big impact for us. It is going to enable us to To put Egypt back on a track where we can grow those volumes and I guess it's going to be very beneficial.
I think in Permian, we've got one rig running today. We're planning to pick up a second rig mid year. As Dave has said, we need to grab another rig there to kind of maintain our Permian volumes, and that would be an objective of ours. But I think as we look going forward beyond that, We don't see trying to ramp up to a big activity pace and try to grow aggressively that we think we want a modified Moderate investment pace where we're investing very wisely and very making very capital efficient use of that capital. Your question on Suriname, clearly, we're underway with is Total as operator.
They've got 2 rigs running in the vicinity Of the Sapa Cara discovery, we have not put out any timelines and I don't see Anything magical about when you need to FID a project. I think the key for us is doing the appraisal work, collecting the data so we can ultimately FID a Project, there's lots of optionality. You are very likely looking at potential FPSOs Like what's been done next door, but it's just really premature to get into anything there. I don't see anything magical about a year end timeline To make 1st oil 2025, I think that could easily slide into next year and still make that type of timeframe. So we're not pressing for any hurdle there.
You want to do the work, you want to do it right, And then you want to be in a position to FID the projects, when you're ready to FID the projects?
Hey, John, can I just go back into the first question That you say you're not going to increase the activity and not in trying to have a major growth? Is that a function to your debt The reduction target that because you haven't reached that yet or that is just because you think the world doesn't need more oil even though the commodity price is
No, I think Paul, I think in the short term, it's a function of Need a debt reduction, but I think longer term, it's just
in the it's part of
the function of more cash flow for shareholders. And we've been in a position for quite some time that growth was not an objective that was worth chasing in and of itself And that this business needs to be something that's returning cash to investors. We need to get the balance sheet fixed first in order to do that. As I mentioned earlier, We think reducing debt is a return to shareholders, just a different type. But longer term, When we get debt where it needs to be, we're not going to be looking for double digit growth.
We're going to be returning cash to investors.
And Steve, I just want to reaffirm that I think earlier you guys said that you're going to add a rig In Egypt, that's not included in the current budget and same as that for Permian, if you're trying to maintain As a fact, it doesn't. So if we're going to do both, then that means that your overall CapEx for this year is going to be higher than $1,100,000,000 right?
Yes. Let us be clear one more time, maybe. We are not changing our guidance at this point in time. We just said that If prices hold up and we continue to make progress on the Egypt modernization, we may be looking at some Further capital spending or capital activity in the second half of the year. If we were committed to doing that, we would be looking at Contracting rigs and we would be telling you we're changing guidance, but we're not doing that right now.
Okay, perfect. Thank you.
Thank you. Our next question comes from the line of Leo Mariani from KeyBanc. Sir, your line is open.
Yes. Hey, guys. Just wanted to follow-up a little bit on Egypt here. In terms of the Hadid discovery, Can
you maybe just give us
a little bit more color around that? Is this something that arose out of the new concessions and new seismic That you folks shot, when do you see first production from that potential discovery here? And then additionally, Do you think that this discovery unlocked a bunch of other drilling opportunities for you late this year and into 2022?
Yes, Leo, great question. It is a result of the new seismic. It was 2013 when we shot our last Vintage and then we started shooting this new seismic and really the 2018, 2019 still shooting process out there. It's given us more clarity where we can see things that are more subtle and we are starting to move really from just drilling big bumps to things that have Stratographic element to them, this is a trend where it sets up multiple wells Within the discovery area, but it also sets up very similar looking prospects that look much like it. It really gives you some insight into the lens we have now and the opportunity that we know sits out there That we now can start to crystallize as we continue to drill more wells off of the new seismic and refine that process.
So On timing, I don't have that for you today. I can let I think Clay can jump in on that on actually on the Hadid well.
Yes. So Leo, this is Clay Bretches. And on the timing for the Hadid, we're laying pipeline right now, and we're making sure that we have a pipeline that is Sized for appropriately for the Hadid, but also for growth opportunities, just like what John said, based on Follow on wells in and around Hadid. But that pipeline is being laid right now and should be in service in the Q4 of this year.
Okay, that's helpful. I just wanted
to jump over to the North Sea here. You guys certainly had some unplanned downtime in the Q1, But you're also saying there's going to be, it sounds like some more of that in the second quarter and then maybe some normal planned turnarounds in Q3. Could you give us a little bit color on how you see North Sea volumes progressing? Would you expect Q2 to go down further or it would be more flat with Q1? And then just kind of what's the cadence into Q3?
Is it down further? And I think you guys were saying that 4th quarter Production should be up a lot. Just wanted to understand the cadence in the next few quarters.
Yes. I mean, it's all planned activity. 2nd and third quarter were from the get go planned as pretty heavy maintenance periods. We were unable to do some of it last year, so they're going to be a little heavier this year. And then you're going to have a really strong rebound in Q4 as we bring everything back online.
Yes, I think the our guidance for the year is we reiterated that and I don't know Dave is there anything else on Shape or anything for Qs 2 and 3 for North Sea?
Yes, just to reiterate what John said, the TARs in the second, third quarter are probably A little larger than normal because they were abbreviated last year because of COVID issues. So we'll see a second and third quarter impacts, rough order of magnitude. Those are kind of in the 6, 500 barrel BOE per day range expected through the quarter for 2nd and third quarter, just on those impacts and We'll see a rebound in the Q4. So again, as John said, no change to guidance.
Okay. Thank you.
Thank you. Our last question comes from the line of Neal Dingmann from Truist Securities. Sir, your line is open.
Thanks for squeezing me in guys. So, just my last question, I don't know anything about this, but I'm just wondering, we've seen a nice one continue not only in oil but in gas. Any thoughts on potential incremental activity in Alpine this year or early next?
Yes. Neal, this is Dave Pursell. From an activity standpoint, we have 5 DUCs that we're completing as we speak. We completed 2 earlier in the year. We're going to evaluate the performance of those, but given where oil prices are and we've got a as we've talked about On this call, we have a constrained capital budget.
With oil in the 60s, it's hard for Alpine to compete With oilier capital in the Permian and in Egypt. So, our view is let's evaluate The performance of the DUCs and then we'll decide or evaluate potential third party capital.
Sure. Makes a lot of sense. And just lastly quickly, are you seeing any just OFS or the cost inflation, not only domestically, but I'm just curious internationally, do you see Mike, over it on the 2 plays.
Yes. On Well Capital, so far the answer is no. We would We're looking for it. We'd anticipate it. We're looking at steel to see if we see inflation on the OCTG side of it.
I think where we're feeling the inflation and Clay talked about it on the LOE stuff, your basic operating Chemicals and diesel costs. So we're seeing a little more real time inflation on the at the LOE level and less at the CapEx level right now.
Very helpful. Thanks again for squeezing me
in. Yes. You bet.
Thank you. There are no further questions in queue. I will now turn the call back to John Christmann. Sir, please go ahead.
Thank you. I'd like to leave you with the following parting thoughts. Delivery was very good in the Q1 and we have reiterated our full year guidance. Commodity prices continue to be constructive And we have clear visibility into at least $1,000,000,000 in free cash flow this year. We are seeing the benefits of our diversified portfolio As increasing volumes in the Permian over the next two quarters will more than offset the seasonal planned maintenance downtime in the North Sea.
Activity will also be picking up in Egypt as we move into the back half of the year. We have successfully transitioned operator Ship on Block 58 to our partner Total with 2 rigs conducting very active appraisal and exploration programs for 2021. We look forward to updating you on our continued progress throughout the year. That concludes our call today.
This concludes today's conference call. Thank you for participating. You may now disconnect.