Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- APA Corp's Permian Basin production now makes up approximately 75% of the company post the Callon acquisition, and they expect to exit 2024 with a very strong fourth quarter, providing strong momentum into 2025.
- APA has increased its expected annual cost synergies from the Callon acquisition by 50%, from $150 million to $225 million, and is making excellent progress in realizing these cost reductions.
- The company remains committed to returning at least 60% of free cash flow to shareholders through dividends and share repurchases, while also focusing on debt reduction.
- Weak natural gas prices at the Waha hub are leading to substantial production curtailments in the Permian Basin, with an estimated impact of 50 million cubic feet per day of gas and 5,000 barrels per day of NGLs in the second quarter. This reliance on stronger gas prices affects the competitiveness of gas projects compared to oil projects.
- Increased debt levels due to the Callon acquisition require the company to make progress on debt reduction, potentially limiting flexibility in capital allocation and shareholder returns. The company is targeting non-core asset sales to reduce debt, which could impact future operations.
- Challenges in Egypt with a backlog of offline production—approximately 12,000 barrels per day temporarily offline and waiting on workover—are expected to take longer to resolve due to an insufficient ratio of workover rigs to drilling rigs. Additionally, gross oil volumes in Egypt declined from the fourth to the first quarter, influenced by reduced drilling activity and completion timing.
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Callon Cost Synergies
Q: How are you achieving cost synergies after acquiring Callon?
A: We've increased our expected cost synergies by 50% and are making significant operational changes. We're adopting fewer wells per section, fewer landing zones, and larger fracs. While Callon used Electric Submersible Pumps (ESPs) on one-third of new wells and 30% on gas lift, we typically use 3% ESPs and 60% gas lift. We're also self-sourcing operations instead of turnkeying, which reduces costs. These adjustments provide substantial savings. -
Capital Efficiency Improvements
Q: Will you work down DUCs and improve capital efficiency?
A: Yes, we've added frac capital in the second half of the year to reduce DUCs and enhance capital efficiency. We don't believe carrying a large DUC inventory is efficient. As we implement our changes on the Callon assets, we expect capital productivity to improve, especially in the back half of the year. -
Debt Reduction and Asset Sales
Q: Do you have targets for debt reduction through asset sales?
A: While we don't have specific targets, we're focusing on selling non-core assets to reduce debt and achieve a solid BBB credit rating. The market is strong, and proceeds will go towards debt reduction. We aim to make significant progress within the next couple of years. -
Permian Growth Outlook
Q: Do you expect continued growth in the Permian post-Callon merger?
A: Yes, the Permian now represents 75% of our company. We're executing at a high rate and confident in delivering strong momentum as we exit 2024 with a robust fourth quarter. Adding frac capacity helps smooth production profiles and avoids activity lulls, enhancing our growth outlook. -
Egypt Production Challenges
Q: Can you return Egypt to single-digit growth despite rig shortages?
A: We're rebalancing workover and drilling rigs to drive production. Gas production has been declining, affecting gross BOEs, but we're growing oil production. We'll monitor and adjust throughout the year, considering how Egypt competes with our Permian operations. -
Egypt Receivables Situation
Q: How are Egypt's receivables and financial situation affecting you?
A: Receivables increased slightly in Q1 2024, but remain below last year's average. Egypt is on a positive path; they've floated their currency, received an increased $8 billion IMF loan, and secured investments. We expect a large payment in Q2 2024 and see improving liquidity and international support. -
Shareholder Returns Commitment
Q: Will your shareholder return plans change?
A: No, we're committed to returning a minimum of 60% to shareholders and will lean into that during market weakness. The remaining 40% is allocated for debt reduction. We'll continue to aggressively pursue both shareholder returns and debt reduction. -
Suriname FID Progress
Q: What's the status of Suriname's FID and drilling plans?
A: We're confident in achieving FID by year-end 2024. This will dictate drilling timing. While there's nothing pressing for 2025, we could resume drilling then. We have until 2026 to start the exploration program. -
Alaska Exploration Results
Q: Can you share details on the Alaska King Street discovery?
A: Preliminary results are encouraging; we've proven a petroleum system with high-quality oil and sand. The positive results at King Street enhance our outlook for the larger Voodoo target. We may redrill both Sockeye and Voodoo prospects in 2025, but we'll decide this with our partners.