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Apache Dumps North American Onshore Rigs, Crews; Reports $4.8B Loss

Houston super independent Apache Corp. has knocked $2 billion out of its capital spending plans for North America this year and slashed its rig count to wait on higher commodity prices and lower service costs.

CEO John J. Christmann said Thursday that onshore North American liquids production growth exceeded guidance for 2014, and Apache exited the year with momentum. However, since the company provided an operational update less than three months ago, "oil and gas prices have decreased substantially, prompting us to act quickly and decisively to reduce activity levels and reset our well cost structure."

To endure, the total rig count has been slashed from an average of 91 rigs at the end of September to an estimated 27 rigs by the end of this month. Hydraulic fracturing crews have been cut in half. Well completions also are delayed "until service costs decrease materially," said the CEO.

The Permian rig count is being decimated to 15 by the end of this month from 42 at the end of December. On average, 10-12 rigs would operate through the rest of this year, Christmann said during a conference call. This year about five rigs are scheduled for the Midland, with four planned in the Delaware and two in the Central sub-basins.

The Eagle Ford rig count, which peaked at 12 in December, is being cut to four by the end of January -- and only one or two rigs are expected be in operation by mid-year.

However, where rigs are dropped and crews are let go, "we're going to be prepared to ramp up if oil prices allow,” Christmann told analysts.

Apache has an abundant "deep inventory" of onshore prospects but it's not willing to damage the balance sheet to drill wells at current prices, he said. Instead, a backlog of drilled wells not yet completed are to be meted out through this year, which should keep production levels in North America flat compared with 2014.

Wintry conditions in the Permian during the first half of January clobbered production, and that alone added to a backlog, he noted. Meanwhile, the CEO is looking to oilfield service companies to cut their prices by more than 10% -- by 15% at least, before there’s any consideration to drilling again. It’s as much about the bottom line as it is about oil prices, he told analysts.

Only 17 rigs on average are to run in North America's onshore operations this year. Capital expenditures (capex) in the onshore alone now is set at $2.1-2.3 billion -- half of the amount projected in November (see Shale DailyNov. 20, 2014).

North American production is forecast to be "relatively flat" from 2014, averaging 302,000 boe/d adjusted for asset sales. Total capex, which also includes for Canada, Egypt, the United Kingdom and Australia, is set at $3.8 billion, excluding any possible leasehold purchases or acquisitions.

Overall, Apache’s capex is set at 60% less than 2014 levels, much higher than many of the majors and other independents have announced to date, particularly a company with a strong balance sheet and low debt. Off the table is a plan that had been in the works to separate/spin off the international business, which now provides a positive backstop for earnings, Christmann noted. He gave no indication as to whether a spin may be considered at some point later when prices are stronger.

"We have planned our budget and operations in such a way that we can dynamically manage our activity levels and capital spending to respond quickly to material changes in commodity prices,” said Christmann. “Should we see a meaningful rebound in oil prices from current strip levels or a notable shift in our cost structure, we have the organizational capability to add rigs and production quickly and efficiently from our ready inventory of highly economic projects in North America."

This year, Apache plans to "run a streamlined capital program that focuses on efficiency improvements, downspacing and other strategic tests to further delineate our extensive inventory of locations within the Permian, Eagle Ford, Canyon Lime, Duvernay and Montney. While we are fortunate to have a substantial inventory of projects that can make economics at these oil prices, we believe it more prudent to curtail our activity until costs are lower and prices recover. This strategy will enable us to further strengthen our balance sheet and preserve the financial flexibility to capitalize on industry opportunities during the downturn."

Because of a $5.2 billion writedown, Apache reported a quarterly net loss of $4.8 billion (minus $12.78/share), versus year-ago profits of $174 million (43 cents). The one-time writedown included a $2 billion reduction on the value of oil and gas properties under a quarterly ceiling test, $1.3 billion impairment of goodwill associated with previous acquisitions, $1 billion deferred tax adjustments from overseas earnings and a $750 million impairment on liquefied natural gas (LNG) assets held for sale.

Adjusted earnings in 4Q2014 were $404 million ($1.07/share) compared with year-ago profits of $610 million ($1.52). Operating net cash was $1.9 billion in 4Q2014, with cash from operations totaling $2.1 billion. Revenues declined in the latest period to $2.95 billion from $3.45 billion. Natural gas revenues fell to $556 million from $579 million, while oil revenues declined to $2.23 billion from $2.84 billion.

North American onshore and Gulf of Mexico (GOM) production overall continued to be strong during the final three months of 2014.

The Permian Basin region, Apache's highest activity area in the U.S. onshore, achieved record production of 168,700 boe/d in 4Q2014, 26% more than in the year-ago period. The region averaged 42 operated rigs during the quarter and drilled 148 gross operated wells. Ten to 12 rigs are scheduled to run in the basin this year.

In the Central region, production totaled about 93,900 boe/d, up 1% year/year and 3% higher sequentially. The region averaged 20 operated rigs, with 72 gross operated wells drilled.  In the emerging Canyon Lime play in Texas, the company is in the "early stages of flowback and testing on its first four-well pad and has drilled two step-out delineation wells that indicate "excellent fluid properties and higher-than-expected oil content," higher than noted in November's update. Two to three rigs are set to run in the Central region during 2015, with one or two in the Canyon Lime.

Gulf Coast output averaged 32,800 boe/d in the final three months of 2014, 8% higher than a year ago and 13% higher sequentially. Since selling the South Louisiana properties in December, "Gulf Coast regional production is almost entirely attributable to the Eagle Ford play," management said. The company completed the sale of 90,000 net acres in December.

Apache now is flowing back wells from several pads in the Eagle Ford operations, which are in the eastern part of the trend in Brazos County, TX, north of Houston. Four wells have been producing for close to two months, producing "substantially higher oil volumes" than had been noted in the November update, Christmann said. One to two rigs are planned in the play this year.

Apache's North American natural gas production during 4Q2014 was down 11% from a year ago, mostly because of asset sales, but gas output inched up 2% sequentially. North American gas output at the end of December was 893,501 Mcf/d, versus 879,991 Mcf/d in 3Q2014 and year-ago output of 1.00 MMcf/d.

The biggest gas gains in the quarter were from the GOM, where volumes jumped 67% from a year ago; they declined 1% sequentially. Permian Basin gas production increased 17% year/year and 3% from 3Q2014, while Central onshore gas volumes increased 1% and were 3% higher than in the previous three months. Gulf Coast volumes fell 18% from 4Q2013 but were 4% higher sequentially. Canada gas output declined 30% from a year ago, and volumes were down 1% sequentially.

Overall, North America oil production, including from the GOM, jumped 19% year/year and was 6% higher sequentially. In North America's onshore, volumes jumped 20% year/year and 6% from the third quarter. Onshore oil production was 153,362 b/d at the end of December, versus 127,609 b/d in the year-ago period.

Permian oil volumes rose 26% from 4Q2013 and were up 7% sequentially, while Gulf Coast output jumped 38% year/year and 11% sequentially. Volumes from Central operations within the Midcontinent increased 4% from a year ago and from the third quarter. Canada volumes rose 3% from a year ago but were down 3% from the third quarter. Gulf of Mexico oil volumes were down 3% from 4Q2013 but were 6% higher year/year.

North American liquids volumes, including the GOM, also rose year/year by 18% and production was 5% higher than in 3Q2014. Onshore output climbed 19% year/year and was 5% higher sequentially, with the Gulf Coast leading the way, up 42% year/year and 21% more than in 3Q2014. Permian liquids rose 29% year/year and were 5% higher sequentially.

Between October and December, Apache expanded its onshore North American leaseholds by spending $800 million in "core" operating areas, which should be completed before the end of March, Christmann said. Apache also has an agreement to sell for $2.75 billion cash and $1 billion in net spending its interests in two LNG export projects, Australia's Wheatstone and British Columbia's Kitimat, which also set to close within six weeks.

"2014 was a year of transition marked by the completion of many of our key strategic portfolio repositioning initiatives," Christmann said. "We completed or announced the sale of approximately $7 billion of assets worldwide and enhanced our North American portfolio through the purchase of approximately $1.2 billion of strategic acreage. 2015 will be a year of tangible operational results that demonstrate the progress Apache has made with the application of leading-edge geoscience and process improvements across our nine primary plays in North America. This will put us in an excellent position to efficiently ramp-up the capital program and take advantage of market opportunities as commodity prices recover."

Worldwide estimated proved reserves totaled 2.40 billion boe at the end of the year, down from 2.65 billion boe at year-end 2013. The decrease in reserves was the result of sales of 358 million boe of proved reserves, partially offset by 313 million boe of proved reserves added through extensions and discoveries. Last year Apache replaced 158% of 2014 North American production through extensions and discoveries.

Production in 4Q2014 consisted of 38% natural gas and 62% liquids, and liquids contributed 81% of the revenue. North American onshore natural gas prices averaged $3.79/Mcf in 4Q2014, compared with $3.55 in the prior-year period. For North American oil, Apache received an average price of $68.21/bbl, versus a year-ago price of $91.64.

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