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Apache Eyeing Permian For Spending Boost as 'Relentless' Focus on Costs Yields Results

Houston super independent Apache Corp. continued to reduce its drilling activities in the first quarter from a year ago, but it still delivered in North America's onshore, with results in the legacy Permian Basin "particularly strong," CEO John Christmann IV said Thursday.

Onshore output in North America beat guidance at 298,000 boe/d, with well costs 45% below the 2014 average. Notably in the Permian Basin's Delaware sub-basin, the most recent well costs now are down about 60%.

Based on the overall results, Apache is forecasting North American onshore production this year will be 5,000 boe/d higher than initially forecast, averaging 268,000-278,000 boe/d.

"Outperformance came primarily from North America onshore...and each of Apache's North American operating areas performed well, despite a significant reduction in capital," Christmann said during a conference call. "The Permian in particular delivered robust results, with strong performance from the underlying base, coupled with solid contributions from both newly drilled wells and base maintenance projects."

Apache's "relentless focus on costs continues to yield significant results," he said. "Well cost reductions, combined with a slight uptick in oil prices, have created a better investment environment. As we become more confident in the sustainability of higher oil prices and the resulting increase in cash flow relative to our $35/bbl plan, we will increase our capital investment program accordingly. The majority of any additional investment would most likely go to the Permian Basin."

Many exploration and production companies are highlighting their lower drilling costs, but for the most part, the reductions have come from recontracting with oilfield service (OFS) firms, which are making deals to keep and expand their market share when the upturn begins. Christmann credited collaboration with the OFS sector, but he said many of the reductions should be sustainable.

"Recently, we have received questions about the sustainability of our well cost improvements once demand for oilfield services begins to rebound," he said. "The high level answer is that more than 50% of our average well cost decrease since the 2014 peak has come from design and efficiency improvements and should therefore be viewed as permanent cost savings...

"Apache's cost achievements to date are more than just belt-tightening efforts in response to the downturn. We seek to continuously implement structural changes and improvements which accrue to the bottom line and enhance our long-term returns regardless of where oil prices and services costs go in the future."

In addition, the recent commodity price improvements, at least on the oil side, "are encouraging. We are now looking for a sustainably improved pricing structure that would generate the cash flow visibility for us to confidently increase our capital program. The potential timing and magnitude of this increase is the topic of significant planning and discussion right now at Apache and with our board.

"In the meantime, the vast majority of Apache North America and onshore spending is focused on target testing, acreage evaluation and expanding our low-cost inventory locations to be exploited in an environment that offers higher returns. When the time is appropriate, our first priorities for increased investment will be to add development rigs in the Permian. We will also accelerate North American acreage testing, and we'll keep our two platform rigs running in the North Sea. Beyond that, the Woodford [Shale] and Egypt are next in line for incremental capital."

Worldwide, Apache averaged 24 operated rigs and drilled/completed 79 gross operated wells between January and March, with 10 rigs working North America's onshore. The company completed 47 wells (gross) in North America's onshore, led by the Permian, where production averaged 171,000 boe/d, down 2% sequentially. Six operated rigs were working in West Texas, with 32 wells completed, versus 57 in the fourth quarter.

In the Permian's Delaware sub-basin, five operated wells were completed, primarily targeting the Bone Spring formation in the Pecos Bend area. The "best well in the basin to date," the Seagull 103-HR, delivered an initial production rate over 30 days of nearly 2,800 boe/d. The company also completed 25 operated wells in the other three major Permian formations -- the Midland, Northwest Shelf and Central Basin Platform -- yielding strong results from the Wolfcamp and Yeso plays.

"Thus far, our efforts in the Pecos Bend area of the Delaware have been focused on two primary landing zones in the Third Bone Spring formation," Christmann said. "During the first quarter, we tested a promising new landing zone within the Third Bone Spring that could significantly enhance our running room in the area..."

Apache's net losses narrowed from a year ago to $489 million (minus $1.29/share), which included a ceiling test writedown of $325 million, from year-ago losses of $4.65 billion (minus $12.34). Adjusted for one-time charges, net losses were $152 million (minus 40 cents/share). Total revenue fell year/year by more than 35% to $1.05 billion. Net cash from continuing operations was $276 million, with cash flow of $435 million. Total capital spending in 1Q2016 was $466 million, below guidance of $500-550 million. Apache is reiterating full-year 2016 capital guidance of $1.4-1.8 billion. It is targeting cash flow neutrality in 2016 under its current budget, which assumes flat $35/bbl oil and $2.35/Mcf natural gas.

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