Houston-based Apache Corp. on Thursday signaled it will boost upstream capital spending this year by 11% to $1.1 billion over 2020, but most of the funds are earmarked for overseas, not in the Lower 48.
The decision to hike capital expenditures (capex) comes after the 4Q2020 results provided “a positive conclusion to a challenging year,” CEO John J. Christmann IV said during a conference call Thursday. He discussed results for 2020 and provided an encouraging outlook for 2021.
As 2020 came to a close, “commodity prices held firm, and we executed well on our production, capital spending and costs objectives while also delivering promising exploration results internationally.”
Moving quickly and efficiently proved a winning strategy last year, a devastating one across the energy spectrum. Apache clipped its upstream capex by 58% from 2019 spend following the Covid-19 assault. By redesigning the organization and reducing the workforce, annual run-rate cost savings of more than $400 million were achieved.
Apache was “able to absorb significant revenue losses relative to our original plan without further leveraging our balance sheet,” Christmann said. “We exceeded our cost reduction goals while continuing to deliver excellent employee health, safety and environmental performance.” Of note, “we have had no known cases of a Covid-19 transmission from one Apache employee or contractor to another.”
The gassy Alpine High development in the Permian Basin’s Delaware sub-basin of West Texas had been Apache’s No. 1 global play. As gas prices stagnated and oil prices climbed, more development capital last year went to international projects. The West Texas development is going to get a bit more love in 2021, Christmann said.
“We are returning to a very modest level of activity in the U.S.,” the CEO said. “During 2021 in the Permian, we are currently running one rig and plan to add a second rig at mid-year. This measured approach will advance our objective of mitigating Permian oil production declines.
“We will likely need to add a third rig at some point to fully arrest the decline at Alpine High.” Apache recently completed two gas wells in Alpine, “and we are planning five similar completions this spring.
“While there are no specific Alpine High drilling plans in 2021, we will continue to monitor commodity prices and remain flexible with this asset.”
Meanwhile, following several years without any development in East Texas, Apache recently raised one rig in the Austin Chalk formation to “drill a few wells that are necessary to help our core acreage position and preserve optionality. We believe the Austin Chalk, which is well situated near existing infrastructure, will likely merit future capital consideration.”
While 2020 overall was a down year for industry development, Apache still had a “banner year on the exploration front, as we announced three discoveries offshore Suriname, followed by a fourth discovery announced in January, achieving a 100% success rate on Block 58 to date,” he said.
Five rigs also continue to run in Egypt. “This year our goal is to stabilize production and ultimately return Egypt to growth, both of which will require the addition of more rigs,” Christmann said.
As well, oil prices and cash flow are being monitored to determine the “appropriate time” to escalate development in the North Sea. The capex program this year “remains relatively unchanged,” with production a bit “lumpy.”
Beyond the oil and gas basics, Apache is advancing a slew of environmental, social and governance (ESG) initiatives. It has enhanced greenhouse gas data collection processes and expanded disclosures to better align with the Task Force on Climate-related Financial Disclosures.
In addition, ESG-related short-term incentive compensation has been increased to 20% from 10%. The compensation-linked ESG goals are tied to emissions and water-use targets. Included is a goal to eliminate “routine” flaring in the Lower 48 by the end of 2021.
Of the upstream capex Apache plans to invest $200 million for exploration and $900 million for production and development activities. The capital program is expected to be funded by internally generated cash flow under an assumed price deck of $45/bbl West Texas Intermediate oil and $3.00/Mcf Henry Hub natural gas.
“Our strategic approach remains centered around capital discipline and flexibility. We have established a 2021 capital plan that prioritizes generating free cash flow for debt reduction,” Christmann said. “We will continue to aggressively manage our cost structure, focus on long-term returns over short-term growth, continuously progress our ESG efforts, and advance our global exploration activities, most notably offshore Suriname.”
Net losses in 4Q2020 totaled $13 million (minus 4 cents/share), compared with a year-ago loss of $2.9 billion (minus $7.89). For 2020, Apache reported a loss of $4.8 billion (minus $12.86/share), versus a 2019 loss of $3.1 billion (minus $9.43).
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