Apache Corp.’s first quarter natural gas volumes from the Permian Basin climbed 57% year/year and 12% sequentially, as the nascent Alpine High development, now the producer’s No. 1 global asset, kicked into gear.

First quarter production in the Permian averaged 183,000 boe/d, with total production up 24% year/year. The West Texas play was the only region in Apache’s portfolio to report higher production overall from a year ago, with gas output climbing to 357.3 MMcf/d and oil production 14% higher at 85,469 b/d.

“I believe 2018 will be a year in which Apache differentiates itself operationally, particularly in the Permian Basin, where our measured pace is enabling the timely integration of key learnings and the ability to more effectively manage the inflationary service cost environment,” CEO John J. Christmann IV said.

“Outperformance in the United States was driven by a combination of shorter completion cycle times, improving efficiencies and excellent performance from new wells.”

Based on overall well efficiencies and production results to date, Apache increased 2018 U.S. guidance to 250,000-258,000 boe/d from 245,000-255,000 boe/d. The company also expects to see a “slight increase” in the U.S. oil mix for the year. Capital guidance of $3 billion remains unchanged.

Overall, the U.S. portfolio’s output averaged 232,000 boe/d during 1Q2018, with 17 rigs running. Apache also drilled and completed 60 gross-operated wells. In Alpine High, which is in the Delaware sub-basin, Apache ran on average 10 rigs and drilled and completed 29 gross-operated wells.

As has been the case since the discovery was confirmed in 2016, most of the capital and development was directed to Alpine High, where production climbed about 33% sequentially in 1Q2018 to average 26,000 boe/d.

Apache now is operating 121 miles of gathering pipeline in Alpine High, along with 33 miles of 30-inch diameter trunkline, 34 central tank batteries and 780 MMcf/d of inlet gas processing capacity, said CFO Stephen Riney.

“An additional 50 MMcf/d processing capacity expansion was planned for later this year,” he told investors during the conference call. Apache now is looking at options to eliminate the expansion by bringing forward the mid-2019 plan start-up of the first cryogenics facility. “We are actively working design and procurement for three 200 MMcf/d cryo plants.”

Plans to joint venture or partly monetize the Alpine High midstream also are on track and a formal process is underway, Riney said.

“That process has drawn a significant amount of interest from a broad range of potential partners, and we are confident we will put some form of venture in place during 2018.”

Riney also took a few minutes to discuss how Apache has worked to mitigate the impact of widening Permian differentials, a topic that has drawn a lot of interest this earnings season.

“We recognized the potential issue over a year ago and have been proactive in addressing it through various strategies,” he said. “We have in place a combination of basis hedges, sales contracts and firm transportation to access other pricing points. We anticipate a relatively tight market situation will last through much of 2019, and that is the timeframe we have targeted for mitigation efforts.”

While Apache expects to have some exposure for both price risk and product flow risk, it is taking actions and “looking for opportunities to further mitigate both of these risks.”

Christmann said pipeline offtake constraints and differential widening “will be a relatively short-lived condition. The industry has been there before in the Permian, and these issues were quickly resolved as Permian Basin intrastate pipeline capacity is comparatively easy to build…

“That said, accelerating industry activity is creating significant competition for oilfield services and nontrivial operational challenges. In this environment, our priority is to protect and grow returns. We are operating at a disciplined pace with the objective to be the returns leader in the Permian with growth as an outcome.”

The transition has begun in the West Texas play to pattern and spacing testing, as well as to develop multi-well pads to improve efficiencies and lower well costs. To that end, well costs during the first quarter were down 20% over 2017 average well costs.

While natural gas output has been the primary production to date in the play, Apache in the first quarter also brought online its first multi-well test in the wet gas window, the four-well Chinook pad, which contained 1,350 Btu of wet gas and oil. The average 30-day initial production (IP) rates for the wells was 1,366 boe/d.

In the twin Midland sub-basin, Apache has transitioned primarily to multi-well pad development. Across three pads, 12 wells were placed on production in the Wolfcamp formation with average peak 30-day IP rates of 173 boe/d per 1,000 lateral feet and 75% oil.

Notably, Apache tested its first Wolfcamp C producer in the Midland, which achieved a 30-day IP of 196 boe/d per 1,000 lateral feet and 70% oil.

“Based on conservative early stage assessments, this result could lead to the addition of several hundred Wolfcamp C locations,” management said.

Apache also has implemented a revamped completion design with more optimal stage and cluster spacing, which management said has contributed to improved early time well performance. More lateral feet/day is being fracture stimulated, allowing the company to complete wells faster and more efficiently at a lower cost.

While the Permian portfolio outperformed, Midcontinent and Gulf Coast natural gas volumes were down 2% year/year in 1Q2018, with oil volumes off by 6%. Gulf of Mexico gas output declined by 35%, with oil production down 14%.

Apache also averaged 14 rigs during the first quarter in Egypt, where it drilled and completed 28 gross operated wells. In the North Sea, three rigs were working, and production averaged 54,000 boe/d. 

Capital investments during 1Q2018 totaled $857 million, with $115 million dedicated to Alpine High midstream. More than two-thirds of the capital spend in the quarter was focused on the Permian Basin.

Earnings totaled $145 million (38 cents/share) in 1Q2018, down from year-ago profits of $213 million (56 cents). Net cash provided by operating activities was $615 million. Before working capital changes, Apache generated $799 million in operating cash flow.

Revenue fell year/year to  $1.74 billion from $1.88 billion. Operating expenses were slightly higher at $1.35 billion from $1.34 billion.