The Alpine High in West Texas, where Apache Corp. threw its chips into making the No. 1 prospect in its portfolio, has crashed on low natural gas and liquids prices, forcing the Houston independent to walk away.

CEO John J. Christmann and his executive team during a quarterly conference call on Thursday offered a blunt assessment of the high-stakes gamble that failed, listing as obstacles a lack of pipeline infrastructure, cryogenic processing to test natural gas liquids (NGL) and of course, slumping prices that never allowed the gassy Permian Basin prospect in the Delaware sub-basin to become successful.

The company, which announced the Alpine High discovery in 2016, “had great hope for what it could mean for Apache,” Christmann said. “It had all the key ingredients of an impact play -- large scale, low cost of entry, and we had acquired the heart of the play. In the end, a number of factors were problematic at Alpine High.

“First is, you just have to recognize gas and NGL prices fell to less than half of the prices we anticipated for long-term economics. Second, the lack of infrastructure prolonged the period to test full development, and this along with the sheer stratigraphic size and aerial extent, increased the cost and time to do so.”

There also has been a  lack of cryogenic processing capacity, which did not allow Apache “to test the NGL mix and yields until the middle of 2019” with ramp at the Altus Midstream Co. processing.

All Sizzle, No Substance

There were other problems in Alpine High besides the lack of pricing and infrastructure, said Christmann.

“We anticipated a meaningful uplift in oil productivity and a significant decrease in well cost as we moved to pad and pattern development, as is the case in almost all unconventional resource plays,” he said. “We were able to drive cost down below our goals, but the uplift in productivity did not materialize.

“So today, we've got about 240,000 acres. There is about 200,000 of it that will...expire over the next three years. And there is some optionality there, but if you look at the end of the macro environment today, if we got back to an NGL market where we were late '18 in, there's definitely some things that would be economic.” How the play could compete in the overall portfolio is a big question.

Things worsened operationally in Alpine High in the back half of 2019, with extended flow data from key spacing and landing zone tests indicating “disappointing performance of our multi-well development pads,” Christmann said. “While these tests are not fully conclusive for the entirety of Alpine High, given the prevailing price environment, further testing is not warranted at this time.”

Apache has dropped all of the Alpine High-directed rigs and some previously planned completions also have been deferred. The company to date has drilled and turned to sales about 200 wells in the play.

Revising Gas Contracts

CFO Stephen Riney said Apache now is attempting to revise long-term gas transportation commitments that move Permian gas to the Gulf Coast “in light of the changing capital plan for Alpine High.”

Anticipating Alpine High’s volume growth when development launched, Apache had contracted for around 1 Bcf/d of long-term transport, Riney noted. Apache also is one of the sponsors of the 2 Bcf/d Gulf Coast Express and the 2 Bcf/d Permian Highway Pipeline now being constructed.

Riney declined to discuss “specific pipeline” obligations, noting Apache has “multiple contractual arrangements for moving gas out of the Permian Basin, and so it's also not specifically related to Alpine High in terms of the gas evacuation. It’s just gas evacuation from the Permian Basin…” Most of Apache’s Permian gas is sold in-basin, he said. The marketing team “then recommends and implements taking actions around...how to ensure basin prices are connected to the broader market over the long-term and example of actions that they might recommend…

“We have chosen now to reduce our longer-term exposure,” and “we've contracted away with counterparties to takeover. Our obligation of up to 310 MMcf/d starts immediately. We still maintain some exposure to that in the short term. And that's probably a good thing at this point in time, but we're taking away the longer-term exposure on some of the pipeline transport capacity that we have in the Permian Basin. And at this point we're still working on a bit more of that we would like to bring that down just a bit more.”

Riney said natural gas and NGL production will decline from 2019 mostly because of the pullback in Alpine High. To show the impact of those reduced volumes, they are expected to trend lower from 4Q2019 levels of 95,000 boe/d to 50,000-60,000 boe/d by the end of the year.

In addition, “these numbers do not include the impact of potential production curtailments due to negative Waha hub pricing,” Riney said.

26% Capex Cut

Total capex for 2020 is set at $1.6-1.9 billion, which, at the midpoint represents a 26% reduction from 2019. Upstream capex projections are underpinned on West Texas Intermediate oil prices averaging $50/bbl.  If oil prices were to deteriorate from current levels, Apache could reduce activity and capital but even if prices were to move higher, the budget will not top $1.9 billion, Christmann said.

“Alpine High will receive minimal to no funding, and we are shifting some capital from Permian oil projects to Egypt, which is better insulated from a weak oil prices due to the production sharing contracts,” Christmann said.

“The rightsizing is a recognition that we will not be returning to past levels of capital activity and need to make a permanent reduction in headcount,” he said, while offering few details on how many jobs may be cut. “The new model...is more centralized and will tie incentives to asset team performance rather than to regions.

“It is designed to enhance collaboration and enables greater mobility of technical personnel as capital is redirected across the portfolio.” With the downsizing, Apache expects to achieve annual savings of at least $150 million.

Big investment opportunities remain in the portfolio beyond the Permian in Egypt, the North Sea and Suriname, a prioritized prospect that “may be transformational and capable of driving long-term volume growth.” Near-term production growth “will be a bit slower than it would be otherwise.” However, “we believe the long-term potential far outweighs any short-term impacts over the coming years.”

Meanwhile, Apache took steps last year to advance environmental social and governance (ESG) initiatives, and has begun to “link ESG performance to short-term incentive compensation, earmarked 2020 capital specifically for sustainability projects,” Christmann said.

Including a $1.4 billion impairment to Alpine High investments, Apache recorded a loss of $3.0 billion (minus $7.89/share) in 4Q2019, versus a loss in 4Q2018 of $350 million (minus $1.00). For 2019, losses totaled $3.68 billion (minus $9.43/share), compared with 2018 profits of $286 million (11 cents).

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