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S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Latest freight railroad layoffs and Wall Street pressure renew concerns about safety and service
Critical asset just had biggest fall on record (Ad)
How major US stock indexes fared Friday, 3/1/2024
Brazil's economy grows 2.9% in Lula's 1st year, beating expectations
Critical asset just had biggest fall on record (Ad)
Question of whether Nebraska public money can go to private schools still set for November ballot
A US appeals court ruling could allow mine development on Oak Flat, land sacred to Apaches
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Georgia's largest county is still repairing damage from January cyberattack
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Latest freight railroad layoffs and Wall Street pressure renew concerns about safety and service
Critical asset just had biggest fall on record (Ad)
How major US stock indexes fared Friday, 3/1/2024
Brazil's economy grows 2.9% in Lula's 1st year, beating expectations
Critical asset just had biggest fall on record (Ad)
Question of whether Nebraska public money can go to private schools still set for November ballot
A US appeals court ruling could allow mine development on Oak Flat, land sacred to Apaches
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Georgia's largest county is still repairing damage from January cyberattack
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Latest freight railroad layoffs and Wall Street pressure renew concerns about safety and service
Critical asset just had biggest fall on record (Ad)
How major US stock indexes fared Friday, 3/1/2024
Brazil's economy grows 2.9% in Lula's 1st year, beating expectations
Critical asset just had biggest fall on record (Ad)
Question of whether Nebraska public money can go to private schools still set for November ballot
A US appeals court ruling could allow mine development on Oak Flat, land sacred to Apaches
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Georgia's largest county is still repairing damage from January cyberattack

APA Q1 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Gary T. Clark
    Vice President Investor Relations
  • John J. Christmann
    Chief Executive Officer and President
  • Stephen J. Riney
    Executive Vice President and Chief Financial Officer
  • David A. Pursell
    Executive Vice President Development
  • Tracey K. Henderson
    Senior Vice President Exploration

Presentation

Operator

Good day, and thank you for standing by. Welcome to the APA Corporation First Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Gary Clark, Vice President of Investor Relations. Please go ahead, sir.

Gary T. Clark
Vice President Investor Relations at APA

Good morning, and thank you for joining us on APA Corporation's First Quarter 2022 Financial and Operational Results Conference Call. We will begin the call with an overview by CEO and President, John Christmann; Steve Riney, Executive Vice President and CFO, will then provide further color on our results and outlook. Also on the call and available to answer questions are Dave Pursell, Executive Vice President of Development, Tracey Henderson, Senior Vice President of Exploration; and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be around 20 minutes in length, with the remainder of the hour allotted for Q&A. In conjunction with yesterday's press release, I hope you've had the opportunity to review our first quarter financial and operational supplement, which can be found on our Investor Relations website at investor.apacorp.com.

Please note that we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. Consistent with previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude noncontrolling interest in Egypt and Egypt tax barrels. I'd like to remind everyone that today's discussion will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the supplemental information on our website.

And with that, I'll turn the call over to John.

John J. Christmann
Chief Executive Officer and President at APA

Good morning, and thank you for joining us. The first quarter brought a strengthening in both oil and gas prices to levels unseen since 2014. This quickly shifted the prevailing energy narrative to questions about spare capacity, energy security and whether producers could realistically deliver more reliable and affordable oil and natural gas. These are all very good questions and hopefully represent a more thoughtful outlook for our energy dialogue. At APA, we significantly increased our capital activity coming out of 2021, and we will remain squarely focused on executing on our 3-year plan, generating strong free cash flow, delivering on our shareholder return framework and continuing to deleverage our balance sheet. Since the beginning of 2021, we have made tremendous progress with debt reduction, which enabled the initiation of our capital return framework. In that time frame, we have reduced our outstanding bond debt by $3 billion, repurchased $1.1 billion of APA stock or roughly 10% of shares outstanding and increased annualized dividend to $0.50 per share. At current strip prices, we expect to generate approximately $2.9 billion of free cash flow in 2022. Based on our capital return framework, this would imply a minimum of $1.8 billion of return to shareholders. Thus, if commodity prices sustain at these levels, you should expect an acceleration in the pace of share buybacks through the rest of the year.

With regard to our operational strategy and 3-year capital activity plan, we anticipate no material changes at this time. In Egypt, we have been increasing our rig count over the past year, investing in shorter cycle projects designed to deliver 8% to 10% compounded gross oil production growth over the next three years. In the U.S., a fourth rig, which was contracted in September, recently arrived and has begun operations. This should help return U.S. oil production to a modest rate of growth as planned. Given the substantial supply chain bottlenecks and scarcity of oil service equipment and field personnel, any attempt to increase activity in the U.S. would be logistically challenging and capital inefficient. In the North Sea, our plan calls for a stable drilling program with one floater and one platform rig, which should be capable of broadly sustaining production over the next three years. And lastly, we continue to explore and appraise our two large blocks offshore Suriname, which we believe have the potential to deliver a significant new source of lower carbon intensity oil production. Of equal importance to this investment activity is continuing to reduce emissions throughout our global operations and improving the health and welfare of our employees and the people in the communities where we operate.

Turning now to some details of the first quarter. Our results continue to demonstrate the power of our unhedged diversified global upstream oil and gas portfolio. Some of the key highlights for the quarter include: free cash flow generation of $675 million, up 39% compared with $485 million in the preceding quarter. In addition to strong operational cash flows, we realized approximately $1 billion in proceeds from the sale of selected minerals acreage in the Delaware Basin and the monetization of a portion of our shares in Kinetik. We continue to return cash to shareholders through the dividend and ongoing share buybacks. During the first quarter, we repurchased $261 million of APA shares. Since initiating the buyback last October, we have repurchased more than 10% of the company's shares through the end of March at an average price of $29. We believe our stock is a compelling value and remain committed to this program as an important part of our returns framework. We also took another significant step forward in strengthening the balance sheet with $1.3 billion of bond debt reductions during the quarter. In terms of operational highlights, we exceeded our oil production target in the Permian Basin and continue to deliver significant productivity improvements in both the Delaware and Southern Midland Basins. We also announced an exploration discovery at Krabdagu on Block 58 in Suriname. Upstream capital investment in the quarter was approximately $360 million or $30 million below guidance, which was mostly driven by the delay of some activity into the second quarter.

Despite the lower first quarter spend, we are increasing full year capital investment guidance by about 8% to $1.725 billion. Approximately half of this increase is associated with Suriname as we now plan to keep the Noble Gerry de Souza drillship in country following conclusion of operations at the Rasper well in Block 53. Non-operated spending as well as some changes in our U.S. activity mix account for most of the remaining capital increase. Total adjusted production in the first quarter was 322,000 BOE per day, which was down about 3% from the fourth quarter and in line with expectations. Total U.S. volumes decreased 7% from the fourth quarter, driven primarily by well completion timing in the Delaware Basin minerals divestiture in early March. U.S. oil production was nearly 70,000 barrels per day and continues to exceed expectations with Permian Basin wells demonstrating excellent performance. This offset some softness in natural gas and NGL production caused by weather events and unplanned third-party downtime. We have been consistent in noting that U.S. production will bottom in the second quarter as an increase in the number of wells placed on production in the second half of the year and incremental activity from a fourth rig should drive volumes higher. That fourth rig is now running in the Delaware Basin, where it is drilling out a previously unfinished 6-well pad at DXL in Reeves County. Following this, the rig will mobilize to Alpine High to resume gas and NGL development drilling in the summer. Outside the Permian Basin, one rig is currently delineating the Austin Chalk in Brazos County, where we are in the early stages of flowback on the first 3-well pad.

Moving to international. First quarter adjusted volumes increased 8% compared to the fourth quarter driven by the positive impacts of our recently modernized PSC terms in Egypt. Adjusted production in Egypt was just over 68,000 BOEs per day consisting of 57% oil. We deferred a number of high rate uphole recompletions from the first quarter into the second quarter as the producing zones in these targeted wells were still delivering at economic rates. As a result, first quarter Egypt oil production was a bit below expectations. However, we are now seeing a significant uptick as this recompletion work is performed. We are in the process of adding our 13th rig in the Western Desert, with the 14th and 15th rigs expected by midyear as planned. Dave Pursell can provide more color on our Egypt operations during Q&A. In the North Sea, production of 43,000 BOE per day was impacted by unplanned downtime at the Forties Echo platform. This resulted in the loss of 2,300 barrels of oil per day for approximately half of the first quarter, and we expect required repair work will keep these volumes offline through the end of the second quarter. Scheduled turnaround repair and maintenance work will also be conducted at both Beryl and Forties through the summer. So we expect North Sea production to decrease for the next two quarters before rebounding in the fourth quarter. Moving on to Suriname. In Block 53, we spread the Rasper exploration well in late March and are drilling above the target zones at this time. We will update the status of this prospect at the appropriate time. In Block 58, we are focused on drilling a prioritized list of exploration and appraisal wells in the central portion of the block to assess and appraise resource, scope and scale to underpin and optimize a potential first development. At the previously announced Krabdagu discovery, flow testing is complete and we are now in the buildup stage in both tested zones.

After we have obtained and analyze this data, we will provide more details. Following conclusion of operations at Krabdagu, the Maersk Valiant will mobilize to the nearby Dico exploration prospect. Before turning the call over to Steve, I'd like to make a few remarks about our ESG progress. We have multiple initiatives underway within our focus areas of air, water and people, and we are piloting and investing in a number of technologies to support the measurement, understanding and reduction of our emissions footprint. In Egypt, we recently completed two projects that are making an immediate and material contribution toward our goal this year of reducing upstream flaring in our Western Desert operations by 40%. I will close by commenting on a frequent question that E&P companies are receiving from industry watchers. That is how will capital investment programs and capital return frameworks change in the context of sustained higher oil and gas prices. As I noted at the beginning of the call, we do not currently anticipate any significant changes to the activity levels set forth in our 3-year program. APA remains committed to safe and steady and efficient operations in all of our regions and to returning a minimum of 60% of our free cash flow to shareholders through dividends and share repurchases.

And with that, I will turn the call over to Steve Riney.

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

Thanks, John. For the first quarter of 2022, under generally accepted accounting principles, APA Corporation reported consolidated net income of $1.88 billion or $5.43 per diluted common share. As is commonly the case, our results include several items that are outside of APA's core earnings. The most significant of these was $1.1 billion of after-tax gains on the divestments of Altus Midstream and the Delaware Basin minerals package. Other material items included a $187 million benefit related to a release of tax valuation allowance to offset deferred U.S. income tax expense or a $53 million charge for early extinguishment of debt associated with our March bond tender. Excluding these and some other smaller items, adjusted net income for the first quarter was $668 million or $1.92 per diluted common share. In our financial and operation supplement, you can find detailed tables for all of our non-GAAP financial measures, including one for adjusted earnings. Our first quarter results underscore APA's strong free cash flow generating capacity.

The impact of the Egypt PSC modernization on production volumes, combined with the higher commodity price environment, drove a 39% increase in first quarter free cash flow compared to the preceding quarter. Cost inflation has become a popular topic in quarterly earnings calls and for good reason. We embedded a good amount of cost pressure into the budget we laid out in February. And for the most part, costs are tracking close to that plan. However, one cost issue in the first quarter that was not fully captured in guidance is related to equity-linked compensation. So let me go through a few details on that with you. You may recall that we have multiple equity-linked compensation plans that are denominated in APA shares. As these plans vest, some are paid out in actual shares and some are paid out in cash, we accrue the anticipated cost of these plans each calendar quarter through their various vesting periods. For the plans that pay out in cash, the accounting is a little more complicated. In the fourth quarter of 2021 and now again in the first quarter of 2022, these plans had a significant impact on our results for three key reasons, all related to improved underlying business performance and share price performance over the last several months. First, since we accrue the cost of these plans at the quarter end share price, our quarterly cost accrual has been increasing substantially with the near doubling of our share price since the beginning of October.

Second, the cumulative number of shares that are accrued but not yet paid out must be mark-to-market at the end of each quarter. The first quarter results include a large mark-to-market impact again due to the significant share price increase since January 1. Third, as a result of the improved business performance and relative share price, the variable payout plans now appear likely to pay out at a higher level than previously anticipated. So we are increasing the accrual levels accordingly. These stock plans apply to nearly the entire employee base. So some costs will flow to LOE and some to capex, but most will flow through G&A. As a result, G&A is notably above our previous guidance and market expectations. We have revised our G&A guidance for the remainder of this year accordingly. That said, stock price movement due to its unpredictable nature will continue to impact quarterly results beyond our revised guidance. We achieved a significant milestone during the first quarter with the closing of the Altus Midstream EagleClaw business combination and the monetization of a portion of our ownership in the resulting entity, Kinetik Holdings. Accounting rules require that we consolidate Altus's profit and loss through the February 22nd merger date. So you will see a partial quarter for these items reflected on our income statement. From a balance sheet perspective, upon closing of the transaction and reduction of our ownership to a minority interest, we will no longer consolidate Altus's balance sheet. As a result, $1.4 billion of debt and redeemable preferred equity from the 2021 year-end balance sheet are no longer consolidated.

This could have a significant positive impact on various APA debt metrics, depending on how you calculate it. Subsequent to the completion of the transaction, APA sold four million shares of our Kinetik common stock holdings in March for net proceeds of $224 million. At quarter end, the market value of APA's remaining 8.9 million Kinetik shares was approximately $580 million. At this point, we view Kinetik as a noncore holding and following the expiry of our lockup period in February of 2023, we will evaluate the potential for further monetization of our position. In the meantime, we continue to see this as an attractive investment with a leading Delaware Basin footprint, stable cashflows, a strong dividend and attractive near-term growth potential. Turning now to the progress we've made during the quarter on our balance sheet. In addition to the deconsolidation of Kinetik, APA completed two important steps on the path to reducing leverage and maintaining strong liquidity. First, we initiated a tender offer in March for $500 million of outstanding bonds. We upsized the tender to $1.1 billion, with a focus on repurchasing shorter maturity bonds. This extended our average maturity to approximately 16 years and reduced our annual bond interest expense by approximately $50 million. To accommodate the upsized tender, we temporarily drew on our revolver, which ended the quarter with a balance of $880 million. By the end of April, however, we reduced the revolver balance to $680 million.

By the end of the year, we plan to use a portion of free cash flow to pay off the revolver and to call at par $123 million of bonds maturing in January 2023. We also recently refinanced Apache Corporation's revolving credit facility. The new facilities, which have been moved up to the APA corporation level and had 5-year primary terms, consist of a $1.8 billion revolving credit facility and a GBP1.5 billion letter of credit facility, which will be used for LC postings related to the abandonment obligations in the North Sea. These efforts, along with our robust cash flow generation and deconsolidation of Kinetik have already been recognized by one rating agency. Fitch recently upgraded Apache to investment grade with a BBB- rating and a stable outlook. I would like to close by discussing some changes to our 2022 production guidance, which can be seen in our financial and operational supplement. Our full year U.S. production guidance is unchanged at this time, with oil volumes continuing to perform well. Reported production guidance for Egypt is down roughly 4%, the majority of which is associated with the impact of higher oil prices on our PSC cost recovery volumes. In the North Sea, we have reduced our full year production outlook by 1,000 BOEs per day, primarily to reflect first half unplanned downtime. Outside of these production impacts and the activity changes that John spoke of, the only other material change to our full year guidance is an $85 million increase in G&A expense, which reflects the equity-linked compensation-related accrual impacts previously discussed. Please refer to our financial and operational supplement or follow up with Gary and his team for any questions related to our updated guidance.

And with that, I will turn the call over to the operator for Q&A.


Questions and Answers

Operator

[Operator Instructions] Your first question comes from the line of Doug Leggate from Bank of America. Your line is open. Please go ahead.

Doug Leggate
Analyst at Bank of America

I think you ask me. Good thanks. Good morning, everybody.

John J. Christmann
Chief Executive Officer and President at APA

Good morning, Doug.

Doug Leggate
Analyst at Bank of America

I think you ask me. So John, I'm going to start -- maybe I'll try to for here. On Suriname on the buyback, the 60% of free cash flow you obviously fell quite a bit below that in the first quarter. But my understanding is when you have nonpublic information on the well test that you can't actually be in the market. So I wonder -- my cue for it is, I wonder if you could give us a more fulsome update as to whether you feel like you are still making progress towards a development and FID this year. And whether at this point, you are able to be back in the market taking advantage of, for example, today's share price weakness. And I've got a follow-up, please.

John J. Christmann
Chief Executive Officer and President at APA

Okay. No, Doug, great question. First off, I'll say we are committed to the return framework of a minimum of 60% of our free cash flow to shareholders, and we are committed to that, and we are committed to that for the calendar year of 2022. We do have periods where you have material nonpublic and we have to use other vehicles in that plan ahead with 10b5-1s and so forth. So there are periods where we have to rely on those and think ahead. We have completed the flow test at Krabdagu. We are now in the important buildup stage. And as you know, Doug, and appreciate sometimes the buildup can be as important as the flow test or more important. So we're excited about where we are. At this point, we're not going to dribble information out on Krabdagu. We'll wait and come back with a report at the appropriate time. But I would say there have been no surprises. As we think about a path to FID in Suriname, we're kind of moving more towards what I'll call a central area hub concept. And it's something that we're excited about and starting to think about with Total. You've got a foundational piece at Sapakara South. We think Krabdagu can also be a foundational piece, but I'm going to hold comments there until we're ready to talk about that. And we prioritized a list of both exploration and appraisal targets that we need to drill.

Obviously, the appraisal targets are helping us find connected volumes, which are critical to scope and scale and the exploration targets that are sizable, we also need to drill to make sure you would get the scope and scale right of that potential first FID. So things are on track. We're excited about how things are progressing. We did say the Maersk Valiant will be moving to an exploration target next, which is Dico. So we're excited about that. And quite frankly, things are progressing nicely. In Block 53, while I'm on Suriname, we're drilling Rasper. As we said in the prepared remarks, we're above the target zones. But we are excited about Rasper, and we'll come back on that when we can talk about it. And we also said we will be retaining the Noble Gerry de Souza in country in Suriname, which is one of the reasons why the capex is going up.

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

And Doug, this is Steve. If I could weigh in on the second part of your question about the pace of buybacks and uses of cash. So as John said in his prepared remarks, we anticipate a strip, about $2.9 billion of free cash flow this year. That would imply at least $1.8 billion, as we said, in returns to shareholders. In the first quarter, we -- between dividends and share buybacks, we did just a little over $300 million. So we're a little bit above a 15% payout at that implied pace of annual payouts. And I think there was some activity that may have been limited due to MNPI. But I think also, you don't start the year with guns blazing, you start probably on a conservative pace. We also, as you know, chose to do something on the debt side. But as John said, we absolutely remain committed to the full year payout of 60% of free cash flow and we actively plan around periods of MNPI. So we understand what that does to us, and there are other mechanisms we can use from time to time to be able to be in the market and buying back shares.

Doug Leggate
Analyst at Bank of America

Hopefully, my second -- my follow-up, I'll let someone was taking to the soon. I think there's two tests going on, so I'm sure others will get into that. But I want to ask you about the trajectory in Egypt. This is the first quarter since the normal modernization. There's are a few mixed changes in there that I think might have surprised some people. So certainly surprised me a little bit more gas. What is the trajectory to how you see your adjusted volumes after minorities and tax files or tax molecules? Can you give an idea what that looks like? And I'll leave it at that.

John J. Christmann
Chief Executive Officer and President at APA

Yes. And I think if you step back big picture in Egypt, Doug, we've been declining gross operated production for a number of years. And the key to modernization was it facilitates the investment levels. And so you've seen us really ramp the rig count, really in the back half of last year, second half, we went from five to 11 rigs. We're at 12 today. We're in the process of picking up a 13th and 14th rig fairly soon, and will likely go one or two higher than that. I think when you look at modernization, you have to look at the net. So despite a rise in oil price, our net production was up 13% in Q1, and that's really the benefits of modernization. And that's with growth staying relatively flat as you're now starting to see that curve turn. April production is moving up quite a bit. And I'll let Mr. Pursell jump in and provide some more details here.

David A. Pursell
Executive Vice President Development at APA

Yes. Doug, so we'll get to your mix, we'll answer the mix question, but it's important to give you the preamble before that. And as John said, April production is moving higher, we're up to -- we're up 8% as we've exited April here relative to the first quarter. So we've got the oil production trajectory the way we like it. And really, that's driven by a couple of things: continued increase drilling rig count, we talked about we'll be up to 15 rigs by the middle of the year. Those drilling rigs really focused on oil have an oil-focus is both exploration and production. We talked in the supplement. We've had a couple of nice exploration successes at Ptah and Hazem Northwest or Ptah West and Hazem Northwest. Our development drilling is on track. We did have some delays on recompletions in the first quarter moved into the second quarter, but we're -- we think we're on track to continue to grow oil production in that. So the oil production mix will continue to improve or increase over time relative to gas.

I think -- and I'll let Gary kind of offline, walk you through the blood, guts and feathers of this. But when you think about the modernized terms, it's also a simplified structure. And so we think going forward that the adjusted and reported mix should mimic and track the gross mix very closely. So there won't be that ambiguity in how you roll up into the adjusted and reported numbers. So we think growth is what you should focus on, and that gross oil mix is going to improve as we continue to focus on oil development here over the next several years.

Doug Leggate
Analyst at Bank of America

Thank you very much.

John J. Christmann
Chief Executive Officer and President at APA

Thank you very much.

Operator

[Operator Instructions] Your next question comes from the line of John Freeman from Raymond James. Your line is open. Please go ahead.

John Freeman
Analyst at Raymond James

Hi, guys.

John J. Christmann
Chief Executive Officer and President at APA

Hello, John.

John Freeman
Analyst at Raymond James

The first question I had, when you mentioned that about half the capex increase was related to the increased activity in Suriname with the decision to keep the de Souza drillship starting on falling Rasper. And I'm just wondering if there's a way to maybe give a little bit more color on how exactly you all go about estimating the incremental capex there given, obviously, your capex obligations are materially different, whether it's appraisal or exploration-related activity in Block 58 as well as out of that rig, drill simply split time between Block 58, Block 53. It's just a lot of different scenarios, and I'm just wondering kind of how you all kind of came up with some risk kind of capex number?

John J. Christmann
Chief Executive Officer and President at APA

Well, John, we're going to keep the de Souza. There's -- you could think about an exploration well in Block 58 where we've got 50% or another well in Block 53, where we got 45% pretty similar. Obviously, if it's appraisal wells in Block 58, they're going to be less because of the carry. So -- and there's also the ability to keep the de Souza for maybe more than one well. So I'll just leave it at that. It will stay in country, and we're still working through details, but we felt like we ought to at least move it up from the amount we've moved it up, and we think it's a good number.

John Freeman
Analyst at Raymond James

So is it -- not to try and put wording about some, but is it fair to say that if all of the incremental activity with de Souza ended up being appraisal that that capex number might come down some?

John J. Christmann
Chief Executive Officer and President at APA

Potentially could. But I would anticipate -- we've got risk exploration and appraisal wells. So it's going to be both.

John Freeman
Analyst at Raymond James

Okay. Okay. And then just my follow-up, kind of sticking with the capex side. So on the U.S., where it was due to the increased non-op activity and then you mentioned the mix change in your activity, some higher working interest. Is it possible at all to sort of say, of the incremental capex associated in the U.S. kind of the split between it being due to kind of increased activity/higher working interest stuff versus just cost inflation that we've been hearing about these calls the last few days.

John J. Christmann
Chief Executive Officer and President at APA

Yes, John, I think, as you know, we built in quite a bit of inflation into our capital numbers with what we laid out first quarter. So the majority of this is we do have some wells that are going to be higher working interest than what we had originally planned, and that's just a function of shifting some pads and moving some pads forward. So there will be some higher working interest. And then we do have some increased non-op capital, some of that could be increased activity and then some of that could be some inflation on the other operators too. It's hard to dig in and understand that, but it's really what we're just seeing on the non-op side moving up. And so those two factors kind of come to play together there on that. But I think we've done a pretty good job of anticipating the inflation and the increases in our 2022 plan. And I think that's playing out kind of as we budgeted and forecasted.

John Freeman
Analyst at Raymond James

Yeah. That's what I was looking for. Thanks, John. I appreciate it.

John J. Christmann
Chief Executive Officer and President at APA

Thank you.

Operator

And your next question comes from the line of Arun Jayaram from JPMorgan Chase. Your line is open. Please go ahead.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Yeah. Good morning. Yes. John, I was wondering if you could give us an update on your marketing agreement with Cheniere on Stage 3, I believe you have the ability to sell 140,000 MMBtu to them. Obviously, a very, very good pricing environment. So I was wondering if you could give us some details, the timing of when that could kick in and perhaps the operating leverage there between your leverage to this and the North Sea exposure to global gas?

John J. Christmann
Chief Executive Officer and President at APA

I'll let Steve dive in. I wish it was a bigger contract, but I'll let Steve dive in on the details.

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

Yes. We wish it was bigger, and we wish it was sooner. So that contract, that's a 15-year contract. You got the basic terms right, Arun. And that one contractually begins on July 1, 2023. At any point in time now, Cheniere does have the option with 30 days' notice -- or 90 days' notice, sorry, to elect to start that contract early. They haven't given us that notice. So we would like to obviously get that one at any point in time. But if we do, we'll start at 90 days later or any other time frame that we might agree with them within that. So it's a fair option to be able to do that. And we obviously can't disclose the terms of that contract. But suffice it to say, what we do is we select a mix of Asian versus European pricing and we effectively sell our gas, we deliver gas on the Gulf Coast. We sell it at this mix for a full year, a mix of Asian and European pricing. And then we net back through liquefaction fees, transport fees and a marketing fee that we pay. So we're, in effect, fully exposed to the European and Asian LNG market pricing for that 15-year period.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great. And that starts mid of next year unless Cheniere elects to early stress that.

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

Exactly.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Okay. Great. And just my follow-up is on Egypt. John, you guys have highlighted your -- the expectation to grow your oil volumes there by 8% to 10% kind of per annum. Just wondering if you could maybe talk a little bit about how your early results are trending. It does sound like things are -- when you got the recompletions going that you are starting to see some growth there. But I was wondering if you can maybe dig down and give us a sense of the trajectory of growth, any supply chain headwinds in country? Obviously, you guys are rapidly expanding activity, but give us a sense of what you're seeing on the ground in Egypt.

John J. Christmann
Chief Executive Officer and President at APA

No. It's -- #1, it's good to get back to work and kind of move our activity levels up to where we can grow that production base. I think we've got a couple of key discoveries to build on. I think the Ptah West in between Ptah and Berenice is a nice early win. It's going to give us some things that we can get on fairly quickly. We did get some of the recompletions underway. And as Dave mentioned, I think we're up about 8% in April over the first quarter already. So it just takes a little bit of time, but things are progressing. And then there's a couple of other discoveries that have been nice. So we're going to be focused on oil drilling. We're kind of prioritizing that. We've got the Northwest Razzak concession that we're -- we shot seismic on and it's kind of a new frontier for us. So -- we've got some nice exploration wells that we're also excited about. But lots of inventory, Arun, and we feel good about the plans that we've laid out, and we're kind of getting our feet under us and getting going. So anything you want to pile on, Dave?

David A. Pursell
Executive Vice President Development at APA

John answered the supply question really well. The trajectory we're very -- we're still confident in the path that we laid out. I think on the supply chain questions, remember, in Egypt, we're drilling relatively conventional. These are conventional wells, they're are vertical. We don't have much, if any, hydraulic fracturing activity in country. So these are, I would call it, kind of commodity sort of wells. But that said, our supply chain team is all over it. They're making sure that we're not waiting on parts. So we've -- as we ramp up, one of the nice things about having a visibility on the plan as it gives the supply chain folks lead time to really make sure that we have all the equipment necessary to keep the program moving forward. And so far, that's been the case.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great. Thanks a lot, Dave.

Operator

Your next question comes from the line of Michael Scialla from Stifel. Your line is open. Please go ahead.

Michael Scialla
Analyst at Stifel Nicolaus

Hi. Good morning, everybody. You're getting close to 1 times debt leverage now. Steve, you said one of the agencies upgraded the debt rating to investment grade. Stock's also done well this year, but it sounds like you're still focused on debt reduction and share buybacks. So I guess with that in mind, I want to see how you view the intrinsic value of the company relative to the current stock price and how you weigh that versus potentially increasing the dividend?

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

Yes, Michael. So yes, a number of questions in there. I think that the key answer to your question would be -- or the key part of your question would be that we still see our share price is undervalued, and we like the buyback program, and we like it quite a bit. But your reference to the amount of debt reduction that we've done, just to step back from it a bit. In the last nine months, we've done $3 billion of bond elimination, which is just phenomenal compared to what you think we might have been able to do just 12 to 18 months ago. Certainly, the balance sheet is much, much stronger today, and then Fitch was the first one to recognize that and acknowledge it. We are in conversations with all three rating agencies, and we continue to work the debt rating hard with all three of them. I think we'll continue along the lines of balance sheet strengthening, but I think it's unlikely that you're going to see the large chunks of debt tender activity, the $1 billion-plus. We're -- as long as we stay in this price environment, we're going to have a significant amount of free cash flow over the next three years. And there will be continued balance sheet strengthening, but there will be a significant focus on share buybacks as well as long as the share price, in our view, stays undervalued, which is what it is now. And we talk about the dividend all the time. We talk about it often, and we've raised it twice in the back half of last year. And we'll continue to look at that. And as the balance sheet gets stronger, as prices continue to play out the way they are and as share price improves, on an absolute and relative basis, then we'll certainly think more seriously about the dividend. But for right now, we're quite happy with the buyback program.

Michael Scialla
Analyst at Stifel Nicolaus

Great. That helps. Second question was a marketing question. I guess, with the deconsolidation of Altus, I believe you retained your firm transportation for gas out of the Permian. I want to see if you plan to use all of that or if you have thoughts on monetizing any excess capacity there?

Stephen J. Riney
Executive Vice President and Chief Financial Officer at APA

Well, as you know, we did monetize some of that in prior years. And we have -- we have about -- in round numbers, we have a little over $670 million a day of transport capacity on PHP and Gulf Coast Express. We have -- as we look forward to the next -- the remainder of this year and into next year, we have, on average, somewhere in the $200 million to $225 million a day of excess capacity. Would we be open to potentially marketing some of that? Yes, I mean, we would entertain a conversation on that, for sure. But at the same time, the differentials look good for the next two years. And as you'll probably see in our results, in our postings that we have actually gone and we've now locked in those differentials on about 90% of that excess capacity all the way through the end of '23. And in doing so, there's a mixture.

We put in some hedges in earlier time periods that were not quite as attractive as they are these days. But we've put in quite a bit just recently. And we've locked in about a little under $50 million of cash margin on that transport capacity. And then the rest of the capacity will be used. We use all of it. And effectively, it gets Gulf Coast pricing on our equity volumes. But that -- we sell all of our equity volumes in basin and then our marketing group buys $670 million a day and transports it and then resells it on the Gulf Coast.

Operator

Your next question comes from the line of Charles Meade from Johnson Rice. Your line is open. Please go ahead.

Charles Meade
Analyst at Johnson Rice

Good morning John, to you and the rest of your team there.

John J. Christmann
Chief Executive Officer and President at APA

Good morning, Charles.

Charles Meade
Analyst at Johnson Rice

John, to you and the rest of your team there. I mentioned this is a question for you or perhaps for Tracey. Can you give us kind of the background and the providence of this Dico I don't know exactly the way to pronounce it, the new tick up prospect and perhaps wrap into it, whether it kind of rise into the top of the power here is connected to your central area hub development concept?

John J. Christmann
Chief Executive Officer and President at APA

Yes, Charles, I will tell you, it is something that would fall in that area. It's an exploration well, and I'm happy to have Tracey say a few things about it, so.

Tracey K. Henderson
Senior Vice President Exploration at APA

Sure, Charles. As John mentioned in the original comments, we're going to be testing sort of a range of different prospects with different attributes in a list in support of looking at appraisal and exploration prospects. So I would say, the Dico well's at the front of the schedule. It's a well that Total really likes with some potential meaningful reserves. So we see it, I think, as a bit higher risk, higher reward because it does have some different seismic attributes than we've tested, but it has the potential to unlock, I would say, some additional follow-on prospectivity, that could incrementally and substantially bit more reserves. So I think it's one we're anxious to see, but it is a bit of a different beast than what we've seen before, but has potential to be meaningful for the appraisal.

Charles Meade
Analyst at Johnson Rice

Great. that's helpful detail. Thanks and that's it for me.

Tracey K. Henderson
Senior Vice President Exploration at APA

Thank you, Charles.

Operator

Your next question comes from the line of Scott Hanold from RBC Capital Markets. Your line is open. Please go ahead.

Scott Hanold
Analyst at RBC Capital Markets

Yes. Thanks. A quick question on the de Souza rig that's in Block 53. If it stays in country. It sounds like it's going to move to Block 58. Would you all continue to be the operator of that rig? Or would you hand that over to Total?

John J. Christmann
Chief Executive Officer and President at APA

Scott, it could stay in Block 53 or we could move it to 58, and let Total take it. So there's optionality there, and I'll just -- I'll leave it at that for now.

Scott Hanold
Analyst at RBC Capital Markets

Okay. But just to clarify, if it did go to 58, they would take over operatorship. Is that right?

John J. Christmann
Chief Executive Officer and President at APA

They are the operator in 58 and we're the operator in 53. So there's a lot of things you can work out. But we're not going -- wouldn't be changing -- they've got the Valiant working, so...

Scott Hanold
Analyst at RBC Capital Markets

Okay. Understood. And then Alpine High, obviously, with where gas prices are, looks a lot more interesting. You guys are moving a rig there and going to resuscitate those volumes. Can you think about big picture? Obviously, Steve talked about the potential excess capacity you all have with your FT. And I know in past -- in the beginning of the Alpine High history, I guess, you all talked about Mexico being an option there to descend gas. But like as you think about gas prices, optionality between LNG, maybe Mexico still yet? How do you think about that longer term? Are you guys going to keep a rig there? Do you -- could you move more on there? Do the economics really warrant ramping up much? Just give a little bit color on that, that would be great.

John J. Christmann
Chief Executive Officer and President at APA

No. We've -- we started last September picking up a rig in the U.S. It's going to be a Delaware Basin focused rig. It's now working in our DXL area. We had a pad there that was partially drilled. And so we wanted to drill that out first, and then it will be moving to Alpine High. We're excited about what those economics look like, right? If you look back at the Willow well, and we had some details in our supplement there. It was one of the best wells we brought on last year of all of our DUCs. I think it has cumed over nine Bcf, and it's been on since really January of '21. So we are excited about those economics. I think they compete well, and we're anxious to get a rig back to work as there's plenty of infrastructure.

Operator

Your next question comes from the line of Bob Brackett from Bernstein Research. Your line is open. Please go ahead.

Bob Brackett
Analyst at Bernstein Research

Good morning. I'll try fishing off Suriname a bit. In terms of the Gerry de Souza, when did the decision to keep that rig occur? Did it occur after you'd spudded Rasper? And a related question, is there an obvious sidetrack to Rasper?

John J. Christmann
Chief Executive Officer and President at APA

We're above target zones at Rasper, Bob. So I'll just leave it at that.

Bob Brackett
Analyst at Bernstein Research

How about a follow-up. If we talk about the Krabdagu flow test, the fact that you went on to the next step of buildup suggests that you flowed oil through a sufficiently permeable reservoir that it makes sense to do a longer-term test. Am I getting the engineering right on that?

John J. Christmann
Chief Executive Officer and President at APA

We're doing a buildup. So we're in the buildup phase, and I said there were no surprises. So I'll leave it at that.

Bob Brackett
Analyst at Bernstein Research

And a final question would just be the restricted flow test at Sapakara South flowed 4,800 barrels of oil, I think. So that -- is that in the realm of no surprises?

John J. Christmann
Chief Executive Officer and President at APA

I'll just say there were no surprises, and we may not have expected there to be a restricted flow test, but I'll leave it at that.

Bob Brackett
Analyst at Bernstein Research

Thank you much.

John J. Christmann
Chief Executive Officer and President at APA

Your questions are always fun, Bob, and creative.

Operator

Your next question comes from Paul Cheng from Scotiabank. Your line is open. Please go ahead.

Paul Cheng
Analyst at Scotiabank

Hey guys. Good morning.

John J. Christmann
Chief Executive Officer and President at APA

Good morning, Paul.

Paul Cheng
Analyst at Scotiabank

Two quick questions, John. Two quick questions. Can you tell us that how many wells do you expect to grow in Alpine High this year? And secondly, that I know it's really early, but given the inflationary environment and the activity level, what is your preliminary give and take, different component in the 2023 budget may look like? Any direction that you can point to?

John J. Christmann
Chief Executive Officer and President at APA

In terms of number of wells, Dave?

David A. Pursell
Executive Vice President Development at APA

Yes, Paul, this is Dave Pursell. Number of wells at Alpine later this year, it will just be a handful because we're -- as John said, we're finishing up an undrilled uncompleted pad at DXL, then we'll move to Alpine. And these are all going to be longer laterals with relatively large stimulation treatment. So it will be a handful of wells that are ready to come online at the end of the year, so...

John J. Christmann
Chief Executive Officer and President at APA

Your second part of your question, Paul, it was hard to hear.

Paul Cheng
Analyst at Scotiabank

I was saying that. I know it's early, but for 2023, any kind of direction you can point to on the preliminary budget and activity levels?

John J. Christmann
Chief Executive Officer and President at APA

Yes. I mean I would say today, as we look at 2023, our 3-year plan we laid out this year looks pretty darn good to us, right? We've added the fourth rig in the U.S. we'll be at 15 rigs in Egypt. So right now, we're not envisioning any increases to the 3-year plan that we laid out at the start of this year.

Paul Cheng
Analyst at Scotiabank

Okay. And how about in the budget given the inflation, I mean, how much additional costs that we should be taking into consideration?

John J. Christmann
Chief Executive Officer and President at APA

Yes. I mean we'll wait until next February to come out with a hard number for '23, we did have an increased dialed in for additional inflation in '23, but I'm not in a position to really give you that number right now. A little early.

Paul Cheng
Analyst at Scotiabank

Okay. Thank you.

John J. Christmann
Chief Executive Officer and President at APA

A little early.

Paul Cheng
Analyst at Scotiabank

Thank you.

John J. Christmann
Chief Executive Officer and President at APA

You bet.

Operator

Your next question comes from Neil Mehta from Goldman Sachs. Your line is open. Please go ahead.

Neil Mehta
Analyst at The Goldman Sachs Group

Good morning, The first question is around the North Sea. And just want to get your perspective on the production cadence there. As you've already indicated, it's going to be a heavy turnaround schedule through the summer. And -- but how are you feeling about the exit rate of 50,000 BOE a day and just any update around activity plans there?

John J. Christmann
Chief Executive Officer and President at APA

Yes, Neil, we're still with the North Sea. We've got a heavy turnaround period coming up that we're anxious to get on and get through. I think it's executing and that's going to be key. I think we've got good news that the Ocean Patriot is back in the field or arriving today. So -- that's been one of the other items that we basically lost an entire quarter with the drilling of the Ocean Patriot, which when you're only running one floater and you lose it for a quarter, it had to go in. It had a large anchor chain that had broke and had to be repaired. So I think we feel good about the prospects that are on that rig line and the work that's ahead of us and the repair works. We feel good about the exit rate, which should be around 50,000, so...

Neil Mehta
Analyst at The Goldman Sachs Group

All right. And then the follow-up is, you operate a global portfolio here. Talk about the inflationary forces that you're seeing in the U.S. relative to international. Fair to say, thus far, a lot of your peers have reported more inflation in their U.S. business relative to international. But how do you see that playing out over the next 12 months?

John J. Christmann
Chief Executive Officer and President at APA

Well, I mean, I think we do operate a global portfolio. I think it's a function of staying ahead. We had a lot of our 2022 program under contract. And so we had cranked a lot of that in the last quarter when we announced the budget. So we feel good about what we dialed in and where that sits. I think a lot of it just depends on where you are and what the demand for that equipment is. And you typically do see higher increases in the U.S. and then more volatility and more stable prices internationally. But I think the thing that's a little bit different this time is we're not all just fighting over rig count, rigs. And -- which drives that hyperinflation. So -- but there's no doubt, commodities are going up, fuel is going up, steel, sand. So as you look out, costs are going up. And then the other thing, if you look back over the last few years, there's not been a lot of equipment that was built. And so a lot of the parts that were needed to keep rigs running and frac crews running have been cannibalized off of older equipment. So there's no doubt, as you look out over the next couple of years, if the price deck holds, you're going to see some higher prices. Dave, anything you want to add to that?

David A. Pursell
Executive Vice President Development at APA

Yes. I think when you look at inflation, it's people, steel, chemicals and diesel. You can't -- I mean, that's ubiquitous around the world. When you look at the Permian relative to the rest of the global portfolio, you're running higher spec and kind of higher-end equipment in the Permian, which will have -- and there's more competition for that equipment. Both those things create more pressure and you've got the pressure pumping and big frac component of the wells in the Permian that is -- can be relative or significantly inflationary, which we don't see in either Egypt or the North Sea. So I think that's the real kind of categorical breakdown.

Neil Mehta
Analyst at The Goldman Sachs Group

Yeah. Makes lot of sense. Thanks, guys.

Operator

Thank you. Your next question comes from the line of Leo Mariani from KeyBanc. Your line is open. Please go ahead.

Leo Mariani
Analyst at KeyBanc

Hey, guys. I just wanted to follow up on some of the prepared comments here. You all kind of describe Sapakara South as a potential kind of foundational part of a project and said kind of stay tuned on Krabdagu. I mean I think there's a plan for Total as kind of talked about maybe hitting FID at the end of the year. But am I reading some pretty good confidence out of you guys in terms of what you've seen so far that you think there's certainly a sizable, viable economic project here?

John J. Christmann
Chief Executive Officer and President at APA

At this point, Leo, we have not announced a project or an FID. I think we've said from the get-go that Sapakara South is a foundational piece. We've shown it's gotten bigger with the extended buildup time as we raised that original estimate from the connected volume just to the one well, and I want to emphasize again, that's just the one initial well was 325 million to 375 million barrels. We raised that to greater than 400 million. And that area continues to get bigger and there's more appraisal to do at Sapakara South. So I think we have confidence in what we have found, and we like the program, but there's still more work to do.

Leo Mariani
Analyst at KeyBanc

Okay. And then just on the North Sea, you all certainly said you've got confidence on this 50,000 BOE per day exit rate. I guess are there some particular wells that you all need to kind of tie in. I know there's a bunch of downtime of turnarounds here this summer. But are there a project or two that are kind of chunky that you guys are going to be bringing on, on the well side that gives you confidence in that number?

John J. Christmann
Chief Executive Officer and President at APA

Yes, there's a Garten well that the Ocean Patriot was scheduled to drill, and we've had to slide that back. But those Garten wells have been high rate, and it's a very, very good location.

Leo Mariani
Analyst at KeyBanc

Okay. Thanks.

John J. Christmann
Chief Executive Officer and President at APA

Thank you.

Operator

And there are no further questions over the phone line. I'd like now to hand the call over to John Christmann, CEO. Please go ahead, sir.

John J. Christmann
Chief Executive Officer and President at APA

Yes. Thank you for participating on our call today. I'd like to leave you with the following closing thoughts. Financially, we have become a much stronger company. We will remain disciplined, both financially and operationally. Lastly, we are committed to our shareholder returns framework, returning a minimum of 60% of our free cash flow to shareholders through dividends and buybacks. Operator, I will now turn the call over to you. Thank you.

Operator

[Operator Closing Remarks]

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