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Apache (NYSE:APA)

Q1 2013 Results Earnings Call

May 9, 2013 10:00 a.m. ET

Executives

Brady Parish – Vice President-Investor Relations

Steven Farris – Chairman and Chief Executive Officer

Rod Eichler – President and Chief Operating Officer

Tom Chambers – Executive Vice President and Chief Financial Officer

Analysts

Pearce Hammond – Simmons & Company

Amir Avif - Stifel Nicolaus

Bob Brackett – Sanford Bernstein

John Freeman - Raymond James

John Herrlin – Société Générale Americas Securities

Eliot Javanmardi - Capital One

Charles Meade – Johnson Rice

Joe Magner - Macquarie Capital

Joe Allman - JPMorgan

Brian Singer – Goldman Sachs

[Kyle Rose] - RBC

Doug Leggate - Bank of America Merrill Lynch

Nathan Churchill - Societe Generale

Operator

At this time, I would like to welcome everyone to the Apache Corporation first quarter 2013 earnings release conference call. [Operator instructions.] At this time I would like to introduce your presenter for today Mr. Brady Parish, vice president of investor relations. Mr. Parish, you may begin your conference.

Brady Parish

Thank you operator. Good morning everyone, and thank you for joining us for Apache Corporation's first quarter 2013 earnings conference call. On today’s call, we will have four speakers making prepared remarks prior to taking questions. I will start by giving a brief summary of the first quarter results, and then we will hear from Steve Farris, our chairman and chief executive officer; followed by Rod Eichler, president and chief operating officer; and finally, Tom Chambers, executive vice president and chief financial officer.

We've prepared our quarterly financial supplemental data package for your use, which also includes the reconciliation of any non-GAAP numbers that we discuss, such as adjusted earnings, cash flow from operations, or pre-tax margins. In addition, we have prepared an operations supplement to summarize our activities across the various Apache operating regions. These can both be found on our website at www apachecorp.com/financialdata.

Today’s discussions will contain forward-looking estimates and assumptions based on our current views and most reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A further disclaimer is located with the supplemental data package on our website.

This morning, we reported first quarter 2013 earnings of $698 million, or $1.76 per diluted share. Adjusted earnings, which exclude certain items that impact the comparability of results, totaled $806 million, or $2.02 per diluted share. Cash flow from operations totaled $2.4 billion.

In the first quarter, total net daily production averaged approximately 782,000 BOE per day with liquids production comprising 53% of the total. This represents an increase from the 769,000 BOE per day reported in the first quarter of 2012 and a decrease from the fourth quarter as we had guided on our year-end earnings call.

Production in the first quarter was negatively impacted by 8,000 BOE per day of deferred production due predominantly to three cyclones, which impacted production in Australia and third-party gas plant downtime in Canada. This downtime was expected and incorporated within our full year guidance.

With that, I’ll turn the call over to Steve.

Steven Farris

Thank you, Brady, and thank all of you for joining us this morning. Apache did report solid financial results for the quarter. We generated over $800 million of adjusted earnings and $2.4 billion of cash flow from operations.

I think of particular note, we generated outstanding production growth in our North American onshore regions at very attractive rates of return. Our onshore North American liquids production averaged 165,000 barrels of oil per day, which constitutes 21% of our total worldwide production, and is an increase of 6% quarter over quarter and nearly 45% versus the first quarter of 2012.

In addition, our U.S. onshore asset base, which we bolstered over the last three year, continues to deliver sector-leading performance. Apache is currently the second most active U.S. onshore driller. During the first quarter, we averaged 206,000 barrels of oil equivalent per day from the Permian and central regions alone or 26% of our worldwide production.

This represents a 50% increase over the first quarter of 2012, and a 40% increase if you adjust for the Cordillera acquisition. In addition, our central region in the Anadarko Basin grew production almost 9% from the fourth quarter of 2012 to the first quarter or nearly 36% on an annualized basis and increased liquids production over 28%.

We’re currently running 42 rigs in the Permian Basin, 28 rigs in the Anadarko Basin, and so we expect this level to continue. Our exceptional onshore liquids growth was offset primarily by the deferred production that Brady mentioned in his opening remarks, a decrease of 5% in North American natural gas production, as we chose not to drill any dry gas wells during the first quarter, and some natural declines in fields in some of our international regions. As Brady pointed out, we’ve already incorporated these deferrals and declines into our plans and we remain on track to achieve our full year guidance of 3% to 5%.

I’d like to move now from our first quarter results and provide more detail on the portfolio review that I mentioned in our year-end conference call. Just over three years ago, we set out to expand our portfolio in areas that we believed could generate profitable growth. With this goal in mind, we significantly strengthened our onshore North American asset base through acquisitions in the Permian, Anadarko, and Western Canadian sedimentary basin. We also entered the deep water Gulf of Mexico and added tactical extensions to our Gulf of Mexico shelf, North Sea, and Egyptian asset base.

Importantly, during this timeframe, we significantly grew our production by almost 200,000 barrels a day, with 162,000 barrels a day, about 198, 82%, coming from North American onshore. Now that we’ve reached the end of this three-year effort, we’ve spent the last several months evaluating our expanded portfolio to determine which assets to keep and which assets might be more highly valued by others.

Having been in the oil and gas business for 50-plus years, this is not the first time Apache has gone through this process. The sole purpose of this review was to determine which assets make the most strategic sense for us to go forward with in order to continue to do what Apache has always done best: exploit our best inventory of opportunities, rigorously allocate capital to generate attractive returns, profitably grow our production, create long term value for our shareholders.

With this single focus in mind, we developed a fairly robust list of potential asset sales and monetizations that we believe will achieve our goal and expect the initial phase of this process to generate about $4 billion of proceeds.

Over the last four months, we’ve been actively engaged in a divestiture and monetization process for certain of these identified assets. Our goal is to complete this initial phase during 2013 and we intend to announce transactions as agreements are in place. As we finalize transactions, our priorities will be, with respect to the proceeds, first to pay down $2 billion of debt, then allocate proceeds received above $2 billion to repurchase shares.

Given the current level of our stock price, our board has authorized Apache management to repurchase up to 30 million shares, or approximately $2 billion of stock based on today’s share price. This share repurchase, combined with recent increases in our dividend, demonstrate our continued commitment to deliver value to our shareholders and reflects confidence in our long term strategy and underlying value of our company.

Given the highly confidential and sensitive nature of these transactions, we’re not going to provide any specifics at this time. Please keep in mind all of these transactions and the use of proceeds received are subject to market conditions. However, we are confident that given the number of items that we have on our list, and assuming commodity prices hold, we should be able to deliver on this plan.

I’d like to note that we have not incorporated any material adjustments from dispositions in our annual production guidance for 2013. Some of the assets we are considering have limited production while some have a meaningful amount of production. So it would be premature to modify our guidance until we gain more clarity on the results of the various processes.

Finally, I want to reiterate something that I’ve said many times. We’ve build this company by focusing on returns, balance, and long term profitable growth and value creation. We are cognizant of the frustration our investors feel regarding our stock price performance and current value. We are shareholders too. Rest assured we are focused on optimizing our portfolio and emerging from this process an even stronger company than we are today, one that can continue to do what we do best: exploit our asset base to generate profitable production growth and increase shareholder value over time.

Now I’ll turn the call over to Rod Eichler, our COO.

Rod Eichler

Thank you, Steve, and good morning. For the second straight quarter, we have compiled an operations supplement for your use, which highlights our activities by region during the first quarter. We received a very positive reaction to our first report, and we have incorporated many of the comments we received in an effort to further improve it, and we hope you find it useful.

As Steve mentioned, we had an outstanding quarter drilling and completing wells, in particular in our North American onshore liquid plays. During the quarter, we averaged 119 rigs operating worldwide and drilled 412 total gross wells, of which 402 were development wells, with 355 of these wells, or nearly 90%, located onshore in North America. These wells were drilled with a success rate of 99%.

In the Permian and Central regions alone, we drilled 263 gross development wells, or 65% of our total. Our production growth in North American onshore liquids of 6% during the quarter was driven predominantly by our Permian and Central regions.

Combined, these two regions grew liquid production 10,000 barrels per day quarter over quarter, or 9%, to 129,000 barrels per day, which represented nearly 31% of total worldwide liquids production. Combined production from these regions was nearly 206,000 barrels of oil equivalent per day, or over 26% of total company production for the quarter. We have truly hit our stride in these two liquids-rich regions.

In the Permian region, we produced 119,400 barrels of oil equivalent per day in the first quarter, 74% liquids, constituting over 15% of our total production. This represents more than 20% production growth over the first quarter of 2012.

We further exploited our 3.8 billion barrels of oil equivalent in net resource potential by running an average of 37 rigs and drilling 187 gross wells, 36 horizontal, with 100% success rate. We continue to have great results in our vertical drilling program and in many cases our well performance is better than expected, especially in plays such as our Midland Basin Fusselman play in which recent 30-day [IP] rates for several wells have averaged over 300 BOE per day, 83% liquids, with only a $1.6 million drilling and complete cost.

We are currently running 17 horizontal rigs out of a total of 42. As such, we are still on track to drill 180 horizontal wells during 2013. We have built upon our successful horizontal drilling programs of 2012, and ramped up activity in our Wolfcamp shale and Cline shale developments. We are currently running seven rigs in the Barnhart Wolfcamp shale play in Irion County and four rigs in the Deadwood Cline shale play in Glasscock County, with excellent results.

During the first quarter of 2013, we drilled 17 Wolfcamp wells in our Barnhart area; eight wells are currently on production while the remaining wells are in the process of being completed. The expected 30-day IP rate per well is more than 500 BOE per day, or 86% liquids.

In the Deadwood Cline shale play, nine wells were drilled during the first quarter, three wells are currently on production, while the remaining wells are in the process of being completed. The expected 30-day initial production rate per well is over 400 BOE per day, 72% oil.

We have moved into full development mode in our Barnhart and Deadwood programs, and have successfully driven down drilling and completion costs by more than $1 million per well, in an effort to further optimize our returns.

We’ll achieve this by reducing our drilling days, primarily by optimizing bit selections and mud programs, among other improvements, and applying best practices on the completion side by substantially reducing our frack costs to self-sourcing, optimizing frack designs, and taking advantage of synergies from pad drilling and frack bonds.

These achievements will have a substantial economic impact when spread across thousands of horizontal locations in our inventory. We expect to further reduce these costs as we continue to optimize our operations.

In the central region, we produced 86,200 barrels of oil equivalent per day in the first quarter. This is a 7,000 BOE per day, or nearly 9%, increase over fourth quarter of 2012 production. Just as significantly, we increased our liquids production by 28% quarter over quarter to 40,000 barrels per day. Liquids now represent over 46% of total region production versus 27% in the first quarter of 2012.

During the first quarter, we accelerated our activity in the Anadarko and Whittenburg basins. We’ve further exploited our 5.4 billion barrels of oil equivalent net resource potential by running an average of 25 rigs, 24 of which are horizontal, and drilling 78 gross wells. We are currently running 20 rigs in the region, and remain on track to drill 300 wells during 2013.

About a third of our program will target the prolific liquids-rich Granite Wash, with another third targeting the oilier Tonkawa. Rigs will also continue to work the Cleveland, Marmaton, Cottage Grove, and Canyon Wash plays.

In our liquids-rich Granite Wash play, our wells continue to exceed expectations. The first six wells that were drilled on production for at least 30 days in 2013 averaged IP rates of nearly 1,500 BOE per day, consisting of 760 barrels of liquids, of which 291 barrels are oil and 4.4 million cubic feet of gas. We still have over 22,800 identified well locations in our resource inventory awaiting exploitation.

In addition, our oily Tonkawa play also had outstanding results. Our first seven Tonkawa wells drilled and on production for at least 30 days in 2013 averaged IP rates of 662 BOE per day, which included 420 barrels of oil, 103 barrels of NGLs, or 80% total liquids. These production rates have substantially exceeded our original expectations. We still have nearly 2,800 identified well locations in our resource inventory.

Finally, we have expanded our Cottage Grove oil play with our recent Beckham County, Oklahoma Simmons 3-30H well, achieving a 30-day IP rate over 1,900 barrels of oil per day and 1.8 million cubic feet of gas per day. We plan to drill over 20 Cottage Grove wells during 2013 and we are in the process of quantifying our resource potential in this prolific oil play.

Similar to the Permian, we are beginning to realize the benefits of scale development in this region. We have been able to drive down drilling and completion costs substantially as we accelerate activity. By implementing new drilling techniques and completion designs, we’ve been able to drive down Granite Wash costs by $1.3 million to $2.0 million per well. And Tonkawa costs, by $1.5 million per well versus last year. By continuing to apply best practices, we expect to further reduce costs by applying these techniques to our other plays in the region.

Finally, I wanted to briefly comment on operations in the North Sea. Having successfully integrated the barrel operations into our North Sea region, we are beginning to bear the fruit of our increased activity. During the first quarter, production from the North Sea increased 79,100 barrels of oil equivalent per day, 87% oil, 85,000 BOE per day increase over the fourth quarter of 2012. We remain on track for mid to high single digit annual production growth for 2013.

In addition, we are still on plan to install and commission the [fast] topside and complete acquisition of our 3D seismic survey [unintelligible] and drill a total of 27 wells in the North Sea during 2013.

Of particular note, we just announced our first well in the satellite Tonto field, about 2 km east of the Forties Bravo platform. The Tonto-1 well came online at an initial production rate of over 10,300 barrels per day from the [unintelligible], the result of successfully applying our recent seismic conversion process and by our geoscience team to delineate the field. This is the third new oilfield brought on in the Forties area within the last three years.

That concludes the operational highlights, and I’ll now turn the call over to Tom Chambers.

Tom Chambers

Thanks, Rod, and good morning everyone. I’ll repeat one more time, this morning we reported earnings of $698 million, or $1.76 per diluted share. Overall, our bottom line results reflected another solid quarter of production revenues and cash flows. Our production this quarter averaged 782,000 barrels of oil equivalent a day, our second-highest quarter ever.

Oil and gas revenues totaled $4.1 billion for the quarter, of which nearly $3.3 billion, or 79% of the total, was oil revenue. Strong first quarter oil prices enabled us to generate $2.4 billion of cash from operations before working capital items. We’ve been able to routinely generate these cash flow levels given the fact that over 53% of our production base is oil and liquids, and that oil currently sells for over 20 times the price of North American non-GAAP.

Our focused drilling program produced a 45% increase in liquids production in North America onshore properties from the prior year quarter, primarily driven by outstanding results in the Permian and Anadarko basins, as you just heard Rod indicate.

Worldwide liquids production for the quarter averaged 416,000 barrels of oil equivalent per day, an increase of 9% from the comparative 2012 quarter. A key point worth emphasizing is that not all liquids are created equal, a fact that was driven home with the significant fall in NGL prices from year ago levels.

For Apache, our liquids growth and drilling opportunities are primarily focused on crude oil. Over 85% of our first quarter liquids production is crude oil. In addition, our international gas portfolio has continued to bolster our realizations as natural gas prices in North America trailed our international realizations by 11% in the first quarter. For the fifth consecutive quarter, international gas price realizations outpaced those in North America.

Although realizations in Egypt were down after the loss of a legacy Egyptian oil linked contract that expired at the end of 2012, Australia and Argentina realizations continued to increase, reflecting the impact of new sales contracts.

Our production efforts directly translated into a pre-tax margin that continues to exceed 30% on a BOE basis. Our operating costs, while higher than we’d like, are a derivative of our product mix, with oil and offshore properties generally more expensive to operate than natural gas properties. With 53% of our first quarter production oil and liquids, and approximately one-third of our production located in offshore areas, our costs per BOE run higher than many of our competitors.

I also wanted to note that the first quarter earnings were impacted by a $31 million after-tax unrealized loss on derivative instruments as well as a $42 million noncash after-tax writedown of our Argentina oil and gas property balance. This was the result of two concessions expiring in the next two to four years, both of which we are currently in discussions with the government to extend.

Adjusting for these noncash writeoffs, FX impacts, and deferred tax adjustments, we earned $806 million, or $2.02 per share, down $0.98 from the first quarter of 2012, a period where we saw record oil prices and down $0.20 on a sequential quarter.

These adjustments also impacted our effective tax rate for the quarter, which was 46%. If you adjust for items mentioned above that impact the comparability of results, our tax rate would have been a more typical 43%. Detailed calculations for margins, adjusted earnings, adjusted tax rate, cash from operations, can be found in the financial supplement located on our website.

Turning to the balance sheet, our ability to generate consistent operating cash flows continues to support our robust drilling program and other planned capital expenditures. This quarter, our total debt balance remained relatively unchanged, and at the end of the quarter, our debt-to-capitalization ratio was 28%, the same as last quarter.

However, as Steve mentioned earlier, we’re working to rebalance our portfolio by actively pursuing asset sales to be completed in 2013. The proceeds of some of these sales would be used to reduce our debt, including the $900 million of notes that mature this year.

The first of these sales was completed in February. As you are aware, we completed a transaction with Chevron Canada to jointly build the Kitimat LNG facilities and develop the shale gas resources in the Liard and Horn River basins of British Columbia. The net proceeds to Apache from the transaction were $405 million.

The results of our efforts to rebalance our portfolio will enhance our debt maturity profile, preserve our balance sheet flexibility to fund operations and growth, and enhance shareholder value.

Finally, one last important item to highlight this quarter. In February of this year we announced that our board of directors increased the regular quarterly cash dividend 18% to $0.20 per share, which demonstrates our confidence in our ability to continue to deliver future growth and shareholder value over the longer term. This increase follows the 13% increase in 2012.

That concludes my remarks, and I’d like to turn the call back over to Brady.

Brady Parish

Thank you, Tom. That concludes our prepared remarks. I will now turn the call over to the operator. Operator, we are ready to open the line to questions.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of Pearce Hammond with Simmons.

Pearce Hammond - Simmons & Company

I guess my first question is you mentioned joint ventures. Is that separate from the $4 billion? Or is that included in that $4 billion worth of divestitures?

Steven Farris

That would be included, but the proceeds have to be cashed, if you understand what I’m saying.

Pearce Hammond - Simmons & Company

So it is included?

Steven Farris

Yes.

Pearce Hammond - Simmons & Company

Then you mentioned the $4 billion of the initial phase, does that imply that there’s a second phase beyond the $4 billion?

Steven Farris

Well, what I can say is the asset list that we have generated at today’s prices, and what our market expectations are, would exceed that $4 billion.

Pearce Hammond - Simmons & Company

Then my last question is, I think the share buyback plan is a great idea, especially given how cheap the stock is. I guess I wondered why not use the full $4 billion to buy back the stock, rather than pay down the debt, because you have a very good balance sheet?

Steven Farris

Two things. One is we want to make sure we retain our flexibility and our A rating. The other one is that it also gives us financial flexibility to invest that money in our ongoing business.

Operator

Your next question comes from the line of Harry Mateer with Barclays.

Harry Mateer - Barclays

You just touched on it, but perhaps if you could just highlight for us again the importance of single-A ratings, and [unintelligible] S&P for your long term vision for the company. And then second, the $2 billion of debt reduction, as you mentioned, you have $9 million of short term debt. Where does the other $1.1 billion of debt reduction come from?

Tom Chambers

The other debt reduction comes from we’re going to pay off some commercial paper.

Harry Mateer - Barclays

And what was that commercial paper number at the end of the first quarter?

Tom Chambers

End of the first quarter, it was $619 million.

Harry Mateer - Barclays

And then on the single-A ratings? That is of importance to you guys longer term?

Steven Farris

We’ve historically tried to be finally fiscal, and we want to continue that. It’s given us great flexibility over the years, and we continue to think it will give us flexibility in the future.

Operator

Your next question comes from the line of Amir Avif with Stifel Nicolaus.

Amir Avif - Stifel Nicolaus

A clarification on the repurchasing of shares. Will that only begin after you have the first $2 billion of asset sales done, or will you start doing that again at the current share price, given where it is?

Steven Farris

Our first priority is to pay down debt. And we would have a goal to get that done this year, the $4 billion.

Amir Avif - Stifel Nicolaus

Okay, so only after you have the first $2 billion, then we’ll start buybacks? That’s fair?

Steven Farris

Yeah, we want to give ourselves a little flexibility.

Amir Avif - Stifel Nicolaus

And then a follow up question on Egypt. The free cash flow you’re generating in Egypt, are there any restrictions on moving that money back to the U.S., outside of repatriation tax?

Steven Farris

No. We move it in all of our international regions.

Operator

Your next question comes from the line of Bob Brackett with Bernstein Research.

Bob Brackett – Sanford Bernstein

Following up on theses asset sales, is Kitimat included in part of that $4 billion target, or is that already done and finished?

Steven Farris

It’s not in the target. Obviously we’re going to have to size Kitimat as we go forward. Right now we are in a position to have taken something from raw materials to wholesale, and there will be a time when it will be retail.

Bob Brackett - Sanford Bernstein

And then I understand you don’t want to talk about the specifics of what potentially is for sale, but can you lay it out in terms of you prefer international versus domestic sales? Is it gas versus oil? Is it production versus acreage?

Steven Farris

I think what we said in our release is that our goal is to come out of this with assets that we think have the potential to grow long term or short term, and that we also have assets that have great generating power to fund those programs.

Bob Brackett - Sanford Bernstein

Not sure that answers the question. Is it looking for assets that are mispriced by the market, where you keep the stuff that’s undervalued, and you trim the stuff that’s potentially overvalued by the global market?

Steven Farris

No, we have an asset base that are growth generators, and we have assets that are cash generators. We want to balance our cash generators with our growth generators.

Operator

Your next question comes from the line of John Freeman with Raymond James.

John Freeman - Raymond James

Sorry to keep beating the same dead horse here, but just to clarify on the last question, when he asked if the $400 million you got from the Kitimat transaction, that’s not included in the planned asset sales that you’ve got? So you’ll be doing $4 billion above and beyond the $400 million you got from Kitimat?

Steven Farris

That’s correct.

John Freeman - Raymond James

And then just a follow up on a question that Pearce asked earlier, on the JV front. So when you view things in terms of, it would have to be cash, does that mean if you did any JV that had a drilling carry, that joint carry would not count towards your asset goal?

Steven Farris

That’s correct.

John Freeman - Raymond James

Okay, and then on Alaska, are you all still on schedule to complete that first onshore well in the second quarter?

Steven Farris

I’ve got to check when the timing is. I don’t know when the timing of that is.

Operator

Your next question comes from the line of John Herrlin with Societe Generale.

John Herrlin – Société Générale Americas Securities

How tax-efficient will the sales process be? Have you thought about that?

Tom Chambers

We have. And it all depends on what the assets are that we sell.

John Herrlin - Société Générale Americas Securities

In terms of a strategic change, does this mean you’ll be reducing your expiration exposure at all?

Steven Farris

Well, certainly if you look at our portfolio today, we’re still going to have a joint venture group that has an exploration bent. But in terms of the amount of funding that they get for the next two or three years, it’s going to be less than they’ve gotten in the past.

Operator

Your next question comes from the line of Eliot Javanmardi with Capital One.

Eliot Javanmardi - Capital One

I apologize for splitting hairs here, but just want to make sure I’m clear. Are these share buybacks, if things go well, do you expect to have it completed this year, in 2013? Or could we expect it to kind of start in the second half and then perhaps just lead into ’14?

Steven Farris

Well, the share buybacks will be obviously opportunistic. We have a goal to have asset sales of $4 billion by the end of this year, and the first $2 billion are going to pay down debt, and the next $2 billion are going to buy back stock. What the timing of the stock buyback is, based on how soon we get the transactions done and closed, and have the cash available.

Eliot Javanmardi - Capital One

You talked about your composition and how it helps you right now. What are you guys targeting, do you think, as far as maybe after you go through this process, initially, and perhaps in another phase, where do you like to be portfolio-wise on your composition mix?

Steven Farris

I’m not following the question, sorry. What will the company look like? What will the assets look like?

Eliot Javanmardi - Capital One

The production [unintelligible] oil and gas mix, kind of what would you be targeting still, close to a balance of 50-50?

Steven Farris

Yeah, we intend the portfolio balance to stay relatively the same.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice.

Charles Meade - Johnson Rice

Looking at the region-by-region production in your earnings supplement, I noticed that one thing that stands out to me is Egypt oil volumes were down about 12,000 barrels quarter over quarter. And I’m curious if you could characterize what that is. Is that natural decline? Or was that some facilities related downtime? And give some guideline on what you expect for the rest of the year there.

Steven Farris

We’re going to try to do a better job of our guidance on Egypt going forward. If you look at the numbers, our gross production was down 2%. And the most important thing to look at in Egypt is cash flow, frankly.

But what we’re going to try to do in the future, and I don’t want to confuse everybody on the line, is we’re going to start showing, basically, net of tax. Because Apache is not responsible for the tax in Egypt, and we basically gross up the volumes for the effective tax rate. And it adjusts numbers.

If we had done it on a net basis, it would have been down about 5,000 barrels a day, or 6,000 barrels a day, rather than 12,000 barrels a day. So we’re going to try to clean that up going forward. In terms of the actual production decline, the 2% on the gross, that’s more timing than anything.

Charles Meade - Johnson Rice

That’s great clarity. I think I understand you. That just kind of introduces some noise that’s not really there. On the flipside of that, I’m also looking at the NGL production you had in your central region in the U.S., and that almost doubled, up 10,000 barrels a day quarter over quarter. And I’m curious, is that just well performance? Or is that also some midstream issues and perhaps ethane rejection that was going on in Q4? Those ethane volumes coming back in Q1?

Steven Farris

No, that’s just well performance.

Operator

Your next question comes from the line of Joe Magner with Macquarie.

Joe Magner - Macquarie Capital

I’ll take another stab at the thoughts or the framework around the asset sale program. With the goal of repaying assets [unintelligible] to drive the near term and long term growth, what should we think about in terms of the growth potential of what could be retained relative to the current five-year, 6-9% growth objective. Is it going to be higher? Lower? Willing to comment?

Steven Farris

It’s premature. We have an asset list that exceeds our target. And how we approach that going forward in the next few months, or six months, will really determine what comes out of the back of it. I’d be premature to answer that question right now. Our whole goal is to be more profitable and more predictable growth.

Joe Magner - Macquarie Capital

And on Kitimat, could you provide us the updates on the [offtake] agreement discussions? And then also, whether there’s a plan in place to exercise the pipeline right away that’s outstanding?

Steven Farris

Well, with respect to to the market, obviously we are in the market. We’re in the market now with our new partner, Chevron, who is leading that charge. Before we got into the current relationship, it was pretty strong then, and I would venture to say, with Chevron as part of the partnership, it is stronger today.

In terms of the pipeline right of way, we’re proceeding forward on all those issues.

Operator

Your next question comes from the line of Joseph Allman with JPMorgan.

Joe Allman - JPMorgan

In terms of the asset sales, when you made the list of non-core assets that made up that robust list, what are the parameters that defined, for you, the non-core assets?

Steven Farris

Whether they had long term growth potential, short term or long term growth potential, or do they generate significant excess cash. That’s it.

Joe Allman - JPMorgan

Was rate of return one of the parameters? Lower relative rate of return?

Steven Farris

Well, yeah. I think if you look at those raw definitions of which ones are on either side, rate of return is our primary focus. So it would fit those categories.

Joe Allman - JPMorgan

And then when you guys sit around and think about the stock’s underperformance relative to the group, to what would you attribute the reason for the underperformance?

Steven Farris

I think two things. I think we haven’t done what we said we were going to do in 2012. And I think that as we get further into the process with Egypt in terms of the continuity of Egypt, I think that will help. We’ve got 26 rigs running in Egypt. We continue to get paid every day. It generates a tremendous amount of cash. And I think over time people will get more comfortable with that.

Joe Allman - JPMorgan

And when you look at the underperformance of the stock, are you focused mostly on over the past year or so, are you focused on underperformance over a longer period of time?

Steven Farris

No, if you look at our stock performance truthfully, through 2010, it’s been very competitive with any of our peer companies. If you look at 2011 and 2012, we’ve really digressed.

Joe Allman - JPMorgan

Is a lot of the problem just concerns about Egypt, do you think? The market’s perception, with the headline risk about Egypt? Do you think that’s the reason for the underperformance?

Steven Farris

Well, I think you can make your own assessments. We think that has some impact on our stock price.

Joe Allman - JPMorgan

And then lastly, just the process, have you opened data rooms yet in the asset sales process? And why not define the assets at this point? What is it about the process that makes you just want to keep the assets you want to sell confidential or secret?

Steven Farris

Well, we have a pretty broad asset list, number one. Number two, we started the process about four months ago, and I think the best thing we can do is do it, and then announce it, as opposed to advertising what we’re doing as we go forward, both from a competitive stand and from a market standpoint.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Steve, you’ve never been shy about opportunistically acquiring assets from the majors or others. Are you as interested as you have been in acquisitions that can improve predictability of growth? And does the resulting stronger balance sheet open up that opportunity? Or are you going to be more focused on the assets that you have?

Steven Farris

We’ve had this discussion before. I think companies, people, go through lifecycles, and right now our lifecycle is to give us a portfolio that we can grow organically. We certainly have been very successful in the acquisition market. That’s not one of our focuses at the present time.

Brian Singer - Goldman Sachs

And we’ve seen volatility in Apache’s production, which has been in part a function of a number of items, weather, other disruptions. Yet you mentioned earlier you’re interested in having more predictable growth. Would the assets that you’re planning to sell have reduced the volatility that we’ve seen in production, say in the first quarter of 2013, or in 2012?

Steven Farris

Long term, what we want to do is have a more predictable growth profile.

Brian Singer - Goldman Sachs

And I guess if you look back on, let’s say the last quarter and the last year, and the assets that you’re looking to sell, if we would have sold those a year ago, year and a half ago, would that have made that more predictable, less volatile?

Steven Farris

When we announce what we are going to sell, then we can have this discussion.

Brian Singer - Goldman Sachs

And then lastly, just a single asset question. In your Permian Basin update, you mentioned a couple of strong Wichita Albany wells that had some pretty good rates. I just was wondering if that’s an area that you see running room in what the production mix is between oil and gas and natural gas liquids.

Steven Farris

Yeah, Wichita Albany is largely oil. We do have some running room in that area. Those wells have been, like a lot of the wells in the Tonkawa in Oklahoma, those Wichita Albany wells have far exceeded our expectations. We’ve got wells that make 900 barrels a day and are still making 800 barrels a day. It’s been a very good play for us. And we do have running room in that play.

Operator

[Operator instructions.] Your next question comes from the line of [Kyle Rose] with RBC.

[Kyle Rose] - RBC

How should we think about Egyptian gas prices for the rest of the year?

Steven Farris

I think Egyptian gas prices, that number will be the same number going forward really forever. That is our gas price now. And the reason is, and I’m sure you’ve heard this before, we had a gas contract that rolled off at the end of 2012 that was one of our higher-priced gas contracts in Egypt. That’s the last one of those kind.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate - Bank of America Merrill Lynch

I apologize, I was a little late getting on the call, so I hope none of these have been asked. My first question, I guess on the portfolio high-grading, or the asset sales I guess you could call it, there’s been a lot of chatter about the Gulf of Mexico discoveries being in that package or in that process. And I guess my question isn’t so much about is that true or not, but it’s really more about your philosophy on exploration and bringing longer-dated projects… You know, you make a discovery, it’s a five year out to development type of situation, is your decision to go down a more aggressive asset sales route impacting your view of exploration as a kind of core strategy for the company?

Steven Farris

I think if you look at our portfolio today, from where it was in 2010, we have now invested in the [Wheatstone] project, which is a long term project that is basically oil-related. It will come on in late 2016 and effectively be 35,000 barrels of oil a day for 20 years. That’s about 270 million barrels of oil production.

So if you look at our long term projects that we have, we’ve got 50 Bcf in Liard that is associated with our Kitimat project. Those are long-lead items that take capital, that also provide steady future revenues for years to come. So in terms of what we look at selling, are the things that have high cost right now, that have lumpy production in the future.

Doug Leggate - Bank of America Merrill Lynch

Are you happy with the balance? Because obviously these up front long term large projects are dilutive to your core goal, which is I guess return on capital. So are you happy that you’ve got the right balance of short term and long term currently? Or do you see that as…

Steven Farris

We do right now, because Wheatstone, we have 13%, we’ve got one more year of capital associated with it, and frankly, with Wheatstone, we’ll just have to see how that goes. We haven’t reached FID yet with Kitimat, and we’ll have to make that decision when we get there.

Doug Leggate - Bank of America Merrill Lynch

And I guess my follow up Steve, and I know this comes up a lot, and I apologize in advance, but Egypt, I think they just had their credit rating downgraded by a third party earlier this morning. It doesn’t seem to be getting any better. And I guess when you think about discount rates applied to your cash flow, which obviously operationally things are going well, but the value doesn’t seem to be [unintelligible]. Is there any updated thought as to how you address the exposure issue? Is it just getting too big a part of the portfolio, given the escalating risk profile? Or are you still happy to hold things as they stand currently?

Steven Farris

Well, I think you’ve got to look at the results. They have gone through a number of quarters now, and almost two years, and we continue to be very profitable there. We continue to think that that will level out over time. My opinion is, Egyptians are Egyptian-first, and then that part of the world. We were just there a month and a half ago, and I feel very good about the forward plan in Egypt. How we convince our U.S. investor base that that is the way it is another matter.

Doug Leggate - Bank of America Merrill Lynch

Should we think about Argentina as being been a long term part of the portfolio?

Steven Farris

Truthfully, Argentina’s got a lot of great resources. Right now they’re troubled politically. How that fits in our program long term we’ll just have to see.

Operator

Your next question comes from the line of Amir Avif with Stifel Nicolaus.

Amir Avif - Stifel Nicolaus

A follow up question on the Permian sequential growth. It was a little slower this quarter. Is that just due to the facility downtime? And can you just [inaudible] you might be running into there’s in the Permian, as you start wrapping up activity?

Rod Eichler

Yeah, we had some facility downtime, but we also had some capacity constraints. As we’ve been ramping up our drilling activity and associated production volumes, we’ll be out in front of the ability to hook up the wells and move products out of there. There’s about a 2.5% on the first quarter.

Amir Avif - Stifel Nicolaus

And that should be alleviated by Q2?

Rod Eichler

That will be an ongoing challenge throughout the year.

Amir Avif - Stifel Nicolaus

And a follow up question, if you could give us an update on your drilling of your acreage in the Miss Lime and the Bakken?

Steven Farris

We have not drilled any wells in the Bakken, nor the Miss Lime, in this last quarter.

Operator

Your next question comes from the line of Harry Mateer with Barclays.

Harry Mateer - Barclays

A follow up on my earlier questions about the debt reduction. You mentioned $900 million of short term debt, and then $600 million change of [CP], but that gets you to a little over $1.5 billion. So if I could just ask a minor point on how we get to the $2 billion, is it because you think you’re going to be slightly free cash flow negative through this year, so you’ll add some debt? And then that will be paid down? Or is there something else that I’m missing?

Tom Chambers

Typically what happens in the first half of the year is when we get off to a quick start, which we have this year, in all of our regions, we usually run a little cash flow negative for the first half, and that’s our plan. We’re actually tracking on that now, so we’ll be able to pay down some debt, [unintelligible] will come from that.

Harry Mateer - Barclays

So relative to first quarter debt balances, debt reduction is not going to be quite $2 billion, it will be less than that? Is that fair? Because it’s going to go up a little bit next quarter?

Tom Chambers

Yeah, based on balance, that’s correct.

Operator

Your last question comes from the line of Nathan Churchill of Societe Generale

Nathan Churchill - Societe Generale

Just back on the asset adjustments, wondering if there are any particular constraints that you have in the portfolio as far as investing some of this additional cash that you have coming in. I know your share price has been a little bit depressed, and I think the buyback makes sense, but just wondering how you think about weighing the buyback versus maybe increasing capex, and also if you’ve considered maybe an MLP of the assets if they’re high cash-generative and low growth.

Steven Farris

I will tell you, in terms of the share buyback, I think, from a board standpoint, and from a management standpoint, we find ourselves in a unique position, because we have relatively high commodity prices, at least on the oil side, and our stock has got a lot of upside in it. So I consider stock buyback [an event], but this is a very good event to buy your stock back.

I can assure you, we have, over the last several months, looked at a number of combinations of an asset base that we want to come out of this going forward.

Nathan Churchill - Societe Generale

On the buyback, it wasn’t really explicitly said, but are these shares cancellation?

Steven Farris

We have no one in here that answers that question. [laughter]

Nathan Churchill - Societe Generale

Okay, maybe switch gears for a second. Can you give us some insight as to what you’re seeing on the service cost side? Has it hit an inflection point as service costs started to bottom, domestically that is?

Steven Farris

I think as we all learn, not just Apache, but I think as our industry learns ways to reduce cost, I think service costs will continue to come down for a while. I don’t think we’ve hit the bottom yet, for all kinds of reasons, because of the different ways you’re sourcing things now, and the different services major service companies provide versus what they used to provide. That’s all changing, as I’m sure you’re aware.

Nathan Churchill - Societe Generale

Of course. And there is the learning curve benefit and then there’s the actual price of the curve, so I was just trying to tease out how I should think about the moving pieces there.

Rod Eichler

Well, drilling rates in the Permian Basin, for example, have been increasing since 2008. However, the curve is flattening. If you look at the day rate increases, the increased from 2012, to what we’re seeing in 2013, it’s only about a 5% increase on average for the 42 rigs we’re running out there. So we’re starting to see that curve starting to turn over. Rig availability is not an issue. As I mentioned in my remarks, we have a large number of programs in place to reduce costs in all elements of drilling and completion. In fact, some of the cost reductions have been rather dramatic that we’ve experienced in the last 12 months through these efforts.

Operator

And at this time, presenters, there are no further questions. Do you have any closing remarks?

Brady Parish

No, I think that’s it. Thanks, everyone, for participating on our call. We appreciate it.

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