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Apache Corporation (NYSE:APA)

Sanford C Bernstein Strategic Decisions Conference Call

May 28, 2014 09:00 ET

Executives

Steve Farris - Chairman and Chief Executive Officer

Analysts

Bob Brackett - Sanford Bernstein

Bob Brackett - Sanford Bernstein

Good morning and welcome to the second session of the day of the 30th Annual Strategic Decisions Conference. Today’s speaker for this session will be Steve Farris, the CEO and Chairman of the Board of Apache Corporation. The format for this hour will be as follows. We will start with perhaps 20, 25 minutes of presentation that you see on the screen. After which, we will adjourn and Steve and I will sit at the fireside chat format to the right. During that time, I will begin by asking questions in front of you and scattered through the room are various white cards. Please write your questions and pass them up. We will have people collecting them. In addition, you feel free to ask a question out loud and clearly your questions are the ones we are here to answer as opposed to mine. So, with that, I will introduce myself. For those of you who may not have met me, I am Bob Brackett. I am the North America E&P analyst for Bernstein. And with that, we will get on to content.

Steve Farris - Chairman and Chief Executive Officer

Thank you, Bob and thanks to Bernstein for having Apache here. I would like to go through some slides very quickly. I would imagine that most of you know that we have been transitioning this company. When we started – in fact, I am going to go forward one slide. When we started this back in 2009, if you think about it where Apache has been over several years, we started getting international early 1900s or 1990s. We got into Egypt. We got into Australia. And if you think about where we went through to the years 2000, we really used our North American asset base to grow our international. And if you think about where we were in 2009, we are about 65% international, 35% North American onshore.

We made a decision in 2009 to get back in North America. We had a pretty good Permian position, we had a pretty good central position, but we felt like we could find just as bigger reserves with more predictable results back in North America. So, we made an awful lot of acquisitions over that timeframe. 85% of those were North American onshore. So, we really beefed up our North American position. And then in 2013, we really made North America the biggest part of our portfolio. We made a deal with Sinopec to sell a third of Egypt. We sold our Gulf Shelf assets. We sold Heidelberg and Lucius. We sold Argentina. And we sold really our shallow gas assets in Canada. So, we are refocused back in North America. We returned cash to our shareholders. We bought $2.1 billion for the stock. We also increased our dividend ‘13 and ‘14 and we strengthened our balance sheet.

So, where are we today? We have gone from 34% North American onshore to 62% at the end of this first quarter. And you can see it’s powered by the Central region, the Permian region and Canada, in fact a big portion of that is also going to be the Gulf Coast and I am going to go over that here in a little bit.

Our total resource, there is a lot of questions about total resource, 1.7 billion barrels is what we have on the books. What we evaluated through the end of 2013 is about 14 billion barrels of resource potential. I will tell you those numbers change daily depending on how we go through the year and what we find. This is our first quarter. We had a very good first quarter. We had adjusted earnings of $1.78, $2.2 billion worth of cash flow. We exceeded estimates on both on our earnings, cash flow, and our production. The bottom number down there, that pro forma production number takes out all of the sales that I talked about, plus it takes out of the third, because under GAAP reporting, we report a 100% of Egypt, but one line down at the bottom, we show Egypt as the one line item for the production out of it. That number has the adjusted production after the one-third to Sinopec.

Permian we are one of the largest players in the Permian basin. We have 1.7 million net acres. We are in every major basin of the play. If you look at the right there on your slide, we were the highest production in the Permian Basin in 2013, 19,000 barrels a day, predominantly liquids about 76% of its liquids. We have a very active program. In fact we are running about 36 – 8 rigs right now. First quarter was very good for us. We added almost 14,000 barrels a day from the fourth quarter to the first quarter of 2013 – first quarter of 2014. I can’t promise you we are going to do 14,000 barrels a day every quarter, because we had a lot of things. We had some pads coming on that we were putting on in the first quarter but this is a growth region for us.

You can look at the slide in terms of our growth over a number of years, over number of quarters. And we are a predominant player in the Permian Basin. This is a pullout I don’t expect you to be able to read all those. Those are just first quarter results of wells that we have drilled. We are heavy in the Wolfcamp, in the Barnhart area down to south. We got six rigs running. Those wells come on any worth in the 1000 to 1500 barrels a day. 30 day IPs. If you look at the Yeso in Southeast New Mexico, it’s a big play for us. We got a huge acreage position there. The Delaware Basin, Pecos Bend we have drilled a number of wells in there. Right now, we have reported two wells both met over 1,000 barrels oil equivalent a day. So anywhere in the basin the Permian Basin, Apache is there.

This is the central region, we have about 1 million net acres. We produced about 91,000 barrels of oil equivalent per day. If you can look the biggest thing on that slide we have double our liquids production over the last few years. We have grown from 45,000 barrels a day in 2011 to 91,000 barrels a day in 2013 and that’s – 50% of that is now liquids. This is our results in the first quarter, actually the first quarter got off to a slow start in the central region and the biggest reason was weather. And weather didn’t affect our production as much as our rig line because what happens is that when you are doing this in a manufacturing mode, it slowdown your whole rig line. We show we had 69 gross wells, 44 net wells actually our plan for the year was almost 90 wells to be completed in the first quarter. So it slowed us down in the first quarter and that will slow us down throughout the year because you never cut shot timing wise on that, but we should show growth.

We showed liquids growth year-over-year with 15%. You can see we did have a good – the wells that we drilled were very good. We drilled a number of Granite Wash wells, Marmaton Shelf wells, Cottage Grove. Those were about 35% liquids, 65% gas. This is an exciting play for us. This is if I flip back, can I flip back? If you see that little yellow blob in the Panhandle of Texas that acreage position setting out there by itself that’s where this is. That’s 200 square miles, it’s a 150,000 contiguous acreage. We own 73% of it. We drilled two wells so far. We are drilling a third these are horizontal wells I am talking, but we also have (indiscernible) which is a conventional play there. It’s come on very well. We got it up to 10 pad – on the conventional side we got up to about 10,000 barrels a day. Today it’s doing about 5,000 barrels a day.

The big play in here is Canyon line. Our first well was a 41, it was quite a bit out of zone. Today it’s making 756 barrels a day. We got about 50% of the load back. The 94 just came on, it’s testing about 649 barrels a day. We are going to get 41% of the load back and we are flowing that well up casing and tubing. So, this could be a major play for us going forward.

This is the Gulf Coast, Eagle Ford, the East Eagle Ford not to be confused with South Eagle Ford. We have got a huge acreage position in here. In fact we have got 500,000 acres, about 207,000 net. We are running five rigs. We are ramping that up to eight rigs in the middle of the year. It’s all about cost. This is going to be a very good play for us. Here are some of the early results. The one well I will show you on there that’s not as good as the rest of them is that Leone 2H, that well was predominantly out of zone.

The last well we drove was the McCullough-Wineman. That well came on at 1,900 barrels a day peak, 30-day average about 1,450, about 65% liquids oil, tremendous opportunity in this play for us, ramp it up. We come on with our first pad in the middle of this summer, a 6-well pad down at the Reveille. And we should show very good growth out of this region or out of this play going forward.

This is Canada. And I don’t have many slides on it. I will tell you Canada was a refocus. We sold as I mentioned, we sold all our shallow gas, an awful lot of stuff that we had bought in the early 2000s. We are concentrated in really four areas. The Kaybob area is really the Montney and the Duvernay. We have 157,000 acres in the Montney – 124,000 acres in the Montney, 176,000 acres in the Duvernay. We have drilled two Duvernay wells so far. We haven’t released the results, but I may give you an analogy, a good Duvernay well will make 6 or 7 million a day and about 1,000, 1,100, 1,200 barrels of liquids. This is a great play, where it should ramp up on a drilling program going into 2015. In 2015, Canada should be a growth region for us.

Our international, I mentioned at the beginning, we are going to have growth assets with our North American onshore and we are going to have cash flow assets. And our two big cash flow assets are Egypt in the North Sea, even after selling Egypt, a third of Egypt our excess cash flow after capital is about $700 million. If you look at the North Sea, the North Sea generates about $1.6 billion of cash flow and we spent about $900 million. So, it will generate $600 million worth of excess cash flow.

Australia, we have two projects coming online, Coniston and our Balnaves. Balnaves should come on. We have had a little hiccup on the FDSO. It should be about a week late. It should come on July 1. And then Coniston will come on later in the year. Together, those will add now this is not for the year, but together those will add about 18,000 to 25,000 barrels a day.

Talk a little bit about LNGs, I know there is an awful lot of concern about our cost going forward and on our LNG projects. I mentioned Alfonso Leon our CFO mentioned on our conference call, we are looking at project financing that. Actually, we are looking at also monetizing that. If we can sell that asset and bring that value forward, we can have a faster growth profile on our North American liquids going forward. So, we have decided to look at the best alternative for our shareholders and that is either project finance or monetizing selling that asset in 2014.

Kitimat, we have already said that from Chevron’s standpoint, Apache standpoint both, we are a 50:50 partner in that project right now. We intend to sell down Kitimat significantly over the next quarters. We right now are positioned as we would either sell to a downstream buyer or an upstream buyer or an upstream investor that wants to be in the Canadian LNG business.

This is our capital program for 2014. We are going to spend about $8.5 billion, which is basically around our cash flow for the year in our E&P business. I mentioned, Wheatstone were in the process of trying to monetize that asset. And Kitimat were in the process of trying to sell that project down. North America, $1.4 billion, 1,400 wells, 875 horizontal wells, we project we will have about 15% to 18% liquids growth. And we are going to continue delineate plays, our Eagle Ford play came in line with our Duvernay and our Montney play.

First, our guidance we are on track for the first quarter. I mentioned we had a good first quarter, which is obviously driven by oil. Overall, we are projecting 5% to 8% production growth and live within our cash flow. Here is our longer term plan, 12% to 16% liquids growth, 5% to 9% production growth. As you can see, it’s powered by our North American onshore asset. The yellow is the North American growth and the dark blue is our international growth.

So, where are we today? 62% of our assets in our North American onshore production and that is growing, it will grow quarter-to-quarter. We have great cash flow assets in the Egypt and North Sea. And one of the strengths of Apache has always been in this industry is that we are very good at execution. And we can take that execution mode that we have had across the globe to North America. We are still a very return focused company. We would want repeatable liquids plays. And we have the asset base to be able to do that.

Bob Brackett - Sanford Bernstein

Well, great. With that, we will shift into the fireside chat format and I will ask Steve to sit down here with me. We have got for people that came in late, there are white cards scattered throughout the room. I will begin with a few questions. In the meantime, throughout my question-and-answer period, we will just collect the cards. So, if you kind of raise your hand and wave the card, somebody will see it and they will bring it forward. As we collect some of those, I will just kick it off with the thing that start to move central in my mind. Talk a little about the Permian, some people see it as a bit of a black box, whereas other operators might be focused on a key zone or a key county, you are kind of everywhere. How do we get an understanding of what you like best in the Permian, what’s working, how do you allocate capital out there?

Steve Farris - Chairman and Chief Executive Officer

Well, we are blessed with 1.7 million acres. So we are in every play in the Permian Basin. If you look at our Wolfcamp Play, the Barnhart play, it’s been tremendous asset for us. We got 40,000 acres in that play. We are running six rigs. We have taken that to about from zero to about 18,000 barrels a day over the last two years. And we continued to drill wells there. We got a pad drilling operation where we just go from section to section. If you look at our Deadwood area we got about 130,000 acres there. We drilled predominantly Cline wells. We have started drilling horizontal. I think one of the carve outs there is Cline well. We have gotten our costs down. We have gotten our EUR up that latest well mode over 1000 barrels a day, 30 day IP. We are in the Delaware Basin. We got a tremendous acreage position in Delaware Basin. In each one of those plays we have significant acreage. So it’s not one 300,000 acres, but if you think about 130,000, 140,000 acres, we got 57,000 acres in the Delaware Basin just in that Pecos Bend area. So we have got a tremendous acreage position and the way we allocate capital is based on the highest rate of return on projects we can find in each one of those basins.

Bob Brackett - Sanford Bernstein

What about cost pressures out in the Permian do you – are you getting evidence of that or takeaway capacity pressures?

Steve Farris - Chairman and Chief Executive Officer

Takeaway capacity pressure is really we – we have in large were actually in the Yeso area, up in Southeast New Mexico. We were slowing down – slowed down for just a little bit and the plant operator have increased the volume out there. So we are starting to drill wells out there again. But the blessing of having acreage all around the basin is that we can fit pods where we can – we have takeaway capacity.

Bob Brackett - Sanford Bernstein

So the other was cost pressures?

Steve Farris - Chairman and Chief Executive Officer

Yes, our cost pressure we are seeing, honestly we are seeing a little cost pressure on the rig side. On terms of the completion side which is at least 65% of the cost, actually we continued to bring costs down. Now that’s not necessarily costs haven’t gone up, it is the way that you go about recompleting wells. We self source of all our sand, we self source all our chemicals. So the only thing that you are really bringing out is hosepipe. And the faster you can do that we measure time in minutes, not in days. So the faster you can do that it’s lower that cost a bit.

Bob Brackett - Sanford Bernstein

So on cost stream is a little, we have three questions around LNG. And I will start broadly what has changed in long-term returns to LNG that makes it less attractive than originally forecasted?

Steve Farris - Chairman and Chief Executive Officer

Well, if you look at our transition and you think about certainly Wheatstone for example. You have a step value in that and you have got 85% of the gas contract as you are pretty certain about the costs. So the value can be determined. If we can get a value that’s commenced with what we think the return is in that project and we can bring that cash forward. We think it’s the best interest of our shareholders to do that because we can power growth in North America with that turnaround.

Bob Brackett - Sanford Bernstein

Just to view that potential buyers of that asset might have lower discount rate and therefore just…?

Steve Farris - Chairman and Chief Executive Officer

I think buyers of LNG have a lower discount value and because of the consistency and the steadiness and the maturity of the cash flow.

Bob Brackett - Sanford Bernstein

What portion of your Kitimat assets are for sale all or part?

Steve Farris - Chairman and Chief Executive Officer

Right now, honestly is a big chunk of it. We intend to remain in it at least for the interim. And we are active pursuing that, I mean that’s an ongoing project for us.

Bob Brackett - Sanford Bernstein

So if you are at 13% of Wheatstone and 50% of Kitimat, should we think 13% is the right size slice of pie?

Steve Farris - Chairman and Chief Executive Officer

Going forward?

Bob Brackett - Sanford Bernstein

For the Kitimat sell down you currently own half that’s I think I am asking exactly the question, would – and you would look to it – and would you look to it in higher exit for the right place?

Steve Farris - Chairman and Chief Executive Officer

Our long-term is going to be North American onshore. We have got a partner with Chevron and our Kitimat project. And that we have got to transition that. So, right now, what we would like to do is sell down a significant portion of it certainly in 2014.

Bob Brackett - Sanford Bernstein

What’s the rationale behind selling some of our Gulf assets to Freeport?

Steve Farris - Chairman and Chief Executive Officer

We sold Heidelberg and Lucius to Freeport. We actually if you remember back in our year end conference call that for 2012 actually we talked about selling some assets, we had a list of assets. (indiscernible) deepwater was on that list. What we also said was we are not going to sell an asset unless we get fair value for it. And I really think our folks have done an outstanding job whether it’s Egypt or Argentina or anything else we have sold, we had a lot of interest in our deepwater assets, but we never got a price that we thought was commensurate with the value. We felt we did with Heidelberg and Lucius. So, we sold to Freeport.

Bob Brackett - Sanford Bernstein

Apache used to be in the business of buying old properties of the majors and squeezing net incremental resource, is that strategy done? Is there too much competition or no need to pursue that anyways?

Steve Farris - Chairman and Chief Executive Officer

I think if you look at what’s happening in North America and you look at the repeatable consistent opportunities that you have. And honestly, Briar Patch, this is all about execution, whether we buy something in a field and then drill a bunch of wells off of it or we buy acreage and drill those wells, it’s still all about execution. And I truly believe we are as good as executing as anybody out there. All we are doing is moving up back to one level to the lease as opposed to an old facility.

Bob Brackett - Sanford Bernstein

Do you believe Apache is misunderstood by investors? If yes, what in particular is being overlooked?

Steve Farris - Chairman and Chief Executive Officer

We have – if you look back that chart 2009, we have had a lot of moving parts from 2009. And I accept that, we aim to. We really wanted to get back in North American onshore. So, from quarter-to-quarter, if you look at the things we either bought or sold, we have had a lot of moving parts. Actually, the first quarter of 2014 is the first quarter that we are steady state and we had a very good quarter and I look it’s going to be a very good year for us. So, I think they understand you will get there.

Bob Brackett - Sanford Bernstein

Are you in the Bakken? Is this is a growth area for you?

Steve Farris - Chairman and Chief Executive Officer

We are not in the Bakken. We bought some acreage on the fringes of the Bakken. We had an idea there. Honestly, it didn’t pan out. We thought that basin would come up and be asymmetrical. And we could find all on the western planks of it, it just didn’t more.

Bob Brackett - Sanford Bernstein

If we talk about a couple, you are always going to have new ventures or new ideas in the portfolio, things in the past you have talked about, whether it’s deep onshore gas or Miss Lime or New Zealand. Are there things in the portfolio that people aren’t thinking about that you still have some hope for?

Steve Farris - Chairman and Chief Executive Officer

Well, certainly I think while our Eagle Ford is pretty much far along now. I mean, I think the results are getting better, I think our costs are going down. I think that will be a big play for us. Certainly, the Canyon Lime is kind to have the potential of being a big play for us. We have a huge acreage position in there. And we can grow lot of wells. And the first three wells that we drilled are good. We have a couple of other plays on North American onshore that were active in right now. Obviously, some of those things you can’t talk about. Internationally, for the most part, we are drilling some wells in Australia. We have a block in Surinam, which we think is the same thing as the Western edge of West Africa. We have got 45% of it. We are going to pay 15% of that well, that you are drilling in 2015.

Bob Brackett - Sanford Bernstein

Please discuss options for improving shareholder returns if the current outline actions don’t lead to a higher stock valuation?

Steve Farris - Chairman and Chief Executive Officer

Well, we are doing it, because I think it will. So, I am not going to speculate on what happened to fit that.

Bob Brackett - Sanford Bernstein

Why, well as we have redirected it, so if you achieve call it 6% to 8% growth if the share buybacks continue if the dividend grows, if you live with them, does that sort of gets you to improved shareholder returns?

Steve Farris - Chairman and Chief Executive Officer

I think it will. I mean, we believe in that. And I believe we can execute on that plan.

Bob Brackett - Sanford Bernstein

Are you being paid in Egypt?

Steve Farris - Chairman and Chief Executive Officer

Our production, 88% of our revenues are oil, the one difference you read a lot of stuff in the paper about people having big receivables in Egypt. We export all our crude oil, which – and we export it to Exxon, lot of different buyers of our crude oil and we export it at a port. So, we get paid outside of Egypt for our oil. So, our receivables actually are lower today than they had been over the last five years.

Bob Brackett - Sanford Bernstein

A new President in Egypt what are your thoughts on how that will affect Apache in Egypt?

Steve Farris - Chairman and Chief Executive Officer

In my opinion, what they are going through right now is what they really should have gone through back in 2011. But one thing I would say is we have 27 rigs running on July 25, 2011. We have 27 rigs running today. We have never shut in a barrel of oil or mcf of gas. And we continue to export crude. So we are very comfortable in Egypt frankly.

Bob Brackett - Sanford Bernstein

If – and I think the questions I have in front of me, so I guess ask my questions. If we go back to Australia, this is a growth year for Australia and into next year as well, some of these barrels will come mid-year and therefore you will kind of get some of that credit for them in next year as well. Is everything on pace? Are there any worries about development risk or startup risk?

Steve Farris - Chairman and Chief Executive Officer

I mentioned our Coniston development, but we had some dumb iron that had 5 millimeters of go into slot that stabilizes both with 5 millimeters too big and 5 millimeters on a 500 pound, it doesn’t seem like very much, but we have got to mill around that. That should set us back about a week, week and a half, but in terms of overall delivery, we are in pretty good shape.

Bob Brackett - Sanford Bernstein

And then in terms if we go back to the North Sea, last year some of the CapEx spend was toward the Forties Alpha expansion platform that gave you a bunch of new slots. That was capital that wasn’t associated with production, but it opens up a potential for more production out there. What are your plans in the North Sea?

Steve Farris - Chairman and Chief Executive Officer

We have put a new platform that’s got 18 new slots. We should get on that platform with a jack-up by the first and fourth quarter. And we will drill 7 wells of that platform. Right now, what we are asking from the North Sea, because it’s a matter of capital. What we are asking for the North Sea to stay flat. There is an awful lot of discussion about the North Sea and runtime etcetera. Our runtime in North Sea on our platforms was 92%. The industry average was 60%. That says something about our people, but it also says something about the assets that we have. We have two of the best assets from the North Sea and Forties in barrels. And that was on purpose, Forties at 2.5 billion barrels of oil in place and barrel had over a billion barrels of oil in place. And in terms of being able to continue to keep that production flat, I feel it’s pretty comfortable with it.

Bob Brackett - Sanford Bernstein

But if I break that asset into the subsurface and topsides, those topside facilities are just as old as a bunch of other facilities in the North Sea, yet you all have managed to keep that uptime higher. Do you ever wonder why offset operators, other operators up there can’t achieve your level of success?

Steve Farris - Chairman and Chief Executive Officer

It’s I can’t say enough it starts with a reservoir. And we put a lot of money into Forties and we put some money into barrel. When we bought Forties in 2003, we were very fortunate, because oil prices were $23 and they went to $35 in about 9 months. So, it gave us an awful lot of cash flow to reinvest on our platform. And we have reinvested quite a bit of money on maintenance etcetera. We also pride ourselves on being pretty good operators too.

Bob Brackett - Sanford Bernstein

That ever caused you to look at other assets that would naturally fold into that business?

Steve Farris - Chairman and Chief Executive Officer

It have to be good assets. I mean, the one place in the world it’s hard to make a living at if you don’t have real good assets that (we now exit).

Bob Brackett - Sanford Bernstein

So for the time it’s probably stick to the asset.

Steve Farris - Chairman and Chief Executive Officer

You are right.

Bob Brackett - Sanford Bernstein

If you can – I am going to come back to the Permian and kind of back to this question if I which zone – I mean how do you think about developing rather than how do you breakdown the unit of investment, is it a well, is it a multi-rig program, is it a production facility?

Steve Farris - Chairman and Chief Executive Officer

It’s EUR versus cost and obviously if you have like we are doing at Barnhart where you had pad drilling. And Wolfcamp honestly right now Wolfcamp and possibly Delaware Basin. The Wolfcamp is right now is probably the best play in the Permian Basin and the Delaware Basin. We have high hopes for the Cline. We have got a huge acreage position in the Cline. Our latest wells have gotten better. But it’s not just which ones are the best on the EURs that’s ones from the rate of return standpoint. And that’s basically how we look at our business.

Bob Brackett - Sanford Bernstein

But if I am (indiscernible) in the Permian is it rolling up individual wells, where you bring a well or you bring a multi-rig program or you bring a section or you bring a big production facility?

Steve Farris - Chairman and Chief Executive Officer

All of it, I mean honestly you start with the well, you start with how many wells can I drill, so I can be the most efficient, okay. And what can I do to lower my cost on completion of one well versus and the whole pad. And when you roll that up and you compare tell there are opportunities and say this project on an overall program basis is the highest rate of return.

Bob Brackett - Sanford Bernstein

And the other is do you have a strategy in the Permian to grow that midstream as a business, is that something, you have seen other operators in other basins grow their midstream in tandem with their upstream eventually kind of spinoff that midstream into a different structure?

Steve Farris - Chairman and Chief Executive Officer

We don’t have a lot of midstream out there. We got a plant in the Permian, we got a plant in the Texas Panhandle. But for the most part we really offloaded that cost to third party, so we don’t have a huge midstream business that we can.

Bob Brackett - Sanford Bernstein

And that’s always been your – that’s the midstream take care of that, does that ever bite you in times of high…?

Steve Farris - Chairman and Chief Executive Officer

In Southeast New Mexico with I think its frontier plant we thought it was going to be on sooner than it was. Actually we worked very closely with them as we realized that we weren’t going to be on plan integrated with our teams in order to get that off. We don’t really make a lot of money on the upstream I mean on the midstream as long as we can make sure we can sell our products at a fair price.

Bob Brackett - Sanford Bernstein

And then I will come back to LNG and you have neither this year or next year is going to be the peak CapEx year for Wheatstone?

Steve Farris - Chairman and Chief Executive Officer

Wheatstone is 2014.

Bob Brackett - Sanford Bernstein

So we are hitting the peak of CapEx this year, Chevron clearly if I contrast Gorgon LNG with Wheatstone LNG, we are going to have a lot of trouble with the different views, can you gave a sense of why those are different assets and why the outcomes will be different as Chevron developed those two?

Steve Farris - Chairman and Chief Executive Officer

Yes, if I pick Gorgon first actually because a lot of the learning is that they have gotten off Gorgon they have taken Wheatstone frankly. You also had crews. You have got I mean it’s all contracted, so they are same crews who are on Gorgon are coming to Wheatstone. The biggest difference honestly is really two. One is on an island Gorgon. And one it’s got about 230 acres onshore Australia, it’s a huge difference. They have got a bubble lost everything that goes one to (indiscernible) island for Gorgon that’s not the same when it comes to the mainland. They also got sideways with their exchange rate. They did a lot of that in Australian dollars and the Australian dollars went from 0.67 to 1.04. When its probably be the biggest one-off that they have. Wheatstone has been very good frankly. I mean we are – we got contracted early. They did a lot of pulley work on the plant site and it’s really done along very well.

Bob Brackett - Sanford Bernstein

And then on Kitimat, so I was up in Kitimat last week looking around clearly there is capital being spent on that sites, clearly this is a project that has not been FID there has been no final investment decision, is that a 2014 event for FID or does it depend on a gas marketing contract or a downstream…?

Steve Farris - Chairman and Chief Executive Officer

I think it’s somewhat of a chicken of the egg. The one thing I will tell you that Chevron did learn at Gorgon and took the Wheatstone and now taken the Kitimat is early site work is tremendously important to that project. The other thing that I will say is honestly it’s not because that’s a good project that we are going to reduce our interest, that is one of the best projects in the world. If you listen to Chevron I mean that’s one of their one or two best projects in the world. We have a right away which you talk about in the utility field for Western taking gas often. West coast of I mean of Canada the pipeline is tremendously important. We are clearing pipeline that project regardless of what Apache’s interest in it will go.

Bob Brackett - Sanford Bernstein

And when you monetize that how do you structure is that just cash for a certain share or is it a swap or for a downstream interest or do the terms of the gas contract get embedded in the sale price?

Steve Farris - Chairman and Chief Executive Officer

If you are talking about the downstream person that once in the upstream, it’s probably your last conversation, if you are an upstream player that wants to be in the LNG business in Canada that’s more of a cash burn interest.

Bob Brackett - Sanford Bernstein

And then if we talk about allocating capital and clearly some of the wells you are drilling in the Permian are triple digit rate of return payout right away, LNG is a different beast, how does LNG compete for capital relative to kind of the bread and butter onshore drilling program?

Steve Farris - Chairman and Chief Executive Officer

If you look at the asset base that we have right now, one of the reasons we made the decision to monetize Wheatstone is if you look at the – Wheatstone will generate $1 billion worth of cash for the next 20 years. But if you discount that back to those dollars and you compare that to what you could get for it, that’s a sure thing. The rate of return is lower, but it’s very predictable and consistent. If you look at what we have now in North America, if we can get a good price for our shareholders we are better off taking that money today and invest it in our base business in North America onshore.

Bob Brackett - Sanford Bernstein

And would that cash – is that cash trapped abroad if you would have so, Wheatstone does that have to get recycled into North Sea or Egypt or Australia?

Steve Farris - Chairman and Chief Executive Officer

That’s a good question because I will tell you some of it will be trapped very well. We have ways to bring it back over time, but some of it will be trapped overseas.

Bob Brackett - Sanford Bernstein

But then – but Canada is overseas literally, but Canada is affecting…?

Steve Farris - Chairman and Chief Executive Officer

We moved money around to point all our international positions.

Bob Brackett - Sanford Bernstein

And then if we think – we have been talking very Apache specific, what about kind of a macro view, where are you in terms of the oil and gas cycle, is oil is Brent going to be $110 for ever, it will go up, go down?

Steve Farris - Chairman and Chief Executive Officer

Yes, let me start on gas because gas is as you – and I have said this for years, so I mean we have much more gas and more views in the next 100 years and we say we have got 100 year supply, we probably – we really have to get it. We probably 200 years supply. No, I think (indiscernible) this morning with $4.47, I can’t see that really changing. Lot of people think that if we get all this LNG offshore, I think – they think it will change. We can plan awful lot of LNG and still supply gas to North America, $4.50 or thereabout. Oil is a world market. I mean, I am very bullish on oil. And I say the same thing today as I said three or four years ago. If you look at the world, I think in 2008, we were using 83 million barrels a day and everybody goes that’s we are using 93 million barrels today or thereabouts. And if you look at the cost that were putting all these barrels on a bookstore, I can’t never say never, because we could see so many thought overall for three or four months, but we are going to see long-term pressure, higher pressure on oil prices in my opinion.

Bob Brackett - Sanford Bernstein

And – but if we think about imagining LNG export occurring at $4.50, that’s not price of gas that gets a patchy interested in adding rigs to gas. So, don’t you need a higher gas price to incent the rigs to come in and grow that supply?

Steve Farris - Chairman and Chief Executive Officer

We saw it in January and February of this year. We had gas prices spiked up a little bit, because we have drawn storage and I wonder it was coal. We probably everybody in the world drill rigs out there and store (indiscernible) wells, because they had shown up on the strip. We see somebody says we are going to have $6 gas, we will have $4.50 gas in a year, because well, everybody will go out there and drill gas levels. We just that with shale drilling and the amount of gas we have, we have got just-in-time inventory.

Bob Brackett - Sanford Bernstein

If you had a gas price spike, how quickly, how long would it take for the supply to come back into that market to hit that price signal, so you decided….

Steve Farris - Chairman and Chief Executive Officer

I think we saw it in January and February this year, I think….

Bob Brackett - Sanford Bernstein

So that, that one or three months response?

Steve Farris - Chairman and Chief Executive Officer

I just don’t have a – we have a lot of graph. I mean, I think that’s I maybe aware I don’t find, I don’t think so, but I am not real bullish on gas prices long-term. And that’s good for this economy. I mean, if you think about all the chemicals, less people start to get to into this country, that’s…

Bob Brackett - Sanford Bernstein

And then how big can North America liquids and oil, I mean, you are running approaching 40 rigs horizontal, you have got competitors that have talked 120 plus horizontal oil rig programs in the Permian? How many rigs can Apache run in the horizontal oil, modern fracked wells before things….

Steve Farris - Chairman and Chief Executive Officer

One of the things I would say, if you think about where Apache was in 2010, we had five rigs running. We spent about $0.5 billion in Permian basin. If you think about where we are today, we are going to spend $2.6 billion or thereabouts, that’s still over three years, four years. There is a thing about being efficient. And one of the things you got to be careful of in any of these shall wells, I mean, plays is you can’t just drive rigs in there and say we are going to grow. I mean, we have done it over a period of time. It will take some time for people to gear up to that kind of – and especially I don’t know if any of you ever been the middle owner, have been the middle in lately, I mean, it’s a tremendous infrastructure being built, tremendous activity level, why is why you want to have a portfolio as far as I am concerned.

And with that, we are down to the less than 10 minutes. If we have any cards left in the audience, feel free to wave them. And I see one in the back, if I could ask someone to fetch that. Thanks, Salim. I think it’s over there. And otherwise you can feel free to call out questions, (indiscernible) the CFO has passed a question forward. And he swears I was at the near after year you mean. No, are you still in the nat gas transport business?

Steve Farris - Chairman and Chief Executive Officer

Well, we are – we are for our self this is did we – we built 20 stations all except to or Apache basically owned and operated. We have 900 vehicles or so on the road fueled vehicles about two-thirds of those are CNG. They burn cleaner. They cost less, they truly are an economic thing for us.

Bob Brackett - Sanford Bernstein

What percent of your Permian acreage is on par with Midland and Delaware core, will the Central Basin platform ever develop into a top horizontal play?

Steve Farris - Chairman and Chief Executive Officer

We are drilling Witchita Albany wells on the Central Basin platform and those wells are doing very well. I think some of our best wells on Witchita Albany. There are a number of plays that we are looking at on the platform. Right now certainly the Midland Basin is the hot basin. We have a lot of acreage there in the Delaware Basin is. But honestly what we see today Permian Basin has much oil of play as any plays else in the world beside Siberia. So when you think about the Permian Basin unlike our Eagle Ford play frankly where you got one zone, you are going and maybe you got some butane, some Austin Chalk in those plays, but the Permian Basin has a tremendous section of just oil field rock. Somebody asked why we are not drilling more Sprayberry wells. We drilled real first horizontal Sprayberry wells maybe at the end of last year. We got big acreage position in there. But we just really haven’t gotten around to it yet.

On the Kitimat stake sale, if you don’t get an attractive offer, what is the alternative? Specifically, will you be on the hook for future say 2015 CapEx that will cause Apache to outspend the cash flow?

Steve Farris - Chairman and Chief Executive Officer

Mark [ph], I am not going to talk about the agreement. I am very comfortable with our – number one, with our ability to sell down, but also with our ability to scale back our capital.

Bob Brackett - Sanford Bernstein

How should we think about Russia’s pivot east in terms of long-term gas strategy to supply? Does that provide a long-term strategy to supply Europe and what is the impact on gas prices?

Steve Farris - Chairman and Chief Executive Officer

I am certainly not an expert of that. There is an awful lot of discussion in the United States by taking LNG to Europe. So, it alleviates that problem. That’s a long-term fix for a short-term problem. I am not sure – I am not qualified to answer that question.

Bob Brackett - Sanford Bernstein

Rephrased in other way, when we learned last week about the sort of Russia/China gas supply agreement, that’s competing in a market that Canadian LNG is competing into, was that something that kept you up all night? Is that something that you had already foreseen to change the dynamic of our negotiations with buyers?

Steve Farris - Chairman and Chief Executive Officer

No. I mean, I – if you look at any our, the Asian countries and especially what the nuclear, what they end up doing with nuclear is still unknown. Tremendous gas needs in China and Asia and they are on our way to fulfill that right now is LNG and they are not going to be totally captive to Russia in the end. I would be surprised if they won.

Bob Brackett - Sanford Bernstein

Well, with that we are wrapping down to the last few minutes. I will throw it out to the audience for any last question? And seeing none, I will thank Steve very much for having the time here.

Steve Farris - Chairman and Chief Executive Officer

Thank you, Bob.

Question-and-Answer Session

[No Q&A session for this event]

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Source: Apache's (APA) CEO Presents at Sanford C Bernstein Strategic Decisions Conference (Transcript)
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