Apache's (APA) CEO Steven Farris on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Apache Corporation (APA)

Apache Corporation (NYSE:APA)

Q2 2014 Earnings Conference Call

July 31, 2014 2:00 PM ET

Executives

Castlen Kennedy – Director-Investor Relations

G. Steven Farris – Chairman, Chief Executive Officer and President

Alfonso Leon – Executive Vice President and Chief Financial Officer

John J. Christmann, IV – Executive Vice President and Chief Operating Officer-North America

Thomas E. Voytovich – Executive Vice President and Chief Operating Officer-International

Analysts

Robert Brackett – Sanford C. Bernstein & Co., LLC

Michael Roe – PPH

Pearce W. Hammond – Simmons & Co.

Joseph David Allman – JPMorgan Securities LLC

John Herrlin – Societe Generale

Doug Leggate – Bank of America Merrill Lynch

Brian Singer – Goldman, Sachs & Co.

Michael Hall – Heikkinen Energy Advisors

Charles A. Meade – Johnson & Rice Company L.L.C.

Arun Jayaram – Credit Suisse

Jeffrey Campbell – Tuohy Brothers

Leo Mariani – RBC Capital Markets

Richard Tullis – Capital One

Joseph Patrick Magner – Macquarie Capital Inc.

Operator

Good afternoon. My name is Sia and I will be your conference operator today. At this time, I would like to welcome everyone to the Apache Corporation Second Quarter Earnings 2014 Conference. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you, at this time I would like to turn the conference over to Ms. Castlen Kennedy. Please go ahead ma’am.

Castlen Kennedy

Thank you, Sia. Good afternoon, everyone and thank you for joining us for Apache Corporation’s second quarter 2014 earnings conference call. On today’s call, we will have three speakers making prepared remarks prior to taking questions.

I will start by giving a brief summary of results and then we will hear from Steve Farris, our Chairman and Chief Executive Officer and President; followed by Alfonso Leon, our Executive Vice President and Chief Financial Officer. In addition, joining us for the question-and-answer session are John Christmann, Executive Vice President and COO of North America; and Tom Voytovich, Executive Vice President and COO of International.

We prepared our quarterly financial supplement for your use, which includes the reconciliation of any non-GAAP numbers that we discuss such as adjusted earnings or cash flow from operations. In addition, we have prepared our quarterly operation supplement which summarizes our activities and includes detailed well highlights across the various Apache operating region. These can both be found on our website at apachecorp.com/financialdata.

Today’s discussion 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 defer materially from what we discuss today. A full disclaimer is located with the supplemental data on our website.

This morning we reported second quarter 2014 earnings from continuing operations of $505 million or $1.31per diluted share. Adjusted earnings which excludes certain items that impact the comparability of results, totaled $644 million or $1.67 per diluted share. Cash flow from operations before changes in working capital totaled $2.2 billion during the quarter.

Total reported net production averaged 635,814 barrels of oil equivalent per day, with liquids production constituting 59% of the total. On a pro forma basis, adjusting for recent sales and excluding the non-controlling interest and tax barrels from Egypt second quarter production was 550,357 barrels of oil equivalent per day, with liquids production constituting 60% of the total.

I’ll now turn the call over to Steve.

G. Steven Farris

Thank you, Castlen and good afternoon, everyone and thank you all for joining us. I want to apologize everyone, I’ve got somewhat of a summer cold, so I sound a little – my sounds a little deeper than it usually does I apologize.

Our second quarter results provided I think additional evidence of our strong North America position, and our ability to continue to profitability grow our production. And before I jump into the details of the quarter, I want to provide an update on Apache’s ongoing repositioning of profitable and repeatable North American onshore growth. Over the last five years Apache has greatly enlarged and enhanced its North American onshore resource base and I believe that it is capable of driving our growth and performance over the next several years.

During the last 18 months, we’ve been increasing the focus on our North American onshore business, by divesting of around $10 billion of property. In addition, we’ve launched an aggressive stock repurchase program and we’ve also made it clear there are no sacred cows and our efforts continue. There has been recent discussion regard Apache’s potential future steps and focusing our portfolio, and today’s call gives me an opportunity to provide an update to our shareholders on our direction and the work that it’s been underway.

First, let me state at the outset, the Apache’s future will be centered on our tremendous North American onshore resource base. Second, I’d like to make it clear, that Apache intends to completely access the Wheatstone and Kitimat LNG project.

And third, in light of our expanding opportunity set in North American onshore, we are evaluating our international assets and are exploring multiple opportunities including the potential for separation of some or all of them through the capital markets.

And one additional note regarding our North American onshore portfolio, over the past year, we deepened our understanding of our North American properties. We’ve elevated our capabilities in advanced emerging plays and in that regard this fall we intend to hold an update presentation on North American onshore highlighting our $1.7 million net acres in the Permian basin.

So, with that out of the way, let me move to the details of our performance in the second quarter. This morning we announced second quarter results of $644 million or $1.67 per share of adjusted earnings, and $2.2 billion of cash flow from operations before changes in working capital.

During the quarter our operational focus in extensive acreage position across our best hydrocarbon region rich basins allowed us to drive production growth in North American onshore liquids. On a pro forma basis, we averaged 201,000, 395,000 barrels of oil per day, which is up 18% year-over-year.

North American onshore liquids represented nearly 61% of our total worldwide liquids production and 37% of our overall production. A corner stone of our North American onshore success has been the outstanding performance in the Permian basin. And through the first half of the year, the Permian region’s performance is ahead of our plan. In fact we surpassed the significant milestone earlier this year as we celebrated reaching 150,000 barrels of oil equivalent and a day net.

We have come a long way since we launched the regions just over four years ago. And have grown production nearly 200% since that time. In fact, we have grown production 17 out of the last 18 quarters, and the last 11 quarters consecutively.

Cash flow from the region is coming in ahead of plan. And we anticipate the region will fully fund its capital program for the year. We expect to deliver over 23% liquids growth and more than 20% Boe growth for the year. And this performance demonstrates our focus on operational excellence and are driving out of cost from the system. And it underscores Apache’s leading position in the Permian.

In the Anadarko Basin, our Central Region has experienced several challenges over the last couple of quarters. And as a result production growth has been disappointing. Our total wells drilled to-date for the year is 26% behind plan due to weather slowdowns as well as mechanical difficulties in both drilling and completion.

We’re retooling the region in addition to recently making personnel changes or scaling back the Anadarko Basin activity and reducing capital and rigs. We continue to believe in the growth opportunities in the Anadarko Basin, we just need to slowdown and assure our selves we’re making good investment decisions over the long term.

We do intend to ramp up our drilling activity in our Central Region Canyon mine play and Oldham and Potter County of Texas Panhandle. And I’ll touch on this in more detail a little later.

As we said in the past, we view North American onshore business as one large resource comprised of several different plays and we will allocate capital and resources to the best opportunities within that portfolio. Despite the challenges we had in the Anadarko Basin, I want to reiterate our 15% to 18% North American onshore liquids guidance. And I also want to reiterate our 5% to 8% increase in our production, overall production guidance. We have a significant opportunity before us in North American onshore and the ability and expertise to continue to execute and deliver growth in the years to come.

I’d like to specifically mention a few highlights from the quarter and share some of the results we are most excited about. I want to start in North American onshore Permian Basin, we have averaged 37 rigs, 24 of which were horizontal, and we grew production 4% over the previous quarter. Year-over-year we’re seeing total production growth of an impressive 26%.

We had a strong Wolfcamp shale results in Regan County in Southern Midland Basin. For example, our SRH 1335 had a 24-hour rates of 1,184 barrels of oil equivalent a day. We also had impressive results in the Bone Spring of the Delaware Basin, with several new wells coming on in Reeves and Loving County, including the Robin 8 with 24-hour rate of nearly 1,200 barrels of oil per day.

And our East Texas Eagle Ford play in Brazos and Burleson counties, we continue to be very excited about our opportunity in this emerging play. We’d recently added additional acreage and now hold over 2,000 net acres in the play.

We’re shifting to more of an appraisal mode in our drilling from pads to further reduce cost and enhance returns. We have spud 26 wells during the quarter, with most scheduled to come on line frankly in the third quarter, the Reveille 8H was completed during the second quarter in a 24-hour IP of 987 barrels of oil equivalent a day.

We also have early test on wells coming on in first part of the third quarter, including the nearby Reveille 10H and 14H which had 24-hour IPs of 906 barrels of oil equivalent per day and 1,220 barrels of oil equivalent per day, respectively. With these strong results and our tremendous land position we decided to further ramp our activity up and should be running 10 rigs by year-end in this play.

In the Canyon Lime play in the Texas Panhandle, we also have seen strong results, specifically our most recent well the Bivins 94-1H at a 30-day IP of 1,718 barrels of oil equivalent a day. We hold approximately 100,000 net contiguous acres in this play and are planning to drill a total of six wells this year to further delineate the play and we should have four rigs running active in this play by year end.

Turning to Canada, in our first quarter call, we disclosed that we had drilled the Duverney and Montney wells. The initial production rates has been encouraging. For an example, in the Duverney in the first quarter we completed well 24-hour rate of 1,963 barrels of oil equivalent a day. And in the Montney our first well was completed in the first quarter, had a 30 day IP of 926 barrels of oil equivalent a day.

And with these positive results, we’re looking to increase activities in these plays and plan to spud 10 wells in the Duverney and two wells in the Montney by year-end 2014. We’ve also been adding to our acreage position in both these plays, we now have 146,000 net acres in the Montney and 177,000 net acres in the Duverney.

I want to take a second and shift to our international region. Production was in line with expectations as we held it flat over the previous quarter. We remain on track to generate significant free cash flow for the year from our international regions.

In the North Sea second quarter production was up 7% quarter-over-quarter, as we recovered from a difficult winter. We drilled eight new wells during the second quarter including a new well in the Beryl field that achieved 30-day IP of 4,500 barrels of oil equivalent a day. And our (indiscernible) well that achieved an average 30-day IP of 1,500 barrels of oil per day.

During the quarter in Egypt, we had additional exploration success, we had notable tests in the AEB, Safa, and Paleozoic reservoirs as well as the horizontal test in Upper Bahariya.

Following Phase I of our (indiscernible) development project the field is now producing at peak productions and we’ve also seen record oil and gas production from successful work on the BP acquired call to two properties at Abu Gharadig and Razak.

And finally, in Australia we continue to make progress on several of our new projects. Our Balnaves project is expected to come online in the third quarter, in fact we expect first of all in the next few weeks.

I want to point out our Coniston development project which is originally scheduled for first oil during the third quarter of 2014 is now going to be delayed until early 2015. Our FPSO, the Ningaloo Vision were delivered to the shipyard in Singapore early part of this year to undergo process upgrades and capacity expansion, which will require to bring on our new Coniston wells.

During a deep hole inspection coincident with the upgrade, it was discovered that it had significant structural steel replacement problem that was necessary to ensure its long-term safety and integrity of production up time for this FPSO. The repair work is well underway; it should start up later than initially planned. However, and this delayed start up does not, but I want to point out this delayed start up does not impact our overall production guidance.

As I mentioned earlier, we are on track to deliver our production guidance for 15% to 18% North American onshore liquids growth and our global BOE expected growth of 5% to 18%, based on our 2013 production on a pro forma basis.

Finally, before I turn the call over to Alfonso, I want to briefly touch on our buyback program, utilizing proceeds primarily from divestments during the quarter Apache bought back an additional $780 million worth of stock. This brings our total expense the launch of our buyback program through the end of the second quarter to nearly $2.3 billion or 26 million shares.

As a reminder during the second quarter our Board increased our authorization by 10 million shares to 40 million shares. And we continue to be Apache shares at compelling value at current prices.

With that, I would like the turn the call over to Alfonso

Alfonso Leon

Thank you, Steve. I’m going to cover some balance sheet highlights and provide production and financial expectations for the remainder of the year. First, with respect to our balance sheet, during the second quarter we completed three significant portfolio focusing steps. The monetization of our major deepwater development projects, the divestment of dry gas properties in Canada, and the focusing of our asset base in south Texas. These three things actions close during the quarter yielding $1.8 billion of cash proceeds.

This brings the total cash proceeds generate before portfolio focusing steps over the last year to $10 billion. As Steve mentioned, we continue to actively repurchase Apache common shares during the quarter. In the second quarter we bought back $780 million in stock. To put that number in context I should note that the $1.4 billion proceeds from our deepwater divestment were only received on the very last day of the quarter, 30th of June.

Our balance sheet remained strong, our total cash position as of June 30 is nearly $1.9 billion. Debt remains unchanged at $9 billion which puts us at 22% debt to cap.

Now I’m going to make some comments regarding your expectations for the remainder of the year, starting with production. As Steve said, we remain on track to deliver our production growth expectations for the year, consistent with our 15% to 18% North American onshore liquids growth expectations, and the third and fourth quarters we anticipate 2% to 4% sequential North American onshore liquids growth, driven by our horizontal development, programs continuing to build on their momentum.

In line with our 5% to 8% global BOE production growth, we anticipate our global gas production to drop 1% to 2% sequentially in the third quarter. And for global BOE production to be flat to 1% up sequentially for the quarter. This is driven primarily by our regularly scheduled third quarter maintenance turnaround in the North Sea, where production is expected to be 12% to 14% down sequentially in the third quarter with that production returning in the fourth quarter.

As a final production note we currently expect Australia production to rise 6,000 to 8,000 BOEs per day sequentially in each of the third and fourth quarters, driven by oil from Balnaves ramping up.

Going to turn now to realizations. We currently expect North American oil realization discounts to WTI of $5 to $8 barrel. On the international oil side we expect to shift to a realization discount to Brent of $1 to $2 per barrel as our mix of production evolves with Australia ramping up.

We continue to expect North American natural gas realization discounts to NYMEX for the full year in line with first quarter or a $0.40 per Mcf discount. And we now see global NGL realizations at 28% to 30% of WTI for the remainder of the year, which is slightly lower than our previous expectation, driven by North America now being expected to be at 25% to 27% of WTI.

Now I'm going to move to the expense side. Starting with LOE. Second quarter unit LOE was up sequentially to $10.59, this is in line with expectations we set out in our previous call, of an increase form first quarter levels by 10% through year-end, driven by the ongoing shift in our portfolio balance and general cost increases.

Going now to DD & A, unit recurring DD & A was up $0.70 sequentially in the second quarter. This is in line with our expectations to see it rise this year by as much $2 per BOE from first quarter numbers, as we focus our capital on liquids projects.

Going to taxes other than income, we expect an increase for the remainder of the year primarily driven by the initiation of Australia PRRT expense. Based on current strip prices, we currently expect taxes other than income to increase sequentially by $40 million to $70 million in the third quarter.

Going to G&A, second quarter G&A expense reflected the timing of third-party reimbursements, we expect a sequential increase of $20 million to $40 million in G&A expense in the third quarter.

And finally, on the Income Statement, going to income taxes, our adjusted income tax rate was 40.3% in the second quarter, which is in line with our expectations of 40% to 44% for the year. On an adjusted basis, our deferred tax percentage was 30% which is broadly in line with our previously stated expectations for the year.

Finally, capital for the first half of 2014 was in line with our plan for the year. We have updated the format of our capital table on Page 10 of financial supplement to facilitate the tracking of our investment.

This concludes our prepared remarks. I think we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Please note that during the Q&A portion of the call, you are allotted one question and one follow-up question. Please hold for the first question. First question will come from Bob Bracket with Sanford Bernstein.

Robert Brackett – Sanford C. Bernstein & Co., LLC

Hi, good afternoon. Question on this international asset separation, and it has two parts. In terms of Egypt, does the JV partner have any preemption rights or any ability to restrict what you might do there? And the second is you talk about North America growth as opposed to U.S. growth. What’s the role of Canada in the portfolio, and is it a target for the international asset separation?

G. Steven Farris

Well, let’s start with the international certainly the way that we are looking at it, we would just spend out or set up a company that was not was above any of the relationships Apache had at the joint venture level. So that would not require votes of other parties.

With respect to Canada, we have said for some time that Canada was a part of our North American onshore portfolio, certainly we have two businesses up there. I think we have a business which is a big business that we have with respect to Duvernay Shale, the Montney Shale and some of the other things that we are working on there and then we also have Kitimat, Horn River, Leard.

Kitimat, Horn River, Leard is part of our LNG projects that we indicated and re-indicated today that we intend to exit.

Robert Brackett – Sanford C. Bernstein & Co., LLC

And then a follow-up on the East Texas Eagle Ford, if you’re ramping the 10 rigs, does that you’ve de-risked it and this is a commercial project that competes for capital.

G. Steven Farris

We feel very comfortable we’d de-risk and it also is going to compete with capital and today what we are trying to do is refine it and it increase the rate of return and the EURs and lower the cost.

Robert Brackett – Sanford C. Bernstein & Co., LLC

Great, thanks.

Operator

The next question will come from Michael Roe with PPH.

Michael Roe – PPH

Yes, good afternoon. I just had a quick question on the central region. So I know you all picked up some rigs in Q2 to try to catch up based on your slowdown in Q1. So I was wondering when you’re decelerating in that region this year, are there particular zones that we will see less capital relative to others?

John J. Christmann, IV

This is John. Yes, I mean we are planning to drop some rigs and slowdown and retool in the central region so we will dropping some capital back half of the year.

G. Steven Farris

I apologize because you were very almost inaudible on this end but – right now we got two parts of the central region, we got the Anadarko Basin, which we are going to drop some rigs on and we also got the Canyon Lime down in Texas Panhandle, we are going to be increasing but net-net we’ll be reducing our capital in the overall program for the central region.

Michael Roe – PPH

Okay, yes, so my question didn’t come through clearly, I was just curious, if there is any specific zone in the Anadarko Basin that will see less capital unlike is it the Cleveland or the Granite Wash, they will see less capital or will it just be kind of uniform across the board.

G. Steven Farris

In general, we still remained very bullish or excited about the basin we just need to slowdown and we’ve had good wells in all those zones. We just need to kind slowdown take a deep breath and pause and regroup.

Michael Roe – PPH

Okay, great, and then I guess just shifting really quick to the Permian Basin, looks like the well results you all had in the Bone Spring look pretty strong in the Pecos Bend area. I was wondering if you could help provide color on how much acreage you have in Reeves, Loving and Ward Counties of the Delaware Basin? Just trying to get a sense of your running room there.

John J. Christmann, IV

When you look at our Delaware basin acreage we’ve got over 500,000 gross for that 215,000 net. So we’ve got good running room in all three of those counties. But I don’t have a break down specifically just to those three. But that is how you kind of look at the whole Delaware basin.

Michael Roe – PPH

Okay, thanks for the color.

Operator

The next question will come from David Tameron with Wells Fargo. David your line is open. Can you hear me your line is open.

Castlen Kennedy

You can go ahead and move to the next question, please.

Operator

The next question will come from Pearce Hammond with Simmons & Co.

Pearce W. Hammond – Simmons & Co.

Hi, good afternoon guys.

G. Steven Farris

Good afternoon.

Pearce W. Hammond – Simmons & Co.

Regarding potential international divestitures, how do you balance the need to simplify the company and placate some shareholders in the near term versus the challenges of receiving fair value for those international assets and what is best for the company in the long-term.

G. Steven Farris

Well I think number one if you look at what we’ve done over the last five years and what we’ve said today they are consistent we – in the past we haven’t said what we’re going to today, we thought like we – with all the discussion out there we felt like we had to discuss some of this.

With respect to what we have sold in the past and the way I feel about the future is, I think we’ve have gotten very fair prices from what we have sold and frankly they are like Heidelberg and Lucius, we started selling that over a year and what we ended up selling it for, because we weren’t going to sell it at prices that don’t make sense. And that’s the way I feel about our international assets. But I do think there is a potential for a capital market solution for a number of these assets and we’re working on that, have been working on that for some time.

Pearce W. Hammond – Simmons & Co.

Thank you, Steve and then my follow up relates to Kitimat. Does the sale of Kitimat impact the value of the Leard and Horn River assets. Or do you – if you’re going to sell down your interest in Kitimat, do you in turn sell down the Leard and Horn River so that goes with that package and does it stay with the Canadian assets that might be at a part of your onshore North America go forward company?

G. Steven Farris

Yeah, I have to honestly say I don’t think the complete exit by Apache has a impact on the value of Kitimat going forward one way or the other. I said frankly whether we’re in it or not is a world class project with world class reserves and frankly Chevron and Apache at this point are a way head of anybody else in that arena. So, and we’ve always been in a position frankly that we felt like we could not be in these LNG projects. And I just think it’s important that we stayed back.

Pearce W. Hammond – Simmons & Co.

Thank you, Steve.

Operator

The next question will come from Joe Allman with JPMorgan.

Joseph David Allman – JPMorgan Securities LLC

Thank you. In terms of Apache post these transactions, what’s your hope in terms of, say a growth rate, what do you think is an appropriate growth rate for a North America onshore focused Apache? What kind of growth rate would you think is competitive? How would you see spending, would you think you would be free cash flow positive, or free cash flow neutral, or would you accelerate and actually be deficit spending? And then also what kind of returns would you be looking forward in the post-transaction Apache?

G. Steven Farris

Well, I think if you look at, frankly if you look at what our growth rate is today, and you compare it with most of the companies of size, our long term forecast is 5% to 9%. Regardless of whether we say that is our forecast, that is competitive in the market, I think our liquids growth are competitive in the market at 15% to 18%. With respect, do we live within our cash flow? I think we have been very open over the last several quarters about what our view of our capital structure is. Our capital structure should be in a position that is competitive in the market, and gives us flexibility in the financial arena, so that’s all I’m going to comment about that.

I think we have the potential frankly with the asset base that we have, and the expertise that we are building the capabilities for, frankly. Really have the potential to have significant growth over the next several years.

Joseph David Allman – JPMorgan Securities LLC

Got you. And then a follow-up, so just a follow-up to that question, and then another one. So just in terms of returns, do you think that the post-Apache or the post-transaction Apache will yield better returns than the existing Apache? And then off question is, like what’s your thinking behind the sale of international and what kind of iterations have you thought about, have you thought about spinning out the Permian for example, or have you thought about spinning and selling everything except keeping Egypt and North Sea, which currently generate free cash flow, and also keeping the Permian, but selling everything else. So just trying to think about what iterations have you thought about, and what does selling international really do for you?

G. Steven Farris

Well, we thought about a number of reiterations. I don’t know that I could mark off each one of the ones you went through in terms of the consideration. I see North American onshore sales as a different business than what we are doing internationally. They take different expertise, they take different time frames, they take different really scientific skill sets.

And I think that it is important for us to recognize that, and recognize if we’re going to be the best we can be, we need to concentrate on the things that we have the most of, and I think has the highest – the greatest growth future.

Joseph David Allman – JPMorgan Securities LLC

Got you. And just on returns do you think, you'll have higher returns post transaction or is there…

G. Steven Farris

Yes, I do. I think overall when you say returns, I’m talking about future returns on invested dollars. As we look at our discretionary spend going forward, where we can spend dollars for the highest rates of return. I think what we’re doing now, certainly in the Permian what we’re doing in Eagle Ford compete with anything else we’re doing investing across the Company. Certainly Egypt is a great rate of return, but we also got to recognize that it’s a situation that fits into international portfolio also.

Joseph David Allman – JPMorgan Securities LLC

Got you. Very helpful. Steve, thank you.

Operator

The next question will come from John Herrlin with Societe Generale.

John Herrlin – Societe Generale

Yes, hi. Two quick ones for me, Steve. What was the condensate yield out of the Duvernay well you mentioned?

G. Steven Farris

John, I’m sorry. I didn’t…

John J. Christmann, IV

Yes, John. Hang on just a second here. On our Duverney well, the 734-barrels of oil a day, 200 barrels are condensate and about $4.4 million. Those are actually 30-day average.

John Herrlin – Societe Generale

Great. Thank you. With respect to the international spin, Steve, what about tax efficiency? Is it easier to do a spin versus an outright sale? How could you shield your basis for a lot of the sales proceeds?

Alfonso Leon

John. Hi, it’s Alfonso. We have been working on this for quite sometime now. Based on our work to-date, we believe that we can effect the separation of our international business in a tax efficient manner. We still have obviously significant work ahead of us as we move this forward. So based on everything that we have seen thus far, we believe we can get this done efficiently?

John Herrlin – Societe Generale

Okay, great. Thank you, very much.

Operator

The next question will come from Doug Leggate with Bank of America/Merrill Lynch.

Doug Leggate – Bank of America Merrill Lynch

Thanks everybody for getting me on. Steve, Egypt when you sold it last year, I think one of the arguments for keeping the two thirds that you retained was about, you may get a better option to see a recovery in the political environment there, and obviously you took a fairly hefty discount on it. I’m just curious therefore, is a separation via a spin preferred to trying to take cash out of Egypt, because obviously you'd end up suffering the same fate I imagine? And if so, would you be thinking an international listing for the international business or would you be thinking about two U.S. listed companies, I know it’s a bit conceptual, but just trying to get understanding how you’re thinking about it, I’ve got a follow-up, please?

G. Steven Farris

Well, certainly if we do it in the capitals market, we spin it, certain of our shareholders will still own it. I mean, and they have the benefit of it. And maybe Alfonso, I didn’t understand the complete question frankly.

Alfonso Leon

Hey, Doug. Look, we are looking at all alternatives, and that’s why we’ve outlined that we are evaluating a number of different alternatives. We need to get to the best possible outcome, the one that maximizes value for our shareholders. So we are progressing different alternatives. Now, when you look at the profile, the profitability the competitive position of our international businesses, they are each of them the leader in their respective competitive space. So obviously, they have a very attractive profile for a portfolio capital markets positioning. So that’s certainly a very compelling opportunity.

Doug Leggate – Bank of America Merrill Lynch

So my follow-up, maybe it’s just for you, Alfonso, but the value of your onshore resources obviously going to be depended on the pace of drilling, and Wheatstone for sure, and certainly North Sea in each of – would have generated on both – currently generated substantial free cash flow. So how do we think about giving that up in terms of the ability to accelerate the onshore using that international free cash flow as you did separate businesses, and I’ll leave it at that. Thank you.

G. Steven Farris

Let me just start with respect to – you’re not really taking it away, let’s assume that we – if we were to divest of it, obviously, we’d also – we’d just bring in the value forward. If we do spin it, we also have debt associated with those assets that are spun out, so in either way you’re not giving up that assets, you’re just separating them.

Doug Leggate – Bank of America Merrill Lynch

So Steve would we expect then to – Apache has always kind of talked about living within cash flow, so in that situation, are you seeing you reduce your balance sheet to accelerate the growing in the lower 48?

G. Steven Farris

Well, I think what I’ve said, and I'll say it again, and because I said it earlier. We look at our financial position based on what we think is a competitive in the market, and also in such – in a position that we can continue to grow. We're in a different space than we were in when we were acquiring and exploiting. We're in a different space in terms of what our go-forward opportunities are. So how we look at our balance sheet is going to change a little bit.

Doug Leggate – Bank of America Merrill Lynch

Got it, understood. Thanks very much fellows.

Operator

The next question will come from Brian Singer with Goldman, Sachs.

Brian Singer – Goldman, Sachs & Co.

Thank you. Good afternoon. A question on the Permian. Relative to your Analyst Meeting in late February, what is evolving in your Permian strategy or assumptions, and how are you looking at potential and drilling opportunities in your central Midland Basin position in Midland, Martin and Howard Counties?

John J. Christmann, IV

Well, I mean what we laid out, we’re pretty much in line. We’ve run six to seven rigs at Barnhard. We’ve been taking those learnings and applying them. We’ve now got 18 rigs running horizontally in the Midland Basin. So we’re starting to announce some results in our Scottish rights and our pile area and so forth. So we’re taking those learnings that we’ve had in Barnhard.

In general, though, we’re still working. I mean, when you look at what we’re doing right now on the completion side, we’re looking at more clusters, more stages, more sand loading per linear foot, all of those things and I think it’s helping wells holdup longer and so forth. So we continue to take those learnings that we’ve had and progress them into other areas as well as into the Eagle Ford and those things.

Brian Singer – Goldman Sachs & Co.

Great, thanks. And then, what is the timing for a greater decision on the separation of the international assets? Is there a specific time you expect to have that, and does that decision need to be made prior to selling Wheatstone, Kitimat, or other international assets individually?

Alfonso Leon

Brian, we haven’t set a specific timeline. We are working on a number of different opportunities and have been working on them for quite some time at the moment. Each of them has a different timeline associated with it, and we will make decisions as we get to decision points. Specifically on the separation workflow, I’m sure you’re very familiar with, those are multi core processes. So that is not something that is executed on an imminent basis. The work has been underway, but there is still significant work ahead of us.

Brian Singer – Goldman Sachs & Co.

Great. Thank you.

Operator

The next question will come from Michael Hall with Heikkinen Energy Advisors.

Michael Hall – Heikkinen Energy Advisors

Thank you. A number of mine have been asked on the portfolio repositioning, so I’ll leave that be, but on the Permian, just a couple questions. The oil growth in the quarter kind of slowed a bit on a quarter on quarter basis. Anything in particular driving that, and is this kind of a timing issue or how should we think about that going forward?

John J. Christmann, IV

It’s clearly timing issue. We pulled a few pads forward into the first quarter. That’s why you had bigger first quarter numbers relative to second quarter. So it’s an issue on the timing and so forth. But we remain optimistic and encouraged with our asset base.

Michael Hall – Heikkinen Energy Advisors

Okay. And I guess in that context, are there any surface constraints that you’re working through at present that might help restructure?

John J. Christmann, IV

We don’t have anything backed up right now. I mean, that’s the nice thing about our portfolio is we plan our schedule, we plan our completion timing, we stay ahead on the facilities. So that’s the big advantage we’ve got, which has really let us have such a track record, 17 out of 18 quarters up. So we remained executing the plan we’ve got out there.

Michael Hall – Heikkinen Energy Advisors

Great, and then just as a reminder, can you remind me what your protection on differentials looks like out of the Permian Basin and in the context the royalty revenues coming from the mineral ownership you have in the basin?

John J. Christmann, IV

In terms of our volumes we do have the ability to take Gulf Coast pricing or WTI or NYMEX. We’ve got protection on the differentials. We have not disclosed anything on our mineral royalties out there. We do have a nice position, but a lot of that is future acreage to be developed and it’s not something that’s contributing a great percentage right now.

Michael Hall – Heikkinen Energy Advisors

Thank you.

Operator

The next question will come from Charles Meade with Johnson Rice.

Charles A. Meade – Johnson & Rice Company L.L.C.

Good afternoon, everybody. I want to go back to the issue of the international assets. It seems to me that a lot of the conversation questions contain the assumption that all of the assets or the whole set of international operations will all go out in one transaction. I wanted to test that assumption a bit because it seems to me that some of the assets would have a better reception in the capital markets and then others maybe belong with you or belong in some other international company’s portfolio. So can you may be shed a little light on whether there’s going to be multiple transactions or just one?

Thomas E. Voytovich

That’s a very good question. Honestly, we truthfully have been working on a number of opportunities. One is a complete capital market solution. But we also have other solutions that you point out that could take place and could take place quicker than a complete capital market’s exit. So, yes, it could be some combination of each one of those.

Charles A. Meade – Johnson & Rice Company L.L.C.

Great, thank you, Tom. And then going back to the Permian, I know you guys have fielded a lot of questions on your royalty position in the last month or so. And I wonder if you could give anymore breakdown of maybe by Midland Basin, central Basin platform, Delaware Basin or by county on where those royalty acres lie.

John J. Christmann, IV

They’re scattered. We’ve got a big position in the very, very southern portion of the Delaware is where a big chunk of it sits, which is really below where the activity has been, but we think it could ultimately move there. But that’s where a lion’s share of it sits. We’ve also got some gains, but nothing that we’ve lined out is in an area right now that we’re going crazy with on the development side.

Charles A. Meade – Johnson & Rice Company L.L.C.

Got it. That’s helpful detail. Thank you, John.

Operator

The next question will come from Arun Jayaram with Credit Suisse.

Arun Jayaram – Credit Suisse

Good afternoon. Alfonso, Steve, understanding you’re still evaluating the potential separation of international. It seems like the comments today suggest that you believe strategically a complete separation of the two makes the most sense. So, is that a fair characterization strategically?

G. Steven Farris

I think it’s a fair characterization that they are – we recognize and we have recognized that there really are two different businesses and I think how we accomplish that recognition in the end will probably end up a majority of those assets being in another vehicle, if you understand what I’m saying. What that vehicle is if it’s a capital structure solution or for an outright sale.

Arun Jayaram – Credit Suisse

Okay. That’s very helpful. Thanks for clarifying that. Second question just goes along with the Anadarko Basin. Steve, this has been an area that I know you focused on post the Cordillera transaction. Can you just give us a little bit more detail on why the growth rate is coming in a little bit lower than you had thought initially?

G. Steven Farris

I think I’ll let John comment on the details. I think our biggest issue is, I think I’ve pointed out in my prepared remarks, we are 26% behind in terms of getting wells on compared with our plan. Regardless of the results of those wells, 26% is, and honestly the majority of those had some kind of mechanical issue either sidetrack, or casing, or completion problems. We just took our eye off the ball frankly and we got to get our eye back on the ball.

John J. Christmann, IV

And, Arun, just a little color there. We’re 43 wells short of what we plan to have on through the first half of the year, which is huge when you had a program of 163 for the plan. And then when you look at a lot of what’s lead to that we’ve had over 27 wells that sidetrack in. So when you look at that, I mean, that’s big, big portion of where we are. I will say we’ve had good results in all of the play. So we aren’t saying none of them are working. We’ve just got to kind of get refocused and get back to doing it how we approach, how we used to do it.

Arun Jayaram – Credit Suisse

Okay.

John J. Christmann, IV

And with new technology too.

Arun Jayaram – Credit Suisse

Okay. And then just my final quick question, you guys reiterated your volume guidance despite the timing in Australia at Coniston plus perhaps a slower growth rate from the central. Where is this going to be made up, Permian and East Texas?

John J. Christmann, IV

Your Permian, your East Texas, Eagle Ford as well as Bivens play, Canada remains ahead of schedule as well.

Arun Jayaram – Credit Suisse

Okay. Thank you for that detail.

Operator

The next question will come from Jeffrey Campbell with Tuohy Brothers.

Jeffrey Campbell – Tuohy Brothers

Good afternoon. I think I’ve got some, John, questions here. Can you give some color on the current DNC costs and the K-bob Duvernay and what you think these costs can look like over the next 18 months?

John J. Christmann, IV

Well, right now we’ve got two wells down and they were not done off of pads and so not really in a position to steer off of where we’ve been. As we work on the program this fall, we plan to spud six more Duvernay wells and I think we’ll see cost come down significantly. But our first couple wells were science wells. And, so they’re not representative of where we’ll be in the future with our program up there.

Jeffrey Campbell – Tuohy Brothers

The next question was the Hector County Kline well was a very strong result. Can you contrast the extra Kline from the Kline wells you’ve been drilling in the East and Glasscock? Are there any noteworthy differences in geology or mix or cost?

John J. Christmann, IV

Well, just like the Midland Basin, you get a little bit deeper in the basin. So you get a little bit pressure or little different oil makeup. So that area, we’re very excited about. But geology is a little different and obviously the fluid property as well.

Jeffrey Campbell – Tuohy Brothers

Okay. If I can sneak one last one in. You said in the first quarter 2014 when you were talking about the East Texas Eagle Ford, you were targeting getting some wells up to 10,000 feet laterals. I was just wondering have you drilled any of that long yet? And can you disclose what the lateral lengths were of the two Reveille wells you highlighted in the second quarter supplement?

John J. Christmann, IV

Those Reveille wells have been in the 6,000 to 7,000 foot range and we have not drilled one up to 10,000. I think we had one about 8,000 was one earlier. So we do think we’ll be able to continue to drill longer laterals. A lot of that’s just driven by how we led the units down in the land position.

Jeffrey Campbell – Tuohy Brothers

Okay, great. Thanks very much.

Operator

The next question will come from Leo Mariani with RBC.

Leo Mariani – RBC Capital Markets

Just a question on the Kitimat disposal here. Can you talk a little bit more about the motivation for this? Is this based on the fact that it’s going to be a significant CapEx burden for a number of years for the company and you wouldn’t see any cash flow out many years? Is that one of the motivating factors behind the disposition? And given how that’s a very early stage project, would you expect to get a material amount of cash for that on the short-term?

John J. Christmann, IV

Well, in terms of the decision process, obviously if you look at where we are going on our base business and you think about the priority of capital and the time frame associated with LNG projects and specifically Kitimat frankly, it makes sense for someone else to own it that has a different time horizon than we do. And in terms of the order of magnitude of the capital, cash, we’ll have to see.

Leo Mariani – RBC Capital Markets

Okay. That’s all I had. Thanks.

Operator

The next question will come from Richard Tullis with Capital One.

Richard Tullis – Capital One

Thanks. Good afternoon. Just a couple quick questions. Steve, what were the average well costs in the second quarter for your Permian, Wolfcamp and Bone Spring wells?

G. Steven Farris

Our Wolfcamp wells have been running around $7 million roughly, which is kind of an average. One thing we’ve seen is we’ve gone with little harsh sand loadings, some have creeped up, $7 million is probably a pretty good number and our Bone Spring wells have come down a little bit and they’re probably in that same range.

Richard Tullis – Capital One

Okay. Given this, what could be even in more focused onshore North America assets than say at the time of the Analyst Meeting, how does the Gulf of Mexico shelf fit into that portfolio? Would you still plan to be active there in 2015/2016?

Thomas E. Voytovich

This is Tom. Gulf shelf remains an area of focus for us, but we are in an inventory building mode now. There’s no capital committed for 2014. We would anticipate some expenditures in 2015 provided of course that that opportunity is competitive with other things in the portfolio.

I will say that inventory building is well underway. We have pretty impressive list of prospects. And I will also say though that there’s no pressure to execute on these right now. The only decision making component here is whether or not these prospects are competitive with what we’re doing in North America onshore. And if they are, they’ll get consideration for capital.

Richard Tullis – Capital One

Okay. And then just lastly, how much has been spent to date on Kitimat on a net basis?

Thomas E. Voytovich

I think IR will have to come back to you on that number.

Richard Tullis – Capital One

Okay that’s fine.

Thomas E. Voytovich

I don't have that number yet.

Richard Tullis – Capital One

All right. Thank you. I appreciate it.

Operator

The final question will come from Joe Magner with Macquarie

Joseph Patrick Magner – Macquarie Capital Inc.

Thanks for getting me on here. Just want to go back to the portfolio of repositioning topic here for a bit. I guess I'm still not clear on what actually is driving the moves now, what's driven the recognition that the domestic business or the North American business is different and should be separate from the international and LNG businesses. And it's only a few months ago that you all had laid out sort of the longer term view with all of the moves that it made last year and there was a lot of hope that perhaps that work was behind you. And now we've got one, two potentially a number of additional transactions to be on the look out for over the coming quarters.

What really, I mean aside from the recent announcements about some increased interest from some potential shareholders, some certain shareholders, I guess that's what I'm trying to get a better handle on. It seem like you were comfortable and had made comments in the past, but the moves that have been made were the moves that you had in sort of in mind and thought that was going to be enough. And now we've got another change here, so could spend a little more time on that?

G. Steven Farris

Certainly. Let me start off with talking about from late 2009. And I thank most of our shareholders and (indiscernible) most have that chart because what I showed is that we made a strategic decision to get back into North America. And if you look at what we did over that timeframe, I think, we brought $16 billion worth of properties and 85% of were with North America onshore. And if you look at about what we were about after 2012, first part of 2013, I think at our year-end analyst call we said we were going to sell $1 billion worth of properties at that time. In the second quarter we came out and announced we were going to sell $4 billion worth of properties and end up now of selling $10 billion worth of properties.

I think the overriding thing that we take from this is that number one; we started out being on the forefront of coming back to North America. And I think what you’re seeing is, what does it take to get North America onshore to center part of this company? And if you look at what we’ve been able to do, it's getting us a long way there.

If you look at what we got in front of us in terms of these LNG projects and the long term nature of them, the amount of capital it takes to invest in them. I think that’s an easy decision. I think the difference what we come to the conclusion of frankly in our North American versus international is they are two different businesses, and if you look at the way that you go about doing them in workflows, et cetera, they are two different businesses.

So, in our opinion it makes sense that we continue to reduce the size of our international assets because we made a decision long time ago, we’re going to be North American onshore. So that’s, honestly that is and we’ve had some recent discussion about that, among lots of folks and I think it’s important that we state our case and that is our case.

Joseph Patrick Magner – Macquarie Capital Inc.

Okay, we will stay tuned for additional updates, thank you.

Operator

There are no further questions at this time.

Castlen Kennedy

Great thank you so much. We appreciate you all participating in our call today and as always feel free to reach out to IR with follow-up questions. Thank you all and have a great day.

Operator

Ladies and gentlemen thank you for participating in today’s conference call. You may now disconnect.

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