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Executives

Patrick Cassidy -

G. Steven Farris - Chairman of the Board, Chief Executive Officer and Member of Executive Committee

Rodney J. Eichler - President and Chief Operating Officer

Thomas P. Chambers - Chief Financial Officer, Executive Vice President and Member of Risk Management Committee

Roger B. Plank - President, Chief Corporate Officer and Member of Risk Management Committee

Analysts

Brian Singer - Goldman Sachs Group Inc., Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

John Malone - Global Hunter Securities, LLC, Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Apache (APA) Q4 2011 Earnings Call February 16, 2012 2:00 PM ET

Operator

Good afternoon. My name is Kendra, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2011 Q4 and Year-End Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Patrick Cassidy. Sir, you may begin your conference.

Patrick Cassidy

Thank you, Kendra. Good afternoon, everyone, and thank you for joining us for Apache Corp.'s Full Year and Fourth Quarter 2011 Earnings Conference Call. This morning, we reported earnings of $4.5 billion or $11.47 per diluted share. Adjusted earnings, which excluded certain items that impacted comparability of results, totaled $4.7 billion or $11.83 per diluted share. Cash flow from operations totaled $10 billion.

On today's call, we will have 4 speakers making prepared remarks prior to taking questions. First we will hear from Steve Farris, our Chairman and Chief Executive Officer; followed by Rod Eichler, President and Chief Operating Officer; and Tom Chambers, Executive Vice President and Chief Financial Officer; and finally Roger Plank, our President and Chief Corporate Officer.

We prepared our usual detailed supplemental data package for your use, which also includes a reconciliation of any non-GAAP numbers that we discuss such as adjusted earnings, cash flow from operations or pretax margin. The data package can be found on our website at www.apachecorp.com/financial data. Today's discussion may contain forward-looking estimates and assumptions, and no assurances can be given that those expectations will be realized. A full disclaimer is located with the supplemental data package on our website.

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

G. Steven Farris

Thank you, Patrick, and good afternoon, everyone, and thank you for joining us today. Apache had an outstanding year in 2011. We had strong production growth, earnings and cash flow, all delivered with the financial and balance sheet discipline that has characterized our company for 57 years. Apache's global oil and gas production in 2011 was 748,000 barrels of oil equivalent a day, which is 14% growth over 2010 and a new record for us. The strong growth delivery is consistent with our performance over time compared with other companies. Whether it's over the last 5 years or 10 years, Apache gross production posted more than most of its peers, and we do this in a balanced and diversified manner, living within our means.

Crude oil represented 45% of our 2011 production and if you add NGL, liquids represented 50% of our production. We already have the portfolio balance that most of our peers aspire to obtain at some point in the future. As we grow competitively, we do not sacrifice our balance. 2011 earnings, as Pat mentioned, was $4.5 billion, which was 50% up year-on-year or 36% per share. Our cash flow from operations before working capital items in 2011 stood at $10.2 billion, which was up 39% year-on-year. The driver of this financial performance is, truthfully saying, we focus on rate of return, and it shows. This financial performance will continue to fuel our growth as it continues to increase our investment capacity. Needless to say, 2011 was an excellent year for Apache.

I'd like now to move to 2012 and talk a little bit about our capital program and our production growth forecast. Our initial exploration and development capital budget for 2012 is $9.5 billion, which is a 25% increase year-on-year on a cash basis, and we'll continue to ramp up our activity in the Permian, the Anadarko wash fairways and development projects in deepwater Gulf of Mexico and also our global exploration. We live within our means, and we do it consistently. I would say at strip prices, this initial 2012 capital program leaves us with well over $1 billion of operating cash flow surplus. As we always do, we will put our additional investment firepower to use as we go through the year.

In the Permian alone, our initial budget increased from $1.1 billion in 2011, and I might add it was $500 million in 2010. In 2012, we'll spend $1.7 billion, and depending on commodity prices, we expect to at least double last year's price. We expect to grow production between 7% and 13% in 2012, which excludes operations divested in 2011. And we delivered this competitive growth with less than half of our capital. As Roger will outline in greater detail, over half of our 2012 capital program goes to projects to grow our production starting in 2013 and beyond.

In 2012, we're also stepping up our global exploration activity, and I'd like to briefly list a number of our key exploration steps for 2012. In the deepwater Gulf of Mexico, we expect to participate in 6 oil prospects with a combined potential of well over 600 million barrels of oil equivalent, and we continue to grow our footprint and prospect pipeline there. In Alaska, we will grow our first wells in the Cook Inlet, which is a [indiscernible] oil exploration play, where we are the largest acreage holder with some over 800,000 acres. In the onshore North America, we're taking advantage of our premiere acreage positions to progress new liquids plays in which we have critical mass such as the Canyon Wash and the Texas Panhandle, where we were the first movers last year and are now shifting to the development phase with 14 wells in the play. A number of new plays in the Permian, including the Wolfcamp Shale play, where we're going to test our 25,000 acreage position there. Deepwater Kenya, we intend to drill our first major oil prospects in the third quarter for the potential of nearly 300 million barrels of oil equivalent and the opportunity to de-risk several additional prospects. In New Zealand, we expect to drill our first 4 wells targeting our new onshore unconventional play. We will also continue our exploration in Australia and Egypt, where we have built so much value through the exploration over the years, and we will continue to add new large-scale exploration positions, some of which we are not ready to announce.

We also started increasing our dividend in 2012, as you've noticed. Steady dividend growth has been an important element of our financial strategy over time. We put this on hold as the world went through its turmoil over recent years, but we believe it is the right time to resume our dividend growth.

Apache's mission is to build long-term value for our shareholders, and we remain confident that our fundamental value will be recognized. We're going to give some assistance from our portfolio evolution and more communication about our unbooked resource potential in the coming years. Over time, the market tends to recognize fundamental performance and in the long term, Apache share price has historically outperformed most of our peers, which is consistent with our leading growth and return delivery.

I'd like to point out that over the last 24 months we have increased our North American proved reserves by almost 50%, which includes our latest acquisition in the Anadarko Basin. Further, our 18 million acres in the heart of the Permian, the Anadarko Basin, Canada's resource plays in the Gulf of Mexico hold a premiere position of unbooked upside in most new plays across those areas. And it's time we gained recognition for our North American asset base, and we intend to communicate more on our resource upside during this year.

On the other hand, Egypt and the Gulf of Mexico shelf have caused concern over time based on the perceived overexposure for the company. Clearly, the events in Egypt have had an impact on our share price over the last year. However, in light of our enlarged portfolio, which includes our announced expansion in the Anadarko wash fairway, either of these regions now represent more than 10% of our proved reserves. Having said that, we remain bullish on both of them. We expect to continue to invest both in Egypt and Gulf of Mexico shelf for many years to come. The fact is with our enhanced portfolio balance, Apache continues to deliver strong growth without depending on any one region.

And with that, I'd like to turn it over to our COO, Rod Eichler.

Rodney J. Eichler

Thanks, Steve. I'll focus my remarks on our 2012 plans based on the initial allocation of capital and what this means in terms of production for each of our regions. The biggest drivers for our growth in exploration in the year ahead include the following: the Permian and Anadarko basins, where we are going to step up our activity by close to $1 billion; the deepwater Gulf of Mexico, where we are broadening our participation in high-impact prospects such as appraisal drilling at Heidelberg and moving into the development of megaprojects such as at Lucius, where our first test well last year flowed at 15,000 barrels of oil per day, a rate that was constrained by a surface test equipment.

In Australia, we've entered full development at Wheatstone LNG, Apache's first LNG project. In our global exploration, our efforts over recent years are now translating to big steps forward across a number of new portfolio positions. During the year ahead, we expect to run between 90 and 95 operated rigs worldwide on a daily basis. This is up from the 80 rigs we averaged during 2011. We are planning up to a 30% increase in new wells drilled, which represents approximately 300 additional wells compared to the 1,100 wells drilled last year. More than half of all planned wells will be drilled in the Permian and Anadarko basins as we exploit their liquid-rich stacked pay opportunities. Across our portfolio, a shift is underway to Apache to direct our drilling to more profitable oil and NGL opportunities. This will be most evident in North America. Our supplemental disclosure document posted on our website outlines Apache's 2012 capital by region. It can be found on Page 10.

I'll move on now to discussing our recent highlights. We continue to ramp up activity in the Permian, where we have been active since 1991 and are now the second-largest player in the basin. The increase and acceleration of activity in this region has been steep. Until 2009, the area was managed from our Tulsa office. We opened our Midland office in 2010 with a half dozen employees operating 5 rigs executing a $500 million capital program. Last year, we spent about $1.1 billion and increased the rig count to 25. Today, we have more than 200 employees in our regional office, with 480 field staff. We operate 30 drilling rigs and more than twice that many pulling units and plan to spend $1.7 billion in the region during 2012 as we continue the steady ramp-up of our drilling program. We plan to drill more than 600 wells in the Permian this year and expect mid-single-digit production growth in 2012, and the true contribution of this investment will be realized in 2013. We expect to increase our pace of activity overall in the Permian throughout the year.

The Wolfcamp play in the Deadwood area will continue to represent about half of our Permian activity in 2012. In the past year, we've cut drilling time in half, further enhancing the already attractive economics of this play. During 2012, we're going to be active in just about every play and area of the Permian basin.

I'd like to talk briefly about a couple of our catalysts in the region. In November, I mentioned the first 2 horizontal wells Apache drilled in lower Cline. We've now drilled 4 lower-Cline horizontal wells at various locations across our 100,000-acre Deadwood leasehold. These wells are contributing -- 3 wells are producing in this 5,500-foot lateral, and a fourth is being prepared for fracture stimulation. Results from the last 2 wells indicate initial production rates of 300 barrels of oil per day and 200 Mcf of gas per day, with expected EURs of 300,000 barrels of oil equivalent per well. Based on this early success, there are potentially an additional 565 resource locations on our current leases. We anticipate drilling up to 4 lower-Cline horizontals in 2012 and testing 2 additional shales in the Atoka, Barnett and the Wolfcamp formations on this acreage.

In the Southern Midland Basin, we leased 20,000 acres in the Wolfcamp shale play in Irion County, which brings our total to 25,000 acres. This is in addition to 31,000 acres in the form of BP leasehold we have in the same area. And during 2012, we plan to drill up to 6 horizontal wells on these properties. We currently think there's potential for up to 150 locations, horizontal wells in this area.

Apache has built a 30,000-acre position in the Bone Spring and Wolfbone plays in the Delaware basin. We currently estimate up to 130 horizontal locations and 160 vertical locations on our position. In 2012, we plan to drill 2 or 3 wells at both the Bone Spring and Wolfbone plays in Loving and Pecos County, Texas. We're still determining the size, but each of these opportunities has the potential resource of drilling backlog for extensive, long-life development. As we drill more wells and collect more data this year, we'll be able to disclose more about our Permian plays. We plan to conduct a detailed review of our Permian resource potential at our Analyst Day in midyear.

I'll move on now to the central region of Oklahoma to Texas Panhandle. We will more than double our position at the Anadarko wash play fairway to more than 1 million acres or 487,000 net acres through the Cordillera acquisition announced last month. Together, Apache and Cordillera are currently running 17 rigs in the region and will assume operatorship of Cordillera's rigs when the deal closes, which is expected in the second quarter. By closing, we expect to have up to 25 rigs operating on the combined properties. We plan to drill up to 160 wells in the Cordillera acreage alone, principally in the liquids-rich Granite Wash and the Tonkawa and Cleveland oil plays. As a result, in 2012 we expect to increase our annual production from this region by nearly 50% on our continuing operations. This excludes East Texas, which has been divested and represents about 6,000 barrels of oil equivalent per day in 2011.

As announced in the news release this morning, we also added 96,000 acres to our position in the Bivins Ranch area. Our initial exploratory results in the emerging Wittenburg Basin play had been very encouraging, with 3D 30-day production ranging from 107 barrels of oil and 42 Mcf of natural gas per day to more than 1,000 barrels of oil and 800 Mcf of gas per day. We completed a 240 square mile 3D shoot on the property during 2011, which we're using to further de-risk in the 5 future drilling locations. Our breadth and scale across these plays allows us to generate efficiencies to increase the value of our position. In the Granite Wash alone, we've been able to reduce costs $500,000 per well by optimizing our casing design, reducing pump volumes and changing profit type. Across the region, we've implemented a fracture database to allow us to reduce frac size and reduce costs by more than 25%. We will continue to pursue these kinds of improvements as we simulate Cordillera assets into Apache.

The Gulf of Mexico shale continued to fuel our investment firepower with strong free cash flow generation and attractive returns. We manage the shale as a financial investment, perhaps the best one we've ever made and that is a growth region. Production there is expected to decline in the high-single-digit range during 2012 as we have channeled most of its cash flow to growth areas in our portfolio. However, we will increase our activity in the deepwater Gulf of Mexico in 2012.

On the development front, we approved the Lucius development project in December, and its first oil date is scheduled in 2014. Heidelberg, another potential 200 million barrel oil development is currently drilling an appraisal well in Green Canyon Block 903. In the year ahead, we expect to commence production from the Bushwood, Mandy and Wide Berth subsea tieback developments, increasing our production for this region by close to 15%.

We also have a mix of prospect types that we'll test this year, including sub-salt and salt overhang targets, where new seismic techniques, particularly one asset's data acquisition and processing, are improving our ability to manage areas that have historically been difficult to manage and interpret. We plan to drill and participate in up to 9 wells in 2012, including appraisals at Lucius and Heidelberg. This also includes 6 exploration prospects with more than 600 million barrels of potential resource and where Apache's working interest average is 35%.

In our Gulf Coast onshore region, we grew our acreage position significantly last year. Rates of return in this traditional hydrocarbon-rich area are robust, and our willingness to seek opportunities away from the herd puts us in a position to have a double-digit production growth in this region in 2012. We expect to run 3 rigs and drill more than 30 wells, nearly all of them targeting oil reservoirs.

Turning to Canada, Apache holds approximately 7.5 million gross acres in Western Canada. And while the region was generally thought as a gas province, we have a substantial multiyear inventory of oil and liquids-rich opportunities, as well as dry gas. 3/4 of Apache's 170 wells planned for Canada in 2012 are currently oil- or liquids-rich reservoirs. We plan to average a 5-rig program for the year, growing production by more than 5%. 80% of our activity will be focused on oil plays, the Glacier, Viking and EOR oil plays, and the Bluesky liquids-rich gas play. We progressed the Glacier oil play to the development stage during the fourth quarter, with 3 horizontal wells tested at an initial rate of approximately 80 barrels of oil per day. We currently hold approximately 162,000 net acres in this shallow drilling play. This success sets up a 37-well program for this year, with EURs ranging from 80,000 to 130,000 barrels of oil equivalent per well. We continue to expand the fairways of these plays in our portfolio as we also test additional oil and liquid plays. Our transition in Canada is well underway, but the step change will come with the Kitimat LNG project. LNG gas sale negotiations continue to move forward, as do all development preparation elements of the project. We will announce further developments at the appropriate time as we progress towards final investment decision. Apache's first mover steps to secure a development-ready integrated LNG project at a very low cost continues to look better and better for our shareholders.

In Australia, we're going to double our investment in 2012 as we move into the heart of the construction phase with a number of major projects. It will provide Apache with growth for many years. The largest component of our investment in the Wheatstone LNG project, which will provide us with a multi-decade visible free cash flow profile that is oil-linked, provides a steady plateau profile year after year and, in fact, has growth potential via expansion phases. Because of the long lead times out of our developments and the timing when all of these projects come online, the production profile of Australia can be lumpy. We expect this region's production to decline in the high single digits for 2012, which is absorbed by the rest of our portfolio as this exploration-driven region continues to develop projects that drive Apache's future growth trajectory. Australia exploration will be active in 2012 on multiple fronts. Most important would be our de-risking of resources to potentially support additional LNG trains and premium-priced domestic gas projects. This includes appraisal of the Zola area, a 2011 gas discovery on trend with the multi-Tcf Gorgon Field and the BHP-operated [indiscernible] exploration prospect.

In our Egypt region, 2011 was a year of production growth, with net oil production up 5%. One of the more active and successful drilling areas in Egypt last year were the development leases acquired for BP. Since November 2010, we've drilled 31 wells in our exploration program as a result of the 3 new field discoveries and 2 new field extensions. Oil production here has increased 60% to 34,000 barrels of oil per day, and gas production is 140% higher at nearly 90 million cubic feet gas per day. One exploration well of note is the Spyglass 1x on the AG development lease that tested at a daily rate of 21 million cubic feet gas per day and more than 400 barrels of oil per day for the lower Bahariya formation.

In 2012, we plan to maintain our 2011 level of investment and growth in Egypt, running 25 rigs and drilling more than 250 wells. Up to 70 of these wells will be exploration test. We are advancing important new exploration plays across our 11 million gross acres in Egypt. These new plays include stratographic traps, the deeper horizons in the Paleozoic and unconventional resources. Like the Permian and Anadarko basins, the Western Desert provides multiple stacked pay opportunities. Each one of these plays has the potential to give our asset base in Egypt entire new decades of life cycle beyond the current successes.

In the North Sea, we closed the ExxonMobil transaction at the end of the fourth quarter, which gives us a greatly expanded asset base and talent pool going into 2012. We expect to run 6 rigs during 2012 and build 33 wells. The Forties Field, previously our sole asset in the region, represents half of our drilling capital in 2012 as we increase our opportunity set with new wells at Beryl, Bacchus and an active exploration program. These important steps will propel our North Sea production to a 60% increase or more in 2012.

The foundation for continued growth in 2013 will also be strengthened during this year as we install additional platform in 40s and acquire the first field-wide 3D seismic survey over Beryl in 15 years.

Finally in Argentina, we maintain our financial discipline by living within our cash flow as we advance the appraisal of what is believed to be one of the largest shale resource basins of any country outside the United States, and Apache is the leading North American company in the shale fairway. Most importantly, Argentina in 2012, we plan to conduct the first oil test in our shale play position. Our acreage is adjacent to the recent wells drilled by YPF at Loma La Lata. Development drilling in areas tied to premium-priced gas plus contracts is expected to drive our Argentina production growth above 5% in 2012.

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

Thomas P. Chambers

Thanks, Rod, and good afternoon, everyone. I'd like to reiterate what Steve mentioned earlier in that we had record results for the year across the board. Underpinning our 2011 financial results was record production, which averaged 748,000 barrels of oil a day, up 14% from the prior year. More importantly, we achieved record oil production of 340,000 barrels per day, allowing us to benefit from higher oil price realizations. For the year, we reported record earnings of $4.5 billion or $11.47 per diluted share, our first time to break the $10 threshold. When we remove items for comparability purposes, adjusted earnings were $11.83 per share, up 32% from the prior-year period. Record production and oil prices drove cash from operations before working capital items, up 39% to $10.2 billion, our best year ever.

In a nutshell, it was a phenomenal year in all respects. Record cash flow enabled us to fund our largest E&D capital budget, acquired assets for another $2 billion in cash, which provide a future platform for continued long-term profitable growth, while we also paid down $925 million in debt. So we were able to end the year and reduce our debt-to-cap 20%.

I want to highlight the importance of our portfolio's ability to consistently generate cash flow. For 2011, our $10 billion of operating cash flow enabled us to achieve many targeted goals and set the stage for continued growth into 2012. Without the constraint of having to pay down debt in 2012, the 2012 capital budget spending rises, as Steve indicated. However, I would emphasize that our disciplined approach reduced capital on a quarterly basis to ensure we do not outspend our cash flow or, if prices rise significantly, to potentially allocate any excess to the best projects available. These results speak volumes for our balanced portfolio strategy given the significant volatility seen in commodities. We've been able to benefit substantially from our oil portfolio and the fact that oil currently sells for over 40x the price of North American gas. Our oil balance also offers us a unique benefit when it comes to price. Dated Brent and sweet crude from the Gulf of Mexico and the Gulf Coast onshore areas continue to be priced at a significant premium to WTI-based prices. Approximately 75% of our total production receives Brent index or Brent comparable index pricing, realizing premiums of $10 to $15 a barrel to WTI. Our North American gas prices remain depressed. Our international portfolio is providing access to rising gas prices, particularly in Argentina and Australia, as you heard Rod just mention. Compared to the prior year, our international gas price realizations were up 27%. Higher realizations and a steady commitment to holding a line on costs allowed us to report solid cash margins of $45.60 per boe, up 30% over 2010 levels. Pretax margins, which includes DD&A, increased 37% to $29.64 per barrel of oil equivalent. These closely watched measures, combined with our focus on returns, drove our return on average capital employed to over 13% for 2011. We are very focused on margins and continue to monitor cost trends. Total cash costs during the year averaged $16.24 per boe, up $0.86 over last year. As with each year, our goal is to keep 2011 cash costs flat with the previous year. We ended up slightly at 6% higher, influenced by the impact of rising oil prices on cost and continued market pressures in nearly all of our regions. Absent taxes other than income, which are basically production taxes linked to prices, we are focused on keeping 2012 cash costs in the range of $13 to $13.50 per boe for the full year average. Our recurring DD&A was also up in 2011 from prior-year levels, as you might expect with our recent acquisition activity. Through our drilling program, we added more -- we more than replaced current production by adding 342 million barrels of oil equivalent to proved reserves during 2011. That's about 125% of what we've produced during the year. Including acquisitions, sales and revisions, we replaced 113% of production. We believe our exceptional cash flow provides a critical foundation as we head into 2012. With the confidence of continued strong future growth prospects and financial position, our Board of Directors, at their last meeting, increased the regular quarterly cash dividend 13% to $0.17 per share, as Steve already indicated. The board also indicated they will continue to review the dividend level annually as our progress -- as we progress further.

To wrap up, we had a record year, one that provided our best financial results in the company's history, one that is ended with a considerable amount of momentum and one that sets the stage for continued growth and opportunity into 2012.

With that, I'd like to turn the call over to Roger.

Roger B. Plank

Thanks, Tom, and good afternoon, everyone. 2011 was, indeed, another year of growth and change for Apache, and I wanted to just take a moment to reflect on how the company's evolved over the last few years. In a deteriorating price environment for North American natural gas, in the last 2 years Apache turned $7.5 billion in cash flow to $17.5 billion. Through drilling and acquisitions, we've invested $25 million, expanding our production and rebalancing our portfolio in areas with considerable future growth prospects. To manage this change and maintain focus on executing and delivering consistent profitable growth, we've added hundreds of professionals and, importantly, 3 new growth regions: deepwater, Gulf Coast onshore and the Permian Basin. In addition, recent changes in our central region, including the Cordillera transaction, will transform its legacy Apache region into one of our most active drilling regions focused on drilling oil and liquids production.

The changes have the affect of beefing up our portfolio in North America and today, onshore North America represents 38% of our worldwide production compared to 28% just 2 years ago. On a pro forma basis, including Cordillera, no single region accounts for more than 1/5 of our total production. Although our geographic mix has shifted, our production mix has not. Half our production remains liquids, in which 90% is oil. Another aspect of Apache's portfolio evolution is the inclusion of a growing number of long lead times, impactful development and infrastructure projects. More than half of our 2012 capital goes to projects that contribute no production this year, but will contribute meaningful volumes in 2013 and beyond. In fact, following additional investment, we expect these projects will add hundreds of thousands of equivalent barrels to our daily production spread out over the next 5 years.

Fortunately, we have the portfolio diversity and financial strength to make these significant long-term investments while still delivering near-term profitable growth. We've also evolved our approach to global exploration. We've established meaningful position through joint venture agreements and acreage acquisitions in frontier areas mentioned earlier, Cook Inlet in Alaska, New Zealand and offshore Kenya. Each of these positions target oil and we believe hold hundreds of millions of barrels of resource potential. While unproven at present, we believe it's just a matter of time before our exploration strategy gains legs and begins to pay off.

At the end of the day, we aren't too concerned whether our production comes through acquisition of drillbit, but we do recognize the potential value of internally generated prospect development and active exploration. Apache's changes come amid a rapidly changing industry and world. The lowest North American natural gas prices in a decade are squeezing industry cash flows and capital investment. After visiting double-digit natural gas prices, the industry is finally reaching a point of capitulation where companies are beginning to pull on their horns due to lack of funding. This process has a cleansing effect. With industry laying down gas rigs, the upward pressure on cost for drilling, completions and other services is beginning to subside. Lower cash flow and capital in the hands of the competition will also lead to more attractive opportunities to drill and acquire. Frankly, it makes for an ideal environment for well-heeled companies with strong cash flows, such as Apache, to excel.

In closing, following a year of record financial results driven by our 31st year of production growth out of the last 33, Apache has all the ingredients to deliver standout results again in 2012.

Patrick?

Patrick Cassidy

That concludes our prepared remarks. Operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Two questions. First on the Cline shale, how does the Cline compete with other horizontal and vertical opportunities that you're pursuing in the Permian Basin? And can you talk to what your well cost expectations are there relative to the EURs that you mentioned earlier?

G. Steven Farris

Well honestly, Brian, I think it's a little early to tell how they can be. But with our portfolio, we are going to test most of the plays and the horizontal plays out there, whether it be the Wolfcamp shale or the Cline. And frankly, we're looking for the highest rate of return. I think Rod mentioned 300,000 barrels of oil equivalent per day with a cost of what, Rod?

Rodney J. Eichler

Completed well cost around $6.5 million.

G. Steven Farris

Yes, completed well cost $6.5 million, so it will compete with most shale plays.

Operator

And your next question is from Pearce Hammond of Simmons & Company.

Pearce W. Hammond - Simmons & Company International, Research Division

You outlined your production growth for this year at 7% to 13%, and you made some smart acquisitions in the course of the last year, the North Sea acquisition and here recently, Cordillera. If we try to look at just the organic production growth rate without the acquisitions, what do you think it might break out to be?

G. Steven Farris

Well honestly, we don't break that out. I will tell you probably in the high single digits.

Operator

Your next question is from John Herrlin of Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Two quick ones. In terms of your CapEx budget, how much is actually exploration and how much is development, because you just depict it as E&D.

G. Steven Farris

Well, whether it's in the regions or new ventures group, it's about $1 billion.

John P. Herrlin - Societe Generale Cross Asset Research

Okay, that's fine. Next one for me is on Egypt, Steve. Your reserves went down out a little bit year-over-year. Were there performance issues because you had negative revisions? Normally, you have positive revisions there. And that's it for me.

G. Steven Farris

Actually, what we had is we had a negative revision, but it all has to do with price. John, you're aware of that concession agreement. What happens is you get more barrels for cost recovery, but you also have an adjustment on the reserve side. So that's counterintuitive. I mean, when you have more production, you have less reserves. And if you have less production, you have more reserves. I mean, it really is the way the concession agreement works.

Roger B. Plank

So because we got to recover our costs, the higher the price per barrel, the lower the reserves you get to report. But the actual reserves performance has been just fine.

Operator

And your next question is from Bob Brackett of Bernstein Research.

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

One of your competitors has talked about a JV or a sale of kind of 1 million acres scale asset in the Permian Basin. What's your appetite for that sort of scale transaction?

G. Steven Farris

Well, we don't really comment on that, number one. And the other one is I think we have a pretty good acreage position as it is. Actually we are never looking, but opportunities come in a lot of different ways.

Operator

Your next question is from Leo Mariani from RBC.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Just kind of 2 quick questions here for you. I guess first off, could you maybe elaborate a little bit on your progress there on Kitimat? You guys kind of advanced negotiations with potential buyers. And a quick question here on the Permian. Obviously, you're stepping up the capital pretty dramatically here in 2012. And if I heard you guys right, you talked about mid-single-digit production growth in the Permian in '12. It just seemed like a low number to me. Is there some infrastructure issues there? Or maybe I misheard you guys.

G. Steven Farris

Yes, I'd answer the first one at Kitimat. Frankly, we're somewhat past the polite introductions and that kind of stuff with respect to buyers. We are now in throes of actual negotiations. And in terms of the Permian Basin, you understand we're the second or third largest producer out there, so you've got 93,000, 94,000 barrels of oil equivalent a day starting off with. So a higher single-digit growth is a pretty good number, especially with the kind of capital that we're putting in there.

Rodney J. Eichler

There's also a lot of timing involved. We have a lot of wells that are being drilled throughout the year. All those wells probably won't make it out to production until the early parts of 2013.

Operator

Your next question is from John Malone of Global Hunter Securities.

John Malone - Global Hunter Securities, LLC, Research Division

Just on Argentina, can you guys give us any color on the [indiscernible] well? The indication so far is gas. Have you seen any liquids in that? And really just overall, can you give us some thoughts on trends, what you're seeing in Argentina in terms of export and patriation, the politics down there?

Rodney J. Eichler

Well, the exploration test we drilled at [indiscernible] in 2011 was specifically targeting the shales in the gas window. So it was a gas -- designed to be a gas test. That's what we have been evaluating. The subsequent wells we'll be drilling in 2012, as I mentioned, will be oil tests that are in the shale oil window as we currently mapped them adjacent to the recent discoveries announced by their operators.

G. Steven Farris

With respect to your question about the politics down there, I think it's well to take a look at the circumstances that YPF, Repsol and the government of Argentina are in. I don't think there's any question that the Argentine government would like more money spent by YPF or Repsol in country. Personally, I think what you're seeing is a lot of discussion that really revolves around a specific issue. So we're truthfully not concerned about the wholesale expropriation of the oil industry down there.

Rodney J. Eichler

In fact, Apache has been held up by the government in their recent press releases as one of several companies and an example of increasing the production and meeting or exceeding their production targets outlined in their concession agreements.

Operator

And your next question is from Mario from Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

It's actually Craig Shere. Mario had to jump off, but we have a quick question as a follow-up on Argentine also. Can you remind us how large the acreage positions are and the gas fee and then the oil shale windows and if you're still looking to expand acreage in either of those? And remind us the details regarding the 2012 drilling effort in the oil shale.

Rodney J. Eichler

Okay. So the first part of your question, we have about 1.7 million gross acres, about 900,000 net acres in the shale fairway. We do not break that out; I don't have a breakout of that by oil province or gas province in that fashion. So it's a simple part of the Neuquén Basin. The second part of your question was what was...

Craig Shere - Tuohy Brothers Investment Research, Inc.

Capital.

Rodney J. Eichler

Capital in 2011?

Craig Shere - Tuohy Brothers Investment Research, Inc.

2012.

Rodney J. Eichler

2012. All right, 2012. We're looking at about $250 million as a preliminary capital allocation for our Argentina projects.

G. Steven Farris

Just so you know, that's not an opportunity number. That is more of a prudency with respect to staying within our cash flow down there. And we're really testing ideas. If you look at any of our areas, when we talk -- Brian asked a question about the Permian Basin. We have built meaningful acreage positions in some of the best hydrocarbon basins in the world. And what we are trying to do is build long-term value for our shareholders. So in the Permian, we're going to test a number of different shales in a number of different ways, horizontal, and the same we're doing in the Neuquén. And we are a legacy owner in the Anadarko Basin. So it's not surprising that new technology catches up with a lot of hydrocarbons.

Operator

And there are no further questions at this time.

Patrick Cassidy

Okay, thank you, Kendra, for those remarks, and thank you for participating in Apache's conference call this afternoon. A webcast replay will be available on our website after 4:00 this afternoon.

Operator

This concludes today's conference call. You may now disconnect.

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