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Apache Corporation (NYSE:APA)

Q1 2008 Earnings Call

May 1, 2008 2:00 pm ET

Executives

Bob Dye – Vice President of Investor Relations

G. Steven Farris – President, Chief Executive Officer, Chief Operating Officer & Director

Roger B. Plank – Chief Financial Officer & Executive Vice President

John A. Crum – Executive Vice President, President of Apache Canada Ltd.

Analysts

Tom Gardner – Simmons & Co. Int’l

Jeffrey P. Hayden – Pritchard Capital Partners

Brian Singer – Goldman Sachs

David Tameron – Wachovia Capital Markets

David Heikkinen – Tudor, Pickering, Holt

Ben Dell – Bernstein

Gil Yang – Cit Investment Research

Operator

Welcome to the Apache Corporation first quarter earning 2008 conference call. (Operator Instructions) At this time for opening remarks and introductions I’d like to turn the program over to Bob Dye, Vice President of Investor Relations.

Bob Dye

This morning Apache Corporation released first quarter 2008 results which totaled net income of $1.02 billion or $3.03 per diluted share. Consistent with prior quarters we also provided adjusted non-GAAP net income for the first quarter that is $2.99 per diluted share with the adjustment primarily related to foreign currency fluctuations on deferred tax balances.

Today’s discussion may contain forward-looking estimates and assumptions and no assurance can be given that those expectations will be realized. A full disclaimer is located on our website. In addition, any non-GAAP number that we discuss such as adjusted earnings cash flow from operations or cost incurred will be identified as such with the reconciliation located on our website located at www.ApacheCorp.com. Steve Farris our CEO and Roger Plank our CFO will now make prepared remarks prior to taking questions.

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

G. Steven Farris

Thank you for joining us for Apache’s first quarter earnings conference call. The first quarter was highlighted by our solid financial results. Some excellent explorations success and continued progress in delivering and expanding our major pipeline of visible growth projects.

Our financial results were excellent as we clipped $3.00 per share for the second consecutive quarter and our $1 billion of earnings was driven by $1.84 billion of cash from operations for the quarter. Roger is going to cover the financial results in more detail and I thought I’d go in to some of the operating highlights.

We told you at the beginning of the year that 2008 would encompass the largest exploration program in our history in terms of resource exposure and I could not be more pleased with our results so far. We’ve made five important discoveries during the first quarter including Brulimar-1, Julimar Southeast-1, the Haylard-1 all in Australia, the Hydra-1X in Egypt and three wells in our Muskwa Shale play in British Columbia Canada. In addition today we announced the positive results of our Julimar Northwest appraisal well offsetting our Julimar discovery in Australia.

I’ll go over the developments on a regional basis in a few minutes but let me summarize up front our achievements for the first quarter of updated Apache’s future growth profile. We began the year with a pipeline of six major projects scheduled to begin production between the latter part of this year and 2012 which should contribute about 120,000 barrels of oil equivalent per day of new production to Apache.

During the first quarter we had updated this profile in really three main ways. First, we added a seventh development project to our inventory, a new 100 million a day gas plant in Egypt which expected should be online by mid 2010 and should add 10,000 barrels of oil equivalent per day of net production to Apache which increases our visible growth profile from our major projects to 135,000 barrels a day by 2012.

Second, as I mentioned during the first quarter we completed our three important test wells in the Muskwa Shale in the Ootla area of BC which allows us to estimate a resource potential in the play of 9 to 16 TCF of gas net to Apache. And, this area will likely give us very significant long-term natural gas production starting in 2011 and 2012.

We now perceive Ootla potentially becoming the eighth major development project in our portfolio which could increase and extend Apache’s growth visibility in a very material manner above the 135,000 barrels of oil a day from our other seven projects.

Third, our exploration success during the first quarter has added significant resources that will extend some of our major projects. As highlighted we have raised our assessment in the total recoverable reserves in the Julimar area in Australia from one to two TCF to two to four TCF and the Hydra discovery, we have the potential to add up to one TCF of recoverable gas in Egypt. That’s not a bad way to kick off the year. Frankly, most of the exciting part of it is that we’ve only scratched the surface with respect to our exploration program for 2008.

As I’m sure all of you have noted, our daily production for the quarter was up 4% year-on-year which was driven substantially all from oil volumes and that’s good news from a financial realization perspective. On a sequential quarter-to-quarter basis daily production was down 3% due to down time from weather in Canada and our central region of the US. We had pipeline access restrictions in Argentina and the Gulf of Mexico and we also made a decision last year to direct some of our Canadian investment budget from Alberta in to longer term projects in BC. Which, by the way, has tremendous potential long term value and growth for our shareholders.

In our yearend earnings call we gave a projection of 6% production growth for 2008 after we take in to account property sales. So far this year we’ve closed approximately $300 million of sales which will affect our production by a little over 1% in 2008. We still believe 6% growth is attainable however, with the impact of current gas restrictions in Argentina and the potential additional strikes and disruptions in North Sea and lower production in Canada a range of 4% to 6% would probably be more conservative.

I’d like to now give you an overview of our regional highlights and in interest of time I’m going to focus on our key growth engine regions of Australia, Canada and Egypt and then I’ll comment briefly on our other solid positions in the North Sea, Argentina and the US. We continue to have exciting news that flows out of Australia.

As I mentioned during the first quarter we completed two successful wells in the Julimar area. Brulimar well had 113 feet of net pay which was followed by our Julimar Southeast-1 well that found 195 feet of pay. We did not test either of these wells because the well logs look very similar to previous wells that we had tested in the field. We have three additional wells that are scheduled to drill in the area through the end of the year which certainly will give us greater clarity to the ultimate reserve estimates.

I hope most of you have read today that we announced the results of our Julimar Northwest-1 well that we logged this week. The well had 43 feet of beautiful sand but importantly, or more importantly from a seismic log and pressure data it indicates that the sand is in communication with our Julimar-1 discovery which is about two miles away from the Northwest well and the Julimar East well which is another two miles east of that well. So, we have a long area with substantial reserves in it. The results of the two wells in the corridor in the just announced Julimar Northwest well certainly adds to our confidence of the growth recoverable reserve assessment of the two to four TCF range.

When we get the appraisal program completed later in the year we’ll follow a dual development track of exploring [LNG] alternatives or also taking that gas in to domestic Australia and market. We tested the Haylard-1 during the first quarter. It tested at 68 million a day from 91 feet of pay. The field is located about 20 miles from our infrastructure so we plan to fast track this development and hopefully start up in 2010 timeframe. We’re obviously very pleased with our Australian exploration program. We have a very deep inventory of high potential wells remaining to be drilled this year both in Carnarvon Basin and also the Gippsland Basin.

From a development project standpoint we’re on schedule with all of them. The Van Gogh development remains on a crack for first production of 20,000 barrels a day net mid 2009. The Pyrenees development which is operated by BHP will likely be on stream by the end of 2009 or at the latest first quarter of 2010 and will add an additional 20,000 barrels a day net. Our Reindeer gas development is on track for a mid 2010 startup at 60 million cubic feet of gas a day net to us.

We’re also close to signing the initial gas contract on that development and expect to have something to announce in the near future. It should demonstrate the gas price upside in our Australian portfolio. Australia will continue to be a very large and important growth driver for the company for many years, driven really by our materiality and the depth of the offshore exploration and project portfolio.

In Canada the big story is our Muskwa Shale play in British Columbia. In April we announced the results of three horizontal wells we drilled during the first quarter of 2008 that had test rates of 5.3, 6.1 and 8.8 million a day. We completed all three wells with six stage frack stimulations. The wells are currently flowing in to our Missile gas plant. I’ve received some questions as to why the 8.8 million a day well floated higher rates than the other two wells. The reason is that all of the fracks in the first two wells had on average about 350,000 pounds of sands pumped per frack.

In the third well we pumped over 700,000 pounds of sand in three of the six fracks and obviously the larger frack size made a difference in the rates. We estimate our net reserve potential to Apache in this play of nine to 16 TCF and for reference our worldwide proven gas reserves at the end of 2007 were 7.8 TCF. We have increased our capital program in Alberta by approximately $200 million primarily in our deep gas drilling in the [Kaybob] area. This change is in direct response to the recent announcement by the Alberta government to address the unattended consequences of their previous royalty increase.

I’ll turn now to Egypt. During the first quarter 2008 we drilled six exploration wells in Egypt. We have three discoveries. The first we announced call the Hydra-1X well in the Shushan concession tested 41 million a day and 13,000 barrels of condensate from 178 foot section in the Jurassic lower Safa section. We also tested 35 million a day and 15,000 barrels a day from a 45 foot section in the AEB.

We are currently appraising this discovery with the [Signas] 3X well that should be down in the next month to month and a half. That well is about a two mile step out to the southeast of our Hydra-1X well. The Hydra area has the potential to contain from 200 BCF to a TCF gas reserves certainly if the appraisal program is positive.

Secondly the Shell operated JDT well in the NEAG Concession tested 3.2 million a day and the third well the West Kanayes-C1X well in our West Kanayes concession has been logged but has yet to be tested. While these results are positive we note that-that’s six exploration wells out of a 40 well exploration program plan for 2008.

On the development side we continue to be on track with the Salam gas plant expansion project which will allow us to increase gross gas production in the area by 200 million a day starting in the fourth quarter of this year. This project should add net production volumes to Apache of about 900 million a day and 45,000 barrels of condensate.

The new development on this front is that we have agreed to move ahead with the construction of an additional plant. It will bring to the market an incremental 100 million a day of gross production in 2010. We anticipate having the same construction organization that is currently completing the Salam plant expansion move over to this new project later this year which has very positive execution, timing and cost management advantages.

The additional facility will net Apache at least 45 million a day and 22,000 barrels of liquid and is projected to be completed by the middle of 2010. We’re also developing several water flood projects in Egypt throughout the next couple of years and those programs are continuing to progress.

In the aggregate during the quarter we drilled 44 water flood wells and eight separate projects. Quarter-on-quarter all production increased 11% to 42,600 barrels a day gross and total water injection increased 8% to 52,500 barrels a day. If you take the combination of our continued exploration success and our lower risk drilling activities there’s little doubt that Egypt’s growth will continue for many years.

I’d like to now provide a little highlights from our other areas: the North Sea; Argentina; and the US. In the North Sea our refurbishments to extend the life and optimize the production consistency is starting to bear fruit. In March we achieved the highest average production in the last 18 months at 63,700 barrels a day. Importantly we had zero outages and a strong contribution from two recent wells that we add 8,200 barrels a day.

During the year end conference last February we mentioned the two week maintenance turnaround schedule for the second quarter of 2008 which began on April 17th of this year. The downtime will impact production by 4,000 barrels a day for the quarter but we’re optimistic that production consistency will continue to improve when we’re completed.

Last week I’m sure most of you are aware we had a temporary curve ball thrown at us involving a labor strike at a refinery in Northern Scotland that receives production and supplies power to BP’s 40-pipeline system. All the Forties field production is transported through BP’s pipeline system and the refinery strike caused the pipeline system and all our remaining production from the Forties Field to go down on April 27. At current strike is over and we should be totally back online by the end of this weekend. There are apparently some discussions about another strike occurring in the immediate future however the expectation of that today at least is remote.

In Argentina we continue to have success notably Tierra Del Fuego. We have a very perspective area with respect to material oil discoveries. During the first quarter we drilled five onshore wells that cumulative tested over 4,000 barrels a day. We also made a discovery at Las [Flechas]. It is an exploratory well. We discovered an oil pay in the down throne of the San Sebastian gas field and it’s currently being completed.

I think probably most of you are aware Argentina announced recently that they’re shipping 12 carloads of [LNG]. It’s going to be imported this winter at a price ranging from $12 to $14 per MCF in an effort to offset the predicted short fall in the national market. Obviously this is a very high cost option and underlies the continuing upside from our gas realizations in the country which at some point has to be driven by basic economics.

In the US, the central region we had 24 rigs running, drove 126 wells with only one dry hole. I’ll give you two areas of highlights in the central region. One is on our acquired Anadarko property. We drilled 18 wells during the quarter with better than expected results. Today, we have completed 10 of the 18 wells that we’ve drilled for a combined rate of about 880 barrels of oil per day. At today’s prices 880 barrels a day equates to over $35 million of annual revenue.

The second area is our Stiles Ranch area in the Texas panhandle where we also continue to have a successful program. We’re now producing 60 million a day gross. Our acreage position has increased from 5,000 acres to 25,000 acres in the past year. During the quarter we had five rigs working in the area, we drilled 10 wells. So far we’ve completed six of those 10 with an average rate of 2.6 million a day and we expect to further ramp up that activity during the remainder of 2008.

In the Gulf region we average 13 operated rigs during the quarter including four onshore. We have continued activity in our Grand Isle Forty complex. And, importantly, we’ve restored production to pre-2005 hurricane levels at 12,200 barrels a day and 47 million cubic feet of gas a day. One of the main reasons we purchased BP’s Gulf of Mexico properties in 2006 was to increase our interest and become the operator at Grand Isle Forty. The acquisition has turned out to be a big win for us and there still remains a great deal of opportunity in the field.

In summary the first quarter has kicked off in a very positive way for Apache. In addition to achieving solid financial results our success in exploration and project development during the quarter has expanded our portfolio of projects that provide Apache with many years of growth potential. We entered the first quarter with a portfolio of six major projects with 125,000 barrels of oil per day of new production between now and 2012.

During the quarter we launched our seventh project, our third [grass] chain in Egypt that should add about 10,000 barrels a day equivalent net. We tested very successfully our Ootla Shale play in British Columbia and we added significantly to our resources in our existing projects through the drill bit in Australia and Egypt. Our drill bit and progress during the quarter was once again balanced across our portfolio not only in North America but also in a major international hydrocarbon provinces of Australia and Egypt. With most of exploration activity for the year still ahead of us we look forward to continued progress in 2008.

Roger B. Plank

Steve talked about our exploration results and our future growth profile so I thought I’d start by looking back on how far we’ve come financially and how large the numbers have grown from just a year ago. First quarter a year ago our revenues were $2 billion. This year they’ve crossed $3 billion. Oil revenue alone climbed $1 billion to $2.1 billion and comprised over two thirds of our total revenue from just half our production which really speaks to the benefit of our uniquely balanced production mix.

Margins reached record levels. Of our $3 billion of revenue over 30% made it to the bottom line. Obviously a $33 per barrel increase in our oil realizations over a year ago significantly benefited the first quarter but that’s really only part of the story. Oil production climbed 30,000 barrels a day to 261,000 barrels driving our 4% growth and equivalent daily production first quarter to first quarter.

The combination of unprecedented oil prices and higher oil production were the primary drivers behind our earnings doubling from a year ago. Excluding the impact of foreign currency fluctuations on deferred tax balances Apache earned a record $1.1 billion or $2.99 a share which is twice the $1.48 adjusted amount we earned a year ago. When you earn half a billion more on essentially the same number of shares outstanding returns become very robust. First quarter annualized return on capital employed was 22%. Return on equity was 26%. Cash flow was also robust up by just over half to $1.84 billion for the quarter.

I just thought that this information might be useful perspective on our progress before I swamped you with detailed comparisons of first quarter versus the fourth quarter which I will now go through. Oil and gas revenues rose 6% of $182 million from the prior quarter while total operating costs increased just 3%. This drove our pre-tax earnings 8% higher.

Our after tax earnings of $1.02 billion rivaled the prior quarter’s $1.07 billion and on an apples-to-apples basis adjusting for the impact of the deferred tax balances that I mentioned from foreign currency fluctuations and for Canadian tax rate reduction that occurred in the fourth quarter last year the first quarter’s $1.01 billion were a record and 3% higher than the $982 million of adjusted earnings in the fourth quarter. Per share adjusted earnings of $2.99 were also a record up $0.07 per share sequentially.

Cash from operations of $1.84 billion or $5.48 a share was up 4% from the prior quarter. Higher prices mitigated the impact of lower production but drove current taxes up. Despite rising costs pre-tax cash margins reached record levels up 10% sequentially to $45.78 of BOE. Higher prices more than offset rising costs including DD&A our total pre-tax margins increased 13% from the prior quarter to $33.03 of BOE.

Lifting costs for BOE rose to $8.96. While that’s up $0.36 per unit I would note that absolute total costs flattened for the first time in recent memory. So, as our production grows through the remainder of the year LOE per unit produced should drop back below the fourth quarter rate of about $8.60. You should also note that LOE previously included ad valorem taxes and we now include that in the line item entitled taxes other than income in order to get a clearer picture of our actual lifting costs.

Full cost DD&A increased 3% sequentially to $11.50 per BOE in line with our expectations given recent drilling costs. G&A costs increased to $1.62 per BOE from $1.42 driven entirely by increased incentive compensation expense following our record year last year and by higher first quarter payroll burdens such as FICA taxes which tend to be front end loaded. Absent these items rising production should drive our future rate to around $1.25 to $1.45 per BOE. Taxes other than income increased $0.91 to $4.78 per BOE which is to be expected given substantially higher commodity prices.

US severance taxes for example rose 14% and North Sea [PRT] basically the equivalent of severance tax increased 25% on the combination of both higher oil volumes than prices. As mentioned this line item now includes ad valorem taxes so we’ve also adjusted prior quarters accordingly. Finance expense decreased $0.15 to $0.87 per BOE on lower average debt balances.

Turning to income taxes our first quarter effective tax rate increased to 39% from 31% in the fourth quarter of 07 primarily due to the one time rate reduction in Canadian taxes during the fourth quarter. Strong commodity prices in the first quarter have also significantly increased current taxable income causing our deferred rate to decrease to 25% of our total tax expense from 39% in the fourth quarter.

Should commodity prices remain strong, absent foreign exchange fluctuations, our effective tax rate and deferred tax percentage are likely to be comparable to first quarter levels over the balance of the year. In the face of tightening global credit markets Apache’s financial condition grew stronger. At 20% debt to cap Apache’s exceptional balance sheet remains a tremendous competitive advantage in carrying out our business strategy to pursue future growth.

So, to sum things up, Apache’s financial results are off to a strong start and production is slated to grow. Add in the fact that current NYMEX prices are substantially higher than first quarter levels of $98 a barrel and $8 per MCF and we could see some very favorable quarter-to-quarter comparisons over the balance of the year.

With that we’d be happy to address any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Gardner – Simmons & Co. Int’l.

Tom Gardner – Simmons & Co. Int’l

Steve, you’re spinning off a lot of free cash flow here driving down sort of our models debt to cap, what level are you most comfortable with and how you see deploying that free cash flow in the near future?

G. Steven Farris

Well, the first quarter we had about $300 million worth of sales included in that cash line that I think you see on our abbreviated balance sheet so it’s not quite as large. The other thing I would say which I say constantly and periodically is that we allocate capital quarterly and we are very active right now.

I would tell you with respect to production we expect the first quarter to be the lowest quarter of the year and we have a very active program going on in a number of places. We’ve got the Salam gas plants coming on fourth quarter. But, I think we’re going to have to go through the year and see what our capital program is and also if these prices hold. We’ve lost about $9 a barrel in the last three or four days on the oil price, it’s pretty volatile out there right now.

Tom Gardner – Simmons & Co. Int’l

Just kind of related to then your growth strategy, with these higher commodity prices we’ve heard some of the majors express regrets over certain investments, I think Forties field was mentioned specifically by one. What is the outlook for large scale unsolicited acquisitions? I mean, are you seeing the opportunity there?

G. Steven Farris

We never plan for acquisitions because they’re events not really a strategy. Having said that, we are a very inquisitive company and we have been since inception and we constantly look for things from a well in west Texas that’s on the Internet that somebody is selling to larger acquisitions.

I will tell you this, in all honestly we are beginning to see that market loosen up a little bit and we don’t have anything we’re doing right now nor do we have anything even on our horizon. But, if you’re in the market you begin to see, certainly not from the big three right now but certainly there are starting to be properties that are out there that are for sale. The real question is can you find something that’s in an area that you like.

Roger B. Plank

I think part of that is this credit crunch, to those with strong balance sheets is perhaps a bit of a benefit. Those who don’t have strong balance sheets are seeing the cost of their borrowing go up significantly or aren’t able to borrow further funds so as credit gets tight the remaining resort for some is to sell properties. So, we’re starting to see a little more of that kind of thing.

Tom Gardner – Simmons & Co. Int’l

One other question I had just given your success in the shale in Canada are you looking at other unconventional resource acquisition opportunities in the lower 48 or perhaps outside North America all together?

G. Steven Farris

We’re in an opportunity business. Certainly, we don’t have any stealth plays out there that we are ready to announce but this business is a business of opportunity and we continue to look for it. We have a new ventures group that whether it’s in Canada, Argentina or anywhere else in the world we continue to look for opportunities. Interestingly, we’re looking at a shale in Argentina right now.

Operator

Your next question comes from Jeffrey P. Hayden – Pritchard Capital Partners.

Jeffrey P. Hayden – Pritchard Capital Partners

Just wondering if you could touch on your activities in the Gippsland Basin so far and what the expectations are for kind of the future drilling activity out there?

G. Steven Farris

In fact Raymond and I and one of our directors just got back from Australia and spent a week in our office there. We’ve drilled pre-dry holes with a jack up, none of which were of the size of the wells that we’re going to drill later this year in what’s called Block-59 which is by far the highest potential in that area. They’re very dissimilar with respect to prospect geological traps and I’ll be real honest with you, they’re exploration wells but I’m tremendously high on the first three we’re going to drill. We really have the potential to find a large amount of oil.

Jeffrey P. Hayden – Pritchard Capital Partners

What’s kind of the timing on those three wells?

G. Steven Farris

We expect to get a rig in July, later part of July, a floater that we have contracted and it depends on whether or not the current contract person that has the rig drills an option well or not. It will either be July, or probably if it’s not in July then it will be in September because they’ll drill one more well.

Operator

Your next question comes from Brian Singer – Goldman Sachs.

Brian Singer – Goldman Sachs

Could you talk a little bit more on the Western Australia side, timing of various gas price contracts? And additionally how you see any exploration that you’re doing nearby anything against the infrastructure that could come on over the next couple of years? Could you give us an update there?

G. Steven Farris

In terms of where we are frankly I would think we are very, very near to announcing the contract that we’ve been talking about now since the turn of this year. I would expect that to happen in May. I may be wrong but I think we’re down to a point where it’s nit and nats.

In terms of projects that we have in front of us, we just announced the Haylard well that is actually a discovery that could come through our [Veranus] Island very easily, it’s about 20 miles north of an oil field that we have that was depleted that will bring the pipeline back through what’s called East Spar. The name is not as important as we could get that on in 18 months.

Later in the year we’re also drilling a well called Rosella, a well that we drilled later last year that actually had quite a bit of gas in it and we expect to be able to get that drilled later this year but it is hat is very close to the John Brookes Field and also East Spar so both of those discoveries or potential discoveries could come back to our island. We’re upgrading our island to add about 100 million a day of capacity to come out of there from compressors so we will have some potential there.

We’re also drilling a well called Marley which is directly north of [Veranus] Island that we would just tie back to one of our platforms off of [Veranus] Island and bring back through. We’ve got two or three shots to be able to do that.

Brian Singer – Goldman Sachs

On the Egypt front with the third processing facility now approved at what point does that give you the ability or willingness in going to the Egyptian government and potentially trying to negotiate higher gas price terms?

G. Steven Farris

You must be visionary. We should be in front of the Egyptians the first part of next week.

Brian Singer – Goldman Sachs

Any initial thoughts on the timing of that process?

G. Steven Farris

I don’t know but we are going to make them a proposal. We will see how receptive that is.

Operator

Our next question comes from David Tameron – Wachovia Capital Markets.

David Tameron – Wachovia Capital Markets

Could you talk a little bit more about Argentina? You mentioned briefly some of the pipeline issues. Can you give us a little more detail there?

G. Steven Farris

The situation is, is that Tierra del Fuego obviously an island on the very tip of the pipeline is 550 miles long and it goes up to Buenos Aires and what has happened recently, like over the last three or four months, is that Chevron and Petrobras are on the mainland and they are actually over-injecting gas into that pipeline which basically makes the line pressure so high that you can’t get gas into it.

When I was down there about a month ago we talked to the Governor of the Province of Tierra del Fuego about the fact that the Province was losing royalties and also losing price in terms of being able to get their gas in that pipe. We have seen a little relief in the last three or four weeks. In fact we got some indication that Tierra del Fuego was going to be able to back Chevron and Petrobras out, but that’s a little bit of a wait and see game.

We could come back and stay where we are or we could see Chevron and Petrobras that had big fields on the mainland continue to over-inject and honestly I wish we could solve that problem. This is not a well issue, it’s purely a restriction issue.

David Tameron – Wachovia Capital Markets

It sounds like there’s no definitive timeline on the back end to get this resolved? It’s a wait and see, like you said?

G. Steven Farris

The real answer to this, and I don’t know if you follow what’s going on down there, they’re increasing the capacity of that line that’s supposed to be done by the middle of 2009 by 250 million a day and then they have a longer term project to bring the capacity of that line up to 500 million a day.

We can find a lot of gas in Tierra del Fuego and there’s a tremendous need for gas, especially in the Buenos Aires area. That is the longer term solution. The shorter term solution was we could we put some additional compression. The other thing we have considered is doing another LPG plant down there where we re-inject gas and take the liquids off the additional gas. I will tell you we are exploring the alternatives for it. The only thing I would say is this is an island issue. Total is significantly constrained also.

David Tameron – Wachovia Capital Markets

The move into Australia, can you talk about the Northwest well that you announced, Northwest Number One, you mentioned in the press release communication with, I think it was Julimar East or Julimar One?

G. Steven Farris

It’s both, Julimar One and Julimar East.

David Tameron – Wachovia Capital Markets

I think those wells you mentioned were four or five miles away, how big do you think this can be and can you talk about the relevance of the communication there?

G. Steven Farris

In terms of the overall clock we’re going to drill a well called Grange starting pretty quickly that’s in the Groban between our Julimar discovery and also the Julimar well. It has a lot of merit to it. In terms of the overall accumulation we definitely believe that it has very good potential to be the 2 to 4 TCF of gas.

David Tameron – Wachovia Capital Markets

You had previously mentioned 1 to 2, so I’m just trying to figure out.

G. Steven Farris

We drilled more wells and I will tell you the other thing is that we’re using obviously amplitude, seismic conversion. We have drilled six out of seven discoveries, the one well that was not a discovery did not have the attributes. We were drilling really for a deeper sand so we’re basically six out of six for amplitudes off of our seismic conversions. We feel very comfortable with our geologic picture.

David Tameron – Wachovia Capital Markets

Any update on pricing in Australia from what you’ve said prior quarter?

G. Steven Farris

I will tell you the pricing is definitely on the rise. I don’t know if you’ve seen any of our presentations. Certainly in the past we’ve gotten from $1 to $2 and I think we’re a little bit higher than that right now. We’re looking at North of $6 for gas now from spot sales, from short term contracts in the five year range, we’re looking for significant price increase there. Hopefully we’ll be able to announce this contract in the near future and it will give you some indication of the pricing.

Operator

Your next question comes from David Heikkinen – Tudor, Pickering, Holt.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

First one follow up question on the Australian TDF pipeline, what’s the current capacity of that line? You said you had increased it.

G. Steven Farris

Argentina. I think TDF takes about 500 million a day.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

So it’s going to double in capacity?

G. Steven Farris

Through 2007 they’re supposed to upgrade it by 250 million a day by the middle of 2009.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

As you think about that expansion what percentage of the expansion would go for Apache and what would go for Total?

G. Steven Farris

We’re in the throes of discussing that. We obviously would like to have gas on that system.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

Switching to another pipe and plant, up at Ootla, the missile plant, what is the gas plant capacity there?

G. Steven Farris

Right now if we put a compressor on it we could do about 50 million a day out of that plant. We will have to put more infrastructure in to get higher there. I don’t know if any of you read that we have a new partner in our Ootla area, Exxon announced that they had bought 115,000 acres in the Horn River play since September.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

As you think about plant capacity in the area are there are any other companies that are actually producing oils into a plan and getting sustained production history from the wells that you know of?

John A. Crum

[Nexun] is just getting ready to start.

G. Steven Farris

John Crum is sitting here with us. He runs our Canadian region. He said there’s no one on yet but [Nexun] is just getting ready to put some of their wells in.

John A. Crum

[Inaudible] later this year.

G. Steven Farris

EOG has announced that sometime in June they’re going to put some gas.

David Heikkinen – Tudor, Pickering, Holt & Co., LLC

At year end you’ll have at least Apache and potentially [Nexun] and EOG will be able to give a lot more details as far as productivity or at least the potential to give a lot more details as far as productivity from Canadian shale?

G. Steven Farris

You bet. The other thing I would tell you is early results from not only the tests but early results of our, because we are producing gas, are favorable. We feel good about what we’re seeing.

Operator

We’ll go now to Ben Dell – Bernstein.

Ben Dell – Bernstein

I had a quick question around the gas model because in general you’ve obviously gone off the natural gas in regions where prices are depressed, when you look around the world at areas like Libya or Algeria even Russia do any of those appeal to you as next places to go?

G. Steven Farris

I don’t imagine anybody would let us in Russia any more. We continue to look and honestly we looked at Libya early on during the first bid round and that was a very difficult bid round and I don’t know that it’s gotten a tremendous amount better in terms of what your takes are. The new ventures group that I alluded to earlier doesn’t just look for shale plays in the United States or North America. It’s a game of opportunity and we’re looking for opportunities that other people haven’t seen or early stages.

Roger B. Plank

You may well be aware but we got intrigued with the upside of Tierra del Fuego and even when we were looking at the first acquisition there, the guys noticed basically right down the middle is the border so obviously what we saw on the Argentine side probably didn’t stop just because the man-made border is there.

That’s what led to our bidding on and getting 1 million net acres on the other side where pricing seems to be better and the price regulations aren’t in place. While that’s a ways off and about all we’ll do is we’ll focus on a shoot seismic. If that does have the kind of potential that exists on the Argentine side that’s right up our alley. We’re already there, we can run it out of the same office and it’s got interesting potential.

G. Steven Farris

We have now officially signed those concession agreements. We should be moving a seismic crew in there in June and hopefully with any luck we’ll have a well drilled by the end of the year.

Ben Dell – Bernstein

Just following up on that in South America there’s been some talk out of Brazil that domestic gas consumption is growing up 20% per annum, do you see any indications from the Brazilians that they’re willing to open up just for the shallower or shelf areas or onshore for their [inaudible] participants to come in especially looking for gas?

G. Steven Farris

They talk about being open for business but the fact of the matter is it’s very difficult to get concessions in those areas away from Petrobras.

Operator

Your next question comes from Gil Yang – Cit Investment Research.

Gil Yang – Cit Investment Research

Steve, can you talk about in Argentina going back there for a moment, did the reduced volumes contribute to the higher prices in the region because you were able to sell less of the lower priced residential gas?

G. Steven Farris

It may be a couple of cents but not really. What we’ve really seen over the last 12 months is we continue to see prices increase in terms of industrial volumes and also in terms of people knocking on their door and wanting gas. There is a move right now actually by the unions and [Donic] and to get together with the producers and demand higher gas prices because the fact of the matter is they see the same problem. They see shrinking investment which means something happening to their jobs.

In fact we just met with them last week. In all of these areas, and I will tell you, the one thing people hopefully understand about is look at quarter-to-quarter but we are more of a long term player. I feel very good about gas production and oil production going throughout the year and I feel very good about gas prices in Argentina. I think you’ll see it. Will we have some hiccups? Sure we will.

Gil Yang – Cit Investment Research

I was just under the impression that a good chunk of the price increase in the last couple quarters was more due to a mix effect than actual prices rising. Or you were just getting more high price gas.

G. Steven Farris

I think what you’re seeing is not just a mix. Definitely [Donic] is a higher price because number one you have more markets there, you can get the gas there easier so you have the potential of finding different markets. In terms of the overall gas price in Argentina it is definitely creeping up and I wouldn’t be surprised if it jumped up here in the next 12 months.

Roger B. Plank

I think that’s all exactly right. The one thing Gill that maybe you’ve got in the back of your mind is they’re just coming out of their summer months and everything is upside down in Argentina. You go in to the winter, that’s when the greatest call is on low fixed price gas for residential use so there is in effect a winter to summer effect that you’re probably seeing in our higher realizations but we haven’t seen these realizations I don’t think this decade. So, what’s Steve is talking about is the primary driver.

Gil Yang – Cit Investment Research

So then as we go in to the winter, their winter, do you think that your average price may drop temporarily?

Roger B. Plank

I think that’s going to be a factor.

G. Steven Farris

You bet it will.

Roger B. Plank

But I don’t think it’s going back to yesterday’s levels.

Gil Yang – Cit Investment Research

Just backing off from a more macro perspective, I know that you don’t typically do a lot of hedging but given that oil was at $120 a few days ago, it’s back up quite a bit, have you given any thought to locking in some prices here?

G. Steven Farris

We should have done that a couple of days ago. I think Roger alluded to the fact that we have 20% debt. I think we certainly have plenty of cash flow to fuel the opportunities that we have in front of us so that’s somewhat our hedge frankly.

Operator

That would conclude our question and answer session.

Roger B. Plank

Thanks for joining us. I know you’ve had a gazillion call today but if any of you have any follow up questions feel free to give me a call after we’re done here. Thank you very much.

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Source: Apache Corporation Q1 2008 Earnings Call Transcript

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