Apache (APA) CEO John Christmann on Apache Corp & Kayne Anderson Acquisition Corp Altus Midstream Conference Call - Transcript

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About: Apache Corporation (APA)
by: SA Transcripts

Apache Corporation (NYSE:APA) Apache Corporation & Kayne Anderson Acquisition Corp Altus Midstream Conference Call August 8, 2018 5:00 PM ET

Executives

Gary Clark – Vice President of Investor Relations for Apache Corporation

John Christmann – Apache’s Chief Executive Officer and President

Kevin McCarthy – Altus Midstream Company’s incoming Chief Executive Officer

Brian Freed – Apache’s Senior Vice President, Midstream and Marketing

Steve Riney – Chief Financial Officer and Executive Vice President

Ben Rodgers – Incoming Chief Financial Officer for Altus Midstream

John Bedingfield – Former Vice President for Apache Corporation

Analysts

Jeremy Tonet – JP Morgan

Charles Meade – Johnson Rice & Company

John Herrlin – Societe Generale Cross Asset Research

Leo Mariani – National Alliance Securities

Paul Sankey – Mizuho Securities

Richard Tullis – Capital One Securities

Douglas Leggate – Bank of America Merrill Lynch

Michael Hall – Heikkinen Energy

Paul Grigel – Macquarie Research

Michael McAllister – MUFG Securities

Operator

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Apache Corporation and Kayne Anderson Acquisition Corp. Conference call on the creation of Altus Midstream Company.

[Operator Instructions] Thank you. Mr. Gary Clark, Vice President of Investor Relations for Apache Corporation, you may begin your conference.

Gary Clark

Good afternoon, and thank you for joining Apache Corporation and Kayne Anderson Acquisition Corp. to discuss the formation of Altus Midstream Company, a pure-play Permian Basin midstream C corp anchored by Apache’s Alpine High infrastructure assets. Speakers making prepared remarks on today’s call will be Apache’s CEO and President, John Christmann; Kayne Anderson Acquisition Corp.’s Chairman of the Board, Kevin McCarthy; and Altus Midstream Company’s incoming CEO, Brian Freed. Also available for the question-and-answer period will be Steve Riney, Chief Financial Officer and Executive Vice President; Mark Meyer, Senior Vice President, Energy, Technology Strategies; Dave Pursell, Senior Vice President, Planning and Energy Fundamentals; and Ben Rodgers, incoming CFO for Altus Midstream.

Our prepared remarks will be approximately 15 minutes in length, with the remainder of the hour allotted for Q&A. On this call, we will be referencing the press release issued this afternoon following the market close, along with the Form 8-K that was concurrently filed with the Securities and Exchange Commission regarding Altus Midstream Company.

Additionally, we have made available the Altus Midstream roadshow presentation on Apache’s website at investor.apachecorp.com and Kayne Anderson Acquisition Corp.’s website at kaynespac.com.

I’d like to remind everyone that today’s discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the press release issued this afternoon. And with that I will turn the call over to John.

John Christmann

Good afternoon. We are very excited to announce our transaction today with Kayne Anderson Acquisition Corp. to create Altus Midstream Company. Just under two years ago, Apache announced the discovery of Alpine High, a world-class resource play located in an area of the Delaware Basin where there was no existing infrastructure. We took a very methodical approach to identifying, discovering, delineating and initiating development of this tremendous hydrocarbon resource, along with great diligence to align these activities with the design and installation of a scalable midstream footprint. Since breaking ground in November of 2016, we have invested nearly $1 billion in gathering, processing and transportation assets at Alpine High.

Today’s announcement highlights the significant value Apache has generated through this investment. The new company we are forming, Altus Midstream, will have a market capitalization estimated at approximately $3.5 billion upon inception and will be the only publicly traded Permian Basin pure-play midstream company with full connectivity to gas, NGL and crude oil markets on the Texas Gulf Coast.

Altus Midstream will have a simplified C corp structure, a conservative balance sheet and a strategic vision to maximize the future value of this unparalleled midstream business. Alpine High is on a tremendous growth path, having recently surpassed the 50,000 net BOE per day mark, just a little more than one year following initial connection of the field to market sales lines. It comprises 340,000 contiguous net acres with an estimated resource in place of 75 Tcf of gas and three billion barrels of oil in just two of the five proven hydrocarbon-bearing formations.

We seen many years of significant high-return volume growth ahead for more than 5,000 identified drilling locations. While our discussion today focuses on Altus Midstream natural gas and NGL infrastructure, I would remind everyone that Alpine High has significant oil resources in place, which Apache will continue to test and develop. I’d like to make a few comments about the thoughtful process that culminated in this transaction and highlight some of the many benefits we see for Apache and Altus Midstream shareholders.

From the beginning, Apache’s primary objective for this transaction was to fund future midstream capital requirements while retaining as much ownership in the assets as possible, thereby benefiting from a long-term value uplift as we execute on our upstream plans at Alpine High. Cash proceeds will not be distributed to Apache for pre-effective date investment. This transaction is about long-term value, not near-term cash.

Altus Midstream will hold the equity options in multiple transportation projects that will move hydrocarbons from the Permian Basin to various points along the Texas Gulf Coast. These options provide Altus Midstream valuable exposure to a full midstream value chain from the Permian to the Gulf Coast. We conducted an extensive competitive process and received many attractive offers to fund our midstream capital at comparable valuations. We chose this alternative for several key reasons: It clearly recognizes the early value of the Alpine High midstream assets. It brings Apache together with a world-class midstream investor. It utilizes a C corp structure, bringing clarity to shareholder reward and to corporate governance; and it brings access to the largest pool of future available capital.

For Apache, this transaction immediately funds nearly $170 million in planned midstream capital for the fourth quarter this year as well as all future midstream expansion capital at Alpine High. The transaction also enables Apache to strategically control and direct the ongoing infrastructure build-out to meet the needs of the upstream development at Alpine High. Importantly, Apache and Kayne Anderson share a similar vision for the growth of Alpine High and Altus Midstream, and our interests are perfectly aligned to deliver on this vision in a value-optimizing manner.

We are very pleased to have Kayne Anderson as a partner. Their track record in the midstream space is unmatched. They share a strategic vision for the Permian Basin, and they bring a vast amount of experience, perspective and sophisticated long-term investors.

With that, I will turn the call over to Kevin McCarthy to share Kayne Anderson’s perspective on the transaction.

Kevin McCarthy

Thanks, John. Everyone at Kayne Anderson is also really excited about this transaction, which represents the culmination of the search we started over 15 months ago when we took the stock public. What we talked about on our IPO roadshow was creating a new way to gain exposure to high-quality, high-growth midstream assets through a C corp structure with no IDRs, with little to no leverage and no need to access the equity markets, and that’s exactly what we have here. And I must say, I never dreamed we would find as good a target as Alpine High or as good a partner as we have with Apache.

We’re excited to be part of creating a brand-new midstream company focused on the Alpine High, which we truly believe is a world-class resource play. We’re bringing together all the talents and experience of Apache with its 64-year track record as a super independent, with Kayne Anderson, a leading investor in midstream securities. The details of the transaction are outlined in the press release, but I’d love to reinforce certain aspects of the transaction that were critical to us.

First is the alignment of interest. On the gathering and processing side of the business, Apache’s activities will be driving cash flows, so the fact that Apache owns more than 70% of the equity was very important to us. Second, we’ve given Apache incentives to increase their ownership, but only if Altus Midstream achieves specified stock price appreciation and production volume targets. The earnout thresholds are 40% and 60% above the current price, and the production threshold is roughly four times the current volume.

Next, I’ll highlight the private placements of more than 550 million that we’ve completed concurrently with the announcement of this transaction. The investors in this private placement are a blue chip group of dedicated value-oriented midstream investors. In our view, this offering validates the attractiveness of the transaction. And finally, all of the proceeds from the private placement and the IPO are going to the Altus Midstream balance sheet. Apache isn’t taking $1 off the table. This means that the company will be able to finance 100% of the projected growth capital without the need to access the common equity markets and keep leverage within targeted investment-grade levels.

At its core, Kayne Anderson is a public midstream investor, and we’re excited that we’re creating a compelling new way to invest in Permian Basin midstream, and certainly, a company that will be a core holding in all of our midstream portfolios.

What we like about the transaction is that it is a unique blend of high-growth gathering and processing assets and long-haul pipeline interests.

On the gathering and processing side, we really like the fact that Apache, an investment-grade company that owns more than 70% of the equity, controls the production and development behind the system. We’re convinced that Alpine High will be a focus area for Apache, not for years, but for decades. We’re also excited about the size and scope of the opportunity. At 340,000 net contiguous acres, it’s a massive asset with stacked pay, and that will allow Altus Midstream to build a super system with tremendous operational efficiencies.

On the pipeline side, we’re really excited by our opportunities to take a meaningful equity ownership in up to five takeaway pipelines. I think that everyone now knows how important take away capacity is out of the Permian Basin and as we exercise our options, we will have interest in pipelines that will transport all three product streams. Altus Midstream will have the right to buy into these projects at cost, in several cases, at or after the in-service date. I’d highlight that the exercise price on these options averages at seven times multiple of EBITDA.

These options have the potential to create tremendous economic value and transform the company into a diversified, integrated midstream enterprise. Finally, as MLP investors, we wanted to structure something that had much wider investor appeal, beyond dedicated investors like ourselves. We believe the C corp structure, no IDRs, no initial leverage and no need to access the equity markets will accomplish this goal. With that, I’ll hand it over to Brian Freed to describe the opportunity in more detail.

Brian Freed

Thank you, Kevin. I very much echo John and Kevin’s enthusiasm from this transaction and couldn’t be more excited about the opportunity to lead Altus Midstream. It truly represents an ideal combination of value, vision and strategic partnership that is a win-win for shareholders of Apache and Kayne Anderson Acquisition Corp. I would emphasize that it’s not simply a financing vehicle for the Alpine High assets, but rather Altus Midstream has a unique and high quality asset base that we intend to grow and build on for many, many years to come. John and Kevin have already hit on many of the important aspects of this transaction, but I’d like to reiterate a few features of Altus Midstream that I’m most excited about.

It is the only publicly traded Permian Basin pure-play midstream company with integrated long-haul transportation assets connected to liquid markets. It is a Permian Basin midstream C-corporation, a structure with no IDRs, that will broaden the base of midstream investors beyond those that traditionally held MLPs. For those reasons, we will have access to a much larger capital pool, which will enable access to future funding sources, organic and other growth opportunities. The underlying upstream resource at Alpine High is truly unique. It is great rock, highly concentrated across 340,000 net acres, which minimizes the need for aerial expansion of Altus Midstream surface facilities to drive growth. The nearly 6,000 feet of vertical stacked pay provides exceptional throughput leverage for our surface footprint, which is unmatched in the Permian Basin. Further, Alpine High provides enormous gathering and processing opportunities.

There is no other acreage position within the Permian Basin that is capable of producing the combined quantities of gas, oil and NGLs from the Woodford and Barnett source interval that Apache can at Alpine High. Altus Midstream’s options for equity participation in up to five transportation projects, from the Permian to the Texas Gulf Coast, are also a critical part of the company’s growth story, and are expected to comprise approximately 50% of projected EBITDA by 2021. These are great projects with well-known midstream operators such as Kinder Morgan and Enterprise, and Altus Midstream has the right to participate in these options at cost with no promote, which is expected to make participation in these JV pipelines highly accretive.

While the gathering and processing business at Alpine High and the options for equity participation in JV pipelines will provide significant to come. Altus Midstream has additional potential sources for growth. System scale, connectivity and the lack of other infrastructure in close proximity present us with opportunities to grow the business with third-party volumes. And lastly, the company will initially have no debt and more than $900 million in cash to fund the ongoing build-out of Alpine High gathering and processing systems.

Future funding, including an appropriate amount of leverage, will bridge us into 2021 when we are projected to turn free cash flow positive. At that time, we will consider initiation of a dividend. I’ll close by reiterating John’s remarks on how pleased we are to partner with Kayne Anderson on this exciting new company. And with that, we will open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jeremy Tonet.

Jeremy Tonet

Good afternoon, congratulation.

John Christmann

Thank you.

Jeremy Tonet

I just want to pick up on the last point here as far as the opportunity for third-party business. And – how meaningful could that be? How much focus will there be on that part of the business going forward? And do you have kind of the financial capacity to take on more CapEx there? Or how do you see that balance between the core mission with Alpine High with Apache here in those other opportunity?

John Christmann

Yes, Jeremy, that’s one of the reasons we took this path, to have that increased flexibility and be able to pursue a third-party business. So we are actually already in active discussions with third parties to do gathering and processing within the basin. Then, additionally, we think we have a public currency that will allow us to selectively pursue M&A opportunities and be a natural consolidator in the basins. So it’s something that we plan to aggressively pursue.

Jeremy Tonet

Great, thanks for that. And then just want to see as far as Apache’s long-term kind of objective here with this new entity, is there kind of a targeted ownership level over time that makes sense? Would APA look to sell down? Or do they like this level? And if there’s – will APA be consolidating the debt for this entity? How does that relationship work?

John Christmann

Yes, Jeremy, I mean, clearly, from the outset, our goal has been – first, has been to move future CapEx into a new vehicle which we’ve successfully done. We think this is the optimal vehicle for midstream going forward, so we’re excited about that. We wanted to maintain as much exposure, which is over 70%, 71% today, with the ability to raise that to the performance metrics. Our initial plans, we see this thing growing significantly in value over the next several years, and so we want to be in a position to appreciate and participate in that.

Steve Riney

Yes, and Jeremy, this is Steve Riney. I would also just add to that, the ending of your question there about consolidating, so we will exercise control over the board of this entity. So we will control the company, and therefore, it will be fully consolidated with Apache’s balance sheet, and then we’ll show a minority interest for the minority shareholders’ share of the company.

Jeremy Tonet

That’s helpful. That’s it for me, thank you.

John Christmann

Thank you.

Operator

Your next question comes from Charles Meade.

Charles Meade

Good morning to everyone or good afternoon to everyone on that end of the line there. I want to thank you for all of the disclosure you put in that presentation. It really answers 90% of the questions that we can come up with. But one I want to explore a little bit perhaps with John Christmann is, can you describe, on a day-to-day kind of working basis, how the – how you will handle the control and the coordination between Apache and Altus? And specifically, I’m thinking you’re obviously – you’re gaining a lot with this transaction, but one of the things that possibly you’re giving up is some coordination with getting your lines to your pads at – when they need to be there and that sort of thing. So can you talk about how that coordination is going to work on?

John Christmann

Well, there’s going to be a – Charles, you’re going to see a transition. I mean, today, everybody’s working for us, and so there will be a very thoughtful and – a transition. I don’t think we’ll have to worry about getting their attention, as we are going to be their largest customer and the driver behind their growth. So it – and it’s something like, as Steve said, we will have control of – be able to control. So we don’t see that as an issue. I don’t know if Kevin or Brian want to comment.

Brian Freed

Yes, additionally, we do have an operating agreement between the two companies, and so we will be able to have the same folks that had been building out this asset from day one retained to continue to grow and work with the asset as well, too.

Charles Meade

That’s helpful. Thank you. That’s it for me.

Brian Freed

Thanks Charles.

Operator

And your next question comes from John Herrlin.

John Herrlin

Okay, I have a couple. One, how long does this take to negotiate, John?

John Christmann

Well, as we’ve said, we’ve been – it’s been a long process. We’ve been deep into it. I mean, I – this goes back to early in the year, and then we went into a formal process, but I think in good earnest, one of the things you’ve seen is we had to run parallel with a lot of the equity options that we were securing on the other lines. And so we’ve had a – we’ve had to time this, but we’ve been in discussions and had a very competitive process with a number of parties for quite some time dating back to early this year.

John Herrlin

Okay, thanks. And who knew Latin, because the name, I think in Latin, if I’m not mistaken, means noble or profound. I was just curious how you came up with that?

John Christmann

I’ll let Brian give you the Brian Freed Well, you’re right. It is – it means actually high, deep, noble or profound. So really, we’re tipping our hat

John Herrlin

Talk about Latin, mine’s not that good. But what…

John Christmann

Brian Freed Well, we’re tipping our hat to Alpine High. But ironically, in the Urban Dictionary, it’s an adjective e for something that is really cool and attractive. So it was probably valid 2,000 years ago and still current today. So…

John Herrlin

Okay, that’s cool. And the last one for me, from the Apache perspective, you were spending a lot in the Alpine High midstream. Now, essentially, you’re not going to be, given the formation of the C corp. So what does that do to your capital budgeting going forward in terms of your upstream activity?

John Christmann

Well, if you look at next year, obviously, we – the fourth quarter this year, we don’t have to spend now, which is $170 million or so roughly. Steve can verify. And then next year, we have $250 million for the next two years. I think you’ve seen from the handouts with the equity options, Altus is probably going to spend at a much higher rate than that. So this frees us up, John. It puts us in the spot we want to be, and we’re going to have a lot more flexibility now. So I mean, as I mentioned on the earnings call last week, we’re at a point now where we can see the light at the end of the tunnel. And so it’s going to let us do some other things and it’s exciting.

John Herrlin

Great, thank you very much.

John Christmann

Thank you.

Operator

Your next question comes from Leo Mariani.

Leo Mariani

Hi, guys. Just wanted to follow up on your last comment there, John. What types of other things do you see this deal freeing up for Apache as we roll into 2019 here?

John Christmann

Well, I mean, obviously we’ve got a very attractive portfolio, and I think you saw strong delivery from us. I mean, our Apaches around the globe are hitting on all cylinders and you saw strong delivery from us in the Permian, you saw it at Alpine High, you see it coming out of our North Sea operations where we’ve got some exciting wells coming on this year, as well as Egypt. So we’ve got an abundance of inventory in places. We like the pace we’re at.

As we mentioned, we were not, even though the capital went up back half of the year, it’s more phased. We’ve gotten to the rationale behind it, so I don’t see us adding a lot of activity right now, but it gives us that opportunity. And then obviously we’re in a position if prices hold and things with the cash in our balance sheet that we can consider some other conversations that we can now have in earnest with the board. So at this point – this was a big hurdle for us, and we’re very excited to be at a point now to be able to kind of articulate exactly the path forward, which we think creates a tremendous amount of long-term value for our shareholders.

Leo Mariani

Okay. That’s helpful. I guess, also, it seemed like you guys alluded to the fact that this vehicle is going to be a lot more than just a way to monetize the midstream for Apache here and really sounds like you have some grand ambitions. Do you guys think you’re going to be able to kind of consolidate other infrastructure in the Permian with this new vehicle, just kind of maybe talk to it in terms of big picture how you see this fitting in to Apache going forward.

Kevin McCarthy

Sure, Leo. This is Kevin. We certainly think that having an attractive currency, like Altus Midstream, will be a competitive advantage. There’s a lot of private equity-backed companies in the basin. But I’d also remind you that the growth that Brian talked about is totally independent of that. That’s above and beyond the growth we see from the core G&P assets and the exercise of the equity options.

Brian Freed

Yes, and the only thing I’ll add is I mean that is 106% growth rate, I suppose, as we note in the roadshow presentation, that we’ve got with the opportunities that are directly in front of us. And so we definitely do look forward to that, but that growth will come from pursuing third-party gathering and processing business as well as taking a look at transactions, but being very selective about it and making sure that they’re accretive.

John Christmann

And Leo, on my hand, clearly, as we’ve said, we wanted to maintain a large exposure because it is the back of Alpine High that’s going to drive this. And so we think it fits quite nicely, and it is going to be the upstream that is going to power this, and so we see significant shareholder appreciation.

Leo Mariani

Okay. And then just lastly, in terms of the comment that you guys had, these options to participate in pipelines at roughly seven times EBITDA, just want to get a sense of what’s the timeframe on that? Is that like a last quarter annualized? Or one year forward? Or is there anything you can kind of guide us to that seven times or first to?

Steve Riney

Leo, that’s based on run rate once the pipelines are in service.

Leo Mariani

Okay, thanks guys.

John Christmann

Thank you.

Operator

Your next question comes from Paul Sankey.

Paul Sankey

Hi, yes good afternoon everyone. Just a direct follow-up. So could you help us with the valuation of this vehicle? Are you – is the seven times the kind of number that we should think about? If I could get the answer from both sides as well, please. Thanks you.

John Christmann

I mean, on our end, Paul, we ran a competitive process. So we feel very strongly about it. And clearly, we’re maintaining a large portion of it. And when you look at the metrics that I’ll let Ben and Kevin talk about, we think it stacks up very attractively. So we were very pleased, and that’s coming from a strong competitive market. So…

Brian Freed

Maybe I’ll just talk about just the pipeline assets and then you can talk about the forward valuation, Ben. But high-quality contracted assets like this in the midstream space would typically trade anywhere from an 11 times to a 13 times multiple. So there’s been substantial value creation here by getting these options and contributing them to Altus. So that’s part of the reason we’re so excited about the opportunity.

Ben Rodgers

Sure. And then from a valuation perspective, looking at Altus standalone, a couple of things. We did post a presentation, and there’s some information on that on both kaynespac website as well as Apache’s website. And so if you look at Page 28 on that, we outlined and walked the valuation. But when you look, both 12 months from the expected closing of this transaction, which is going to be in the fourth quarter of 2018, look, 12 months from there and 24 months from there to 2019 and 2020, the peers in the high-quality midstream peers that we’re comping to kind of trade in the 12 times to 13 times. And then when you look out two years for us, that’s really where we like encircle our valuation metric because from an operational and capital perspective, all five of the JV pipelines that we’ve talked about have been funded and are cash flowing. And then the – all the cryos that we plan to build out through 2020 are also online. And so when you look at us out in 2020 in the fourth quarter, we trade about three turns tighter to what the peers are kind of in the low 9’s versus 12. And so it’s obviously an attractive investment opportunity right now. But moving forward from that period, expect it to trade more in line with the peers because our growth profile exceeds those peers moving through the three-year period and then for years to come after that.

Steve Riney

And I would just add one other thing to that, this is Steve. The thing that’s unique about this one is that there are two powerful assets behind it – the pipeline options, which are the – when the pipelines come into service, they go to an immediate almost complete ramp of EBITDA on day one, and then there’s the slow, steady, rather significant growth over a number of years of the EBITDA that will come from the in-field midstream assets. And it’s the combination of those two that creates a really powerful EBITDA growth profile, some that come in the short-term and then a lot more coming later on in life.

Paul Sankey

Understood. I mean, I guess the tough thing about the valuation. On the Kayne side, sorry, did I miss the guidance for long-term growth for this vehicle? Did you put something out as to how you expect it to grow? Or did I just miss it? Or it does not exist?

Kevin McCarthy

No, right now, we’re only guiding through 2021. I can say that we believe the growth will be substantial after that. This will be a core asset for Apache, and as I said, growing for decades, not for years.

Operator

And your next question comes from Richard Tullis.

Richard Tullis

Yes thanks good afternoon congratulations John and team getting this deal done. Just two quick questions. When you look at 2019 EBITDA projections, what percentage of that estimate is related directly to Apache production?

Brian Freed

Sure. Again, there’s a lot of information in the slides, but when we look at 2019 and 2020 and beyond, there’s about – let’s say, in 2019, I think about 40% to 45% – or excuse me, 30% to 35% for all of 2019 is attributable to the JV pipelines and the rest is to the G&P business.

Richard Tullis

And is the G& P business all Apache production?

Brian Freed

There is a small amount of third party assumed for 2019 volumes, but it’s very, very minor, less than 5%.

Richard Tullis

Okay. That’s helpful. And when you look at, say, the accounting for this, Steve, at the Apache level, what’s going to be the expected OpEx impact once the transaction closes?

Steve Riney

Yes, so the – it will be fully consolidated with the minority interest. So on a fully consolidated basis, the – it really won’t be much different than what it is today, which is where we’ll net out all of the revenues from the – for the midstream business from our gathering and transportation costs, and then what we’ll do is – what will show up in our transportation costs is the actual operating cost of the midstream business.

Richard Tullis

And then just lastly, John, can you talk about remaining midstream assets in the U.S. and globally? And just any thoughts on maybe potential monetizations down the road for those assets?

John Christmann

Yes, I mean, I think, historically, we have let others build. I mean, it’s been something that – especially in the U.S., we’ve got a lot of gathering. It’s pretty interesting how creative folks are getting today with inline – infield water disposal systems and things. But – so we handle a lot of water up in the Central Basin Platform and things. But in terms of pure midstream, we historically haven’t built in the U.S. like we did here. So this is the big unique one for us in the Delaware other than what I would call our normal gathering and batteries and types of things. Internationally, obviously, we’ve done this in Egypt as we brought on [indiscernible] and so forth. So – but when you look, this is the big asset for us in the U.S. And Brian, you might comment?

Brian Freed

Yes, the only thing I’d add to that is, within the Alpine High, there are two types of assets that Altus kept a ROFO on. The first is the opportunity to build up crude gathering system when it comes time to build out that crude gathering system. And then the second one is the water system that Apache is retaining right now because it’s strategic to what’s being done in the upstream business. But Altus has a ROFO on that. But then Altus also has a ROFO on any additional long-haul pipeline options that may be developed over time.

John Christmann

Thanks very much and congratulation to all.

Richard Tullis

Thank you.

Operator

Your next question comes from Douglas Leggate.

Douglas Leggate

A couple of clarification comments and really follow ups on two questions that have been asked already, and I don’t want to belabor the valuation question, but if I may ask someone to refer to the slides, five of the eight comps that you’ve given here are obviously MLPs, which are tax-free entities and you’re a C corp, presumably as a taxable entity, why should we not haircut those valuations to take account of? That’s my first question.

Ben Rodgers

Sure, from a tax perspective, yes, at some point in time, Altus, as a C corp, will be a cash taxpayer. But through the projected period, given the spend and the high growth, we’re not expecting to be a cash taxpayer for the guidance period that we’ve outlined here. And even when that would kick in a couple of years after the period that we’ve shown here, we expect it to be de minimis as we continue to have CapEx to meet the growth in the system.

Kevin McCarthy

And this is Kevin McCarthy from Kayne Anderson, and I can assure you, as an MLP investor, MLPs are no longer getting a premium valuation compared to C corps. There’s been a lot of C corp conversions in the space. And we think for this type of asset, the market will place a premium on something that’s a C corp rather than something that’s paying out all this cash flow and having to come to the market to fund growth.

Douglas Leggate

My follow- up, maybe just one for Stephen, but it’s really more the consolidation accounting again, Stephen, but obviously you’re going to consolidate but you’re getting an uplift theoretically on the revenues associated with this. But obviously, there’s a cost to that, which is a cost to the upstream business. So can you help quantify for us what do you expect that cost to be? Is that – I don’t have the slide right open in front of me now, but it looks like Slide 20, is that what we should be thinking about as the uplift on cost? And just as a quick follow-up, at any point, would you expect to monetize part of your interest in order to pull some of the values through to your shareholders? And I’ll leave it there.

Steve Riney

Yes, Doug, so I’m not sure what I – sure I’m understanding what you mean about the uplift in cost, but I can tell you that the revenue won’t show up – the revenue that we pay to this entity will not show up as revenue in our P&L. it will be eliminated out of our transportation costs that’s on our P&L. The only revenue that would show up in our consolidated P&L would be anything associated with third-party volumes. And then the – of course, on the bottom of the P&L, the minority interest share of the net profits would then be netted out. So on a GAAP- reported basis, it would include 100% with minority interest subtracted out at the bottom. Then I’m not – if you could clarify may be on the cost side what you mean by that? Are you talking about the capital cost? Yes, I think he – he’s off. Okay. I mean, that’s

John Christmann

I mean, the other thing I’ll say is, is the assumptions in terms of what we’ve been showing actually are better than what we’ve been shown in our economics. So there will not be a cost increase on the well-level economics we’ve been showing. Let’s go to the next question, I guess.

Operator

Your next question comes from Michael Hall.

Michael Hall

Yes, I guess maybe to tail off of the last question. I think maybe what he was getting at there was, is there any plan for returning any capital to shareholders at Apache as a result of this transaction? I know you’ll have a good amount of cash on hand. How should we think about the potential for buybacks as a result of this deal?

Steve Riney

Steve. I think John commented a little bit on that earlier. We do have – well, so we do have a meaningful amount of cash on hand. We’ve gone a debt maturity coming up here in a few weeks that we plan to pay down with some of that cash. We also have some other things going on through the end of the year.

We’ve talked about it at the last earnings call. We increased guidance on production volume. You could take the strip pricing forecast, and with the elimination of the capital spend for the midstream for the fourth quarter, you’d probably calculate out that with a little bit of noncore, some small divestments, we’d probably end the year with somewhere between $600million and $800 million of cash on hand. And we’ll look at all possibilities of what we might do with that cash, including possibly return to shareholders.

Michael Hall

Okay. Sorry if I missed that from earlier. Yes, and then I was also just curious, the way this is structured, are there any NVC’s associated with this relationship at this point for Apache?

Steve Riney

No, there are not. And so I’ll refer you to the roadshow presentation, but all the fees are 100% fixed fee. The rates are all market based, and there are acreage dedications within an area of mutual interest. So there’s no attempt to transfer value between the two companies. On Page 26, you can see what the fees look like on average, but they’re very much market-based rates and market-based terms and conditions.

Michael Hall

All right. Thanks.

Operator

Your next question comes from Paul Grigel.

Paul Grigel

Just following up maybe on the second part of, I think, where Doug was trying to go. On the CapEx side, obviously there’ll be kind of savings to the upstream entity but it seems like there’s more growth CapEx coming from Altus, but that will be consolidated back overall with an extra $1 billion of spending. How should we think about that in regards to the capital cost side overall?

Brian Freed

Sure. From a capital perspective, and there are some information in the deck, but all that will be funded separately from Apache on Altus’ balance sheet. And the majority of the pick up that you can see in 2018, 2019 and 2020 is attributable to the JV pipelines. And then there is a slightly higher number when you back those out compared to the guidance that Apache has put out for capital spend in 2019 and 2020, and that increase is attributable to an additional cryo that will be brought online before the end of 2020 that was not in the original forecast.

Steve Riney

Sorry, Paul, this is Steve. Just to be clear, so that capital spending that’ll be done within Altus, it obviously will show up on the consolidated balance sheet with Apache as property, plant and equipment along with any other assets. If, to the extent – to whatever extent Altus takes on other forms of financing, debt or structured equity or whatever other form that might be, then that will show up on Apache’s consolidated balance sheet, as well. As long as Apache continues to have control over Altus, it will be fully consolidated with ours.

Brian Freed

It will be fully consolidated but nonrecourse to Apache.

Steve Riney

Yes, right, right. Any debt that would be taken on or any other form of structured finance taken on would be nonrecourse to Apache Corp.

Paul Grigel

Okay. And then I guess as a kind of sideline to that, is the view still on the upstream side to be free cash flow neutral to positive, excluding the outspend at Altus? And then also with the third-party volumes assumed beyond 2019, that would be helpful as well.

Steve Riney

Well, I think the – so we ended the second quarter with $900 million of cash. If we’re going to – we’re going to pay down $400 million of debt in September. So if we were going to end the year with $600 million, $800 million of cash, then yes, you can say that’s roughly cash flow breakeven for the upstream for the remainder of the year. That would include us paying the third quarter of CapEx for Altus and actually slightly cash flow positive for the rest of the year.

And overall, I won’t get into 2019 other than the guidance that we’ve given on 2019 in the past that – I’ll just say that what we’ve always said is that we do believe – philosophically, we believe that an E&P company needs to be capable, in general, over a run of years of living within cash flow, funding the capital program that’s capable of growing the enterprise and returning cash to shareholders at an appropriate level.

Brian Freed

And then on your third-party question, just commenting on volumes, there’s a guidance slide in the Altus deck, and when you look at the volumes that are reflected on that page, for 2019 and 2020, we have used the Apache Alpine High public guidance for those numbers. Apache has not issued guidance for 2021, and so we use the earnout target for the additional consideration shares for that 2021 period. And then in each of 2019, 2020 and 2021, third-party volumes are 5% or less.

Operator

And your next question comes from Michael McAllister.

Michael McAllister

Sorry, guys. You just answered my question within the gathered volumes. So just to go over it again, the 2019 and 2020 are Apache’s guidance for Alpine High?

Brian Freed

Okay. So for 2019 and 2020, those are gross volumes. So you have to adjust from the net.

Michael McAllister

Right.

Brian Freed

Yes. And then in 2021, the midpoint of that is the earnout target that is disclosed in the deck. And then for each year, third parties represent 5% or less.

Michael McAllister

Perfect, that’s all from me. Thanks.

Operator

And your next question comes from Ross Pain [ph].

Unidentified Analyst

How are you doing guys? I know this is early, but given the overlay of Apache and a strong balance sheet, is it your goal at some point to be an investment grade once cash flows ramp up enough? Thanks.

Brian Freed

You’re referring to Altus in terms of their credit rating?

Unidentified Analyst

Correct.

Brian Freed

Yes, so from the outset, we don’t have to have a credit rating of that entity until we issue a security down there that requires a rating. But from a credit profile perspective, when you look at the conservative financial metrics, it is actually stronger than a lot of the investment – or the credit rating agencies’ metrics that they have. We’ll have to wait and see what their view is from a scaled perspective, but it’s very conservative balance sheet and with a target leverage ratio of three times, that allows us to be very nimble for growth projects and acquisitions and be opportunistic for any corporate strategy out there at the Altus level.

John Bedingfield

And Ross, we thought that having that target leverage ratio at three times was very important. There’s so many opportunities in the Permian Basin. We’ve seen some of the competitors out there have great opportunities but have to lever up their balance sheet to take advantage of it. So we wanted to be poised to be able to grow above and beyond the projections.

Unidentified Analyst

Great, sounds good guys, thanks.

Operator

Your next question comes from Jeremy Tonet.

Jeremy Tonet

Hi, Kevin. Thanks for follow-up. Just wanted to touch base on the Series A. And is this like a normally publicly traded security? Or is there certain lockups here? Any special preferential treatment? Just trying to understand that a bit better.

Kevin McCarthy

Yes, Jeremy, I think the best way to describe it is it’s a traditional UP-C structure. So the publicly traded shares will be the Class A shares. Apache will own interests that are convertible into those shares, but otherwise have no special rights. They do have the right to name directors based on their ownership thresholds, but you should really think of this as a typical UP-C structure where they’re economically equivalent.

Brian Freed

And there is a 180-day lock up for Apache pursuant to the shares that Apache does own.

Jeremy Tonet

Got you. And the private placement that KAAC did today, that’s just like everything else, right?

Kevin McCarthy

That’s just like everything else, yes. We were thrilled to be able to raise that amount of capital from a blue chip group of investors, and we think that certainly validates the story.

Jeremy Tonet

That’s helpful, thanks for taking my question.

Operator

We have reached the end of our Q&A. Mr. John Christmann, Apache’s CEO, your closing remarks, please?

John Christmann

Well, I just would like to say this is a big strategic step for Apache. I want to thank our partner, Kayne Anderson. I also want to thank all the Apaches that have made this possible. We’ve put in a lot of hard work, and it’s great to see has continued to take the positive steps. So thank you, and we’ll go from there. Thanks.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.