APA Corporation (APA) CEO John Christmann on Q3 2021 Results - Earnings Call Transcript

Nov. 04, 2021 2:21 PM ETAPA Corporation (APA)1 Comment
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APA Corporation (NASDAQ:APA) Q3 2021 Earnings Conference Call November 4, 2021 11:00 AM ET

Company Participants

Gary Clark – Vice President of Investor Relations

John Christmann – CEO

Stephen Riney – Executive Vice President and CFO

Dave Pursell – Executive Vice President of Development

Tracy Henderson – Senior Vice President of Exploration

Clay Bretches – Executive Vice President of Operations

Conference Call Participants

Doug Leggate – Bank of America

Neal Dingmann – Truist Securities

Michael Scialla – Stifel

Bob Brackett – Bernstein Research

Leo Mariani – KeyBanc

John Freeman – Raymond James

Operator

Good day. Thank you for standing by and welcome to the APA Corporation 's Third Quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the conference over to your speaker today, Mr. Gary Clark, Vice President of Investor Relations. The floor is yours.

Gary Clark

Good morning. And thank you for joining us on APA Corporation Third Quarter 2021 Financial and Operational Results Conference Call. We will begin the call with an overview by CEO and President John Christmann. Steve Riney, Executive Vice President and CFO, will then provide further color on our results in 2021 outlook. Also on the call and available to answer questions are Dave Pursell, Executive Vice President of Development. Tracy Henderson, Senior Vice President of Exploration, and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be approximately 18 minutes in length, with the remainder of the hour allotted for Q&A.

In conjunction with yesterday's press release, I hope you've had the opportunity to review our 3rd quarter financial and operational supplement, which can be found on our Investor Relations website at investor. apacop.com. Please note that we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. Consistent with previous reporting practices, adjusted production numbers cited in today's call are adjusted to exclude non-controlling interest in Egypt and Egypt tax barrels.

Finally, I would like to remind everyone that today's discussion 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 discussed today. A full disclaimer is located with the supplemental information on our website. And with that, I will turn the call over to John.

John Christmann

Good morning and thank you for joining us. Our top priority coming into 2021 was to continue strengthening the balance sheet through debt reduction. With the significant recent strides in that regard and a favorable outlook for continued free cash flow generation, we are in a position today to announce some material changes at our capital investment plans and use of free cash flow. First, we're moving toward a capital budget that will sustain or slightly grow global production volumes. This is being accomplished through a gradual ramp in activity over the next few quarters primarily in Egypt where we are anticipating PSC modernization terms will be approved by year-end, but also in the onshore U.S. Second, we're committing to a significant increase in cash return to shareholders.

While a stronger commodity price environment has accelerated progress on the Balance sheet is the quality and cash flow generating capacity of our core operating areas through a range of commodity price environments that are enabling our new capital return framework. We have a substantial inventory of quality drilling opportunities throughout our portfolio. In addition to Egypt, which now has the deepest inventory in more than a decade, we also have significant potential in our onshore U.S. portfolio. Primarily in the Southern Midland Basin, Alpine High, and Austin Chalk. In this price environment, there are many compelling drilling opportunities that should be funded and we anticipate adding a fourth onshore U.S. rig in 2022. With regard to our new capital return framework, we are committed to returning a minimum of 60% of our free cash flow to shareholders.

This begins with our base dividend, which in September we announced would increase to an annualized rate of $0.25 per share. Yesterday, we announced a doubling of that rate to $0.50 per share. In early October, we took the more significant step of initiating a share repurchase program. Through October 31st, we have repurchased 14.7 million shares and expect to continue returning capital in this manner through the Fourth Quarter and into 2022. Our commitment is to return at least 60% of free cash flow to shareholders and we will exceed this amount in the current quarter. We believe that, APA currently offers one of the highest free cash flow yields at our peer group. And that this framework could deliver us an attractive and highly competitive return to our shareholders.

Turning now to the third quarter results of highlights. Through a combination of strong commodity prices, capital and cost discipline and good well performance, we generated nearly $1.2 billion of adjusted EBITDA, making it our strongest quarter of the year thus far. We anticipate fourth-quarter will be even stronger. U.S. production exceeded guidance in the Third Quarter and we continue to see good performance in the Permian oil plays, Alpine High, and the Austin Chalk. Internationally, production was a bit below guidance as we experienced some extended maintenance turnarounds and compressor outages in the North Sea and lower volumes in Egypt associated with the impact of strengthening oil prices on our production sharing contracts. We expect gross production in both the UK and Egypt will increase in the Fourth Quarter.

In the U.S. we placed a total of 10 wells online during the quarter. This included 9 wells in the southern Midland Basin, 3 of which were 3 miles in length. At Alpine High no new wells were placed on production during the quarter. But performance from this year's DUC completions, as well as the underlying base production volumes continue to exceed expectations. In the East Texas Austin Chalk, we drilled three operated wells earlier this year, two of which are on production. We've recently added a third rig in the U.S., which will be used to continue the delineation of our Austin Chalk acreage position. We have now gathered a substantial amount of data in this play that indicates returns will compete with other quality portfolio opportunities. Dave Pursell can provide more details around the Austin Chalk during the Q&A. Turning to international operations. In Egypt, gross production has began to turn higher, putting us on a good trajectory as we enter 2022.

In anticipation of modernized PSC terms, we recently increased our rig count to 11. We will likely add more rigs in 2022 as modernized terms would return Egypt to being the most attractive investment opportunity within our portfolio. In the North Sea, we continue to operate 1 floating rig in 1 platform crude. As expected, production was up modestly in the third quarter compared to the second quarter as we continued to work through both planned and unplanned maintenance downtime. On the drilling front, we recently TD the store to development well, which we plan to place online in January. While one of the primary objectives in this well was wet, we encountered more than 300 feet of net pay and other targets, which we're projecting we'll IP around 20 million cubic feet per day of gas and 2500 barrels per day of condensate.

Our 59% working interest in this well provides good leverage to what should be robust North Sea natural gas and condensate prices over the coming months. In Block 58 offshore Surinam, our partner Total is currently running 2 rigs, one of which is conducting a flow test at Sahakara Sal and the other is drilling the Bond Bonnie exploration well in the Northern portion of the block. These operations are still ongoing and the data we collect will help inform the next steps in the Block 58 appraisal and exploration programs. On Block 53, we are finalizing plans for our next exploration well location with partners Petronas and Septa. The Noble Jerry D'souza drillship is scheduled to commence drilling this well in the First Quarter. The plan is to drill one well in Block 53 in 2022, but we have an option on the drillship for two additional wells if warranted. Before closing, I want to comment on the charge we took this quarter related to the Gulf of Mexico properties we sold to Fieldwood in 2013.

Since Fieldwood emerged from bankruptcy in August, we have independently assess the situation and have elected to book the contingent liability that you saw in our press release. Steve will walk you through some of the details. In closing, I'd like to make a few remarks about the progress we're making on the ESG front. We recently announced that we have eliminated all routine flaring in U.S. operations. This was an ambitious goal that we set at the beginning of the year and achieved 3 months ahead of schedule. Additionally, through the end of the third quarter, flouring intensity in the U.S. was only.38%, significantly below our target of less than 1%. Our global safety performance has also been strong. We have delivered a 35% improvement in our total recordable incident rate compared to this time last year. We have also progressed a number of important initiatives that foster diversity and inclusion within the organization and that enhance the health and well-being of our employees.

In October, we published our 2021 sustainability report, which I hope you will review for a more in-depth look at our ESG philosophy, performance, initiatives, and success stories. Finally, we are in the process of establishing some very rigorous short, medium and long-term ESG goals. Which will include further efforts on GHG and methane emissions and we look forward to discussing these in the near future. And with that, I will turn the call over to Steve Riney, who will provide additional details on our third quarter results and outlook.

Stephen Riney

Thank you, John. In my prepared remarks this morning, I will make some additional comments on our third quarter performance. provide a bit more color on the field with related contingent liability, review aspects of ULTA's midstream's recently announced combination with EagleClaw and provide some more context around our free Cash Flow outlook and capital framework. As noted in our news release yesterday, under Generally Accepted Accounting Principles, APA Corporation reported a Third Quarter 2021 consolidated loss of $113 million or $0.30 per diluted common share.

These results include a number of items that are outside of core earnings, excluding the impacts of the Fieldwood related contingent liability, a loss on extinguishment of debt, a charge for tax-related valuation allowance, and some other smaller items, adjusted net income for the Third Quarter was $372 million or $0.98 per share. Most of our financial results were in line with or better than guidance this quarter. Upstream capital investment was considerably below guidance, primarily due to the timing of infrastructure spending in Egypt and lower exploration costs in Suriname. Our teams have done a good job holding the line on capital and LOE despite service cost inflation. And we expect these will finish the year at or below our original 2021 guidance. G&A was also below guidance this quarter, mostly due to the timing of some costs which we now expect to be incurred in the fourth quarter. I would like to provide a bit more color now on the Fieldwood ARO situation.

Through Fieldwood most recent bankruptcy process, we had to rely on third-party estimates of the remaining net abandonment obligations related to our legacy properties. Since Fieldwood emerged from bankruptcy in August, we have conducted our own evaluations. Based on that work, it appears the combination of the various financial security packages and the anticipated future net cash flows from the properties will not be sufficient to fund all of the remaining abandonment obligations. Accounting rules require that the entire undiscounted contingent obligation and the offsetting undiscounted value of the financial security will be brought onto our books. These are recorded independently as a liability and an asset without netting them against one another. Accordingly, in the Third Quarter, we brought onto our books the anticipated net ARO obligation of $1.2 billion. We also recorded the offsetting value of the financial security in the amount of $740 million.

As a reminder, the financial security includes a funded abandonment trust, letters of credit, and surety bonds. As abandonment activity occurs, it will be funded first by the free cash flows currently being generated by the legacy properties. To the extent these cash flows are insufficient, Apache Corporation will be required to fund the activity and will be reimbursed through the financial security. Only after the operating cash flows and financial security packages are fully depleted, will Apache Corporation be obligated to fund the activity without a source of reimbursement. The undiscounted net liability is $446 million and we anticipate it will be at least 2026 before Apache incurs costs in excess of the available financial security. A few weeks ago, our majority on midstream Company, Ulta's, announced that it will combine with the parent Company of EagleClaw Midstream, to form the largest integrated midstream Company in the Delaware Basin.

We considered a wide range of strategic options for Altice for more than a year. Ultimately, we determined that this transaction would allow all Altice shareholders to reposition equity holdings into a pro forma Company with the best combination of scale, synergies, asset quality, and attractive growth opportunities. The transaction would also preserve the $6 per share annual cash dividend for the public shareholders and provide near-term optionality for APA to monetize a meaningful portion of our current position. Such a secondary sale would benefit the combined Company by improving the public float. It would also provide APA with cash flow. A portion of which would be deployed into Alpine High activity, thereby enhancing dedicated sources of revenue for the Company.

Reducing our ownership interest in Altice to a minority position provides a number of benefits for APA as well, including simplification of our financial reporting, increased comparability with our upstream only peers, and improved leverage metrics upon deconsolidation of $ 1.3 billion of debt and preferred equity as of September 30th. As we proceed towards closing, which is anticipated in the First Quarter of 2022, we will provide further detail around the accounting treatment and the financial statement impacts of this transaction. With respect to portfolio management more generally, as we build the capital investment program to a level capable of sustaining or slightly growing production, you will see increasing activity in our core asset areas, primarily in the U.S. onshore and in Egypt.

This will demonstrate both the quality and running room in our core assets, as well as the need for a more accelerated pace of non-core asset divestments. As part of that, in 2022, we anticipate a minimum of $500 million of further non-core U.S. onshore asset divestments. I'd like to close by reiterating some of John's comments regarding APA's free Cash Flow generation capacity and it's anticipated uses. As always there can be some confusion around a term like free Cash Flow. So we want to be clear what it means at APA. You will find our definition of free Cash Flow in our financial and operational supplement, which we published with every quarterly earnings report. In the Fourth Quarter of this year at current strip pricing, we expect to generate free cash flow in excess of $600 million, which would result in full-year 2021 free cash flow of around $2 billion.

Under our new capital return framework, a minimum of 60% of this free cash flow would go to ordinary dividends and share repurchases. And as John indicated, we expect to exceed this 60% framework in the current quarter. Looking ahead to next year, we currently contemplate a capital budget of around $1.5 billion. This would consist of roughly $1.3 billion for development and $200 million for exploration and appraisal activities, mostly in Suriname. As we've indicated, we believe the plan level of activity would put our global total BOE production on a sustaining to slightly growing long-term trajectory. This excludes any future production contribution from Suriname.

The near-term allocation of capital would likely be bias to increasing oil production, which would offset declining gas and NGL production. That said, the commodity price environment is very active. And we have considerable flexibility within our portfolio to redirect capital as appropriate. Based on this investment level, we anticipate free Cash Flow in 2022 would again be in the neighborhood of $2 billion prior to any benefits of Egypt PSC modernization. Finally, I would like to caveat all of this with, as is customary, the final plan for 2022 will be reviewed in the Fourth Quarter call in February. And with that, I will turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. You have your first question coming from the line of Doug Leggate from Bank of America. Your line is now open.

Doug Leggate

Well thanks. Good morning everybody. Just checking, John, can you hear me okay, I'm finding it difficult?

John Christmann

Yes, Good morning Doug.

Doug Leggate

Some companies can give me some problems. John, I'm going to start with Egypt if I may. I'm sure you saw the report we put out a month or so ago. One of your smaller peers has been a little bit more transparent on the potential changes in terms from the PSC modernization. So one of those conceptually, you could walk us through how are you see the moving parts as it relates to increased profit oil and in particular, the potential for legacy stranded capital cost recovery. If you could put some maybe a range of potential impacts on your assuming similar terms applied.

John Christmann

Well, Doug, it's a great question. And you know, from our perspective, we are the largest onshore producer in Egypt. You've hit on some of the key points. We've made the decision not to give more color on that until it's finalized. I will tell you that the modernized PSC has recently been approved by the cabinet and it has moved on to Parliament. So we're getting close and we expect it to everything's on track for a year end approval. But in terms of anymore color you've done a good piece of work out there. And I'll let Steve comment on a couple of things.

Stephen Riney

Yeah. Doug, the thing I would add to that, based on your work, you've demonstrated, you understand how the PSC's work. The backlog -- while we haven't indicated exactly how much that is, the mechanism to recover that, is that it is the backlog would be -- and we've shared this publicly already. The backlog would be recovered over a 5 year period on a quarterly basis. And that backlog would roll into the other costs for cost recovery. So it is all subject -- to sum of all of that, is subject to the 40% limit on cost recovery barrels. the benefit -- the real benefit as you've noted in your right out is that by aggregating all of these into a single bucket for cost recovery purposes, you don't end up with stranded costs in any of the smaller buckets and that will allow us to get this backlog of cost recovered as well especially in this price environment.

Doug Leggate

Steve, I know you don't want to give specifics, but end my -- my note I did suggest the potential of the impact could be several $100 million across would you push back on that or give some affirmation that we're in the ballpark?

Stephen Riney

Yeah, Doug. I think I need to be really careful about that. So I think we won't comment on it at this point in time.

Doug Leggate

Okay. I understand. Let me move on very quickly to my second question, which is understandably Suriname. You've got a well test, I guess you drilled out the fox about 3.5 weeks ago. John, I guess I'm a little surprised that you're not ready to give us some updates there or on Bonboni, where our guys on the ground are suggesting that you'd already in the formation era. So I'm just wondering if you can offer any color around those 2 pieces of potential news flow that we expect, I guess in the coming months, now we get there. Thank you.

John Christmann

Great question. I'll address Sahakara Sal South first. Number 1 you can appreciate that there's multiple phases of a flow test that you go through and sometimes even more important than the flow period is the buildup and the pressure response and all of those things. So it's early. I will just tell you save your question. I'm not in a position to reveal anything on it today, but hold your the question and we'll be able to respond in the near future. So is returned to Bonboni? Yes, there's Total's got two rigs, the developers of Sapakara South. The value in is at Bonboni I will remind everybody it's 45 kilometer step-out to the North, It is a key well. And I think the prospectivity up there will -- will inform the Northern portion of the block, as well as have some implications on Block 53. So once again, I'm not in a position to provide any update but I would just stay tuned, right? So and we'll be in a position to update you when we can.

Doug Leggate

Awesome, thanks so much, guys.

Operator

Next question comes from the line of Neal Dingmann from Truist Securities. You may ask your question.

Neal Dingmann

Hello, John. Nice update on the shareholder return. I was just going to add one thing around that. Just your thought -- I don't know. Either you're the Company's for personal thoughts on something about doing more of a variable versus buyback. And obviously your stock appears to me on many levels quite cheap here. So I'm just wondering how you think about the two alternatives.

John Christmann

Neal, I guess I'll start out and just on the framework, I'll just give a few comments here. It really should not come as a surprise that anybody that's engaged with us over the last several years, when we've been on the road and in our meeting. Stephen and I have been really clear that a quality EMP needs to have a strong Balance Sheet. You need to have a sustaining the low growth profile. Multiple years of inventory, but not too many years of inventory. And we should be throwing off the majority of our free cash flow to shareholders. We've had a lot of work to do. The volatile pricing environment has at times impacted.

But we're in a position where we're finally here. If you look at the framework, we believe you want to do a nice mix. You need a competitive dividend. We're not big fans of the variable dividend in terms of how that works. And I think with where our share price is, especially today is as cheap as it is, that that would be the primary means of how we'd look at it. Steve, any more specifics you want to provide?

Stephen Riney

Yeah. Only on the [Indiscernible] that. Thanks for the question because I think it is important to share some of the context around the framework that we've rolled out today. And I think John framed it exactly right in terms of the history of where we've been. I think if you just step back and think about the industry, it wasn't too long ago that the industry was all about growth and really, little or no returns to shareholders. More recently, we've finally gotten to where it's about moderated growth ambitions and really starting to roll out these returns frameworks. And I think the big step right now is to figure out well, what's the right return framework?

And I'd say it's early days for the industry in general and we're all figuring that out now that returns frameworks right now are migrating towards a percent of free cash flow and I think that's probably good. Ranges out there pretty broad. I see ranges from 25% all the way up to 75%. We're probably going to find a sweet spot in there. And I think it's starting to migrate towards somewhere around 50% as an industry for APA specifically. I mean, we just took a significant step in improving the capital structure of the Company with the debt tender this fall and that was a 100% focused on debt reduction. We know there's more to do on the Balance Sheet and we'll get to that. But to be clear, we still want to get to investment-grade, that can take some time and that's okay.

We do have to just recognize that, shareholders are pretty important too and we need to find a balance in returns to share holders, while at the same time continuing to improve the Balance Sheet. And the industry has chosen 50%, because they're kind of migrating towards that. We chose 60%. We think this is the right balance, or ACA. We have a quality diversified portfolio. It's exposed to a good range of commodity price and geographic mix. It's capable of sustaining free cash flow for many many years. And remember free cash flow, the basis for the return's circulation is after capital spending.

We've been improving the Balance Sheet. We can still continue to strengthen the Balance Sheet up to 40%. Still available for other uses including debt reduction, but I'd say in the near-term, we certainly have a bias for dividends and buybacks. And remember also we did talk about, in my prepared remarks, we talked about the fact that we're going to probably pick up the pace on non-core asset sales and that's also a source of funds for continuing to strengthen the balance sheet, but also for potentially for more returns to shareholders as well. So we feel pretty good about that balance and the 60% level. As John indicated, we don't -- we're not particular fans of the variable dividends at this point in time.

We will consider -- will keep -- we'll continue to look at that for the future and consider how the market reacts to those. I think the variable dividend needs to be in general, a smaller piece. And just in terms of balancing dividends versus buybacks, for now we're just happy to lean into buybacks. We believe our share price is too low. We've been discounting for several months now greater than 25% free cash flow yield, one of the highest in the peer group. We don't believe our base cash flow generating capacity is actually fully appreciated by the market. And we need to continue to work on that. We know that. But for now the share price is just too low, so we will continue with leaning in on the buybacks. We know we need to have a competitive ordinary dividend yield.

And it needs to be competitive against other E&P s as well as the broader market. And I think that's probably higher than what we see is the typical 2% ordinary dividend yield we see today. And we'll figure that out and it's about getting to a balance around what's the right strength of Balance Sheet that certainly is spending to something stronger. But also what price are we going to base all of that on, because I think it's a valid question is to what we all think mid-cycle price is now. We'll get on with raising the dividend as well. We just need to be thoughtful about that. It was only 18 months ago that we cut the dividend by 90% and that was a pretty painful process. We're going to make sure we don't put ourselves in a situation where we have to do something like that again. Probably more than you added for, but I wanted to take the opportunity to lay out a lot of context around the returns framework.

Neal Dingmann

No, I appreciate. I think what you said about the -- both said about the Total return makes a lot of -- or about the shared buybacks makes sense. And one just quick follow-up, John, just thoughts on future of, I'd say near-term, medium-term Alpine High activity given not only the strong natural gas prices post the Altice deal and even that Schneer long-term supply contract agreement seems to be get you closer to fruition. So given all that, maybe what you could say about Alpine High.

John Christmann

When you look at our U.S. program, we've got 2 rigs in the southern Midland Basin. We picked up another 1 that's in the Chalk now. We've indicated we will be adding another rig, probably middle of next year, which will put us 3 that will go to Permian. And quite frankly then we envision those rigs working those assets in tandem. We're in pad drilling. You will be seeing those move. And what the time it takes on the unconventional side to mobilize a rig, drill pads, and see production. Your short-term windows are benefiting from those right now at Alpine High with the dokcs that we did earlier, right?

So I think you're going to see our very well thought out efficient capital program in the U.S., where we're moving those rigs around those place based on the, how we've laid the inventory out in the infrastructure, so we can maximize those returns. But there is a portion of the Altice piece if we sell the -- sell down shares that we do put in there, but it will all fit into our framework. So it's nice to have quality inventory and options, because then we can just really plan it out and be thoughtful, but you'll see activity across our Permian next year in a very thoughtful way.

Neal Dingmann

Got it. Thank you all so much for the time.

John Christmann

You bet. Thank you, Neal.

Operator

Your next question comes from the line of Michael Ciara from Stifel. You may ask your question.

Michael Scialla

Yeah. Good morning, buddy. See what the next steps would be at [Indiscernible] the issue with both appraisals. They're just lack of reservoir quality sands as you stepped out. Did you just step out too far in the edge so you need to move back towards the discoveries with the next appraisals or is it more complicated than that?

John Christmann

Mike, it's a good question. I will tell you that at [Indiscernible] it was a big step out. We know it looked a little different in terms of the signature. So we knew there was more risk to it. But there is work to do at Cadcassie, in closer. But I think from the priorities, it will all be put into is your working across all the discoveries and the appraisal program. We're integrating data. We've prioritized for the appraisal there things that you would be what I'll call lower GOR black oil that you could potentially fast-track. And so we're working those in a queue based on the learnings, we've integrated everything in. Some of that will come to one of the reasons why crab to go is the next exploration well. It's in the neighborhood and we like the way it looks. So I think it's all part of an integrated plan.

Michael Scialla

Okay. Helpful. And maybe just to follow-up on Neal 's question. Can you talk about that decision to put the third rig in the Chalk versus the Midland or Alpine High. And Steve mentioned a plan to add a fourth rig next year. Any early preview on where that might land. I guess, any possibility of going beyond four rigs, and then U.S. next year.

David Pursell

Yes. This is David Pursell, good question. So remember on the Chalk we talked about drawing a handful of wells in our Brazes County acreage position. One, because we're trying to maintain optionality. We -- we've had significant experience a bit to the West and the Washington County area and we had a decent acreage position put together and wanted to hold it together and we liked what we've seen so far. It's consistent with the geology we've seen in Washington County in well results. And so we really just want to leverage that experience. We liked what we saw and felt like it was time to put a rig there and continue to progress that position. The thing to remember it's near infrastructure. There's a lot of pipe infrastructure in the area. It's less than a 100 miles from Houston Ship Channel.

So we're getting Henry Hub pricing and LLS pricing for the crude. The GORs are little bit higher than what you typically see in the Permian. So there's a little bit of a gas component too, which we like in these markets. So for us it was a pretty easy decision on the Chalk. The extra rig we talked about, the incremental rig in the middle of 2022. I think it's important to point out, first of all, as you -- as we think about adding another rig, it's harder to stand up a rig quickly, it's a couple of quarters to from the time you make that decision till the time you're turning to the right just because of long lead items in supply chain issues and to make sure that we have everything we need to keep that rig running. I think John highlighted that there is a lot to do in the Permian.

We have two rigs in the southern Midland Basin. We have a lot of development inventory that we're not getting to, which includes Alpine High and we have a lot of good opportunities for that rig and we'll post John those in February that you can imagine that Alpine would be on that list of places we'd be looking to drill next year.

Stephen Riney

And to be clear, there will be no fifth rig in the onshore U.S. next year.

David Pursell

Yes -- Yes. Thank you, Steve.

Michael Scialla

Thanks, guys.

John Christmann

Thank you, Mike.

Operator

Your next question comes from the line of Bob Brackett from Bernstein Research. Your line is now open.

Bob Brackett

Good morning all. Just a question following up on the Austin Chalk and the Alpine High, how do you think longer-term about the balance of gas-directed drilling versus oil-directed drilling, any thoughts there?

David Pursell

Bob, I think the beauty of the diverse portfolio is we have the ability to flex that. And so I'm going to give you a non-answer because it really depends on where commodity markets go. Obviously, we've got a very constructive crude market and our gas markets is becoming more constructive. We'd like to see the back end of the gas curve strengthen a little bit from here. But again with the diverse portfolio, both diverse in the Permian and diverse globally, we have the ability to flex and move, and take advantage of commodity markets across the globe. So I'll leave it at that, but we're getting -- we're watching the forward curve on gas let's just leave it at that.

Bob Brackett

Okay perfectly clear. We're traveling the globe, can you talk about inflation and sort of what's you're baking in domestically, where you might be seeing something a bit higher versus maybe some of the international assets. What's baked into that sort of capex guide in terms of inflation?

John Christmann

Yes, Bob, you look today and this is the commodities, right? I mean steel is up, where we've got fuel. Your power costs, you are people costs. But it's really steel and people, is how we frame it. And we have factored some of that into that capital number, as we look at our programs. And then we try to get ahead on the purchases. And so, if you get into the middle of '22, it is baked into our capital numbers.

Bob Brackett

Any difference domestically versus internationally? And is there a number you'd hazard to throw out?

John Christmann

No. I mean, I think you can look at those numbers and easily you get into the -- I mean, 15-20% number easily, and in some places even higher, but not a lot of difference between the two. You just don't have -- I mean, the nice thing about a places like Egypt there's not as much competition for rig ads and things. And so it's probably easier to pick up rigs in Egypt than I would say in the U.S. Just because I take you back to 2014, we were running 28 rigs there. So it's not like we're going up to a level where we've got to bring the equipment in and those sorts of things. Hello Dave, any more specific you want to say?

David Pursell

The only thing I'd add is if you think about the type of drilling that we did in Egypt, its vertical wells. It's more commodity drilling compared to what we're doing in the Permian where a lot of the well cost is really on the completion side. So just less I think John hit it, there's less inflation in Egypt and astray just because of the type of wells that we tend to drill day in and day out.

John Christmann

The other thing I would add, Bob, is some of the targeted divestments have man on our higher water cuts. From Basin Platform properties where we're burning more energy and moving more fluid and those types of things are helping our numbers too in terms of what we're targeting. So there's -- we're trying to be really smart about the portfolio and factoring all those in.

Bob Brackett

Great, that makes sense. Thanks much.

Operator

Your next question is from Leo Mariani from KeyBanc. Please go ahead.

Leo Mariani

Hi guys. Just wanted to follow up on the stock buyback program here. I guess, high level you guys talked about roughly I guess $2 billion of free cash flow. There's some dividend here, but 60% to the buyback I mean, that certainly could imply North of a billion dollars on the buyback. And just in our math, that's certainly seems to be a very large percentage of your shares outstanding currently approaching 15%, upwards of that maybe in one year or next year. Just wanted to get a sense of do you guys think that a number that size is roughly correct and is it feasible to buyback that much stock?

Stephen Riney

Well, if the share price stays roughly where it is, and that'll be the outcome, yes. And if oil prices stay where they are.

Leo Mariani

Right. Okay.

Stephen Riney

And, yes, I think it is feasible. Yes.

Leo Mariani

Okay. And then just wanted to follow-up on the Austin Chalk here. So obviously, it's like this point you've dedicated rig. In your slide deck you talked about one well result looked very strong. Presumably there's probably more than that in terms of results that maybe you guys have seen out there. I was hoping maybe you could give us a little bit more color in terms of inventory of aerial extent of where you guys have drilled. Is there an acreage number you think is a sweet spot out there for you that, would give you just a number of years of inventory and maybe just more color about what that rig is doing. Is it all development work? Is there going to be a mix of some exploration in there? Can you maybe just provide a little bit more color about what the run rig is doing and what you've seen so far?

John Christmann

One comment from me is, not only do we have the operated rig, but we're also amount up on some of Magnolia's operations, so there's quite a bit of data. Dave, I'll let you jumped in.

David Pursell

Yeah. It's good question. The way -- on the Brazos County side, we haven't really talked yet about the sides of this, but there is some -- I wouldn't call it exploration, but there is some additional delineation work we're doing to see how big this could be. But when we look at it, there's easily over five rig years worth of development to do in this one spot. So again, we're leveraging a lot of our knowledge on the work we've done over in the Washington County area as operator and as John suggested, a fairly significant non-op position. We'll leave it at that.

Leo Mariani

Okay. Thanks, guys.

Operator

Next is from John Freeman, from Raymond James. Please go ahead.

John Freeman

Hi, guys. Thanks for taking my questions.

John Christmann

You better, John.

John Freeman

I wanted to follow up on Alpine High, which I'm sure you would have -- a couple of quarters ago, I don't think we would have realized that we haven't multiple questions on Alpine High, but obviously a lot of things change. And so I guess, when I look at the Alpine High and what gas NGL prices have done. And then following up on the recent Altice - EagleClaw deal where those processing gathering rigs got a heck of a lot more attractive. And then I know that you have done some stuff on wider spacing than you are used to do there as well. I'm just curious as it sounds pretty likely that that fourth rate will go to Alpine High if we might -- there might be some plan to get an update on the economic model for Alpine High cause it has been quite a while since we've seen it.

David Pursell

Yes, John, this is Dave. We look for that as we get into 2022 and really kind of hone in on where that additional rigs are going to focus. But you're right. I mean, it's not just gas price and cost structure. We've done some things on performance, on some of the docks with spacing as well as its prac design and some of those wells are in the public domain and the results are very, very good and certainly exceeded our expectations. So there's a number of factors that would drive us to really focus on Alpine as well as some of the other opportunities out there.

John Freeman

Okay. And then just the follow-up question on Egypt. So if I heard you right, John, it sounded like the 11 rigs was going to go higher post the modernization, getting completed if I heard that right. And obviously it's been a while since we've been at this sort of an activity set. So Egypt until at least Suriname gets to a point where it's at first oil, Egypt becomes the growth driver for the Company. And I guess I'm just curious when we think historically has been an 8 rig program or so would try and keep production roughly flat if we go 11 rigs plus. Is it a double-digit type growing asset just I guess any additional color how you're thinking about Egypt.

John Christmann

Clearly, we've been gradually ramping, right? We went from 5 -- we started the year around 5 rigs, we went to 8, now we are at 11. The plan would be to go up another step. I don't see us going back -- needing to go back to where we once were in the mid-20 range. But it will -- it's going to turn the corner. We've been under -- slightly under-investing in Egypt for quite a number of years. And definitely we'll turn the trajectory the other way, which is what Egypt wants. And quite frankly, part of the overall win-win that 's in this for Egypt and APA.

John Freeman

Got it. Thanks. I appreciate it.

John Christmann

Thank you.

Operator

[Operator Instructions] Your next question is from Michael Scialla from Stifel. Your line is now open.

Michael Scialla

Actually, John just asked my 2 questions, but I'll ask one more. The asset retirement liability being put back to you with those Gulf of Mexico assets, does Fieldwood continue to operate there and do you have any input on what they do there?

Stephen Riney

No. Those assets came out of Fieldwood, so the Legacy Fieldwood Company is now a Company called Quarter North. And they don't own the old Fieldwood assets that Apache had sold to them. Those came out and went into an interview that we now call Tom Shelf. There is a person that's contract managing those assets because there are assets that are still producing. But the contract today is in place with Quarter North, the old field with organization to operate those assets for us, and we will continue to evaluate whether that's the best long-term situation.

Michael Scialla

Is there any thought on just taken over or could you potentially take over operations there? Or do you want -- if you've got the -- all the liability, would it make sense to operate it yourself?

Stephen Riney

We'd have to ask the lawyers that of whether we can operate those assets or not. I believe there's some issues with us being able to operate them. But I doubt that we would take over operatorship of those assets at this point in time. These are -- so there are -- the nature of the assets there, there's the -- a large inventory of properties that came out of Fieldwood. A number of them are in abandonment activity today. And a number of them -- a smaller number of them are operating and still generating free cash flow. And I won't go through the details unless somebody wants me to, but we booked a net, $1.2 billion liability on our balance sheet.

That's the gross abandonment obligation, less the free cash flows that we see coming out of those assets for their remaining life. And then we also booked on the asset side of our Balance Sheet $740 million of various forms of financial security that we have in place to fund that abandonment obligations. So a net liability on our part, a net obligation of about 450 million, that obligation won't --we won't -- we won't actually start funding anything on that obligation until 2026 at the soonest, in terms of costs that could be incurred, that we wouldn't have any form of reimbursement for. And then that would carry over for about 5 or 6 years after 2026 in terms of that

Stephen Riney

situation. The present value of all of those costs today are about 250 million. Guess we had to book an undiscounted number of the 450 million. The other thing I just might comment on is that the way we went about doing the work, because we only got access to the raw data behind all of this in August and we've been scouring through that since we got that. We've looked hard at abandonment costs and we've looked at -- the 2nd priority was to look at the operating assets and the cash flow from the PDPs on those. And then the 3rd priority was to look at the capital investment opportunities, because any assets like these are going to have uphold recompletion opportunities and things like that.

That was the third priority and we really haven't gotten through all of those. There are literally hundreds of capital investment opportunities. We got to the ones that, we think -- we thought were the highest priorities seemed like the best opportunities. And so those are included in the free cash flows. But we think there are more. We think that, there are opportunities to reduce the operating and overhead costs in the PDPs and we believe there are probably more opportunities in investment side that, we just haven't been able to get to yet. So we'll be -- we should be watching for those over the coming quarters. And that has a decent chance of possibly bringing that $450 million liability down over time. And that would also decrease obviously, the present value of that opportunity.

Michael Scialla

Thanks for the detail on that, Steve. One more. You'd mentioned Steve, that the divestitures you plan next year. I know you guys don't want to give detail on that, but I'm just curious. Can you speak broadly as to what assets might be put in that divestiture bucket or I'm assuming they are on the domestic side and outside of your 3 core areas or were core interception?

John Christmann

Mike actually, we sold some Central Basin Platform properties earlier this year that were higher costs, higher water cut, later life in the country for having a portfolio for a long long time. What I call some of the legacy. You can anticipate more of those types of assets is probably what would make sense.

Michael Scialla

Yeah. Okay. Very good. Thank you, guys.

John Christmann

Thank you.

Operator

You have your last question comes from the line of Doug Leggate from Bank of America. Please go ahead.

Doug Leggate

Hey guys. Sorry for double-dipping today, but I have a couple of things I wanted some clarification on so I queued up again. First one is -- on the buyback I think I missed the comment and I'll ask a question like this. When you take disposals potentially into account, as well as, I guess we've already dealt with the Egyptian thing as it relates to cash flow. Is it an upward limit on how aggressive you would expect to be with the buybacks? In absolute terms?

John Christmann

No.

Doug Leggate

Okay. Simple enough. My focus is

Stephen Riney

So just to get a bit of color on that, Doug, I think again, I think our shares are trading at a pretty meaningful discount today. They have improved over the last month or so and that no doubt as part of the purpose of the buyback. But we believe there's still trading at a meaningful discount relative to the price environment we find ourselves in. And we just think that's, for long-term shareholders, that's one of the better investment opportunities we can make, so we'll continue doing that. As long as the free Cash Flow holds up. So that's why we say it's a minimum of 60%.

Doug Leggate

Steve, the 5-1/4 million, does that go to the Balance Sheet or does that go to buybacks as well, because that's not technically Operating cash flow?

Stephen Riney

Yes we're just going to remain noncommittal on what the buybacks, and for that matter, the other 40% can go to the -- I mean the disposal proceeds and the other 40% of free Cash flow because we'll deal with that as it occurs. Could go to Balance Sheet strengthening, could go to more buybacks, could raise the dividend quicker. We've got -- we've got a number of things on the horizon with Egypt modernization also occurring. So we've got a lot of things still ahead of us here.

Doug Leggate

I don't want to labor the point but credit agencies, do they have a view on the buyback, have you run this past them to get their opinion?

Stephen Riney

We haven't spoken to them yet, but we will be speaking with them shortly.

Doug Leggate

Okay. And my last one --

Stephen Riney

We will reassure them of the same thing that we've talked about here today. We're still going to have plenty of free cash flow to do further balance sheet improvements and [Indiscernible] from asset disposals, if we need to do that and if we feel like that's the best thing to do at the point in time.

Doug Leggate

Thank you. My follow-up is a real quick one for clarification. Cheniere is your contract kicking in pari - passu with their 3rd Corpus Christi development, which is not even FID-ed yet. My understanding was that that contract to become effective middle of next year. Can you just offer some clarification on the timing? And maybe what you would expect that the ultimate tooling costs to be for you guys.

Stephen Riney

Yes, I can certainly comment on the first part of that. Our contract is, while it was in the context of FID in another project, it's not contractually tied to any project. And so it's just a contract that, starts in 2023 and runs for 15 years. A 140 million cubic feet a day, and Schneer has an option to bring that forward one year to start it in mid 2022, July of 2022. And we were waiting to see if they will exercise that option.

Doug Leggate

Alright, thanks folks.

John Christmann

Thank you Doug.

Operator

That ends our question-and-answer session. I will turn the call back over to John Christmann for closing remarks.

John Christmann

Thank you. And before ending today's call, I'd like to leave you with the three following points. First, we're taking prudent and appropriate steps now to increase our capital investment to a level that will enable us to sustain production on a global basis for many years. Our portfolio offers considerable depth and flexibility to do this efficiently.

Second, we're generating substantial free cash flow in this environment, which we currently estimate will be around $2 billion for the full-year 2021 and again in 2022. And lastly, we are committed to returning a minimum of 60% of our free cash flow via dividends and share buybacks. And we're demonstrating our commitment to this process right now in the Fourth Quarter. Thank you for participating in our call today. Operator, I'll turn it over to you.

Operator

That concludes the conference call. Thank you all for participating. You may now disconnect.

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