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Apache Corporation (APA)

June 14, 2012 9:00 am ET


Patrick Cassidy - Director of Investor Relations

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

John Christmann - Vice President

Robert V. Johnston - Region Vice President of Central Region

Rodney J. Eichler - President and Chief Operating Officer

John R. Bedingfield - Vice President of Worldwide Exploration & New Ventures

James L. House - Regional Vice President of Apache North Sea Ltd and Managing Director of Apache North Sea Ltd


Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Joseph Patrick Magner - Macquarie Research

John Malone - Global Hunter Securities, LLC, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Brian Singer - Goldman Sachs Group Inc., Research Division

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Patrick Cassidy

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Please take a seat, and we'll get started. Good morning, and thank you for joining us for Apache's 2012 Investor Day. Speaking today, we have: Steve Farris, Chairman and Chief Executive Officer; John Christmann, Region Vice President for the Permian Region; Rob Johnston, Region Vice President for the Central Region; Rod Eichler, our President and Chief Operating Officer; and John Bedingfield, Vice President for Exploration and New Ventures. We also have several other members of the management team for Apache here with us. This includes: Roger Plank, our President and Chief Corporate Officer; Tom Chambers, our Chief Financial Officer; Mike Bahorich, Senior Vice President and Chief Technology Officer; Kregg Olson, Senior Vice President for Corporate Reservoir Engineering; Alfonso Leon, Vice President for Strategy; Bob Dye, Senior Vice President for External Affairs; and numerous other officers, including David French; Anthony Lannie; members of our regional operating groups, Mark Bauer; Janine McArdle from Gas Monetization; John Bedingfield; Michael Bose; Jim House; Tim Wall; Jon Jeppesen; Corey Loegering; Tom Maher; Paul McKinney. And we also have members from our Board of Directors. This includes: Scott Josey; Dr. Randolph Ferlic; Bill Montgomery; and Charles Pitman.

The schedule for today includes a break, following the first 3 presentations, that will occur at 10 a.m., resuming at 10:15. The question-and-answer period will follow at the end of the formal presentation before concluding with lunch at noon. Earlier this morning, we posted today's presentation on the company's website at Today's discussion may contain forward-looking estimates and assumptions. And no assurance can be given that these expectations will be realized. A full disclaimer is located in the presentation pack and on our website. It also includes reference to non-GAAP financial measures, including adjusted earnings and cash flow. Reconciliations of these measures can also be found on our website.

Lastly, I would request of the site audience that cell phone dial tones be turned to vibrate or silent in consideration of the speakers and other audience members. And with that, I'll turn the microphone over to Steve Farris.

G. Steven Farris

Good morning, everyone. I'd especially like to thank those that made it here in person. I also understand we have about 300 on the line listening electronically and looking and flipping through the slides, so welcome to you also. I don't know if you've had a chance to go through -- flip through the pages today. I hope you're impressed with what you see, most of which you haven't seen before. And although it's new to us -- I mean, not new to us, it's going to be new to you.

Actually, before I go through my slides, I want to talk a little bit about the macro overview of what you're going to see in the presentation. And I want to start with what you're going to see today has taken us about 2.5 years to build. Portfolios are always an evolution. But I think we're in a position right now to give you a picture, a coherent picture of what we started about 2.5 years ago.

And frankly, I'm going to give you 2 premises that we started with back in late 2009, and they're going to sound real obvious today. But back in 2009, they weren't so obvious. And the first one was that the maturity curve of gas and maturity curve of oil in the world are 2 different things. And I think they're, at least for the foreseeable future, going to be totally delinked. If you think about it in just real simplistic terms, the world uses between 85 million and 90 million barrels a day. And that doesn't sound like too much. But when you stop and think about it on a yearly basis, that's over 30 billion barrels of oil. That's bigger than Prudhoe Bay ever was. That's bigger than all the tertiary in the deepwater Gulf of Mexico that has been surmised to be in the deepwater Gulf of Mexico. So it's a big number. So we've set out over the last 2.5 years to really move our oil prospects and oil inventory up. And I think you're going to see that today. The other thing that I hope you come away with today is that we're now in a position, both from an asset inventory, drilling inventory and also from a financial standpoint to really move the needle in the United States in a prudent financial way. But certainly, we have the inventory to do that and we also have the acreage to do that.

Lastly, what I'd like to say is we are starting to see fruits from our exploration endeavor that we took up about -- at the end of 2009, we decided to start a global exploration outreach. And the purpose was -- is to put together an exploration team, starting in 2010, that would be able to look globally to find opportunities that would really move and impact the needle. And you're going to see some of those today. We're working on some others that we are not at liberty to show you today. But you're going to see 2 or 3 of them that we think really have the potential to have a big impact on Apache in the future.

I'm going to go through my slides pretty quickly. It's really the summary. But the meat of the presentation is what you're going to see after my slides. I'd like to emphasize a couple of things. One is you're only going to see the Anadarko Basin and the Permian and basically our new venture stuff today. We've really skinnied this down to try to show you what we're doing in those 2 areas because it's really what we've built over the last 2.5 years. The other thing is that does not deemphasize -- we have a number of Apache Regional Vice Presidents here. We are still a very much a portfolio player. And over the coming months, we're going to showcase those regions as we go-forward also.

So with that, I'd like to start with the presentation. This is the key. We're going to talk about -- John Christmann is going to get up and talk about the Permian Basin. We have 35,000 locations, drillable locations that we've identified on our existing acreage. On a risk basis, that's about 3.8 billion barrels of oil equivalent resource potential. Only 6% of it is on the books today. You're also going to see we are -- we have identified about 35 -- 33,000 locations in the Anadarko Basin, over 5 billion barrels of oil resource potential, drillable locations on spots on the map with our working or net revenue interest in it. Two huge plays in North America for this with the coming years for Apache. We're also going to talk and we're going to -- Rod is going to get up and talk a little bit about our project inventory that we've got around the world in terms of projects that we've got coming on over the next several years. And then John Bedingfield is going to get up and talk a little bit about some of the worldwide new ventures.

The first one is going to be Liard. It's a play that we started 2 or 3 years ago. We have 400,000 acres up in British Columbia. We've got 3 wells drilled. I will tell you it's probably the best shale -- gas shale play in the world. We think that we have about 48 Tcf of gas. Certainly, with gas prices struggling right now, we have takeaway issues. But in terms of just resource, with the 1 well we drilled horizontal, we put 6 fracs on it. It's going to go to 18 Bcf of gas, came on at 22 million a day, a tremendous resource.

We've also, over the last 1.5 years, been putting acreage together in Mississippian Lime. We now have 580,000 acres in that play, 100%. Leasing has not caught up to us, so we're done leasing there in terms of costs. We also got a play in the Williston Basin, it's on the western side of the Bakken play. Interestingly, when -- we've added about 300,000 acres, interestingly, our biggest competitor up there on the west side of us was Exxon. And then we're going to go through some of the stuff we're doing in the Cook Inlet in Kenya.

We've been able to build a lot of strength in this company over the last 10 years -- actually over the last 57 years. This is -- whether it's production per share, reserve per share, cash flow per share, earnings per share. We've been able to deliver on what we've said we've been able to do or could do. So what you're going to see is really the current evolution of Apache. We've gone through a lot of life cycles in our company, and the current life cycle is probably the most exciting because it's in front of us. We have an expanded liquids play in North America. We have global exploration. And although we're not going to talk a lot about it today, we have 2 LNG projects. The Wheatstone will come on in 2017, and we're projecting that the Kitimat project will come out at around that same time frame.

The portfolio may change, but the principles that guide us haven't changed. We're going to be portfolio-balanced, we're going to be rate-of-return-focused. And when I say rate-of-return-focused, I'm not talking about just wellhead-focused. I'm talking about total all-in rates of return. And I think if you just look at our performance over the last several years on a cash flow per share or ROE or ROCE, we are either #1 or #2 in our industry over that time frame. We're going to live within our means, and I'm going to show you what this program looks like in terms of, based on today's strip, what kind of excess capital that we have generated even over and above our growth rate. And we're going to be away from the herd. One of the things that I started out talking about was that we really saw it was a good time to be back in the United States. The idea that we are in the last land grab, really if you look back in 2009 -- we have a tremendous inventory or acreage base in this country. And what our premise was -- is that those that had the financial strength when that acreage came back around would be able to take advantage of it. So that's what, some of what you're seeing today.

A lot of people talk about financial strength. The world's going -- it's off its speed because everybody's trying to catch up with their debt. And that doesn't matter if it is Greece or Spain or some companies in our sector. What we've learned over many, many years is that you can't continually put on debt and outspend your cash flow. This is from Goldman Sachs, it's EBITDA for 2011 versus net debt. And you can look on there, many of our peers have 2x, 3x, 4x the cash flow to -- or the debt to their cash flow. And things haven't gotten much better in 2012. So we find ourselves in a very good position to take advantage of what's in front of us.

This is our guidance. We're sticking with 6% to 12% growth rate. You can see, we really have 2 numbers on there. We have a base. This has no North American gas investment in it. This is only growth off the properties that we think that have liquids. It also has a very small component of our exploration. You can see the 2 regions that really fuel our growth, the Permian Region and the Central Region. And that growth rate in Central is after the Cordillera acquisition. All of the rest of our regions grow, but certainly our growth over the next 5 years are going to be coming out of those 2 regions.

This is our cash flow to capital. This is based on the strip. And this is how much of our capital we use on a yearly basis in order to hit that 6% to 9%. So you can see, we have tremendous upside from a cash flow standpoint, assuming we get the strip price we have today, to be able to continue to grow above that 6% to 9%.

I want to digress a little bit and talk about Egypt because I will tell you, I took more questions last night. It wasn't about the inventory or the things you're going to see today as much as it was about Egypt. What's happening in Egypt is not what's happening in the rest in that part of the world. It's got the highest population growth in the world. They've got 88 million people. They have a runoff. And I just read this morning that the court upheld that Shafiq, one of the candidates, is going to be the runoff candidate against the Freedom and Justice Party. For those of you who don't know, the gentleman that is running on the Freedom and Justice Party is a U.S. -- graduated from USC and his kids are U.S. citizens.

Not like Syria, it's not like Afghanistan, I can't tell you what's going to happen. But I will tell you that I think what's going to happen is Apache's going to be there for a long time. We continue to grow our production there. We continue to get paid. In fact, I'm going to get on a plane in the morning, will be in Egypt Saturday and Sunday when the elections take place. If you go to Egypt, it's a very easy place to live in. We have 100 expats there. We have about 200 dependents that work and reside in Maadi, which is right outside Egypt (sic)[Cairo]. And we really haven't had a hiccup. I will say though that, based on that planned scenario, although Egypt is going to grow, it's going to become less and less part of our portfolio. And I will tell you this wasn't on purpose, it is just the inventory that we have in front of us.

What you can see is the biggest growth is going to be on the U.S. onshore, and it's going to be liquids. We're going from 50% liquids in 2011 production to 58% liquids in 2016. And the U.S. onshore goes from 21% of our portfolio to 41% of our portfolio. We think it's a good time to drill wells in the United States today.

These are just a ramp-up of the numbers that you saw on that very first slide. At the end of 2011, we had about 3 billion barrels of equivalent reserves on the books. We have 2 regions, the Central and the Permian, that have resource potential of 5 billion and 3 billion, about 8 billion, 9 billion barrels of oil. If you look at Liard and you look at -- and John Bedingfield is going to talk to you a little bit about what we've done in the Vaca Muerta in Argentina, and you can argue about the topsides, but it's real difficult to argue about the subsurface in that play, as you're going to see in a little bit. And then we have a number of new ventures plays, some of which are easy, like the Mississippian Lime, and we're really very confident about what we're doing in the Bakken. And then there are some a little further out like Kenya, which is a truly frontier exploration play [ph]. So we have a lot of ways to continue to grow this company over the next 5 years.

It's really the beginning of a new life cycle for us. And I will tell you it's a little bit like the pop star that got discovered that took him 13 years to get discovered. I mean, we've been working on what you're seeing on this slide for a number of months, actually for about 2.5 years. So we now find ourselves with a very good position in U.S. onshore. We think it's a good time to drill. More equipment available today at more reasonable prices than we've seen in the last 5 years. 1.5 years ago, we couldn't find a frac crew in the Permian Basin, now you've got them running all over you. A lot of things have changed in the last 1.5 years. We have a global exploration group that's now showing fruits. We are in an enviable position on the financial side, and we expect to grow to over 1 million barrels a day by 2016.

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