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Apache Corp  (NYSE:APA)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lisa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Gary Clark, Investor Relations, you may begin your conference.

Gary Thomas Clark -- Investor Relations

Good morning, and thank you for joining us on Apache Corporation's third quarter 2018 financial and operational results conference call. We will begin the call today with an overview by Apache, CEO and President, John Christmann; Tim Sullivan, Executive Vice President of Operations Support will then provide additional operational color; and Steve Riney, Executive Vice President and CFO, will summarize our third quarter financial performance. Also available on the call to answer questions are Apache's Senior Vice Presidents Brian Freed, Midstream and Marketing; Mark Meyer, Energy Technology, Data Analytics and Commercial Intelligence; and Dave Pursell, Planning, Reserves and Fundamentals.

Our prepared remarks will be approximately 25 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 third quarter financial and operational supplement, which can be found on our Investor Relations website at investor.apachecorp.com.

On today's conference call, 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 interests in Egypt and Egypt's tax barrels.

Finally, 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 supplemental data on our website.

And with that, I will turn the call over to John.

John Christmann -- President and Chief Executive Officer

Good morning, and thank you for joining us. On the call today, I will discuss Apache's strategic positioning, provide a preview of 2019, comment on our strong third quarter performance, and review our key focus areas.

Apache is a very different and much improved company from four years ago when oil prices began their prolonged downturn in the fall of 2014. We acknowledge very early on that the industry, including Apache, needed to make significant changes, not only in terms of reducing activity levels and overall cost structure, but equally to reestablish long-term returns disciplined in the capital program. At that time, we chose to significantly curtail our drilling program, allowing production to decline rather than pursue growth in an environment where commodity prices and costs were not properly aligned.

We refrained from participating in high-cost acreage acquisitions in the harder proven place choosing instead to build our own conventional exploration capabilities. An important outcome of this strategy was the discovery of Alpine High. We have frequently stated our philosophy than an E&P company should be capable of living within cash flow from operations, generating sustainable long-term reserve and production growth, while also returning capital to shareholders.

After significant upfront investment at Alpine High in the pending completion of our Altus Midstream transaction, Apache has turned the corner and is well positioned to deliver on this philosophy for many years to come. We continue to generate steady production growth on a flat activity set and are poised to deliver positive free cash flow in 2019. This can be sustained over the long term through development of our extensive inventory.

We will be supplemented by organic exploration, including discoveries in hand today and a refreshed portfolio of new opportunities. Lower F&D costs, increasing returns and continual portfolio high grading will accompany our growth and drive sustainable shareholder value growth through time. This is the investment proposition Apache offers and it is one that we strongly believe in, as evidenced by our decision to begin repurchasing shares in September under an existing authorization. Recently, our Board of Directors approved a new authorization for the repurchase of 40 million shares, which represents more than 10% of shares outstanding.

Now I would like to provide a preview of 2019. For more than a year, Apache has operated at a relatively constant upstream activity level, which has enabled us to deliver operational efficiencies, effectively control costs and generate sustainable liquids production growth. We anticipate maintaining a similar activity level next year, but on a lower capital budget. The changes in expected cash flow dictate, we have the flexibility to reduce our activity levels accordingly.

In 2019, assuming commodity prices in line with the current strip, Apache expects upstream capital investment of approximately $3 billion, which is consistent with our current guidance and is lower than 2018. Adjusted production at the high end of our 410,000 to 440,000 BOEs per day guidance range, representing more than 15% growth in the US and 10% growth overall. Positive free cash flow and continued return of capital to shareholders. This is well aligned with the philosophy I outlined at the beginning of the call and we look forward to providing a more detailed 2019 outlook in February.

Our performance to date in 2018 underpins our confidence in this outlook as we have demonstrated excellent growth and exceeded our guidance for three consecutive quarters. In the third quarter, we delivered very strong earnings and cash flow, driven by our significant Brent and LLS oil price leverage, robust NGL realizations and solid production results. We've seen our positive production trends continue into the fourth quarter, and are again raising our full year 2018 US guidance. Notably, we expect a meaningful increase in fourth quarter oil volumes.

Internationally, we delivered robust cash flow in the third quarter on production that was in line with guidance. In Egypt, our drilling program continued to achieve a high success rate and gross production remained relatively steady. While net adjusted production was reduced by the impact of higher oil prices on our production sharing contracts. Cash flow trended higher in the third quarter on strong Brent oil prices.

In the North Sea, production was impacted by routine seasonal maintenance, but was also in line with expectations. We anticipate significant growth in the fourth quarter with positive momentum continuing into 2019.

Turning now to midstream. We achieved an important milestone during the third quarter with the announcement of Altus Midstream Company. Altus accomplishes the primary objectives that we have previously articulated in the market. It enables Apache to maintain control of the midstream infrastructure build out and establishes an entity capable of funding all future midstream investment at a lower cost to capital. Since the announcement, we have spoken with many of our largest institutional shareholders. That feedback has been overwhelmingly positive and we look forward to the closing of the transaction in November.

Now I would like to provide a strategic overview of Apache's key operating areas. In the Midland and Delaware Basins, the strategic testing we've conducted over the past three years is paying dividends as we shipped a much greater percentage of our capital to full pattern development. This is generating significant improvements in cost and productivity. And today we believe that we are drilling some of the best wells in both basins. In the Midland Basin, development drilling continues in the Powell, (inaudible) areas with excellent results. We recently expanded our activity outside of these areas as we focus on increasing Apache's inventory of high graded opportunities.

In the Delaware Basin. We are delineating acreage into the Mexico slope play and adding landing zones in our Dixieland and Pecos Bend areas in Texas. Our drilling inventory in these areas continues to increase and will support a multi-rig program for the foreseeable future.

Moving onto Alpine High. While testing and delineation activity will continue for some time given the magnitude of the total resource, we are transitioning now to a multi-well pad development designed to optimize spacing, pattern and completions configurations. We've previously discussed the framework for monitoring our progress with Alpine High in the context of well costs, well productivity and inventory. On well costs, we have achieved an approximate 25% reduction in drilling, completion and equipment cost per lateral foot year-over-year through the first three quarters of 2019, which is in line with our goal.

In terms of well productivity, we are beginning to extend our laterals where applicable and are seeing a high correlation between productivity and lateral length in our Woodford and Barnett wells. We're also beginning to modify our completions design, including higher profit loads, which is delivering a step change in well productivity.

Turning to our delineation program in the shallow Wolfcamp and Bone Spring para sequence formations. We recently began flow-back on a 10 well pad, which incorporates larger frac geometries and is designed to test the productivity of patterns and special relationship. The pad is developing roughly a half section and contains four wells in the Wolfcamp A, four wells in the Wolfcamp B and two wells in the Bone Spring formation.

Aggregate production from the eight Wolfcamp wells is currently around 3,300 barrels of oil per day. We are very encouraged by the performance of these wells which are still cleaning up and have not reached peak IP rates. We are in the early stages of bringing the two Bone Spring wells online and we'll provide an update on the progress of this pad in the future. Tim will provide some more detail on our Alpine High program in his remarks.

Turning now to the international region. In Egypt, we have been investing at a pace that has maintained gross production at a relatively flat level. Our drilling success rate is very high and very consistent, while our inventory of opportunities is growing significantly to the addition of new acreage concessions and high-density 3D imaging. Egypt deliver some of the best returns on the portfolio and we are confident this region can return to growth in production and free cash flow for many years to come.

Our current drilling program in the North Sea consists of two platform rigs and one semi-submersible, which we believe is an appropriate place to deliver our strategic objective of sustaining production and free cash flow generation. Capital efficiency has improved significantly in the North Sea and we anticipate delivering higher production in the fourth quarter and in 2019 with a flat capital profile.

Production growth will be driven by the tie-in of three significant wells in the barrel area. A development well at Callater and a discovery well store, and our discovery well at Garten, which we have now accelerated into 2018. Longer-term, the Garten discovery has lowered the risk profile of several analogous exploration prospects, some of which we will likely test in 2019.

Moving on to exploration. In Suriname, we continue to progress our technical evaluation and are working a multitude of prospects. We will initiate a drilling program next year on Block 58, where Apache currently owns 100%. This block is untested in adjacent to the ExxonMobil operated stable block in neighboring Guiana.

In the US, we have a strategy of expanding our portfolio through organic growth opportunities at a low-entry cost. Onshore unconventional exploration teams are acquiring acreage in multiple perspective areas focusing on oil. Our third and fourth quarter capital reflects some incremental activity in this regard.

Before turning it over to Tim, I'd like to address reports that Apache is actively marketing certain assets in our US portfolio. We regularly review the strategic value of holding assets in our portfolio. If another party is willing to fund assets that are not attracting capital from Apache, then an opportunity exist to increase value for our shareholders through a sale. Our approach has always been to notify the market upon execution of a sale agreement for any material asset disposition and refrain from commenting prior to that. To the extent, we do complete asset sales, return of capital to shareholders is a high priority use of proceeds.

With that, I will turn the call over to Tim Sullivan, who will provide some operational details on the corner.

Timothy Sullivan -- Executive Vice President of Operations Support

Good morning. My remarks will briefly cover third quarter 2018 production and operational performance, including drilling highlights and activity in our core regions. Operationally, we had another very good quarter and saw improvement in many key areas. We achieved companywide adjusted production of approximately 401,000 barrels of oil equivalent per day, a 13% increase from the same period a year ago and up 3% from the second quarter 2018.

The Permian Basin continues to drive our growth. Compared with the third quarter a year ago, oil production in the basin increased 16% and total production grew 38%. These are impressive growth rates on a large production base, which reflect the success of our ongoing development in the Midland and Delaware Basins and the continued ramp up at Alpine High. We averaged 18 rigs and five frac crews in the Permian Basin during the quarter, compared with the preceding period, we held our oil production steady, up 1%. And with the completion schedule skewed toward the back half of the year, there will be a larger contribution to oil growth in the fourth quarter and even more so in 2019.

In the Midland Basin, we placed 13 wells online in the third quarter, all of which were on multi-well pads. This includes the nine well pad in our Powell field, comprising a mix of 1.5 mile and 2 mile laterals. In addition, we drilled a four well strategic pad in our Hartville field in Reagan County, testing four separate Wolfcamp landing zones with very encouraging results.

In the Delaware Basin, at Dixieland, we placed on production 10 high rate wells with one mile laterals. Eight are producing from two proven upper Wolfcamp zones, while the remaining two successfully tested two additional landing zones in the lower Wolfcamp, adding inventory across the field. Please refer to the quarterly supplement for production details.

Production at Alpine High averaged approximately 49,000 BOE per day during the quarter. We are currently producing approximately 55,000 BOE per day on a net basis. For the full year 2018, we are tracking toward 44,000 BOE per day net, down slightly from our 45,000 BOE per day guidance. This reduction results primarily from a processing upset that sets moisture down the pipeline, requiring a two-day field shutdown to pick the lines. At Alpine High, we placed 27 wells on production during the third quarter. We will remain on track to place more than 90 wells on production this year.

John mentioned the results we've seen thus far on our 10 well Cypress pad, so I will note a few other results here. Recent Barnett completions during the quarter include the Mohican 201, which averaged a 30-day initial production rate of 7.7 million cubic feet of rich gas and 319 barrels of oil per day. The Lumbee 201 which averaged a 30 day IP rate of 7.3 million cubic feet of rich gas and 256 barrels of oil per day. Both wells were completed with laterals averaging 5,700 feet and standard profit modes of 1,970 pounds per foot. They produce extremely rich gas with an average BTU content of nearly 1,300 and assuming cryo processing, we yield up to 160 barrels of NGLs per million cubic feet of gas. We have many analogous Barnett wells scheduled for multi-well pad development in our 2019 drilling program.

I also wanted to provide an update on the 12 well Blackfoot pad, which we discussed last quarter. We call that the Blackfoot tested 660 foot spacing in three Woodford landing zones. These wells were relatively small completions, triggered with only 1,600 pounds per foot of sand. The pad peaked at a 30 day IP rate of nearly 105 million cubic feet of gas and 280 barrels of oil per day, following our last quarterly call. The majority of the gas is being recovered from the upper two Woodford landing zones. Based on our frac geometry and production results, we believe we can recover most of these reserves with fewer wells and larger fracs, which will significantly enhance pad economics. The strong performance from the upper Woodford landing zones and tighter spacing has a positive impact on a location count.

On the cost side, Apache is successfully navigating a challenging inflationary environment in the US. Our initial 2018 budget contemplated the 10% to 15% average service cost increase. However, steel tariffs, rising fuel and chemical prices and higher labor costs, particularly trucking and construction have resulted in incremental inflation. We are managing these dynamics with improved well bore and completion designs, longer laterals, multi-well pad drilling and proactive investment in water management infrastructure.

As we look into 2019, we are likely to see a continuation of higher labor, steel, fuel and chemical costs. However, as we move through the tender process, we are realizing reduced cost for rigs and pressure pumping crews. Net-net, we believe these cost trends will roughly offset each other in 2019 and we plan to budget for a relatively flat or slightly down year-over-year service costs overall.

Internationally, in Egypt, we drilled and completed 24 gross wells with an 83% success rate. Noteworthy results are included in our supplement. These are primarily high-rate oil wells, all with Brent index pricing. Our seismic acquisition in the Western Desert continues. Today, we've acquired close to 1 million acres of planned to 2.6 million acres seismic shoot, completing acquisitions in our legacy West Kalabsha and Shushan areas.

We have recently initiated seismic acquisition in our new North West Razzak concession. Fast track processing is bringing very exciting results. We're seeing both (ph) in geologic surfaces, especially in the deeper section that we could not image before. We have identified several new leads and prospects just from this initial data review.

Moving to the North Sea. Production averaged approximately 51,000 BOE per day during the quarter, as operations were impacted by maintenance turnarounds. Production has begun to rebound in the fourth quarter and should continue to ramp up. In late September, we brought on stream our fourth development well in our Callater field at Beryl. This well is having a positive impact, both on production and reserves, and is currently producing 3,500 BOE per day net to Apache. Apache owns a 55% working interest. Also as John noted, we have accelerated development at Garten.

The Beryl near field discovery announced in March with first oil expected later this month. By locating this test well near existing infrastructure, we have been able to reduce our cycle time, minimize development costs, and bring this well into production in only seven months for $80 million, which we expect will translate to a very attractive F&D cost of less than $10 per barrel. We anticipate achieving our highest average production rate for the year in the North Sea during the fourth quarter.

To sum up, operationally, we remain on track for a very good year with growing momentum heading into 2019. We are focused on building on this success and quarters ahead.

I will now turn the call over to Steve.

Stephen Riney -- Executive Vice President & Chief Financial Officer

Thank you, Tim. As noted in the press release issued last night, under Generally Accepted Accounting Principles, Apache reported third quarter 2018 net income of $81 million or $0.21 per diluted common share. Results for the quarter included a number of items that are outside of core earnings, which are typically excluded by the investment community and published earnings estimates. The most significant of these is a $75 million after-tax loss we incurred as a result of the bond tender exercise in August. Excluding this and other smaller items, adjusted earnings for the quarter were $244 million or $0.63 per share.

Third quarter financial performance was good across the board. Production volumes were strong and we anticipate this will continue into fourth quarter and 2019. Our average realized oil price exceeded $69 per barrel in the third quarter as nearly 70% of oil production received Brent or Gulf Coast linked pricing. NGL realizations were also very strong, up 18% from second quarter.

Cost continue to trend well both on a per unit basis for LOE and DD&A, and on a gross basis for G&A and exploration expense. All are tracking below previous full year guidance ranges which we have reduced accordingly. Note that, cash tax guidance has been increased for the year to reflect higher income levels internationally, primarily as a result of the strong Brent oil prices. Capital investment in the quarter was $966 million, which includes $122 million for Alpine High Midstream.

As highlighted in our financial and operational supplement, upstream activity level for the prior four quarters have been remarkably consistent. Upstream capital investments is averaged between $700 million and $750 million per quarter on a steady global rig count. We plan to maintain a similar level of baseline activity through 2019, resulting in typical quarterly capital investment of around $750 million.

As John indicated, this will result in a $3 billion capital program for 2019. We believe this is a prudent level of investment and remain prepared to reduce it further should industry conditions warrant. Through a combination of the timing of capital activity and some incremental lease acquisitions and extensions, third quarter upstream investment was $844 million. Fourth quarter upstream investment will be approximately $800 million, which also includes some significant lease acquisition investments.

With the combination of strong operational performance and recent price levels, financial returns have improved and will continue to do so. Our cash return on invested capital through the first three quarters of 2018 was 23% on an annualized basis. We ended the third quarter with $593 million of cash on hand.

In terms of balance sheet management, in the third quarter, we took certain steps to improve our debt portfolio. We issued $1 billion of new 10-year senior notes, repurchased $731 million of outstanding debt, and paid our $400 million of maturing debt. These actions extended our debt maturity profile, reduced our average cost of debt, modernized our standard debenture terms and reduced debt by $131 million. This is in addition to the $150 million debt reduction we affected earlier in the year.

I will conclude with comments on midstream and marketing. There continue to be many concerns about transport and now fractionation capacity to accommodate growing Permian Basin production volumes. For the upstream industry in general, these concerns are well founded and the underlying situation is likely to extend through much of 2019. The good news is that much of the midstream investment is already under way and Apache has taken the necessary steps to mitigate the short-term impact of these issues. As an interim solution, we entered into swaps on Waha gas basis, back in late 2017 and early 2018, to lock in an average $0.51 differential on a significant quantity of gas production through much of 2019.

As a part of the longer-term solution, Apache's midstream businesses contracted for transport on multiple pipeline projects across all three commodities. In many cases, our contracting was critical to enabling FID on the project. As such, the midstream business was able to secure equity participation options in those projects and become an important piece of Altus Midstream Company.

We've talked extensively about the gas and oil transport project. With the recent concerns around NGL transport and fractionation, let me share a few more details on our agreement with enterprise. This agreement will accommodate NGL transport and fractionation ramping up to 205,000 barrels per day, beginning with the commissioning of the Chinook NGL pipeline Waha lateral. The agreement has a 10-year primary term with a very attractive fixed transport and fractionation fee structure.

At Apache's option, the agreement can be extended under the same terms for two additional five-year periods of time. The pipelines lateral is anticipated to be operational shortly after the completion of the first Cryo facility at Alpine High. We are currently working with enterprise and other parties on interim solutions in the event the Cryo facility is operational before the pipeline lateral is commissioned. The enterprise agreement will access attractive Mont Belvieu pricing for our NGLs and contain certain options that enables further margin expansion possibilities.

In 2019, the value of the NGL-margin uplift for Alpine High will become much more apparent. We are closing out 2018 and entering 2019 in a very strong financial position and with great momentum, lower debt, robust cash flow and increasing returns. All of those we set at the beginning of the year. I look forward to reporting on our full-year financial performance in February and further discussing our outlook for 2019.

And with that, I will turn the call over to the operator for Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Gail Nicholson from Stephens. Your line is open.

Gail Nicholson -- Stephens -- Analyst

Good morning, everybody. You guys had a really strong Permian NGL price relation this quarter. I was curious, what percent of your Permian NGL's are ethane and then how is that going to change post the Cryo facility coming online in Alpine next year?

Stephen Riney -- Executive Vice President & Chief Financial Officer

Hey, Gail. This is Steve. So I don't have at hand an exact number of the percent of NGLs that are ethane. I might see if we can get that before the end of this call, but that obviously will be impacted quite a bit as we actually bring on three Cryo units in Alpine in 2019, the first one by the middle of the year, and then twp more before the end of the year. We produce -- in aggregate, we produce about 60,000 barrels a day of NGLs in the US, and most of those -- those are all basically priced based on net back Mont Belvieu type of pricing with a deduction for transportation and fractionation cost, and a quick turnaround on the first part, about 42% is ethane in the Permian.

Gail Nicholson -- Stephens -- Analyst

Okay, great. And then, in the market we tend to be overly focused on your US onshore execution, but you had some really high quality international assets. Can you just talk about what could potentially be on the horizon in the North Sea in Egypt in '19, specifically maybe in Egypt as maybe you return that asset more to a growth asset?

John Christmann -- President and Chief Executive Officer

Yeah, Gail. Thank you. If you look at Egypt, we've got a big 3D program that's under way and we've added a lot of new concessions and so, you know it's a 2.6 million acre shoot, we've shot over 1 million of it. Things are progressing well. And I can tell you the early looks on the seismic are very exciting, I mean, there are just a lot of rock to deal with out there, it's high productivity and we've got such a massive infrastructure, backbone in place that it will be easy to bring things on. So we're very excited about Egypt and we're excited about getting more of the 3D in and starting to high grade our inventory there, which really has become very robust.

Historically, we had about two years of inventory that we could see, because it just took so long to build it. Today, we've got a lot much, much longer time horizon on our Egypt portfolio and it gives us the ability to -- we believe we're going to be able to grow the free cash flow, as well as grow production over the next several years on the new acreage. So that's the first thing.

If you look at the track record in the North Sea, Garten this year was a big discovery for us. And as we said on the notes this morning, we are going to be accelerating that from early next year into the fourth quarter. So we're excited about that. It will be a very high rate well, it's a big structure and there is potential in there. We'll just have to see how it performs, even add more wells. But most importantly, it also de-risk several other structures that are very similar to Garten. So we continue to have success in the Beryl area with tiebacks. We've got store coming on as well in 2019, we brought on another well in Callater. So we've got a lot of momentum going into 2019 in the North Sea.

Not to mention the work we're doing at '40s as well, on the water injection. We really start to see some stabilization of the decline rates and flattening of that, which has big ramifications. So the international portfolio has provided a tremendous amount of cash flow, it's Brent pricing and we get really high gas prices in the UK as well and we're excited about what that's going to continue to do for us for the foreseeable future.

Gail Nicholson -- Stephens -- Analyst

Great. Thank you so much.

John Christmann -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Charles Meade from Johnson Rice. Your line is open.

Charles Meade -- Johnson Rice -- Analyst

Good morning, John, to you and your whole team there.

John Christmann -- President and Chief Executive Officer

Good morning, Charles.

Charles Meade -- Johnson Rice -- Analyst

Yeah, I wanted to -- I feel like you guys talked a little bit about the -- you talked about the para sequence test, you have -- and I wonder, I think Tim said that was the Cypress state pad? Did I catch that, right?

John Christmann -- President and Chief Executive Officer

You did.

Charles Meade -- Johnson Rice -- Analyst

Okay. And so, John, I recognize it's early days there, but could you give a little bit more color and you said the wells are still cleanup, but I did the quick math, it looks like there -- those four Wolfcamp tests are right now a little bit over 400 barrels a day of oil each. I wonder if you could talk about how much water you're seeing, where you think that -- what would be a good result in your view on where those wells go? And also, I have to say, maybe you can talk a little bit about the decision to do all eight wells, a one-time rather than just kind of, you know way generally into that test?

John Christmann -- President and Chief Executive Officer

Well, -- first of all, Charles, we are very excited about it. It's a 10 well oil pad test. There are four Wolfcamp As, there are four Wolfcamp Bs and two Bone Springs, really, really high productivity. It's very early. I will tell you we are gas lifting all eight of the Wolfcamp wells. There is extreme deliverability and productivity and they are really just starting to clean up. So they started cutting oil pretty early. There's a tremendous amount of fluid to move and we're very optimistic and encouraged by those. They were -- they're still short laterals, larger fracs about GBP4,000 of foot. This is really 10 wells in a little over a half section. So it's like we've talked about.

The name of the game is getting to pad development, understanding the spacing -- from a spatial and pattern position, and we're excited about these. We are going to continue to clean up when we look at the IPR curves. There is a lot of room for these wells to come up. We expect them to hold in for quite a while. So we're very encouraged. The two Bone Spring, we've just really started and we run some pumps in those two wells. So -- and are both cutting oil, but just really getting started. So it's early and the 40-gravity oil, it's black oil and well costs were very reasonable for the size jobs we pumped and we're very optimistic.

Charles Meade -- Johnson Rice -- Analyst

Got it. That sounds promising. We'll just have to stay tuned on that. And then, if I could go back and touch on the -- you guys talked about the CapEx outlook for 2019, but that's really a piece of the free cash flow outlook for 2019. And you guys also talked about the possibility of asset sales and that would be the scenario, which you would look to return more cash to share or so. I think you guys already have a dividend, you've maintained it through the whole downturn, but can you give us a little bit of your thoughts? Are you thinking about, how would you -- if you did have more free cash flow to an asset sale or just through sustained strength in commodity price, how are you thinking about maintaining or increasing your dividend going with the special dividend. And then, also you guys announced this 40 million share repurchase authorization. Can you give us how those priorities sort out in your -- in your mind?

John Christmann -- President and Chief Executive Officer

Well, Charles, it's a lot of questions. I'll try to summarize in a couple of points and then I'll give you a chance to come back if we didn't answer them. But first of all, as we look to 2019, we've been running a pretty flat activity set, going back to the back half of 2017. So we're very comfortable with what are the capital forecast is going into next year. We figure for $3 billion. We can deliver a pretty flat activity set, which sets us up very nicely. When you look at the corporate level in the US growth, which of course will be driven by Permian.

So we also believe it -- we will be in a position to generate some free cash flow and clearly a high priority with that free cash flow, right now, especially with who we share price with, would be to supplement our dividend policy, which we've maintained through the downturn. I mean, we're one of the few that did not cut our dividend, and so we see that buybacks is something we can do to supplement our dividend policy as we return incremental cash flow to the shareholders.

So the only thing I'll say about the capital program going into next year, it can easily be flexed up as we have significant inventory to do so, but also it's really very easy to ratchet back if things change in the environment. So we'll have more color on the call in February, but very comfortable with the rates in place, we've been running at. I think we're set up for a really strong 2019 after a really good 2018 and we do see us being able to increase the stock back to shareholders.

Stephen Riney -- Executive Vice President & Chief Financial Officer

Yeah, Charles that --

Charles Meade -- Johnson Rice -- Analyst

Thanks, John. That was the overview I was looking for. Go ahead, I'm sorry.

Stephen Riney -- Executive Vice President & Chief Financial Officer

Yeah, sorry Charles. I'd just add to that. We ended -- just in terms of what potential we might have on that. We ended the third quarter with $600 million of cash with positive free cash flow planned at strip for 2019. By the -- through the end of 2019 and after paying the dividend and after retaining a bit of cash on the balance sheet for operational purposes, you're probably looking at as much as $500 million to $1 billion of cash available depending on price, available for either debt reduction or further share buybacks and then that would exclude any proceeds from asset sales.

Charles Meade -- Johnson Rice -- Analyst

Thanks, Steve.

Operator

Our next question comes from the line of Brian Singer from Goldman Sachs. Your line is open.

Brian Singer -- Goldman Sachs -- Analyst

Thank you, good morning.

John Christmann -- President and Chief Executive Officer

Good morning Brian.

Brian Singer -- Goldman Sachs -- Analyst

One to touch on Alpine High well productivity. You talked to some of the success and endeavors you're taking, extending laterals, and also greater profits loads. Can you add a little bit more color on what you're seeing, and more specifically, whether -- when you talk about the improvement in productivity that is increasing EURs and recovery rates or that is just bringing forward -- bringing forward production?

John Christmann -- President and Chief Executive Officer

Yeah, Brian, I mean, I think the thing we've determined that we now have substantial flow time on it is that the larger fracs are definitely increasing productivity. We're also seeing that on a -- in the Woodford, in the Barnett, on a longer laterals. We're pretty much one-to-one in terms of lateral foot for the productivity. So in both cases, we're getting benefit from longer laterals as well as the bigger fracs.

You know, the last pad we brought on, the Blackfoot was the smaller fracs. We did that even though going into that. We know the larger fracs are doing more, but we needed to see the data point in terms of the number of landing zones in the spatial placement between those. And it's confirmed what we believe that we're probably going to be able to develop at Woodford with two landing zones, drop the A's and B's a little bit lower with a little larger fracs, and then we've got to come back and pump the bigger fracs on those and then figure out optimal number of well bores.

But the good news is, our location counts have had very conservative assumptions. Now we've proven that it -- less than 2000 pounds we can place the wells, 660 feet apart, and our well count assumptions were 925 to 1,000. So well count is going to go up when we come back and quantify that, but we still got some more work to do in terms of the -- what's going to drive the greatest return and PV per capital dollar invested with how we develop these patterns. We've got the 12 wells in the Blackfoot. We are going to come back right now. We're in the process of completing 10 wells in the Barnett and the later date you'll see us come back with a para sequence.

So at the moment right now, we are in the process of flowing back or starting to flow back some Woodford and Barnett test, which have a little larger fracs. So there's a lot of data that's coming and has been designed to help us yield. We know what's going to be critical at the development scenarios. So a lot of good work and a lot of progress and at some point, you know, we'll come back and unfold a lot of that for you.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you for that. And then my follow up is with regards to use of capital, Permian and M&A. Can you just kind of talk to, to what degree M&A opportunities are competitive or not competitive relative to share repurchase for use of free cash, and where the Permian outside Alpine High plays into that if at all?

John Christmann -- President and Chief Executive Officer

Well, I mean, I think if you look at us today, first of all, as I said on the -- in the closing part of my comments, if there is an asset that we're not funding and here is an opportunity for somebody else to put capital in that asset and there may be an arbitrage and the ability to create some value for our shareholders. So we're constantly looking at the portfolio, and you've seen that historically with us. We exited Canada last year. So it's something we're constantly looking at. Clearly right now, if you look at our portfolio, we're very excited about where we are in the Midland Basin, we've been predominantly work in three areas.

And as Tim mentioned, we branched out past those three areas in the Permian. But if you look at those three areas, it's less than 20% of what we would call our core Midland Basin acreage and we've really developed less than 20% of the locations we see in those. So there is tremendous amount of running room in our Wolfcamp and Spraberry locations in our Midland Basin.

And then if you look at our portfolio from an exploration standpoint, we believe today you better serve -- the best impact is going to be through organic well designed exploration, and Alpine High was a result of that. We put together a tremendous portfolio over the last few years.

On the conventional side, we've got to block that in Suriname that we're very, very excited about, and we've also got some new place at -- you know, we've been working on the unconventional side. As you know, it's a depleting business and you have to continue to find areas, and we think organically through the exploration if you can do with low cost, high impact areas, we think that's the best way to create value, and it's also why we also like our share price right now.

Brian Singer -- Goldman Sachs -- Analyst

Thank you very much.

Operator

Our next question comes from the line of John Herrlin with Societe Generale. Your line is open.

John Herrlin -- Societe Generale -- Analyst

Yeah, thanks. Just one quick one for me. Are you going to be buying puts next -- for next year's oil production?

John Christmann -- President and Chief Executive Officer

Yeah, John, historically we've we put things in place to protect our programs. And I think, you know, fundamentally, you know, we like to stay away from hedging unless we feel like we need to do something. And at times, when we felt like we had a capital program like the Midstream and Alpine High, we've done things to protect that cash flow or through acquisitions as ways to fund those. So I think as we go into 2019, we're in a position today where with the capital program we can ratchet that up or down if necessary. So it's just something we'll have to kind of look at.

John Herrlin -- Societe Generale -- Analyst

Okay. Now, that's fine. I didn't figure you'd be putting any on, but I was just asking. And then, Altus closes this month, end of month, mid-month or --

John Christmann -- President and Chief Executive Officer

You know, let Brian --

Brian Freed -- Senior Vice President of Midstream and Marketing

Yeah. This is Brian. The proxies were mailed out on October 22 and we've got the shareholder meeting scheduled for November 6 with the close and funding scheduled for November 9. And at that point in time, the ticker symbol will change to ALTIM (ph) and the name will change at closing to Altus Midstream from Kayne Anderson Acquisition Company.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you.

Operator

Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your line is open.

Douglas George Blyth Leggate -- BofA Merrill Lynch -- Analyst

Thank you. Good morning, everybody. John, I wonder if you could help me with, it's really a bit of a production visibility question for next year. And it's really about how we should think about the fractionation start-ups and how that -- how we could see your liquids yield evolve from the wet gas you've got currently, because obviously that's going to be a pretty significant catalyst I think for your step change in cash flow as we go over the next year or so.

John Christmann -- President and Chief Executive Officer

Yeah, I think, Doug, you know clearly 2019 will be an inflection point year for the NGLs at Alpine High. If you look at '18 to '20, we showed a transition where NGLs will grow from 10% in '18 to 30% in 2020. We've got one cryo coming on in the second half or in the -- or the back end of the second -- first half of the year, and then we got two coming on in the second half. So it will all happen kind of start happening second and third quarter in the next year.

Timothy Sullivan -- Executive Vice President of Operations Support

Yeah. And Doug, I'd just add to that. Our contract with enterprise provides for a ramp up of volumes to 205,000 barrels a day and that's a fixed contract, they've got to take it, it's a fixed fee structure for transportation and fractionation. And as I said in my prepared remarks, we actually have some options to even further enhance margins beyond just Mont Belvieu mixed NGL barrel pricing netted back to Alpine High.

Douglas George Blyth Leggate -- BofA Merrill Lynch -- Analyst

Steve, just to be clear, when would you expect to fill that capacity. I know it's a bit of a stretch question, but can you provide any visibility as when you would expect that volume to be achieved?

Stephen Riney -- Executive Vice President & Chief Financial Officer

No, not at this time, Doug. I think what I recommend is, let's just -- let's wait until the next plan roll out in February and we could probably have a better view of that kind of stuff. Obviously, I'll just state the obvious, and that is as we -- as we were bringing on three cryo facilities in 2019, two more in 2020, that won't be the end of it. But obviously as we bring on cryo facilities, the goal would be to have a drilling schedule that fills those as quickly as possible.

Douglas George Blyth Leggate -- BofA Merrill Lynch -- Analyst

Thank you. My follow-up, John, I don't know how you want to deal with this one, it's on Egypt. It's about, I guess, seven or eight years now since everything kind of went (inaudible) in the country and things have changed dramatically as you know. I'm just curious, we haven't really had a formal update on your plans for Egypt for the new seismic program and so on, the visibility for the sustaining business or the growth plan going forward. And it strikes me that the market could probably benefit from getting a refresh on that. I'm just wondering if you can update, do you have any intention of doing that and any high-level plans that you can share as you think about the next several years?

John Christmann -- President and Chief Executive Officer

Well, I mean if you look back, we've been able to maintain our Egypt production level with a much lower rig count. We are running 28 rigs in Egypt in 2014 and we -- we got down as low as six or seven, we've been running around 12 rigs, and we've been able to really stabilize that, and that's with the -- are starting to get toward the point where it would go on decline. So we've done a really, really good job and I think our productivity and capital efficiency in Egypt has gone up significantly, and that was really two discoveries, Ptah and Berenice which helped drive that, which we had in early '15.

If you look at the new seismic, I think as we -- with the new concessions and we get the new seismic back, we would be in a position, Doug, to kind of unfold some of that as well. So we've expanded a lot over the last three years, we've added a lot of acreage in Egypt, and as I mentioned earlier, we've got great infrastructure and a great track record. And so we look at Egypt, a scenario that we can continue to grow the free cash flow. You can't underestimate what we've done with that and what has been able to do for us over the last several years and grow our production. So Egypt is actually an improving position for us as well. We've got better there over the last couple of years. And I think once we get the new seismic back, then we would be in a position to unfold that a little bit.

Douglas George Blyth Leggate -- BofA Merrill Lynch -- Analyst

Just one closing comment for me John if I may. It's just an observation, nothing else. This I'd say obviously throws off a lot of free cash. The markets still seems to apply a dated discount to the asset, and if you could provide some visibility on the sustainability of that free cash, I think it would really pay divided. That's really what I was getting at so. Appreciate your answer. Thanks.

John Christmann -- President and Chief Executive Officer

It's a great comment, Doug. Thank you.

Operator

Our next question comes from the line of Leo Mariani from Nat Alliance. Your line is open.

Leo Paul Mariani -- National Alliance Securities -- Analyst

Hey, guys. I wanted to dig into the forward plans at all this little bit. Obviously I know the -- handful of days away. I guess, you got a center closing coming up soon as well. But assuming everything closes as planned, how do you see you know sort of the progress over the next couple of quarters and do you guys have some significant options to purchase some equity interest from some rather large pipelines and you guys talked about other organic opportunities. Can you just kind of refresh everyone in terms of what you have planned to do here in short term and all this post-close.

Brian Freed -- Senior Vice President of Midstream and Marketing

Yeah, this is Brian Freed. I'll address that a little bit. I mean, quite frankly, what we have in front of us, we've got a lot of cigarettes (ph) over in front of us, in terms of door (ph), we've got in front of us. We've got the cryo's that John mentioned that need to come on in 2019 and the equity options that we will start exercising by the end of this year.

We've got a supplement tab on the website that shows us some of those option exercise dates are. So you can dig into the details there. So I won't burden this call with all of that. But we do expect to start exercising these options by the end of the year and then we have a lot of gathering and processing to continue to build out through the rest of this year and into 2019 as well too.

Leo Paul Mariani -- National Alliance Securities -- Analyst

Okay, that's helpful. And I guess just jumping over to Suriname, obviously an area, you guys are quite excited about here. Wanted to see if you could give us a little bit more color on sort of the capital plan there for '19 in terms of how much money you plan to throw out and how many potential wells you guys could drill?

John Christmann -- President and Chief Executive Officer

Well, I mean it's a large area. We've got about 1.4 million acres. There are a number of prospects at a very high quality. We will drill at least one well in 2019 and there will be options to make that program much larger. So that's one of things we're looking at, but it will include at least one well.

Leo Paul Mariani -- National Alliance Securities -- Analyst

Okay, that's helpful. And I guess, is that well likely to kind of come by mid-year, what can you tell us on timing there?

John Christmann -- President and Chief Executive Officer

I'd probably say, late second, early third quarter likely, but --

Leo Paul Mariani -- National Alliance Securities -- Analyst

Okay, Thank you.

Operator

Our next question comes from the line of Richard Tullis from Capital One Securities. Your line is open.

Richard Tullis -- Capital One Securities -- Analyst

Hey, thanks. Good morning, John. Just a couple of questions on the exploration side. I know that's not a topic discussed all that much in E&P land these days. But regarding the planned Suriname wells next year, how are you able to use that data from the other recent unsuccessful wells drilled offshore Suriname by other operators and then you hedge your own well? How useful was that data in trying to plan your 2019 well?

John Christmann -- President and Chief Executive Officer

Well, I mean, I think if you go back and look in our Block 53, the two wells that we've drilled over the last, call it three years, we've learned a lot from both of those. You look at 58, it position differently. It's in a different part with a very large basin, that's a very large block. So we feel like that Block 58 is ideally positioned and the really the results outbound that Block 58 will not have an impact on our view of Block 58.

Richard Tullis -- Capital One Securities -- Analyst

Okay, John. Thank you for that. And then, just continue with exploration. You talked a little bit about exploration potential in the portfolio. What areas globally look interesting to Apache at this point, either is operator or non-operator? What percentage of the budget, as you start to generate the excess cash flow moving forward 2019, plus what percentage of the budget could exploration represent going forward?

John Christmann -- President and Chief Executive Officer

Well, I mean, that's something you got to keep in check. If you look at -- on our international portfolio -- our international capital, we spend some exploration dollars in both the North Sea and in Egypt, right. So in those are continual programs we've had great results from. So there's a small portion there. Suriname is the one place outside where we operate today that we will be active next year. And then on the unconventional side, it's more US focused and that's more oil focused, and those are things where we don't spend a lot of money because we're looking at things that are off the radar from other companies where we think we can add value, pickup meaningful acreage positions at low cost, they could have a really high impact. And so that's how we approach the unconventional side, but you got to keep it in check.

We got to have the lion's share of your capital going into your development programs that are driving your returns and your volume growth and the cash flow.

Richard Tullis -- Capital One Securities -- Analyst

That's it for me. Thank you so much John.

Operator

Our next question comes from the line of Michael Hall with Heikkinen Energy Advisors. Your line is open.

Michael Hall -- Heikkinen Energy -- Analyst

Thanks, good morning. Maybe following up a little bit on the last couple on Suriname and exploration. How are you thinking about ownership on the Block 58. You currently have 100% on it. Is that something that you likely want to sell down and that probably something you do before or would you wait for the results after the first on that block?

John Christmann -- President and Chief Executive Officer

Yeah, Michael, it's something we own 100% today. There is quite a bit of interest in the Block, and so that's just something we have to see in the future.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. But you -- it sounds like you're out for taken the full interest on the first -- the first well.

John Christmann -- President and Chief Executive Officer

I mean, we're definitely prepared. We like the risk to upside profile. Wells are not real expensive. You're probably $55 million to $60 million tops for one of the deeper water well. So it's something we can easily do a couple of wells on. So we'll just see. It's a block we're very excited about and we'll will discuss and see how it unfolds.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. That make sense. That's helpful, thanks. And I guess, a bigger picture, just thinking about the 2019 outlook relative to the kind of back half experienced here in 2018. I know obviously we've been executing on production, taking that up, pointed to a high end of the 2019 production guide our prior guide, but at same time capital has also been moving higher in the last couple of quarters. Are you comfortable with that planned ramp down in quarterly spending rate? What are the key drivers that given you confidence in planning around that at this point.

John Christmann -- President and Chief Executive Officer

Well, I'll let Steve give you some specifics. But if you look at our last six quarters, we've been running a pretty flat activity set. And if you look at the actual, E&P capital has been pretty flat. I mean, you saw a little bit of a rise in the back half of this year and that's been toward acreage, but I'll let Steve give a little bit more color.

Stephen Riney -- Executive Vice President & Chief Financial Officer

Yeah, I think that's the story, Michael. I mean, for four quarters in a row, leading up to third quarter, we spent less than $750 million per quarter on upstream capital. If you just set aside the midstream stuff in Alpine High. In the fourth quarter of 2018, we've guided to $800 million but $65 million of that is going to be exploration land acquisition, kind of a one-off land acquisition. So really we're under $750 million underlying kind of baseline upstream spending in the fourth quarter of 2018.

The third quarter is a bit of a lumpiness to it. Again, there is about $800 million excluding land acquisitions in the third quarter, that's just a bit of lumpiness why that's over $750 million. There's a lot of lumpiness around activity on completion. As you remember, we took the completion holiday and we had some backlog there. We upsized quite a number of those completions. There is some lumpiness in some facility spending and some other type of stuff.

So I would say that the exception was the third quarter at $800 million on an underlying baseline upstream spend rate as opposed to the second half. Now the other way to look at it is, second half of 2018, we'll spend 1. -- in round numbers $1.65 billion. We've got a little over 100 million of land acquisitions, lease extensions and acquisitions. So we're just -- we're a little bit over 1.5 billion in the second half of '18 and running at about 1.5 billion on a half-year basis going into 2019. So I just -- I think that the number in the third quarter was the anomaly in exception, it's not underlying. We're spending at or even possibly slightly below for most of the last four quarters, $750 million a quarter in the upstream and we're not meaningfully changing activity levels here.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. And I guess on that land acquisition side in the fourth quarter that $65 million you highlighted -- sorry if I missed. Where is that roughly?

John Christmann -- President and Chief Executive Officer

We have not -- Michael, we have not disclosed. That is part of our unconventional programs that would be areas that at some point of future we talk about.

Michael Hall -- Heikkinen Energy -- Analyst

Yeah.

Stephen Riney -- Executive Vice President & Chief Financial Officer

And some portion of that -- some portion of that Michael is lease extensions spending and some of it is new lease acquisition here.

Michael Hall -- Heikkinen Energy -- Analyst

Okay, thanks very much.

John Christmann -- President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Mr. John Christmann.

John Christmann -- President and Chief Executive Officer

Well, thank you all for joining us today. I would like to leave you with three key takeaways from today's call. First, Apache had an excellent quarter both operationally and financially. We significantly exceeded consensus earnings and cash flow estimates. We've beaten -- raised our production guidance for the third quarter in a row and we outlined a strong 2019 view.

Second, we are planning a year-over-year reduction in upstream capital in 2019, and upon closing, Altus Midstream will fund our Alpine High infrastructure spend. This creates good visibility to free cash flow for which a high priority will be share repurchases.

And lastly, we are realizing significant benefits from our diversified portfolio and strong leverage to oil prices. In 2019, as we ramp our wet gas volumes at Alpine High, in conjunction with cryo installation, we will see a step function change in margins and cash flow from the play. I look forward to sharing our ongoing progress with you in the future.

Operator

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

Duration: 62 minutes

Call participants:

Gary Thomas Clark -- Investor Relations

John Christmann -- President and Chief Executive Officer

Timothy Sullivan -- Executive Vice President of Operations Support

Stephen Riney -- Executive Vice President & Chief Financial Officer

Gail Nicholson -- Stephens -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

John Herrlin -- Societe Generale -- Analyst

Brian Freed -- Senior Vice President of Midstream and Marketing

Douglas George Blyth Leggate -- BofA Merrill Lynch -- Analyst

Leo Paul Mariani -- National Alliance Securities -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Michael Hall -- Heikkinen Energy -- Analyst

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