Apa (APA) Q2 2023 Earnings Call Transcript

Apa (APA 0.40%)
Q2 2023 Earnings Call
Aug 03, 2023, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the APA Corporation second-quarter 2023 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] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker, Mr. Gary Clark, vice president of investor relations. The floor is yours, sir.

Gary Clark -- Vice President, Investor Relations

Good morning and thank you for joining us on APA Corporation second-quarter 2023 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 and outlook. Also, on the call and available to answer questions are Dave Pursell, executive vice president of development; Tracey Henderson, executive vice president of exploration; and Clay Bretches, executive vice president of operations.

Our prepared remarks will be less than 15 minutes in length with the remainder of the hour allotted for Q&A. In conjunction with yesterday's press release, I hope you had an opportunity to review our financial and operational supplement, which can be found on our Investor Relations website at investor.apacorp.com. Please note that we may discuss certain non-GAAP financial measures today. 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 noncontrolling interest in Egypt and Egypt tax barrels. I'd 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. The full disclaimer is located with the supplemental information on our website. And with that, I'll turn the call over to John.

John Christmann -- President and Chief Executive Officer

Good morning and thank you for joining us. On today's call, we will review second-quarter highlights and discuss our outlook for the rest of the year. APA delivered strong results and made notable progress on a number of fronts during the quarter, most specifically with regard to drilling and completion efficiencies in the U.S. and Egypt, a reduction in year-over-year per unit LOE and G&A costs, working capital improvements in Egypt, and the appraisal of Krabdagu in Suriname. We also delivered on our production goals with total adjusted production of 325,000 BOE per day coming in at the high end of our guidance range.

This was driven by good Permian Basin and Egypt oil performance, partially offset by price-related dry gas curtailments in the Permian, and unscheduled compressor downtime in the North Sea. Total adjusted oil production of 154,000 barrels per day exceeded our guidance by 4,000 barrels per day, driven mostly by the U.S. Capita investment during the period was in line with guidance as our average operated drilling rig count remained steady at 17 in, Egypt, five in the Permian Basin, and one semi-submersible in the North Sea. As previously planned, we released the Ocean Patriot in the North Sea at the end of June.

U.S. oil production increased by 6% compared to the first quarter, and we are projecting a similar percentage increase in the third quarter. Our steady drilling program in the Permian is delivering substantial efficiencies and oil production increases, which we expect will continue though the timing and size of pad completions can result in a lumpy production profile. APA's Permian rig activity is directed toward oil development in the southern Midland Basin where we currently have two rigs operating and oil-related development in the Delaware Basin where we currently have three rigs operating. As we noted on our last call, we are deferring additional drilling and completion activity at Alpine High until natural gas and NGL prices improve. That said, the most recent wells placed online at Alpine High are performing in line with expectations, and we look forward to returning to work there in the future. Turning now to Egypt.

Gross oil production of 141,000 barrels per day was in line with our guidance. Drilling efficiencies, new oil connections, rig completions, and exploration success were all consistent with our expectations for the quarter. As a result, we are projecting gross oil production will be up 5% in the third quarter to 148,000 barrels per day. And we are making good progress toward our fourth-quarter guide of 154,000 barrels per day. In the North Sea, second-quarter production of 42,000 BOEs per day was well below our guidance due to the previously mentioned compressor downtime.

We expect volumes to increase in the third quarter to a range of 46,000 to 48,000 BOE per day, driven by higher operating efficiency and the positive impact of our Storr North well, which went on production in late June. In Suriname Block 58, we are currently focused on appraising last year's Krabdagu discovery. As previously noted, we have completed testing at Krabdagu-2 and results were consistent with our pre-drill expectations. At Krabdagu-3, we are in the pressure buildup phase and data collected, thus far, is very encouraging. The DD III semi-submersible rig is still on location and will be released upon completion of operations. We believe that no additional appraisal or exploratory drilling is necessary in the Sapakara and Krabdagu area at this time.

Looking ahead to the second half of the year, we expect drilling programs to remain constant in both the U.S. and Egypt as a steady operational cadence in these areas enables more efficient operations. That said, we have reduced our four-year upstream capital investment outlook to reflect previously noted North Sea platform drilling reductions, no additional drilling in Suriname this year, and some minor service cost declines. We are also reducing our full-year LOE outlook from $1.5 billion to $1.4 billion, which reflects our ongoing success in actively managing these costs down, as well as some price decreases associated with shorter-cycle items such as diesel and chemicals. APA remains committed to returning at least 60% of our free cash flow this calendar year to shareholders. During the first half of the year, we generated $366 million of free cash flow, 94% of which we return to shareholders via dividends and stock buybacks.

Since the commencement of our share repurchase program in October of 2021, we have repurchased nearly 20% of total shares outstanding at an average price of just under $34 per share. In closing, we believe the investment case for APA and the EMP industry is strong and that the longer-term outlook for hydrocarbon prices is very constructive. APA has a diversified portfolio and the operational flexibility to quickly respond to commodity price volatility and other externalities. We are committed to our shareholder returns framework and to allocating capital for the long-term benefit of investors. APA seeks to produce oil and gas safely and to reduce the environmental impact of our operations. Last month, we issued our 2023 Sustainability Report, which highlights recent achievements on these fronts, as well as our current ESG goals and initiatives.

I encourage all of you to review this report, which you can find on our website. And with that, I will turn the call over to Steve Riney. 

Steve Riney -- Executive Vice President, Chief Financial Officer

Thanks, John. For the second quarter, under generally accepted accounting principles, APA reported consolidated net income of $381 million, or $1.23 per diluted common share. As usual, these results include items that are outside of core earnings, the most significant of which are mark-to-market appreciation in the value of our Kinetik stock ownership and unrealized gain on Waha basis swaps. Excluding these and other smaller items, adjusted net income for the second quarter was $264 million, or $0.85 per diluted common share.

Free cash flow which, for external purposes, excludes changes in working capital, was $94 million in the quarter. Through dividends and share repurchases, we've returned 131% of this amount to shareholders during the quarter. As John noted, both operational and cost performance were very good during the quarter. Compared to the same quarter last year, total adjusted oil production was up 14%. Adjusted oil mix increased from 44% to 47%, and we held lease operating expenditures nearly flat.

G&A expense was $72 million, significantly below our underlying actual run rate cost. This is a result of APA's lower stock price at the quarter end and the mark-to-market impact on previously accrued share-based compensation. Underlying quarterly G&A costs remained stable around $100 million. Switching to forward-looking guidance. Oil production is expected to increase significantly in the third quarter in all three of our operating regions. Our full-year guidance implies that oil production will increase again in the fourth quarter in both the U.S.

and Egypt. Declines at the mature Qasr gas field in Egypt and at Alpine High, where we have deferred drilling and completion activity, will result in total company natural gas production continuing to decline through the rest of this year. Next, I would like to provide some color related to our changing guidance for profit or loss on our gas transport obligations. As most of you know, we hold just over 670 million cubic feet per day of Permian Basin takeaway capacity. We sell our produce gas and basin, and we manage the transport obligation by purchasing third-party gas in basin for resale on the Gulf Coast. We realize a net trading margin based on the price differentials less the total transport cost.

Since the transport cost is mostly fixed, this activity will generate a profit when price differentials are wide and a loss when they are narrow. In the second quarter, this activity generated a net profit of $13 million. As we have all seen, the differential between Waha and Gulf Coast pricing has compressed dramatically since late May. Based on the forward strip, we anticipate these trading activities will result in a small loss in both the third and fourth quarters, and we have adjusted our guidance accordingly. The flip side of this is that we are now getting higher realizations on our gas produced and sold in the Permian Basin. We commenced deliveries under our Cheniere gas supply agreement on August 1st.

At current strip prices, this contract will generate approximately $120 million of free cash flow for the last five months of 2023 and an estimated $385 million for the full year of 2024. As you know, these cash flows are likely to be volatile from quarter to quarter. As a reminder, these projections are net of all costs, including the cost to acquire and transport the gas to Cheniere. Our complete guidance for both the third quarter and updated full-year 2023 can be found in our financial and operational supplement. Finally, a brief comment on Egypt receivables.

We have a long-standing well-functioning relationship with Egypt based on nearly 30 years of working in their country. Like many parts of the world today, they are experiencing some challenging financial times, and we will partner with them through that process, just like we have in the past. Since the first-quarter earnings call, we have had very constructive conversations with Egypt. As a result of steps already taken, the receivables balance came down in second quarter, and we are confident further steps will keep this on the right track. In closing, our original full-year production guidance is unchanged, and we have reduced our 2023 budget capital and operating expense in aggregate by about $250 million. Our balance sheet and debt maturity profile are in good shape, and this was most recently recognized by Moody's who returned us to investment-grade in June. Since the beginning of 2021, we have significantly improved our capital structure by reducing our outstanding bond debt by $3.2 billion while also returning $2.9 billion to shareholders via share repurchases and dividends.

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

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question will come from the line of Doug Leggate with Bank of America.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Gosh. Good morning, guys. I'll take that, but thanks for taking my question.

John Christmann -- President and Chief Executive Officer

Good morning, Doug.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Yeah, yeah, I -- yeah, it's more exotic than it probably should be, but morning, John. So, a couple of things from me. So, I want to ask you about Egypt, not about the working capital progress, which is terrific. I think you've addressed that, Steve, with your commentary.

But I want to ask you about the confidence in the medium-term oil growth trajectory in Egypt. That seems to be the only knock on the quarter is that, you know, folks are maybe questioning whether you can actually deliver that. So, how is that progressing? What is the outlook today? And I've got a follow-up, please.

John Christmann -- President and Chief Executive Officer

Yeah, Doug -- you know, the nice thing about -- I mean, early August, you know, we have the luxury of seeing a lot of the wells we've got coming on in the near future. And if you look and you won't see it, but our July -- our July volumes have actually averaged 145,000 barrels a day on the oil side. So, we're up already in July over the second quarter. And we've got good line of sight on what's coming, and it's going to be a good back half of the year.

And I'll -- I'll let Dave Pursell, you know, jump in with a little bit more detail.

Dave Pursell -- Executive Vice President, Development

Yeah, Doug, as John alluded -- or John said, the gross oil at 145 in July gives us confidence. We have a couple other data points. We've had good success on exploration in both the mature and avant-garde basins. So, we have good line of sight on the well stock remaining through the rest of the year that will come online.

If you look at expected wells online in the back half of the year, it's significantly higher than the front. So -- so, just some numbers. First half of the year, we brought 48 wells online. Back half of the year, we expect to put over 70 wells online.

So, more wells, high quality, good confidence in what those wells look like. So, again, our confidence in the back half guidance is -- is very good, very high.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

And what about beyond 2023, Dave?

Dave Pursell -- Executive Vice President, Development

Yeah, we continue to -- to look at at the -- at the '24 plan. And we're, you know, too early to give guidance, but we have confidence in the ability to -- to keep the growth engine moving.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Great stuff. Thank you for that. John, I apologize, I'm going to have to be predictable, but so -- so, Talos is having this Analyst Day at the end of September. I think they've given a pretty good year that they're going to have something to say there on Suriname.

So, I know you don't want to front on that, but I do want to ask you about resource scale to the extent you can and what you know today. And I'll frame it like this. When Liza-2 was sanctioned in Guyana with GORs, the capacity of the development, 600 million barrels, 220,000 barrels a day. From everything we know, especially with Baja and the connectivity there, tell me why resource of that scale is -- is wildly off the mark.

John Christmann -- President and Chief Executive Officer

I mean, at this point, well, a couple of things, Doug. Number one, we still have the rig on location. So, it's -- it's early. You know, number two, we came into this year with the primary objective being appraising the Krabdagu fairway.

And, you know, you had the original discovery well, if I flip over, it's a totally different set of partners in Block 53. But we had -- you know, when we announced the Baja discovery, we said it was a down dip low above that fairway. So, yes, it does stretch from there all the way now back to Krabdagu-3. Krabdagu-3 was -- was 14 kilometers from the discovery well. And, you know, as we've said, the results are very, very encouraging.

It -- we do -- we can confirm it's oil, but it's early for me to comment or say anything at this point. We've got a lot of technical work to do. It's a very large fairway, and there will be resource in there that you're not going to see from the flow test. So, there's just a lot of technical work that we need to do, and -- and we'll come back in due course with, you know, information in the relatively near future.

Operator

Thank you. One moment for our next question, and that will come from the line of John Freeman with Raymond James. Your line is open.

John Freeman -- Raymond James -- Analyst

Hi, guys.

John Christmann -- President and Chief Executive Officer

Good morning, John.

John Freeman -- Raymond James -- Analyst

Yeah, the first topic I wanted to address was on the shareholder returns. You know, you returned 131% of free cash flow this quarter. Last quarter, you did 81%. So, I just be curious kind of your thought process and kind of how you all determine when it's the appropriate time to kind of really lean into -- to shareholder returns like you did? Obviously, that was more than double the minimum, you know, 60% target that you all have.

So, just sort of how you all think about when it's -- when it's appropriate time to kind of lean into these things.

Steve Riney -- Executive Vice President, Chief Financial Officer

Yeah, John, this is Steve. You know, if I just -- if I step back and take a look at the year, you know, we -- we always plan that the second half free cash flow would be greater than the first half. And, you know, that's going to -- that's going to come from production growth, it's going to come from the Cheniere contract. It's going to come from a lower amount of capital spending that we'll have in the second half.

And now, as we look at that actual prices for the first half, anticipated prices for the second half, price will also be a benefactor there. So, you know, to -- to address one potential concern that, you know, maybe we've -- we've done most of our share buybacks in the first half, I'd say the second half, there's still plenty -- plenty of buybacks to do, plenty of capacity to do that. We've always said the 60% is a minimum, and I think every time period that we would look at, we've -- we've exceeded that minimum. We did in that fourth quarter of '21.

We did it for the full year of '22 and certainly doing it first half of '23, Now I'll just say, you know we -- we did front end. We chose to obviously -- obviously to front-end load the -- the buyback program in 2023. I'd just say that we're very happy with the share prices that we got, especially in the second quarter, and, you know, we're -- we'll -- we'll see what -- what the second half of the year brings for us.

John Freeman -- Raymond James -- Analyst

OK, and then my follow-up, just kind of following on to Doug's questions on Egypt, just sort of what you all identified in terms of the -- you got the mature natural gas field that's declining to that -- that oil mix as we've seen now for the last three quarters just keeps inching up. It looks like, just ballpark, that for 2024, like something in that, like, 65% kind of oil mix would be -- would be possible. Just sort of any commentary about how you all see that -- that oil mix sort of continuing to evolve as it continues to ramp up.

John Christmann -- President and Chief Executive Officer

John, that's a great point. I mean, as costs were -- continue to decline, you're going -- you know, you will see our oil mix in Egypt rise. And if you go back to Qasr's legacy large field, 3 Ts, it's been on the decline and it is declining. And so, as Qasr continues to decline and our -- our programs are in the more oily driven, you know, areas, you'll see that mix rise.

And so, it's early, I don't want to get into '24, but it wouldn't surprise me, and I wouldn't probably anticipate, that the oil mix will be higher in '24 than it is in '23.

Operator

Thank you. One moment for our next question. That will come from the line of Neal Dingmann with Truist Securities. Your line is open.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, guys. John, maybe one more in Egypt. Just specifically, given the ample -- I'm just wondering, are you seeing ample equipment and personnel there continue to run the 17 rigs? And if so, given the strong results and your strong balance sheet, any thoughts to boost activity next year?

John Christmann -- President and Chief Executive Officer

You know, Neal, it took us a little bit of time last year with training programs to kind of get the program where we wanted it. We're there today. So, we feel good about that. We put a lot of training in place.

I think right now, you know, 17, 18 rigs is a pretty good number. I think that's about all that's in country and from a staffing perspective. So, I think we're in a pretty good place and you're seeing us finally get the -- you know, the results and the efficiencies where we were hoping we'd get to. So, we feel like we're in a good place, and right now, that's what I see for the foreseeable future.

Neal Dingmann -- Truist Securities -- Analyst

Very good. And then, my -- my second for you guys is just on the southern Midland. Can you speak to now, have you changed or are you walking up the average size, lateral length? Seems like some of your peers are continuing to go to larger wells, larger pads to try to get more efficiencies. I'm just wondering if you're on the same mindset.

John Christmann -- President and Chief Executive Officer

Yeah, yeah. We came into this year, you know, really with our programs focused on the longer laterals, a lot of two- and three-milers. So, Dave, I think you've got a little more color or some -- some statistics there.

Dave Pursell -- Executive Vice President, Development

Yeah. So, just on the Permian, in general, we continue to walk lateral length higher. If you look at last year, we averaged just over 10,000 feet. This year, we're going to average closer to 10,500 feet per lateral.

Again, there's variance. There's some three milers and there's some 1.5, but on average, the program is getting longer. And in 2024, we anticipate the -- the links will continue to inch a little bit longer as well. And I think on the frac size, we've tended to lean to a little bit looser spacing and larger individual frac stage size and have had good success with that.

And so, I don't know that we'll get any bigger, but we've -- we've -- we're pretty comfortable with where we are on our completion designs at this point.

Operator

Thank you. One moment for our next question. That will come from the line of Scott Gruber with Citigroup. Your line is open.

Scott Gruber -- Citi -- Analyst

Yes, good morning. I'm up here around the corner, a little bit to here in the '24 on the U.S. side, it looks like, you know, implied in the full-year guidance that your U.S. oil production can continue to climb in 4Q and maybe get into the mid-80s.

How should we think about '24 at this juncture in terms of oil growth in the U.S.?

John Christmann -- President and Chief Executive Officer

It's early in terms of numbers. I mean, we typically don't start getting into '24. I can tell you we're working the '24 plan and a lot of detail right now that, you know, we start getting into reviewing that and so forth in the fall. I would anticipate, you know, pretty level activity sets from where we are today.

And so, if you look at that, you know, with the programs we're delivering and the types of laterals we're drilling, you know, I would expect fairly similar increments of growth maybe on a little higher base in terms of, you know, with the volume that we're growing this year. But, you know, it's always lumpy when you're running five rigs with the timing. And so, I don't know how the timing will line up, you know, year over year, fourth quarter over fourth quarter, some of those numbers, but I would expect a very strong continuous program in the U.S. and in Egypt for 2024. 

Scott Gruber -- Citi -- Analyst

And if deflation in service costs here in the states, if that turns out to be more material, do you end up recycling that back into -- into more drilling, or would you kind of keep the program the same even in light of that deflation and just, you know, reap the benefits in terms of greater free cash?

John Christmann -- President and Chief Executive Officer

I mean, I would say, right now, the -- the -- the plans would be to, you know, take the program and let the program dictate because, you know, five rigs we're working 1.5 frac crews. We're in a pretty good cadence there. You know, it's hard to just add, you know, incrementally without going up and stair-step function. So, you know, I would anticipate that the service side, whatever benefits there, would come to free cash flow, and the program will be pretty stable.

You know, we do try to go in every year with a pretty set framework on the capital side. And so, we -- you know, a lot of what's going on this fall will dictate what our service costs will look like, you know, for the portions that we will try to lock down for next year. So, you know, we'll just have to wait and see how things play out. And, you know, clearly, you've had a little bit of softening in some areas right now, but I think everybody's waiting to kind of see what prices do the back half of the year to really steer next year's capital, so.

Operator

Thank you. One moment for our next question. That will come from the line of Charles Meade with Johnson Rice. Your line is open.

Charles Meade -- Johnson Rice and Company -- 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 and Company -- Analyst

John, I have to say I'm eager to -- as I'm sure you guys all are, to see all the -- or to learn about all the appraisal results, that crap, but I recognize we're going to have to wait a little bit, so. So, I want to instead ask about Baja and specifically what your plans are -- or what the considerations are for appraisal there. I recognize that you guys said it's in the same depositional system as Krabdagu. And perhaps just part of talking about your plan for appraisal, could you also address that is -- is it also one of these shelf slope kind of targets, or has it -- are you maybe starting to hit the transition into the basin [Inaudible] out there?

John Christmann -- President and Chief Executive Officer

I can let Tracey in a second get in a little bit to the geology. But what -- what I'll just tell you first on, you know, Baja, it is a discovery that we, you know, discovered the discovery well as in Block 53 where we have a, you know, a separate set of partners as opposed to Block 58 where it's us and Total. You know, we are the operator of Block 53. And so, I can't say a lot at this point other than, you know, we've got a lot of work to do in terms of does Baja potentially flow into, you know, an oil hub and Block 58, or does it make up its own project in Block 53.

So, at this point, you know, I can't say a lot there other than, obviously, there's a lot of work being done and a lot of different angles looked at. And, Tracey, I'll have you chime in a little bit on the geology.

Tracey Henderson -- Executive Vice President, Explorationw

Sure. Morning, Charles. I think great question on the fairway. And your initial assessment there about being slope channel systems of what we've discussed in the past.

So, you know, what we're describing as a fairway and, as John mentioned in his remarks, you know, something we've defined now that's roughly 25 kilometers from Baja to Krabdagu-3. So, you've got a very, you know, robust system that's coming through here in a series of slope channels that, you know, you can tell from our original release at Krabdagu-1, which are stacked systems. So -- so, correcting your assessment, we're seeing slope channel systems. As John said, we've got more technical work to do.

We've still got a well on location and a lot of work to integrate going forward.

Charles Meade -- Johnson Rice and Company -- Analyst

Thank you, Tracey. Thank you, John. That's it for me.

John Christmann -- President and Chief Executive Officer

You bet.

Operator

Thank you. One moment for our next question. That will come from the line of Roger Read with Wells Fargo. Your line is open.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah, thank you. Good morning.

John Christmann -- President and Chief Executive Officer

Good morning, Roger.

Roger Read -- Wells Fargo Securities -- Analyst

Morning, John. Just like to ask about Egypt and not from an operational standpoint but, you know there's been more financial, I don't know if I'd call it risk, or just it's Egypt being Egypt. But I was just curious how things are going in terms of your ability to fund the operations in the country, return capital out of the country as needed or as desired, and anything else we should be watching there.

John Christmann -- President and Chief Executive Officer

No, I mean as -- you know, Steve mentioned in his prepared remarks that Egypt and a lot of places around the world right now are going through some difficult times. There is, you know, stress in the system if you look at wheat prices and things. But from a standpoint of our business, you know, it's been pretty much normal course in terms of, you know, movements and things like that. And you've seen us, you know, working constructively with Egypt to make progress, and, you know, you're seeing that so.

Roger Read -- Wells Fargo Securities -- Analyst

OK, I'll take that as a good answer. And then, my other question is, just as you look at operations in the Permian, what would be the broader description of sort of productivity and efficiency gains you're seeing, you know, sort of leaving any service cost inflation or deflation aside? But just what you're seeing in terms of performance on, you know, the drilling side, on the completion stages, things like that?

Dave Pursell -- Executive Vice President, Development

Yeah, Roger, this is Dave. So, on the -- on the drilling side, we continue to -- to improve our drilling performance. You know, again, there's any number of metrics which I won't bore you with, but the drilling team is doing a good job of getting our wells down in a very efficient and -- manner. Where -- where I think you might be going is on the productivity side.

You know, lateral lengths, as I talked about earlier, getting a little bit longer, and that helps. But on a lateral length-adjusted basis, relaxed spacing and bigger fracs have -- have been a benefit to us in getting those lateral length-adjusted productivity numbers to continue to improve. And, you know, it's always hard to forecast are we going to keep getting better, but we're happy with the program. So far, '23 looks pretty good compared to' 22.

And, you know, the team, we have a pretty good or very good subsurface team that continues to try to push the envelope on productivity per foot. And we're -- we're striving to continue to move that into 2024.

Operator

Thank you. One moment for our next question, and that will come from the line of Arun Jayaram with J.P. Morgan Securities. Your line is open.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

John, good morning. I wanted to get your thoughts on how the process you think will move once you've fully evaluated the Krabdagu-3 results toward the declaration of commerciality and perhaps an FID decision.

John Christmann -- President and Chief Executive Officer

Yeah, I mean, Arun, first of all, it's like we said, we're rigs still on location, and so we've got a lot of technical work to do. But, you know, we'll come back at some point with more data. That is exactly what you just mentioned would be the steps you'd take. And, you know, we've got a lot of work to do to be in a position to do that.

And obviously, we'll be working with our partner and, you know, Total, so.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Got it, got it. I mean, I just wanted to maybe follow up there. You know, Total has a frame agreement with the provider, John, as you know, and they've raised the scope of the surf package to over $1 billion from previously this 250 to 500. Anything to read into that in terms of potential boat size at this point?

John Christmann -- President and Chief Executive Officer

You know, the only thing I'd say, and I'm going to, you know, defer, we'll let Total handle those, you know, relationships, and that's what they're -- they'll be operator, right? I'll just leave it at that. But I mean, I would say we came into this year with the goal to appraise Krabdagu because we said it could impact scope scale. And clearly, we've had a, you know, a positive result in Krabdagu-3. So, you know, yeah, that was one of the objectives with -- with the appraisal program and the -- you know, the number 3 well was designed for a very large step out to better understand, you know, potentially what type of resource we could have there.

So, you got to let the technical teams do the work, but, you know, that was the objective coming into this year was to help better understand scope and scale.

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Great. A quick follow-up on the North Sea. John, oil prices, Brent is now moving -- you know, eclipsed 80. What do you think needs to happen for the North Sea to attract capital next year? And -- and maybe just thoughts on the broader portfolio.

If we get into a situation where the North Sea is just not competitive, are you just comfortable with, call it, two legs of the stool, ex [Inaudible] at this point?

John Christmann -- President and Chief Executive Officer

I mean, you know, obviously, the nice thing is -- is having a diverse portfolio where we've got, you know, places to put capital. And, you know, we basically ran a program in the North Sea with the Ocean Patriot for six months. You know, you see us in a good position in terms of sustaining and growing the company. So, as we look at next year, you know, we'll factor in what makes sense, but you know, right now, more and more importantly from the North Sea's perspective, you know, you'd need to see some stability in the regime to make long-term investments.

And right now, we have not seen any stability. And so, you know, I would not anticipate us jumping in because prices are up and deciding to put a lot of capital in the North Sea at this point, other than what we need to do for maintenance and integrity and safety.

Operator

Thank you. One moment for our next question. That will come from the line of Leo Mariani with ROTH MKM. Your line is open.

Leo Mariani -- ROTH MKM -- Analyst

Hi, guys. Just wanted to follow up quickly on Suriname here. So, certainly seems as though you guys have found, you know, significant oil here, you know, Krabdagu. Based on the comments you've made, I understand there's more technical work to go, but I'm just curious a little bit kind of around the thought process on kind of stopping drilling, you know, for the rest of the year.

I mean, it feels like you've got great momentum there. You found a lot of oil at the end of the day. You know, why get rid of the rig for the last, you know, call it, four or five months of the year? Why not sort of build in that momentum, drill some of the other exploration targets, just given, you know, how vast the basin is at this point in time?

John Christmann -- President and Chief Executive Officer

Yeah, Leo, I mean, you've got a -- we've got a large block, we've got a lot of time, you know, for other prospect areas and so forth. And I think the key was coming in. You know, there's been a focus on, let's -- let's get to a project and an oil development, and that was what the focus was this year. And, you know, there are other prospects in the Krabdagu and Sapakara area.

But at this point, we don't, you know, think it's necessary to drill those right now, so.

Leo Mariani -- ROTH MKM -- Analyst

OK, and then just, you know, in terms of the U.S. well performance, you guys talked about this a little bit. You know, it sounds like there have been some changes to the completion design potentially here with, you know, a little bit kind of wider spacing. But it seems like the -- the oil performance there has been a lot more consistent.

You guys basically said that it looks like '23 well performance is a little better than -- than '22. Just kind of wanted to get a little sense of, you know, what do you think the kind of running room here is on kind of the tier 1. You know, Permian acreage, if you look out, you know, a handful of years, do you guys have kind of an estimate on how long you can kind of keep five rigs running and kind of how much inventory you have maybe in terms of kind of rig years or something?

Dave Pursell -- Executive Vice President, Development

Yeah, Leo, we've talked about kind of our visibility kind of through the end of the decade on -- on -- on this run rate in this program and no change to that. So, we're -- we're pleased with -- we're looking at a three- to five-year plan and pretty happy with -- with what we have in there. So, stay tuned.

John Christmann -- President and Chief Executive Officer

Yeah, and the other -- the other thing I would add is if you look at the evolution of the program, a lot of the stuff we're drilling today that's tier 1, two years ago, we had it a tier 2, tier 3, right? We've got a nice acreage footprint, and so you're always also looking to -- to see the evolution of the -- of the resource. So, you know, we've got strong confidence in -- in the U.S. inventory at these -- you know, at these program rates.

Operator

And thank you. One moment for our next question. and that will come from the line of Jeoffrey Lambujon with TPH. Your line is open.

Jeoffrey Lambujon -- Tudor, Pickering, Holt and Company -- Analyst

Good morning, guys. Appreciate your taking my questions. I wanted to ask my first one on U.S. activity.

Just wondering if the two Midland and three Delaware splits, good to assume as part of that base case of steady activity. And if you can talk about how you think about toggling that in the near term, if at all, whether in terms of inventory comparing the two or any of the factors. I'd imagine the flexibility of the Delaware in terms of proximity to the Alpine High plays into it to some degree. If you could also maybe speak to what you want to see there on the macro or from the wells to add back any sort of capital there.

Dave Pursell -- Executive Vice President, Development

Yeah, Jeoffrey, good question on the Midland versus Delaware split. You know, if you -- again, as you know, rigs are fungible, we could -- there's no magic at Delaware rig could move over to the southern Midland Basin. But if you think about a, you know, the next 18 months or so, two in SMB and three in Delaware Basin tends to make sense. And then, the question on Alpine, it's really about not just gas price, but what gas price does it take for those wells to be competitive versus an oil rig line either in SMB or Delaware.

And, you know, those are the decisions we'll be looking at as Matterhorn comes online sometime back half of next year.

Jeoffrey Lambujon -- Tudor, Pickering, Holt and Company -- Analyst

OK, great, and that makes sense. And then, maybe just a quick follow-up on the North Sea. I know it's already a relatively small part of the budget and getting smaller just looking into next year with the release of the Ocean Patriot as you guys highlighted. But can you talk about what sort of operations we should think about there just in terms of steady state going forward and what that means for -- for capex? It seems like, year over year, you could maybe be looking at something like maybe half of spend that was originally budgeted for -- for this year.

John Christmann -- President and Chief Executive Officer

Yeah, I mean, I think if we look at the back half of '23, we've got around $50 million of capital in the North Sea, and that's probably what you'd assume going into, you know, for each half of next year, I'd say. So, 100 million give or take is what it would look at like today roughly. I think the biggest thing there is -- is just philosophy change. I mean, we're going to be operating for safety and integrity and managing the Cline and managing free cash flow.

And, you know, there's still a lot of life left. I think the important thing is even by pulling the Patriot out, it doesn't really change our -- you know, our timing on when we see abandonment. I think we're still well into the early 2030s. And so, you know, we're going to do as good a job with that asset, managing it for free cash flow.

Operator

Thank you. One moment for our next question. And that will come from the line of Paul Cheng with Scotiabank. Your line is open.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning, guys. John, maybe I got it wrong, but I think at one point, there's a number, talking about your Suriname, so far to this country, say around 800 million barrels. Just want to clarify if that is the right number and that's in pace or comfortable way, and whether -- I assume that's not including the Krabdagu-3 latest appraisal.

And just want to see if the geologists there to make what kind of reasonable recoverable way is in place that we should assume any reason that they won't recover more than 50% of the resource in place? That's the first question.

John Christmann -- President and Chief Executive Officer

Yeah, so Paul, the -- you know, you get to the 800, as we've disclosed, it's Sapakara, you know, from the original well, and the second well we had more than 600 million barrels of connected resource. So, you know that's where six of it comes from. And then, the original 200 was from the discovery well from the flow test we did there at Krabdagu. So, the 800 number is -- would be a connected resource in place.

And it's not a recoverable number, but it also does not include Krabdagu-2 or, you know, Krabdagu-3 and the integration work that's going on now that, you know, will come forward, so. And, Dave, you might reference just, you know, it's really high-quality rock. And it'd be early to talk about actual recovery factors, but you can give some insights there.

Dave Pursell -- Executive Vice President, Development

Yeah, Paul, I think if you -- you can just look at historical recovery factors in -- in big deepwater discoveries to -- to put a range on it. You know, the recovery factors are a function of the field development plans that you have. We're going to have gas injection here. And, you know, again, there'll be a lot of pressure maintenance.

You know, these are our high-quality reservoirs, so I think you'd expect, you know, high recovery factors. But at this point, it's way premature to -- to try to put a -- put a number on that.

Paul Cheng -- Scotiabank -- Analyst

OK. Do you have a rough estimate what's the gas cut in that [Inaudible] number?

Dave Pursell -- Executive Vice President, Development

Yeah, you're talking about gas cut, Paul?

Paul Cheng -- Scotiabank -- Analyst

Yeah, yeah, what's the gas percentage or what's the oil percentage either way?

Dave Pursell -- Executive Vice President, Development

Yeah, I don't have that at the tip of my fingers, but we've -- we've put the GORs in the prior press releases on the Sapakara and the Krabdagu discovery, and we've not disclosed anything yet on Krabdagu-2 or -3. 

John Christmann -- President and Chief Executive Officer

Yeah, Sapakara was 1,100 GOR roughly. And the discovery well at Krabdagu had a couple of different ranges from around, you know, the high teens to, you know, the high 2,000.

Paul Cheng -- Scotiabank -- Analyst

OK, great. And on Permian, you're doing a number of three-mile wells, so just want to see there, is there a number you can share? What percent of your inventory backlog that you could do three months and what percent of your work program for the next couple years is going to be in the three miles? Thank you.

Dave Pursell -- Executive Vice President, Development

Yeah, Paul, this is Dave. I don't have that number. It's a relatively small percent of the total work plan. We're -- we're happy with the results from our three milers.

It's really just a question of where does the acreage footprint, you know, allow that -- allow us to drill the three milers. You can tell just by the numbers I threw out earlier, you know, most of what we're drilling are two milers. But the team, any time we get a chance to drill three miler, we'll do it, and that's just acreage footprint. But from a -- from a modeling standpoint, it's -- it's probably best to just assume they're all two milers in the program.

Operator

Thank you. [Operator instructions] One moment for our next question. That will come from the line of Omar Chaudhary with Goldman Sachs. Your line is open.

Omar Chaudhary -- Goldman Sachs -- Analyst

Hi. Good morning and thank you for taking my questions.

John Christmann -- President and Chief Executive Officer

You bet.

Omar Chaudhary -- Goldman Sachs -- Analyst

My first question is on -- on the 100 million savings from your operating cost management program. You talked about diesel and chemicals driving some savings there. Any additional color you can provide in terms of any other buckets which is driving those savings?

Dave Pursell -- Executive Vice President, Development

Yeah, this is -- this is Dave. If you look at it, it's really just across the board. It's -- it's a lot of things and -- and really, it's the operating team has shown really good cost discipline through the year. We came into the year with some inflationary headwinds, and the team kind of took that as a challenge and really is doing a great job in all the -- the areas, Egypt, North Sea, and the U.S.

and trying to keep those costs in check. And so, it's, you know, diesel and chemicals are easy to see, but everything else it's just a lot of little things that add up to -- to material numbers.

Omar Chaudhary -- Goldman Sachs -- Analyst

Thank you. And then, would echo comments from earlier, excited to see more on Suriname down the road. But separately, we'd just love your thoughts around the M&A landscape. And how does that -- how does that compare versus some of your organic opportunities here?

John Christmann -- President and Chief Executive Officer

I mean, I think, in general, you've seen a couple of deals take place in the Permian. They've traded at what we viewed as pretty high valuations. Yeah, you look, obviously, we've been focused organically, but you know, you've always got to be on the lookout for things that could make sense. And, you know, and obviously, that's -- that's where we are and what we do.

We come in every day to try to make this company more valuable and more attractive, so.

Operator

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. John Christmann for any closing remarks.

John Christmann -- President and Chief Executive Officer

Yes, thank you for participating on our call today. I want to close with the following thoughts. Our asset teams are executing at a high level, and we have a high number of quality wells scheduled for the back half of the year, which gives us confidence in achieving our full-year production guidance. We're progressing in a positive direction in Suriname, and we remain committed to our capital return program.

We look forward to keeping you apprised of our progress. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Gary Clark -- Vice President, Investor Relations

John Christmann -- President and Chief Executive Officer

Steve Riney -- Executive Vice President, Chief Financial Officer

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Dave Pursell -- Executive Vice President, Development

John Freeman -- Raymond James -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Scott Gruber -- Citi -- Analyst

Charles Meade -- Johnson Rice and Company -- Analyst

Tracey Henderson -- Executive Vice President, Explorationw

Roger Read -- Wells Fargo Securities -- Analyst

Arun Jayaram -- JPMorgan Chase and Company -- Analyst

Leo Mariani -- ROTH MKM -- Analyst

Jeoffrey Lambujon -- Tudor, Pickering, Holt and Company -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Omar Chaudhary -- Goldman Sachs -- Analyst

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