APA (APA) Q3 2023: Permian Oil Output Jumps 15% as Capital Shifts from North Sea
Permian oil production outperformance led APA to exceed guidance for a third straight quarter, as management reallocated capital from the North Sea to U.S. growth. Egypt drilling and Suriname appraisal programs both advanced, but operational and geopolitical complexities remain. Looking ahead, APA’s capital plan signals continued portfolio rebalancing and a focus on disciplined cash returns.
Summary
- Permian Execution Surpasses Expectations: Oil volumes exceeded guidance as capital shifted from the North Sea.
- Egypt Growth Balanced by Operational Hurdles: Rig ramp and workover backlog drive both promise and complexity.
- Suriname Progress Sets Up 2024 FID: Appraisal success underpins a major oil hub, but timeline risk persists.
Business Overview
APA Corporation is an independent oil and gas exploration and production company. It generates revenue by producing and selling crude oil, natural gas, and natural gas liquids, with operations spanning the U.S. (primarily the Permian Basin), Egypt, the North Sea, and Suriname. Its business is organized around these core regions, each with distinct capital allocation and operational profiles.
Performance Analysis
APA’s third quarter was defined by standout Permian execution, with adjusted oil production topping the high end of guidance for the third consecutive quarter. U.S. oil output was the primary driver, benefiting from strong well performance and the addition of a sixth rig in the Delaware Basin. The North Sea also met the upper end of guidance, supported by the Store North well ramp, though activity there is now focused on maintenance rather than growth.
In Egypt, gross oil volumes grew by roughly 4,000 barrels per day, modestly below expectations due to a growing backlog of workover projects and increased barrels offline. APA’s free cash flow for the quarter reached $307 million, with 32% returned to shareholders, and the company reaffirmed its commitment to return at least 60% of full-year free cash flow. The new Chenier gas sales contract began contributing material free cash flow, expected to reach $375 million for 2024.
- Permian Outperformance: Consistent well execution and capital reallocation drove U.S. oil growth above guidance.
- North Sea Capital Pullback: Investment shifted to safety and asset integrity, with production volumes set for decline but potential for higher free cash flow.
- Egypt Operational Complexity: Rig ramp and workover backlog increased barrels offline, but drilling program remains robust.
Overall, APA delivered on volume and capital return commitments, but operational nuances in Egypt and the evolving North Sea strategy will shape future cash flow dynamics.
Executive Commentary
"For the third quarter in a row, adjusted oil production exceeded the high end of our guidance range. Good execution and strong well performance in the Permian are the primary drivers of this trend."
John Chrisman, CEO and President
"As anticipated, the second half of 2023 is poised for improving production and free cash flow versus the first half of the year. With the improving performance, we are tracking very close to our original full year guidance across most of our key financial and operational metrics for the year."
Steve Reine, Executive Vice President and CFO
Strategic Positioning
1. Permian Basin Capital Intensification
APA is reallocating capital from the North Sea to the Permian, adding a sixth rig and accelerating well completions. This reflects a deliberate shift toward higher-return U.S. oil assets, leveraging operational momentum and long-lateral drilling expertise to sustain output growth into 2024.
2. Egypt: Growth Amid Backlog Challenges
Egypt remains a core pillar of APA’s international portfolio, with 18 rigs running and a steady mix of development and exploration drilling. However, a growing backlog of workover projects has doubled barrels offline, prompting increased workover activity and root cause analysis to address submersible pump failures and maintain production growth.
3. North Sea: Transition to Maintenance Mode
APA has suspended drilling in the North Sea, redirecting investment to asset integrity and safety. While production will decline, the lower capital intensity could support stable or even higher free cash flow if commodity prices hold, though management will provide detailed 2024 guidance in February.
4. Suriname: Appraisal Success, FID on Horizon
The successful appraisal at Block 58 (Crab Dagu and Sapakara) underpins a planned 200,000 barrel per day oil hub, with FID targeted for late 2024. The project is de-risked by 700 million barrels of recoverable oil and a carry from TotalEnergies, but timeline acceleration remains dependent on operator actions.
5. Portfolio Exploration and Optionality
APA maintains a $150 million exploration budget, spanning Suriname, Egypt, Alaska, and other frontier areas. This balanced approach—combining organic exploration with targeted U.S. acquisitions—aims to sustain long-term inventory and value creation beyond near-term drilling.
Key Considerations
APA’s quarter demonstrates both operational strength and evolving strategic priorities, as management balances near-term oil growth with longer-term portfolio diversification and capital discipline.
Key Considerations:
- Permian Rig Addition as Growth Signal: The sixth rig reflects confidence in inventory depth and well economics, with management projecting multi-year runway at current activity levels.
- Egypt Workover Backlog: Doubling of barrels offline to over 10,000 bpd poses near-term operational risk, but ramped workover activity and root cause analysis aim to restore volumes.
- North Sea Cash Flow Dynamics: Capital withdrawal may increase free cash flow despite volume declines, but maintenance and tax volatility require monitoring.
- Suriname FID and Operator Dependency: Project timeline and capital needs hinge on TotalEnergies’ execution, with APA’s carry providing downside protection.
- Exploration Discipline Maintained: $150 million earmarked for 2024 exploration sustains future option value, even as peers consolidate U.S. shale positions through M&A.
Risks
APA faces a complex risk landscape, including operational setbacks in Egypt (workover backlog and pump failures), North Sea production declines, and dependency on partner execution in Suriname. Geopolitical instability in Egypt and broader regional volatility could disrupt operations or receivables, though APA’s long history in-country and government prioritization of oil and gas mitigate some risk. Commodity price swings and tax/regulatory changes in key jurisdictions also remain material uncertainties for cash flow and capital allocation.
Forward Outlook
For Q4 2023, APA guided to:
- Slightly lower total production volumes, driven by North Sea downtime (Barrel Bravo shut-in)
- Flat U.S. oil output, with a seasonal decline in gas
- Continued oil growth in Egypt, but not enough to fully offset North Sea deferrals
For full-year 2024, management expects:
- Upstream capital budget of $2.0 to $2.1 billion, similar to 2023 but with increased Permian and Egypt allocation
- Low single-digit oil production growth, with increases in the Permian and Egypt offsetting North Sea declines
Management emphasized operational flexibility and a minimum 60% free cash flow return commitment, with formal 2024 guidance to be provided in February.
- Permian and Egypt remain growth engines
- North Sea shift to maintenance mode
Takeaways
APA’s Q3 results reinforce its pivot toward U.S. oil growth and disciplined capital returns, while operational and regional headwinds in Egypt and the North Sea warrant continued scrutiny.
- Permian Momentum: Operational outperformance, capital reallocation, and inventory depth position APA for sustained U.S. oil growth.
- Egypt Complexity: Drilling success is offset by workover challenges, with management proactively addressing root causes to maintain growth.
- Suriname and Exploration Optionality: Appraisal success supports future growth, but FID and timeline risk are tied to partner execution and market conditions.
Conclusion
APA delivered another quarter of operational outperformance, especially in the Permian, while managing evolving challenges in Egypt and the North Sea. Strategic capital shifts and a focus on cash returns underpin the company’s investment case, but execution on workovers and Suriname FID will be key to sustaining momentum in 2024.
Industry Read-Through
APA’s results highlight a broader industry pivot toward U.S. shale oil growth, with capital flowing away from mature offshore assets like the North Sea and toward higher-return, inventory-rich basins. The company’s balanced approach—combining disciplined exploration with U.S. development—contrasts with peers prioritizing M&A or pure-play strategies. Egypt’s operational and geopolitical dynamics offer a cautionary signal for international E&Ps, while Suriname’s progress reinforces the potential for new deepwater oil hubs in frontier basins. Overall, APA’s quarter underscores the importance of capital flexibility, operational execution, and diversified portfolio management in today’s volatile energy landscape.