APA Corporation Common Stock 2026 Q2 Earnings Call

Good morning. Thank you for joining us on APA Corporation's second quarter 2026 financial and operational results conference call. We will begin the call with an overview by CEO John Christmann. Ben Rodgers, CFO, will share further color on our results and outlook. Stephen Riney, President, and Tracey Henderson, Executive Vice President of Exploration, are also on the call and available to answer questions. We will start with prepared remarks and allocate the remainder of time to Q&A. In conjunction with yesterday's press release, I hope you have had the 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. A reconciliation of the differences between these 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 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. A number of factors could cause actual results to differ materially from what we discuss on today's call. A full disclaimer is located with the supplemental information on our website. With that, I will turn the call over to John.

Good morning. Thank you for joining us. Today, I will review our second quarter 2026 results, outline continued progress across our portfolio, and share our updated outlook for the remainder of the year. Last quarter, I reviewed the pillars guiding APA's strategy: delivering top-tier operational performance, building and growing a high-quality portfolio, and maintaining financial discipline. Overarching all of this is our long-term strategic commitment to oil and gas. Our second quarter results demonstrate continued momentum consistent with each of these priorities. Operational performance remains strong, costs are declining, both the scale and quality of our portfolio are improving, and we continue to strengthen our balance sheet. At the core of our strategy is a simple objective: doing more with less. This is directly reflected in the quality of our execution during the quarter and the improvement in our forward outlook.

It is further reinforced by the ongoing delivery of our cost reduction initiatives. Execution has remained ahead of plan. We now expect to exit the year with approximately $500 million of annualized run rate savings, up from the $450 million target we established at the beginning of the year. More importantly, these improvements continue to strengthen the underlying economics of the business, reinforcing the progress we've made over the past two years. Turning to the second quarter, across our core Permian and Egypt assets, we met or exceeded production guidance while delivering capital investment below guidance. In the Permian, we have continued to build on the operational momentum established over the past several quarters. Oil production exceeded guidance while capital was in line with plan. Strong execution across drilling, completions, and field operations is reducing the level of capital investment required to sustain current production levels.

At the same time, targeted investments to enhance base production reliability and lowering operating costs are delivering measurable results. Based on the progress we've made to date, we remain on track to achieve our expected $3.5 million per month run rate operating cost savings target by year-end. Taken together, these efforts are more than offsetting current inflationary pressures while improving the capital efficiency and overall economics of our Permian business. In Egypt, adjusted BOE production was in line with our guidance, reflecting higher gross volumes net of PSC impacts. Gross gas production grew meaningfully during the second quarter as we continue to execute our development strategy. Approximately half of our gas production is now benefiting from the revised pricing agreement, improving the value of every incremental molecule we produce. This underscores the growing value of our gas portfolio and supports a more sustainable cash flow profile for the Egypt business.

In Suriname, the Gran Morgu development continues to progress on budget and on schedule toward first oil in mid 2028. Shifting to our exploration portfolio, we also made further strides in building long-term optionality. We recently announced an agreement to acquire Savant Alaska, which secures critical infrastructure adjacent to our eastern North Slope position and increases flexibility as we evaluate next steps. This includes a processing facility, a pipeline connection into the Trans-Alaska Pipeline System, and supporting field infrastructure we can leverage to appraise and potentially develop this highly prospective resource position. Our upcoming program this winter will comprise an appraisal test to further delineate the Sockeye discovery, as well as an exploration well targeting a larger, separate prospect. In Uruguay, we're pleased to welcome Eni as a strategic partner in OFF-6 following a highly competitive process.

This partnership underscores the quality of the block's prospectivity and our ability to attract top-tier partners to progress large-scale exploration opportunities. APA will retain a 60% working interest, with Eni funding a significant portion of the initial exploration well, which we plan to spud in 2027. Turning to capital returns. We continued making progress toward our $3 billion net debt target while returning capital to shareholders through dividends and share repurchases. Our long-term capital allocation framework remains unchanged. Since introducing the framework in late 2021, we have consistently returned at least 60% of free cash flow to shareholders every year while also improving the balance sheet. We expect to achieve this again in 2026. Moving to our full-year outlook. Our updated guidance reflects a broader improvement in the capital efficiency and durability of our two core assets.

As a reminder, following the Callon integration, we initially estimated that sustaining Permian oil production around 120,000 barrels per day would require eight rigs and roughly $1.7 billion of capital. Since then, improvements in drilling, completions, and base management have significantly lowered capital intensity. As a result of these structural efficiency gains and our strong operational execution, we now expect to operate four rigs for the remainder of the year while raising our full-year oil production guidance to 123,000 barrels per day. This is a significant increase relative to our original guidance of 120,000 barrels per day, while our capital budget remains unchanged at $1.3 billion despite certain inflationary pressures. Egypt has followed a similar trajectory, although the drivers have been different.

Since signing the revised gas pricing agreement in 2024, we have maintained annual capital at roughly $500 million net to APA while progressively allocating a greater share of this investment towards attractive gas opportunities. Even with this shift, gross oil production has continued along a modest and predictable decline trajectory, while gas production has grown meaningfully, supported by a refocused exploration program and ongoing development activity. During the quarter, outperformance from recent rich gas discoveries resulted in the deferral of some lower-pressure gas volumes at Qasr. While this slightly reduces our near-term gas outlook, higher associated liquids offset the impact, resulting in a similar BOE profile as originally anticipated. Accordingly, we now expect full-year gross oil production of approximately 118,000 barrels per day and gross gas production of 535 million cubic feet per day while maintaining our original BOE production outlook.

We expect the impact on free cash flow to be minimal. More importantly, we remain excited about the significant gas potential across our Egypt acreage position. Our full-year outlook also reflects slightly lower exploration capital, primarily associated with the timing of exploration activity in Block 58. The next exploration well, previously planned to spud late in the fourth quarter of 2026, is now expected in 2027. In closing, I'd characterize the second quarter with one word, momentum. We're sustaining top-tier operational performance across our portfolio, driving stronger production, lower costs, and lower capital intensity. These results reflect the structural improvements we've made over the past two years to become a cost leader and drive higher capital efficiency across our core assets in the Permian and Egypt.

We are well on our way to achieving our $3 billion net debt target, which will improve resilience across commodity price cycles and provide greater flexibility for the long term. Taken together, APA is entering its strongest position in several years. With a highly capital-efficient base business, multiple high-quality investment opportunities and exploration, a strengthened balance sheet, and a clear path to organic oil production growth led by Gran Morgu. With that, I'll turn the call over to Ben.

Thank you, John. For the second quarter, APA reported consolidated net income of $747 million, or $2.11 per diluted common share. Consistent with prior periods, these results include items outside of core earnings. The most significant after-tax adjustment was an unrealized gain of $92 million related to our basis hedges. Excluding this and other small items, adjusted net income for the quarter was $669 million, or $1.89 per diluted common share. One additional item to note is that deferred tax expense increased during the second quarter, primarily due to higher U.S. income, which accelerated the expected utilization of our U.S. net operating losses. This is a non-cash item that had no impact on second quarter cash flow and only has a minimal impact on our current outlook for full-year current tax expense.

We generated $738 million of free cash flow during the second quarter and returned $189 million to shareholders through dividends and share repurchases. Underpinning these results was strong execution across production, capital, and operating costs. Some of the cost variance was timing related, particularly in the North Sea, where the lifting schedule for our crude oil sales shifted a portion of LOE from late second quarter into early third quarter. However, these results also reflect underlying efficiency gains and cost savings, particularly in the U.S., which have offset inflationary pressures such as global diesel costs. Through the first six months of 2026, we've generated more than $1.2 billion in free cash flow, which is more than we produced during each of the past three years. While higher prices have played a role, we are also benefiting from structural improvements we've made across the business over the past two years.