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APA Corporation (APA)

Q1 2022 Earnings Call· Thu, May 5, 2022

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the APA Corporation First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Gary Clark, Vice President of Investor Relations. Please go ahead, sir.

Gary Clark

Analyst

Good morning, and thank you for joining us on APA Corporation's First Quarter 2022 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, Senior Vice President of Exploration; and Clay Bretches, Executive Vice President of Operations. Our prepared remarks will be around 20 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 first quarter 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 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 discuss today. A full disclaimer is located with the supplemental information on our website. And with that, I'll turn the call over to John.

John Christmann

Analyst · Bank of America

Good morning, and thank you for joining us. The first quarter brought a strengthening in both oil and gas prices to levels unseen since 2014. This quickly shifted the prevailing energy narrative to questions about spare capacity, energy security and whether producers could realistically deliver more reliable and affordable oil and natural gas. These are all very good questions and hopefully represent a more thoughtful outlook for our energy dialogue. At APA, we significantly increased our capital activity coming out of 2021, and we will remain squarely focused on executing on our 3-year plan, generating strong free cash flow, delivering on our shareholder return framework and continuing to deleverage our balance sheet. Since the beginning of 2021, we have made tremendous progress with debt reduction, which enabled the initiation of our capital return framework. In that time frame, we have reduced our outstanding bond debt by $3 billion, repurchased $1.1 billion of APA stock or roughly 10% of shares outstanding and increased annualized dividend to $0.50 per share. At current strip prices, we expect to generate approximately $2.9 billion of free cash flow in 2022. Based on our capital return framework, this would imply a minimum of $1.8 billion of return to shareholders. Thus, if commodity prices sustain at these levels, you should expect an acceleration in the pace of share buybacks through the rest of the year. With regard to our operational strategy and 3-year capital activity plan, we anticipate no material changes at this time. In Egypt, we have been increasing our rig count over the past year, investing in shorter cycle projects designed to deliver 8% to 10% compounded gross oil production growth over the next 3 years. In the U.S., a fourth rig, which was contracted in September, recently arrived and has begun operations. This should…

Steve Riney

Analyst · Bank of America

Thanks, John. For the first quarter of 2022, under generally accepted accounting principles, APA Corporation reported consolidated net income of $1.88 billion or $5.43 per diluted common share. As is commonly the case, our results include several items that are outside of APA's core earnings. The most significant of these was $1.1 billion of after-tax gains on the divestments of Altus Midstream and the Delaware Basin minerals package. Other material items included a $187 million benefit, related to a release of tax valuation allowance to offset deferred U.S. income tax expense or a $53 million charge for early extinguishment of debt associated with our March bond tender. Excluding these and some other smaller items, adjusted net income for the first quarter was $668 million or $1.92 per diluted common share. In our financial and operation supplement, you can find detailed tables for all of our non-GAAP financial measures, including 1 for adjusted earnings. Our first quarter results underscore APA's strong free cash flow generating capacity. The impact of the Egypt PSC modernization on production volumes, combined with the higher commodity price environment, drove a 39% increase in first quarter free cash flow compared to the preceding quarter. Cost inflation has become a popular topic in quarterly earnings calls and for good reason. We embedded a good amount of cost pressure into the budgets we laid out in February. And for the most part, costs are tracking close to that plan. However, 1 cost issue in the first quarter that was not fully captured in guidance is related to equity-linked compensation. So let me go through a few details on that with you. You may recall that we have multiple equity-linked compensation plans that are denominated in APA shares. As these plans vest, some are paid out in actual shares and…

Operator

Operator

[Operator Instructions] Your first question comes from the line of Doug Leggate from Bank of America.

Doug Leggate

Analyst · Bank of America

I think you asked me. So John, I'm going to start -- maybe I'll try to for here. On Suriname on the buyback, the 60% of free cash flow you obviously fell quite a bit below that in the first quarter. But my understanding is when you have non-public information on the well test that you can't actually be in the market. So I wonder -- my 2 for it is, I wonder if you could give us a more fulsome update as to whether you feel like you are still making progress towards a development and FID this year. And whether at this point, you are able to be back in the market taking advantage of, for example, today's share price weakness. And I've got a follow-up, please.

John Christmann

Analyst · Bank of America

Okay. No, Doug, great question. First off, I'll say we are committed to the return framework of a minimum of 60% of our free cash flow to shareholders, and we are committed to that, and we are committed to that for the calendar year of 2022. We do have periods where you have material nonpublic and we have to use other vehicles in that plan ahead with [ten V51s] and so forth. So there are periods where we have to rely on those and think ahead. We have completed the flow test at Krabdagu. We are now in the important buildup stage. And as you know, Doug, and I appreciate, sometimes the buildup can be as important as the flow test are more important. So we're excited about where we are. At this point, we're not going to dribble information out on Krabdagu. We'll wait and come back with a report at the appropriate time. But I would say there have been no surprises. As we think about a path to FID in Suriname, we're kind of moving more towards what I'll call a central area hub concept. And it's something that we're excited about and starting to think about with Total. You've got a foundational piece at Sapakara South. We think Krabdagu can also be a foundational piece, but I'm going to hold comments there until we're ready to talk about that. And we prioritized a list of both exploration and appraisal targets that we need to drill. Obviously, the appraisal targets are helping us find connected volumes, which are critical to scope and scale and the exploration targets that are sizable, we also need to drill to make sure you would get the scope and scale right of that potential first FID. So things are on track. We're excited about how things are progressing. We did say the Maersk Valiant will be moving to an exploration target next, which is DCP. So we're excited about that. And quite frankly, things are progressing nicely. In Block 53, while I'm on Suriname, we're drilling Rasper. As we said in the prepared remarks, we're above the target zones. But we are excited about Rasper, and we'll come back on that when we can talk about it. And we also said we will be retaining the Noble Jury to SUSA in country in Suriname, which is 1 of the reasons why the CapEx is going up.

Steve Riney

Analyst · Bank of America

And Doug, this is Steve. If I could weigh in on the second part of your question about the pace of buybacks and uses of cash. So as John said in his prepared remarks, we anticipate a strip, about $2.9 billion of free cash flow this year. That would imply at least $1.8 billion, as we said, in returns to shareholders. In the first quarter, we -- between dividends and share buybacks, we did just a little over $300 million. So we're a little bit above a 15% payout at that implied pace of annual payouts. And I think there was some activity that may have been limited due to MNPI. But I think also, you don't start the year with guns a blazing, you start probably on a conservative pace. We also, as you know, chose to do something on the debt side. But as John said, we absolutely remain committed to the full year payout of 60% of free cash flow and we actively plan around periods of MNPI. So we understand what that does to us, and there are other mechanisms we can use from time to time to be able to be in the market and buying back shares.

Doug Leggate

Analyst · Bank of America

Hopefully, my second -- my follow-up, I'll let someone was taking to the soon. I think there's 2 tests going on, so I'm sure others will get into that. But I want to ask you about the trajectory in Egypt. This is the first quarter since the normal modernization. There's are a few mixed counties in there that I think might have surprised some people. So certainly surprised me a little bit more gas. What is the trajectory to how you see your adjusted volumes after minorities and tax files or tax molecules? Can you give an idea what that looks like? And I'll leave it at that.

John Christmann

Analyst · Bank of America

Yes. And I think if you step back big picture in Egypt, Doug, we've been declining gross operated production for a number of years. And the key to modernization was it facilitates the investment levels. And so you've seen us really ramp the rig count, really in the back half of last year, second half, we went from 5 to 11 rigs. We're at 12 today. We're in the process of picking up a 13th and 14th rig fairly soon, and will likely go 1 or 2 higher than that. I think when you look at modernization, you have to look at the net. So despite a rising oil price, our net production was up 13% in Q1, and that's really the benefits of modernization. And that's with growth staying relatively flat as you're now starting to see that curve turn. April production is moving up quite a bit. And I'll let Mr. Pursell jump in and provide some more details here.

Dave Pursell

Analyst · Bank of America

Yes. Doug, so we'll get to your mix, we'll answer the mix question, but it's important to give you the preamble before that. And as John said, April production is moving higher, we're up to -- we're up 8% as we've exited April here relative to the first quarter. So we've got the oil production trajectory the way we like it. And really, that's driven by a couple of things: continue to increase drilling rig count. We talked about we'll be up to 15 rigs by the middle of the year. Those drilling rigs really focused on oil have an oil-focused is both exploration and production. We talked in the supplement. We've had a couple of nice exploration successes is at Pita and Hazem Northwest or Pita West and Hazem Northwest. Our development drilling is on track. We did have some delays on recompletions in the first quarter moved into the second quarter, but we're -- we think we're on track to continue to grow oil production in that. So the oil production mix will continue to improve or increase over time relative to gas. I think -- and I'll let Gary kind of offline, walk you through the blood guts and feathers of this. But when you think about the modernized terms, it's also a simplified structure. And so we think going forward that the adjusted and reported mix should mimic and track the gross mix very closely. So there won't be that ambiguity in how you roll up into the adjusted and reported numbers. So we think growth is what you should focus on, and that gross oil mix is going to improve as we continue to focus on oil development here over the next several years.

Operator

Operator

[Operator Instructions] Your next question comes from the line of John Freeman from Raymond James.

John Freeman

Analyst · John Freeman from Raymond James

The first question I had, when you mentioned that about half the CapEx increase was related to the increased activity in Suriname with the decision to keep the Desousa drillship starting on falling Raper. And I'm just wondering if there's a way to maybe give a little bit more color on how exactly you all go about estimating the incremental CapEx there given, obviously, your CapEx obligations are materially different, whether it's appraisal or exploration-related activity in Block 58 as well as out of that rig, drill simply split time between Block 58 -- Block 53. It's just a lot of different scenarios, and I'm just wondering kind of how you all kind of came up with some risk kind of CapEx number?

John Christmann

Analyst · John Freeman from Raymond James

Well, John, we're going to keep the Desousa. There's -- you could think about an exploration well in Block 58, where we've got 50% or another well in Block 53, where we got 45% pretty similar. Obviously, if it's appraisal wells in Block 58, they're going to be less because of the carry. So -- and there's also the ability to keep the Desousa for maybe more than 1 well. So I'll just leave it at that. It will stay in country, and we're still working through details, but we felt like we ought to at least move it up from the amount we've moved it up, and we think it's a good number.

John Freeman

Analyst · John Freeman from Raymond James

So is it -- not to try and put wording about some, but is it fair to say that if all of the incremental activity with Desousa ended up being appraisal that, that CapEx number might come down some?

John Christmann

Analyst · John Freeman from Raymond James

Potentially could. But I would anticipate -- we've got risked exploration and appraisal wells. So it's going to be both.

John Freeman

Analyst · John Freeman from Raymond James

Okay. Okay. And then just my follow-up, kind of sticking with the CapEx side. So on the U.S., where it was due to the increased non-op activity and then you mentioned the mix change in your activity, some higher working interest, is it possible at all to sort of say, of the incremental CapEx associated in the U.S. kind of the split between it being due to kind of increased activity/higher working interest stuff versus just cost inflation that we've been hearing about these calls the last few days.

John Christmann

Analyst · John Freeman from Raymond James

Yes, John, I think, as you know, we built in quite a bit of inflation into our capital numbers with what we laid out first quarter. So the majority of this is we do have some wells that are going to be higher working interest than what we had originally planned, and that's just a function of shifting some pads and moving some pads forward. So there will be some higher working interest. And then we do have some increased non-op capital, some of that could be increased activity and then some of that could be some inflation on the other operators, too. It's hard to dig in and understand that, but it's really what we're just seeing on the non-op side moving up. And so those 2 factors kind of come to play together there on that. But I think we've done a pretty good job of anticipating the inflation and the increases in our 2022 plan. And I think that's playing out kind of as we budgeted and forecasted.

Operator

Operator

And your next question comes from the line of Arun Jayaram from JPMorgan Chase.

Arun Jayaram

Analyst · Arun Jayaram from JPMorgan Chase

Yes. John, I was wondering if you could give us an update on your marketing agreement with Cheniere on Stage 3, I believe you have the ability to sell 140,000 MMBtu to them. Obviously, a very, very good pricing environment. So I was wondering if you could give us some details the timing of when that could kick in and perhaps the operating leverage there between your leverage to this and the North Sea exposure to global gas?

John Christmann

Analyst · Arun Jayaram from JPMorgan Chase

I'll let Steve dive in. I wish it was a bigger contract, but I'll let Steve dive in on the details.

Steve Riney

Analyst · Arun Jayaram from JPMorgan Chase

Yes. We wish it was bigger, and we wish it was sooner. So that contract, that's a 15-year contract. You got the basic terms right, Arun. And that one contractually begins on July 1, 2023. At any point in time now, Cheniere does have the option with 30 days notice -- or 90 days notice, sorry, to elect to start that contract early. They haven't given us that notice. So we would like to obviously get that one at any point in time. But if we do, we'll start at 90 days later or any other time frame that we might agree with them within that. So it's a fair option to be able to do that. And we obviously can't disclose the terms of that contract. But suffice it to say, what we do is we select a mix of Asian versus European pricing and we effectively sell our gas, we deliver gas on the Gulf Coast. We sell it at this mix for a full year, a mix of Asian and European pricing. And then we net back through liquefaction fees, transport fees and a marketing fee that we pay. So we're were, in effect, fully exposed to the European and Asian LNG market pricing for that 15-year period.

Arun Jayaram

Analyst · Arun Jayaram from JPMorgan Chase

Great. And that starts mid of next year unless Cheniere elects to early stress that.

Steve Riney

Analyst · Arun Jayaram from JPMorgan Chase

Exactly.

Arun Jayaram

Analyst · Arun Jayaram from JPMorgan Chase

Okay. Great. And just my follow-up is on Egypt. John, you guys have highlighted your the expectation to grow your oil volumes there by 8% to 10% kind of per annum. Just wondering if you could maybe talk a little bit about how your early results are trending. It does sound like things are -- when you got the recompletions going that you are starting to see some growth there. But I was wondering if you can maybe dig down and give us a sense of the trajectory of growth, any supply chain headwinds in country? Obviously, you guys are rapidly expanding activity, but give us a sense of what you're seeing on the ground in Egypt.

John Christmann

Analyst · Arun Jayaram from JPMorgan Chase

No. It's – number 1, it's good to get back to work and kind of move our activity levels up to where we can grow that production base. I think we've got a couple of key discoveries to build on. I think the Pita West in between Pita and Barnes is a nice early win. It's going to give us some things that we can get on fairly quickly. We did get some of the recompletions underway. And as Dave mentioned, I think we're up about 8% in April over the first quarter already. So it just takes a little bit of time, but things are progressing. And then there's a couple of other discoveries that have been nice. So we're going to be focused on oil drilling. We're kind of prioritizing that. We've got the Northwest Razak concession that we're -- we shot seismic on and it's kind of a new frontier for us. So -- we've got some nice exploration wells that we're also excited about. But lots of inventory, Arun, and we feel good about the plans that we've laid out, and we're kind of getting our feet under us and getting going. So anything you want to pile on, Dave?

Dave Pursell

Analyst · Arun Jayaram from JPMorgan Chase

John answered the supply question really well. The trajectory we're very we're still confident in the path that we laid out. I think on the supply chain questions, remember, in Egypt, we're drilling relatively conventional. These are conventional wells are vertical. We don't have much, if any, hydraulic fracturing activity in country. So these are, I would call it, kind of commodity sort of wells. But that said, our supply chain team is all over it. They're making sure that we're not waiting on parts. So we've -- as we ramp up, one of the nice things about having a visibility on the plan as it gives the supply chain folks lead time to really make sure that we have all the equipment necessary to keep the program moving forward. And so far, that's been the case.

Operator

Operator

Your next question comes from the line of Michael Scialla from Stifel.

Michael Scialla

Analyst · Michael Scialla from Stifel

You're getting close to 1x debt leverage now. Stevie, you said one of the agencies upgraded the debt rating to investment grade. Stock's also done well this year, but it sounds like you're still focused on debt reduction and share buybacks. So I guess with that in mind, I want to see how you view the intrinsic value of the company relative to the current stock price and how you weigh that versus potentially increasing the dividend?

Steve Riney

Analyst · Michael Scialla from Stifel

Yes, Michael. So yes, a number of questions in there. I think that the key answer to your question would be -- or the key part of your question would be that we still see our share price is undervalued, and we like the buyback program, and we like it quite a bit. But your reference to the amount of debt reduction that we've done, just to step back from it a bit. In the last 9 months, we've done $3 billion of bond elimination, which is just a phenomenal compared to what you think we might have been able to do just 12 to 18 months ago. Certainly, the balance sheet is much, much stronger today, and then Fitch was the first one to recognize that and acknowledge it. We are in conversations with all 3 rating agencies, and we continue to work the debt rating hard with all 3 of them. I think we'll continue along the lines of balance sheet strengthening, but I think it's unlikely that you're going to see the large chunks of debt tender activity, the $1 billion-plus. We're -- as long as we stay in this price environment, we're going to have significant amount of free cash flow over the next 3 years. And there will be continued balance sheet strengthening, but there will be a significant focus on share buybacks as well as long as the share price, in our view, stays undervalued, which is what it is now. And we talk about the dividend all the time. We talk about it often, and we've raised it twice in the back half of last year. And we'll continue to look at that. And as the balance sheet gets stronger, as prices continue to play out the way they are and as share price improves, on an absolute and relative basis, then we'll certainly think more seriously about the dividend. But for right now, we're quite happy with the buyback program.

Michael Scialla

Analyst · Michael Scialla from Stifel

Great. That helps. Second question was a marketing question. I guess, with the deconsolidation of Altus, I believe you retained your firm transportation for gas out of the Permian. I want to see if you plan to use all of that or if you have thoughts on monetizing any excess capacity there?

Steve Riney

Analyst · Michael Scialla from Stifel

Well, as you know, we did monetize some of that in prior years. And we have -- we have about -- in round numbers, we have a little over $670 million a day of transport capacity on PHP and Gulf Coast Express. We have -- as we look forward to the next -- the remainder of this year and into next year, we have, on average, somewhere in the $200 million to $225 million a day of excess capacity. Would we be open to potentially marketing some of that? Yes, I mean, we would entertain a conversation on that, for sure. But at the same time, the differentials look good for the next 2 years. And as you'll probably see in our results and our postings that we have actually gone and we've now locked in those differentials on about 90% of that excess capacity all the way through the end of '23. And in doing so, there's a mixture. We put in some hedges in earlier time periods that were not quite as attractive as they are these days. But we've put in quite a bit just recently. And we've locked in about a little under $50 million of cash margin on that transport capacity. And then the rest of the capacity will be used. We use all of it. And effectively, it gets Gulf Coast pricing on our equity volumes. But that -- we sell all of our equity volumes in basin and then our marketing group buys 670 million a day and transports it and then resells it on the Gulf Coast.

Operator

Operator

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

Charles Meade

Analyst · Charles Meade from Johnson Rice

John, to you and the rest of your team there. I mentioned this is a question for you or perhaps for Tracey. Can you give us kind of the background and the providence of this [indiscernible] I don't know exactly the way to pronounce it, the new tick up prospect and perhaps wrap into it, whether it kind of rise into the top of the power here is connected to your central area hub development concept?

John Christmann

Analyst · Charles Meade from Johnson Rice

Yes, Charles, I will tell you, it is something that would fall in that area. It's an exploration well, and I'm happy to have Tracey say a few things about it, so.

Tracey Henderson

Analyst · Charles Meade from Johnson Rice

Sure Charles. As John mentioned in the original comments, we're going to be testing sort of a range of different prospects with different attributes in a list in support of looking at appraisal and exploration prospects. So I would say, the Diku wells at the front of the schedule. It's a well that Total really likes with some potential meaningful reserves. So we see it, I think, is a bit higher risk, higher reward because it does have some different seismic attributes than we've tested, but it has the potential to unlock, I would say, some additional follow-on prospectivity, that could incrementally and substantially but more reserves. So I think it's one we're anxious to see, but it is a bit of a different beast than what we've seen before, but has potential to be meaningful for the appraisal.

Operator

Operator

Your next question comes from the line of Scott Hanold from RBC Capital Markets.

Scott Hanold

Analyst · Scott Hanold from RBC Capital Markets

A quick question on the Desousa rig that's in Block 53. If it stays in country. It sounds like it's going to move to Block 58. Would you all continue to be the operator of that rig? Or would you hand that over to Total?

John Christmann

Analyst · Scott Hanold from RBC Capital Markets

Scott, it could stay in Block 53 or we could move it to 58, and let Total take it. So there's optionality there, and I'll just -- I'll leave it at that for now.

Scott Hanold

Analyst · Scott Hanold from RBC Capital Markets

Okay. But just to clarify, if it did go to 58, they would take over operatorship. Is that right?

John Christmann

Analyst · Scott Hanold from RBC Capital Markets

They are the operator in 58 and we're the operator in 53. So there's a lot of things you can work out. But we're not going -- wouldn't be changing -- they've got the value at working, so.

Scott Hanold

Analyst · Scott Hanold from RBC Capital Markets

Okay. Understood. And then Alpine High, obviously, with where gas prices are, looks a lot more interesting. You guys are moving a rig there and going to resuscitate those volumes. Can you think about big picture? Obviously, Steve talked about the potential excess capacity you all have with your FT. And I know in past – in the beginning of the Alpine High history, I guess, you all talked about Mexico being an option there to descend gas. But like as you think about gas prices, optionality between LNG, maybe Mexico still yet? How do you think about that longer term? Are you guys going to keep a rig there? Do you – could you move more on there? Do the economics really warrant ramping up much? Just give a little bit color on that, that would be great. A –John Christmann: No. We’ve – we started last September picking up a rig in the U.S. It’s going to be a Delaware Basin focused rig. It’s now working in our DXL area. We had a pad there that was partially drilled. And so we wanted to drill that out first, and then it will be moving to Alpine High. We’re excited about what those economics look like, right? If you look back at the Willow well, and we had some details in our supplement there. It was one of the best wells we brought on last year of all of our DUCs. I think it has cumed over 9 Bcf, and it’s been on since really January of ‘21. So we are excited about those economics. I think they compete well, and we’re anxious to get a rig back to work as there’s plenty of infrastructure.

Operator

Operator

Your next question comes from the line of Bob Brackett from Bernstein Research.

Bob Brackett

Analyst · Bob Brackett from Bernstein Research

I'll try fishing off Suriname a bit. In terms of the Jerry DeSousa, when did the decision to keep that rig occur? Did it occur after you'd spudded RASPER? And a related question, is there an obvious sidetrack to RASPER?

John Christmann

Analyst · Bob Brackett from Bernstein Research

We're above target zones at RASPER, Bob. So I'll just leave it at that.

Clay Bretches

Analyst · Bob Brackett from Bernstein Research

How about a follow-up. If we talk about the Krabdagoe flow test, the fact that you went on to the next step of buildup suggests that you flowed oil through a sufficiently permeable reservoir that it makes sense to do a longer-term test. Am I getting the engineering right on that?

John Christmann

Analyst · Bob Brackett from Bernstein Research

We're doing a buildup. So we're in the buildup phase, and I said there were no surprises. So I'll leave it at that.

Bob Brackett

Analyst · Bob Brackett from Bernstein Research

And a final question would just be the restricted flow test at Sapakara South flowed 4,800 barrels of oil, I think. So that -- is that in the realm of no surprises?

John Christmann

Analyst · Bob Brackett from Bernstein Research

I'll just say there were no surprises, and we may not have expected there to be a restricted flow test, but I'll leave it at that. Your questions are always fun, bob, and creative.

Operator

Operator

Your next question comes from Paul Cheng from Scotiabank.

Paul Cheng

Analyst · Scotiabank

Two quick questions, John. Two quick questions. Can you tell us that how many wells do you expect to grow in Alpine High this year? And secondly, that I know it's really early, but given the inflationary environment and the activity level, what is your preliminary give and take, different component in the 2023 budget may look like? Any direction that you can point to?

John Christmann

Analyst · Scotiabank

In terms of number of wells, Dave?

Dave Pursell

Analyst · Scotiabank

Yes, Paul, this is Dave Pursell. Number of wells at Alpine later this year, it will just be a handful because we're -- as John said, we're finishing up an undrilled uncompleted pad at DXL, then we'll move to Alpine. And these are all going to be longer laterals with relatively large stimulation treatment. So it will be a handful of wells that are ready to come online at the end of the year, so.

John Christmann

Analyst · Scotiabank

Your second part of your question, Paul, it was hard to hear.

Paul Cheng

Analyst · Scotiabank

I was saying that. I know it's early, but for 2023, any kind of direction you can point to on the preliminary budget and activity levels?

John Christmann

Analyst · Scotiabank

Yes. I mean I would say today, as we look at 2023, our 3-year plan we laid out this year looks pretty darn good to us, right? We've added the fourth rig in the U.S. we'll be at 15 rigs in Egypt. So right now, we're not envisioning any increases to the 3-year plan that we laid out at the start of this year.

Paul Cheng

Analyst · Scotiabank

Okay. And how about in the budget given the inflation, I mean, how much additional costs that we should be taking into consideration?

John Christmann

Analyst · Scotiabank

Yes. I mean we'll wait until next February to come out with a hard number for '23, we did have an increased dial in for additional inflation in '23, but I'm not in a position to really give you that number right now. A little early.

Operator

Operator

Your next question comes from Neil Mehta from Goldman Sachs.

Neil Mehta

Analyst · Goldman Sachs

John and team. The first question is around the North Sea. And just want to get your perspective on the production cadence there. As you've already indicated, it's going to be a heavy turnaround schedule through the summer. And -- but how are you feeling about the exit rate of 50,000 BOE a day and just any update around activity plans there?

John Christmann

Analyst · Goldman Sachs

Yes, Neil, we're still with the North Sea. We've got a heavy turnaround period coming up that we're anxious to get on and get through. I think it's executing and that's going to be key. I think we've got good news that the Ocean Patriot is back in the field or arriving today. So -- that's been one of the other items that we basically lost an entire quarter with the drilling of the Ocean Patriot, which when you're only running 1 floater and you lose it for a quarter, it had to go in. It had a large anchor chain that had broke and had to be repaired. So I think we feel good about the prospects that are on that rig line and the work that's ahead of us and the repair works. We feel good about the exit rate, which should be around 50,000, so --

Neil Mehta

Analyst · Goldman Sachs

All right. And then the follow-up is, you operate a global portfolio here. Talk about the inflationary forces that you're seeing in the U.S. relative to international, fair to say, thus far, a lot of your peers have reported more inflation in their U.S. business relative to international. But how do you see that playing out over the next 12 months?

John Christmann

Analyst · Goldman Sachs

Well, I mean, I think we do operate a global portfolio. I think it's a function of staying ahead. We had a lot of our 2022 program under contract. And so we had cranked a lot of that in the last quarter when we announced budget. So we feel good about what we dialed in and where that sits. I think a lot of it just depends on where you are and what the demand for that equipment is. And you typically do see higher increases in the U.S. and then more volatility and more stable prices internationally. But I think the thing that's a little bit different this time is we're not all just fighting over rig count rigs. And -- which drives that hyperinflation. So -- but there's no doubt, commodities are going up, fuel is going up, steel, sand So as you look out, costs are going up. And then the other thing, if you look back over the last few years, there's not been a lot of equipment that was built. And so a lot of the parts that were needed to keep rigs running and frac crews running have been cannibalized off of older equipment. So there's no doubt, as you look out over the next couple of years, if the price deck holds, you're going to see some higher prices. Dave, anything you want to add to that?

Dave Pursell

Analyst · Goldman Sachs

Yes. I think when you look at inflation, it's people, steel, chemicals and diesel. You can't -- I mean, that's ubiquitous around the world. When you look at the Permian relative to the rest of the global portfolio, you're running higher spec and kind of higher-end equipment in the Permian, which will have -- and there's more competition for that equipment. Both those things create more pressure and you've got the pressure pumping and big frac component of the wells in the Permian that is -- can be fairly or significantly inflationary, which we don't see in either Egypt or the North Sea. So I think that's the real kind of categorical breakdown.

Operator

Operator

Your next question comes from the line of Leo Mariani from KeyBanc.

Leo Mariani

Analyst · Leo Mariani from KeyBanc

I just wanted to follow up on some of the prepared comments here. You all kind of describe Safacura South as a potential kind of foundational part of a project and said kind of stay tuned on Krabdagoe. I mean I think there's a plan for Total as kind of talked about maybe hitting FID at the end of the year. But am I reading some pretty good confidence out of you guys in terms of what you've seen so far that you think there's certainly a sizable, viable economic project here?

John Christmann

Analyst · Leo Mariani from KeyBanc

At this point, Leo, we have not announced a project or an FID. I think we've said from the get-go that Sapakara South is a foundational piece. We've shown it's gotten bigger with the extended buildup time as we raised that original estimate from the connected volume just to the 1 well, and I want to emphasize again, that's just via the 1 initial well was 325 million to 375 million barrels. We raised that to greater than 400 million. And that area continues to get bigger and there's more appraisal to do at Sapakara South. So I think we have confidence in what we have found, and we like the program, but there's still more work to do.

Leo Mariani

Analyst · Leo Mariani from KeyBanc

Okay. And then just on the North Sea, you all certainly said you've got confidence on this 50,000 BOE per day exit rate. I guess are there some particular wells that you all need to kind of tie in. I know there's a bunch of downtime of turnarounds here this summer. But are there a project or 2 that are kind of chunky that you guys are going to be bringing on, on the well side that gives you confidence in that number?

John Christmann

Analyst · Leo Mariani from KeyBanc

Yes, there's a Garden well that the Ocean Patriot was scheduled to drill, and we've had to slide that back. But those Garden wells have been high rate, and it's a very, very good location.

Operator

Operator

And there are no further questions over the phone line. I'd like now to hand the call over to John Christmann, CEO. Please go ahead, sir.

John Christmann

Analyst · Bank of America

Yes. Thank you for participating on our call today. I'd like to leave you with the following closing thoughts. Financially, we have become a much stronger company. We will remain disciplined, both financially and operationally. Lastly, we are committed to our shareholder returns framework, returning a minimum of 60% of our free cash flow to shareholders through dividends and buybacks. Operator, I will now turn the call over to you. Thank you.

Operator

Operator

Thank you, sir. Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.