Apa's 2026 Q2 Earnings Call: 60% Return Pledge vs. Rising Exploration Spending

Date of Call: Aug 6, 2026

Financials Results

• EPS: $2.11 per diluted common share (adjusted $1.89)

Guidance:

• Full-year 2026 Permian oil production guidance raised to 123,000 barrels per day from 120,000.
• Full-year 2026 capital budget unchanged at $1.3 billion.
• Exit 2026 with $500 million annualized run rate savings (up from $450 million target).
• Full-year 2026 LOE guidance reduced to $1.5 billion ($25 million below prior guidance).
• Gas trading portfolio expected to generate ~$950 million pre-tax cash flow in 2026.
• Total free cash flow expected to be ~$2.3 billion for 2026.
• $3 billion net debt target expected to be achieved in 2027.

Business Commentary:

Operational Performance and Cost Efficiency:

• APA Corporation reported exceeding production guidance while maintaining capital investment below expectations in the Permian, with $500 million of annualized run rate savings anticipated by year-end, up from a previous target of $450 million.
• The improvements were driven by strong operational execution, cost reduction initiatives, and increased capital efficiency.

Production and Capital Outlook:

• The company raised its full-year oil production guidance to 123,000 barrels per day, while keeping the capital budget unchanged at $1.3 billion.
• This was due to structural efficiency gains and strong operational execution, allowing for more production with fewer rigs and lower capital intensity.

Egypt's Gas Production and Pricing:

• In Egypt, adjusted BOE production was in line with guidance, with gross gas production growing significantly, now with approximately half benefiting from a revised pricing agreement.
• This growth in gas production value supports a more sustainable cash flow profile for the Egypt business.

Exploration and Portfolio Expansion:

• APA Corporation made progress in exploration with new partnerships and acquisitions, including an agreement to acquire Savant Alaska and a partnership with E&I in Uruguay.
• These moves are aimed at securing critical infrastructure and appraisal opportunities, enhancing the company's long-term optionality and portfolio quality.

Debt Reduction and Shareholder Returns:

• The company continues to make progress toward its $3 billion net debt target and returned $189 million to shareholders through dividends and share repurchases in the second quarter.
• This is supported by strong free cash flow generation, enabling debt repayment while maintaining a commitment to return at least 60% of free cash flow to shareholders annually.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated: 'I'd characterize the second quarter with one word, momentum.' CFO noted: 'We delivered a very strong second quarter with production above guidance and lower capital and operating costs. The business today is fundamentally stronger than it was just two years ago.' Management highlighted 'strong operational performance,' 'cost leadership position,' and 'differentiated source of high-margin oil production' from Grand Morgue.

Q&A:

• Question from Doug Leggett (Wolf): Good morning, everybody. John, this is the first time that you've had a call since you acquired Savant. And I wonder if I could just ask you to maybe offer as much color as you can, because your partner has been pretty open about the potential for a recoverable development north of 400 million barrels today. You've now bought a pipeline, which I presume you wouldn't have done if you weren't at least aligned on the possibility of that. So can you share what your current thinking is? Do you have the semblance of a development with Sochi as it stands today, or is it contingent on a successful appraisal program? Any other color you can offer would be great. Thank you.
  Response: The Alaska position is large and successful with two discoveries; appraisal and another exploration well are planned for 2027. Development plans are still contingent on appraisal results.

• Question from Doug Leggett (Wolf): My follow-up, if I may take advantage of Tracy being on the call or whoever wants to take this, but the E&I deal, ANCAP has given quite a lot of detail on the prospectivity of the whole area. E&I is obviously one of the top, if not the top, global explorer in the last several years. And I guess my question is simply this. There's one well in the deep water, John, Rhea, that you know well. It looks to us that it didn't go deep enough. Can you characterize what the exploration optionality is in Uruguay and what happens beyond the first well?
  Response: Exploration in Uruguay targets Cretaceous-age reservoirs closer to source rock, deeper than the single existing well. The first well will test key concepts, with multiple prospectivity options.

• Question from John Freeman (Raymond James): Good morning, John. Morning. Last quarter, you know, y'all emphasized maintaining the flexibility between, you know, debt reduction and buybacks. And now given just how strong the balance sheet is, obviously y'all are pretty explicit that the number one priority now, the free cash for the rest of the year is on the buybacks. And kind of reiterating that minimum 60% annual return of free cash flow to shareholders. And just given that there was some maybe confusion in the market the prior couple of months, maybe just give you all the opportunity to kind of readdress sort of that framework and how you all think about those allocation priorities going forward.
  Response: Management reaffirmed commitment to returning at least 60% of free cash flow to shareholders in 2026, with significant buybacks planned in the second half, while balance sheet remains strong.

• Question from John Freeman (Raymond James): And then, you know, y'all raised your cost savings target yet again to the $500 million. Can you kind of clarify, you know, how much of that has actually been captured versus what still needs to be achieved between kind of now and year end? I know y'all highlighted some projects in the Permian in the presentation, but just a little bit more clarity on what's captured and what's still left.
  Response: Approximately $425 million in savings captured year-to-date (net of inflation), with $500 million run rate exiting 2026, driven by efficiencies across Permian, Egypt, and North Sea.

• Question from Josh Silverstein (UBS): Hey, thanks. Good morning, guys. Ben, you highlighted some of the benefits of the gas trading portfolio and how there's limited free cash flow impacts for the change in Waha prices. And I believe some of this is due to the hedges that you guys have in place for this year. I was hoping directionally if you can kind of give us a view into next year. Do you plan on adding some additional basis swaps to kind of have a similar kind of net zero impact and how things may look for you guys next year?
  Response: Hedging trend has continued for years; no specific hedges placed for 2027 yet, but management monitors and may update. The current hedge provides stability and offsetting effects.

• Question from Josh Silverstein (UBS): And then, John, you mentioned you're two years away from the startup of the Grand Margo project, and that's clearly a key differentiator for your growth profile into the future. Knowing you have this around the corner, how does this impact the development of the existing asset base and capital allocation strategy? Do you want to hold things steady with the existing production base? But how do you think about different options there?
  Response: Suriname JV with Total provides a large carry, enabling continued investment in Permian, Egypt, and exploration without constraining other projects or shareholder returns.

• Question from Arun Jaram (J.P. Morgan): Good morning, John and team. John, I was wondering if you could comment on how you think your sustaining capital requirements in the U.S. are evolving. This year, you guys have highlighted $1.3 billion. of domestic capital for 123,000 barrels of oil. But then you did mention how your rig count now is going down to four, and obviously you're generating some efficiencies. So I know you're probably not ready to give us a 2027 guide, but I wanted to see if you thought there's further potential to reduce sustained capital based on efficiency gains.
  Response: Rig count flexibility demonstrates capital efficiency gains; planning for 2027 will be discussed later, but team continues to improve efficiencies and scale.

• Question from Arun Jaram (J.P. Morgan): Appreciate that. And maybe just a little bit of a follow-up on Egypt, where you guys mentioned that you are testing some new play concepts. I wondered if you could elaborate on some of the exploration-type work you're doing in the Western Desert.
  Response: Exploration in Egypt's Western Desert focuses on deeper, conventional gas targets, leveraging 30 years of data. Successes allow predictable follow-on drilling, with ongoing program yielding steady results.

• Question from Neil Dingman (William Blair): our next question is from neil dingman of william blair your line is now open uh morning john team um john my first question is just um a little bit more on your exploration program specifically You've been active in Alaska and Uruguay. I'm just wondering, are those areas where you consider sort of at the front of the potential exploration line, or would you all also consider exploration activity, I don't know, maybe in Block 58 or other blocks in Suriname as well as maybe any other new areas you might see?
  Response: Exploration portfolio includes Alaska, Suriname, Uruguay, and more in Block 58. These areas were targeted during a period of reduced industry activity, providing de-risked opportunities.

• Question from Neil Dingman (William Blair): Yeah, I would agree on the deep portfolio and the de-risking. You guys have done a fantastic job. And then just a second question around the Permian natural gas takeaway, maybe for you or Ben, just specifically looking at Slide 19 for your presentation last night. Would you all consider adding further FT, or I guess maybe ask another way, is your gas takeaway capacity at all limiting potential future oil growth? It doesn't appear to be, but just want to see how you're considering that.
  Response: Current takeaway capacity exceeds equity production; extensions available in 2029 provide optionality for future growth without immediate constraint.

• Question from Chris Baker (Evercore ISI): You guys, thanks. Just wanted to maybe step back for a second. Some, you know, some great progress in terms of the debt reduction we've seen year to date. Obviously, you know, with the $3 billion target and expecting to end the year at 3.3, you know, it does seem like we're coming up to a point where, you know, you'll be a target. I'm just curious, John, or on a benefit You want to take this one just around the added flexibility that hitting that target provides in terms of, you know, either incremental cash return to shareholders or, you know, if there's other things as you look at the landscape in terms of exploration and frontier opportunities that kind of rise to the top of your list. We'd love to get a sense just for how you're thinking about that.
  Response: Hitting $3 billion net debt target in 2027 provides flexibility for continued exploration, capital projects, and shareholder returns, with options to be determined later.

• Question from Chris Baker (Evercore ISI): Great, thanks. And then, you know, obviously a lot of progress as well in terms of capital efficiency in the Permian, getting down to the four and a half rigs, obviously is a big move from where you all started after the merger. I'm just curious, in terms of how you think about the biggest potential sources of further improvement there. I guess, where is the team's focus? We'd love to get a sense of where we could see continued progress on that front.
  Response: Focus is on fine-tuning well designs and operational efficiencies, leveraging scale and repetition to drive further cost reductions.

• Question from Bob Brackett (Bernstein Research): Good morning. I'd like to return to Uruguay Block 6. The Raya prospect was Cenozoic and was sitting out in sort of record water depth, but it had prograded well out there. You mentioned chasing deeper objectives closer to the reservoir, so that suggests Cretaceous, and that also suggests that you can drill in more palatable water depths. I guess, is that correct thinking? And can you talk about maybe the size of prospects and maybe the chance of success that you're targeting with that first well?
  Response: Target is Cretaceous-age reservoirs, similar to successful African conjugate margins. Prospects are large; drilling deeper (not necessarily deeper water) to test source rock and trap.

• Question from Leo Ariani (Roth): Yeah, hi, guys. So I just wanted – you mentioned this a couple times. I just wanted to clarify. I think you've said in the past that you're going to step up some of your capital commitments in the next couple years with more to do on the exploration side. You know, are you still going to be committed over the next handful of years to that 60% return of capital, even if we get into a little bit of a weaker oil environment, if you are having to kind of step up, you know, some of those capital equipments to some of these longer term projects?
  Response: Commitment to returning at least 60% of free cash flow to shareholders remains, with exploration capital increase seen as a step-up from a lighter 2026, not exceeding prior framework.

• Question from Leo Ariani (Roth): Okay. And just on the exploration side, like you said, it's going to step up in the next couple of years. Is there kind of like a ballpark target? Is that kind of moving to kind of, you know, 15% plus you think of capital in the next few years? Just trying to get a sense of how meaningful that can be.
  Response: Exploration spend expected to be in the $200-$250 million range for 2027, representing 10-15% of capital, with significant carry on certain projects.

Contradiction Point 1

Exploration Capital Allocation Commitment

Contradiction on whether the 60% capital return commitment is maintained if exploration spending increases.

Leo Ariani (Roth) - Leo Ariani (Roth)

2026Q2: Yes, the 60% return commitment is maintained. 2026 is a lighter year for expiration spend... so the increase in exploration spending is factored into the framework. - John Christman(CEO)

Will you maintain the 60% capital return commitment if exploration spending rises amid lower oil prices? - Leo Mariani (Roth)

2026Q2: Yes, APA is committed to returning at least 60% of free cash flow to shareholders annually. The exploration spend in 2026 is relatively light, but it will increase in 2027. The 60% return is a consistent policy... - Ben Rogers(CFO)

Contradiction Point 2

Capital Efficiency Savings Target

Contradiction on the amount of savings captured versus what remains to be achieved.

John Freeman (Raymond James) - John Freeman (Raymond James)

2026Q2: As of H1 2026, approximately $475M of savings has been captured (net of inflation). Run rate savings exiting 2026 are now expected to be $500M, up from $450M... - Ben Rogers(CFO)

How much of the raised $500M cost savings target has been achieved versus what remains by year-end? - Leo Mariani (Roth)

2026Q2: In the first half of 2026, approximately $475 million in savings were captured, offset by inflation, resulting in a net $425 million. - Ben Rogers(CFO)

Contradiction Point 3

Exploration Spending as a Percentage of Capital

Inconsistent guidance on future exploration spend relative to total capital.

Leo Ariani (Roth) - Leo Ariani (Roth)

2026Q2: Exploration spending will increase to ~10-15% of capital. - Ben Rogers(CFO)

What is the expected growth rate of exploration capital as a percentage of total capital over the coming years? - Chris Baker (Evercore ISI)

2026Q1: Reaching the $3 billion net debt target provides flexibility... to continue investing in exploration (which will increase in 2027). - Ben Rodgers(CFO)

Contradiction Point 4

Capital Allocation Priorities

Contradiction on the primary use of significant free cash flow in the current environment.

What are your thoughts on the company's recent earnings performance? - John Freeman (Raymond James)

2026Q2: The company reaffirmed its commitment to returning at least 60% of free cash flow to shareholders annually. With strong balance sheet progress... significant share buybacks will occur in the second half of 2026. - Ben Rogers(CFO)

What are the current allocation priorities for free cash flow, specifically regarding buybacks and the minimum 60% return to shareholders? - John Freeman (Raymond James)

2026Q1: The company is committed to its capital returns framework but will be thoughtful in deploying the significant free cash flow in the current volatile environment. The mix between debt paydown, dividends, and buybacks is being evaluated. - John Christmann(CEO) & Ben Rodgers(CFO)

Contradiction Point 5

Exploration Capital Allocation and 2027 Budget

Different figures for 2027 exploration spend and its categorization.

Leo Ariani (Roth) - Leo Ariani (Roth)

2026Q2: Exploration spending will increase to ~10-15% of capital. For 2027, ... Total exploration spend for 2027 will be in the "two-handle" (~$200M-$250M). - Ben Rogers(CFO)

What is the expected increase in exploration capital as a percentage of total capital in the coming years? - Neal Dingmann (William Blair)

2025Q4: The $230 million is exclusively for the GranMorgu development project. Exploration spending is separate ($70 million total in 2026). - John Christmann(CEO), Stephen Riney(President)