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Apache's new midstream company to exercise options on Permian pipe by year-end

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Apache's new midstream company to exercise options on Permian pipe by year-end

Apache Corp. executives said a new publicly traded midstream company that Apache is creating with an investment firm will start exercising options on pipelines by the end of 2019.

Apache, shunning the master limited partnership model, announced a decision in August to move its West Texas midstream assets into a joint venture with Kayne Anderson Acquisition Corp. The deal, forming Altus Midstream LP, is expected to close Nov. 9 with a market capitalization of around $3.5 billion.

"We've got a lot to say grace over ... in terms of the work we've got in front of us," said Brian Freed, the Apache senior vice president of midstream and marketing who is set to become Altus' CEO. Freed spoke during the company's third-quarter earnings call Nov. 1.

With a majority ownership stake in Altus, Apache will control the gathering, processing and transportation infrastructure in the Alpine High, touted by the driller as a major oil and gas find that it will drill for decades.

Altus has options for equity stakes in five gas, NGL and crude oil pipeline projects from the Permian Basin to the Gulf Coast. West Texas oil producers have grappled with a shortage of takeaway capacity from the Permian. The company expects to bring three cryogenic gas processing plants online in 2019 to support Alpine High production.

"We do expect to start exercising these options by the end of the year, and then we have a lot of gathering and processing to continue to build out through the rest of this year and into 2019 as well," Freed said.

Apache, which has faced concerns about the slowly emerging Alpine High, pursued the joint venture as a way to capture the value of investments in midstream infrastructure there and to free up cash flow by eliminating future capital spending. The company said it seeks to grow production and reserves while returning cash to shareholders.

"After significant upfront investment at Alpine High and the pending completion of our Altus Midstream transaction, Apache has turned the corner and is well-positioned to deliver on this philosophy for many years to come," President and CEO John Christmann said.

Apache on Oct. 31 reported $244 million, or 63 cents per share, in adjusted net income for the third quarter, compared to $14 million, or 4 cents per share, a year earlier. The S&P Global Market Intelligence consensus normalized earnings estimate for the third quarter was 47 cents per share. The company attributed the increase in third-quarter earnings to production in the Permian Basin.

Apache said production came to 476,255 barrels of oil equivalent per day in the third quarter, compared to 448,235 boe/d a year earlier.

Apache operated 18 rigs in the Permian Basin during the third quarter. Eight of those were in the Alpine High, where production averaged 49,000 boe/d, up 52% from the second quarter. Analysts at Stifel Nicolaus & Co. told clients in a note before the call that they negatively viewed the wells highlighted by the company from the third quarter, describing the 30-day oil rates of 17% or less as "heavily gas-weighted."

Shares of Apache traded just above $36 in afternoon trading Nov. 1, down about 4% on the day.

For 2019, Apache said it expects capital expenditures of $3 billion and production at the high end of the 410,000 to 440,000 guidance range, in line with consensus estimates.

"On the cost side, Apache is successfully navigating a challenging inflationary environment in the U.S.," said Timothy Sullivan, executive vice president of operations support. He pointed to "steel tariffs, rising fuel and chemical prices and higher labor costs, particularly trucking and construction," that the company is managing in part by seeking greater well efficiencies. Executives said the company is also seeing reduced costs for drilling rigs and fracking crews.

"We believe these cost trends will roughly offset each other in 2019, and we plan to budget for a relatively flat or slightly down year-over-year service cost overall," Sullivan said.