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Anadarko Pulling Back in U.S. Onshore, With Capex Reduced by Half

Anadarko Petroleum Corp. is reducing its capital spending plans by almost half this year, but volumes still could be up to 4% higher, led in the United States by conventional production in the deepwater Gulf of Mexico and continued strength from the Wattenberg field in Colorado and Permian Basin, despite lower planned activity.

The super independent, headquartered north of Houston in The Woodlands, recorded a $1.25 billion loss (minus $2.45/share) in 4Q2015 and a full-year loss of $6.69 billion (minus $13.18), underscored by the commodity price drain. The latest quarter included a $954 million writedown. In the year-ago period, losses totaled $395 million (minus 78 cents/share), which included writing down $582 million. Revenue in 4Q2015 fell year/year to $2.05 billion from $3.18 billion, while cash flow from operating activities plunged to $257 million from $1.95 billion.

CEO Al Walker and his management team discussed the results during a conference call Tuesday, highlighting that they'd expected the downturn to last longer than many had thought.

"As discussed last year at this time, we did not expect oil prices to recover in 2015 and believed it could take well into 2016 before markets would stabilize on a sustained basis, costs would become more aligned with the new operating environment and investments in short-cycle assets would be more attractive," Walker said. "Therefore, value enhancement drove our capital allocation philosophy."

Capital expenditure (capex) has been set 50% lower than a year ago and 70% under 2014 spend, with nearly all of the cuts from "short-cycle opportunities," i.e., unconventional plays in the onshore. Anadarko spends most of its capex in the long-term, high-cost deepwater projects and in overseas endeavors that include a massive liquefied natural gas export facility planned in Mozambique. With "greater market dislocation" likely this year, Anadarko plans to keep spending in check where it can, Walker said. "It's our best course of action," he told analysts.

Even with "two of the best assets" in the U.S. onshore, the Wattenberg and in the Permian's Delaware sub-basin, returns in the current price environment aren't compelling enough to increase activity. Activity is being reduced in each play, "to preserve the shorter cycle opportunities for a better day."

Even with a slowdown in activity, total sales volumes are expected to only decline by 2-4%, with lower margin natural gas volumes accounting for all of the decline. Oil production is forecast to remain relatively flat from 2015, kept in check by ramping up production in January from the Heidelberg spar in the GOM and "continued outperformance" from Lucius, its twin spar (see Daily GPI,Jan. 21).

Oil and gas producers aren't in the "revenue business," Walker said. "We are in the margin business, so in this price environment, we have a dislocation between what it costs to either operate or drill wells versus the commodities that are being provided by the market. That dislocation, we believe, is going to continue. We don't find the margins we are seeing today to be attractive."

In the current environment, more contraction is likely.

"We have concerns of events well beyond our control, and consequently until we see events stabilize and we see oil prices in particular take on a new supply/demand dynamic than is currently in the market...we will continue to be a cautious investor in this environment." What Anadarko management foresaw a year ago remains true. "A year ago we were very concerned" the price recovery would take much longer than some pundits had expected. "Typically, when you go into a downcycle you come out of a downcycle with a pretty good price increase. We are a little concerned at this time" that volatility in the coming years is going to be stronger than it has been for 30 years.

Anadarko last year organically replaced more than 130% of its production with reserves additions at a cost of about $14/boe. The percentage of proved developed reserves increased 80% versus 69% in 2014. Proved reserves at year-end 2015 totaled 2.06 billion boe, 52% weighted to liquids and 48% to gas.

Average U.S. sales volumes during 4Q2015 fell to 598,000 boe/d from year-ago volumes of 613,000 boe/d. Domestic gas volumes declined to 1.958 Bcf/d from 2.088 Bcf/d, while oil/condensate output was 166,000 b/d from 152,000 b/d. Natural gas liquids (NGL) in the onshore fell to 106,000 b/d from 113,000 b/d. In the GOM, gas volumes declined to 115 MMcf/d from 179 MMcf/d, while oil/condensate increased to 52,000 b/d from 47,000 b/d and NGL volumes were flat at 6,000 b/d.

In the Wattenberg field, Anadarko year/year was able to reduce drilling costs/foot by 50% and completion costs by one-third, while increasing oil volumes by almost 30%. The operator also continued to delineate its 600,000 acre (gross) position in the Delaware, with estimated ultimate recoveries already approaching 1 million boe/well in the Wolfcamp Shale.

Anadarko ended last year with $939 million of cash on hand. In December, it extended the maturity of its $3 billion unsecured revolving credit facility to January 2021. Last month it also renewed its $2 billion 364-day credit facility to a new maturity in 2017.

As for hedging its oil and gas volumes, Walker asked why any company would do it in a $30/bbl oil price environment.

"I don't think any company has a motivation to hedge until it's probably a negative cost of replacement. I'm not sure we or anybody else would find ourselves motivated to lock in prices that are lower than the margin of costs and margin of development...If we are finding ourselves with an attractive wellhead margin that we want to be able to lock in for a short to intermediate point of time, that would be something we would find worth spending time on. Typically in the past, we tried to approach every period with taking about half of the hydrocarbon price off the table natural gas or oil. That philosophical view hasn't changed, but it really comes back to seeing something in the market that gives us that wellhead margin that's attractive to be able to use the derivatives to help us protect the price elements."

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