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Anadarko Raises Capital Budget; Analyst Speculates Merger, 'Icahn' Move 'Viable'

Spurred by the success of a refocused strategy unveiled last year, Anadarko Petroleum Corp. last week added $300 million to its 2005 capital budget to build U.S. operations in three major areas: onshore acquisitions and drilling; coalbed methane (CBM) operations in Wyoming; and additional deepwater Gulf of Mexico exploration.

The Houston-based explorer, which unveiled its stepped up U.S. plans during an analyst and investor conference, said it now expects to spend $3.1-3.3 billion for capital operations in 2005. Among other things, Anadarko said it remains on track to deliver 5-9% in annual volume growth through 2009, aided by a portfolio that includes an additional net risked resource potential of 2.1 billion boe.

CEO Jim Hackett said the net risked resource potential is in addition to Anadarko's year-end 2004 proved reserves of 2.4 billion boe. "About half of these potential new resources are related to properties we are already developing," he said. "The remainder are attributable to exploration prospects in our portfolio, including a substantial number of unconventional resource play opportunities onshore North America."

In the past 12 months, Anadarko has undergone an internal restructuring that involved selling $3.5 billion (pretax) of nonstrategic assets, while it retired $1.4 billion in debt and repurchased $1.5 billion of common stock.

"Last June we set an aggressive game plan, and today we're continuing to deliver on that plan," Hackett said. "Our success over the past year demonstrates our ability to deliver on our growth projections through 2009."

Besides the projected annual production growth, Hackett said Anadarko expects to reach 4-6% annual reserve growth and 6-10% annual cash flow growth.

"We're also positioning ourselves for growth beyond 2009 by capturing and advancing new projects in the deepwater Gulf of Mexico, Indonesia, Qatar, the Georgia Black Sea and North and West Africa as well as our liquefied natural gas project in Canada," he said.

Following the analyst conference, Deutsche Bank Securities managing director Robert Rubin wrote that even though Anadarko's "credit metrics remain sound, we believe a lagging stock price will entice Anadarko to continue to look to extract shareholder value."

Because Anadarko's share price has lagged its peers, Rubin wrote, "we believe there is little incentive for Anadarko to further improve the company's credit metrics. Instead, we believe there is a greater likelihood that either the company or external investors will look to extract shareholder value via a number of possible scenarios, including a takeover, an 'Icahn' like investment or some form of merger or acquisition activity. We are not going to speculate on any one outcome as we believe that any scenario mentioned above represents a viable option."

Rubin was referring to financier Carl Icahn's recent proxy fight with Kerr-McGee Corp., in which he and his group purchased about 9% of the producer's shares, which forced Kerr-McGee to buy back $4 billion worth of stock and sell off some U.S. onshore, Gulf of Mexico and North Sea assets (see NGI, April 18). The move by Icahn also pushed Kerr-McGee's share price up substantially.

In the interim, Rubin wrote, Anadarko "will look to share repurchases and growth through the drillbit to drive the stock performance. Considering the company has only $500 million left under the announced $2.0 billion share repurchase program we believe that the company will discuss additional share repurchases in 2005 or early 2006."

Deutsche Bank revised its trading recommendation to "hold" from "sell." Rubin wrote, "With the potential for shareholder friendly initiatives to play themselves out in the near term and the fact that spreads are currently full, we believe that the downside outweighs any near term upside in spreads."

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