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Anadarko, XTO Join Crowd, Cut Costs to Cope

Some of the biggest natural gas producers in North America are doing what needs to be done to cope with low commodity prices and tight credit markets. Anadarko Petroleum Corp. has dropped around 30% of its U.S. onshore rigs since the end of 2008, the company said last week. And XTO Energy Inc. is slicing $1 billion from its capital expenditures (capex) for 2009.

Faced with sustained lower natural gas and oil prices, Anadarko's Houston-based management team is working with its service companies to reduce fees, CEO Jim Hackett said. "Material reductions" should be evident in the next two to three months, he told financial analysts last week during a conference call to discuss quarterly results.

Hackett was joined in the call by other managers, including COO Karl Kurz, who explained that service costs were not in sync with the fall in commodity prices, so the company took matters into its own hands. "We are living in a 2008 service cost world with 2004 commodity prices," Kurz said.

Anadarko executives were hesitant about providing specific capex plans for 2009; the company has scheduled another conference call for Wednesday (Feb. 11) to detail its guidance for the year. However, there were enough indications that spending will be down.

Previously Anadarko had estimated that this year's capex would match 2008 levels, Hackett reminded analysts. "We have obviously dialed that down meaningfully," he said.

According to Anadarko's 4Q2008 operations report, which was posted on its website, the company had 58 rigs running in the U.S. onshore in the last three months of 2008 -- one less rig than in 3Q2008. Hackett said Tuesday Anadarko now has "about 40" rigs in operation in the U.S. onshore.

"We've dropped pretty significantly from the fourth quarter," said Hackett. "There are several reasons. In particular, some of the rigs only work during the winter months..."

Besides laying down rigs, Anadarko also has delayed completion of some of its wells as it waits for service costs to come down, said Hackett. Asked in what regions the delays were taking place, he answered, "We're looking at it across the board."

There is a lot of good news, however. Even with fewer rigs in operation, Anadarko's onshore U.S. gas projects still will achieve a 10% return on prices $5/MMBtu, Hackett said. Around 20% of Anadarko's 2009 capex is to be dedicated to "major projects;" 20% will be spent on exploration. Included in its development package is a new deepwater discovery on the Heidelberg prospect in Green Canyon Block 859, which was announced last week (see related story).

Anadarko's U.S. natural gas volumes in the last three months of 2008 totaled 202 Bcf, compared with 185 Bcf for the same period of 2007. On average the company produced 2.2 Bcf/d in 4Q2008, versus 2.01 Bcf/d in 4Q2007. The producer added 290 MMboe of proved reserves in the final period, before the effects of price revisions. It also spent around $4.78 billion on capex in the last quarter.

One-time hedging gains lifted Anadarko's net profit in 4Q2008 to $824 million ($1.79/share), compared with $264 million (56 cents) in 4Q2007. Minus the one-time gains, Anadarko's net profit was well below the same period a year ago, reaching $69 million (15 cents/share) versus $264 million (56 cents).

Meanwhile, XTO announced huge cuts to its spending plans for 2009, but even with less spending and fewer rigs running, the independent's gas-weighted production volumes are predicted to jump 14% over 2008 levels. XTO now plans to spend $2.75 billion in 2009, which is down from an earlier budget that provided $3.3 billion for exploration and $500 million for pipeline infrastructure, compression and processing facilities.

"Given the continuing weakness in commodity prices, XTO is taking the opportunity to further reduce the drilling activity and reset our volume growth target to 14%," said Chairman Bob R. Simpson. "Increasing production too rapidly into the currently oversupplied natural gas markets is not a prudent use of our shareholders' resources. Instead, we look to capitalize on our extraordinary hedge position, which represents 80% of our expected sales volumes, to further fortify the company's financial strength."

CEO Keith A. Hutton said XTO "is always positioned to be a growth leader, but it is not the time to push aggressively on growth. Now is the time to maximize cash flow and economic returns...As drilling activity across the industry collapses, we will concentrate on managing falling costs to maximize returns and unit margins."

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