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Anadarko Sees More Potential in NGLs Until Prices Strengthen

Anadarko Petroleum Corp. is "cautiously optimistic" about natural gas prices, but drilling activity will be managed by following cash prices and reacting to what's happening in the "real market" before spending more than cash flow, CEO Jim Hackett said last week.

"We want to balance the capital program with the cash flow and achieve our objectives for growth without necessarily having to boost up the natural gas production in a significant way," Hackett told energy analysts during a conference call to discuss quarterly earnings.

Anadarko already is putting more money in areas "that offer higher liquids yield and better margins and value realization," Hackett said. "As a result, our production mix better capitalizes on the value disparity between oil and natural gas. On this point, crude and NGLs [natural gas liquids] comprised more than 42% of our volumes in the third quarter, compared to only 37% in the second quarter."

EOG Resources Inc. also is moving toward more NGL production, CEO Mark Papa said Friday (see related story).

More liquids-rich production is expected from Anadarko's holdings in the Greater Natural Buttes play in Utah, and in Wattenburg, CO, where the production stream is about 40% liquids. Also encouraging are early drilling results in the Eagle Ford Shale in South Texas and the Deep Haley area of the Delaware Basin in West Texas.

"Our most recent well delivered initial daily production of nearly 3 MMcf of natural gas along with about 1,100-plus barrels of condensate," said Hackett. "We will continue to evaluate our acreage and activity in both of these areas in the coming periods."

Shale plays are becoming a growing part of Anadarko's portfolio, but for now production will be "liquids-oriented, and that's the same case for next year if we find that gas prices aren't cooperating," Hackett said. If gas prices cooperate, "we can turn the dial on it very significantly and quickly."

Anadarko has exploration under way in several of the big shale plays, and "whether it's the Marcellus, Haynesville or the Eagle Ford, you're seeing there the beginnings of what we're trying to look down the road and understand where we want to position ourselves onshore," the CEO told analysts. "We are still fairly cautious as it relates to natural gas price discovery dynamics. We do see a little bit more encouragement with the wellhead economics for natural gas going up rather than down...

"In the Marcellus, we see probably in our estimation the best wellhead economics of any place where we can spend money, and we do like the commercial nature," Hackett explained. "In that particular shale play, we believe it can be an additive to our portfolio, as well as for the industry."

Driven by better-than-expected production in the Rocky Mountains and the Gulf of Mexico (GOM), Anadarko set a record for output in 3Q2009, bumping up natural gas and oil sales volumes from its retained properties by 12% from a year ago. At the same time, lease operating expenses fell and the company's capital spending was down 15% in the first nine months.

Natural gas, crude oil and NGL sales volumes rose to 57 million boe, or 616,000 boe/d, compared with 51 million boe in 3Q2008. Anadarko in 3Q2009 produced on average 2.144 Bcf/d of gas, 205,000 b/d of oil and 54,000 b/d of NGLs. GOM volumes rose 8% sequentially from 2Q2009 following the completion of repairs to third-party infrastructure damaged by Hurricane Ike.

"As a result of both improved operating performance and the absence of severe weather in the Gulf of Mexico, we expect our full-year sales volumes to be approximately 220 million boe, up from our original midpoint of 210 million boe at the beginning of the year, without increasing capital spending," said Hackett. "This equates to a forecasted growth rate of approximately 7% over our 2008 total sales volumes of 206 million boe, while spending approximately 35% less capital on near-term projects."

Cost-control efforts paid off for Anadarko, with 3Q2009 capital spending ($849 million) well below guidance of $1-1.15 billion. The reason: an increased focus on "enhancing production from its base," said the independent.

Anadarko also found success in some of its exploration projects both domestically and abroad. Among other things the producer successfully drilled a development well near the Tonga West discovery as part of the Caesar/Tonga complex in the Green Canyon area of the GOM. The well encountered more than 500 net feet of oil pay and will be tied back to the company's Constitution spar. The partnership is drilling the third of four subsea wells in the development, which is expected to deliver 40,000 boe/d gross; it remains on schedule for first production in early 2011.

A significant domestic production milestone also was celebrated in the quarter when the deepwater Independence Hub natural gas facility, which Anadarko operates, surpassed 500 Bcf.

Anadarko's net income from continuing operations in 3Q2009 totaled $200 million (40 cents/share) excluding one-time gains. For the period Anadarko posted a net loss of $51 million (minus 11 cents); Wall Street had pegged losses to be about 33 cents/share. In 3Q2008 Anadarko reported net income of $2.16 billion ($4.62/share). Cash flow in 3Q2009 totaled slightly more than $1 billion, and discretionary cash flow was about $1.26 billion.

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