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Kerr-McGee, Western Star in Anadarko's Banner 3Q

The former Kerr-McGee Corp. and Western Gas Resources Inc. made their debut in Anadarko Petroleum Corp.'s quarterly results to stunning effect late Monday. The Houston-based producer reported 3Q net income of $1.46 billion ($3.15/share), up from $596 million ($1.25/share) in the year-ago period.

Revenue more than doubled from a year ago to $3.5 billion from $1.53 billion. Excluding Kerr-McGee and Western, earnings from continuing operations were $1.38 billion ($2.98/share), including $873 million ($1.23/share) in unrealized hedging gains. In the 2005 third quarter income from continuing operations was $532 million ($1.12/share), including $99 million (13 cents/share) of unrealized hedging losses.

Analysts had expected the company to report earnings of $1.35/share on revenue of $2.28 billion.

During a conference call with analysts Tuesday morning, executives were largely reticent about future divestiture plans as well as expectations for a midstream master limited partnership (MLP). Success of the company's divestiture efforts to date and expected asset sales through the third quarter of next year continue to shrink the size of an eventual equity offering from the $7.5 billion originally expected.

In the third quarter Anadarko produced 1.69 Bcf/d of gas in the United States, up from about 1.1 Bcf/d in the year-ago period. Domestic prices, excluding hedging, were down to $6.03/Mcf for gas from $7.58/Mcf in the year-ago period. Price performance with hedging was much better: $9.93/Mcf, up from $6.94/Mcf a year ago.

Third quarter sales volumes of natural gas, crude oil and natural gas liquids totaled 54 million boe, or 585,000 boe/d. Sales volumes from continuing operations totaled 49 million boe, or 530,000 boe/d, as natural gas sales averaged 1.69 Bcf/d, oil sales averaged 203,000 b/d, and natural gas liquids sales averaged 45,000 b/d.

Results include Kerr-McGee and Western beginning on their respective Aug. 10 and Aug. 23, acquisition dates (see Daily GPI, Aug. 24; June 26), while continuing operations results exclude Anadarko's divested Canadian subsidiary, Anadarko Canada Corp. (see Daily GPI, Nov. 3; Sept. 15; June 29).

Operating cash flow from continuing operations was $1.57 billion in the third quarter 2006, and discretionary cash flow totaled $1.11 billion.

CEO Jim Hackett said the company's capital budget is essentially unchanged other than adding in the Kerr-McGee and Western pro-forma capital. During the third quarter the capital program totaled $1.4 billion, excluding acquisitions. Year-to-date capital expenditures totaled $3.4 billion, of which $771 million (24%) was on exploration. With the addition of Kerr-McGee and Western, Anadarko expects to spend between $1.5 billion and $1.7 billion by the end of the year.

"The third quarter was very significant for Anadarko as we completed two major acquisitions and began repositioning our company for the future, including the divestiture of our Canadian subsidiary and certain deepwater properties, which will help us de-lever the balance sheet," said Hackett. "Financial and operating results continued to be strong, assisted by partial-quarter contributions from Kerr-McGee and Western Gas. In addition, we are already beginning to achieve operating synergies within our expanded core Gulf of Mexico deepwater and Rockies unconventional resource plays, providing further conviction that the combined portfolio can deliver competitive growth and returns."

Tuesday, analysts quizzed Hackett and other executives about the company's asset divestiture plans. Little was revealed, though, as the company is determined to not tip its hand. However, the company is "far from being done with some of the things we want to do in the Gulf of Mexico." Look for more Gulf assets to go, but only if the price is right. Longer term, Anadarko plans on being a very large player in the Rocky Mountain region, as well as the Gulf, and then selected international areas. Monday, Anadarko announced the sale of two Gulf of Mexico discoveries and one prospect to Norway's Statoil (see Daily GPI, Nov. 7).

Executives said more with regard to asset sales could be revealed in advance of the company's Dec. 12 meeting with investors. Some time after that more could be revealed about Anadarko's plans for an MLP. The new asset footprint is expected to be less capital intensive with fewer legacy Anadarko assets in the portfolio. Executives are promising production and reserve growth with better returns on capital.

The eventual sale of Anadarko's ill-fated Bear Head liquefied natural gas (LNG) terminal at Cape Breton Island near Point Tupper, NS, is still a possibility following the failure of a deal to sell the unfinished terminal to U.S. Venture Energy for $125 million (see Daily GPI, Sept. 29).

"We're continuing to discuss things with them although we do not have a deal with them at this point," said Robert Daniels, senior vice president, worldwide exploration. "We also have another party that we're in discussions with to continue to move that project forward. And we're also in the process of slowing the overall project down or potentially going to a mothball situation. We do think that we want to take these to fruition and see whether there's not a good solution to keep the project moving, bring in a partner that has a business model that fits it and gets our needs met, which would be very similar to what we had with the U.S. Venture energy deal that we announced in the summertime."

Davis said Anadarko has minimized its spending on the project and has discussed its situation with project contractors and the Nova Scotia government. "We are going down the path of very much slowing down the project."

Onshore in the United States, Anadarko, like others, is hoping for still bigger and better things to come from the coalbed methane-rich Powder River Basin. Karl Kurz, senior vice president, North America operations, midstream and marketing, said that the County Line area of the Big George play is "exceeding expectations." The company said the Powder River continues to set coalbed methane production records. During the quarter the area reached a new milestone of 480 MMcf/d.

Hackett noted that Anadarko is hedged so that about 90% of its Rockies production is protected against location basis blowouts.

In the Pinedale/Jonah field, production set an all-time record of 709 MMcf/d gross (56 MMcf/d net). Anadarko said its 9% nonoperated working interest offers exposure to incremental resource potential of 1.5 Tcf net. Recent 10-acre spacing approval by the Wyoming Oil and Gas Commission in July increased drilling density and is expected to add about 3,000 drilling locations.

Offshore, the Independence Project, a hub operated by Anadarko in the ultra-deepwater Gulf of Mexico (GOM), was only a vision three years ago. Now it is eight months away from piping up to 1 Bcf/d of natural gas to U.S. markets (see Daily GPI, Oct. 23). Anadarko has a 61% interest in throughput capacity at the hub and said that first volumes are still expected in the second half of next year. During the third quarter, installation of the 24-inch Independence Trail gas export pipeline was completed for its entire 134-mile route.

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