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Anadarko Expects to Book 200 MMboe in Reserves

Anadarko Petroleum Corp. CEO Jim Hackett said Tuesday the company's reshaped portfolio will show its worth this year, and even with no new exploration success, the company still will book more than 200 MMboe in reserves. The company expects to add 100 MMboe from the Rockies, more than 50 MMboe from other U.S. onshore and Gulf of Mexico (GOM) properties, and 50 MMboe from the Peregrino play in Brazil.

Hackett, who presided over a conference call to discuss quarterly and year-end earnings, said he was "very optimistic" about the company's future. However, he asked shareholders "for patience," because the restructured portfolio will affect "several of our future quarters following the outgrowth of our transactions in the last year. We are eager to prove we can execute."

In anticipation of development, Anadarko upped its budget for exploration and production in 2007 to $2.5 billion, which includes $650 million for exploration. Capital expenditures in 2006 totaled $1.8 billion.

"We have a pipeline of reserves ready to bring on from a portfolio of longer-lived, less-capital-intensive resource plays in the Rockies, in addition to existing discoveries in the GOM and Brazil," Hackett said. Anadarko, he said, expects to have reserve growth of 5-9% "on the upside from our exploration success in the deepwater GOM and the Rockies, we have a strong array of exploration in the United States and internationally that will provide predictable growth in the years to come."

Anadarko began reshaping its portfolio when it purchased Kerr-McGee Corp. and Western Gas Resources in separate transactions last year. To rebuild the bottom line, the company sold several fields in Louisiana, Wyoming and Texas, as well as its Canadian subsidiary. So far this year, Anadarko also has sold properties in Oklahoma and Texas, and assets in Venezuela and elsewhere remain for sale.

Excluding the sale of reserves in place, Anadarko ended 2006 with the addition of 1.04 billion boe in reserves. The company added 248 MMboe from its organic drilling, however, most of those additions were offset by 235 MMboe of downward revisions from lower prices at year-end and performance issues, including problems at its K2 project in the deepwater. Including downward revisions, Anadarko replaced only about 7% of the 178 MMboe its ongoing operations produced last year.

Hackett admitted year-end 2006 reserves were "lower than anticipated" because the company did not "predict the downward spike in commodity prices." Downward reserve revisions included 99 MMboe, which resulted from lower prices at year-end and 136 MMboe from "performance issues," most notably the K2 complex in the deepwater GOM.

"Our 2006 organic reserve replacement rate was impacted by downward reserve revisions and is not indicative of the success of our exploration program," said Hackett. "For example, the sale of the Genghis Khan, Knotty Head and Big Foot deepwater discoveries generated substantial value, selling for $2.3 billion from an initial investment of approximately $300 million, prior to fully booking these discoveries."

The reserve revisions at year-end "made good organic replacement appear unacceptable," said Hackett. Still, "we strongly believe our line of sight is much better with our portfolio. The Rockies will return 1 billion of reserve additions. Other U.S. onshore plays...also are continuing to contribute. And we have growing excitement around the nine GOM discoveries we are getting ready for development."

Net of property sales, the company ended 2006 with a total of 3.0 billion boe, up 23% from year-end 2005. Organic reserve additions of 248 MMboe were primarily from core U.S. onshore properties, including the Uinta Basin's Greater Natural Buttes play and the Wattenberg fields in Colorado, along with coalbed methane and enhanced oil recovery projects in the Rockies. Reserves also showed gains in Anadarko's Haley, Bossier and Carthage fields in Texas.

Year-end proved reserves were balanced between natural gas (58%, or 10.5 Tcf) and liquids (42%, or 1.3 billion bbl), which include crude oil, condensate and natural gas liquids.

Gas sales volumes from continuing operations averaged 2.23 Bcf/d, up from 1.14 Bcf/d in 4Q2005. The increase was attributed to a full quarter of production related to acquisitions and record production from its Rockies assets in the Greater Natural Buttes and Powder River Basin, along with the Haley field in West Texas.

COO Karl Kurz said management is "very comfortable" with the 200 MMboe forecast for its reserve additions in 2007. Independent auditor Netherland Sewell is now a "permanent member" of the company's internal review team, in 2006, more than 70% of Anadarko's reserves were audited, up from 29% in 2005. "It covered all of our key fields," which he said gives the company a "reasonable, confident" belief that the assets it owns will build reserves.

"In 2007, you will see a sharper focus on execution and progress in restoring our balance sheet," Kurz said. "Operationally in the second half of the year we anticipate the start up of the [deepwater GOM] Independence Hub, which will add substantial volumes to U.S. gas production." Anadarko has earmarked about 20% of its total capital expenditure budget for the GOM; Kurz said typically, half of the total GOM budget goes for rigs and well work.

Besides development of other offshore plays, Kurz said that onshore, Anadarko continues to expect a successful outcome from its tight gas access plays. In everything, though, he said the bottom line is key.

"We are working diligently to improve our cost structures," said Kurz. The 1Q2007 volumes are expected to be "slightly" down because of well work completions. And through 2007, operating costs "will continue to be higher." The higher costs were attributed to lease costs, as well as the company's decision to change its accounting to a unit-of-production method versus the cash method.

Last week, EOG Resources Inc. and Apache Corp. both warned that high service costs, combined with lower gas prices, could force them to curtail some North American development. Anadarko, however, is "seeing some moderation" for onshore rig rates and services, said Kurz. "The larger inflationary pressures are being abated right now." He was hesitant about detailing whether, or at what level, lower prices would cause the company to consider cutting its budget.

"We would have to see a material change in the long-term price deck," he said. "We have very good protection on downward side for prices, and operationally, prices would weigh into the equation, but we don't actively model our capital expenditures."

In 4Q2006, net income reached $1.92 billion ($4.13/share), from $875 million ($1.87) for the same period of 2005. Income from continuing operations was $186 million (40 cents/share), including charges and a gain of $1.77 billion ($3.80) from the sale of Anadarko Canada. Revenue jumped to $3.18 billion from $1.92 billion.

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