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Colorado Rains on Anadarko, But Wattenberg Still Doubles Output

Anadarko Petroleum Corp.'s infrastructure buildout in Colorado's Wattenberg field was slowed by recent flooding, and about 250 wells remain shut-in, but the field's output in the third quarter still more than doubled from a year ago, with U.S. onshore volumes breaking records.

Liquids output jumped 16% from a year ago.

CEO Al Walker discussed the quarterly results with analysts, pointing to record volumes in the U.S. onshore over the past three years that were "self-funded." Onshore output reached 590,000 boe/d in the latest period, achieved in part by redirecting capital to areas that enabled the operator to double oil volumes to about 100,000 b/d from 50,000 b/d a year earlier.

"During the same time period we achieved industry-leading drilling and completion metrics while lowering our pre-unit operating calls by 13% to just above $3.00/boe this year," he said.

The super independent's prowess extends into the Gulf of Mexico's ultra-deepwater and overseas, but the talk on Tuesday centered on the onshore, particularly the high-profile Wattenberg, an area of the Permian Basin and the Marcellus Shale. The Wattenberg continues to be the success story for The Woodlands, TX-based producer. However, 250 wells in northeastern Colorado remain shuttered following heavy flooding in September. Anadarko has more than 5,800 wells in that area.

"The flood set us back a couple of months and we are still feeling the impact," said U.S. onshore chief Chuck Meloy. "But this will pass."

Horizontal drilling in the Colorado play between July and September more than doubled year/year to 56,500 boe/d from 26,700 boe/d. However, in addition to the flooding problems, there was a downside from the rapid production build-up, which "resulted in high line pressures limiting our near-term ability to reach the overall productive capacity of the field," Walker said.

In addition, "the impacts from the unprecedented floods that occurred in September had temporarily compounded the issue, forcing us to shut in vertical wells and delaying our ability to move heavy equipment necessary to complete the planned infrastructure expansions."

However, the stall in Colorado won't last for long. Thirteen rigs are slated for action in 2014. More benefits are expected on the startup of the Lancaster gas midstream plant and the Front Range pipeline.

The Permian's Delaware Basin, and specifically, the Wolfcamp formation, also is proving to be a worthy prospect. To date, six wells have been evaluated more than 15 miles apart. Each has had gross processed initial production rates of 1,000-1,600 boe/d, with a 70% oil cut. The formation is more than 1,500 feet deep, cutting across most of Anadarko's 600,000 gross acres, which gives it multiple benches to test.

Just one year ago, Anadarko had zero rigs running in the Wolfcamp, Walker reminded analysts. Today, six rigs are actively testing the horizontal and vertical extent of the leasehold. And the Wolfcamp's growth has created a "third leg of our liquids and oil capabilities onshore in the U.S.," he said.

All is going well in the Texas play, but it remains in the delineation exploration mode, said Meloy. "Effectively, we've drilled four sections out of that 600,000 position. So we're still delineating. We really haven't gone into manufacturing mode. And while we're delineating, what we're essentially doing is drilling laterals that are about 5,000 feet, putting around 15 [hydraulic fracturing] stages on each of them, and that'll give us an idea of the prospectively of the area...

"So far we've had very good success...As we get a little deeper into this and others have drilled in and around our acreage position, we're getting more and more excited about this opportunity."

Four "opportunities" are in the Delaware Basin, said Meloy. "The nomenclature is a little different from the Midland Basin," also part of the Permian. "We've worked primarily on the second bench, which they call the 'A' in the Midland Basin. And that's been particularly good to us. And now we're trying the lower fourth bench in one of the wells, and the early returns on that look really good as well."

The Marcellus, where Anadarko operates 300,000-plus gassy acres, has grown tremendously, with output now more than 2 Bcf in the joint venture area with an affiliate of Mitsui & Co. Ltd. (see Shale Daily,Feb. 17, 2010). Gas volumes are growing, but Anadarko has been slowly reducing the rig count to accommodate the oversupplied gas market, Meloy said.

"We've gone from around nine rigs back a couple of years ago to three currently, and we're probably headed down as we go into 2014 until the gas supply situation balances up there. What we're drilling, we're still getting in the order of 30% rate of returns, and those are good economics. But we actually have better economics when you look at some of the oil plays that we're in. And so as the opportunity presents itself, we're typically moving capital out of the Marcellus and into the oilier plays."

Anadarko is an opportunity-rich company, said Walker.

"At some point the Marcellus will be a place we come back to as markets, as they typically do over time, rebalance and you have some equilibrium. So while I think industry generally likes what we've seen happen in the Marcellus, today the rates of return that we can achieve do not allow us to spend a lot of capital there versus other places.

"In fact, given our marketing efforts to get the gas out and not being burdened by gathering and transportation fees, that actually gives us even less at the wellhead, the rates of return that we are achieving are about as good as I think industry can expect out of the dry gas portion of the play...My guess is you're going to continue to see a sequential decline by industry there...

"We're not going to be running the rigs that we were running a few years ago by any means," Walker added.

Anadarko now has a backlog of about 200-plus wells in the Marcellus, said Meloy. "They're drilled and not yet on production...We will continue to complete those wells. We'll slow down that backlog by reducing our rig count, and our nonoperating partners are also slowing their activity down and have been recently.

"So I think you'll see that backlog fall, but that provides the opportunity to maintain and probably even grow our production in the near future. These are such big wells. And we can turn them on and we have the capacity to move the gas. So the backlog should fall and the inventory of new wells will be less. The math will work in the right dimension to increase production."

Net earnings in 3Q2013 were $182 million (36 cents) versus year-ago profits of $121 million (24 cents). The latest quarter included $389 million in one-time items that reduced income by 77 cents/share; the year-ago quarter included  $301 million in derivative losses, contributing 60 cents to per-share earnings. Revenue jumped 16% to $3.85 billion. Cash flow from operating activities  was $1.78 billion, and discretionary cash flow totaled $2.02 billion.

Realized prices for crude oil and condensate averaged $106.05/bbl, up 6.1% from 3Q2012. Natural gas realizations averaged $3.33/Mcf, 24.7% higher, while liquids prices were 7.1% more at $38.49/bbl.

Canaccord Genuity analyst Robert Christensen said Anadarko's "lighter than expected" crude oil volumes in the Gulf of Mexico led the operator to miss his 3Q2013 earnings forecast, but "future growth is visible." In addition, year/year growth in the Wattenberg and in Texas remains "robust." Ramping up activity in the Permian Basin also is encouraging, he said.

“The real story here is that the ramp-up in drilling activity in the Delaware Basin should yield many more wells this year and next," said Christensen. Anadarko exited 3Q2013 running 10 rigs in the basin after starting in July with five. It had begun 2013 with only two rigs there. "That is a five-fold increase in drilling activity in about 10 months, so we sense some real enthusiasm for the Permian Basin and we believe Anadarko will likely showcase more well results in the coming quarters."

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