Record natural gas and oil sales volumes failed to prevent Anadarko Petroleum Corp. from suffering a huge loss in the final quarter of 2013 as it set aside funds to pay for as much as $5.2 billion in litigation claims related to its acquisition of Kerr-McGee Corp. in 2006.
Despite record volumes in the quarter, The Woodlands, TX-based super independent reported a loss of $770 million (minus $1.53/share), compared with earnings of $203 million (40 cents) in 4Q2012. Adjusted net income was $375 million (74 cents/share), down from $457 million (91 cents).
A loss accrual related to Kerr McGee's legacy Tronox Inc. operations sliced quarterly net income by almost $1.145 billion (minus $2.27/share). For the year, net income was $941 million ($1.58/share), well below 2012 earnings of $2.24 billion.
In December Anadarko was found liable for as much as $14.5 billion after a judge ruled it had acted improperly with Kerr-McGee after Tronox was spun off in anticipation of the merger (see Daily GPI, Dec. 13, 2013). Three months before the merger was announced, Kerr-McGee spun off the troubled chemicals unit, which at the time was burdened with liabilities related to pollution site cleanups. Tronox filed for bankruptcy in 2009 and subsequently sued the producers for defrauding the federal government of funds to clean up sites.
Costs related to the Tronox litigation alone could range from $850 million to $5.2 billion, according to Anadarko. The 4Q2013 loss accrual for Tronox only accounted for a payment of $850 million. The operator also faces charges related to the Macondo well blowout in 2010; it was a partner in the BP plc-operated project.
When the courts ruled against Anadarko in December, the company lost $3 billion in market value in a single day. The 4Q2013 news late Monday sent shares down $2.52, but on Tuesday shares recovered by almost 2.4%, or $1.86/share. If it were determined that Anadarko had to pay the full $14.5 billion, it would be the largest award ever in a bankruptcy case for federal claims, according to the U.S. Department of Justice and the Environmental Protection Agency.
The financial losses didn't impact the record breaking sales volumes, which rose 8.8% in the quarter year/year to 74 million boe, primarily on strong contributions from Colorado's Wattenberg field, the Eagle Ford Shale and from the East Texas/Louisiana fields. Gas production rose in the Haynesville and Marcellus shales, but Anadarko indicated it plans to reduce activity in the Marcellus going forward to focus on higher-return projects.
Realized prices for oil in the quarter averaged $99.20/bbl, 1.5% higher, while natural gas prices rose 5.5% to $3.46/Mcf. Anadarko also received $40.30/bbl (3.4% higher) for its natural gas liquids in the quarter.
Total quarterly costs rose almost 7% to $3.123 billion, primarily on an increase in operating and exploration expenses. The operating margin in 4Q2013 was 6.4%, down from the year-ago margin of 14.3%.
Analysts said the information provided by Anadarko regarding Tronox offers some clarity going forward.
JPMorgan Chase & Co. analyst Joseph Allman said the loss related to Tronox "is now probable and estimable...Not surprisingly, it chose the defendants' best estimate" from a brief issued in January of $850 million.
What Allman found a bit surprising was the estimated range of probable losses. Because Anadarko management said a significant portion (88%) of the $850 million now set aside is tax deductible, and it recorded a $274 million tax benefit, "but management cautioned the same percentage deductibility might not be scalable with a larger damage award..." The accrual doesn't include possible interest, attorneys' fees or other costs, "which could be material..."
When Allman asked during the quarterly results conference call Tuesday if any form of settlement talks was ongoing, management had no comment. However, he noted that management said that the accrual and the stated probable range "could change materially over time, including between now and the 10-K" filing in February.
Jefferies & Co. Inc.'s Subash Chandra and his team said the losses by the exploration and production (E&P) giant weren't that big of a deal. The earnings per share miss "was driven by exploration expense that was $300 million more than forecast." Meanwhile, quarterly production of 74 million boe "was ahead of guidance and beat our 71 million boe expectations by 4%."
Oil, natural gas and natural gas liquids (NGL) volumes "all beat estimates," Chandra said. Cash costs were lower than expected, and depreciation, depletion and amortization "was significantly lower than forecast, at $2.18/Mcfe, compared to our estimate of $2.40/Mcfe...Pricing was roughly in line on a blended basis. NGL pricing was strong, with realizations of over $40/bbl (5% better than we expected). This is a trend that may continue through E&P earnings season."
Anadarko "failed to maintain its earnings surprise streak," but "the initiatives taken by the management to boost the exploration activity is appreciable," said analysts with Zacks Equity Research. Initiatives in the Gulf of Mexico, U.S. onshore and offshore Mozambique should "boost the company's performance going forward."