Anadarko Petroleum Corp. delivered stronger-than-expected production during the second quarter, with output averaging 846,000 boe/d — 18,000 boe/d higher than guidance — as it continued to improve drilling efficiencies in its key operating areas.

The U.S. onshore was the biggest driver of the output gains, with production rising 30% year/year. Full-year production now is forecast to be 13% higher than in 2014, adjusted for asset sales, CEO Al Walker told analysts during a conference call Wednesday.

“The operating improvements achieved to date are contributing to an expected full-year increase over 2014 of 13%, or about 35,000 b/d, enhancing our relative cash margins and enabling us to drill more than 100 additional wells this year — all while staying within our capital guidance,” he said. “In addition, we’ve created significant option value through our exploration success offshore Colombia and in the Gulf of Mexico…”

Production gains achieved to date this year won’t be as strong in the second six months, in part because of asset sales but mostly because of the uncertainty for prices, Walker explained. Third quarter output is forecast to be down sequentially, around 772,000-793,000 boe/d. Full-year output is seen averaging 816,000-827,000 boe/d.

Before boosting output, Anadarko has to have the margins, which are a higher priority today than the hydrocarbon volumes, Walker said.

“Even with a tremendous amount of hardship that service providers have gone through in the first half of the year, we as an upstream company still don’t have the margins we had a year ago,” he said.

It’s now clear to Anadarko that commodity prices aren’t going to strengthen this year, Walker said. Prices have fallen faster than oilfield service costs in some of the projects, like the Wattenberg field in Colorado and in the Permian Basin. However, even an increase in crude prices wouldn’t tip Anadarko’s hand to expand output because the margins are key.

“We still see the uncertainty that we made reference to in the first quarter with respect to sustainable prices,” said the CEO. “I don’t think the rest of this year is going to create that.”

Still, there are efficiencies and cost savings to be had across the board, and all of those should be sustainable even when commodity prices — and hence, oilfield service costs — are higher, Walker said. Anadarko earlier this year estimated that as oilfield service vendors cut prices, it would take around $3 billion in capital expenditures to keep production levels flat. That figure now has fallen to around $2.7 billion, and there’s still room for more gains

For instance, the cost to drill a Wattenberg well has fallen by almost half in two year’s time, with costs for one horizontal well below $1 million. Those cost efficiencies have come as the flagship play achieved a production milestone in 2Q2015 of 101,000 b/d on average.*

Lower service costs translate into more bang for the buck, and drilling efficiencies are the bonus. Total costs to drill and complete a well in the Wattenberg now stand at about $3.5 million a well, about half of the costs two years ago. Anadarko now expects to drill 70 wells in the Colorado play this year, versus 35 in 2014, said Executive Vice President Darrell Hollek. He now runs the U.S. onshore exploration and production arm following Chuck Meloy’s recent retirement (see Daily GPI, April 28).

Those efficiency gains also are a bonus for the Eagle Ford Shale, where more than 200 wells are planned using fewer rigs than initially forecast. Less drilling time has enabled Anadarko to reallocate rigs from the Eagle Ford to the Permian’s Delaware subbasin, where sales volumes in the Wolfcamp Shale improved almost 30% year/year. As in Wattenberg, Permian drilling costs have fallen to around $1 million each, enabling Anadarko to add an eighth rig in the Delaware, with the possibility for a ninth before the end of the year.

However, that’s different than moving into a “growth mode,” said Walker. Shale wells typically deplete by 50-80% a year, and it’s imperative to ensure the timing is right to bring wells into production. Anadarko expects to have up to 200 drilled but uncompleted wells, DUCs, in inventory by the end of the year to await higher prices. Three months ago it planned to have around 125 DUCs awaiting ramp up by year’s end.

“We as an industry are not anywhere close to the type of margin improvement that’s needed before we get back into a growth mode,” Walker said.

Most the incremental production in 2Q2015 came from higher-margin oil reserves in the U.S. onshore, particularly the Delaware subbasin and Colorado’s Denver-Julesburg Basin, which enabled Anadarko to deliver adjusted net income of $57 million (11 cents/share). That’s below year-ago profits of $227 million (45 cents/share), but profits still beat Wall Street consensus, which pegged Anadarko to report a loss of more than 50 cents/share.

Operating net cash was higher than earnings in the period at $1.2 billion, but because of the breakdown in commodity prices, it was more than half year-ago levels of $2.5 billion.

Adjusted for one-time items, including hedging effects, Anadarko earned $4 million (1 cent/share) in 2Q2015, compared with $669 million ($1.32) a year ago. In the quarter, the producer booked a $76 million loss related to commodity derivatives and a $159 million loss related to interest rate derivatives. Operating cash flow was $1.24 billion net, down about half from 2Q2014. Operating income totaled $90 million, versus $1.21 billion a year ago.

Anadarko spent $1.4 billion on its capital projects between April and June, about $1 billion less than a year earlier. Natural gas volumes, all produced in the United States, totaled 2.35 Bcf/d in 2Q2015, versus 2.62 Bcf/d in 2Q2014. Oil/condensate sales increased to 240,000 b/d from 196,000 b/d, while natural gas liquids (NGL) sales totaled 130,000 b/d versus 119,000 b/d.

Most of the volumes were made in the U.S.A., including 2.24 Bcf/d of natural gas, 174,000 b/d of oil/condensate and 123,000 b/d of natural gas liquids (NGL). In the year-ago quarter, the operator’s U.S. onshore development had produced 654,000 boe/d, with 2.44 Bcf/d of gas, 134,000 b/d of oil/condensate and 113,000 b/d of NGLs.

In the deepwater Gulf of Mexico (GOM), volumes totaled 83,000 boe/d, mostly comprised of 113 MMcf/d of natural gas, along with 57,000 b/d of oil/condensate and 7,000 b/d of NGLs. A year earlier, production in the GOM was considerably higher at 654,000 boe/d, including 2.44 Bcf/d of gas, 134,000 b/d of oil/condensate and 113,000 b/d of NGLs.

In the deepwater GOM, Anadarko’s Lucius facility achieved nameplate capacity during the quarter of 80,000 b/d. The company also continued to advance the twin 80,000 b/d Heidelberg spar on schedule with the installation of the hull and completion of the topsides. Also in the deepwater, a third appraisal well was spud in the Shenandoah field, and there are plans to begin drilling an appraisal well in the Yeti discovery, which has encountered more than 270 net feet of oil pay.

Anadarko ended the second quarter with about $2.2 billion of cash on hand. Year to date, the operator has reached agreements to divest more than $1.1 billion in assets, including the recently announced $440 million sale of its Bossier natural gas field and associated midstream infrastructure in Texas (see Shale Daily, July 6). In addition, Anadarko accelerated more than $575 million of value from the secondary sale of Western Gas Equity Partners LP units and a linked equity unit offering.

*Correction: This story originally incorrectly stated Anadarko’s average oil production achieved during the second quarter from the Wattenberg field in Colorado. Anadarko’s average oil production was 101,000 b/d, not per well. NGI regrets the error.