Prompted by falling commodity prices and rising service costs, Anadarko Petroleum Corp. on Friday expanded its share repurchase program for 2005, calling it a better investment than its previous plan to accelerate development drilling.
The reduced drilling budget dropped Anadarko’s 2005 oil and gas forecasted output by 1 MMboe to a range of 159-164 MMboe. However, CEO Jim Hackett noted that Anadarko is not abandoning development drilling. The capital spending plan this year still includes $1-1.1 billion for developmental projects.
“Since announcing our 2005 budget in November, oil and natural gas prices have fallen significantly, while drilling and other service costs have continued to rise,” Hackett said. “As a result, indicated excess cash flow is lower, our stock price has retrenched a bit, and we now believe investing in our own proved reserves through share buy-backs is more compelling than our previously planned acceleration of development drilling.”
The planned stock repurchases should “more than offset that reduction on a per share basis,” he said. “In fact, the lower share count should keep our 2005 per share growth target at 7-11%, even though the starting point — our pro forma 2004 volumes — is expected to come in at the high end of our previous guidance, at approximately 150 MMboe.”
Pro forma volumes adjust the expected 2004 results for major property divestitures, as if the properties had been sold at the beginning of 2004. Anadarko expects to report actual 2004 volumes of approximately 190 MMboe, about 40 MMboe from properties that are no longer in the portfolio.
“By changing the drilling program to be more sensitive to reserve growth and asset intensity, we expect additional benefits, including an approximate $1/boe reduction to our previous 2005 finding and development (F&D) cost expectations to a new range of $9-11/boe,” said Hackett. “This expected improvement is achieved without significantly changing our plans to develop previous discoveries or to deliver sustainable growth through exploration.”
Anadarko planned to repurchase $1.1 billion of its shares in 2004 and an incremental $200 million in early 2005, using proceeds from asset sales, Hackett explained. “We were able to accelerate that plan, buying back the full $1.3 billion of stock by year-end.”
By repurchasing stock instead of increasing drilling, Anadarko reduced its 2005 capital spending to a range of $2.7-3 billion.
“It is important to point out though, that the development drilling prospects are still economically viable projects and are important to our portfolio,” Hackett said. “We are simply deferring them until a more opportune time. Anadarko’s 2005 capital spending plan still includes $1 billion to $1.1 billion of development drilling.”
The reduced budget, he said, is consistent with the company’s disciplined strategy for reinvesting mid-cycle cash flow into core operations and using excess cash flow above that level for share repurchases, debt reductions and other strategic options that can improve returns to shareholders.
“From time to time, we will reevaluate our capital allocation, make changes and refine expectations,” Hackett said. “That is one of the key attributes to our financial and operating strategy. As conditions change, we will continue to manage toward higher per share returns. Sometimes that means investing more in the reserves we know best…our own. Even with a strong portfolio of projects that are economic at far lower commodity prices, when we do the math, we believe the best current incremental investment of our free cash flow remains Anadarko common stock.”
Since last June, Anadarko has implemented a refocused strategy, balancing the portfolio through asset sales totaling $3.3 billion, repurchasing 20.3 million outstanding shares at a cost of $1.3 billion and retiring more than $1.2 billion of debt. The company said it had sufficient uncommitted cash available at year end 2004 to complete the originally planned total debt reduction of $1.4 billion by retiring $170 million of debt that matures in 2005.
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