With “huge” new supplies of natural gas expected to flood the North American market by 2009, Anadarko Petroleum Corp. increased its hedging position to protect its future cash flow.
CEO Jim Hackett led a conference call with his management team to discuss the company’s final quarter and year-end 2007 results. Management of the independent is tracking what it sees as a lot of gas that will be in the U.S. system by 2009, including increased contributions from Anadarko in nearly all its U.S. basins. Overall, gas production and demand have kept pace for the past two years, holding prices to around $7-8/MMBtu after spiking to $15 at the end of 2005.
However, “huge” new supplies of gas are expected to begin moving through the U.S. market with more liquefied natural gas (LNG) shipments, infrastructure enhancements in the Rocky Mountains and other gas-rich basins and the continuing stream from the deepwater Gulf of Mexico (GOM) Independence Hub, Hackett said.
As many as 10 LNG terminals are expected to be in service in the United States by 2009, Hackett noted. And Rockies’ gas supplies will be growing, assisted by a plethora of new pipes and infrastructure led by the Rockies Express Pipeline LLC (REX), which went into service last month. Anadarko also operates the Independence Hub, and it is currently producing on average 800 MMcf/d. The hub’s gas output has been curtailed in recent days because of regular maintenance activities, but average output has been 850-950 MMcf/d since it ramped up last summer.
“As part of our risk management strategies and similar to 2008, we see some potential volatility in 2009,” said Hackett. “In 2008, our gas hedging position…gives us significant protection. To further protect ourselves against short-term down drafts in U.S. gas markets, we have hedged approximately 500 MMcf/d for 2009 using Nymex [New York Mercantile Exchange] costless three-way collars with a floor of $7.50/Dth, with an upside of up to $11/Dth.
“In addition, because of the potential impact Rockies Express could have in the Midcontinent in Texas gas markets, we have increased our basis hedges for those areas as well for 2008 and 2009.” Last week other producers, including EOG Resources Inc. and Devon Energy Corp., also announced substantial gas hedging for 2008 (see related stories).
Asked how REX has impacted Rockies’ production in the short period it has been in service, COO Karl Kurz said that “with REX coming on line, we’ve seen system pressures drop across the board.” This winter’s foul weather has been a “factor on well connections.” Kurz said he asks “every other day” what the impact of REX would be without weather as a factor, but he admitted that the question “is a hard one to answer.” Despite the weather, Anadarko’s Big George play “continues to perform better than expected, and it will still surprise us going forward.”
Hackett called 2007 “remarkable” following a period of realignment for the company after it purchased Kerr-McGee Corp. and Western Gas Resources Corp. in 2006. Now, he said, production continues to rise in nearly all of its U.S. basins.
Natural gas sales volumes in the final quarter averaged 2.01 Bcf/d, which was down from 2.23 Bcf/d in 4Q2006. Gas prices in 4Q2007 averaged $5.46/Mcf. Sales volumes of natural gas, crude oil and natural gas liquids (NGL) from continuing operations for 2007 totaled 211 million boe.
Worldwide proved reserves at year-end 2007 were estimated at 2.43 billion boe. Excluding asset sales last year, the company added 250 million boe of proved reserves and incurred costs in exploration and development activities of $3.84 billion. Reserve additions primarily were driven by low-risk development activities and infill drilling in the Greater Natural Buttes area, Wattenberg field and Powder River Basin, as well as a development offshore Brazil. Anadarko’s year-end 2007 proved reserves were balanced between natural gas (58%, or 8.50 Tcf) and liquids (42%, or 1.01 billion bbl), which include crude oil, condensate and NGLs.
Net income totaled $264 million (56 cents/share) on revenues of $3.06 billion in 4Q2007, down from $1.92 billion ($4.16) in 4Q2006, due in part to an unrealized loss of $322 million (69 cents/share) on commodity derivatives. Excluding gains of 58 cents/share and losses of 80 cents/share, the company would have earned 78 cents/share.
This year Anadarko has set a capital budget of $4.5-4.7 billion, which includes about 20% for exploration.
“Anadarko’s 2008 capital program is geared toward accelerating the value of the more than 7 billion boe in net risked captured resources in our asset base,” said Hackett. “Exploration remains a key component of the program, which also leverages our industry-leading deepwater rig position, hub-and-spoke infrastructure in the GOM and extensive midstream position onshore.
“Through a combination of our product hedging strategy, basis swaps and firm transportation commitments, we’ve reduced risk and ensured that we will have adequate cash flow to fund our capital program while continuing to reduce leverage. A focus on capital efficiency, reduced costs and reserve growth will continue to drive our investment decisions and portfolio management.”
The company also increased its guidance for expected 2008 oil and natural gas production to 205-210 million boe. Anadarko’s capital budget for this year emphasizes achieving double-digit production growth in the Rocky Mountain region, continuing development in the deepwater GOM, including the start-up of the Blind Faith platform, driving toward first production at the Peregrino field offshore Brazil and extending the company’s deepwater exploration activities worldwide.
About 30% of this year’s budget will be allocated to the Rockies, 20% to southern U.S. operations, 25% to deepwater GOM activities, 10% to midstream projects and 15% to international and frontier areas. Up to 3,000 U.S. onshore development wells are planned in 2008, composed of 85% in the Greater Natural Buttes, Wattenberg, Powder River Basin and other areas in the Rocky Mountains, and approximately 15% in the company’s Southern region, which includes the Delaware Basin, eastern Chalk and Carthage areas of Texas.
Two major projects are scheduled to begin this year. The first involves the second-phase expansion of the Chapita plant in Greater Natural Buttes, which would add a cryogenic processing facility to double Chapita’s current processing capacity to 500 MMcf/d. The other project would add 400 MMcf/d of gathering capacity at the Fort Union system, bringing its total capacity to 1.3 Bcf/d and making it the largest capacity gathering system in the Powder River Basin.
In the deepwater Anadarko will place most of its focus on the eastern GOM and K2 unit. Six-to-eight exploration and appraisal wells are set to target Miocene and Lower Tertiary objectives.
“In 2007, we transformed Anadarko’s portfolio and positioned the company for consistent and predictable performance in 2008 and beyond,” said Hackett. “Throughout the year, our retained properties demonstrated the strong and efficient performance we expected and delivered solid production volume growth. As a result, we were able to increase production guidance on three separate occasions in 2007, by a total of about 6% from the original projection, while improving the company’s cost structure.”
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