It must have been the Enron jinx that caused Anadarko Petroleum to miss a $1.7 billion ($1.08 billion, or $4.33/share, after tax) ceiling test write-down charge in the third quarter of 2001. The company revealed the error late Tuesday that results in a larger loss for the quarter and a net loss for the full year.

Anadarko couldn’t have picked a worse time to make such a mistake, with Enron and Arthur Andersen pinned under the microscope for financial mischief, and investors far and wide fully alerted about potential accounting funny business. Anadarko’s stock took a 5% plunge early Wednesday, but then turned around with the rest of the market and ended the day down only 1% after the Federal Reserve ended its long string of rate cuts on an assessment that the economy is looking pretty good right now. The quick rebound may be an indication of the company’s standing with the investment community. It’s not many companies lately that can lose a billion dollars — even on paper — and take such a small hit.

Company officials at Anadarko said they discovered the error while calculating an impairment of the book value of U.S. oil and gas properties for a full-year financial report.

“We made an isolated error, and we corrected it as promptly and forthrightly as possible,” said Mike Rose, Anadarko’s CFO. “We have reviewed the miscalculation with our outside auditing firm and with our board of directors.”

Anadarko will file a revised report on Form 10-Q with the Securities and Exchange Commission for the third quarter, which will include the additional non-cash, pre-tax write-down. When combined with Anadarko’s previously announced ceiling test charge for the third quarter 2001 for oil and gas properties in Canada and South America, the total third quarter ceiling test charge will be $2.53 billion ($1.57 billion after-tax, or $6.26 per share, diluted).

The third-quarter charges were caused by low oil and gas prices in U.S. and Canadian markets on Sept. 30, 2001. Anadarko said error arose out of using incorrect figures for both the tax basis and deferred taxes on U.S. properties acquired in the merger with Union Pacific Resources (UPR) for purposes of determining the impairment. It was found when preparing year-end reports as the company reconciled a quarterly ceiling test against its tax returns.

The non-cash ceiling test write-down increases Anadarko’s reported loss for the third quarter 2001 and will give the company a loss for the full year 2001. As a result, future expenses for depreciation, depletion and amortization (DD&A) will be reduced, and earnings for the fourth quarter 2001 will increase. In addition, at current production rates, net income should increase by about $100 million annually for the next several years as a result of reduced DD&A related to this impairment of U.S. properties. Anadarko’s 2001 financial and operating results will be reported today.

The company’s previously reported total capitalization at the end of the third quarter 2001 was about 39% debt and 61% equity. With this correction, debt was about 43% of total capitalization at the end of the third quarter.

“Cash flow is unchanged, and the company’s ability to carry out its 2002 capital program is unaffected by the non-cash impairments,” said John N. Seitz, Anadarko CEO. “The high quality oil and gas reserves Anadarko has built over the past 40 years are not affected by this action.”

Under SEC rules for exploration and production companies that use the full-cost method of accounting, a ceiling test must be done to determine a limit (or ceiling) on the book value of oil and gas properties. That limit is basically the after-tax, present value of the future net revenues from proved crude oil and natural gas reserves. Future revenues are calculated based on estimated production volumes using the oil and gas prices in effect on the last day of the quarter, held flat for the life of the reserves and discounted at a prescribed 10% discount rate. Future income taxes, based on the existing tax rates, are deducted from the future net revenues to determine the ceiling. The ceiling is then compared to the book value of the oil and gas properties reduced by any related deferred income tax liability. If the net book value exceeds the ceiling, an impairment (or non-cash write-down) is required. In effect, the actual tax basis for the UPR properties was lower than what had been used in making the earlier calculations of future income taxes.

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