As a precursor to releasing its third quarter earnings next week, Anadarko Petroleum Corp. reported Friday that it will record a non-cash, pre-tax charge of $827 million, or $483 million after-taxes ($1.81 per diluted share) in the quarter as a result of low natural gas prices and unusually high differentials for heavy oil at the end of the quarter.

The nations largest independent oil and gas company said that excluding this charge, it expects its recurring third-quarter results to be above Wall Street analysts’ recent consensus estimates. Anadarko reported earlier in the week that it will release its third-quarter results on Oct. 25. The charge reflects a $464 million after-tax impairment of the carrying value of oil and gas properties in Western Canada and a $19 million after-tax impairment of the carrying value of assets in Argentina and Brazil, the company said.

“We continue to be enthusiastic about our business in Canada, and this write-down will not have a significant effect on our operations there,” said Robert J. Allison, Jr., Anadarko CEO.

Anadarko said the charge will have no significant effect on its capital structure. The company’s total capitalization at the end of the second quarter, before the write-down, was 37% debt and 63% equity. Following the write-down, the company said debt is expected to be about 39% of total capitalization. “While this impairment will give Anadarko a significant loss in the third quarter, the resulting reduction of future-period expenses for depreciation, depletion and amortization will increase net income by approximately $50 million annually for the next several years at current production rates,” the company said.

Anadarko said the impairment is the result of applying what is commonly known as a “ceiling test” under rules prescribed by the U.S. Securities and Exchange Commission (SEC) for exploration and production companies such as Anadarko that use the “full-cost” accounting method. A company using the ceiling test compares the net capitalized costs of its oil and gas properties on a country-by-country basis against the present value (assuming a 10% discount rate) of future net cash flows from those reserves, generally using commodity prices on the last day of the quarter, held flat for the life of the reserves, Anadarko added. If the net capitalized costs exceed this valuation, the company must record a non-cash write-down equal to the difference.

“The price deck the SEC requires us to use in this ceiling test isn’t representative of today’s market environment, but that’s the rule, and we have to follow it,” Allison said. “Furthermore, those low prices do not represent what the market believes the reserves are worth. This write-down effectively values our Canadian proved reserves at less than 60 cents per Mcfe, which is about half what companies have recently paid for Canadian reserves.”

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