Anadarko Petroleum Corp. on Wednesday unveiled a “refocused” corporate strategy that will raise $2.5 billion by selling 15% of the company’s year-end 2003 proved reserves and 25% of current oil and gas production — nearly all located in North America. The goal is to deliver higher returns and sustainable 5-9% annual production growth.

The divested properties include between 325-350 MMboe of proved reserves and between 115,000-125,000 boe/d of production volumes. Most are located in the shallow Gulf of Mexico (GOM), Western Canadian Sedimentary Basin and the U.S. Midcontinent region. The bulk of the sales are expected to close by year-end, with the rest by the end of the first quarter of 2005.

“The best time to fix your roof is when the sun is shining, and it’s shining on our industry right now, with recent property sales going at record prices,” said CEO Jim Hackett. “This is not an effort to raise capital or reduce debt; we are already producing significant free cash flow at current prices.”

In the United States, Anadarko will sell GOM shelf properties, most of its central Oklahoma enhanced oil recovery fields, Kansas/Oklahoma Hugoton Basin fields, West Texas Panhandle fields; Wyoming/Utah Overthrust region, southeast Colorado region, various Permian Basin fields; and various onshore properties. It also plans to sell some limited term coal royalty interests in Wyoming.

Canadian divestitures include various central Alberta fields, various northeastern British Columbia fields, southeastern Saskatchewan fields and some southern Alberta fields. Anadarko also will sell some international assets in Oman and miscellaneous properties.

“Since the beginning of the year, we’ve been conducting a thorough review of the entire company to determine the best path forward,” said Hackett. “Our review highlighted the fact that, despite the good quality of our assets, there were factors at work making it difficult to grow the company and maintain strong capital efficiency.”

The new strategy does several things: refocuses Anadarko’s efforts and money on areas that have “consistently” produced strong results; institutionalizes a dynamic process to manage assets differently; lowers the reinvestment required to maintain existing production levels; and strengthens financial discipline and strategic flexibility. Proceeds from the asset sales will be used to reduce net debt and to repurchase up to $2 billion of common stock.

“From a strategic perspective, the divestitures will enhance our ability to perform in the future,” Hackett said. “By removing properties that are difficult for Anadarko to grow and retaining those we can grow efficiently and that have more upside potential, we expect to be able to provide near-term growth and profitability while also generating enough cash flow to fund long-term growth.”

Using pro forma 2004 numbers — as if the planned divestitures had occurred on Jan. 1, 2004 — Anadarko expects its annual growth rate to rise 5-9% over its previous guidance of 3-7%. “Importantly, growth in 2005 is expected to be above the high end of the new range due to major development projects that will be commencing this year and next,” Hackett said. “Furthermore, the portfolio improvements should lead to cash flow growth at a rate even faster than production.”

Standard & Poor’s Ratings Service (S&P) said the sales will improve Anadarko’s operating metrics by increasing its reserve life by about 1.5 years (to about 14.3 years) and lower unit cash costs. “Anadarko has struggled in recent years to grow in large part because of the steep production decline curves that characterize many of the properties that are slated for divestiture. By selling these assets, Anadarko will become somewhat less capital intensive and could achieve better annual production growth and returns on capital off of the reduced base.”

The new management team, said S&P, “appears to have less appetite for exploration risk and is unlikely to drill high-cost wells without partners, which should reduce its potential for large dry-hole costs.”

The Houston-based independent is not changing what it does, said Hackett, but rather where and how resources are allocated.

“We are retaining our commitment to exploration and development, especially in the areas of high-potential exploration and unconventional resource identification and commercialization,” he said. “We will strengthen our focus in those areas. However, we are changing which properties we choose to work, and how we’re going to manage them.”

The retained properties will be separated into two broad categories — “foundation” and “growth platforms” — and monetarily managed to serve different roles within the overall portfolio.

Anadarko’s foundation assets, primarily located onshore North America, have flat production or modest growth, with generally low underlying decline rates over a long period of time. “They will generate significant free cash that can be reinvested into growth areas,” Hackett said.

Within the foundation assets, Anadarko has split properties between “funded” and “harvest.” Harvest assets will not receive the same level of capital and human resource commitment as funded foundation assets, but will be managed primarily for cash generation with a focus on cost efficiency. Funded foundation assets will receive significant capital and staff attention, but still be managed to provide free cash for growth.

Growth platforms will increasingly become more global — most of Anadarko’s current expansion is in the deepwater GOM, Algeria and Qatar. Anadarko said these assets are tasked with delivering differentiated growth rates by targeting high-potential, exploration-focused investments and/or new ventures that may include acquisitions as entry vehicles.

“Production from our foundation assets is expected to provide enough cash to help fund both recurring corporate capital needs and the growth platforms,” said Hackett. “The growth platforms will be expected to provide incremental volume above the foundation’s targeted 4% annual growth rate through 2009.”

Over the next five years, Hackett said, “the combination of foundation and growth assets is expected to deliver annual reserve growth of approximately 4-6% at an estimated finding cost of $7-9/boe. In addition, at mid-cycle oil and gas prices, we expect to generate $1.5 billion of unallocated cash flow over the next five years, which provides some crucial flexibility to deliver on our goals.”

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