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Anadarko's $2B Freeport-McMoRan Deal to Boost Spending in DJ, Delaware

The free cash flow generated by Anadarko Petroleum Corp.'s $2 billion-plus purchase of the Freeport McMoRan Inc. (FCX) Gulf of Mexico (GOM) portfolio will be a catalyst to increase spending and the rig count in the Permian and Denver-Julesburg (DJ) basins, CEO Al Walker said Tuesday.

Anadarko agreed Monday to purchase all of the offshore interests held by Freeport McMoRan Oil & Gas for $2 billion, as well as make $150 million in contingent payments and assume $500 million in asset retirement obligations.

The dealmaking would add 80,000 boe/d net to Anadarko's current production, 85% weighted to oil, and almost double offshore output to around 150,000 boe/d.

As important, at current strip prices the new offshore properties would generate an estimated $3 billion of incremental free cash flow over the next five years, enabling "accelerated investments" in the onshore, Walker said.

"We expect these acquired assets to generate substantial free cash flow, enhancing our ability to increase U.S. onshore activity in the Delaware and DJ basins," he said during a conference call. "Our current plans are to add two rigs in each play later this year, and to increase activity further thereafter, with an expectation of more than doubling our production to at least 600,000 boe/d collectively from these two basins over the next five years."

During the second quarter, Anadarko was running six rigs in the Delaware and one in the DJ (see Shale DailyJuly 27). Anadarko exited June producing a record 45,000 boe/d net in the Delaware, with total liquid volumes averaging 29,000 b/d, almost one-quarter more than in the year-ago period and 11% higher sequentially. In the DJ, even with a 70% reduction in capital expenditures (capex) from a year ago, the operator still achieved 1% sales volume growth from the first quarter and record sales volumes of 243,000 boe/d.

The CEO said during a quarterly conference call in July that the company planned to accelerate spending in its U.S. operations -- specifically the offshore, DJ and Delaware -- as prices rose. But he never tipped his hand about expanding what is seen as the most expensive of the three, the offshore portfolio.

Executive Vice President (EVP) Bob Daniels, who runs international and deepwater exploration, said the transaction actually is a big bolt-on, a "modest investment in the Gulf of Mexico, and a material investment in the U.S. onshore."

Added Walker, "We feel that this deal is really a catalyst for the things we wanted to do."

The transaction, which expands offshore infrastructure and adds to a growing inventory of subsea tieback opportunities and new exploration prospects, led Anadarko to raise the capex target for 2016 by $200 million to $2.8-3 billion, excluding the $2 billion acquisition costs.

The higher capital spending primarily reflects increased activity planned for the Delaware and DJ. Management is guiding a 10-12% compound annual growth rate (CAGR) in oil production through 2020 within cash flow of $50-60/bbl.

The Delaware and DJ would be the biggest drivers of CAGR, with implied 15%-plus growth through 2021. While the onshore portfolio is big, it's going to take some oomph in pricing for other areas to compete for capital, Walker said.

"We always compete within the portfolio," he said. If oil prices were to increase as expected in 2017, and "if there are opportunities for development that can compete for capital with the DJ and the Delaware, we'll consider that...

"If the Delaware is not the finest oil play in the North American onshore, I'd be surprised if someone made a counter comment to that...In the DJ, we've talked many times about putting more rigs back to work. Those two basins are likely to compete for a lot of capital" alongside the GOM.

Plans are to monetize some assets too if they are unlikely to "compete for cash" for the next five years. Walker declined to offer any suggestions for what may be on the block.

"This is a bolt-on opportunity, material enough to be meaningful to a company our size," Daniels said. In every case, acquisitions "come down to price."

Anadarko continues to eye other prospects, but "we're not chasing pricey transactions, like in the Delaware," he said. "We look at them all the time, and we'd love to find the right opportunity. But we have a footprint that gives us running room for a long time and we can leverage off the infrastructure..."

Operationally stressed FCX was a "very motivated seller" and the transaction came together a low price, Walker said. The Phoenix-based conglomerate for months has been shopping for a buyer to take over its entire U.S. portfolio (see Daily GPI,April 27). Anadarko wasn't interested in anything other than the offshore, where the two companies partner in major projects, including the Lucius and Heidelberg systems.

"In our view, certain assets made sense to us," and "we indicated if they ever isolated the deepwater, we'd be interested," Walker said. "It took a while to get to where we were" Monday, but once the offshore alone was for sale, "we were ready to go."

Going forward, Anadarko knows it has become a buyer's market. However, not every asset is worth the price, Daniels explained.

"We don't want to to an acquisition where the cost of entry is too high," he said. "We'd never make any money there. Buying at the right price, where we can drive material oil growth inside cash flow, is pretty attractive...Those opportunities are few and far between. We want to find one or two of them, then stay disciplined."

The transaction, financed through a 35.35 million common stock offering, about 7% of shares outstanding, is set to close by year's end.

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