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Anadarko Sees 'Compelling' Economics in Marcellus Shale

Funding for Anadarko Petroleum Corp.'s Gulf of Mexico (GOM) and international exploration projects is secure, but with natural gas prices remaining low, the company now favors short-cycle investment opportunities in the U.S. onshore where there are "compelling economics," like those in the Marcellus Shale, CEO Jim Hackett said last week.

Hackett and his management team detailed the company's quarterly results in a conference call on Tuesday. The Woodlands, TX-based producer, which was second only to BP plc in U.S. gas production in the first three months the year, delivered a record 56 million boe in sales volumes from its retained gas and oil properties during 2Q2009. Sale volumes were 9% above the 1Q2009 figures.

"This is a testament to the innovation dedication of our operating organization, which made excellent strides improving the cost structure of our company," Hackett said. "With these efficiencies, we have been able to reallocate our capital such that approximately 25% of total capital expenditures are now dedicated to building upon the success of our worldwide exploration program."

Costs across Anadarko's operations continued to drop, with lease operating expenses 12% better sequentially than in 1Q2009, said Hackett. Capital expenditures (capex) came in below guidance at $914 million. U.S. capex dropped 30% from year-ago levels, and the company had 22 rigs in operation in the Lower 48 states, which was down 60% from peak levels reached in the final three months of 2008.

Quarterly gas sales volumes averaged 2.34 Bcf/d, compared with 1.87 Bcf/d in 2Q2008. Anadarko produced 213 Bcf in 2Q2009, up from 170 Bcf in the year-ago period. Averaged realized prices were $3.07/Mcf, compared with $8.79/Mcf in 2Q2008. The company also produced 9 million bbl of oil in the period, down from 11 million bbl a year earlier.

Drilling records were set on almost a third of the wells Anadarko drilled in its onshore Southern Region, which includes the Haynesville Shale play. The company also cut its drilling times in half across the Rockies, which allowed the company to "run fewer rigs and drill 32 more wells" in the first half of this year, compared with the first half of 2008, said Hackett.

Although it's only begun to explore its Marcellus Shale leasehold, Hackett said the company's engineers are impressed with the results to date.

"Early success from our Marcellus activities indicates this play possesses some of the most compelling economics in our onshore portfolio," Hackett told financial analysts. Anadarko's onshore focus had been trained on the Rockies, but those assets are "now competing with our Marcellus position and the Haynesville position, as well as the international activities that we have had. We've taken our capital and tried to be as efficient as we possibly can with it to take advantage of the best opportunities we have."

Anadarko holds stakes in more than 600,000 gross acres in the Marcellus Shale, and during the quarter it spudded its first operated horizontal well and participated in six new horizontal wells and three completions as a nonoperator. Additional rigs, both operated and nonoperated, are to begin drilling in the second half of the year.

"We'll continue to prudently ramp up activity and anticipate having three to four operated rigs and eight to 10 nonoperated rigs running in the play by the end of 2009," he said. "We are seeing between 4-8 Mcf/d and estimated recovery of between 3-6 Bcf per well achievable at Nymex [New York Mercantile Exchange] prices as low as $2.50/MMBtu."

By the end of the year, "we should see continued growth of our production profile," said the CEO. "In the Rockies, the assets are performing extremely well and particularly given how cautious we have become with our rig program, we will continue to see growth in the Wattenberg...in the Greater Natural Buttes, we think we'll continue to see growth there, and then if you add the Marcellus portfolio, we anticipate we'll see substantial growth in Marcellus production."

Anadarko's "major assets" in the Rockies, which include the Wattenberg and Greater Natural Buttes gas fields, "have extremely good economics down to very low prices, and they are aided, to a large degree...with either the oil or the liquids...We see pretty considerable uplifts to our netbacks at the leases," said Hackett.

Anadarko increased the midpoint of its sales volume guidance for 2009 by 2.5 million boe, which would be 3% higher than in 2008. About 30% less is to be spent on its near-term projects, compared with last year. The guidance accounts for scheduled maintenance and potential hurricane-related downtime in the Gulf of Mexico. Anadarko explores for oil and gas in the deepwater and is operator of the deepwater Independence Hub gas platform.

"I expect the Independence Hub to be running at reduced rates throughout the remainder of this quarter as we plan to perform scheduled maintenance on the allocation separators," Hackett told analysts. Production at the hub is "right around 900 MMcf/d," which is about where output has been since the hub, which is able to produce up to 1.5 Bcf/d, ramped up two years ago.

Anadarko reported a net loss of $224 million (minus 47 cents/share) in 2Q2009, compared with earnings of $16 million (3 cents) in 2Q2008. The loss included $2 million from discontinued operations. Adjusting for one-time items, losses from continuing operations totaled 56 cents/share, versus a profit of $1.76 in the year-ago period. Revenue fell to $1.75 billion from $2.78 billion in the year-ago period. Cash flow from continuing operations was $1.23 billion, and discretionary cash flow totaled $1.5 billion in 2Q2009.

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