Anadarko Petroleum Corp.'s sales volumes of natural gas, natural gas liquids (NGL) and oil were up 6% in the second quarter from a year ago and the company now expects volumes to increase 5-7% from 2009, boosted by strong production gains in the Marcellus, Eagle Ford and Haynesville shales.

"During the second quarter, Anadarko's diverse portfolio continued to deliver upon our operating and strategic objectives with increased sales volumes, improved cost management and margins, continued drilling success onshore and offshore, and significant gains in drilling efficiencies," said CEO Jim Hackett. "Because of the company's strong and consistent portfolio performance, we are increasing full-year production guidance for the second time this year, while maintaining initial capital guidance. We now expect sales volumes to be in the range of 232 million to 236 million boe, representing an increase of 5-7% over 2009."

Anadarko's shale plays "are achieving critical mass," and production also is gaining in the Rockies, said Hackett. Sales volumes of natural gas, crude oil and NGLs totaled 59 million boe, or 651,000 boe/d in 2Q2010. Gas sales volumes averaged around 2.3 Bcf/d, while NGL sales were 66,000 b/d. Oil sales volumes averaged 198,000 b/d.

In the Maverick Basin of South Texas, "we transitioned the Eagle Ford play from a exploration effort to a full-scale development project," the CEO said. "Our wells have a high liquids content comprising about 75% of the revenue stream. And due to the high capital returns it delivers, this has become an area for increased capital deployment. The cost to drill these wells is about $4.5 million per well with estimated ultimate recoveries of more than 300,000 bbl."

The company also is beginning to see drilling and completion costs in the basin trend down "as we move to multi-well pad drilling and optimize our completion configuration" in the Eagle Ford Shale. "Based on these results, we ramped up our development program to six rigs. There's significant running room in this preferred portion of the play with potential to drill more than 2,000 Eagle Ford wells on the 400,000 gross acres we control."

Anadarko also is evaluating the deeper shale in the Eagle Ford play, "which is a dry gas play and represents additional option value," said Hackett. "Our Eagle Ford activity will allow us to hold these opportunities and enable us to capitalize in the future when this natural gas investment option becomes more competitive within our portfolio."

In addition, Anadarko is evaluating a joint venture in the Eagle Ford Shale. An affiliate of Mitsui & Co. Ltd. in February agreed to pay $1.4 billion to acquire a one-third stake in Anadarko's Marcellus leasehold (see Daily GPI, Feb. 17).

"Given the tremendous value we see for the Eagle Ford play, Anadarko is evaluating another joint venture similar to the one we completed in the first quarter in the Marcellus and we anticipate having something to announce before year-end," said Hackett.

The Marcellus Shale development also is accelerating, said the CEO. Six operated rigs and 15 nonoperated rigs currently are running on the 760,000 gross acres in which it participates or has control of in the play.

"We're seeing significantly improved cycle time, and excellent estimated ultimate recoveries, consistently above 4 Bcf per well," said Hackett. "Peak production during the quarter reached about 140 MMcf/d gross from 35 wells with another 100-plus wells waiting either completion or connection to the gathering system.

"We expect to have taps in place for about 1.2 Bcf/d and total gathering capacity of more than 700 MMcf/d within the next year. With the consistent results to date across this large acreage position we estimate the captured resource potential on our Marcellus acreage at well over 1 billion boe."

Anadarko also is pursuing "several other opportunities with the liquids focus," including in West Texas. "In the Bone Spring play in West Texas we are now running four rigs on our 540,000 gross-acre position in the area and we're already seeing some initial production rates of more than 1,000 b/d of oil with natural gas that is a high BTU content as well as good market access.

"This play also offers significant running room when combined with potential from the overlying shale where we should have our first results by the end of this month," said Hackett. Another "emerging area" for Anadarko is northeastern Colorado and southeastern Wyoming, where the company has more than 500,000 gross acres. Plans are to begin drilling six to 10 operated wells.

Hackett spent some time discussing the Deepwater Horizon explosion. Anadarko is a 25% stakeholder in the Macondo well; BP plc was the majority owner and operator. Anadarko does not plan to record a contingent liability for the Gulf of Mexico spill to pay for future expenses because management believes BP will be found willfully negligent in its operation of the well, the CEO said.

"There are numerous ongoing inquiries and independent investigations that must be brought to conclusion," said Hackett. "However, the information and findings that have been made public to date continue to reinforce our belief that serious errors in judgment occurred...As I told the U.S. [House] subcommittee two weeks ago, any actions we have taken or may take under the joint operating agreement to affect our rights should in no way affect our obligation.

"BP has continued to make good on its commitment to pay all legitimate claims. It is in the best interest of all stakeholders in this tragic event." So far the deepwater drilling moratorium has not impacted current production or near-term guidance, Hackett said. However, Anadarko continues "to redirect capital from the Gulf to other areas of the portfolio, such as the Eagle Ford Shale and the Bone Spring areas in our onshore portfolio," said the CEO.

In any event, Anadarko's balance sheet "remains strong," he said.

The producer reported a net loss of $40 million (minus 8 cents/share) in 2Q2010. Operating cash flow totaled $1.57 billion; discretionary cash flow totaled $1.28 billion. The company, based in The Woodlands near Houston, increased quarterly sales volumes year/year by 6 % and reduced lease operating expenses/unit by 15%.

Anadarko ended the quarter with about $3.4 billion of cash on hand. In addition, the company said it received new bank commitments from a group of lenders led by J.P. Morgan for an aggregate $6.5 billion. The new commitments include a $5 billion senior secured five-year credit facility, which will replace the company's existing $1.3 billion credit facility, and a $1.5 billion senior secured six-year term loan, which will be used to refinance approximately $1.3 billion of debt currently scheduled to mature in 2012.

"Our financial position is very strong," said Hackett. "We generated discretionary cash flow of approximately $1.3 billion during the second quarter, and...new bank facilities further enhances our liquidity position. We believe this action is prudent in order to extend the maturity date of our credit facilities, replace near-term maturing debt, provide the ability to finance our ongoing business needs, and protect the interests of all of our stakeholders by providing ample access to additional capital, should the need arise."

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