UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
17001 Northchase Drive, Houston, Texas 77060-2141
(281) 875-1101
Incorporated in the Employer Identification
State of Delaware No. 76-0146568
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes X No _____
The number of shares outstanding and entitled to vote of the
Company's common stock as of April 28, 2000 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, par value $0.10 per share 128,086,367
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31
thousands except per share amounts 2000 1999
Revenues
Gas sales $102,143 $ 77,840
Oil and condensate sales 101,751 43,580
Natural gas liquids and other 43,157 14,944
Total 247,051 136,364
Cost and Expenses
Operating expenses 42,939 34,056
Administrative and general 30,086 24,409
Depreciation, depletion and amortization 57,308 56,524
Other taxes 11,321 9,233
Impairments related to international
properties -- 20,000
Total 141,654 144,222
Operating Income (Loss) 105,397 (7,858)
Interest Expense 21,094 18,638
Income (Loss) Before Income Taxes 84,303 (26,496)
Income Taxes 42,504 (6,141)
Net Income (Loss) $ 41,799 $(20,355)
Preferred Stock Dividends 2,730 2,730
Net Income (Loss) Available to
Common Stockholders $ 39,069 $(23,085)
Per Common Share
Net income (loss) - basic $ 0.31 $ (0.19)
Net income (loss) - diluted $ 0.30 $ (0.19)
Dividends $ 0.05 $ 0.05
Average Number of Common Shares Outstanding 128,046 120,492
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
thousands 2000 1999
ASSETS
Current Assets
Cash and cash equivalents $ 9,369 $ 44,769
Accounts receivable 277,533 259,658
Inventories 32,133 46,090
Prepaid expenses 3,691 5,425
Total 322,726 355,942
Properties and Equipment
Original cost 6,095,154 5,917,195
Less accumulated depreciation,
depletion and amortization 2,287,451 2,236,044
Net properties and equipment - based
on the full cost method of accounting
for oil and gas properties 3,807,703 3,681,151
Deferred Charges 89,412 61,270
$4,219,841 $4,098,363
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET (continued)
(Unaudited)
March 31, December 31,
thousands 2000 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 214,705 $ 298,589
Banks 24,576 26,446
Accrued expenses
Interest 13,689 19,949
Taxes and other 44,195 42,187
Total 297,165 387,171
Long-term Debt 1,573,217 1,443,322
Deferred Credits
Deferred income taxes 614,997 576,804
Other 147,833 156,512
Total 762,830 733,316
Stockholders' Equity
Preferred stock, par value $1.00
(2,000,000 shares authorized, 200,000
shares issued as of March 31, 2000
and December 31, 1999) 200,000 200,000
Common stock, par value $0.10
(300,000,000 shares authorized,
130,075,884 and 129,620,333 shares
issued as of March 31, 2000 and
December 31, 1999, respectively) 13,008 12,962
Paid-in capital 662,129 633,957
Retained earnings (as of March 31, 2000,
retained earnings were not restricted
as to the payment of dividends) 796,146 763,480
Deferred compensation (7,341) (7,907)
Executives and Directors Benefits Trust,
at market value (2,000,000 shares as of
March 31, 2000 and December 31, 1999) (77,313) (67,938)
Total 1,586,629 1,534,554
$4,219,841 $4,098,363
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
thousands 2000 1999
Cash Flow from Operating Activities
Net income (loss) $ 41,799 $(20,355)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 57,308 56,524
Amortization of restricted stock 393 315
Interest expense - zero coupon debentures 804 --
Deferred U.S. income taxes 24,603 (10,765)
Impairments of international properties -- 20,000
124,907 45,719
(Increase) decrease in accounts receivable (17,875) 30,081
(Increase) decrease in inventories 13,957 (7,726)
Decrease in accounts payable - trade and
other and accrued expenses (88,136) (67,642)
Other items - net (21,010) (5,637)
Net cash provided by (used in) operating
activities 11,843 (5,205)
Cash Flow from Investing Activities
Additions to properties and equipment (184,011) (111,758)
Sales and retirements of properties
and equipment 151 105
Proceeds from the sale of assets to be
leased, net -- 3,777
Net cash used in investing activities (183,860) (107,876)
Cash Flow from Financing Activities
Additions to debt 344,724 300,000
Retirements of debt (215,633) (164,630)
Decrease in accounts payable, banks (1,870) (18,310)
Dividends paid (9,133) (8,757)
Issuance of common stock 18,529 3,300
Net cash provided by financing activities 136,617 111,603
Net Decrease in Cash and Cash Equivalents (35,400) (1,478)
Cash and Cash Equivalents at Beginning
of Period 44,769 17,008
Cash and Cash Equivalents at End of Period $ 9,369 $ 15,530
See accompanying notes to consolidated financial statements.
5
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Accounting Policies
General Anadarko Petroleum Corporation is engaged in the
exploration, development, production and marketing of natural gas,
crude oil, condensate and natural gas liquids (NGLs). The terms
"Anadarko" and "Company" refer to Anadarko Petroleum Corporation and
its subsidiaries. The principal subsidiaries of Anadarko are: Anadarko
Algeria Corporation, Anadarko Energy Services Company and Anadarko
Gathering Company.
2. Inventories Materials and supplies and natural gas inventories
are stated at the lower of average cost or market. Natural gas, when
sold from inventory, is charged to expense using the average cost
method. Oil, due from third-parties, is stated at market value. The
major classes of inventories are as follows:
March 31, December 31,
thousands 2000 1999
Oil, due from third-parties $12,672 $24,659
Materials and supplies 13,108 14,171
Natural gas, stored in inventory 6,353 7,260
$32,133 $46,090
3. Properties and Equipment Oil and gas properties include costs of
$330,865,000 and $323,019,000 at March 31, 2000 and December 31, 1999,
respectively, which were excluded from capitalized costs being
amortized. These amounts represent costs associated with unevaluated
properties and major development projects.
4. Long-term Debt A summary of long-term debt follows:
March 31, December 31,
thousands 2000 1999
Commercial Paper $ 162,369 $ 198,322
Notes Payable, Banks 65,000 145,000
8 1/4% Notes due 2001 100,000 100,000
6 3/4% Notes due 2003 100,000 100,000
5 7/8% Notes due 2003 100,000 100,000
Zero Coupon Convertible
Debentures due 2020 345,528 --
7 1/4% Debentures due 2025 320 100,000
7% Debentures due 2027 100,000 100,000
6.625% Debentures due 2028 100,000 100,000
7.20% Debentures due 2029 300,000 300,000
7.73% Debentures due 2096 100,000 100,000
7 1/4% Debentures due 2096 100,000 100,000
$1,573,217 $1,443,322
6
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Long-term Debt (continued)
The commercial paper and notes payable to banks have been classified as
long-term debt in accordance with Statement of Financial Accounting
Standards No. 6, "Classification of Short-term Obligations Expected to
be Refinanced," under the terms of Anadarko's Bank Credit Agreements.
In March 2000, Anadarko issued $345,000,000 of Zero Coupon Convertible
Debentures due March 2020, with a face value at maturity of
$690,000,000. The Debentures were issued at a discount and accrue
interest at 3.50% annually until reaching face value at maturity;
however, interest will not be paid prior to maturity. The Debentures are
convertible into common stock at the option of the holder at any time at
a fixed conversion rate. A holder has the right to require Anadarko to
repurchase a Debenture at a specified price in March 2003, 2008 and
2013. The Debentures are redeemable at the option of Anadarko after
three years. The net proceeds from the offering were used to repay
floating interest rate debt.
In April 2000, the Company entered into a 364-Day Credit Agreement. The
364-Day Credit Agreement provides for $300,000,000 principal amount and
expires in 2001.
5. Preferred Stock For the first quarter of 2000 and 1999,
dividends of $13.65 per share (equivalent to $1.365 per Depositary
Share) were paid to holders of preferred stock.
6. Common Stock Under the most restrictive provisions of the
Company's credit agreements, which limit the payment of dividends,
retained earnings of $796,146,000 and $763,480,000 were not restricted
as to the payment of dividends at March 31, 2000 and December 31, 1999,
respectively.
The Company's basic earnings per share (EPS) amounts have been computed
based on the average number of common shares outstanding. Diluted EPS
amounts include the effect of the Company's outstanding stock options
under the treasury stock method and the net effect of the assumed
conversion of the convertible debentures.
7
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Common Stock (continued)
The reconciliation between basic and diluted EPS is as follows:
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
thousands except Per Share Per Share
per share amounts Income Shares Amount Loss Shares Amount
Basic EPS
Income (loss) available
to common stockholders $39,069 128,046 $0.31 $(23,085) 120,492 $(0.19)
Effect of convertible
debentures 515 2,675 -- --
Effect of dilutive
stock options -- 743 -- --
Diluted EPS
Income (loss) available
to common stockholders
plus assumed conversion $39,584 131,464 $0.30 $(23,085) 120,492 $(0.19)
For the three months ended March 31, 2000 and 1999, options for
3,189,000 and 4,463,000, respectively, shares of common stock were
excluded from the diluted EPS calculation because the options' exercise
price was greater than the average market price of common stock for the
periods. For the three months ended March 31, 1999, there were 735,000
common stock equivalents related to outstanding stock options that were
excluded from the computation of diluted EPS, since they had an anti-
dilutive effect.
7. Statement of Cash Flows Supplemental Information The amounts
of cash paid (received) for interest (net of amounts capitalized) and
income taxes are as follows:
Three Months Ended
March 31
thousands 2000 1999
Interest $24,525 $19,361
Income taxes $ 1,771 $ (198)
8. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 allowed
a "severance, production or similar" tax to be included as an add-on,
over and above the maximum lawful price for natural gas. Based on the
Federal Energy Regulatory Commission (FERC) ruling that the Kansas ad
valorem tax was such a tax, the Company collected the Kansas ad valorem
tax.
Background of Present Litigation FERC's ruling regarding the ability
of producers to collect the Kansas ad valorem tax was appealed to the
United States Court of Appeals for the District of Columbia Circuit
(D.C. Circuit). The Court held in June 1988 that FERC failed to provide
a reasoned basis for its findings and remanded the case to FERC.
8
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
Ultimately, the D.C. Circuit issued a decision on August 2, 1996 ruling
that producers must refund all Kansas ad valorem taxes collected
relating to production since October 1983. The Company filed a petition
for writ of certiorari with the Supreme Court. That petition was denied
on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest at
issue which has not been paid to date, assuming that the October 1983
effective date remains in effect, is about $47,127,000 (pretax) as of
March 31, 2000.
FERC Proceedings Depending on future FERC orders, the Company could
be required to pay all or part of the amounts claimed by all pipelines
(which might include PanEnergy Corp) pending further potential review by
FERC or the courts.
PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit in
the Federal District Court for the Southern District of Texas against
PanEnergy seeking declaration that pursuant to prior agreements Anadarko
is not required to issue refunds to PanEnergy for the principal amount
of $14,003,000 (pretax) and, if the petition for adjustment is denied in
its entirety by FERC with respect to PanEnergy refunds, interest in an
amount of $31,349,000 (pretax) as of March 31, 2000. The Company also
seeks from PanEnergy the return of $816,000 of the $830,000 (pretax)
charged against income in 1993 and 1994. In response to a motion filed
by PanEnergy, the United States District Court issued an order on
March 17, 1998 staying the litigation, pending the exercise by FERC of
its regulatory jurisdiction.
FERC Order of October 13, 1998 On October 13, 1998, FERC issued a
final order on Anadarko's complaint. The order declares that Anadarko
Production Company (now an affiliate of Duke Energy) is responsible as
first seller for making refunds of Kansas ad valorem tax reimbursements
collected from 1983 through August 1, 1985. The Company estimates this
amount to be as much as $17,070,000. The Company is responsible to make
refunds for reimbursements it collected as first seller from August 1,
1985 through 1988. On February 23, 2000, FERC clarified its prior order
stating the Company must, in the first instance, make refunds for former
subsidiaries of Anadarko Production Company. The Company estimates this
amount to be as much as $27,805,000. The FERC order states that whether
Anadarko Production Company or the Company is entitled to reimbursement
from another party for the refunds ordered is a matter to be pursued in
an appropriate judicial forum. On January 15, 1999, FERC issued an order
9
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
denying a request for rehearing filed by PanEnergy and reaffirming the
October 1998 order. FERC may, in the near future, issue an order based
upon the above allocation regarding when the refunds must be paid and
the specific refund amount. The issue of reimbursement will now be
pursued in U.S. District Court. On April 16, 1999, the U.S. District
Court ordered the parties to mediation. One session with the mediator
has been held. The Court has also set the matter for trial on the
November/December 2000 trial term. Supplemental motions for summary
judgment have been filed by both parties.
Kansas Corporation Commission (KCC) Proceeding On April 30, 1998,
the Company's subsidiary, Anadarko Gathering Company (AGC), filed a
petition with the KCC to clarify AGC's rights and obligations, if any,
related to the payment by first sellers of Kansas ad valorem tax
refunds. The refunds at issue relate to sales made by Anadarko
Production Company, a PanEnergy affiliate, through facilities known as
the Cimmaron River System during the time period from 1983 to 1988. AGC
purchased the Cimmaron River System from Centana, the successor of
Anadarko Production Company, in 1995. The petition, among other things,
asks the KCC to determine whether AGC or Anadarko Production Company is
responsible for the payment or distribution of refunds received from
first sellers to Anadarko Production Company's former customers and
requests guidance concerning the disposition of refunds received that
are attributable to sales made to Anadarko Production Company customers
that did not reimburse Anadarko Production Company for Kansas ad valorem
taxes during the relevant time periods. On June 1, 1999, the KCC entered
an order approving the plan proposed by AGC. Under this order, after the
conclusion of all litigation related to Kansas ad valorem tax
proceedings, "AGC shall be authorized to deduct from the amounts of
refunds due for the period from 1986 to and through 1988 all amounts
shown not to have been collected by AGC's predecessor in interest,
Centana Energy Corporation by year, for the period from 1986 through
1988." The order is now final.
Anadarko's net income for 1997 included a $1,800,000 charge (pretax)
related to the Kansas ad valorem tax refunds. This charge reflects all
principal and interest which may be due at the conclusion of all
regulatory proceedings and litigation to parties other than PanEnergy.
The Company is unable at this time to predict the final outcome of this
matter and no provision for liability (excluding amounts recorded in
1993, 1994 and 1997) has been made in the accompanying financial
statements.
10
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. The information, as furnished, reflects all normal recurring
adjustments that are, in the opinion of management, necessary to a fair
statement of financial position as of March 31, 2000 and December 31,
1999, the results of operations for the three months ended March 31,
2000 and 1999 and cash flows for the three months ended March 31, 2000
and 1999.
10. Pending Merger Transaction On April 2, 2000, Anadarko and Union
Pacific Resources Group Inc. (UPR) entered into an Agreement and Plan
of Merger. Subject to the terms and conditions set forth in the
agreement, UPR will be merged with and into a subsidiary of Anadarko
and UPR shareholders will receive 0.4550 Anadarko common shares for each
UPR common share they own. As a result following completion of the
merger, Anadarko shareholders will hold approximately 53% of the combined
company and UPR shareholders will hold approximately 47%. The stock-
for-stock deal is subject to approval by shareholders of both UPR and
Anadarko, satisfaction of conditions and customary regulatory approvals.
Following the merger, UPR will be a wholly-owned subsidiary of Anadarko.
Anadarko expects the merger to be treated as a tax-free reorganization
and accounted for as a purchase. In connection with the execution of the
merger agreement, UPR and Anadarko granted each other the right to
purchase 19.9% of each other's outstanding shares.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has made in this report, and may from time to time otherwise
make in other public filings, press releases and discussions with
Company management, forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 concerning the Company's operations,
economic performance and financial condition. These forward looking
statements include information concerning future production and
reserves, schedules, plans, timing of development, contributions from
oil and gas properties, and those statements preceded by, followed by or
that otherwise include the words "believes", "expects", "anticipates",
"intends", "estimates", "projects", "target", "goal", "plans",
"objective", "should" or similar expressions or variations on such
expressions. For such statements, the Company claims the protection of
the safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
various risks and uncertainties, and actual results could differ
materially from those expressed or implied by such statements due to a
number of factors in addition to those discussed elsewhere in this Form
10-Q and in the Company's other public filings, press releases and
discussions with Company management. Anadarko undertakes no obligation
to publicly update or revise any forward-looking statements. See
Additional Factors Affecting Business in the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in
the Company's 1999 Annual Report on Form 10-K.
Overview of Operating Results
For 2000's first quarter, Anadarko reported net income available to
common stockholders of $39.1 million, or 31 cents per share (basic), on
revenues of $247 million. By comparison, during 1999's first quarter,
Anadarko had a net loss of $23.l million, or 19 cents per share (basic),
on $136 million of revenues. The loss in the first quarter of 1999
reflected a non-cash charge of $20 million before taxes ($12.8 million
after taxes) related to operations in Eritrea. Excluding the
international impairment, the Company's net loss for the first quarter
of 1999 was $10.3 million, or 8 cents per share (basic).
The improved revenues and earnings in the first three months of 2000
compared to the same period in 1999 were due primarily to the
significant improvement in commodity prices, partially offset by higher
operating expenses, administrative and general costs, and interest
expense.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table shows the Company's volumes and average prices for
the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31
2000 1999
Natural gas
Bcf 44.3 44.0
MMcf/d 486 489
Price per Mcf $ 2.46 $ 1.59
Crude oil and condensate
United States
MBbls 1,847 2,324
MBbls/d 20 26
Price per barrel $24.72 $ 9.92
Algeria
MBbls 1,967 1,644
MBbls/d 22 18
Price per barrel $27.87 $11.57
Total
MBbls 3,814 3,968
MBbls/d 42 44
Price per barrel $26.34 $10.60
Natural gas liquids
MBbls 2,006 1,632
MBbls/d 22 18
Price per barrel $20.73 $ 8.60
Total Energy Equivalent
Barrels (MMEEBs) 13.2 12.9
Bcf - billion cubic feet
MBbls - thousand barrels
MBbls/d - thousand barrels per day
Mcf - thousand cubic feet
MMcf/d - million cubic feet per day
MMEEBs - million energy equivalent barrels
Costs and expenses during the first quarter of 2000 were $141.7
million, an increase of 14% compared to $124.2 for the first quarter of
1999 (excluding the impairment). The increase is primarily due to
increases in operating expenses associated with processing natural gas
liquids (NGLs) volumes and administrative and general expenses
associated with increased employee benefits.
Interest expense for the first quarter of 2000 was $21.1 million, an
increase of 13% compared to $18.6 million for the first quarter of
1999. The increase was primarily due to higher interest rates in 2000.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Natural Gas Volumes and Prices During the first quarter of 2000,
Anadarko's natural gas production was essentially level with 1999's same
period. Increases in production from the Bossier gas play were offset
by production declines in the Gulf of Mexico. The Company's wellhead
price for natural gas was $2.46 per thousand cubic feet (Mcf) for the
first three months of 2000, up 55% from $1.59 per Mcf for the first
three months of 1999.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
Anadarko's oil production for the first three months of 2000 averaged
42,000 barrels of oil per day (BOPD) compared to 44,000 BOPD in 1999's
first quarter. Anadarko's average oil price for the first quarter of
2000 was $26.34 per barrel, up 148% from $10.60 per barrel for the first
quarter of 1999.
In the first three months of 2000, the Company's NGLs sales volumes
averaged 22,000 barrels per day, a 22% increase from 18,000 barrels per
day in the first three months of 1999. The Company's average price for
NGLs was $20.73 per barrel in the first quarter of 2000, up 141% from
$8.60 per barrel in the first three months of 1999.
Capital Expenditures, Liquidity and Dividends
During the first quarter of 2000, Anadarko's capital spending
(including capitalized interest and overhead) was $184.0 million
compared to $111.8 million in the first quarter of 1999.
The Company believes that cash flows and existing or available credit
facilities will provide the majority of funds to meet its capital and
operating requirements for 2000. The Company will continue to evaluate
funding alternatives, including property sales and additional
borrowing, to secure other funds for capital development.
In March 2000, Anadarko issued $345 million of Zero Coupon Convertible
Debentures due March 2020, with a face value at maturity of $690
million. The Debentures were issued at a discount and accrue interest at
3.50% annually until reaching face value at maturity; however, interest
will not be paid prior to maturity. The Debentures are convertible into
common stock at the option of the holder at any time at a fixed
conversion rate. A holder has the right to require Anadarko to
repurchase a Debenture at a specified price in March 2003, 2008 and
2013. The Debentures are redeemable at the option of Anadarko after
three years. The net proceeds from the offering were used to repay
floating interest rate debt.
In April 2000, the Company entered into a 364-Day Credit Agreement. The
364-Day Credit Agreement provides for $300 million principal amount and
expires in 2001.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Pending Merger Transaction
On April 2, 2000, Anadarko and Union Pacific Resources Group Inc.
(UPR) entered into an Agreement and Plan of Merger. Subject to the
terms and conditions set forth in the agreement, UPR will be merged
with and into a subsidiary of Anadarko and UPR shareholders will
receive 0.4550 Anadarko common shares for each UPR common share they
own. As a result following completion of the merger, Anadarko
shareholders will hold approximately 53% of the combined company and
UPR shareholders will hold approximately 47%. As a result of the
merger, on a combined basis as of year-end 1999, the combined companies
would have had a total capitalization of $10 billion, comprised of $5.9
billion of equity and $4.1 billion of debt. The debt to total
capitalization ratio would be 41%. The Company believes that the
additional debt related to the merger will not adversely affect
Anadarko's ongoing operations. The stock-for-stock deal is subject to
approval by shareholders of both UPR and Anadarko, satisfaction of
conditions and customary regulatory approvals. Following the merger,
UPR will be a wholly-owned subsidiary of Anadarko. Anadarko expects the
merger to be treated as a tax-free reorganization and accounted for as
a purchase. In connection with the execution of the merger agreement,
UPR and Anadarko granted each other the right to purchase 19.9% of each
other's outstanding shares.
Exploration and Development Activities
During the first quarter of 2000, Anadarko drilled or participated in
a total of 119 wells, including 42 oil wells, 73 gas wells and 4 dry
holes. This compares to a total of 55 wells in the first quarter of
1999, including 21 oil wells, 21 gas wells and 13 dry holes. Following
is a description of activity during the quarter.
Onshore - Lower 48 States
Bossier Sand Play In terms of both production growth and
operational efficiency, Anadarko continues to achieve strong results
from its most active onshore domestic program. At the end of the first
quarter, the Company's net natural gas volumes from the Bossier Sand
Play were 135 MMcf/d, more than three times higher than production
levels at the same time a year ago. Over that same period, the number
of rigs in operation has increased from eight to 21. Of the 130 Bossier
wells the Company has completed since 1996, only one has been a dry
hole.
During the first quarter, Anadarko spudded its first well in the Vernon
Field of Jackson Parish, Louisiana. In addition, the Company has
approved a five-well development program.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company reported results from the first significant producers in
the Dowdy Ranch Field, a new development area northeast of the Dew and
Mimms Creek Fields in Freestone County. The Burgher B-1 well tested 9.2
MMcf/d of gas and the Swank A-1 tested 2.5 MMcf/d of gas. Other
completions of note from the first quarter include:
- Stephens A-4 (6.9 MMcf/d of gas), Dew Field
- Alma Moore No. 8 (6.4 MMcf/d of gas), Mimms Creek Field
- Burgher C-1 (6.3 MMcf/d of gas), Dowdy Ranch Field
- Burgher G-1 (6.1 MMcf/d of gas), Dowdy Ranch Field
- High A-10 (5.5 MMcf/d of gas), Dew Field
- Turner A-4 (5.5 MMcf/d of gas), Dew Field
- High A-8 (5.3 MMcf/d of gas), Dew Field
Anadarko owns a 100% working interest in each of these wells.
Hugoton Embayment First quarter activity in southwest Kansas was
highlighted by the Company's fifth success out of six wells it has
drilled as part of the Hugoton Joint Venture program with Mobil. The
HJV Miller A-1 well in Stevens County, Kansas, tested 1.3 MMcf/d of gas
after being completed as a Lower Morrow producer. The Company owns a
100% working interest in the well. Combined production from the first
five producers was 3 MMcf/d of gas at the end of the first quarter.
Since signing the four-year joint venture agreement in 1997, Anadarko
and Mobil have been working together to explore the deeper horizons in
this traditionally shallow field.
Along the Stevens/Morton County line in Kansas, the Company completed
its fourth successful producer in the Simmons Field during the first
quarter. The Jenkins C-3 was producing at a rate of 14.3 MMcf/d of gas
from the Upper Morrow sand at the end of the first quarter. Anadarko
has a 100% working interest in the well.
Also in Morton County, Kansas, Anadarko announced the successful
recompletion of the USA Barker No. A-3 well during January. The
Berryman Richfield Field producer tested 2.2 MMcf/d of gas after being
recompleted to the Wabaunsee and Topeka intervals. The Company owns a
100% working interest in the well.
Texas Panhandle As part of a comprehensive infill drilling program
in the West Panhandle Field of Moore County, Texas, Anadarko completed
the Brown B-6034R well. The shallow Red Cave well tested 1.9 MMcf/d of
gas. The Company has a 100% working interest in the well.
Permian Basin Activity in two separate waterflood programs launched
in 1999 continued at a steady pace in the first quarter of 2000. In the
Snyder Field of Howard County, Texas, Anadarko reported results from
three wells. The Susie B. Snyder No. 2042 and No. 2031 tested at a
combined rate of 172 BOPD from the San Angelo and Clearfork formations,
while the No. 2731 well produced 66 BOPD from the San Angelo Formation.
Anadarko owns a 100% working interest in each of these wells, which are
part of a 27-well program that began in 1999. An additional 61-well
program was approved during the first quarter and is now in progress.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In the Revilo Field of Scurry County, Texas, another core waterflood
area for Anadarko, the Company completed a 13-well drilling program
that commenced in late 1999. During the first quarter, Anadarko
reported three significant completions from this program: combined
production from the R.W. Boyd No. 15 and 17 wells was 136 BOPD, while
the R.W. Boyd No. 14 well tested 71 BOPD. The Company has a 100%
working interest in the wells.
After the recent extension of the North Shugart Field in Eddy County,
New Mexico, Anadarko had two successful recompletions during the first
quarter. The Paton "B" Federal No. 2 encountered 285 feet of pay in the
Bone Spring Formation after being drilled to a total depth of 9,000
feet and is currently producing 179 BOPD and 117 thousand cubic feet
per day (Mcf/d) of gas. Other pay intervals behind the pipe have yet to
be tested. In addition, the Baish Federal No. 8 well was drilled to a
total depth of 9,030 feet and encountered 254 feet of net pay in the
same Bone Spring interval. Current production from the well is 214 BOPD
and 205 Mcf/d of gas. The Company has a 100% working interest in each
of these wells. Anadarko has also drilled six other Bone Spring wells
that are in various stages of completion and initial results are
encouraging. The Company holds about 1,200 acres in the North Shugart
Field, which is located about 60 miles southeast of Roswell, New
Mexico. Production from the field is 700 BOPD and 600 Mcf/d of gas - a
ten-fold increase in volumes prior to the start of the program.
Offshore - Gulf of Mexico
Sub-salt Following successful results from the second
development/delineation well, Anadarko has increased the area of known
reserves at the Hickory Field. The Grand Isle Block 116 No. 2 well
encountered main field pay zones down-dip of the original discovery
well (Grand Isle 116 No. 1) drilled in 1998, about one mile to the
north. The Company has drilled the second delineation well and will now
drill the fourth well in the field to delineate the reservoir. A
separate exploration well has been approved for Grand Isle Block 111
and will begin drilling once the work on Block 116 is completed.
Construction of the Hickory platform continued during the first quarter
in Houma, Louisiana and is on schedule for installation during the
summer of 2000. First production should begin in the fourth quarter of
2000. Anadarko serves as operator and has a 50% working interest.
Fabrication continues on the jacket and production deck that will be
used to develop the Tanzanite discovery (Eugene Island 346), offshore
Louisiana. The platform is on schedule for installation during the
summer of 2000. Meanwhile, the Company continues its drilling and
seismic processing program to further delineate the field. First
production is expected to begin in the fourth quarter of 2000. Anadarko
holds a 100% working interest in the Tanzanite project.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In the Agate Field (Ship Shoal Block 361), Anadarko completed a
replacement well during the first quarter, thus restoring production
that had been disrupted since May 1999. The well is currently flowing
5.1 MMcf/d of gas and 310 barrels of condensate per day (BCPD) with
production tied-back via a sub-sea completion to the Mahogany platform
(Ship Shoal Block 349/359), which is six miles to the east. Anadarko
has a 50% working interest in the Agate Field.
Conventional Two wells were successfully recompleted at the High
Island 376 "B" platform, one of Anadarko's conventional projects in the
Gulf of Mexico. The B-1 well tested 1,744 BOPD and 2.2 MMcf/d of gas
after being recompleted to the Basal Nebraskan (BN)-4 interval. The
High Island 376 B-3 well was recompleted to the BN-3 interval, testing
21 MMcf/d of gas and 1,622 BCPD. Anadarko owns a 34% working interest
in the field and serves as operator.
The East Cameron Block 347 No. 1 well, which discovered a natural gas
accumulation above salt at the Garnet prospect offshore Louisiana, was
completed during the first quarter and is currently producing 20 MMcf/d
of gas and 390 BCPD. Production was tied-back to East Cameron 359 three
miles to the south through a sub-sea completion. The Company has a 100%
working interest in the Garnet prospect.
At the Matagorda Island 622/623 Complex, during the first quarter
Anadarko successfully completed the C-7 well, increasing gross field
production from 215 MMcf/d to 295 MMcf/d of gas. A second well is
currently drilling. The Company owns a 37.5% working interest in the
complex.
Deepwater In April 2000, Anadarko announced initial results from
the Marco Polo prospect, its first Company-operated deepwater project
in the Gulf of Mexico. The Green Canyon Block 608 No. 1 well
encountered 320 feet of oil pay in two major intervals while being
drilled to its current depth of 13,225 feet. Additional delineation
drilling will be required to determine the commerciality of the field.
A sidetrack well to the Green Canyon 608 No. 1 well is now being
drilled. The Company owns a 100% working interest in the Marco Polo
prospect, which is located 160 miles off the Louisiana coast in 4,300
feet of water.
Lease Sale Anadarko strengthened its acreage position in the
central Gulf of Mexico during the first quarter after participating in
the federal Outer Continental Shelf (OCS) Lease Sale No. 175 conducted
by the Minerals Management Service (MMS). Working alone and with
partners, Anadarko was the apparent high bidder for 33 blocks
representing a net investment to the Company of $24.9 million. The
tracts cover 166,482 acres (gross) and include a mix of traditional
shallow water areas and non-traditional plays such as the sub-salt and
deepwater. Water depth of the blocks range from 229 feet to 4,400 feet.
All bids are subject to review and final approval by the MMS.
18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Alaska
Preparation for first production from the Alpine Field on the North
Slope continued in the first quarter. Construction of the modules has
been completed and the various components have been delivered to the
development site. Overall, the project is about 85% complete. Initial
production of 40,000 BOPD (gross) is slated to begin in the third
quarter of 2000. Anadarko has a 22% working interest in the field.
During the winter season, the Company and its partners completed
drilling on four prospects (Nanuk, Clover, Rendezvous and Spark).
Results have not been released pending evaluation and further study.
International
Algeria Efforts during the first quarter were primarily focused on
continued development of the Company's discoveries on Block 404.
Construction of Stage II facilities is underway at the Hassi Berkine
South (HBNS) Field and when completed should increase gross production
capacity from 60,000 BOPD to 135,000 BOPD beginning in 2001.
Construction has now begun on a third production train to develop the
Hassi Berkine (HBN) Field, which is expected to add an additional
75,000 BOPD of gross production capacity in 2002.
In the first three months of 2000, Anadarko reported results on a
number of water injection projects that will help enhance recovery from
the HBNS and Ourhoud Fields. The HBNS-23 well was completed after being
drilled to a total depth of 11,170 feet. Water injection operations
commenced following the connection of the HBNS-23 and HBNS-22 wells to
the distribution system. At the southern end of Block 404, the QB-9
well was drilled to a total depth of 11,748 and suspended as a planned
water injector awaiting completion.
In March, the HBNS-29 was completed as an oil producer after being
drilled to a total depth of 11,068 feet.
New Accounting Principles
Accounting for Derivatives Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," provides guidance for accounting for derivative
instruments and hedging activities. In July 1999, SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," was issued
and delays the effective date for one year, to fiscal years beginning
after June 15, 2000. The Company is evaluating the impact of the
provisions of SFAS No. 133.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Use of Derivatives Anadarko produces, purchases and sells natural
gas, crude oil and NGLs. As a result, Anadarko's financial results can
be significantly affected by changes in these commodity prices.
Anadarko uses derivative commodity instruments to hedge the Company's
exposure to changes in the market price of natural gas and crude oil,
and to provide methods to fix the price for natural gas independently
of the physical purchase or sale. Derivative commodity instruments also
provide methods to meet customer pricing requirements while achieving a
price structure consistent with the Company's overall pricing strategy.
While derivative commodity instruments are intended to reduce the
Company's exposure to declines in the market price of natural gas and
crude oil, the derivative commodity instruments may also limit
Anadarko's gain from increases in the market price of natural gas and
crude oil. As a result, gains and losses on derivative commodity
instruments are generally offset by similar changes in the realized
price of natural gas and crude oil. Gains and losses are recognized in
revenues for the periods to which the derivative commodity instruments
relate. In the event of a loss of correlation between oil and gas
reference prices for a derivative commodity instrument and actual oil
and gas prices, gains or losses for the amount the instrument has not
offset the change in actual prices are recognized in the period.
Occasionally, the Company may enter into derivative commodity
instruments for trading purposes with the objective of generating
profits on or from exposure to shifts or changes in the market price of
natural gas and crude oil. These trading activities do not qualify as
hedges of production and are marked to market in the period. Trading
gains or losses are recorded with revenues from the corresponding
product. Anadarko's derivative commodity instruments currently are
comprised of futures, swaps and options contracts.
While the volume of derivative commodity instruments utilized by the
Company to hedge its market price risk can vary during the year within
the boundaries of its established policy guidelines, the fair value of
those instruments at March 31, 2000 and December 31, 1999 was, in the
judgment of the Company, immaterial. Additionally, through the use of
sensitivity analysis, the Company evaluates separately, for its non-
trading and trading activities, the potential effect that reasonably
possible near term changes in the market prices of natural gas and
crude oil may have on the fair value of the Company's derivative
commodity instruments. Based upon an analysis utilizing the actual
derivative contractual volumes and assuming a 10% adverse movement in
commodity prices, the potential decrease in the fair value of the
derivative commodity instruments at March 31, 2000 and December 31,
1999 does not have a material adverse effect on the financial position
or results of operations of the Company.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Anadarko is also exposed to risk resulting from changes in interest
rates as a result of the Company's variable and fixed interest rate debt
as well as fixed to floating interest rate swaps. The Company has
evaluated the potential effect that reasonably possible near term
changes in interest rates may have on the fair value of the Company's
various debt instruments and its interest rate swap agreements. Based
upon an analysis, utilizing the actual interest rates in effect as of
March 31, 2000 and December 31, 1999 and assuming a 10% increase in
interest rates, the potential decrease in the fair value of the
derivative interest swap instruments at March 31, 2000 and December 31,
1999 does not have a material effect on the financial position or
results of operations of the Company.
21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Kansas Ad Valorem Tax See Note 8 of the Notes to Consolidated
Financial Statements under Part I. Financial Information of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits
not so designated are incorporated herein by reference to a prior
filing as indicated.
Exhibit Original Filed File
Number Description Exhibit Number
2(a) Agreement and Plan of Merger 2.1 to Form 8-K dated 1-8968
dated as of April 2, 2000, April 2, 2000
among Anadarko, Subcorp and
UPR
(b) Amendment No. 1 to Rights 2.4 to Form 8-K dated 1-8968
Agreement, dated as of April 2, 2000
April 2, 2000, between
Anadarko and Rights Agent
3(a) Restated Certificate of 19(a)(i) to Form 10-Q 1-8968
Incorporation of Anadarko for quarter ended
Petroleum Corporation, September 30, 1986
dated August 28, 1986
(b) Amendment to the Restated 3(b) to Form 10-Q 1-8968
Certificate of Incorporation for quarter ended
of Anadarko Petroleum March 31, 1999
Corporation, dated
April 29, 1999
(c) Certificate of Correction 3(c) to Form 10-Q 1-8968
filed to correct the for quarter ended
Amendment to the Restated June 30, 1999
Certificate of Incorporation
of Anadarko Petroleum
Corporation, dated
June 15, 1999
(d) By-laws of Anadarko 3(b) to Form 10-Q 1-8968
Petroleum Corporation, for quarter ended
as amended June 30, 1996
*4(a) 364-Day Credit Agreement,
dated as of April 14, 2000
22
Item 6. Exhibits and Reports on Form 8-K (continued)
Exhibit Original Filed File
Number Description Exhibit Number
*12 Computation of Ratios of
Earnings to Fixed Charges
and Earnings to Combined
Fixed Charges and Preferred
Stock Dividends
*27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated March 7, 2000 was filed in which the
earliest event reported was March 7, 2000. This event was reported
under Item 5, "Other Events" and Item 7, "Financial Statements and
Exhibits".
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized officer and principal financial
officer.
ANADARKO PETROLEUM CORPORATION
(Registrant)
May 12, 2000 By: [MICHAEL E. ROSE]
Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer