____________________________________________________________________
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: June 30, 1997
Commission File Number: 1-8968
______________________
ANADARKO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0146568
(State of incorporation) (I.R.S. Employer
Identification No.)
17001 NORTHCHASE DRIVE, HOUSTON, TEXAS 77060-2141
(Address of executive offices)
(281) 875-1101
(Registrant's telephone number)
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 of each of the registrant's
classes of common stock as of July 31, 1997 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, $0.10 par value 59,678,483
____________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
thousands except June 30 June 30
per share amounts 1997 1996 1997 1996
Revenues
Gas sales $ 83,147 $ 88,070 $190,198 $177,185
Oil and condensate sales 39,926 34,894 82,521 65,766
Natural gas liquids and other 15,808 12,124 36,668 27,844
Total 138,881 135,088 309,387 270,795
Cost and Expenses
Operating expenses 33,456 27,918 66,311 54,451
Administrative and general 17,152 19,499 34,187 34,698
Depreciation, depletion and
amortization 47,922 40,268 93,261 83,207
Other taxes 10,701 10,276 23,614 20,415
Total 109,231 97,961 217,373 192,771
Operating Income 29,650 37,127 92,014 78,024
Other Income and (Expenses)
Other income 121 147 960 345
Interest expense (7,967) (9,600) (17,205) (19,102)
Income before Income Taxes 21,804 27,674 75,769 59,267
Income Taxes 8,030 10,046 27,561 21,123
Net Income $ 13,774 $ 17,628 $ 48,208 $ 38,144
Per Common Share
Net income $ 0.23 $ 0.30 $ 0.81 $ 0.65
Dividends $ 0.075 $ 0.075 $ 0.15 $ 0.15
Average Number of Shares
Outstanding 59,640 59,162 59,626 59,108
See accompanying notes to consolidated financial statements.
-2-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
thousands 1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 16,142 $ 14,601
Accounts receivable 146,799 226,824
Inventories, at average cost 28,100 24,540
Prepaid expenses 2,193 3,843
Total 193,234 269,808
Properties and Equipment
Original cost 4,299,484 4,036,165
Less accumulated depreciation, depletion
and amortization 1,810,575 1,738,709
Net properties and equipment - based on
the full cost method of accounting
for oil and gas properties 2,488,909 2,297,456
Deferred Charges 15,618 16,766
$2,697,761 $2,584,030
See accompanying notes to consolidated financial statements.
-3-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET (continued)
(Unaudited)
June 30, December 31,
thousands 1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 165,381 $ 244,219
Banks 14,779 17,995
Accrued expenses
Interest 12,843 12,812
Taxes and other 16,778 10,227
Total 209,781 285,253
Long-term Debt 791,973 731,049
Deferred Credits
Deferred income taxes 516,251 498,973
Other 119,265 54,675
Total 635,516 553,648
Stockholders' Equity
Common stock, par value $0.10
(200,000,000 shares authorized,
60,654,898 and 60,525,699 shares issued
as of June 30, 1997 and December 31, 1996,
respectively) 6,111 6,098
Preferred stock, par value $1.00
(2,000,000 shares authorized, no
shares issued as of June 30, 1997
and December 31, 1996) --- ---
Paid-in capital 339,255 335,848
Retained earnings (as of June 30, 1997,
$410,491,000 was not restricted
as to the payment of dividends) 778,649 739,395
Deferred compensation (2,474) (3,444)
Executives and directors benefit trust,
at market value (1,000,000 shares
as of June 30, 1997 and December 31, 1996) (60,906) (63,813)
Treasury stock (2,316 and 70 shares as
of June 30, 1997 and December 31,
1996, respectively) (144) (4)
Total 1,060,491 1,014,080
$2,697,761 $2,584,030
See accompanying notes to consolidated financial statements.
-4-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
thousands 1997 1996
Cash Flow from Operating Activities
Net income $ 48,208 $ 38,144
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation, depletion and amortization 93,261 83,207
Amortization of restricted stock 953 868
Deferred income taxes 18,456 17,656
160,878 139,875
Decrease in accounts receivable 80,025 2,182
Increase in inventories (3,560) (3,551)
Decrease in accounts payable - trade and
other and accrued expenses (72,256) (40,352)
Other items - net 18 7,980
Net cash provided by operating activities 165,105 106,134
Cash Flow from Investing Activities
Additions to properties and equipment (309,265) (151,756)
Proceeds from the sale of assets to be
leased, net 87,900 ---
Sales and retirements of properties
and equipment 2,843 3,373
Net cash used in investing activities (218,522) (148,383)
Cash Flow from Financing Activities
Additions to debt 72,000 41,147
Retirements of debt (11,076) ---
Increase (decrease) in accounts payable,
banks (3,216) 3,694
Dividends paid (8,954) (8,871)
Issuance of common stock 6,344 6,487
Issuance of treasury stock 497 475
Purchase of treasury stock (637) (608)
Net cash provided by financing activities 54,958 42,324
Net Increase in Cash and Cash Equivalents 1,541 75
Cash and Cash Equivalents at Beginning
of Period 14,601 17,090
Cash and Cash Equivalents at End of Period $ 16,142 $ 17,165
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 Gathering Company; Anadarko Energy Services Company; and,
Anadarko Algeria Corporation.
Use of Derivatives Anadarko uses derivative financial instruments
to reduce the Company's exposure to changes in the market price of
natural gas and crude oil, to fix the price for natural gas and crude
oil independently of the physical purchase or sale, and to manage
interest rates. Commodity financial instruments also provide methods
to meet customer pricing requirements while achieving a price
structure consistent with the Company's overall pricing strategy. The
types of commodity derivative financial instruments currently used by
Anadarko are futures, options and swaps.
Anadarko utilizes the hedge or deferral method of accounting for
commodity derivative financial instruments (with the exception of
losses on certain written options) whereby gains and losses on these
hedging instruments are realized and recorded as revenues on the
income statement when the related natural gas or oil production has
been produced, purchased or delivered. As a result, gains and losses
on commodity financial instruments are generally offset by similar
changes in the realized prices of natural gas and crude oil.
Unrealized gains and losses on these hedging instruments are deferred
and recorded as assets or liabilities on the balance sheet at fair
market value as of the balance sheet date. To qualify as hedging
instruments, these instruments must be highly correlated to
anticipated future sales such that the Company's exposure to the risks
of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines
in the market price of natural gas and crude oil, the commodity
financial instruments may also limit Anadarko's gain from increases in
the market price of natural gas and crude oil.
Written options that are not combined with offsetting purchased
options are not classified as hedges. Unrealized losses on these
written options, offset by any option premiums received for these
written options, are charged to the income statement as a reduction to
revenues on a current basis.
-6-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
1. Summary of Accounting Policies (continued)
Use of Derivatives (continued)
Gains and losses related to the Company's interest rate swap agreement
are included in interest expense on a current basis. The swap agree-
ment effectively converts a portion of the Company's fixed interest
rate debt to variable interest rate debt.
2. Inventories Inventories are stated at the lower of average cost
or market. NGLs and natural gas, when sold from inventory, are charged
to expense using the average-cost method. The major classes of
inventories are as follows:
June 30, December 31,
thousands 1997 1996
Materials and supplies $28,014 $23,495
Natural gas liquids, stored in inventory 54 28
Natural gas, stored in inventory 32 1,017
$28,100 $24,540
3. Properties and Equipment Oil and gas properties include costs of
$310,646,000 and $254,811,000 at June 30, 1997 and December 31, 1996,
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:
June 30, December 31,
thousands 1997 1996
Commercial Paper $ 19,973 $ 31,049
Notes Payable, Banks 72,000 ---
8 3/4% Notes due 1998 100,000 100,000
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
7 1/4% Debentures due 2025 100,000 100,000
7.73% Debentures due 2096 100,000 100,000
7 1/4% Debentures due 2096 100,000 100,000
$791,973 $731,049
The commercial paper, notes payable to banks and 8 3/4% Notes due 1998
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.
-7-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Long-term Debt (continued)
In June 1997, the Company's Revolving Credit Agreement and 364-Day
Credit Agreement were amended. The Agreements were amended as
follows: the principal amounts of the Agreements were reduced from
$250,000,000 and $150,000,000, respectively, to $225,000,000 and
$125,000,000, respectively; the number of commercial banks in the
group was changed from eleven to eight; and, the expiration dates of
the Agreements were extended for one year. During 1996 and the first
six months of 1997, there were no outstanding borrowings under these
Agreements.
In July 1997, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that will permit upon effectiveness
the issuance of up to $300,000,000 in senior and subordinated debt
securities and equity securities. Net proceeds, terms and pricing of
offerings of securities issued under the shelf registration statement
will be determined at the time of the offering. Anadarko has used
similar shelf registration statements since 1989 to provide added
flexibility in financing strategies. There have been no securities
issued under this shelf registration.
5. Compressor Sale-Leaseback Agreement In January 1997, the
Company entered into a sale-leaseback agreement for $87,900,000 (net)
involving 145 natural gas compressors in Anadarko's major mid-
continent gathering systems. Proceeds from the transaction were used
for general corporate purposes. The gain of $66,200,000 is deferred
and will be amortized over the lease term as a reduction to operating
expenses.
6. Common Stock For the second quarter of 1997, dividends of
seven and one-half cents per share were paid to holders of common
stock. Under the most restrictive provisions of the Company's credit
agreements, which limit the payment of dividends, retained earnings of
$410,491,000 and $364,080,000 were not restricted as to the payment of
dividends at June 30, 1997 and December 31, 1996, respectively.
7. Statement of Cash Flows Supplemental Information The
amounts of cash paid for interest (net of amounts capitalized) and
income taxes are as follows:
Six Months Ended
June 30
thousands 1997 1996
Interest $17,423 $18,931
Income taxes $10,903 $ 3,905
-8-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Operating Expenses Operating expenses by category are as
follows:
Three Months Ended Six Months Ended
June 30 June 30
thousands 1997 1996 1997 1996
Oil and gas $20,398 $17,165 $38,416 $32,288
Plant, gathering and
marketing 9,920 8,117 19,594 15,587
Gas purchases 2,597 2,476 7,185 6,061
Other 541 160 1,116 515
$33,456 $27,918 $66,311 $54,451
9. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 (NGPA)
allows 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 in addition to the otherwise maximum lawful
price. FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia (D.C. Circuit), which held in
June 1988 that FERC failed to provide a reasoned basis for its
findings and remanded the case to FERC for further consideration.
On December 1, 1993, FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for
sales made on or after June 28, 1988. FERC clarified the effective
date of its decision by an order dated May 19, 1994. The clarification
provided that the June 28, 1988 effective date applies to tax bills
rendered after that date, not sales made on or after that date. Based
on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) was
charged against income in 1994, in addition to $130,000 (pre-tax)
charged against income in 1993. Numerous parties filed appeals of
FERC's action in the D.C. Circuit. Anadarko, together with other
natural gas producers, challenged FERC's orders on two grounds:
(1) that the Kansas ad valorem tax, properly understood, does qualify
for reimbursement under the NGPA; and (2) FERC's ruling should, in any
event, have been applied prospectively. Other parties separately
challenged FERC's orders on the grounds that FERC's ruling should have
been applied retroactively to December 1, 1978, the date of the enact-
ment of the NGPA and producers should have been required to pay
refunds accordingly.
-9-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Kansas Ad Valorem Tax (continued)
The D.C. Circuit issued its decision on August 2, 1996 which holds
that producers must make refunds of all Kansas ad valorem taxes
collected with respect to production since October 1983. Petitions
for rehearing were denied November 6, 1996. The Company, along with
other gas producing companies, subsequently filed a petition for writ
of certiorari with the United States Supreme Court seeking to limit
the scope of the potential refunds to tax bills rendered on or after
June 28, 1988 (the effective date originally selected by FERC).
Williams Natural Gas Company filed a cross-petition for certiorari
seeking to impose refund liability back to December 1, 1978. Both
petitions were denied on May 12, 1997.
Anadarko estimates the maximum amount of principal and interest at
issue which has not been paid to date and assuming that the October
1983 effective date remains in effect, is about $38,600,000 (pre-tax)
as of June 30, 1997. Of this amount, up to $36,600,000 (pre-tax) is
at issue in the FERC petition for adjustment and the litigation with
PanEnergy Corp et al. (PanEnergy) discussed below.
The Company along with other gas producing companies, filed a petition
for adjustment with FERC on May 12, 1997. In so doing the Company is
seeking waiver of all interest which might otherwise be due. The
total interest at issue is approximately $23,800,000 (pre-tax). On
May 13, 1997 the Company also filed a lawsuit in the Federal District
Court for the Southern District of Texas against PanEnergy seeking a
declaration that pursuant to prior agreements Anadarko is not required
to issue refunds to PanEnergy for the principal amount of $14,000,000
(pre-tax) and, if the petition for adjustment discussed above is not
granted in its entirety by FERC with respect to PanEnergy refunds,
interest in an amount up to $22,600,000 (pre-tax) as of June 30, 1997.
The Company also seeks from PanEnergy the return of $816,000 of the
$830,000 (pre-tax) charged against income in 1993 and 1994. The
Company is unable at this time to predict the final outcome of this
matter and no provision for liability (excluding the amounts recorded
in 1993 and 1994) has been made in the accompanying financial
statements.
10. 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 June 30, 1997 and December
31, 1996, the results of operations for the three and six months ended
June 30, 1997 and 1996, and cash flows for the six months ended June
30, 1997 and 1996.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has included a number of 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 in Item 2 of this Form 10-Q.
These forward looking statements, including any production and reserve
disclosures contained therein, are based on the best data available at
the time this report was released for printing; however, actual results
could differ materially from those expressed or implied by such state-
ments due to a number of factors including: commodity pricing and
demand, exploration and operating risks, development risks, domestic
governmental risks, foreign operations risk and competition. See
Additional Factors Affecting Business in the Management's Discussion
and Analysis included in the Company's 1996 Annual Report on Form 10-K.
Overview of Operating Results
For the second quarter of 1997, Anadarko's net income was $13.8
million (23 cents per share) on revenues of $138.9 million. By
comparison, net income for the second quarter of 1996 was $17.6
million (30 cents per share) on revenues of $135.1 million. The
decrease in net income is due to lower prices for crude oil,
natural gas and natural gas liquids (NGLs) and higher costs and
expenses, which were partially offset by higher production volumes.
For the first six months of 1997, Anadarko's net income increased 26
percent to $48.2 million (81 cents per share) on revenues of $309.4
million. This compares to net income of $38.1 million (65 cents per
share) on revenues of $270.8 million for the same period of 1996.
The increases in year-to-date revenues and net income are primarily
due to higher production volumes of oil, natural gas and NGLs and
higher commodity prices in the first six months of 1997 compared to
the same period in 1996. The gain in production volumes and prices
was partially offset by higher costs and expenses compared to the
same period in 1996.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table shows the Company's volumes and U.S. prices for
the three and six months ended June 30, 1997 and 1996:
Three Months Ended
June 30 % Increase
1997 1996 (Decrease)
Natural gas, Bcf 43.8 40.4 8
Average daily volumes, MMcf/d 481 444 8
Price per Mcf $ 1.85 $ 2.04 (9)
Crude oil and condensate, MBbls 2,249 1,670 35
Average daily volumes, MBOD 25 18 39
Price per barrel $17.48 $19.83 (12)
Natural gas liquids, MBbls 1,032 779 32
Average daily volumes, MBOD 11 9 22
Price per barrel $13.45 $14.11 (5)
Six Months Ended
June 30 % Increase
1997 1996 (Decrease)
Natural gas, Bcf 86.1 84.1 2
Average daily volumes, MMcf/d 476 462 3
Price per Mcf $ 2.24 $ 1.99 13
Crude oil and condensate, MBbls 4,251 3,372 26
Average daily volumes, MBOD 23 19 21
Price per barrel $18.94 $18.73 1
Natural gas liquids, MBbls 2,263 1,767 28
Average daily volumes, MBOD 13 10 30
Price per barrel $14.65 $14.21 3
__________________
See "Natural Gas Volumes and Prices" and "Crude Oil, Condensate
and Natural Gas Liquids Volumes and Prices".
Costs and expenses during the second quarter of 1997 were $109.2
million, an increase of 12 percent compared to $98.0 million for the
second quarter of 1996. The increase is primarily due to higher
depreciation, depletion and amortization (DD&A) expense and operating
expenses related primarily to the increase in production volumes,
offset slightly by lower administrative and general expenses.
For the first six months of 1997, costs and expenses totaled $217.4
million, an increase of 13 percent compared to $192.8 million for
the first six months of 1996. The increase is primarily due to higher
operating expenses, DD&A expense and production taxes related to the
increase in production volumes.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest expense for the second quarter of 1997 decreased 17 percent
to $8.0 million compared to $9.6 million for the second quarter of
1996. For the first six months of 1997, interest expense was $17.2
million, a decrease of ten percent compared to $19.1 million for the
same period of 1996. The decreases in interest expense are due to
higher capitalized interest in 1997 and an adjustment in the second
quarter of 1997 of interest expense accruals.
Natural Gas Volumes and Prices During the second quarter of 1997,
Anadarko's natural gas production increased eight percent to 43.8
billion cubic feet (Bcf) or 481 million cubic feet per day (MMcf/d)
compared to 40.4 Bcf or 444 MMcf/d in the second quarter of 1996. The
Company's average U.S. wellhead gas price in the second quarter of
1997 fell nine percent to $1.85 per thousand cubic feet (Mcf) compared
to $2.04 per Mcf in the same period of 1996.
Anadarko's natural gas production in the first six months of 1997 was
86.1 Bcf or 476 MMcf/d. This compares to production of 84.1 Bcf or 462
MMcf/d in the first half of 1996. The Company's average wellhead gas
price for the first six months of 1997 increased 13 percent to $2.24
per Mcf compared to $1.99 per Mcf in the same period of 1996.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
Anadarko's crude oil and condensate volumes for the second quarter
of 1997 rose 35 percent to 2.2 million barrels (MMBbls) or 25 thousand
barrels of oil per day (MBOD) compared to 1.7 MMBbls or 18 MBOD in the
second quarter of 1996. The increase in crude oil and condensate
volumes is due to increased drilling activity in the Company's core
domestic areas and production from the Mahogany Field in the Gulf of
Mexico. Anadarko's average U.S. oil price was $17.48 per barrel in
the second quarter of 1997, a decrease of 12 percent compared to
$19.83 per barrel in the same period of 1996.
In the first six months of 1997, Anadarko's crude oil and condensate
volumes increased 26 percent to 4.3 MMBbls or 23 MBOD compared to 3.4
MMBbls or 19 MBOD in the same period of 1996. Anadarko's U.S. oil
prices in the first half of 1997 averaged $18.94 per barrel compared
to $18.73 per barrel in the first half of 1996.
Anadarko's NGLs sales volumes in the second quarter of 1997 were 1.0
MMBbls compared to 779 thousand barrels (MBbls) in the same period of
1996. During the second quarter of 1997, prices for NGLs declined
five percent to $13.45 per barrel compared to $14.11 per barrel in the
second quarter of 1996.
NGLs volumes in the first half of 1997 were 2.3 MMBbls, an increase of
28 percent compared to 1.8 MMBbls in the first half of 1996. The
Company's NGLs price averaged $14.65 per barrel in the first half of
1997 compared to $14.21 per barrel in the same period of 1996.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Use of Derivatives Anadarko uses derivative financial instruments
to hedge the Company's exposure to changes in the market price of
natural gas and crude oil, to provide methods to fix the price for
natural gas independently of the physical purchase or sale and to
manage interest rates. Commodity financial instruments also provide
methods to meet customer pricing requirements while achieving a price
structure consistent with the Company's overall pricing strategy.
While commodity financial instruments are intended to reduce the
Company's exposure to declines in the market price of natural gas
and crude oil, the commodity financial 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 commodity financial
instruments are generally offset by similar changes in the realized
price of natural gas and crude oil. Gains and losses generally are
recognized in revenues for the periods to which the commodity financial
instruments relate. Anadarko's commodity financial instruments
currently are comprised of futures, swaps and options. See Note 1
of the Notes to Consolidated Financial Statements under Item 1 of
this Form 10-Q.
Capital Expenditures, Liquidity and Dividends
During the first six months of 1997, Anadarko's capital spending
(including capitalized interest and overhead) was $309.3 million
compared to $151.7 million in the same period of 1996. The increase
is due to increased exploration and development activity in Algeria
and the U.S. Capital expenditures in both periods related primarily
to the Company's oil and gas exploration and development activities.
The Company believes cash flows, including proceeds from divestitures,
and existing credit facilities will be sufficient to meet capital and
operating requirements, including any contingencies, during 1997.
In January 1997, the Company entered into a sale-leaseback agreement
for $87.9 million (net) involving 145 natural gas compressors in
Anadarko's major mid-continent gathering systems. Proceeds from the
transaction were used for general corporate purposes.
In June 1997, the Company's Revolving Credit Agreement and 364-Day
Credit Agreement were amended. The Agreements were amended as
follows: the principal amounts of the Agreements were reduced from
$250,000,000 and $150,000,000, respectively, to $225,000,000 and
$125,000,000, respectively; the number of commercial banks in the
group was changed from eleven to eight; and, the expiration dates
of the Agreements were extended for one year. During 1996 and the
first six months of 1997, there were no outstanding borrowings under
these Agreements.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In July 1997, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that will permit upon effectiveness
the issuance of up to $300,000,000 in senior and subordinated debt
securities and equity securities. Net proceeds, terms and pricing of
offerings of securities issued under the shelf registration statement
will be determined at the time of the offering. Anadarko has used
similar shelf registration statements since 1989 to provide added
flexibility in financing strategies. There have been no securities
issued under this shelf registration.
Anadarko's Board of Directors declared a quarterly dividend of seven
and one-half cents per share of common stock outstanding. The
dividend is payable on September 24, 1997 to stockholders of record
on September 10, 1997. Under the most restrictive provisions of the
Company's credit agreements, which limit the payment of dividends,
retained earnings of $410,491,000 were not restricted as to the
payment of dividends at June 30, 1997. The amount of future dividends
for Anadarko will depend on the Company's earnings, financial
condition, capital requirements and other factors, and will be
determined by the Board of Directors on a quarterly basis.
Changes in Accounting Principles
Earnings per Share Statement of Financial Accounting Standards
(SFAS) No. 128 focuses on additional disclosures related to earnings
per share. SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997. Anadarko does not expect SFAS
No. 128 to have any material effect on its calculations of earnings
per share.
Comprehensive Income SFAS No. 130 focuses on reporting comprehen-
sive income. SFAS No. 130 is effective for financial statements for
periods beginning after December 15, 1997. Anadarko does not expect
SFAS No. 130 to have any material effect on its calculations of net
income.
Exploration and Development Activities
During the second quarter of 1997, Anadarko participated in a total of
149 wells, including 91 oil wells, 42 gas wells and 16 dry holes.
This compares to a total of 55 wells, including 28 oil wells, 18 gas
wells and nine dry holes during the second quarter of 1996. For the
first six months of 1997, Anadarko participated in a total of 275
wells, including 166 oil wells, 82 gas wells and 27 dry holes. This
compares to a total of 116 wells, including 60 oil wells, 31 gas wells
and 25 dry holes during the first six months of 1996. Following is a
description of activity during the first half of 1997.
-15-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Domestic
Gulf of Mexico At the East Cameron 157 platform, installed in
1994, Anadarko drilled two additional development wells in the first
half of 1997, bringing the total well count on the platform to six.
Production now averages 47 MMcf/d of gas and 1,150 barrels of
condensate per day (BCPD). In the second half of 1997, Anadarko plans
to recomplete two of the original wells on the platform to further
increase production volumes. Anadarko owns a 100-percent working
interest in the platform.
At the Brazos A-47 platform, Anadarko acquired a 100-percent working
interest from partners in late 1996. In the first half of 1997, the
Company repaired one well and drilled one new exploration well. Both
wells are now on-line and production is 11 MMcf/d of gas. In the third
quarter of 1997, Anadarko plans to add compression at the platform to
increase production volumes.
An aggressive drilling program to accelerate production rates is
underway in the Amoco-operated Matagorda Island 623 Field. Three rigs
are currently running in the Field; one platform rig and two jack-ups.
In the second half of 1997, four new wells are expected to be on-line
and production volumes are expected to increase by 100 MMcf/d of gas
(gross). Production from the Field currently averages 225 MMcf/d of
gas and 3,000 BCPD (gross). Anadarko owns a 37.5-percent working
interest in the platform.
In the Anadarko-operated Matagorda Island 587 Field, the A-2 well was
recompleted in the first quarter of 1997. The A-1 well will be
recompleted in the third quarter in another productive sand.
Production from the platform now averages 13 MMcf/d of gas (gross).
Anadarko owns a 32.5-percent working interest in the Field.
At the Company-operated High Island 376 "B" platform, installed in
1994, the Company recompleted one of the original wells in the first
quarter of 1997 and plans to recomplete the second original well in
the second half of 1997. An additional development well is planned for
the second half of 1997. A horizontal well is also planned from the
platform later this year to help recover additional reserves. Current
production from the platform is 1,250 barrels of oil per day (BOPD)
and 1.4 MMcf/d of gas (gross). Anadarko owns a 33.8-percent working
interest in the platform.
At the Vermilion 78 production platform, Anadarko drilled one
development well in the first half of 1997, adding 15 MMcf/d of gas
and 370 BCPD to production. Current production from the platform is 23
MMcf/d of gas and 390 BCPD (gross). Anadarko owns a 37.5-percent
working interest in the platform.
-16-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Phillips-operated Mahogany platform came on-line in late 1996.
Four wells are now on production. At the end of July 1997, production
was about 19,000 BOPD and 30 MMcf/d of gas (gross). In the second half
of 1997, the partners plan to complete drilling operations on the No.
5 well which was drilled to the top of salt and suspended to allow for
installation of the production platform. Additional wells may be
drilled from the platform to increase future production volumes.
Anadarko owns a 37.5-percent working interest in the project.
Exploratory Drilling - One exploration well is currently drilling in
the Gulf of Mexico, which is the Anadarko-operated Malachite Prospect,
located at South Marsh Island 123 spud in May 1997. Anadarko owns a
75-percent working interest in the Malachite Prospect. Anadarko plans
to spud at least two additional exploration wells in the Gulf of
Mexico in the second half of 1997.
Hugoton Embayment In the first six months of 1997, Anadarko drilled
93 wells (66 deep, 27 shallow) in the Hugoton Embayment, located in
southwest Kansas and the Oklahoma Panhandle. Initial combined
production rates (net) from all wells is over 35 MMcf/d of gas and
1,000 BOPD. Anadarko is on track to drill a total of 120 net deep
wells and 58 net shallow wells during 1997. Six Company-operated
drilling rigs are now running. Key results include:
Adams L-2 Located in the Eubank Field of Haskell County, Kansas,
the Adams L-2 flowed 12.7 MMcf/d of gas from the prolific Upper Morrow
formation which had a core permeability of over 1,000 millidarcy.
Anadarko's operations staff split connected the well and sold gas to
two pipelines to maximize the flow rate.
Keller D-1 Located in the Arkalon Field in Seward County, Kansas,
the well flowed 3.7 MMcf/d of gas from a 24 foot interval in the Lower
Morrow. Offset production averages 200 thousand cubic feet per day
(Mcf/d) per well with a bottom hole pressure of 300 psi, while this
stepout well encountered over 800 pounds per square inch.
Garey A-3 Located in the Evalyn Field in Seward County, Kansas,
this well flowed 260 BOPD and 900 Mcf/d of gas from 27 feet of overall
pay in the Chester "A" interval. Anadarko's geology department
identified this unconventional pay using special log analysis
techniques.
Malin A-4 Located in the Shuck Field in Seward County, Kansas, the
Marlin A-4 flowed 5.8 MMcf/d of gas from 17 feet of pay in the Lower
Morrow.
-17-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Turner D-2 Located in the Taloga N.E. Field in Morton County,
Kansas, this well flowed 1.5 MMcf/d of gas from a low resistivity
Cherokee zone. Special log analysis techniques were used to identify
this zone since conventional log analysis indicated the zone was not
productive.
Gregory D-2 Located in the Gentzler S.W. Field in Stevens County,
Kansas, this well flowed 1.7 MMcf/d of gas from the Morrow interval.
This prospect was generated through 3-D seismic that predicted a
structural bump at the Morrow level.
Hittle A-5 Located in the Youngren NW Field in Stevens County,
Kansas, this well flowed 4.1 MMcf/d of gas from 21 feet of pay in the
Lower Morrow. The well has encountered multiple uphole pay sections.
In late 1996, Anadarko began an aggressive 320 acre infill drilling
program in the Lower Morrow/Upper Chester gas zones that has resulted
in the drilling of 31 wells at an 84-percent success rate. Anadarko
spent a total of $8 million and developed these low risk reserves at a
cost of finding of only $3.20 per energy equivalent barrel (EEB). The
Company has identified several additional infill well locations on its
acreage.
In early 1997, Anadarko drilled its first two sidetrack lateral oil
wells in SW Kansas. The Ray C-5 vertical wellbore was producing high
volumes of water as a result of behind-pipe communication with a wet
zone just a few feet below the target zone. Anadarko cut a hole in the
casing and drilled a lateral in the target zone. The Ray C-5L is
currently producing at a stabilized rate of 100 BOPD compared to offset
vertical wells that range from 20-35 BOPD.
The second lateral well, the McHargue A-3 was producing only three BOPD
from the St. Louis zone. Anadarko cut a 400 foot lateral resulting in
a stabilized rate of 85 BOPD. Anadarko is evaluating potential in six
fields in SW Kansas that could result in 20 new laterals.
In addition to drilling development wells, the Company is also
recompleting current producing wells to increase production. In the
first half of 1997, Anadarko recompleted 40 wells. Anadarko has spent
$2.2 million to develop these behind pipe reserves at a cost of finding
of only $1.40 per EEB. Initial net production rates from all
recompletions combined is 15 MMcf/d of gas and 600 BOPD. Anadarko has
identified 25 additional recompletion opportunities for the second half
of 1997. Example recompletions are three Victory Field wells, located
in Haskell County, Kansas, were recompleted into another productive
zone, increasing combined production by 5 MMcf/d of gas.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Since 1996, Anadarko has acquired about 300 square miles of 3-D seismic
data over its Kansas properties. These data are used to drive many of
the Company's current deep drilling programs in the area. To date,
Anadarko has utilized 3-D seismic to drill a total of 34 wells at a 91-
percent success rate. Anadarko has spent over $11 million to drill
these wells at a cost of finding of only $3.20 per EEB.
The Company added six satellite booster stations to the Hugoton
Gathering System, increasing gross production by 6.2 MMcf/d of gas and
reducing wellhead pressure. The Company installed 44 wellhead
compressors, adding 8.8 MMcf/d of gas to gross production volumes. In
the first half of 1997, Anadarko completed 60 well connects, adding gas
production of 31 MMcf/d.
Permian Basin The Company's program in the Permian Basin focuses on
waterflood operations, development drilling and increased density
drilling. During the first half of 1997, Anadarko drilled 183 wells in
the Permian Basin compared to 179 wells in the full-year 1996. The
Company now has 10 operated rigs running in the area. Since 1996,
Anadarko's average net production from the Permian Basin has increased
from 8,800 BOPD to 10,500 BOPD, a gain of 19 percent.
A major area of focus is the TXL North and TXL South Units, located in
Ector County, Texas. Anadarko completed 53 wells in the TXL South Unit
in the first half of 1997, increasing gross production from 1,600 BOPD
at year-end 1996 to a peak rate of 4,200 BOPD and 9.7 MMcf/d of gas.
Production in the TXL North Unit has increased from 1,200 BOPD at year-
end 1996 to a current rate of 1,400 BOPD.
In Ector County, Texas, Anadarko drilled 12 increased density wells in
the first half of 1997 in the Goldsmith Cummins Deep Unit. Eleven of
these wells are now producing and gross production has increased to
1,535 BOPD from 860 BOPD at the beginning of 1997.
In the Sharon Ridge/Diamond M Field, located in Scurry County, Texas,
the Company has embarked on a $13.7 million waterflood expansion
project. In the first half of 1997, Anadarko completed 38 wells in the
Field. Production has increased from 1,425 BOPD at year-end 1996 to a
current rate of 2,040 BOPD.
In the Forbes Unit, located in Crosby and Garza Counties of Texas,
Anadarko drilled and completed 12 wells in the first half of 1997 as a
part of a waterflood expansion program started in 1996. Anadarko has
increased gross production to 460 BOPD from 180 BOPD at the start of
waterflood operations.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Anadarko drilled and completed 21 new wells in the Ketchum Mountain
(Clearfork) Field, located in Irion County, Texas. Several of the new
wells tested more than 150 BOPD. Production from the Field is currently
2,400 BOPD. The most recent five wells completed are producing at a
combined rate of 800 BOPD.
Golden Trend In the first half of 1997, Anadarko drilled 16 wells in
the Golden Trend of central Oklahoma. The Company is planning to drill
a total of 31 wells in 1997. Of significant note was a new field
discovery made by the Company in July 1997 in Grady County, Oklahoma,
known as the Laflin Creek Field. The Heiple "A" 1-35 exploratory well
flowed 1,152 BOPD and 2.4 MMcf/d of gas. A multi-well delineation
program is now underway to develop this newly discovered Field.
West Panhandle Field In the first half of 1997, Anadarko drilled 25
lateral wells in the West Panhandle Field of Texas to increase
production volumes. The Company is planning to drill about 50 lateral
wells in 1997 and net production should increase by approximately 15
MMcf/d to about 46 MMcf/d from the Field.
INTERNATIONAL
Algeria In the first half of 1997, Anadarko and partners drilled six
wildcats with three discoveries. Anadarko plans to drill up to 10
exploration wells in Algeria in 1997.
QBN-1 The Qoubba North No. 1 (QBN-1), drilled on Block 404 about
9.5 kilometers (six miles) northeast of the Berkine East No. 1 (BKE-1)
Field discovery well, flowed 1,214 BOPD from Triassic pay sands. The
Trias Argilo-Greseuo Inferieur (TAGI) sand tested in the QBN-1 well
is the same interval that is productive in the Qoubba Field. Later
this year, Anadarko is planning to evaluate a possible reservoir
connection with the Qoubba Field through further study. Work
continues with other interest owners on full-scale development for the
Qoubba Field with first production estimated in late 1999 or early
2000.
HBNSE-1 The Hassi Berkine South East No. 1 (HBNSE-1) well
discovered a new field about 7.5 kilometers (4.5 miles) southeast of
the HBNS Field on Block 404. The HBNSE-1 well flowed 17,092 BOPD of
48 degree API gravity oil and 37.5 MMcf/d of gas. The discovery is
located 10 kilometers (6.2 miles) from the production facilities being
built at the HBNS Field. The test results from HBNSE-1 are currently
being studied by partners and delineation drilling is under
evaluation.
-20-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
BSFN-1 With operator Broken Hill Proprietary Co. (BHP), Anadarko
and its partners announced a new field discovery on Block 402 in May
1997. The Bir Sif Fatima North (BSFN-1) well flowed 5,570 BOPD of 42
degree API gravity oil. The drilling location was determined through
evaluation of 1,900 kilometers of new seismic data acquired by the
partners in 1996. The BSFN-1 well is located about 3.75 kilometers (2
miles) from a recent discovery announced by the Italian oil company,
Agip. A delineation drilling program has been approved by the partners
and should begin in late summer 1997. BHP owns a 45-percent interest
in the project; Anadarko holds a 27.5-percent interest, with Lasmo and
Maersk each holding a 13.75-percent interest.
Three exploration wells are currently being drilled in Algeria - two
operated by Anadarko and one by BHP. The Rhourde Oulad Djemma (ROD-1),
located on Block 402a about 10 kilometers (6.2 miles) northeast of the
BSFN-1 well, spud in June 1997. The Hassi Berkine Central (HBNC-1)
well, located about two kilometers (1.2 miles) north of the HBNS Field
on Block 404, also spud in June 1997. The Sidi Yedda East (SYDE-1),
located on Block 211, spud in July 1997. An additional rig is being
mobilized to begin drilling development wells in the HBNS Field in
August 1997. Development operations are jointly managed with
SONATRACH, the national oil and gas enterprise of Algeria.
Ireland In June 1997, Anadarko was awarded interests in nine
blocks offshore Ireland. ARCO is the operator of three blocks and
BG Exploration and Production is the operator of four full and two
partial blocks. This is a new exploration area for the Company.
-21-
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 (NGPA)
allows 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 in addition to the otherwise maximum lawful
price. FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia (D.C. Circuit), which held in
June 1988 that FERC failed to provide a reasoned basis for its
findings and remanded the case to FERC for further consideration.
On December 1, 1993, FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for
sales made on or after June 28, 1988. FERC clarified the effective
date of its decision by an order dated May 19, 1994. The clarification
provided that the June 28, 1988 effective date applies to tax bills
rendered after that date, not sales made on or after that date. Based
on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) was
charged against income in 1994, in addition to $130,000 (pre-tax)
charged against income in 1993. Numerous parties filed appeals of
FERC's action in the D.C. Circuit. Anadarko, together with other
natural gas producers, challenged FERC's orders on two grounds:
(1) that the Kansas ad valorem tax, properly understood, does qualify
for reimbursement under the NGPA; and (2) FERC's ruling should, in any
event, have been applied prospectively. Other parties separately
challenged FERC's orders on the grounds that FERC's ruling should have
been applied retroactively to December 1, 1978, the date of the
enactment of the NGPA and producers should have been required to pay
refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996 which holds
that producers must make refunds of all Kansas ad valorem taxes
collected with respect to production since October 1983. Petitions
for rehearing were denied November 6, 1996. The Company, along with
other gas producing companies, subsequently filed a petition for writ
of certiorari with the United States Supreme Court seeking to limit
the scope of the potential refunds to tax bills rendered on or after
June 28, 1988 (the effective date originally selected by FERC).
Williams Natural Gas Company filed a cross-petition for certiorari
seeking to impose refund liability back to December 1, 1978. Both
petitions were denied on May 12, 1997.
Anadarko estimates the maximum amount of principal and interest at
issue which has not been paid to date and assuming that the October
1983 effective date remains in effect, is about $38,600,000 (pre-tax)
as of June 30, 1997. Of this amount, up to $36,600,000 (pre-tax) is
at issue in the FERC petition for adjustment and the litigation with
PanEnergy Corp et al. (PanEnergy) discussed below.
-22-
Item 1. Legal Proceedings (continued)
Kansas Ad Valorem Tax (continued)
The Company along with other gas producing companies, filed a petition
for adjustment with FERC on May 12, 1997. In so doing the Company is
seeking waiver of all interest which might otherwise be due. The
total interest at issue is approximately $23,800,000 (pre-tax). On
May 13, 1997 the Company also filed a lawsuit in the Federal District
Court for the Southern District of Texas against PanEnergy seeking a
declaration that pursuant to prior agreements Anadarko is not required
to issue refunds to PanEnergy for the principal amount of $14,000,000
(pre-tax) and, if the petition for adjustment discussed above is not
granted in its entirety by FERC with respect to PanEnergy refunds,
interest in an amount up to $22,600,000 (pre-tax) as of June 30, 1997.
The Company also seeks from PanEnergy the return of $816,000 of the
$830,000 (pre-tax) charged against income in 1993 and 1994. The
Company is unable at this time to predict the final outcome of this
matter and no provision for liability (excluding the amounts recorded
in 1993 and 1994) has been made in the accompanying financial
statements.
-23-
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 24, 1997, the Company held its Annual Stockholders'
Meeting.
(b) Messrs. Conrad P. Albert and Robert J. Allison, Jr. were re-
elected as Class II directors to serve for a term of three
years. Messrs. Ronald Brown, John R. Gordon and John R. Butler,
Jr. will continue to serve as Class I directors and Messrs. Larry
Barcus and James L. Bryan will continue to serve as Class III
directors.
Mr. Conrad P. Albert was re-elected with votes for of 49,981,689
and votes withheld of 510,865. Mr. Robert J. Allison, Jr. was
re-elected with votes for of 49,945,270 and votes withheld of
547,284.
(c) The stockholders approved an amendment to the 1993 Stock
Incentive Plan (Incentive Plan). The Incentive Plan is intended
to attract and retain employees, to encourage employees to devote
their best efforts to the Company and to recognize employees for
their contributions to the overall success of the Company. A
total of 47,136,232 shares of common stock voted for the amend-
ment to the Incentive Plan, 3,185,696 shares of common stock
voted against the amendment to the Incentive Plan and 170,626
shares of common stock abstained.
-24-
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
3(a) Restated Certificate of
Incorporation of Anadarko 19(a)(i) to Form 10-Q 1-8968
Petroleum Corporation, for quarter ended
Dated August 28, 1986 September 30, 1986
(b) By-laws of Anadarko 3(b) to Form 10-Q 1-8968
Petroleum Corporation, for quarter ended
as amended June 30, 1996
*4(a) Amendment to Credit
Agreement, dated June 13,
1997
*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
There were no reports filed on Form 8-K for the three months
ended June 30, 1997.
-25-
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)
August 13, 1997 [MICHAEL E. ROSE]
Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer