___________________________________________________________________________
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: September 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 October 31, 1997 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, $0.10 par value 59,865,248
__________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
thousands except September 30 September 30
per share amounts 1997 1996 1997 1996
Revenues
Gas sales $ 94,773 $ 81,960 $284,971 $259,145
Oil and condensate sales 42,036 34,275 124,556 100,041
Natural gas liquids and other 21,514 12,316 58,183 40,160
Total 158,323 128,551 467,710 399,346
Cost and Expenses
Operating expenses 39,319 27,454 105,630 81,906
Administrative and general 19,486 18,132 53,673 52,830
Depreciation, depletion and
amortization 51,062 40,708 144,323 123,914
Other taxes 10,720 9,212 34,333 29,627
Gains and impairments
related to international
properties, net --- (16,356) --- (16,356)
Total 120,587 79,150 337,959 271,921
Operating Income 37,736 49,401 129,751 127,425
Other Income and (Expenses)
Other income 394 768 1,354 1,113
Interest expense (11,452) (9,707) (28,657) (28,808)
Income before Income Taxes 26,678 40,462 102,448 99,730
Income Taxes 9,586 15,513 37,148 36,636
Net Income $ 17,092 $ 24,949 $ 65,300 $ 63,094
Per Common Share
Net income $ 0.29 $ 0.42 $ 1.09 $ 1.07
Dividends $ 0.075 $ 0.075 $ 0.225 $ 0.225
Average Number of Shares
Outstanding 59,742 59,267 59,665 59,161
See accompanying notes to consolidated financial statements.
-2-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
thousands 1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 13,838 $ 14,601
Accounts receivable 173,827 226,824
Inventories, at average cost 33,573 24,540
Prepaid expenses 4,940 3,843
Total 226,178 269,808
Properties and Equipment
Original cost 4,482,406 4,036,165
Less accumulated depreciation, depletion
and amortization 1,857,715 1,738,709
Net properties and equipment - based on
the full cost method of accounting
for oil and gas properties 2,624,691 2,297,456
Deferred Charges 17,869 16,766
$2,868,738 $2,584,030
See accompanying notes to consolidated financial statements.
-3-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET (continued)
(Unaudited)
September 30, December 31,
thousands 1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 198,501 $ 244,219
Banks 19,355 17,995
Accrued expenses
Interest 10,261 12,812
Taxes and other 22,868 10,227
Total 250,985 285,253
Long-term Debt 890,571 731,049
Deferred Credits
Deferred income taxes 527,866 498,973
Other 122,847 54,675
Total 650,713 553,648
Stockholders' Equity
Common stock, par value $0.10
(200,000,000 shares authorized,
60,852,586 and 60,525,699 shares issued
as of September 30, 1997 and December 31,
1996, respectively) 6,130 6,098
Preferred stock, par value $1.00
(2,000,000 shares authorized, no
shares issued as of September 30, 1997
and December 31, 1996) --- ---
Paid-in capital 362,942 335,848
Retained earnings (as of September 30, 1997,
$426,469,000 was not restricted as to
the payment of dividends) 791,262 739,395
Deferred compensation (12,084) (3,444)
Executives and directors benefit trust,
at market value (1,000,000 shares as of
September 30, 1997 and December 31, 1996) (71,781) (63,813)
Treasury stock (70 shares as of
December 31, 1996) --- (4)
Total 1,076,469 1,014,080
$2,868,738 $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)
Nine Months Ended
September 30
thousands 1997 1996
Cash Flow from Operating Activities
Net income $ 65,300 $ 63,094
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation, depletion and amortization 144,319 123,914
Amortization of restricted stock 1,424 1,331
Deferred income taxes 29,014 25,384
Provision for impairment of
international properties --- 5,400
240,057 219,123
Decrease in accounts receivable 52,997 19,245
Increase in inventories (9,033) (5,587)
Decrease in accounts payable - trade
and other and accrued expenses (35,628) (23,072)
Other items - net (342) 5,082
Net cash provided by operating activities 248,051 214,791
Cash Flow from Investing Activities
Additions to properties and equipment (496,402) (260,522)
Proceeds from the sale of assets to be
leased, net 87,900 ---
Sales and retirements of properties
and equipment 3,141 45,811
Net cash used in investing activities (405,361) (214,711)
Cash Flow from Financing Activities
Additions to debt 159,522 100,000
Retirements of debt --- (73,008)
Increase in accounts payable, banks 1,360 1,912
Dividends paid (13,433) (13,319)
Issuance of common stock 9,094 10,660
Issuance of treasury stock 739 677
Purchase of treasury stock (735) (677)
Net cash provided by financing activities 156,547 26,245
Net Increase (Decrease) in Cash and Cash
Equivalents (763) 26,325
Cash and Cash Equivalents at Beginning
of Period 14,601 17,090
Cash and Cash Equivalents at End of Period $13,838 $ 43,415
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.
Net Income and Dividends Per Common Share The calculations of
net income and dividends per common share have been computed based
on the average number of common shares of stock outstanding.
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
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 other offsetting instru-
ments 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:
September 30, December 31,
thousands 1997 1996
Materials and supplies $33,461 $23,495
Natural gas liquids, stored in inventory --- 28
Natural gas, stored in inventory 112 1,017
$33,573 $24,540
3.Properties and Equipment Oil and gas properties include costs of
$304,212,000 and $254,811,000 at September 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:
September 30, December 31,
thousands 1997 1996
Commercial Paper $162,271 $ 31,049
Notes Payable, Banks 28,300 ---
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
$890,571 $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
nine 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 permits 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 third 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
$426,469,000 and $364,080,000 were not restricted as to the payment of
dividends at September 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:
Nine Months Ended
September 30
thousands 1997 1996
Interest $28,903 $29,898
Income taxes $10,930 $ 8,436
-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 Nine Months Ended
September 30 September 30
thousands 1997 1996 1997 1996
Oil and gas $21,011 $15,870 $ 59,427 $48,157
Plant, gathering and
marketing 14,342 8,080 33,937 23,667
Gas purchases 2,922 2,551 10,107 8,612
Other 1,044 953 2,159 1,470
$39,319 $27,454 $105,630 $81,906
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 $39,000,000 (pre-tax)
as of September 30, 1997. 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
$25,000,000 (pre-tax). On September 10, 1997, FERC denied the petition
for adjustment and established procedures for the payment of refunds.
Under FERC's order, interstate and intrastate pipelines are required
to serve on first sellers statements of refunds due. This statement is
due on or before November 10, 1997. Refunds are due to be paid by
first sellers within 180 days of the date of the FERC order, or by
March 9, 1998.
The Company, along with other gas producers and the State of Kansas,
have sought rehearing, clarification and a stay of the FERC's
September 10 Order. On November 10, 1997, FERC issued an order
allowing for more time to consider the rehearing requests, but denied
the stay request at this time. If FERC denies rehearing, appeals of
the FERC's decision may be filed. The filing of any such appeal will
not, in and of itself, result in a stay of FERC's order.
FERC's September 10 Order permits affected first sellers to file
individual petitions for adjustment. Depending on the nature of the
claims submitted by pipeline purchasers on November 10, 1997, the
Company may pursue an individual petition for adjustment, and may seek
deferral of the refund obligation on other specific grounds. The
Company reserves all rights to contest any specific Statement of
Refunds due submitted by any pipeline purchaser.
-10-
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Kansas Ad Valorem Tax (continued)
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 $23,000,000 (pre-tax) as of
September 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.
Net income for the third quarter of 1997, included a $1,700,000 charge
(before income taxes) 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 the amounts recorded in 1993, 1994 and the third quarter of
1997) 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 September 30, 1997 and
December 31, 1996, the results of operations for the three and nine
months ended September 30, 1997 and 1996, and cash flows for the nine
months ended September 30, 1997 and 1996.
-11-
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 third quarter of 1997, Anadarko's net income was $17.1 million
(29 cents per share) on revenues of $158.3 million. By comparison, net
income for the third quarter of 1996 was $24.9 million (42 cents per
share) on revenues of $128.6 million.
Net income for the third quarter 1996 includes a gain on the sale of
the Company's Indonesia interests of $21.8 million ($13.8 million after
taxes). This gain was partially offset by provisions for impairment of
other international properties of $5.4 million ($3.4 million after
taxes). Stated without the effect of the gain and impairments of
international properties, net income for the third quarter of 1996
would have been $14.6 million (25 cents per share).
Excluding the effect of the unusual items, the higher revenues and net
income in the third quarter of 1997 are primarily due to higher
production volumes of oil and gas and higher natural gas prices. The
increase in revenues is partially offset by higher operating costs and
depreciation, depletion and amortization (DD&A) expenses compared to
the same period in 1996.
For the first nine months of 1997, Anadarko's net income was $65.3
million ($1.09 per share) on revenues of $467.7 million. By
comparison, net income for the first nine months of 1996 was $63.1
million ($1.07 per share) on revenues of $399.3 million; and, stated
without the effect of the gain and impairments of international
properties, net income would have been $52.7 million (89 cents per
share). Excluding the unusual items, the increases in revenues and net
income in 1997 are due to higher natural gas prices and higher
production volumes of oil and gas. The increase in revenues is
partially offset by higher operating costs and DD&A expenses compared
to the same period in 1996.
-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 U.S. prices for
the three and nine months ended September 30, 1997 and 1996:
Three Months Ended
September 30 % Increase
1997 1996 (Decrease)
Natural gas, Bcf 45.4 39.8 14
Average daily volumes, MMcf/d 494 433 14
Price per Mcf $ 2.02 $ 1.95 4
Crude oil and condensate, MBbls 2,392 1,611 48
Average daily volumes, MBOD 26 17 53
Price per barrel $17.06 $20.67 (17)
Natural gas liquids, MBbls 1,430 710 101
Average daily volumes, MBOD 16 7 129
Price per barrel $14.65 $15.32 (4)
Nine Months Ended
September 30 % Increase
1997 1996 (Decrease)
Natural gas, Bcf 131.5 123.9 6
Average daily volumes, MMcf/d 482 453 6
Price per Mcf $ 2.17 $ 1.98 10
Crude oil and condensate, MBbls 6,643 4,983 33
Average daily volumes, MBOD 24 18 33
Price per barrel $18.26 $19.35 (6)
Natural gas liquids, MBbls 3,693 2,478 49
Average daily volumes, MBOD 14 9 56
Price per barrel $14.65 $14.53 1
__________________
See "Natural Gas Volumes and Prices" and "Crude Oil, Condensate
and Natural Gas Liquids Volumes and Prices".
Costs and expenses during the third quarter of 1997 were $120.6
million, an increase of 26 percent compared to $95.5 million for the
third quarter of 1996 excluding the effect of the unusual items. The
increase is primarily due to higher operating expenses and DD&A
expense related to the increase in production volumes during the third
quarter of 1997.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
For the first nine months of 1997, costs and expenses totaled $338.0
million, an increase of 17 percent compared to $288.3 million for
the first nine months of 1996 excluding the effect of the unusual
items. The increase is primarily due to higher operating expenses and
DD&A expense related to the increase in production volumes during 1997.
Interest expense for the third quarter of 1997 increased 18 percent
to $11.5 million compared to $9.7 million for the third quarter of
1996. The increase is due primarily to higher levels of borrowings in
1997. For the first nine months of 1997, interest expense was $28.7
million, a decrease of one percent compared to $28.8 million for the
same period of 1996. The decrease is primarily due to higher
capitalized interest in 1997 partially offset by an increase related to
higher levels of borrowings in 1997.
Natural Gas Volumes and Prices During the third quarter of 1997,
Anadarko's natural gas production increased 14 percent to 45.4 billion
cubic feet (Bcf) of gas or 494 million cubic feet per day (MMcf/d)
compared to 39.8 Bcf or 433 MMcf/d in the third quarter of 1996. The
increase in production volumes is due to increased activity in all of
the Company's core operating areas in 1997. The Company's average
wellhead gas price increased four percent to $2.02 per thousand cubic
feet (Mcf) in the third quarter of 1997 compared to $1.95 per Mcf in
the same period of 1996.
Anadarko's natural gas production in the first nine months of 1997
increased six percent to 131.5 Bcf or 482 MMcf/d. This compares to
natural gas production of 123.9 Bcf or 453 MMcf/d in the first nine
months of 1996. The Company's average wellhead gas price for the first
nine months of 1997 increased 10 percent to $2.17 per Mcf compared to
$1.98 per Mcf in the same period of 1996.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
Crude oil and condensate volumes increased nearly 50 percent to 2.4
million barrels (MMBbls) or 26 thousand barrels of oil per day (MBOD)
compared to 1.6 MMBbls or 17 MBOD in the third quarter of 1996. The
increase in oil volumes is due to increased activity in all of the
Company's core operating areas, including the Mahogany Field in the
Gulf of Mexico. Anadarko's average U.S. oil price in the third
quarter of 1997 was $17.06 per barrel, a decrease of 17 percent
compared to $20.67 per barrel in the same period of 1996.
The Company's crude oil and condensate production volumes increased
33 percent in the first nine months of 1997 to 6.6 MMBbls or 24 MBOD
compared to 5.0 MMBbls or 18 MBOD in the same period of 1996. Oil
prices in the first nine months of 1997 decreased six percent to
$18.26 per barrel compared to $19.35 per barrel in the first nine
months of 1996.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Anadarko's natural gas liquids (NGLs) sales volumes in the third
quarter of 1997 more than doubled to 1.4 MMBbls or 16 MBOD compared to
710 thousand barrels (MBbls) or 7 MBOD in the third quarter of 1996.
During the third quarter of 1997, prices for NGLs declined four
percent to $14.65 per barrel compared to $15.32 per barrel in the same
period of 1996.
NGLs volumes in the first nine months of 1997 increased about 50 per-
cent to 3.7 MMBbls or 14 MBOD compared to 2.5 MMBbls or 9 MBOD in the
same period of 1996. The Company's NGLs price averaged $14.65 per
barrel in the first nine months of 1997 compared to $14.53 per barrel
in the same period of 1996.
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 nine months of 1997, Anadarko's capital spending
(including capitalized interest and overhead) was $496.4 million
compared to $260.5 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 has increased its anticipated capital expenditures for
1997 from $560 million to about $700 million, a 25 percent increase.
The Company's revised spending estimate includes increased investments
in 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.
-15-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 nine 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 permits 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 December 24, 1997 to stockholders of record
on December 10, 1997. Under the most restrictive provisions of the
Company's credit agreements, which limit the payment of dividends,
retained earnings of $426,469,000 were not restricted as to the
payment of dividends at September 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.
-16-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Exploration and Development Activities
During the third quarter of 1997, Anadarko participated in a total of
172 wells, including 110 oil wells, 43 gas wells and 19 dry holes.
This compares to a total of 64 wells, including 40 oil wells, 15 gas
wells and nine dry holes during the third quarter of 1996. For the
first nine months of 1997, Anadarko participated in a total of 447
wells, including 276 oil wells, 125 gas wells and 46 dry holes. This
compares to a total of 180 wells, including 100 oil wells, 46 gas
wells and 34 dry holes during the first nine months of 1996.
Following is a description of activity during the first nine months of
1997.
Domestic
Gulf of Mexico High activity levels at the Matagorda Island 622/623
complex continued in the third quarter of 1997. During August, the
Matagorda Island 623 No. B-1 was recompleted in another productive zone
and tested 33.5 MMcf/d of gas and 895 barrels of condensate per day
(BCPD). The new perforations range in depth from 9,346-9,400 feet.
The Matagorda Island 623 B-8 development well was also drilled during
the third quarter and flowed 50.2 MMcf/d of gas and 250 BCPD.
Currently, there are six production platforms and three single-well
structures set in the Matagorda Island 622/623 complex. Since the Field
was discovered by Anadarko in 1980, the Matagorda Island 622/623
complex has produced nearly 750 Bcf of gas and eight MMBbls of
condensate (gross). The work program of development wells, workovers
and recompletions has increased gross production at Matagorda Island
622/623 from 189 MMcf/d of gas in early 1997 to a current rate of 370
MMcf/d of gas. Anadarko owns a 37.5-percent working interest in the
Amoco-operated field.
Production from the Phillips-operated Mahogany Field, located at Ship
Shoal 349/359, averaged 13,100 barrels of oil per day (BOPD) and 24.1
MMcf/d of gas during the third quarter of 1997. Production is currently
11,500 BOPD and 22 MMcf/d of gas. Four wells are on production with
only one of the wells producing from the "P" sand, the Field's main pay
zone.
Three of the wells at the Mahogany platform are producing from other
zones that hold a small portion of the Field's total reserves.
Hydrocarbons from these zones must be produced before recompleting
these wells to the "P" sand. Once wells are recompleted to the "P"
sand, Management believes production should increase. A fifth well is
currently drilling from the platform and additional development wells
are planned in 1998. Anadarko has a 37.5-percent working interest in
the Mahogany Field.
-17-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Hugoton Embayment Anadarko continued to aggressively develop the
"deep" horizons of the Hugoton Embayment. The deep drilling program
features multiple pay objectives from 3,000-6,000 feet deep, low cost
of finding and high rates of return. Year-to-date, the Company has
achieved an 85 percent success rate in the deep drilling program,
primarily in Seward County, Kansas and Texas and Beaver Counties,
Oklahoma. Current production from the Company's deep acreage in the
Hugoton Embayment is 85 MMcf/d of gas equivalent. During the third
quarter of 1997, the Company drilled 37 wells (30 deep and 7 shallow)
and completed 41 wells in the Hugoton Embayment; some of the most
significant include:
Krey D-2 (Richland Center N. Field) Texas County, Oklahoma - 15.0
MMcf/d of gas
Keller D-1 (Arkalon Field) Seward County, Kansas - 3.8 MMcf/d of gas
Bennett F-1 (Floris Field) Beaver County, Oklahoma - 7.0 MMcf/d of
gas
Malin A-4 (Shuck Field) Seward County, Kansas - 5.8 MMcf/d of gas
Brown K-1 (Condit Field) Seward County, Kansas - 3.3 MMcf/d of gas
Going A-7 (Dunkle Field) Morton County, Kansas - 3.3 MMcf/d of gas
Dorman C-1 (Floris Field) Beaver County, Oklahoma - 2.9 MMcf/d of
gas
Gregory C-2 (Gentzler SW Field), Seward County, Kansas - 2.7 MMcf/d
of gas
In the third quarter of 1997, the Company completed a six-well
delineation program in the Unity Field of Texas County, Oklahoma.
Combined initial production from the five successful wells totaled 25.2
MMcf/d of gas. Anadarko owns a 100-percent working interest in four of
the wells and a 97-percent working interest in the fifth well. Anadarko
also completed a 50 square-mile 3-D seismic survey over a 32,000-acre
area, which includes the Unity Field.
In addition to development drilling, Anadarko carried out a number of
important recompletions and workovers. During the third quarter of
1997, the Company recompleted 10 wells, and worked over another 17
wells in the Hugoton Embayment. The Leathers Land A-2 well in the
Eubank South Field of Haskell County, Kansas was fracture stimulated,
increasing production from 23 BOPD and 40 thousand cubic feet per day
(Mcf/d) of gas to 290 BOPD and 370 Mcf/d of gas. The Ray C-4 well in
the Eubank Field of Haskell County, Kansas was recompleted in another
productive zone and tested 2.0 MMcf/d of gas.
In late August 1997, operations began at Anadarko's West Ward No. 1 and
No. 2 satellite compressor stations. Combined, the two stations have
reduced suction pressure in the field to 18 pounds per square inch
(psi) and increased production by 3.0 MMcf/d of gas. The facilities are
among 16 satellite booster stations the Company has added in 1997.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the third quarter of 1997, Anadarko installed 27 wellhead
compressors, which have added 6.6 MMcf/d of gas to gross production
volumes. In addition, the Company connected 32 new wells which added
39.8 MMcf/d in initial production volumes. Anadarko also reduced the
field pressure of its system by installing 12 miles of additional pipe
alongside selected gathering lines - a technique known as "line-
looping."
Permian Basin In the Permian Basin, Anadarko continued its growth
strategy which focuses on field expansion, infill drilling, waterflood
operations and strategic property acquisitions. In the third quarter of
1997, the Company operated 10 drilling rigs and drilled 110 wells. Net
production increased 32 percent to 12,533 BOPD compared to 9,461 BOPD
for the same period in 1996.
A multi-rig infill drilling program continued in Ector County, Texas,
where the Company operates three large waterflood units. In the third
quarter of 1997, 50 wells were spudded, including wells in a 10-acre
spacing pilot program. Results from the pilot program have averaged
about 60 BOPD per well. Total gross production from the Ector County
Units has more than doubled to 8,000 BOPD compared to a 1996 average of
3,670 BOPD.
The Company's field extension program continues at the Ketchum Mountain
(Clearfork) Field, located in Irion County, Texas. Anadarko drilled 12
wells in the Field in the third quarter of 1997 and completed seven new
wells on the Scott "2" lease, which extended the Field's limit.
Production from the Ketchum Mountain Field is 2,900 BOPD, an increase
of 60 percent over an average of 1,820 BOPD in 1996.
In the Sharon Ridge/Diamond M Field of Scurry County, Texas where
Anadarko is actively involved in a waterflood expansion program, the
Company completed 36 wells in the third quarter of 1997, which have
increased production to 2,300 BOPD compared to average production of
1,425 BOPD in 1996.
West Panhandle Field In the West Panhandle Field of Carson and
Moore Counties, Texas, Anadarko continued its aggressive
sidetrack/lateral drilling program. Through the first nine months of
1997, Anadarko completed 41 sidetracks, increasing Field capability by
14 MMcf/d of gas. Production from the West Panhandle Field is currently
61 MMcf/d of gas (gross).
The Bossier Play In Freestone County, Texas, successful results
were reported from the Black "A" No. 1 during the third quarter of
1997. The well tested 7.1 MMcf/d of gas through an 18.5/64-inch choke.
Anadarko owns a 100-percent working interest in the discovery, known as
the Caroline prospect. Anadarko now has interests in 12 wells in the
Bossier Play with net production of 8.2 MMcf/d of gas. Two drilling
rigs are currently operating in the Bossier Play.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Coal-Bed Methane Anadarko is nearing completion of Phase I
development of the Helper Field in Carbon County, Utah. In the first
nine months of 1997, Anadarko drilled and completed 20 coal-bed methane
wells in the Helper Field. Installation of a gathering system is
underway and Management believes the gathering system should be
completed in the fourth quarter of 1997. Anadarko has a 100-percent
working interest in this play.
International
Algeria In the third quarter of 1997, Anadarko raised its reserve
estimate for crude oil and condensate discovered in the Sahara Desert
to 2.0 billion barrels (gross). The previous reserve estimate, made in
1995, was 1.5 billion barrels of crude oil and condensate (gross). The
reserve increase was due to continued success in both exploration and
delineation drilling. In the first nine months of 1997, Anadarko
drilled ten wells, six of which were discoveries.
Stage I construction of the Central Production Facility for the Hassi
Berkine South Field (HBNS), located on Block 404, is approximately 80
percent complete. The construction contractor, Brown & Root Condor,
currently has about 400 workers at this desert location. Initial
production from Stage I is expected in early 1998 at a rate of 60,000
BOPD (gross).
Eritrea In September 1997, Anadarko added additional exploration
acreage in Eritrea's Red Sea. A Production Sharing Agreement was signed
for an additional 2.3 million acres, bringing the Company's acreage
position to 9.0 million acres. Anadarko now has two blocks - the
original Zula Block and the new Edd Block. Anadarko signed a rig
contract with an international drilling company and plans to drill
three exploration wells in Eritrea in 1998.
Jordan The Company is currently drilling the first of two planned
stratigraphic test wells on the Safawi Block, a 4.2 million acre area
in northeast Jordan. The test wells are designed to prove the existence
of quality source rock and reservoir sands prior to conducting a
seismic survey.
Peru In July 1997, Anadarko began a seismic acquisition program on
Block 84 in Peru. The Company is conducting a 600 kilometer seismic
program on this 2.56-million acre Block, located in the Ucayali Basin
near the Brazilian border. The initial seismic acquisition program is
expected to take about 12 months to complete.
-20-
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.
-21-
Item 1. Legal Proceedings (continued)
Kansas Ad Valorem Tax (continued)
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 $39,000,000 (pre-tax)
as of September 30, 1997. 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
$25,000,000 (pre-tax). On September 10, 1997, FERC denied the
petition for adjustment and established procedures for the payment of
refunds. Under FERC's order, interstate and intrastate pipelines are
required to serve on first sellers statements of refunds due. This
statement is due on or before November 10, 1997. Refunds are due to
be paid by first sellers within 180 days of the date of the FERC
order, or by March 9, 1998.
The Company, along with other gas producers and the State of Kansas,
have sought rehearing, clarification and a stay of the FERC's
September 10 Order. On November 10, 1997, FERC issued an order
allowing for more time to consider the rehearing requests, but denied
the stay request at this time. If FERC denies rehearing, appeals of
the FERC's decision may be filed. The filing of any such appeal will
not, in and of itself, result in a stay of FERC's order.
FERC's September 10 Order permits affected first sellers to file
individual petitions for adjustment. Depending on the nature of the
claims submitted by pipeline purchasers on November 10, 1997, the
Company may pursue an individual petition for adjustment, and may seek
deferral of the refund obligation on other specific grounds. The
Company reserves all rights to contest any specific Statement of
Refunds due submitted by any pipeline purchaser.
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 $23,000,000 (pre-tax) as of
September 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.
-22-
Item 1. Legal Proceedings (continued)
Kansas Ad Valorem Tax (continued)
Net income for the third quarter of 1997, included a $1,700,000 charge
(before income taxes) 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 the amounts recorded in 1993, 1994 and the third quarter of
1997) has been made in the accompanying financial statements.
Item 5. Other Information
On July 28, 1997, John N. Seitz was promoted to the position of
Executive Vice President - Exploration and Production and was elected
to Anadarko's Board of Directors as a Class II director.
-23-
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
*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 September 30, 1997.
-24-
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)
November 13, 1997 [MICHAEL E. ROSE]
Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer