UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
17001 Northchase Drive, Houston, Texas 77060-2141
(281) 875-1101
Incorporated in the Employer Identification
State of Delaware No. 76-0146568
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes X No _____
The number of shares outstanding of each of the registrant's
classes of common stock as of April 30, 1998 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, $0.10 par value per share 60,015,081
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31
thousands except per share amounts 1998 1997
Revenues
Gas sales $ 93,520 $107,051
Oil and condensate sales 31,398 42,595
Natural gas liquids and other 21,470 20,860
Total 146,388 170,506
Cost and Expenses
Operating expenses 40,257 32,855
Administrative and general 21,243 17,035
Depreciation, depletion and amortization 51,337 45,339
Other taxes 10,829 12,913
Total 123,666 108,142
Operating Income 22,722 62,364
Other Income and (Expenses)
Other income 613 839
Interest expense (12,358) (9,238)
Income before Income Taxes 10,977 53,965
Income Taxes 3,962 19,531
Net Income $ 7,015 $ 34,434
Per Common Share
Net income - basic $ 0.12 $ 0.58
Net income - diluted $ 0.12 $ 0.57
Dividends $ 0.075 $ 0.075
Average Number of Shares Outstanding 59,917 59,612
After giving effect to the two-for-one stock split, effected in the form
of a 100 percent stock dividend, declared on April 30, 1998 (Note 9)
Per Common Share
Net income - basic $ 0.06 $ 0.29
Net income - diluted $ 0.06 $ 0.29
Average Number of Shares Outstanding 119,834 119,223
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
thousands 1998 1997
ASSETS
Current Assets
Cash and cash equivalents $ 7,902 $ 8,907
Accounts receivable 156,397 177,157
Inventories, at average cost 30,731 28,564
Prepaid expenses 3,603 4,366
Total 198,633 218,994
Properties and Equipment
Original cost 4,929,098 4,669,251
Less accumulated depreciation, depletion
and amortization 1,962,385 1,914,472
Net properties and equipment - based on
the full cost method of accounting
for oil and gas properties 2,966,713 2,754,779
Deferred Charges 24,485 18,692
$3,189,831 $2,992,465
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET (continued)
(Unaudited)
March 31, December 31,
thousands 1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 249,951 $ 202,822
Banks 14,567 22,102
Accrued expenses
Interest 13,541 13,607
Taxes and other 20,686 13,799
Total 298,745 252,330
Long-term Debt 1,095,142 955,733
Deferred Credits
Deferred income taxes 550,177 546,792
Other 123,030 120,830
Total 673,207 667,622
Stockholders' Equity Note 9
Common stock, par value $0.10
(200,000,000 shares authorized,
121,882,064 and 60,885,994 shares issued
as of March 31, 1998 and December 31,
1997, respectively) 12,188 6,134
Preferred stock, par value $1.00
(2,000,000 shares authorized, no
shares issued as of March 31, 1998
and December 31, 1997) --- ---
Paid-in capital 359,241 353,125
Retained earnings (as of March 31, 1998,
$472,737,000 was not restricted as to
the payment of dividends) 831,307 828,787
Deferred compensation (10,278) (11,203)
Executives and Directors Benefits Trust,
at market value (2,000,000 and 1,000,000
shares as of March 31, 1998 and
December 31, 1997, respectively) (69,719) (60,063)
Treasury stock (56 shares as of
March 31, 1998) (2) ---
Total 1,122,737 1,116,780
$3,189,831 $2,992,465
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
thousands 1998 1997
Cash Flow from Operating Activities
Net income $ 7,015 $ 34,434
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 51,337 45,339
Amortization of restricted stock 294 589
Deferred income taxes 3,935 9,734
62,581 90,096
Decrease in accounts receivable 20,760 83,716
Increase in inventories (2,167) (617)
Increase (decrease) in accounts payable -
trade and other and accrued expenses 53,950 (75,996)
Other items - net (2,800) (2,755)
Net cash provided by operating activities 132,324 94,444
Cash Flow from Investing Activities
Additions to properties and equipment (268,131) (120,472)
Proceeds from the sale of assets to be
leased, net --- 87,900
Sales and retirements of properties
and equipment 4,860 2,635
Net cash used in investing activities (263,271) (29,937)
Cash Flow from Financing Activities
Additions to debt 239,409 ---
Retirements of debt (100,000) (31,049)
Decrease in accounts payable, banks (7,535) (6,688)
Dividends paid (4,495) (4,553)
Issuance of common stock 2,565 4,548
Issuance (purchase) of treasury stock (2) 4
Net cash provided by (used in) financing
activities 129,942 (37,738)
Net Increase (Decrease) in Cash and Cash
Equivalents (1,005) 26,769
Cash and Cash Equivalents at Beginning
of Period 8,907 14,601
Cash and Cash Equivalents at End of Period $ 7,902 $ 41,370
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 explora-
tion, development, production and marketing of natural gas, crude oil,
condensate and natural gas liquids (NGLs). The terms "Anadarko" and
"Company" refer to Anadarko Petroleum Corporation and its subsidiaries.
The principal subsidiaries of Anadarko are: Anadarko Algeria Corpora-
tion (Anadarko Algeria), Anadarko Energy Services Company and Anadarko
Gathering Company. Certain amounts have been restated to conform to
the current presentation. See Note 9.
2. Inventories Inventories are stated at the lower of average cost
or market. Natural gas, when sold from inventory, is charged to
expense using the average-cost method. The major classes of
inventories are as follows:
March 31, December 31,
thousands 1998 1997
Materials and supplies $27,173 $27,332
Natural gas, stored in inventory 3,558 1,232
$30,731 $28,564
3. Properties and Equipment Oil and gas properties include costs of
$379,546,000 and $343,789,000 at March 31, 1998 and December 31, 1997,
respectively, which were excluded from capitalized costs being
amortized. These amounts represent costs associated with unevaluated
properties and major development projects.
4. Long-term Debt A summary of long-term debt follows:
March 31, December 31,
thousands 1998 1997
Commercial Paper $ 213,642 $125,733
Notes Payable, Banks 81,500 30,000
8 3/4% Notes due 1998 --- 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% Debentures due 2027 100,000 100,000
6.625% Debentures due 2028 100,000 ---
7.73% Debentures due 2096 100,000 100,000
7 1/4% Debentures due 2096 100,000 100,000
$1,095,142 $955,733
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.
6
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Long-term Debt (continued)
In January 1998, Anadarko issued $100,000,000 principal amount of
6.625% Debentures due 2028. The proceeds were used to fund capital
spending projects in core operating areas.
In March 1998, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that permits the issuance of up to
$500,000,000 in debt and equity securities. This registration
statement includes $100,000,000 in debt and equity securities
registered and remaining unissued under the Company's previous shelf
registration statement. Net proceeds, terms and pricing of offerings
of securities issued under the shelf registration statement will be
determined at the time of the offerings. See Note 9.
5. Common Stock For the first quarter of 1998, 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
$472,737,000 and $466,780,000 were not restricted as to the payment of
dividends at March 31, 1998 and December 31, 1997, respectively.
The Company's basic earnings per share amounts have been computed based
on the average number of common shares outstanding. Diluted earnings
per share amounts include the effect of the Company's outstanding stock
options under the treasury stock method.
The following table illustrates the reconciliation of the numerators
and denominators of the basic and diluted earnings per common share
computations for income related to the unexercised stock options
outstanding at March 31, 1998 and 1997. See Note 9.
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
thousands except Per Share Per Share
per share amounts Income Shares Amount Income Shares Amount
Basic earnings per
share
Income available to
common stockholders $7,015 59,917 $0.12 $34,434 59,612 $0.58
Stock options -- 325 -- 436
Diluted earnings per
share
Income available to
common stockholders
and assumed
conversion $7,015 60,242 $0.12 $34,434 60,048 $0.57
7
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Statement of Cash Flows Supplemental Information The amounts
of cash paid (received) for interest (net of amounts capitalized) and
income taxes are as follows:
Three Months Ended
March 31
thousands 1998 1997
Interest $13,798 $11,046
Income taxes $(6,660) $ (43)
7. Operating Expenses Operating expenses by category are as follows:
Three Months Ended
March 31
thousands 1998 1997
Oil and gas $20,939 $18,018
Plant, gathering and marketing 19,318 14,837
$40,257 $32,855
8. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 (NGPA)
allowed a "severance, production or similar" tax to be included as an
add-on, over and above the maximum lawful price for natural gas. Based
on the Federal Energy Regulatory Commission (FERC) ruling that the
Kansas ad valorem tax was such a tax, the Company collected the Kansas
ad valorem tax in addition to the otherwise maximum lawful price.
Background of Present Litigation FERC's ruling regarding the
ability of producers to collect the Kansas ad valorem tax in addition
to applicable maximum lawful prices was appealed to the United States
Court of Appeals for the District of Columbia Circuit (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.
8
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
Numerous parties filed appeals of FERC's action in the D.C. Circuit.
Anadarko, together with other natural gas producers, challenged the
FERC's orders on two grounds: (1) that the Kansas ad valorem tax,
properly understood, did 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 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 that 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 $40,100,000 (pre-tax)
as of March 31, 1998.
FERC Proceedings The Company, along with other producing companies,
filed a petition for adjustment with FERC on May 12, 1997. In so
doing, the Company sought waiver of all interest which might otherwise
be due. The total interest at issue is about $25,500,000 (pre-tax) as
of March 31, 1998. On September 10, 1997, FERC denied the petition for
adjustment. On January 28, 1998, FERC denied rehearing, but granted
first sellers the right to escrow funds in dispute by a separate order
(the "Order Clarifying Procedures"). By order dated February 26, 1998,
in response to producers' requests and Anadarko's particular request
based on the litigation with PanEnergy referenced below, FERC granted
first sellers the right to secure a surety bond instead of placing cash
in escrow. Requests for rehearing of this order are pending before
FERC.
9
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
The Company and other producers filed petitions for review of FERC's
January 28, 1998 order denying adjustment relief with the United States
Court of Appeals for the Fifth Circuit (Fifth Circuit). The State of
Kansas and the Kansas Corporation Commission (KCC), as well as another
producer of natural gas, filed appeals of the same orders in the United
States Court of Appeals for the Tenth Circuit.
The Public Service Company of Colorado and an affiliate filed a motion
in the Fifth Circuit to dismiss the pending appeals or to transfer them
to the D.C. Circuit. On April 27, 1998, the Fifth Circuit denied the
motion to dismiss but granted the motion to transfer the appeals to the
D.C. Circuit.
Several parties, including Anadarko, sought rehearing or clarification
of the Order Clarifying Procedures issued by FERC on January 28, 1998.
In that rehearing request, the Company outlined in detail its
interpretation of the scope of the phrase "amounts in dispute" as
encompassing legal disputes. At least one adverse party has requested
that FERC change its order to permit only so-called "computational"
disputes, rather than legal disputes, to be eligible for escrow.
On March 4, 1998, FERC granted rehearing of its Order Clarifying
Procedures solely for purposes of further consideration. No substantive
guidance was offered to the parties in the March 4, 1998 order.
If FERC should change or clarify its policy regarding the availability
or scope of a first sellers' right to bond or escrow disputed amounts,
either on its own motion or in response to pending requests from
adverse parties, or if FERC should reject the Company's legal defenses,
the Company could be required to pay all or part of the amounts claimed
by all pipelines (which might include PanEnergy) pending further
potential review by FERC or the courts. However, a FERC order issued
February 26, 1998 involving refunds paid by another producer to
Northern Natural Gas Company indicates that, if a producer prevails in
subsequent legal challenges, the producer may recoup amounts paid
directly from the pipeline itself, even if the pipeline already
distributed refunds to the pipeline's customers. Requests for
rehearing of this order are pending.
The Company intends to comply fully with all lawful orders issued by
FERC, without waiver of any claim of right or any defense or the right
to seek judicial review or intercession.
10
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
FERC's September 10, 1997 and January 28, 1998 orders permit affected
first sellers to file individual petitions for adjustment. The Company
may pursue an individual petition for adjustment and has reserved all
rights to contest specific Statements of Refunds submitted by pipeline
purchasers. Offers of settlement and demands for a hearing have been
filed by producers, including Anadarko. The offer of settlement filed
by Anadarko with respect to PanEnergy is subject to the litigation
discussed below such that if a settlement amount is agreed to, the
litigation will determine whether PanEnergy or Anadarko issues the
agreed refund amount. On March 3, 1998, FERC issued notices regarding
those settlement offers and requested comment by all interested
persons.
On March 9, 1998 and March 10, 1998, the Company filed several
compliance filings with FERC paying undisputed amounts billed by
pipelines and bonding amounts in dispute. The entire refund claim by
Panhandle Eastern Pipe Line Company, a PanEnergy affiliate, was
disputed, and the Company posted a surety bond for the amount in
controversy.
PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit
in the Federal District Court for the Southern District of Texas
against PanEnergy seeking declaration that pursuant to prior agreements
Anadarko is not required to issue refunds to PanEnergy for the
principal amount of $14,000,000 (pre-tax) and, if the petition for
adjustment is denied in its entirety by FERC with respect to PanEnergy
refunds, interest in an amount of $24,600,000 (pre-tax) as of March 31,
1998. The Company also seeks from PanEnergy the return of $816,000 of
the $830,000 (pre-tax) charged against income in 1993 and 1994. In
response to a motion filed by PanEnergy, the United States District
Court issued an order on March 19, 1998 staying the litigation, pending
the exercise by FERC of its regulatory jurisdiction. On May 4, 1998,
the Company filed a complaint against PanEnergy at FERC, requesting
that FERC either refer the proceeding back to the federal court or
resolve the matters in dispute.
11
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
KCC Proceeding On April 30, 1998, the Company's subsidiary,
Anadarko Gathering Company (AGC) filed a petition with the KCC to
clarify AGC's rights and obligations, if any, related to the payment by
first sellers, including the Company, of Kansas ad valorem tax refunds.
The refunds at issue relate to sales made by Centana Energy Corporation,
a PanEnergy affiliate, through facilities known as the Cimmaron River
System during the time period from 1983 to 1988. AGC purchased the
Cimmaron River System from Centana in 1995. The petition, among other
things, asks the KCC to determine whether AGC or Centana is responsible
for the payment or distribution of refunds received from first sellers to
Centana's former customers and requests guidance concerning the
disposition of refunds received that are attributable to sales made to
Centana customers that did not reimburse Centana for Kansas ad valorem
taxes during the relevant time periods.
Anadarko's net income for 1997 included a $1,800,000 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 1997) has been made in the
accompanying financial statements.
9. Subsequent Events
On April 30, 1998, the Board of Directors approved a two-for-one stock
split, to be effected in the form of a 100 percent stock dividend. The
distribution date is July 1, 1998 to stockholders of record on June 15,
1998. In connection with the stock dividend, $6,049,000 was transferred
to common stock from paid-in capital in the March 31, 1998 balance sheet.
12
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Subsequent Events (continued)
The following table illustrates the reconciliation of the numerators
and denominators of the restated basic and diluted earnings per common
share computations for income related to the unexercised stock options
outstanding at March 31, 1998 and 1997.
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
thousands except Per Share Per Share
per share amounts Income Shares Amount Income Shares Amount
Basic earnings per
share
Income available to
common stockholders $7,015 119,834 $0.06 $34,434 119,223 $0.29
Stock options -- 651 -- 873
Diluted earnings per
share
Income available to
common stockholders
and assumed
conversion $7,015 120,485 $0.06 $34,434 120,096 $0.29
In addition, the Board of Directors approved an increase in its
quarterly dividend to $0.10 per share (up from seven and one-half cents
per share). The dividend is payable on June 24, 1998 to stockholders
of record on June 10, 1998. Following the stock split, the Company
expects to pay quarterly dividends in the amount of $0.05 per share of
Common Stock. Anadarko has paid common stock dividends every quarter
since 1986. The amount of future dividend payments will depend on the
Company's earnings, financial condition, capital requirements and other
factors and will be determined by the Board on a quarterly basis.
On May 7, 1998, Anadarko issued $200,000,000 of 5.46% Series B
Cumulative Preferred Stock in the form of two million depositary
shares, each depositary share representing 1/10th of a share of the
5.46% Series B Cumulative Preferred Stock. The Preferred Stock has no
stated maturity and is not subject to a sinking fund or mandatory
redemption. The shares are not convertible into other securities of the
Company.
Anadarko has the option to redeem the shares at $100 per depositary
share on or after May 15, 2008. Holders of the shares will be entitled
to receive, when, and as declared by the Board of Directors, cumulative
cash dividends at an annual dividend rate of $5.46 per depositary
share. The proceeds from the offering will be used to reduce
commercial paper and bank borrowings and provide capital for Anadarko's
1998 work program. The Preferred Stock was issued under the Company's
shelf registration statement.
13
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 March 31, 1998 and December 31,
1997, the results of operations for the three months ended March 31,
1998 and 1997 and cash flows for the three months ended March 31, 1998
and 1997.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has made in this report, forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 concerning the Company's
operations, economic performance and financial condition. These forward
looking statements include information concerning future production and
reserves, contributions from Algerian properties, and those statements
preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "estimates",
"projects", "target", "goal", "plans", "objective", "should" or similar
expressions or variations on such expressions. For such statements, the
Company claims the protection of the safe harbor for forward looking
statements contained in the Private Securities Litigation Reform Act of
1995. Such statements are subject to various risks and uncertainties,
and actual results could differ materially from those expressed or
implied by such statements due to a number of factors in addition to
those discussed elsewhere in this Form 10-Q and in the Company's other
public filings, press releases and discussions with Company management.
See Additional Factors Affecting Business in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's 1997 Annual Report on Form 10-K.
Overview of Operating Results
For the first quarter of 1998, Anadarko's net income was $7.0 million
(12 cents per share) on revenues of $146.4 million. By comparison, net
income for the first quarter of 1997 was $34.4 million (58 cents per
share) on revenues of $170.5 million. The decrease in net income is
primarily due to significantly lower commodity prices in 1998,
partially offset by higher production volumes. Net income for 1998
also reflects higher costs and expenses as well as increased interest
expense.
The following table shows the Company's volumes and U.S. prices for the
three months ended March 31, 1998 and 1997:
Three Months Ended
March 31 % Increase
1998 1997 (Decrease)
Natural gas, Bcf 44.0 42.3 4
Average daily volumes, MMcf/d 489 470 4
Price per Mcf $ 2.02 $ 2.66 (24)
Crude oil and condensate, MBbls 2,251 2,002 12
Average daily volumes, MBOD 25 22 14
Price per barrel $13.02 $20.58 (37)
Natural gas liquids, MBbls 1,704 1,231 38
Average daily volumes, MBOD 19 14 36
Price per barrel $11.68 $15.65 (25)
See "Natural Gas Volumes and Prices" and "Crude Oil, Condensate
and Natural Gas Liquids Volumes and Prices".
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Costs and expenses during the first quarter of 1998 were $123.7
million, an increase of $15.6 million (14 percent) compared to $108.1
million for the first quarter of 1997. The increase was primarily due
to higher operating and depreciation, depletion and amortization
expenses related to increased volumes and higher administrative and
general expenses due to costs associated with the Company's growing
workforce.
Interest expense for the first quarter of 1998 was $12.4 million, an
increase of 34 percent compared to $9.2 million for the first quarter
of 1997. The increase was primarily due to higher average borrowings
partially offset by lower interest rates in 1998 and an increase in
capitalized interest in the first quarter of 1998.
Natural Gas Volumes and Prices The Company's average U.S. wellhead
gas price in the first quarter of 1998 was $2.02 per thousand cubic
feet (Mcf), down 24 percent from $2.66 per Mcf in the first quarter of
1997. Lower U.S. natural gas prices were partly offset by a four
percent increase in gas production volumes in the first quarter of
1998. Anadarko produced 44.0 billion cubic feet (Bcf) of gas or 489
million cubic feet per day (MMcf/d) of gas in the first quarter of 1998
compared to 42.3 Bcf of gas or 470 MMcf/d of gas in the same period of
1997.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
During the first quarter of 1998, the Company's average U.S. price for
crude oil dropped nearly 40 percent to $13.02 per barrel from $20.58
per barrel in the first quarter of 1997. The Company's crude oil and
condensate volumes during the first quarter of 1998 were up 12 percent
to 2.3 million barrels (MMBbls) or 25 thousand barrels (MBbls) per day.
This compares to first quarter 1997 volumes of 2.0 MMBbls or 22 MBbls
per day. The increase in oil and condensate volumes is primarily due to
increased production from the Mahogany (Ship Shoal 349/359) platform in
the Gulf of Mexico and the Permian Basin in west Texas.
Natural gas liquids (NGLs) sales volumes in the first quarter of 1998
increased nearly 40 percent to 1.7 MMBbls or 19 MBbls per day compared
to 1.2 MMBbls or 14 MBbls per day in 1997. Prices for NGLs in the
first quarter of 1998 decreased 25 percent to an average of $11.68 per
barrel. NGLs prices in the first quarter of 1997 averaged $15.65 per
barrel.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Use of Derivatives Anadarko produces, purchases and sells natural
gas, crude oil, and NGLs. As a result, Anadarko's financial results
can be significantly affected by changes in these commodity prices.
Anadarko uses derivative 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 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 contracts.
While the volume of derivative commodity instruments utilized by the
Company to hedge its market price risk can vary during the year within
the boundaries of its established policy guidelines, the fair value of
those instruments at March 31, 1998 and December 31, 1997 was, in the
judgment of the Company, immaterial. Additionally, through the use of
sensitivity analysis, the Company evaluates the potential effect that
reasonably possible near term changes in the market prices of natural
gas and crude oil may have on the fair value of the Company's
derivative commodity instruments. Based upon an analysis utilizing
the actual derivative contractual volumes and assuming a ten percent
adverse movement in commodity prices, the potential decrease in the
fair value of the derivative commodity instruments at March 31, 1998
and December 31, 1997 does not have a material adverse effect on the
financial position or results of operations of the Company.
The Company also evaluated the potential effect that reasonably
possible near term changes in interest rates may have on the fair
value of the Company's interest rate swap agreement. Based upon an
analysis, utilizing the actual interest rates in effect as of March
1998 and December 1997, and assuming a ten percent increase in
interest rates, the potential decrease in the fair value of the
derivative interest swap instrument at March 31, 1998 and December 31,
1997 does not have a material effect on the financial position or
results of operations of the Company.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Capital Expenditures, Liquidity and Dividends
During the first quarter of 1998, Anadarko's capital spending
(including capitalized interest and overhead) was $268.1 million
compared to $120.5 million in the first quarter of 1997.
The Company believes cash flows, including proceeds from divestitures,
issuances of additional debt or securities, and existing credit
facilities will be sufficient to meet capital and operating
requirements, including any contingencies, during 1998.
In January 1998, Anadarko issued $100 million principal amount of
6.625% Debentures due 2028. The proceeds were used to fund capital
spending projects in core operating areas.
In March 1998, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that permits the issuance of up to
$500 million in debt and equity securities. This registration
statement includes $100 million in debt and equity securities
registered and remaining unissued under the Company's previous shelf
registration statement. Net proceeds, terms and pricing of offerings
of securities issued under the shelf registration statement will be
determined at the time of the offerings.
In April 1998, the Company's Revolving Credit and 364-Day Credit
Agreements were amended. The Revolving Credit Agreement was amended to
increase the number of commercial banks in the group from eight to
nine. The 364-Day Credit Agreement was amended as follows: the
principal amount of the Agreement was increased from $125 million to
$175 million; the number of commercial banks in the group was changed
from eight to nine; and the expiration date of the Agreement was
extended for 10 months.
On April 30, 1998, the Board of Directors approved a two-for-one stock
split. The stock split will be effected by way of a 100 percent stock
dividend. The distribution date is July 1, 1998 to stockholders of
record on June 15, 1998.
In addition, the Board of Directors approved an increase in its
quarterly dividend to $0.10 per share (up from seven and one-half cents
per share). The dividend is payable on June 24, 1998 to stockholders
of record on June 10, 1998. Following the stock split, the Company
expects to pay quarterly dividends in the amount of $0.05 per share of
Common Stock. Anadarko has paid common stock dividends every quarter
since 1986. The amount of future dividend payments will depend on the
Company's earnings, financial condition, capital requirements and other
factors and will be determined by the Board on a quarterly basis.
18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
On May 7, 1998, Anadarko issued $200 million of 5.46% Series B
Cumulative Preferred Stock in the form of two million depositary
shares, each depositary share representing 1/10th of a share of the
5.46% Series B Cumulative Preferred Stock. The Preferred Stock has
no stated maturity and is not subject to a sinking fund or mandatory
redemption. The shares are not convertible into other securities of
the Company.
Anadarko has the option to redeem the shares at $100 per depositary
share on or after May 15, 2008. Holders of the shares will be entitled
to receive, when, and as declared by the Board of Directors, cumulative
cash dividends at an annual dividend rate of $5.46 per depositary
share. The proceeds from the offering will be used to reduce
commercial paper and bank borrowings and provide capital for Anadarko's
1998 work program. The Preferred Stock was issued under the Company's
shelf registration statement.
Exploration and Development Activities
During the first quarter of 1998, Anadarko drilled or participated in
a total of 109 wells, including 66 oil wells, 32 gas wells and 11 dry
holes. This compares to a total of 126 wells in the first quarter of
1997, including 75 oil wells, 40 gas wells and 11 dry holes. Following
is a description of activity during the quarter.
Gulf of Mexico The Matagorda Island 587 A-1 well was recompleted
in March 1998, flowing 15.1 MMcf/d of gas and 8 barrels of condensate
per day from a new zone. Anadarko is operator with a 36-percent working
interest.
Hugoton Embayment In January 1998, the Boles F-1 well in the
recently renamed Archer Field of Seward County, Kansas, was completed
as a discovery, flowing 200 barrels of oil per day (BOPD) from the St.
Louis Formation. Traditionally, this formation has been very difficult
to image with conventional seismic. Anadarko is relying on 3-D seismic
data in this area for its exploratory program. In March 1998, the
discovery well was offset by two delineation wells -- The Boles F-2
well flowed 291 BOPD and 170 thousand cubic feet per day (Mcf/d) of gas
and the Boles F-3 well tested 287 BOPD and 100 Mcf/d of gas. Anadarko
owns a 100-percent working interest in these wells.
Also in Seward County, Kansas, the Blackmer A-3 well flowed 386 BOPD
and 276 Mcf/d of gas from the Chester interval. Located in the Fedder
Southwest Field, the Malin B-1 well produced 1.0 MMcf/d of gas from the
Upper Morrow Sands. From the same Field, the Milhon B-1 well flowed 1.6
MMcf/d of gas from the Upper Morrow Sands. Anadarko owns a 100-percent
working interest in all three wells.
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In Morton County, Kansas, the USA Barker A-3 tested 2.5 MMcf/d of gas
from the Upper Morrow Sands. Anadarko owns a 100-percent working
interest in this well, located in the Berryman Richfield Field.
In the Hough South Field, the Long D-1 well tested 335 BOPD and 246
Mcf/d of gas from the Upper Morrow Sands. Anadarko owns a 100-percent
working interest in the well.
Permian Basin Anadarko continued its successful field extension
drilling program at the Ketchum Mountain (Clear Fork) Field in Irion
County, Texas. In the first quarter of 1998, 15 wells were drilled,
including 11 wells on the Busby "10" and Sugg/Farmar "11" leases that
extend the northeast limits of the Field. To date, nine wells have been
completed on these two leases, with a combined initial production rate
of 1,076 BOPD. Anadarko has a 100-percent working interest in these
wells.
The Company plans to implement secondary recovery operations in the
Ketchum Mountain East (KME) development area. The planned waterflood
encompasses about 3,850 acres adjacent to the existing Ketchum Mountain
(Clear Fork) Field waterflood. Current production of 2,460 BOPD from
the KME area is expected to increase to approximately 3,400 BOPD by
2000.
Central Oklahoma Anadarko acquired 37,000 acres with 370 production
and injection wells in the Golden Trend of Oklahoma from OXY USA, Inc.
in the first quarter of 1998 for a purchase price of $120 million. As
part of the agreement, Anadarko purchased working interests in five oil
and gas fields and an interest in a 120-mile, eight-inch CO2 pipeline.
Current production from the properties is 2,600 BOPD and 5.4 MMcf/d of
gas and Anadarko estimates proved reserves from the purchase of about
20 million energy equivalent barrels. Anadarko has identified more
than 150 drilling locations that could further add to reserves and
production during 1998 and beyond.
In the Golden Trend's Antioch Southwest Field of Garvin County,
Oklahoma, the Tomlinson "A" No. 4-26 flowed 1.2 MMcf/d of gas and 109
BOPD. Anadarko owns a 74-percent working interest in the well.
East Texas' Bossier Sand Play From the Dew Field in Freestone
County, Texas, Anadarko completed the Johnson "A" No. 2 well, flowing
7.1 MMcf/d of gas. The Johnson "A" No. 1 exploratory well flowed 2.3
MMcf/d of gas. Also in the Dew Field, the McAdams A-1 flowed 5.4 MMcf/d
of gas and 12 BOPD. The Black "A" No. 6 flowed 4.4 MMcf/d of gas.
Anadarko owns more than 16,000 acres in the Bossier Sand Play and has
achieved a 100-percent drilling success rate to date. This is now the
Company's third largest onshore gas field.
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Algeria Anadarko announced in March 1998 the discovery of another
potentially significant oil field in Algeria's Sahara Desert - the El
Merk North (EMN) Field. The EMN-1 well, located on Block 208, flowed
21,395 BOPD and encountered 119 feet of net oil pay. This was the
highest flow rate ever achieved by the Company. Anadarko owns a 50-
percent interest in the Production Sharing Agreement, prior to
participation by SONATRACH during exploitation.
On the BHP-operated Block 402, Anadarko and partners participated in
the completion of the Bir Sif Fatima No. 1 well in February 1998,
flowing 1,960 BOPD. Also on Block 402, the Rhourde Oulad Djemma No. 2
well tested at a peak rate of 18,100 BOPD in March 1998. Anadarko has a
27.5-percent interest in the Production Sharing Agreement with BHP.
Anadarko currently has three rigs running in Algeria. Two rigs are
drilling delineation wells (El Kheit Et Tessekha No. 3 on Block 208 and
Qoubba North No. 2 on Block 404) and the third rig is drilling
development wells in the Hassi Berkine South (HBNS) Field.
In May 1998, the Company announced first crude oil production from the
HBNS Field, located on Block 404 of Algeria's Berkine Basin.
Production from the HBNS 1B well began flowing through the Stage I
production facilities. During the start-up phase, production from the
first well will be brought on in increments to minimize safety
concerns. As the flow rate is increased and stabilized, additional
development wells in the Field will be brought on line. The Central
Production Facility's design capacity is 60,000 BOPD.
Year 2000
Anadarko has assessed the impact of the year 2000 on its computer
systems and applications and has developed a plan to ensure that all
information systems will handle the millennium date change. To date,
about 80 percent of Anadarko's information systems are already year
2000 compliant and an additional 19 percent will be year 2000 compliant
by the end of 1998. There have been no significant expenditures to date
for the year 2000 conversion. The Company does not expect any incremental
expenditures to complete the year 2000 conversion to be significant. The
Company is in the process of initiating formal communications with its
significant suppliers and large customers to determine the extent to which
the Company's operations may be potentially vulnerable to those third
parties' failure to prepare for the year 2000 change.
21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Kansas Ad Valorem Tax See Note 8 of the Notes to Consolidated
Financial Statements under Part I. Financial Information of this Form
10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits
not so designated are incorporated herein by reference to a prior
filing as indicated.
Exhibit
Original Filed File
Number Description Exhibit Number
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 as of
April 17, 1998
*12 Computation of Ratios of
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 March 31, 1998.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized officer and principal financial
officer.
ANADARKO PETROLEUM CORPORATION
(Registrant)
May 14, 1998 [MICHAEL E. ROSE]
Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer