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, 1999
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
17001 Northchase Drive, Houston, Texas 77060-2141
(281) 875-1101
Incorporated in the Employer Identification
State of Delaware No. 76-0146568
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes X No _____
The number of shares outstanding and entitled to vote of the
Company's common stock as of April 30, 1999 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, par value $0.10 per share 120,974,332
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 1999 1998
Revenues
Gas sales $ 77,840 $ 93,520
Oil and condensate sales 43,580 31,398
Natural gas liquids and other 14,944 22,083
Total 136,364 147,001
Cost and Expenses
Operating expenses 34,056 40,257
Administrative and general 24,409 21,243
Depreciation, depletion and amortization 56,524 51,337
Other taxes 9,233 10,829
Impairments related to international properties 20,000 ---
Total 144,222 123,666
Operating Income (Loss) (7,858) 23,335
Interest Expense 18,638 12,358
Income (Loss) Before Income Taxes (26,496) 10,977
Income Taxes (6,141) 3,962
Net Income (Loss) $(20,355) $ 7,015
Preferred Stock Dividends 2,730 ---
Net Income (Loss) Available to
Common Stockholders $(23,085) $ 7,015
Per Common Share
Net income (loss) - basic $ (0.19) $ 0.06
Net income (loss) - diluted $ (0.19) $ 0.06
Dividends $ 0.05 $ 0.0375
Average Number of Common Shares Outstanding 120,492 119,834
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 1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 15,530 $ 17,008
Accounts receivable 151,410 181,491
Inventories 33,586 25,860
Prepaid expenses 3,595 5,569
Total 204,121 229,928
Properties and Equipment
Original cost 5,558,783 5,488,721
Less accumulated depreciation, depletion
and amortization 2,144,745 2,107,183
Net properties and equipment - based on
the full cost method of accounting
for oil and gas properties 3,414,038 3,381,538
Deferred Charges 39,672 21,524
$3,657,831 $3,632,990
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 1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 166,285 $ 227,988
Banks 8,413 26,723
Accrued expenses
Interest 14,386 15,210
Taxes and other 13,690 18,805
Total 202,774 288,726
Long-term Debt 1,560,762 1,425,392
Deferred Credits
Deferred income taxes 516,061 522,953
Other 143,701 136,463
Total 659,762 659,416
Stockholders' Equity
Preferred stock, par value $1.00
(2,000,000 shares authorized, 200,000
shares issued as of March 31, 1999
and December 31, 1998) 200,000 200,000
Common stock, par value $0.10
(200,000,000 shares authorized,
122,551,004 and 122,436,712 shares issued
as of March 31, 1999 and December 31,
1998, respectively) 12,255 12,244
Paid-in capital 378,544 361,390
Retained earnings (as of March 31, 1999,
$584,533,000 was not restricted as to
the payment of dividends) 727,859 756,971
Deferred compensation (8,437) (9,461)
Executives and Directors Benefits Trust,
at market value (2,000,000 shares as of
March 31, 1999 and December 31, 1998) (75,688) (61,688)
Treasury stock (12 and 20 shares as of
March 31, 1999 and December 31, 1998,
respectively) --- ---
Total 1,234,533 1,259,456
$3,657,831 $3,632,990
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 1999 1998
Cash Flow from Operating Activities
Net income (loss) $(20,355) $ 7,015
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 56,524 51,337
Amortization of restricted stock 315 294
Deferred U.S. income taxes (10,765) 3,935
Impairments of international properties 20,000 ---
45,719 62,581
Decrease in accounts receivable 30,081 20,760
Increase in inventories (7,726) (2,167)
Increase (decrease) in accounts payable -
trade and other and accrued expenses (67,642) 53,950
Other items - net (5,637) (2,800)
Net cash provided by (used in) operating
activities (5,205) 132,324
Cash Flow from Investing Activities
Additions to properties and equipment (111,758) (268,131)
Proceeds from the sale of assets to be
leased, net 3,777 ---
Sales and retirements of properties
and equipment 105 4,860
Net cash used in investing activities (107,876) (263,271)
Cash Flow from Financing Activities
Additions to debt 300,000 239,409
Retirements of debt (164,630) (100,000)
Decrease in accounts payable, banks (18,310) (7,535)
Dividends paid (8,757) (4,495)
Issuance of common stock 3,300 2,565
Issuance of treasury stock, net --- (2)
Net cash provided by financing activities 111,603 129,942
Net Decrease in Cash and Cash Equivalents (1,478) (1,005)
Cash and Cash Equivalents at Beginning
of Period 17,008 8,907
Cash and Cash Equivalents at End of Period $ 15,530 $ 7,902
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.
2. Inventories Materials and supplies and natural gas inventories are
stated at the lower of average cost or market. Natural gas, when sold
from inventory, is charged to expense using the average-cost method. Oil
inventory is stated at market value. The major classes of inventories
are as follows:
March 31, December 31,
thousands 1999 1998
Materials and supplies $17,579 $20,231
Oil, stored in inventory 12,087 3,816
Natural gas, stored in inventory 3,920 1,813
$33,586 $25,860
3. Properties and Equipment Oil and gas properties include costs of
$353,511,000 and $353,647,000 at March 31, 1999 and December 31, 1998,
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 1999 1998
Commercial Paper $ 229,262 $ 367,892
Notes Payable, Banks 231,500 257,500
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 100,000 100,000
7.20% Debentures due 2029 300,000 ---
7.73% Debentures due 2096 100,000 100,000
7 1/4% Debentures due 2096 100,000 100,000
$1,560,762 $1,425,392
The commercial paper and notes payable to banks have been classified as
long-term debt in accordance with Statement of Financial Accounting
Standards No. 6, "Classification of Short-term Obligations Expected to
be Refinanced," under the terms of Anadarko's Bank Credit Agreements.
6
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Long-term Debt (continued)
In March 1999, Anadarko issued $300,000,000 principal amount of 7.20%
Debentures due 2029. The proceeds were used to repay floating interest
rate debt.
In April 1999, the Company amended the Revolving Credit Agreement and
entered into a new 364-Day Credit Agreement. The Revolving Credit
Agreement provides for $225,000,000 principal amount and the 364-Day
Credit Agreement provides for $285,000,000 principal amount. The
Revolving Credit Agreement expires in 2002.
In April 1999, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that permits the issuance of up to
$1,000,000,000 in debt 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 offerings.
5. Preferred Stock For the first quarter of 1999, dividends of $13.65
per share (equivalent to $1.365 per Depositary Share) were paid to
holders of preferred stock. The Company's preferred stock was issued in
May 1998.
6. Common Stock Under the most restrictive provisions of the
Company's credit agreements, which limit the payment of dividends,
retained earnings of $584,533,000 and $609,456,000 were not restricted
as to the payment of dividends at March 31, 1999 and December 31, 1998,
respectively.
The Company's basic earnings per share (EPS) amounts have been computed
based on the average number of common shares outstanding. Diluted EPS
amounts include the effect of the Company's outstanding stock options
under the treasury stock method.
The reconciliation between basic and diluted EPS is as follows:
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
thousands except Per Share Per Share
per share amounts Loss Shares Amount Income Shares Amount
Basic EPS
Income (loss) available
to common stockholders $(23,085) 120,492 $(0.19) $7,015 119,834 $0.06
Effect of dilutive
stock options -- -- -- 651
Diluted EPS
Income (loss) available
to common stockholders
plus assumed conversion $(23,085) 120,492 $(0.19) $7,015 120,485 $0.06
7
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Common Stock (continued)
For the three months ended March 31, 1999, there were 735,000 common
stock equivalents related to outstanding stock options that were
excluded from the computation of diluted EPS, since they had an anti-
dilutive effect. In addition, options for 4,463,000 shares of common
stock were excluded from the diluted EPS calculation because the
options' exercise price was greater than the average market price of
common stock for the three months ended March 31, 1999.
In May 1999, Anadarko issued 6,250,000 shares of common stock. Aggregate
proceeds from the offering were approximately $240,500,000 after all
expenses. Proceeds from the offering were used initially to repay
floating interest rate debt. The common stock was issued under the
Company's shelf registration statement.
7. Statement of Cash Flows Supplemental Information The amounts
of cash paid (received) for interest (net of amounts capitalized) and
income taxes are as follows:
Three Months Ended
March 31
thousands 1999 1998
Interest $19,361 $13,798
Income taxes $ (198) $(6,660)
8. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 allowed
a "severance, production or similar" tax to be included as an add-on,
over and above the maximum lawful price for natural gas. Based on the
Federal Energy Regulatory Commission (FERC) ruling that the Kansas ad
valorem tax was such a tax, the Company collected the Kansas ad valorem
tax.
Background of Present Litigation FERC's ruling regarding the ability
of producers to collect the Kansas ad valorem tax was appealed to the
United States Court of Appeals for the District of Columbia Circuit
(D.C. Circuit). The Court held in June 1988 that FERC failed to provide
a reasoned basis for its findings and remanded the case to FERC.
Ultimately, the D.C. Circuit issued a decision on August 2, 1996 ruling
that producers must refund all Kansas ad valorem taxes collected
relating to production since October 1983. The Company filed a petition
for writ of certiorari with the Supreme Court. That petition was denied
on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest at
issue which has not been paid to date, assuming that the October 1983
effective date remains in effect, is about $43,600,000 (pretax) as of
March 31, 1999. 8
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
FERC Proceedings Depending on future FERC orders, the Company could
be required to pay all or part of the amounts claimed by all pipelines
(which might include PanEnergy) pending further potential review by FERC
or the courts.
PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit in
the Federal District Court for the Southern District of Texas against
PanEnergy seeking declaration that pursuant to prior agreements Anadarko
is not required to issue refunds to PanEnergy for the principal amount
of $14,000,000 (pretax) and, if the petition for adjustment is denied in
its entirety by FERC with respect to PanEnergy refunds, interest in an
amount of $27,900,000 (pretax) as of March 31, 1999. The Company also
seeks from PanEnergy the return of $816,000 of the $830,000 (pretax)
charged against income in 1993 and 1994. In response to a motion filed
by PanEnergy, the United States District Court issued an order on
March 17, 1998 staying the litigation, pending the exercise by FERC of
its regulatory jurisdiction.
FERC Order of October 13, 1998 On October 13, 1998, FERC issued a
final order on Anadarko's complaint. The order declares that Anadarko
Production Company (now an affiliate of Duke Energy) is responsible as
first seller for making refunds of Kansas ad valorem tax reimbursements
collected from 1983 through August 1, 1985. The Company estimates this
amount to be as much as $26,000,000. The Company is responsible to make
refunds for reimbursements it collected as first seller from August 1,
1985 through 1988. The Company estimates this amount to be as much as
$16,000,000. The FERC order states that whether Anadarko Production
Company or the Company is entitled to reimbursement from another party
for the refunds ordered is a matter to be pursued in an appropriate
judicial forum. On January 15, 1999, FERC issued an order denying a
request for rehearing filed by PanEnergy and reaffirming the October
1998 order. FERC may, in the near future, issue an order based upon the
above allocation regarding when the refunds must be paid and the
specific refund amount. The issue of reimbursement will now be pursued
in U.S. District Court. On April 16, 1999, the U.S. District Court
ordered the parties to mediation, which should be completed on or before
August 2, 1999. The Court has also set the matter for trial on the
May/June 2000 trial term.
Kansas Corporation Commission (KCC) Proceeding On April 30, 1998,
the Company's subsidiary, Anadarko Gathering Company (AGC), filed a
petition with the KCC to clarify AGC's rights and obligations, if any,
related to the payment by first sellers of Kansas ad valorem tax
refunds. The refunds at issue relate to sales made by Anadarko
Production Company, a PanEnergy affiliate, through facilities known as
9
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
the Cimmaron River System during the time period from 1983 to 1988. AGC
purchased the Cimmaron River System from Centana, the successor of
Anadarko Production Company, in 1995. The petition, among other things,
asks the KCC to determine whether AGC or Anadarko Production Company is
responsible for the payment or distribution of refunds received from
first sellers to Anadarko Production Company's former customers and
requests guidance concerning the disposition of refunds received that
are attributable to sales made to Anadarko Production Company customers
that did not reimburse Anadarko Production Company for Kansas ad valorem
taxes during the relevant time periods. This matter is presently being
pursued before the KCC. The KCC is expected to issue its order regarding
Anadarko's petition in this matter by May 28, 1999.
Anadarko's net income for 1997 included a $1,800,000 charge (pretax)
related to the Kansas ad valorem tax refunds. This charge reflects all
principal and interest which may be due at the conclusion of all
regulatory proceedings and litigation to parties other than PanEnergy.
The Company is unable at this time to predict the final outcome of this
matter and no provision for liability (excluding amounts recorded in
1993, 1994 and 1997) has been made in the accompanying financial
statements.
9. The information, as furnished, reflects all normal recurring
adjustments that are, in the opinion of management, necessary to a fair
statement of financial position as of March 31, 1999 and December 31,
1998, the results of operations for the three months ended March 31,
1999 and 1998 and cash flows for the three months ended March 31, 1999
and 1998.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has made in this report, and may from time to time otherwise
make in other public filings, press releases and discussions with
Company management, forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 concerning the Company's operations,
economic performance and financial condition. These forward looking
statements include information concerning future production and
reserves, schedules, plans, timing of development, contributions from
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 1998
Annual Report on Form 10-K.
Overview of Operating Results
For 1999's first quarter, Anadarko reported a net loss available to
common stockholders of $23.1 million, or 19 cents per share (diluted),
on $136 million of revenues. The loss reflects a non-cash charge of
$20 million before taxes ($13.3 million after taxes) related to its
remaining operations in Eritrea as a result of drilling an unsuccessful
exploration well. By comparison, during the first quarter of 1998,
Anadarko had net income of $7 million, or 6 cents per share (diluted),
on $147 million of revenues.
Excluding the foreign impairment, the Company's net loss for the first
three months of 1999 was $9.8 million, or 8 cents per share (diluted).
In addition to the charge for Eritrea, the Company attributed the
decrease in revenues and earnings during 1999's first quarter primarily
to significantly lower commodity prices, higher interest expense and
preferred stock dividends.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table shows the Company's volumes and average prices for
the three months ended March 31, 1999 and 1998:
Three Months Ended
March 31 % Increase
1999 1998 (Decrease)
Natural gas, Bcf 44.0 44.0 -
Average daily volumes, MMcf/d 489 489 -
Price per Mcf $ 1.59 $ 2.02 (21)
Crude oil and condensate, MBbls 3,968 2,251 76
Average daily volumes, MBbls/d 44 25 76
Price per barrel $10.60 $13.02 (19)
Natural gas liquids, MBbls 1,632 1,704 (4)
Average daily volumes, MBbls/d 18 19 (4)
Price per barrel $ 8.60 $11.68 (26)
Total Energy Equivalent
Barrels (MMEEBs) 12.9 11.3 14
Bcf - billion cubic feet
MBbls - thousand barrels
MBbls/d - thousand barrels per day
Mcf - thousand cubic feet
MMcf/d - million cubic feet per day
MMEEBs - million energy equivalent barrels
Costs and expenses during the first quarter of 1999 (excluding the
impairment) were $124.2 million, essentially flat compared to the first
quarter of 1998.
Interest expense for the first quarter of 1999 was $18.6 million, an
increase of 51% compared to $12.4 million for the first quarter of 1998.
The increase was primarily due to higher average borrowings partially
offset by lower interest rates in 1999.
Natural Gas Volumes and Prices In 1999's first quarter, the
Company's natural gas production averaged 489 MMcf/d, level with the same
period in 1998. Anadarko's wellhead price for natural gas was $1.59 per
Mcf for the first quarter of 1999, off 21% from $2.02 per Mcf a year ago.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
Anadarko's oil production for the first three months of 1999 rose 76% to
an average of 44 MBbls/d, up from 25 MBbls/d in 1998's corresponding
period. The higher oil production volumes were offset by a 19% decline
in 1999's first quarter oil prices. Anadarko's average oil price for the
first quarter of 1999 was $10.60 per barrel, compared to $13.02 per
barrel a year ago.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the first three months of 1999, Anadarko's natural gas liquids
(NGLs) sales volumes averaged 18 MBbls/d, a 4% decline compared to 19
MBbls/d in 1998's first quarter. The Company's average price for NGLs
was $8.60 per barrel in 1999's first quarter, 26% below an average
price of $11.68 per barrel a year ago.
Capital Expenditures, Liquidity and Dividends
During the first quarter of 1999, Anadarko's capital spending
(including capitalized interest and overhead) was $111.8 million
compared to $268.1 million in the first quarter of 1998.
The Company believes that cash flows, existing or available credit
facilities and access to the public markets will provide the majority
of funds to meet its capital and operating requirements for 1999. The
Company will continue to evaluate funding alternatives, including
property sales and additional borrowing, to secure other funds for
capital development.
In March 1999, Anadarko issued $300 million principal amount of 7.20%
Debentures due 2029. The proceeds were used to repay floating interest
rate debt.
In April 1999, the Company amended its Revolving Credit Agreement and
entered into a new 364-Day Credit Agreement. The Revolving Credit
Agreement provides for $225 million principal amount and the 364-Day
Credit Agreement provides for $285 million principal amount. The
Revolving Credit Agreement expires in 2002.
In April 1999, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission that permits the issuance of up to
$1 billion in debt 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 offerings.
In May 1999, Anadarko issued 6.25 million shares of common stock.
Aggregate proceeds from the offering were approximately $240.5 million
after all expenses. Proceeds from the offering were used initially to
repay floating interest rate debt. The common stock was issued under
the Company's shelf registration statement.
Exploration and Development Activities
During the first quarter of 1999, Anadarko drilled or participated in
a total of 55 wells, including 21 oil wells, 21 gas wells and 13 dry
holes. This compares to a total of 109 wells in the first quarter of
1998, including 66 oil wells, 32 gas wells and 11 dry holes. Following
is a description of activity during the quarter.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gulf of Mexico In the Tanzanite Field (Eugene Island Block 346),
the Company is suspending the No. 2 well after successfully
encountering the same main pay zone as the original discovery well. The
No. 2 well was originally drilled to the northeast, outside of the
known amplitude, but only encountered minimal pay. The well was then
sidetracked to the east and encountered salt. Drilling to the south
proved successful as the well encountered the main reservoir as
expected. Aker Gulf Marine has been selected as the fabricator for the
Tanzanite jacket and production platform, and construction is scheduled
to start this summer. Anadarko has a 100% working interest in the
Field.
The first development well at the sub-salt Hickory (Grand Isle Block
116) discovery has been completed with encouraging results. The Company
serves as operator and has a 50% working interest in the Field.
Anadarko has proposed to partners that a production platform with the
capacity to produce about 300 MMcf/d of gas be built and that a third
well be drilled about three miles northeast of the original discovery
well.
Offshore activity during the first quarter of 1999 was highlighted by a
number of significant recompletion projects. The A-4 well at Matagorda
Island Block 623 flowed 25.8 MMcf/d of gas and 328 barrels of
condensate per day through a 54/64-inch choke after being recompleted
in a new productive sand. Anadarko owns a 37.5% working interest in the
BP Amoco-operated block.
At the Phillips-operated Mahogany Platform (Ship Shoal Block 349/359),
two development wells were completed in a shallower gas formation above
the main "P" sand pay zone and placed on production. The A-8 well
flowed 4.5 MMcf/d of gas through a 1/2-inch choke while the A-10 well
tested 4.1 MMcf/d of gas from a 1/4-inch choke. In March, the A-1 well
was recompleted in the "P" sand interval flowing 8.9 MMcf/d of gas and
2,595 BOPD through a 25/64-inch choke. Gross production from the
Mahogany Platform, including volumes from the Agate Field, was 15,800
BOPD and 50 MMcf/d of gas at the end of the first quarter. Anadarko has
a 37.5% working interest in the Field.
East Texas' Bossier Play The success achieved by the Company over
the past two years in the Bossier Sand Play continued in the first
quarter of 1999. Two rigs were added during the first quarter giving the
Company a total of eight rigs currently operating in the Bossier Play.
Gross production from the Dew and Mimms Creek Fields is currently about
55 MMcf/d of gas. Among the most significant completions reported in the
first quarter were:
Eubanks Trust No. 4 (6.8 MMcf/d), 100% Anadarko W.I.
High A-2 (4.8 MMcf/d), 100% Anadarko W.I.
McAdams A No. 4 (4.5 MMcf/d), 100% Anadarko W.I.
McAdams A No. 3 (2.7 MMcf/d), 100% Anadarko W.I.
H.E. White No. 3 (2.6 MMcf/d), 36% Anadarko W.I.
Turner A-1 (2.5 MMcf/d), 100% Anadarko W.I.
Hartley No. 3 (1.1 MMcf/d), 100% Anadarko W.I.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the first quarter, Anadarko added a compression package to its
Dew Gathering system which reduced line pressure from 1,100 psi to
about 300 psi. With the addition of 3,800 lease acres in the first
quarter, the Company now has about 30,000 acres (gross).
Hugoton Embayment A 3-D seismic shoot conducted in 1997 that led to
the discovery of a new interval in the Basal Chester formation
continued to produce excellent results in the first quarter. The Smith
AE-3 well, in the Lorena East Field of Beaver County, Oklahoma, tested
480 BOPD and 180 thousand cubic feet per day of gas. This marks the
second oil well discovery (sixth successful well overall) in the Basal
Chester formation. The Company has a 100% working interest in the well.
Another significant completion in the first quarter included the Boles B-
5 well in the Wideawake Field of Seward County, Kansas. Anadarko owns a
100% working interest in the well which tested 1.7 MMcf/d of gas.
Alaska First quarter activity in Alaska was concentrated primarily
on the North Slope where development of the Alpine Field continues. The
first gravel pad has been completed and development drilling has begun
from these permanent locations. Overall, the facilities are about 65%
complete. To the north of Alpine, two exploration wells have been
drilled; however, results have not been made public by the operator.
Construction of production modules for Alpine, underway at Nikiski on
the southern coast of Alaska and Corpus Christi, Texas, progressed in
the first quarter. First production of 40,000 BOPD (gross) from the
Alpine Field is expected to begin in mid-2000, increasing to 70,000 BOPD
(gross) in 2001. Anadarko owns a 22% working interest in the ARCO Alaska-
operated Field.
Algeria Development work on several important fields, including
Hassi Berkine South (HBNS), comprised most of the activity in Algeria
during the first quarter. The Company also reported a successful
development well in the Qoubba Field-since renamed Ourhoud (ORD)-on
Block 404. The QB-3 well, in the northwest portion of the Field, came
in structurally high. In February, Algeria's Council of Ministers
announced the approval of the Exploitation License for ORD.
Under a Production Sharing Agreement (PSA), Anadarko has a 50% interest
covering Blocks 404 and 208, 211 and 245 before participation in the
exploitation phase by SONATRACH. Anadarko's two partners in this PSA
are LASMO Oil (Algeria) Limited and Maersk Olie Algeriet AS. Under the
terms of the agreement, liquid hydrocarbons discovered, developed and
produced are shared by SONATRACH, Anadarko and its two partners. Under
a separate PSA, Anadarko has a 27.5% interest in Blocks 401a and 402a
which are operated by BHP Petroleum (Algerie) Inc. The Company's other
partners are LASMO and Maersk.
North Atlantic Margin The first exploration well on Tranche 61
began drilling on April 10. The well is located on Block 214/4 where
the water depth is over 5,300 feet. Anadarko has a 7.5% working
interest in the well, which is operated by Mobil North Sea Limited.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Eritrea Anadarko's third exploration well offshore Eritrea was
unsuccessful. The Edd No. 1 well was drilled to a total depth of 3,262
meters (10,765 feet) on the Edd Block in the Red Sea. In 1998, the
venture drilled two wells on the nearby Zula Block which also were
unsuccessful.
In the first quarter of 1999, Anadarko recorded a non-cash charge
related to its remaining operations in Eritrea as a result of the dry
hole on the Edd Block. Anadarko serves as operator and holds a 50%
interest in both the Edd and Zula concessions. The remaining interests
are held by Agip Eritrea B.V. with 30% and Burlington Resources Eritrea
Limited with 20%.
Year 2000 Overview The Year 2000 issue relates to the inability of
certain computers and software applications to correctly recognize and
process date sensitive information for the Year 2000 and beyond. Without
correction, the computers and software applications could fail or create
erroneous information. The Company has established a Year 2000
Compliance Program focused on minimizing disruptions of the Company's
operations as a result of the millennium change. Since this problem
could affect the Company's systems, as well as the systems of its
business partners, the Program focuses on the internal systems and
external services considered most critical to Anadarko's continuing
operations.
Since 1993, the Company has enhanced its scientific processing
capabilities, implemented new business systems and upgraded its
network infrastructure. These information systems were purchased from
leading suppliers of technology, most of whom are representing their
products to be Year 2000 compliant. The Company is in the process of
testing third-party hardware and software for compliance, which
should be completed by the end of the third quarter 1999. Any
necessary replacements of non-compliant computer equipment and
software are underway and should also be completed by the end of the
third quarter 1999.
Embedded system inventories' assessments for domestic and internal
operations have been completed. Remediation and testing are in progress
and will be completed by the end of the third quarter of 1999.
The Company is assessing the readiness of its business partners,
including joint-venture operators and outside-operated pipeline and
processing facilities as well as suppliers of goods and services.
Interruptions in these services could disrupt Anadarko's production
and delivery of oil, gas and NGLs early in 2000. Analysis and review
of key business partners is underway. Natural gas affiliates
providing gathering, transportation and processing services are being
contacted to determine Year 2000 compliance at inter-connect and
sales points. Operations personnel have completed the development of
critical vendor and commodities lists. The assessment of the critical
suppliers and availability of goods and services is in progress.
These efforts should be completed by the end of the second quarter of
1999.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Contingency Planning The Company is developing contingency plans to
provide business continuity and to address operations, safety and
environmental concerns. A model contingency planning guide has been
developed. Planning by the individual departments is in progress and
expected to be completed by the end of the third quarter of 1999.
Estimated Cost The total cost of testing, remediation and
contingency planning is expected to be approximately $5 million,
which will be funded by operating cash flows. This estimate does not
include the Company's share of potential Year 2000 costs as a result
of participation in partnerships in which Anadarko is not the
operator. As of March 31, 1999, the Company had spent less than $1
million for the Year 2000 project. These expenditures include costs
to establish Year 2000 testing facilities, inventory field automation
equipment domestically and internationally, and purchase Year 2000
scanning software. In total, the Company expects to spend $3.5
million to test internal systems, upgrade and replace hardware and
software, and complete field automation testing. The remaining $1.5
million is for replacement of any non-compliant field automation
equipment discovered during testing, instrumentation consulting
services and contingency planning. Anadarko's Year 2000 Program is
an on-going process that may result in changes to cost estimates and
schedules as testing and business partner assessment progresses.
Risks The Company expects to have all internal systems and computer
equipment Year 2000 compliant prior to the millennium change. The
Company is relying on its business partners and suppliers to be Year
2000 ready as well. Failure of significant third parties to complete
their Year 2000 compliance projects could interrupt the supply of
materials and contract services needed for oil and gas operations.
Disruptions to oil and gas transportation networks controlled by third-
party carriers could result in reduced production volumes delivered to
market. Risk associated with foreign operations may increase with the
uncertainty of Year 2000 compliance by foreign governments and their
supporting infrastructures. Such occurrences could have a material
adverse effect on the Company's business, results of operations and
financial condition. However, the Year 2000 Program is expected to
significantly reduce the Company's level of uncertainty about the Year
2000 issue.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Use of Derivatives Anadarko produces, purchases and sells natural
gas, crude oil and NGLs. As a result, Anadarko's financial results can
be significantly affected by changes in these commodity prices.
Anadarko uses derivative 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, 1999 and December 31, 1998 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 10% adverse
movement in commodity prices, the potential decrease in the fair value
of the derivative commodity instruments at March 31, 1999 and
December 31, 1998 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 31, 1999 and
December 31, 1998 and assuming a 10% increase in interest rates, the
potential decrease in the fair value of the derivative interest swap
instrument at March 31, 1999 and December 31, 1998 does not have a
material effect on the financial position or results of operations of
the Company.
18
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 19(a)(i) to Form 10-Q 1-8968
Incorporation of Anadarko for the quarter ended
Petroleum Corporation, September 30, 1986
dated August 28, 1986
*(b) Amendment to the Restated
Certificate of Incorporation
of Anadarko Petroleum
Corporation, dated
April 29, 1999
(c) 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 Revolving
Credit Agreement, dated
as of April 15, 1999
*(b) 364-Day Credit Agreement,
dated as of April 15, 1999
*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 March 31, 1999.
19
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 13, 1999 [MICHAEL E. ROSE]
Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer
20