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, 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 October 29, 1999 is shown below:
Number of Shares
Title of Class Outstanding
Common Stock, par value $0.10 per share 127,518,656
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 1999 1998 1999 1998
Revenues
Gas sales $ 98,203 $ 86,253 $259,849 $267,443
Oil and condensate sales 55,085 35,010 156,726 97,989
Natural gas liquids and other 26,647 18,928 61,243 59,286
Total 179,935 140,191 477,818 424,718
Cost and Expenses
Operating expenses 35,216 41,848 103,712 120,754
Administrative and general 24,639 21,950 72,243 64,914
Depreciation, depletion and
amortization 51,748 51,562 162,210 151,286
Other taxes 9,657 9,116 27,414 28,432
Impairments related to
international properties --- --- 20,000 ---
Total 121,260 124,476 385,579 365,386
Operating Income 58,675 15,715 92,239 59,332
Interest Expense 17,899 14,991 55,041 41,127
Income Before Income Taxes 40,776 724 37,198 18,205
Income Taxes 19,264 260 25,349 6,385
Net Income $ 21,512 $ 464 $ 11,849 $ 11,820
Preferred Stock Dividends 2,730 2,730 8,190 4,368
Net Income (Loss) Available
to Common Stockholders $ 18,782 $ (2,266) $ 3,659 $ 7,452
Per Common Share
Net income (loss) - basic $ 0.15 $ (0.02) $ 0.03 $ 0.06
Net income (loss) - diluted $ 0.15 $ (0.02) $ 0.03 $ 0.06
Dividends $ 0.05 $ 0.05 $ 0.15 $ 0.1375
Average Number of Common
Shares Outstanding 127,437 120,140 124,395 120,008
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 1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 14,803 $ 17,008
Accounts receivable 211,762 181,491
Inventories 27,855 25,860
Prepaid expenses 5,561 5,569
Total 259,981 229,928
Properties and Equipment
Original cost 5,733,300 5,488,721
Less accumulated depreciation, depletion
and amortization 2,209,456 2,107,183
Net properties and equipment - based on
the full cost method of accounting
for oil and gas properties 3,523,844 3,381,538
Deferred Charges 49,954 21,524
$3,833,779 $3,632,990
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 1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade and other $ 185,009 $ 227,988
Banks 10,114 26,723
Accrued expenses
Interest 14,347 15,210
Taxes and other 23,124 18,805
Total 232,594 288,726
Long-term Debt 1,405,305 1,425,392
Deferred Credits
Deferred income taxes 543,871 522,953
Other 144,180 136,463
Total 688,051 659,416
Stockholders' Equity
Preferred stock, par value $1.00
(2,000,000 shares authorized, 200,000
shares issued as of September 30, 1999
and December 31, 1998) 200,000 200,000
Common stock, par value $0.10
(300,000,000 shares authorized,
129,460,363 and 122,436,712 shares issued
as of September 30, 1999 and December 31,
1998, respectively) 12,946 12,244
Paid-in capital 623,313 361,390
Retained earnings (as of September 30, 1999,
retained earnings were not restricted as
to the payment of dividends) 741,859 756,971
Deferred compensation (8,601) (9,461)
Executives and Directors Benefits Trust,
at market value (2,000,000 shares as of
September 30, 1999 and December 31, 1998) (61,688) (61,688)
Treasury stock (0 and 20 shares as of
September 30, 1999 and December 31, 1998,
respectively) --- ---
Total 1,507,829 1,259,456
$3,833,779 $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)
Nine Months Ended
September 30
thousands 1999 1998
Cash Flow from Operating Activities
Net income $ 11,849 $ 11,820
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 162,210 151,286
Amortization of restricted stock 1,189 829
Deferred U.S. income taxes 8,762 4,818
Impairments of international properties 20,000 ---
204,010 168,753
(Increase) decrease in accounts receivable (30,271) 19,407
(Increase) decrease in inventories (1,995) 7,603
Decrease in accounts payable - trade and
other and accrued expenses (39,523) (42,737)
Other items - net (6,208) (5,600)
Net cash provided by operating activities 126,013 147,426
Cash Flow from Investing Activities
Additions to properties and equipment (431,625) (672,368)
Sales and retirements of properties
and equipment 102,580 5,454
Proceeds from the sale of assets to be
leased, net 3,777 20,170
Net cash used in investing activities (325,268) (646,744)
Cash Flow from Financing Activities
Additions to debt 300,000 418,898
Retirements of debt (320,087) (100,000)
Issuance of preferred stock --- 195,675
Issuance of common stock 260,707 12,000
Increase (decrease) in accounts payable,
banks (16,609) 4,695
Dividends paid (26,961) (20,976)
Net cash provided by financing activities 197,050 510,292
Net Increase (Decrease) in Cash
and Cash Equivalents (2,205) 10,974
Cash and Cash Equivalents at Beginning
of Period 17,008 8,907
Cash and Cash Equivalents at End of Period $ 14,803 $ 19,881
See accompanying notes to consolidated financial statements.
5
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Accounting Policies
General Anadarko Petroleum Corporation is engaged in the
exploration, development, production and marketing of natural gas,
crude oil, condensate and natural gas liquids (NGLs). The terms
"Anadarko" and "Company" refer to Anadarko Petroleum Corporation and
its subsidiaries. The principal subsidiaries of Anadarko are: Anadarko
Algeria Corporation, Anadarko Energy Services Company and Anadarko
Gathering Company.
2. Inventories Materials and supplies and natural gas inventory
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:
September 30, December 31,
thousands 1999 1998
Materials and supplies $13,302 $20,231
Natural gas, stored in inventory 9,088 1,813
Oil, stored in inventory 5,465 3,816
$27,855 $25,860
3. Properties and Equipment Oil and gas properties include costs
of $332,941,000 and $353,647,000 at September 30, 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.
During the first quarter of 1999, the Company made a provision for
impairment of international oil and gas properties of $20,000,000. The
impairment related to the Company's remaining exploration program in
Eritrea.
6
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Long-term Debt A summary of long-term debt follows:
September 30, December 31,
thousands 1999 1998
Commercial Paper $ 230,305 $ 367,892
Notes Payable, Banks 75,000 257,500
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
$1,405,305 $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.
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. In May
1999, the Company issued $240,500,000 of common stock under the shelf
registration statement. See Note 6.
5. Preferred Stock In each of the first, second and third quarters
of 1999, dividends of $13.65 per share (equivalent to $1.365 per
Depositary Share) were paid to holders of preferred stock. In the
second and third quarters of 1998, dividends of $8.19 and $13.65 per
share (equivalent to $0.819 and $1.365 per Depositary Share),
respectively, were paid to holders of preferred stock. The Company's
preferred stock was issued in May 1998.
7
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Common Stock Under the most restrictive provisions of the
Company's credit agreements, which limit the payment of dividends,
retained earnings of $741,859,000 and $609,456,000 were not restricted
as to the payment of dividends at September 30, 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
September 30, 1999 September 30, 1998
thousands except Per Share Per Share
per share amounts Income Shares Amount Loss Shares Amount
Basic EPS
Income (loss) available
to common stockholders $18,782 127,437 $ 0.15 $(2,266) 120,140 $(0.02)
Effect of dilutive
stock options -- 874 -- --
Diluted EPS
Income (loss) available
to common stockholders
plus assumed conversion $18,782 128,311 $ 0.15 $(2,266) 120,140 $(0.02)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
thousands except Per Share Per Share
per share amounts Income Shares Amount Income Shares Amount
Basic EPS
Income available
to common stockholders $ 3,659 124,395 $ 0.03 $7,452 120,008 $0.06
Effect of dilutive
stock options -- 662 -- 923
Diluted EPS
Income available
to common stockholders
plus assumed conversion $ 3,659 125,057 $ 0.03 $7,452 120,931 $0.06
For the three and nine months ended September 30, 1999, options for
3,190,000 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 periods.
8
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Common Stock (continued)
For the three months ended September 30, 1998, there were 979,000
common stock equivalents related to outstanding stock options that were
excluded from the computation of diluted EPS, since they had an anti-
dilutive effect. For the three and nine months ended September 30,
1998, options for 3,206,000 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 periods.
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 to repay
floating interest rate debt. The common stock was issued under the
Company's shelf registration statement.
In September 1999, the Company filed a registration statement with the
Securities and Exchange Commission that permits the issuance of up to
4,500,000 additional shares of Anadarko common stock under the Anadarko
Dividend Reinvestment and Stock Purchase Plan.
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:
Nine Months Ended
September 30
thousands 1999 1998
Interest $55,059 $41,078
Income taxes $ (185) $(6,516)
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.
9
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
Ultimately, the D.C. Circuit issued a decision on August 2, 1996
ruling that producers must refund all Kansas ad valorem taxes
collected relating to production since October 1983. The Company
filed a petition for writ of certiorari with the Supreme Court. That
petition was denied on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest
at issue which has not been paid to date, assuming that the October
1983 effective date remains in effect, is about $45,300,000 (pretax)
as of September 30, 1999.
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 $29,600,000 (pretax) as of September
30, 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
10
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Kansas Ad Valorem Tax (continued)
by PanEnergy and reaffirming the October 1998 order. FERC may, in the
near future, issue an order based upon the above allocation regarding
when the refunds must be paid and the specific refund amount. The
issue of reimbursement will now be pursued in U.S. District Court. On
April 16, 1999, the U.S. District Court ordered the parties to
mediation. One session with the mediator has been held. The Court
has also set the matter for trial on the 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
the Cimmaron River System during the time period from 1983 to 1988.
AGC purchased the Cimmaron River System from Centana, the successor of
Anadarko Production Company, in 1995. The petition, among other
things, asks the KCC to determine whether AGC or Anadarko Production
Company is responsible for the payment or distribution of refunds
received from first sellers to Anadarko Production Company's former
customers and requests guidance concerning the disposition of refunds
received that are attributable to sales made to Anadarko Production
Company customers that did not reimburse Anadarko Production Company
for Kansas ad valorem taxes during the relevant time periods. On
June 1, 1999, the KCC entered an order approving the plan proposed by
AGC. Under this order, after the conclusion of all litigation related
to Kansas ad valorem tax proceedings, "AGC shall be authorized to
deduct from the amounts of refunds due for the period from 1986 to and
through 1988 all amounts shown not to have been collected by AGC's
predecessor in interest, Centana Energy Corporation by year, for the
period from 1986 through 1988." The order is now final.
Anadarko's net income for 1997 included a $1,800,000 charge (pretax)
related to the Kansas ad valorem tax refunds. This charge reflects
all principal and interest which may be due at the conclusion of all
regulatory proceedings and litigation to parties other than PanEnergy.
The Company is unable at this time to predict the final outcome of
this matter and no provision for liability (excluding amounts recorded
in 1993, 1994 and 1997) has been made in the accompanying financial
statements.
11
Item 1. Financial Statements (continued)
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. The information, as furnished, reflects all normal recurring
adjustments that are, in the opinion of management, necessary to
a fair statement of financial position as of September 30, 1999 and
December 31, 1998, the results of operations for the three and
nine months ended September 30, 1999 and 1998, and cash flows for the
nine months ended September 30, 1999 and 1998.
12
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 third quarter, Anadarko had net income available to common
stockholders of $18.8 million, or 15 cents per share (diluted), on
$179.9 million of revenues. By comparison, during the same period in
1998, the Company had a net loss of $2.3 million, or 2 cents per share,
on $140.2 million of revenues. The increase in earnings in the third
quarter of 1999 is primarily due to significantly higher commodity
prices.
For the nine-month period ending September 30, 1999, Anadarko had net
income available to common stockholders of $3.7 million, or 3 cents per
share (diluted), on $477.8 million of revenues. The year-to-date
results reflect a non-cash charge in the first quarter of 1999 of $20
million before taxes ($13 million after taxes) related to the remaining
operations in the Company's Eritrean exploration program. By
comparison, through the first nine months of 1998, Anadarko reported
net income of $7.5 million, or 6 cents per share (diluted), on $424.7
million of revenues.
Excluding the international impairment, net income available to common
stockholders for the first nine months of 1999 was $16.7 million, or 13
cents per share (diluted). In addition to the charge for Eritrea,
earnings for the first nine months of 1999 were impacted by an increase
in Algeria oil production volumes and higher commodity prices,
partially offset by a decline in gas production volumes, higher
interest expense and higher preferred stock dividends, compared to the
same period in 1998.
13
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 and nine months ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
Natural gas
Bcf 41.9 45.7 127.9 131.9
MMcf/d 456 497 468 483
Price per Mcf $ 2.40 $ 1.82 $ 1.97 $ 1.94
Crude oil and condensate
United States
MBbls 1,967 2,474 6,458 7,284
MBbls/d 21 27 24 27
Price per barrel $18.62 $11.17 $ 14.16 $ 11.86
Algeria
MBbls 818 466 4,108 587
MBbls/d 9 5 15 2
Price per barrel $20.99 $12.96 $ 14.97 $ 12.82
Total
MBbls 2,785 2,940 10,566 7,871
MBbls/d 30 32 39 29
Price per barrel $19.32 $11.46 $ 14.47 $ 11.93
Natural gas liquids
MBbls 1,787 1,788 4,949 5,062
MBbls/d 19 19 18 19
Price per barrel $14.76 $ 9.44 $ 11.84 $ 10.65
Total Energy Equivalent
Barrels (MMEEBs) 11.6 12.4 36.8 34.9
___________
Bcf - billion cubic feet
MBbls - thousand barrels
MBbls/d - thousand barrels per day
Mcf - thousand cubic feet
MMcf/d - million cubic feet per day
MMEEBs - million energy equivalent barrels
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Costs and expenses during the third quarter of 1999 were $121.3
million, a decrease of 3% compared to $124.5 million for the third
quarter of 1998. The decrease is primarily due to lower operating
expenses partly offset by increased administrative and general expenses
associated with the Company's workforce.
For the first nine months of 1999, costs and expenses excluding the
impairment totaled $365.6 million, level with the first nine months of
1998. A decrease in operating expenses was offset by an increase in
depreciation, depletion and amortization due to higher production
volumes and an increase in administrative and general expenses
associated with the Company's workforce.
Interest expense for the third quarter of 1999 increased 19% to $17.9
million compared to $15.0 million for the third quarter of 1998. For
the first nine months of 1999, interest expense was $55.0 million, an
increase of 34% compared to $41.1 million for the same period of 1998.
The increases in interest expense are primarily due to higher levels
of long-term debt in 1999 compared to 1998.
Natural Gas Volumes and Prices In 1999's third quarter, Anadarko's
natural gas production averaged 456 million cubic feet per day
(MMcf/d), down 8% from 497 MMcf/d during the same period a year ago.
The Company's wellhead price for natural gas was $2.40 per thousand
cubic feet (Mcf) for the third quarter of 1999, up 32% from $1.82 per
Mcf for the third quarter of 1998.
In 1999's first nine months, Anadarko's natural gas production averaged
468 MMcf/d, down 3% compared to 483 MMcf/d for the corresponding period
in 1998. The Company's wellhead price for natural gas was $1.97 per Mcf
for the first nine months of 1999, up 2% over $1.94 per Mcf for the
first nine months of 1998.
Crude Oil, Condensate and Natural Gas Liquids Volumes and Prices
The Company's average oil price for the third quarter of 1999 was
$19.32 per barrel, up 69% from $11.46 per barrel for the third quarter
of 1998. In the third quarter of 1999, Anadarko's oil production
averaged 30,000 barrels of oil per day (BOPD), off 5% from an average
of 32,000 BOPD in the third quarter of 1998.
Anadarko's oil production for the first nine months of 1999 rose 34% to
an average of 39,000 BOPD, up from 29,000 BOPD in 1998's corresponding
period. The Company's average oil price for the first nine months of
1999 was $14.47 per barrel, up 21% from $11.93 per barrel for the same
period in 1998.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the third quarter of 1999, Anadarko's natural gas liquids (NGLs)
sales volumes averaged 19,000 barrels per day, level with 1998's
corresponding period. The Company's average price for NGLs was $14.76
per barrel in 1999's third quarter, compared to $9.44 per barrel for
the third quarter of 1998, representing a 56% increase.
During the first nine months of 1999, Anadarko's NGLs sales volumes
averaged 18,000 barrels per day, down slightly from 19,000 barrels per
day in 1998's corresponding period. The Company's average price for
NGLs for year-to-date September 30, 1999 was $11.84 per barrel or 11%
higher than the average of $10.65 per barrel for the first nine months
of 1998.
Capital Expenditures, Liquidity and Dividends
During the first nine months of 1999, Anadarko's capital spending
(including capitalized interest and overhead) was $431.6 million
compared to $672.4 million in the same period of 1998.
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.
In September 1999, the Company filed a registration statement with the
Securities and Exchange Commission that permits the issuance of up to
4,500,000 additional shares of Anadarko common stock under the Anadarko
Dividend Reinvestment and Stock Purchase Plan.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company believes that the equity issue along with cash flow and
proceeds from asset sales will provide the majority of funds to meet
Anadarko's capital and operating requirements for 1999.
Exploration and Development Activities
During the third quarter of 1999, Anadarko participated in a total
of 52 wells, including 11 oil wells, 34 gas wells and 7 dry holes.
This compares to a total of 116 wells, including 58 oil wells, 47
gas wells and 11 dry holes during the third quarter of 1998.
For the first nine months of 1999, Anadarko participated in a total
of 136 wells, including 35 oil wells, 77 gas wells and 24 dry holes.
This compares to a total of 320 wells, including 173 oil wells, 113
gas wells and 34 dry holes during the first nine months of 1998.
The decline in drilling activity is a direct result of reduced
capital expenditures in anticipation of low commodity prices in
1999.
Following is a description of activity during the first nine months
of 1999.
Gulf of Mexico Sub-salt Update The Company is in the process
of completing a natural gas discovery made above salt at its Garnet
prospect offshore Louisiana (East Cameron 347). The well is being
completed with a sub-sea tieback to Anadarko's East Cameron 359
platform three miles to the southeast. First production is expected
early in 2000.
Seismic depth imaging is already being processed on 40 blocks
Anadarko acquired in the exploration agreement with Texaco announced
in July. The tracts cover approximately 400,000 gross acres,
doubling Anadarko's leasehold position in the Gulf of Mexico's sub-
salt fairway. Anadarko is evaluating about 80 prospects and leads
identified thus far.
In October, drilling began on a new well to restore production from
the Agate Field (Ship Shoal Block 361) which has been off-line since
May. Production will be tied back to the Phillips-operated Mahogany
Platform (Ship Shoal Block 349/359). Anadarko has a 50% working
interest in Agate and a 37.5% working interest in Mahogany.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Tanzanite Update Construction of the jacket and deck for the
Tanzanite sub-salt discovery continues at Aker Gulf Marine's facility
near Corpus Christi, Texas. Installation is scheduled for the fall of
2000 with first production set for the fourth quarter of 2000. The
platform will have a capacity of 200 MMcf/d of gas and 15,000 BOPD.
Anadarko has a 100% working interest in the block.
Hickory Update Gulf Island Fabrication, a Houma, Louisiana-based
company, is moving ahead with construction of the Hickory platform,
which, like the Tanzanite project, is scheduled to be installed during
the fall of 2000, with initial production expected in the fourth
quarter of 2000. The platform has been designed with a capacity of 300
MMcf/d of gas and 15,000 BOPD. The Company has a 50% working interest
in Hickory and serves as operator.
Conventional Projects Update Activity from Anadarko's Matagorda
Island 622/623 complex, the largest gas field ever discovered offshore
Texas, was highlighted by the C-7 replacement well, which began
drilling during September. First production is slated for the first
quarter of 2000. Anadarko holds a 37.5% working interest in the field.
East Texas' Bossier Sand Play Activity in Anadarko's second-
largest onshore gas field was highlighted by two important milestones
during the third quarter-the 100th well was spudded and production
topped 100 MMcf/d of gas. By the middle of 2000, net production from
the Bossier Play is expected to surpass net volumes from the Hugoton
Field which is currently Anadarko's largest onshore gas field.
Anadarko presently holds about 60,000 net acres in the play and plans
to acquire additional leasehold acreage. In fact, the limits of the
play have yet to be determined. Anadarko's ability to drill and
effectively stimulate the low permeability Bossier sandstone at
reasonable costs is a key factor that may ultimately define the field
limits. The Company's average working interest in this play is above
90%.
The Bossier Play is one of Anadarko's most economically attractive
domestic programs because of the Company's ability to leverage its
high level of activity to generate substantial cost savings. In
addition, the play offers significant returns on capital invested,
increasingly lower finding and development costs and high netbacks
from gas sales. The Company currently has 17 rigs operating in
Freestone County, Texas and expects to have 18 rigs running by the end
of the year. Each rig is capable of drilling about 8 wells per year.
18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Enhancing the economics of the play even further is Anadarko's Dew
Gathering System. The facilities are connected to two different
transmission pipelines, which helps the Company maximize gas prices.
Additional compression is now being added that should significantly
increase capacity. Since 1996, Anadarko has drilled 110 wells in the
Bossier Play and production has grown from zero to more than 110
MMcf/d of gas. Some of the most significant completions from the
Bossier Play during 1999 include:
- Lane A-1R (7.7 MMcf/d), 100% Anadarko working interest (W.I.)
- Eubanks Trust No. 4 (6.8 MMcf/d), 100% Anadarko W.I.
- English No. 5 (6.1 MMcf/d), 100% Anadarko W.I.
- High No. 6 (5.8 MMcf/d), 100% Anadarko W.I.
- Alma Moore No. 6 (5.5 MMcf/d), 100% Anadarko W.I.
- High A-5 (5.1 MMcf/d), 100% Anadarko W.I.
- High A-4 (5.0 MMcf/d), 100% Anadarko W.I.
- High A-3 (5.0 MMcf/d), 100% Anadarko W.I.
- High A-2 (4.8 MMcf/d), 100% Anadarko W.I.
- Johnson A-7 (4.7 MMcf/d), 100% Anadarko W.I.
- B.K. Johnson B-2 (4.6 MMcf/d), 79.6% Anadarko W.I.
- McAdams A No. 4 (4.5 MMcf/d), 100% Anadarko W.I.
Hugoton Embayment Highlighting Anadarko's efforts in the third
quarter were successful completions in deeper formations. The Tucker
M-1 well in the Wildcat Field was drilled to a total depth of 9,050
feet, the deepest ever for a Seward County, Kansas well and the fourth
deepest in state history. Anadarko owns a 75% working interest in the
well, which tested 2.3 MMcf/d of gas from the Chester formation.
In August, Anadarko recorded its second successful completion in the
Simmons Field of Stevens County, Kansas. The Jenkins C-2 tested 6.1
MMcf/d of gas and is an offset to the first Simmons Field producer, the
Anadarko B-2 well, where third quarter production peaked at 7.5 MMcf/d
of gas. A successful offset well, the Anadarko B-3, was completed in
early October and is currently producing 6.1 MMcf/d of gas. These two
Lower Morrow producers are unique in the fact that the Company owns a
100% working interest as well as 100% of the mineral rights in each.
Permian Basin In the North Shugart Field of Eddy County, New
Mexico, Anadarko recompleted the Paton B Federal No. 1 well to the Bone
Springs Dolomite formation. The Company has a 100% working interest in
the well which tested 646 BOPD and 316 Mcf/d of gas.
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Another Eddy County recompletion increased production at the Arnold
Federal Com No. 1 well from 30 Mcf/d of gas to 5.1 MMcf/d of gas.
Anadarko owns an 83.7% working interest in the Morrow producer, which
is located in the Cedar Breaks Field.
Alaska Activity during the third quarter of 1999 was focused
primarily on the North Slope where development facilities for the
Alpine Field are more than 80% complete. Production modules, which had
been under construction at fabrication yards in Nikiski on Alaska's
southern coast and in Corpus Christi, Texas, were delivered to the
North Slope. Various components of the oil processing facility are
already on-site, with the remaining pieces to be transported over ice
roads this winter. First production of 40,000 BOPD (gross) from the
Alpine Field is expected to begin in mid-2000. Operator ARCO Alaska
recently announced an increase in its reserve estimate for the field
from 365 million barrels to 429 million barrels. At the same time,
estimates of gross peak production were also raised from 70,000 BOPD to
80,000 BOPD in 2001. Anadarko plans to have about 25 wells drilled by
the start-up of production.
Development plans are also being evaluated for the Fiord discovery
north of Alpine announced early in the third quarter. The accumulation
could be developed as a satellite field to Alpine under an existing
state-approved unit (Colville River Unit) which should expedite work.
At the Fiord No. 5 well, flow tests of the Jurassic and Kuparuk
reservoirs yielded 2,500 BOPD of 30 degree API gravity oil and 1.2
MMcf/d of gas. The Fiord No. 4 well, two miles northeast of the No. 5
well, also encountered an oil-bearing Jurassic reservoir. A 3-D
seismic acquisition program planned for the winter of 2000 will help
determine the economic viability of the discovery as well as future
development plans. Anadarko has a 22% working interest in the Alpine
and Fiord projects with operator ARCO Alaska owning the remaining 78%.
In addition to an active Alpine development program, Anadarko is also
moving forward with its wildcat drilling efforts on the North Slope.
The Company has more than a dozen mapped and leased prospects on the
Slope and partner, ARCO Alaska, has filed applications for permits to
drill four exploration wells within the National Petroleum Reserve
Alaska (NPRA). In addition, eight notices of staking, which identify
the precise location of operations, have been filed with the Bureau of
Land Management. An environmental assessment is nearing completion.
Applications for permits have also been filed for another potential
drilling location on the Nanuk prospect south of the Alpine Field.
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Algeria Development of its discoveries on Block 404 was the focus
of Anadarko's Algerian activities during the third quarter. In
September, Anadarko and SONATRACH signed an agreement awarding the
Engineering, Procurement and Construction (EPC) contract for Stage II
production facilities at the Hassi Berkine South (HBNS) Field to Brown
& Root Condor, a company jointly owned by Brown & Root (a subsidiary of
Halliburton Company) and affiliates of SONATRACH. Work has already
begun on the project, which involves construction and installation of
processing, separation, gathering, compression and injection systems.
When completed, production capacity from the HBNS Field is expected to
increase from 60,000 BOPD to 135,000 BOPD beginning in 2001.
The EPC contract also includes a fixed-price option for construction of
a third production train, with a capacity of 75,000 BOPD, to develop
the Hassi Berkine (HBN) Field, previously known as El Biar. A second
fixed-price option gives Anadarko and its partners the opportunity to
build a fourth production train, with a capacity of 75,000 BOPD, to
develop the four satellite fields (HBNSE, RBK, QBN, and BKNE)
surrounding the HBNS Field. When fully developed, oil production
capacity at the Central Production Facility in the northern part of
Block 404 could surpass 285,000 BOPD (gross) in 2002.
At the south end of Block 404, development of the Ourhoud Field (ORD),
previously known as Qoubba, continues as well. During the third
quarter, Anadarko and partners requested bids for the EPC contract,
which the Company expects to sign next year with first production
expected to follow in 2002. The Exploitation License granted by the
Algerian authorities for development of the ORD Field provides for peak
production rates of about 230,000 BOPD (gross). The ORD Field is
Anadarko's largest discovery in Algeria and is Algeria's second-largest
oil field.
A mechanical problem that has limited production at the Central
Production Facility since July 1999, has been resolved. Oil volumes
began flowing at approved rates on October 6, nearly a month ahead of
schedule.
In July 1999, Anadarko and partner, LASMO plc, sold their non-operated
interests in Blocks 401a and 402a to Agip Algeria Exploration B.V. The
$127 million agreement ($84.7 million net to Anadarko) covers contract
areas operated by BHP that contain several previously announced oil
discoveries. The sale allows Anadarko, which had a 27.5% interest in
the contract area, to capture the value of non-operated properties and
use the proceeds to more efficiently develop its primary Algerian
operating areas on Blocks 404 and 208. The agreement is subject to
SONATRACH's preferential right to purchase as well as the approval of
state authorities in Algeria.
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Tunisia Using the same techniques and parameters that have been so
successful in Algeria, Anadarko is making plans for a comprehensive
exploration program across its 1.4 million acre Anaguid Block in
Tunisia. Anadarko acquired a 33.3% interest at the exploration phase,
which may revert to a 16.67% interest if ETAP (Tunisia's national oil
company) exercises its option to back into the project. The transfer
of the interest is subject to approval by the Tunisian government.
Other participating interests in the Block include COHO Anaguid, Inc.
and Bligh Tunisia Inc.
The Company believes the "trend acreage" in Tunisia features the same
geology as that found in Algeria and has the potential for the
discovery of Triassic oil fields. Drilling operations on the AMG Well
No. 1, which were underway at the time Anadarko acquired its working
interest in the block, have been completed. Results have not yet been
released.
Also in Tunisia, Anadarko and partner AGIP Tunisia B.V. have completed
a 2-D seismic acquisition project on the nearby Jenein Nord Block and
are evaluating exploration prospects that may be drilled in 2000.
North Atlantic Margin Anadarko and partners have completed
drilling an exploratory well on Tranche 61 located northwest of the
Shetland Islands in the North Atlantic Ocean. Results have not yet
been released. Anadarko has a 7.5% working interest in the well which
is the Company's first in a play that it believes has the potential
for oil discoveries. The Company is also involved in projects on
Tranches 63 and 21.
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 has completed testing
of critical third-party hardware and software for compliance and
replaced non-compliant computer equipment and software. Assessment
and remediation of critical embedded systems in both domestic and
international operations has also been completed.
22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Anadarko has contacted all of its key business partners in its U.S.
and international operations, including joint-venture operators,
outside-operated pipeline and processing facilities as well as
suppliers of goods and services, to ascertain their level of Year
2000 readiness. This process included contacting natural gas
affiliates providing gathering, transportation and processing
services to review their Year 2000 readiness at inter-connect and
sales points, as well as contacting critical suppliers to review
their Year 2000 readiness to provide goods and services. The
responses have indicated that these key business partners believe
the Year 2000 issue will not have a material adverse effect on their
ability to perform. The Company, however, can not ensure that its
business partners will be Year 2000 compliant. Interruptions in
these sevices could disrupt Anadarko's production and delivery of
oil, gas and NGLs early in 2000.
Business Contingency Planning The Company has developed contingency
plans to provide business continuity and to address operations, safety
and environmental concerns. Individual departments have developed
their plans and the Company's internal audit group has reviewed the
operating units' business contingency plans for feasibility and
completeness.
The Company believes that the most reasonably likely worst-case
scenario is that there will be some Year 2000 related interruptions at
individual sites that could affect certain business operations or
processes. Because of this potential uncertainty, the business
contingency plans focus on minimizing the duration and scope of any
Year 2000 interruption that may occur. Anadarko expects to have
personnel and resources available and ready to address any Year 2000
problems that occur.
Estimated Cost The total cost of testing, remediation and business
contingency planning is expected to be less than $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 September 30, 1999, the Company had spent less than $3 million
for the Year 2000 project. These expenditures include costs to
establish Year 2000 testing facilities, inventory, assess and remediate
field automation equipment domestically and internationally, purchase
Year 2000 scanning software, and upgrade infrastructure and desktop
equipment. Anadarko's Year 2000 Program will continue to be reviewed
and updated through early 2000, which could result in changes to cost
estimates.
23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Risks The Company has completed the major components of its planned
activities to review and remediate critical internal systems and
computer equipment for Year 2000 compliance. 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.
The Company currently believes that with the major components
of the Year 2000 Program completed the Company's risk
associated with the Year 2000 issue should be reduced.
Changes in Accounting Principles
Accounting for Derivatives Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
for Hedging Activities", provides guidance for accounting for
derivative instruments and hedging activities. In July 1999, SFAS
No. 137 "Deferring Statement 133's Effective Date", was issued and
delays the effective date for one year, to fiscal years beginning
after June 15, 2000. The Company has not yet completed an evaluation
of the impact of the provisions of SFAS No. 133.
24
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 September 30, 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 September 30, 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 September 30, 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 September 30, 1999 and December 31, 1998 does not
have a material effect on the financial position or results of
operations of the Company.
25
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.
26
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 quarter ended
Petroleum Corporation, September 30, 1986
dated August 28, 1986
(b) Amendment to the Restated 3(b) to Form 10-Q 1-8968
Certificate of for quarter ended
Incorporation of Anadarko March 31, 1999
Petroleum Corporation,
dated April 29, 1999
(c) Certificate of Correction 3(c) to Form 10-Q 1-8968
filed to correct the for quarter ended
Amendment to the Restated June 30, 1999
Certificate of
Incorporation of Anadarko
Petroleum Corporation,
dated June 15, 1999
(d) By-laws of Anadarko 3(b) to Form 10-Q 1-8968
Petroleum Corporation, for quarter ended
as amended June 30, 1996
*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, 1999.
27
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 11, 1999 By: [MICHAEL E. ROSE]
(Michael E. Rose - Senior Vice President,
Finance and Chief Financial Officer)