Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Anadarko Petroleum Corporation (NYSE:APC)

Q3 FY08 Earnings Call

November 4, 2008, 10:00 AM ET

Executives

John Colglazier - IR

James T. Hackett - Chairman, President and CEO

Robert P. Daniels - Sr. VP, Worldwide Exploration

Charles A. Meloy - Sr. VP, Worldwide Operations

Darrell E. Hollek - VP Gulf of Mexico Operations

Karl F. Kurz - COO

Analysts

Thomas L. Gardner - Simmons & Company

David Heikkinen - Tudor Pickering & Co

Brian Singer - Goldman Sachs

Benjamin Dell - Sanford C. Bernstein

David Tameron - Wachovia Capital Markets

Eric Hagen - Merrill Lynch

Rehan Rashid - FBR Capital

Gil Yang - Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the Anadarko Petroleum Corporation Third Quarter 2008 Earnings Conference Call. My name is Michele, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. John Colglazier. Please proceed.

John Colglazier - Investor Relations

Well, thank you, Michele. Good morning, and thank you for joining us today for Anadarko's third quarter 2008 conference call. Joining me today on the call are; Jim Hackett, our Chairman and CEO and other executives who will be available to answer you questions later in the call.

As a reminder, we have also posted additional information in our third quarter operations report available on our website at www.anadarko.com.

Before I turn the call over to Jim, I do need to remind you. This presentation contains our best and most reasonable estimates and information. A number of factors could cause actual results to differ materially from what we discuss. You should read our full disclosure on forward-looking statements in our presentation slides, our latest 10-K, other filings and press releases for the risk factors associated with our business.

In addition we'll reference non-GAAP measures. So be sure to see the reconciliations in our earnings release. We encourage you to read the cautionary note to U.S investors contained in the presentation slide for this call.

And with that let me turn the call over to Jim Hackett.

James T. Hackett - Chairman, President and Chief Executive Officer

Thanks John. Good morning, everyone. As stated in last night's earnings release, our quarterly performance was very strong. And we think our employees have achieved remarkable results in the midst of some very turbulent weather and market conditions.

Some highlights from the news release were significant under normal circumstances and even more so considering the hurricanes and recent market volatility. At one point during the quarter, we achieved a company record of 600,000 barrels of oil equivalent per day of reported sales. And overall for the quarter, we reported sales volumes of 51 million barrels of oil equivalent. This represents an increase from retained properties of about 9% over third quarter 2007, while overcoming the affects of major back-to-back hurricanes.

Our operated facilities in the deepwater Gulf of Mexico weathered both storms with only minor localized damage. A real testament to the design and construction of our producing platforms. As stated earlier, our employees and contractors are doing great job by quickly and safety restoring production while protecting the environment.

In fact Anadarko was one of the first large deepwater operators to restore production following Hurricane Ike. Our Independence Hub platform was producing at pre-shutting levels of about 900 million cubic feet per day, with in 72 hours of Hurricane Ike. During the week after Ike, Independent Hub accounted for about half of all production from the Gulf of Mexico.

Our capital efficient portfolio continues to demonstrate depth and balance. In the Rockies we recognized nearly 20% sales growth year-over-year through the third quarter. We also achieved new daily gross operated production records of about 330 million cubic feet per day in the Greater Natural Buttes area and about 430 million cubic feet per day in the Power River basin.

Third quarter 2008 sales volumes in the Greater Natural Buttes were almost 40% higher than last years third quarter and utilizing the same year-over-year comparison we were about 55% higher in the Powder River basin. Improved drilling and completion efficiencies and significant midstream expansion enabled this growth.

In addition to this strong operating performance, we've also delivered outstanding exploration and drilling success internationally and domestically. We were very excited about our pre-salt program in Brazil, especially the recently announced Wahoo discovery on block BM-C-30 in the Campos Basin, which is similar in many respects to the nearby giant Jubarte field. Wahoo was Anadarko's first operated pre-salt test in Brazil and we have a 30% working interest in the Block.

Since announcing this discovery, we drilled about a total depth encountering a potentially significant additional oil accumulation at a deeper zone [ph], while also confirming the quality of the previously announced reservoir with more than 200 feet of net pay containing a high quality light crude oil. Our internal pre-drill estimated resource range for the Wahoo prospect was a 150 million to 700 million plus BOE. Based upon our internal technical valuation we view [ph] the upper zone alone puts us well within this initial range.

We are eager to further evaluate this multiple hydrocarbon drilling zone for drill stem testing and appraisal drilling to assess the ultimate size of the reservoirs as we worked toward deciding commerciality. We are also planning additional exploration drilling on the block in 2009. On the adjacent block, the MC32, we've identified strong prospectivity as well; which we and our partners plan to test in 2009.

Having control of the Transocean Deepwater Millennium drillship has enabled to execute on our pre-salt program at Brazil. And in order to fulfill our Brazilian lease obligations we plan to move the drillship to the Espirito Santo Basin. Currently we expect to drill five to seven additional pre-salt tests in Brazil; each with minimum estimated resources of 150 million barrels of recoverable oil.

Our first planned activity is to reenter the circle well where we previously encountered hydrocarbon bearing sands in a secondary objective. We look forward to drilling unto targeted depth to reach and evaluate our primary objective which was not achieved previously due to rig limitations.

Another international area that continues to generate a lot of enthusiasm with Anadarko was West Africa. In Ghana, Anadarko and our partners will have four rigs operating in the Jubilee area with exploration, appraisal and development drilling activities ongoing in 2009. We spud the Hyedua-2 appraisal well on the Deepwater Tano license in October.

We also anticipate having a second rig in the fourth quarter drilling the Mahogany number 3 appraisal well, followed by the Tweneboa exploration prospect which is very similar in size in geology to our Jubilee field. Jubilee, which the partnership expects to sanction this year is estimated to hold between 500 million and 1.8 billion barrels of recoverable oil.

Moving to the Gulf of Mexico, we just finished drilling... successfully drilling an appraisal well of approximately 300,000 feet to the south and up dip from our Tonga West discovery well. This appraisal well in Green Canyon Block 770 encountered approximately 700 feet of high quality TVD net pay in the [ph] formations. This is better sand thickness and quality than we had anticipated. The MMS has approved utilization agreement for the complex, which includes Tonga West and the Caesar discovery approximately 3 miles to the North. Anadarko expects to sanction this exceptional project by year end and have our first significant volumes from this development in 2011. These are tied back to our 100% owned Constitution Spud.

In our Gulf of Mexico exploration program we are currently drilling a lower tertiary test at the Shenandoah prospect and the Walker ridge area and expect to reach total depth in the fourth quarter.

We also anticipate fourth quarter's spuds at Vito prospect in Mississippi Canyon and the Hyedua prospect which is near to Tonga West discovery, in Green Canyon testing similar miles and [ph] objectives.

In US onshore, we have completed a number of wells with very encouraging results in the Maverick Basin and in Haynesville and Marcellus Shale. We hold extensive acreage position in these plays and expect to continue an active exploration program in all three. We have provided additional information on each of these areas and other global operations and exploration activity in our third quarter 2008 operations report which is available on our website.

It's evident that the previous two years restructuring of our portfolio has resulted in capital efficient assets with strong economics even in lower price environments. In addition, Anadarko's capital structure and liquidity position remained very strong which is increasingly important in these challenging times. We've provided updates in our financials status at the capital markets release last month and in the third quarter earnings release yesterday.

I'll highlight a few of the items that are particularly important to our stakeholders. During the third quarter, we continued to execute upon our base capital program of approximately $5 billion for the year, completed an accelerated repurchase of a little more than 10 million of our shares for $600 million and repurchased approximately $350 million of debt.

All this was accomplished while also increasing our cash balance from $650 million at end of the second quarter to nearly $2 billion at the end of the third quarter. Since that time we've repurchased an additional $130 million of 14 rate [ph] notes at $0.94 on the dollar. We also expect to close the previously announced divestiture of the Peregrino heavy oil asset in Brazil by yearend 2008 which will generate significantly more than $1 billion in additional cash.

Certain of the net proceeds will go toward debt reduction and by year-end 2008, we expect to be within our debt-to-Cap get range of 25% to 35% without issuing equity.

In addition to these cash reserves and improving balance sheet metrics we continue to maintain additional financial flexibility and liquidity to our un-drawned $1.3 billion committed revolving credit facility that doesn't mature until 2013.

For the fourth quarter we've more clearly defined our production guidance range of 50 to 53 million barrels of oil equivalent. Approximately 75% of our Gulf of Mexico volumes are back online. And all of our operated facilities are operational.

However, we anticipate delays in third party facilities and infrastructure returning to service, which will reduce our volumes by 3 to 5 million barrels of oil equivalent for the fourth quarter. These additional volumes are not lost but we will be partially deferred into 2009 as these non operated production facilities and infrastructure recover.

Based upon the most current information we've received from third parties we expect the reminder of shut in Gulf of Mexico production to come back online, equally split between the fourth quarter 2008 and the first quarter of 2009.

You'll find our fully updated guidance in the supplemental pages attached to last night's earnings release. While we mentioned in our second quarter call, it's worth reiterating, even at today's service cost. Each of our core natural gas projects in the U.S. onshore is capable of generating at least a 10% rate of return at approximately a NYMEX 5 dollar flat gas price depth. Also recurrence service cost in the flat price case of NYMEX 30 per barrel.

Our major Deepwater project such as Caesar/Tonga in Ghana are each capable of generating greater than 10% rates of return. Our rigs managing strategy in the Rockies also continues to be a competitive advantage for us. We have firm transportation commitments and interacted basis hedges in place covering approximately 95% of our production in 2008 and 2009 and about 70% of our production in 2010.

As we have commented previously, we have no material counterparty risk with the derivatives supporting our basis management. We've locked in differentials in the majority of our Rockies production with pricing of Henry Hub less $1.47 per MMBTU for this year, Henry Hub less a $1.25 per MMBTU in 2009 and Henry Hub less a $1.28 per MMBTU in 2010.

We've also committed to an incremental 450 million cubic feet per day firm transportation to underpin substantial additional take away capacity in the region for the 2010 to 2011 time period. I'll close by again stating how pleased we were with the third quarter performance. We overcame tremendous weather challenges and met our production commitments while building above the average liquidity and improving further upon our strong balance sheet.

Operationally, Anadarko's capital efficient assets are performing well. We remain confident that we will continue to deliver upon our commitments with a 5% to 9% compound annual production growth rate; better than 120% annual production replacement at a competitive replacement cost and at least 200 million barrels of oil equivalent of net annual resource additions from our exploration program.

With that, I will turn over to the operator and open up for questions. Michelle, if you could take that from me.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Tom Gardner of Simmons & Company. Please proceed.

Thomas L. Gardner - Simmons & Company

Good morning, Jim.

James T. Hackett - Chairman, President and Chief Executive Officer

Good morning, Tom.

Thomas L. Gardner - Simmons & Company

A question on taxes; can you walk as through the drivers behind that unexpectedly lower tax rate in the quarter and to what degree the same factors are in play in the fourth quarter?

John Colglazier - Investor Relations

Yes, Tom, this is Colglazier. Couple of things are driven that; one is with the TPE that's in effect in Algeria, it has the effect of actually raising our taxes. But what the best amounts of mark-to-market gains that we recognize in the quarter diluted that affect. So that had a dampening impact on our taxes as well as in our net effective tax rate that we used for the year. Also Brazil, again on the anticipated gain on sale is embedded in that number as well. And it is pretty non-efficient tax efficient transaction so it had a dampening effect also.

Thomas L. Gardner - Simmons & Company

Okay. Great, thank you. And I just have a couple of play specific questions. First, with respect to the Maverick Basin, can you walk us through sort of the range of resource potential as opposed to margin and upside case and to what degree that play is oil versus gas on your acreage?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yes, Thomas, Bob Daniels. We are pretty encouraged by what we are seeing in the Maverick. We got two horizontal wells now in the Eagle front [ph] that are online, one horizontal in the pre-salt that we are just testing right now. And the area that we got into we really wanted to look at both of those shells and so we got to where they overlaid and potential as so we are actually testing both, I think that both have a lot of opportunities for us.

Thomas L. Gardner - Simmons & Company

Great, great.

Robert P. Daniels - Senior Vice President, Worldwide Exploration

We've got 250,000 [ph] acres out there, all fairly continuous in this. And we think that the resource potential is... on the average is going to be about a Bcf, may be Bcf and half per well. But we are in much shallow areas and we see an awful lot of drilling out here if this all works out. And right now we are encouraged with what we are seeing.

Thomas L. Gardner - Simmons & Company

Excellent. And then jumping over to Haley, and kind of rumors out there that some partners going on consent, is that true and what is that... what are the implications for Anadarko?

Charles A. Meloy - Senior Vice President, Worldwide Operations

Tom this is Chuck, right now at Haley, we have about five rigs running between us and our partners and we've scaled it down a little bit in consideration of the gas prices and the cost of services out there. Through the course of time, we've had wells that we're drilling in and around Haley proper and what we have done recently is go back to the core where we've seen our best production and best economics. And the partnerships are in sense not in that strategy.

Thomas L. Gardner - Simmons & Company

Okay. If partners were to give non consent in that area would you continue to drill... the, I guess, it's a penalty clause I guess about 300% or is it

Charles A. Meloy - Senior Vice President, Worldwide Operations

Tom,if the partners are non consensus, we own some individual wells, but in general the programs and pull backs to the core and all the parties are comfortable with that strategy.

Thomas L. Gardner - Simmons & Company

All right, got you. Okay, well thank you very much.

Operator

And your next question or comment comes from the line of David Heikkinen of Tudor Pickering & Co. Please proceed.

David Heikkinen - Tudor Pickering & Co

Good morning. Just had a question, thinking about your efficiency that you've shown in the ops report on drilling activity and the implications for a number of rigs that you are going to run. What can you talk about as far as sustained rig count and just kind of a continued efficiency and what that does to your rig count?

James T. Hackett - Chairman, President and Chief Executive Officer

David we are really excited about how well our drilling group has done in conjunction with our operating teams to wring more and more efficiency our of our programs and drilling parameters we use, the mobilization times have all come down. We've, through time that we upgraded our fleet to more efficient rig fleets that are capable of pad drilling. All those kind of things that deliver better and better efficiency through time.

What we've seen is particularly, as you look forward in just a generality, we could probably drill a similar number of wells with 20% less rigs than we could two years ago.

David Heikkinen - Tudor Pickering & Co

Okay.

James T. Hackett - Chairman, President and Chief Executive Officer

And that's, that's really helped us with our permitting and all that type of thing and then so we're... particularly in the Rockies, we're going almost exclusively to pad drilling and trying to continue to wring more and more efficiency out of it and I think that will reduce our rig count overtime.

David Heikkinen - Tudor Pickering & Co

So, if I think about the data that you had in your ops report of third quarter versus third quarter and looked regionally at rig count, I mean could I just assume that's spud-to-spud percentage would be an increase in well count per rig, is that the... or no?

James T. Hackett - Chairman, President and Chief Executive Officer

I think that's a reasonable assumption in probably half the cases and the other side of it is we just wouldn't hire incremental rigs.

David Heikkinen - Tudor Pickering & Co

Okay.

James T. Hackett - Chairman, President and Chief Executive Officer

As we continue to see the start up efficiency.

David Heikkinen - Tudor Pickering & Co

And then during the prepared remarks you talked about buying in some of the floating-rate notes and where they are trading on a relative basis. Can you talk about intentions and thoughts of share repurchases and buying and then increasing capital budgets or maintaining capital budgets. Just kind of the thoughts there?

Darrell E. Hollek - Vice President Gulf of Mexico Operations

Hey, David good morning. This is Darrell. There's a number of questions clustered in there. I'll try to take them one by one. On the floating-rate notes I think as we've mentioned, we have been buying those and we bought some in through the quarter. We have bought a few more entering during this quarter. Currently those floating-rate notes are trading a price of 94. We'll continue to watch that. We are developing an asset and liability management plan right now where we are trying to look at the liabilities that we have out more than most attractive liabilities to call in so that we start to use some of this cash that we currently have and we'll prospectively build through the sale of Peregrino to get within that 25% to 35% debt-to-Cap range that we previously communicated.

Right now this is not a targeted liability or security from our perspective. Each have their own advantages and disadvantages when you look at them on a yield to maturity as well as maturity schedules. So, those all look pretty interesting and I think we'll continue to evaluate what is best terms with respect to those securities.

On the stock buyback and I think as we communicated in August, our plans were to buyback stock with free cash flow. I think as we move into '09 we watched the commodity price environment but we're still committed to spending we think a fairly good [ph] amount on our planned property and equipment as we look at into early next year when we finalize our Cap plan in and around something that somewhere to where we will probably finish out this year.

I think the details of that we just really want to finalize as we better understand the commodity and what they look like for '09.

So, as you think about us buying back at the company stock I think I would still think about as it as a free cash flow over and above what we think we need to beat the asset base with this Cap.

David Heikkinen - Tudor Pickering & Co

Okay. And I just talked along AND [ph] markets and kind of current thoughts there, any big deals or small deals that you are looking at or what you think about on the acquisition side?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, I think given where we currently trade on in spot, barrels as simple as David said right now, and he was thinking about during anything as far as it relates to an acquisition. It will be more likely than not we want to buyback in stock rather than making an asset acquisition or a company acquisition where the price per barrel looks like it's a significant premium over for trade.

David Heikkinen - Tudor Pickering & Co

All right. Thanks guys.

Operator

And your next question or comment comes from the line of Brian Singer of Goldman Sachs. Please proceed.

Brian Singer - Goldman Sachs

Thanks. Just following-up on that when you think about next year's spending, how do you prioritize developing deep water discoveries versus Rockies gas drilling versus southern region drilling, in broad terms and then how do you think about the relationship between spending and growth?

James T. Hackett - Chairman, President and Chief Executive Officer

Brian, if I could take a first stab at that and I might ask, any of the other operating guys to weigh in as well as it. We have already, in terms of our thinking, changed our plans relative to what's happening in the commodity markets. So, we have kind of announced in August where we were going to have a much more aggressive capital program that what Al [ph] just indicated.

As we start to go down that curve of reacting to commodity prices, there are things that our investors will want us to drill and should want us to drill, because they are longer dated projects. We have flexibility to not fund things if we need to and there is a very strong good creative tension right now occurring between that very subject of offshore longer dated activity versus shorter term onshore activity.

And the question between oil and gas and the question between the Rockies differential issue, the good news is that I think we can still get the growth and still be capital disciplined as well as to execute on the tremendous inventory of opportunities we have. And so we... in cutting back to the levels that Al spoke to, we've made some of those hard decisions if you will, putting projects off that we would otherwise like to drill. And that will be a dynamic process.

We'll continue watch commodity prices every month, every quarter, and get our best sense of where things are headed. And we may end up making tougher decisions if that the commodity curve stays down for an extended period of time. Our personal view is that it's an issue that's largely driven by the overall economy in the world and if we all feel that economy won't recover for a year, it will be a different decision if that economy won't recover for a couple of years.

But we feel that if and when it starts, that we're in a great place with a lot of inventory and lot of opportunities to really spend money wisely. Good news is we've got balance sheet to handle some temporary fluctuations in stock prices without sacrificing our ability to finance our future. And I know that's a broad generalizations, but others can add anything they want.

Karl F. Kurz - Chief Operating Officer

The only thing I would add, Brian this is Karl, the only thing I would add is that even within a disciplined financial model that we're exercising onto right now and planning around, we still are very excited about being able to meet our long term strategic objectives. Of the 5% to 9% production growth, of a greater than a 120% reserve replacement and adding 200 million barrels of resources every year to our pipeline.

Brian Singer - Goldman Sachs

Thanks. And then secondly on Jubilee, how much of the steel and heavy items have already been contracted and are you seeing any downward pressure on pricing there?

Karl F. Kurz - Chief Operating Officer

We are in the process of extracting the... the FPSO, also looking at the sub-sea umbilical risers and flow lines and all that is in midst of the contracting activity right now. Very little long-term steel has actually been purchased at this time.

James T. Hackett - Chairman, President and Chief Executive Officer

Which I presume is good.

Brian Singer - Goldman Sachs

Are you seeing I guess willingness there for may be softer pricing or the impact of softer pricings and may be were you were in negotiations a few months ago?

Karl F. Kurz - Chief Operating Officer

Well, I think its clear that as steel prices have fallen that will be and we want to counter some of those gains. And, during the course of contracting activity negotiations, we'll hopefully do that.

John Colglazier - Investor Relations

Brian, I'd like to add one point to your last question. I think it's really important as a company when we are doing the prioritization on our capital budget, that economics are there. That we have to have economics and we stated earlier all of our programs that we have, that we're currently doing, clearly produce substantial margin even at lower prices that we are today. But maintaining in the gains that we've achieved in our efficiency, on our drilling programs, and in our installation programs, and that type of thing. So it used to, so having that momentum particularly even moving into a lower price cycle gives us such an advantage that we certainly want to hold on to that.

Brian Singer - Goldman Sachs

Thank you.

Operator

And your next question comes from the line of Ben Dell of Stanford Bernstein. Please proceed.

Benjamin Dell - Sanford C. Bernstein

Hi guys.

James T. Hackett - Chairman, President and Chief Executive Officer

Hi Ben.

Benjamin Dell - Sanford C. Bernstein

I had a quick question around year end output [ph]. Obviously it sounds like you are going to be booking a reasonable amount of reserves from the developments you have coming through. Can you give us some guidance on how low that'll be or how big the bookings will be from Ghana and Brazil?

James T. Hackett - Chairman, President and Chief Executive Officer

What Chuck and I recall, and Chuck and I was trying to handle all this together Ben. I think we are still expecting to move far in this year in Ghana with the sanctioning. If that occurs, there is probably not much this year that we would anticipate. As related to the Caesar/Tonga again, I think we've mentioned that we expect to sanction that as well.

So we do believe you'll see some barrels there. In the aggregate I think the guidance we've given you historically is one that today we'll just affirm that we think it's in and around in that manner or north of it. I feel pretty good about our ability to deliver a fairly competitive S&G relative to others this year. A good news is, with all the hurricane and related weather issues this year, I don't think that's the way that blows any sort of F&D...and check with Karl, would you like to add to that?

Karl F. Kurz - Chief Operating Officer

No I think you said it well. I think we are path to deliver at least if more than what we guided to on reserves. Obviously with prices being down we'll see some price impacts that everybody else will. But as far as our core base program, we're very pleased how it's working to have us working on delivering the reserves we built it around.

Benjamin Dell - Sanford C. Bernstein

Great. And if I could just ask one exploration question on Sierra Leone, can you just tell me when in '09 you are planning on drilling that and does your activity... will your activity in Liberia change any of that or do you... or when do you expect to drill that?

James T. Hackett - Chairman, President and Chief Executive Officer

Probably end of this year. On Sierra Leone I can't give you an exact timing on when we are going to drill it. So, we're still trying to figure out the rig schedule, which rig we're going to use. The Prospect's ready to drill, it's 3D defined, the same partner that we have there at Jubilee. So we're very excited about getting up there and drilling it. But at this point we don't have it firmly on our rig schedule, which rig' s going to get over there. But it will be drilled in 2009.

On Liberia, that does not have 3D over yet it's a 2D program that they have. So, we contract a 3D vessel which should be in Liberia _ the three northern blocks of the three I guess the western block starting at the end of this month or mid of this month and we will continue on this 2009. Then once we get that date and we will interpret it and in fact where we need to drill there. We don't have any drilling commitments in Liberia right now it's a sizeable commitment, so we want to get the 3D and identify the potential there. What we saw in 2D very good.

Benjamin Dell - Sanford C. Bernstein

Okay. So, you think you could have a drillable prospect there by the end of '09?

James T. Hackett - Chairman, President and Chief Executive Officer

We could probably a drillable prospect by the end of '09 hope if we may not have a rig drill right there unless we go back to back of Sierra Leone and that would be a pretty tight timing to make all that happen. So, probably going to drill Sierra Leone, take the rig elsewhere may be down to JBD or something like that and meanwhile interpret the Liberia data with this Sierra Leone well results and then drill over there.

Benjamin Dell - Sanford C. Bernstein

Okay, great, thank you.

Operator

Your next question comes from the line of David Tameron of Wachovia. Please proceed.

David Tameron - Wachovia Capital Markets

Hi good morning.

James T. Hackett - Chairman, President and Chief Executive Officer

Good morning, David.

David Tameron - Wachovia Capital Markets

Could you just talk about, when you rendered 2008... I guess would be eighth capital program and looking forward to 2009. What was the cut off, for your 2008 on a price severity basis where do you draw that line as far as well mineral projects.

James T. Hackett - Chairman, President and Chief Executive Officer

David, let me see if I can clarify, than I'll understand your question, I mean from a price that prospective or internal rate of return prospective.

David Tameron - Wachovia Capital Markets

Yes, I am sorry, from a price that prospective when you drew that line and say, we're going to spend this much in CapEx and these projects, are going to get deferred until later, what was that price threshold

James T. Hackett - Chairman, President and Chief Executive Officer

And again, this was as we're looking for the deploying capital in 2008.

David Tameron - Wachovia Capital Markets

Yes, I am trying to figure out what that... or better than you can tell me where its going to be for 2009, but I am trying get a read through on...

James T. Hackett - Chairman, President and Chief Executive Officer

Okay. As it relates to gas, we are probably a year ago just kind of looking at a gas market that's not too dissimilar from the gas market where we are looking at right now, just thinking about a year in gas price. So as we were looking at the forward curve, I don't think our views were a whole lot of different than they were a year, as we are thinking about how we deploy capital and get a good rate of return, and we use a number of different price points in order to evaluate that, not one in particular.

I know I am sounding like I'm avoiding your question, but there isn't like one price out there that we would have tagged. As a result, I just encourage you, looking where the gas prices ended up during the year last year, and you'll see its pretty much where we are right now, and then now that we thought like as we deployed capital, onshore that was a good barometer, obviously oil finished the year lot higher last year something, just under 189 [ph]. So that's probably the one year as we think about planning from capital spending in '09 that's a delta from a year ago.

David Tameron - Wachovia Capital Markets

Okay. That helps.

Charles A. Meloy - Senior Vice President, Worldwide Operations

David, I might add, when we look at our capital budgeting, our capital investment portfolio is not driven by a price forecast, its really driven by an opportunity data set, our opportunity said that we had to invest in is very a resilient as, Jim mentioned in his comments down to a $5.09 mix and $30 price of oil. So, we've got projects that are very economical than those type of levels, what we drive it around is ability to fund that cash flow and maintain a financial discipline around the target and giving ratio we talked around of 25 to 35%.

So, we are really restricted on a capital side, not on project side. So, prices are what cuts off our funding of projects, it's really our financial discipline.

David Tameron - Wachovia Capital Markets

Okay. Thanks. I have another question for you which [ph] 25 to 35% and maybe mentioned this and I missed it, but where did you want to be long-term on debt-to-cap, what's your target, and what's your ideal level?

James T. Hackett - Chairman, President and Chief Executive Officer

Well,I think that 25% to 35% debt to book cap is definitely the range we see ourselves wanting to maintain, the balance sheet or the leverage associated with our operations. It could be times we might be modestly willing to be outside of that either end of it, but I think for a relevance sake that 25% to 35% is definitely where we see ourselves, both in the near term and what we would like to achieve longer time.

And the reason for that is, and we've talked about this many-many times, we feel like its important to have a very strong balance sheet do be able to afford the develop that comes from the explanation that we are able to generate, that expirations success about Daniels and for expiration people have been able to demonstrate here in the last couple of years whether the West Africa, now in offshore Brazil and consistently before that in the Gulf of Mexico, its really important that we have the balance sheet to be able to maintain that investment rate appeared to risk [ph] to be able to enjoy the development comes with that expiration.

David Tameron - Wachovia Capital Markets

All right. I think one more question on Wahoo; can you just talk a little bit about what exactly is on the deeper zone when you found the new accumulation? I mean what the plans are as far as development, and when you anticipate putting this online et cetera, kind of give you the next couple of your snapshot on that front?

Charles A. Meloy - Senior Vice President, Worldwide Operations

All right.David [ph] we have announced that we had a shower zone when we start and watch. And then we drill on down, we drill to 6030 meters. In the course of drilling we had excellent mud lot shows [ph] we actually had a roll on the pits as we were drilling in the lower section. And then, when we got our logs we saw some grounds of interest down there which we attempted to then do a full evaluation on. We think we got 300 foot growth section, that is hydrocarbon saturated. We were unable to get MBTs because we couldn't get a seal on the MBT. We think that's because, that's either fractured or very course grained. But we did to recover side-wall cores which did have oil in the cores.

So, we are very confident that we got an accumulation and what we need to do then is get some sort of flow rate out of it to see what kind of other more characteristics it has. So, what we did was, we set a casing to TD [ph] and we are planning on doing several DSTs in the well now. We will do the lower zone first when we come back next year or two to well, and then we will come up and touch the upper zone which we have a lot of confidence in the upper zone, given that we have all of today's fair amount.

David Tameron - Wachovia Capital Markets

All right. And Jim did you say 700 million barrels, and did I hear the number right?

James T. Hackett - Chairman, President and Chief Executive Officer

Yes, that was in the resource, in pre-drill estimates it was 150 to 700 million plus, right.

David Tameron - Wachovia Capital Markets

Okay. And then final... well go ahead.

James T. Hackett - Chairman, President and Chief Executive Officer

I was going to say, in terms of the length of the development of these to the extent you've cared about that as once you'd get the definition around them. What are you curious of total development cycle time?

Charles A. Meloy - Senior Vice President, Worldwide Operations

We usually, I mean pre-drilling when we are doing our international assessments; we plan on a seven year cycle from first discovery to first production. And as we've seen in an example as Ghana, once we figured out what we have than we can pull up forward if it's called for. So right now that would be where we have carried as a seven year cycle.

Now, there's a lot of things that can happen in Brazil and with this type of a development we may want to do an extended test, very similar to what they're doing at [indiscernible], where the flow is 18,000 barrels a day from one well, from the same upper zone that we have here. So we're in the process of thinking about all of those options, but we need to get back next year, do the DSTs and drill an appraisal wells to this. In meanwhile we've got a lot of exploration work to do on this block too.

David Tameron - Wachovia Capital Markets

Okay. And one final question. When you say high quality, high gravity, can you put a number on that?

James T. Hackett - Chairman, President and Chief Executive Officer

We can't get the exact because of course we just had the MDT samples, but that's 28 to 32 gravity crew.

Recoveries for some minor determination, so it's not exact.

Unidentified Analyst

Alright. Thanks.

Operator

And your next question or comment comes from the line of Eric Hagen of Merrill Lynch. Please proceed.

Eric Hagen - Merrill Lynch

Hi, good morning. Just a question on the deepwater rigs you have under contract. How are those deployed right now, are you seeing any weakness in that market?

Karl F. Kurz - Chief Operating Officer

Well, [ph] the blending that was spoke up was in the... was in Brazil and the remainder were then were currently in the Gulf of Mexico. We're busy with all eleven we haven't seen any weakening or toll in the deepwater slice particularly the ultra deepwater space this time.

Eric Hagen - Merrill Lynch

Okay. Great. Final question on the other Marcellus shale, lot of discrepancy between with various operators have reported, sort of the... I guess the leader in the play saying up to 3.5-4 Bcf wells. One of your competitors just said, I think it gets a potentially a vast overstatement and maybe 2 Bcf. Do you have an opinion on that range or any comments?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Eric, this is Bob Daniels. I'd say that we're too early to say on that. We think the potential is there, [ph] but we've only got four wells down. We're testing those wells now, and we've got a lot more work to do to get the ultimate recovery. And all these shale plays you're going to be experimenting as you get not only in the zones that you're targeting, but the completion technology. And as you learn, technically they've gotten better, but right now it's still very early in the Marcellus.

Eric Hagen - Merrill Lynch

Okay. And I'll ask one more question, sorry. On K2 timing of the year-end first quarter of '09 for your determination on that?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

With Q3 we are finishing up well, 562 number forward and then we're going to move to 606 number one, and we are in discussion with our partners to select the best EOR technique and I mentioned last time at the call that seems like water flooding is leading the pack at this point, and I think that's still the case. And we are hoping to come to that conclusion with our partners year-end or early next year. And then as we worked to the economic sanctioning for the end of next year.

Eric Hagen - Merrill Lynch

Ant estimates to the upside, a potential of that?

Unidentified Company Representative

That's not been disclosed yet

Eric Hagen - Merrill Lynch

Great. Thank you.

Operator

[Operator Instructions]. And your next question or comment comes from the line Rehan Rashid of FBR Capital. Please proceed.

Rehan Rashid - FBR Capital

Good morning. On Caesar/Tonga any rough parameters around what can be [ph] development to what it look like, how many wells? What rates could we expect in 2011?

Charles A. Meloy - Senior Vice President, Worldwide Operations

Ron this is Chuck. What we are seeing is the anticipation that we have four development wells and what we call Phase I stretching in the north of Caesar well down to the well we just drilled, which is an area probably six miles long or thereabouts. We anticipate putting those four wells online into the sub-sea systems back to our Constitution's spud which we own 100%. Now the partnership is agreed, the unit has been approved by the MMS and production handling bringing back the Constitution is in final process there.

We... at Constitution we should have at the time of our first production at Caesar/Tonga 40 to 50,000 barrels of space available. Now for first production the four wells that we have or will have can easily accommodate that production level. And we should see first significant production early in the first quarter of 2011.

Rehan Rashid - FBR Capital

Okay. And the ramp, would that be all four wells at the same time or just going to ramp it throughout the year?

Charles A. Meloy - Senior Vice President, Worldwide Operations

We're still working on that. We hope to have all four of them capable of production. But, we're still working on having that done.

Rehan Rashid - FBR Capital

Got it. Still staying with the same topic, in terms of, if you did not have this constitution platform, how much longer would it have taken and how much more extra CapEx would have been needed?

Charles A. Meloy - Senior Vice President, Worldwide Operations

Well, we've done a bit of a study on that, as part of the partnership work we're doing on the development plan. It appears by doing it this way we'll avoid nearly a billion dollars of extra CapEx for the partnership. So, it's a very substantial advantage to take it back to our infrastructure we have in place, particularly when it has this kind of capacity now available or it will have in 2011.

So, it's a very substantial advantage. And in the construction market today, in particularly with the steel deliveries, and that type of thing that we've seen recently, we're saving at least a year and probably more like two.

Rehan Rashid - FBR Capital

And how do you buy such to your partnership based on your infrastructure?

Charles A. Meloy - Senior Vice President, Worldwide Operations

Well, it's a negotiation as you would imagine there. There's alternatives out there and we work closely with them and have come to an agreement that we're all comfortable with.

James T. Hackett - Chairman, President and Chief Executive Officer

That's why we don't give it away the rates

Rehan Rashid - FBR Capital

So, I guess that this is one of the reasons why your... it's very economic even down to $30 oil but we essentially wont have any LOE that to you.

Unidentified Company Representative

Well it's because we have something, order to substantial amount [ph] of CapEx. Amortization is considerably lower than it would have been has been. The time is substantially better than what it could have been and the LOE is shared among several fields and both of these just one, so

Rehan Rashid - FBR Capital

Got it, got it. Okay. I am going back to your efficiencies of drilling any thoughts in terms of putting some numbers around there? How much capital have you saved and how much NPV have you improved? Any thoughts on that front?

Charles A. Meloy - Senior Vice President, Worldwide Operations

We've done some work in that regard, and it has certainly helped the economics. I think that thing that if you look at the numbers we pitched out in the operation reports, we believe that through the course of 2008 we essentially defeated what was fairly a significant inflationary market for services.

We drilled our program for what we anticipated the drilling and defeated the inflation that occurred during the year. And for that we're very, very proud of our drilling group and [indiscernible] were drawn [ph] this past year.

Rehan Rashid - FBR Capital

But no particular numbers around that 15% means about a $100 million, $200 million towards the capital market spent

Charles A. Meloy - Senior Vice President, Worldwide Operations

What we... on those wells we were able to drill additional wells too because of the time element. So, we did invest our programs and defeated inflation at the same time.

Rehan Rashid - FBR Capital

Got it.Going back to deep water, last question here, on Hydroberg and mission D, Hydroberg, it is closer to Tonga. It looks like does it tied going to be geologically or are you looking got the same stuff and on Mission Deep a quick update on that front please.

James T. Hackett - Chairman, President and Chief Executive Officer

on the Hydro burg. The exact same thing we got at Caesar/Tonga. It's the same objective. Where same clients separated, you are in the same mini basin so you come off of a structure at Caesar/Tonga. So that you [ph] find back up of another salt water structure at [indiscernible] and it looks very-very good. So we are planning to expel [ph] that well here all in a next couple of weeks. And we are really looking forward to seeing that well down.

I'll let Chuck, give you the results on mission deep well.

Charles A. Meloy - Senior Vice President, Worldwide Operations

In mission deep we found two quarries [ph] that are all that [ph] significant oil columns that were appraisal wells through a well that we have drilled several years ago.

The program that we went out to test to see the commerciality of that field and it's... at these prices it's right on the margin. And so are going to evaluate our options there. There is not infrastructure immediately available. If there were a sub-sea cam that would certainly be economical. So we are evaluating all our options at this point and we will try to grasp the value of that.

Rehan Rashid - FBR Capital

Apologies, one more question. Globally speaking, Sierra Leone, Liberia, countries not only use some of the other operators also that compressed and I would have never thought that we would be going there. From abroad by the technology or just kind of better geologically understanding standpoint, what change that did globally speaking and we are kind of an industry doing more of these kinds of explorations?

James T. Hackett - Chairman, President and Chief Executive Officer

I think what's changed is the deep water technology which allowed us to see and then drill and evaluate wells in 10,000 feet of water. That's given us access us to not just the shelf of Africa but also into the deeper waters and then I would say what changed in this margins specifically is that you believe discovery, that is a play that has not yet pursued. Any of that the Iberian or the Liberian Basin.

There were discoveries and pretty marginal reservoirs up on the shelves. So you really had hydrocarbon system there. But that is a play opener and so we have actively pursued that play up and down the margin and we think that what have in Sierra Leone is very-very similar to what we've already discovered in Ghana.

And so we are going to go up there and test that idea. We think that drilling system in both of those basins is active. As I mentioned there is good shows and fleets along the margin and up on the shelf. So, it has the ability to access the deepwater and the play opener there at Jubilee has given us a lot of confidence that there's a lot more opportunities all the way from Niger Delta up into mid Sierra Leon.

John Colglazier - Investor Relations

And this is John. Having it offshore obviously helps as we've seen in Nigeria that it only helps to a certain extent. We aren't onshore. The other thing is that the politics obviously changed in a great way there in that part of the world and we have involvement of international groups that protect the political system to the extent you can actually find oil wealth that insures that it stays there longer but then over time there of course is the opposite effect of others wanting to get access to that and to manage it for their own interest and we remain alert, if you will, to that dynamic, particularly with what happened to us in Venezuela.

So, we are very excited to be in Sierra Leon and Liberia today. And we'll continue to watch that overtime. It's up to them whether people stay there over very long period of time.

Rehan Rashid - FBR Capital

Sure. Okay, thank you.

Operator

And your next Question or comment comes from the line of Gil Yang of Citibank, please proceed.

Gil Yang - Citigroup

Good morning. Could you for Wahoo what is left to be done in the sense of evaluating the size of that prospect? Is it, you sort of said that it's a, I guess close to the high end of the range, I think you said that for just the first horizon. Does that suggest that the, the thickness of the pay and the quality of the pay was better than you expected?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Gil its Bob Daniels. I'd say that there were some components of that, that were dead-on what we expected and then some were better than we expected nothing was worse than what we have partners, just kind of our mid range, in just that I presume. They also have the deeper objective, we carried into the higher risk. We certainly had the potential to be there and that's why we took the well down.

To talk about the overall what we need to do, right now we've got a lowest known [ph] in the upper zone. We don't have any kind of water contact though we've got a lot of structures still below us. So, we need to get down and test. So we've got to get an appraisal well down there. And see how far this oil accumulation extends. That will give us a bigger aerial extent of course which will then push us towards the high end of the range.

And then we've got to get a DST on the lower zone and find that what kind of flow characteristics it has. Right now we are not attributing really the resource numbers in to it until after we get a DST on them.

Gil Yang - Citigroup

Okay. So a lot of it is the aerial, so you need to poke holes sort of to extend the aerial to get an idea before you go there. Right?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

That's right. We think with the lowest known and reservoir characteristics on just the upper zone, we are within that resource range that we had pre drilling

Gil Yang - Citigroup

Is there... what would be the top of the reservoir? Is that a gas cap or is there a ... do you know if it's liquid filled all the way to the top or?...

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yes, all indications that we have is that it's liquid, all the way to top that we do not have a gas cap. Now we didn't drill on top of the structure either.

Gil Yang - Citigroup

Do you know where the highest known oil would be or you can't know that until you drill a well there?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

No, well, we know where our highest known is with this well, but we don't know whether there's gas cap on the top of the structure, now we would have to drill right on the crest to get that information.

Gil Yang - Citigroup

Okay. And presumably you would do that at some point to test that area?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

At some point we would get up and see whether we had a gas cap. I think it's more important to find out where the down dip limits of the accumulation would be. And, that would make it bigger than what we think right now which is just taking it... we're taking it conservatively to the lowest known that we saw in the well bore. And that's give us well, as Jim has mentioned.

James T. Hackett - Chairman, President and Chief Executive Officer

And the focus is on aerial spud, Gill, [ph] but the other thing I might mention is that this is the start along with sort of library we're building on that regional geological play type. And it's a great sign with regard the other exploration opportunities we have both in that block for a while who is located as well as the blocks that we're active in. So it's a... we have got a lot of upfront stuff in front of us. So...

Gil Yang - Citigroup

Is there any chance that the aerial extend of this reservoir extend beyond the boundaries of your leasehold?

James T. Hackett - Chairman, President and Chief Executive Officer

That would be an outside possibility, but we would not know that at all until we're able to drill more wells. Right now, it's clearly sync and separated from the Jubarte complex to the North, now whether or not that means that the oil accumulation is clearly separated, and it will take a well down in the sink line to know that.

Gil Yang - Citigroup

Is it bothering [ph] a sink line on your side of the lease mine or the other side.

James T. Hackett - Chairman, President and Chief Executive Officer

It's on our side.

Gil Yang - Citigroup

Okay. And then this last question is; you guys scheduled in lot of rigs... locked in lot of rigs 3, 4, 5... four years ago. So, at this point in time do you wish you've been more aggressive on that or you okay with what you have got?

James T. Hackett - Chairman, President and Chief Executive Officer

Few on my [ph] credits give a shot that anything else can add anything. I think we are comfortable with what we did, and I think you... at varying times at $145 oil, we certainly wished we would had one more because we didn't see any loosening in the market. We are in the market trading rigs all the time. So its not just our own sense of our own rigs, but we are actually getting sense of other people's rigs, its still very tight, it could loosen a bit in a couple of years because if prices stay down. And so it's a periodical issue that it's hard to get your hands around whether you should have done something differently, a year ago I would have said to you; we wish we had another spec rig. Today, I am not sure I'd say the same thing what if it was... when we originally did it, we did it with a notation that we can under pin with our own exploration and development activities.

An obviously as Bob Daniel's exploration group is added to the opportunities that we have in the explorations side, we even feel better about our better rig positions, and in some cases might wish we could automate it kind of tactically. If you will... we think there maybe opportunities get those rigs lined up down the road here. If prices stay week and they get strong again, we're going to wish we had one more, maybe two more. But, we've got a really great position and we still feel very good about being able to execute of program, and that's in a very different place than most of our competitors.

Gil Yang - Citigroup

Okay. Thanks a lot Jim.

Operator

And that does conclude the question and answer session. I'll now turn it back to management for closing remarks.

John Colglazier - Investor Relations

Well, I just want to thank everybody for being on the call and we certainly feel we're well positioned for this kind of environment that we're heading into, both from a balance sheet prospective as well as from the standpoint of been able to deliver growth, at a reasonable capital level, and to continue to give you confidence in the exploration program and the ability to add additional resources for the future.

So, I want to thank you and it will be a very interesting day with the election obviously. Have a good day.

Operator

Ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day. .

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Anadarko Petroleum Corp. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts