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Anadarko Petroleum Corporation (NYSE:APC)

Q42012 Earnings Call

February 05, 2013 10:00 am ET

Executives

John Colglazier - Vice President, Investor Relations and Communications

Al Walker - President, Chief Executive Officer

Douglas Hazlett - Vice President, U.S. Onshore Exploration

Robert Daniels - Senior Vice President, International and Deepwater Exploration

Chuck Meloy - Senior Vice President, U.S. Onshore Exploration and Production

Robert Gwin - Chief Financial Officer, Senior Vice President - Finance

Scott Moore - Vice President, Marketing

Analysts

Brian Singer - Goldman Sachs

Subash Chandra - Jefferies

David Tameron - Wells Fargo

Robert Brackett - Bernstein Research

Evan Calio - Morgan Stanley

Brian Lively - Tudor, Pickering, Holt

David Kistler - Simmons & Co.

Doug Leggate - Bank of America Merrill Lynch

John Herrlin - Societe Generale

John Malone - Global Hunter Securities

Scott Hanold - RBC Capital Markets

Charles Meade - Johnson Rice

Eliot Javanmardi - Capital One Southcoast

Joe Magner - Macquarie Capital

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 Anadarko Petroleum Corporation earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now turn the conference over to John Colglazier. Please go ahead, sir.

John Colglazier

Thank you, Steve. Good morning, everyone. I am so glad you could join us today for Anadarko's fourth quarter and full-year 2012 conference call. Today's presentation includes forward-looking statements and certain non-GAAP financial measures. So we encourage you to read the full disclosure and GAAP reconciliations located on our website and attached to last night's earnings release. Also on our website, we have provided a comprehensive summary of the company's operations activities in our operations report.

In a moment, we will turn the call over to Al Walker who will discuss the company's 2012 results and Al is joined by other members of our executive team who will be available to answer the questions later in the call. Al?

Al Walker

Thanks, John and good morning. 2012 for Anadarko was, in a word, outstanding. First, we delivered record sales volumes of 268 million BOE, well above the high end of our initial guidance. Second, we replaced 162% of our reserves at a cost of less than $15 per BOE before the impact of price revisions. Third, we achieved a 67% success rate from our deepwater exploration and appraisal program. Fourth, we monetized more than $1 billion of assets and established a market value of more than $6.5 billion dollars for Anadarko's remaining 91% interest in the WGP following its IPO. Fifth, we generated $852 million of adjusted free cash flow during the year.

Our record sales volumes growth was driven by our capital efficient, use of onshore assets, growing it at 16% over 2011, with 25,000 barrels per day increase in this higher margin liquid volumes. The Wattenberg field in Colorado was the single largest contributor to this growth increasing liquid sales volumes by 11,000 barrels per day over 2011, total production of 18,000 BOE per day, which generated rates of return in excess of 100%.

This past year, we increased our net resource estimate in this field to 1 billion to 1.5 billion BOE and doubled the number of identified drill sites to 4,000. To the south of our core Wattenberg acreage, we closed the $114 million transaction for 59,000 acres retaining a 20% royalty interest on fee acreage and believe by doing this we have accelerated the value of these assets by using third-party capital

Beyond Wattenberg, we achieved record sales volumes in many other growth areas of our portfolio. These include the Eagleford shale, our East Texas horizontal liquids plays, the various Permian oil prone horizons we are actively developing, our greater natural Buttes acreage and the Marcellus Shale. We have also continued to significantly improve drilling efficiencies across all of our active areas. In the Eagleford, for example, we exited the year with our drilling cycle times reduced to an average of 9.2 days, giving us a 26% year-over-year improvement.

Complementing the success of our onshore programs 2012 was one of the active years in history for our deepwater international exploration and development teams. That included a resurgence in the activity in the Gulf of Mexico. Earlier in 2012, we achieved first oil at Caesar Tonga and we are currently in the process of completing a fourth development well in the field. We also continue to make significant progress at the Lucius development, our next major megaproject in the Gulf, where the construction of Lucius is on schedule and our first development well, as you saw in our release encountered 910-feet of oil pay, exceeding what we have seen in the unit to-date.

During 2012, we promoted a portion of our interest in Lucius by closing a carried interest agreement with a partner. This transaction should fully fund our capital for first production, significantly increases our project returns and values our interest in Lucius at almost $2.8 billion, where we have very little amount of capital invested.

We have also advanced the Heidelberg project, the first oil, we believe, in 2016 awarding long lead items, taking a design and build-to approach constructing another truss spar with capacity for Lucius at 80 thousand barrels of oil per day and we continue to be very active in the Gulf of Mexico, with high-impact exploration, appraisal and development operations on ongoing at eight locations.

Turning to our international activities, and start with Algeria, we expect to achieve first oil production this quarter from the first of three facilities at El Merk and steadily increased sales volumes throughout 2013, as this new facility ramps towards capacity. We remain committed Algeria, our partnership with Sonatrach and our operations there.

As I am sure you can expect, we have taken appropriate actions for Sonatrach and the Algerian government to enhance security for people and facilities. We will refrain from discussing our activities on any specific regarding security at this time and hope you will understand.

So, if I could, let me move onto East Africa. Mozambique continues to be an incredible success story. Our discoveries at Golfinho/Atum doubled the recoverable resource estimate of our offshore area one, block to a range of 35 to 65 Tcf. The projected timeline for the first LNG cargos remains in 2018. As we're awarded Competitive FEED contract and reached the Heads of Agreement with Eni, concerning development of one of our fields.

In West Africa, our partnership submitted the plan of development to the Canadian government for the Atum complex. Atum will be the second FPSO development offshore Ghana, following Jubilee which is now producing more than 110,000 barrels of oil per day.

We expect 2013 to be another very active year in our international drilling program with a significant number of high-impact exploration wells. All of E&P activities we've described today provide confidence in our ability to achieve our goal of 3 billion barrels of reserves by the end of 2013. In 2012, we added reserves at competitive costs of $14.65 per BOE, excluding the impact of price revisions. Our proved developed reserves now comprise 74% of our year-end total, an improvement over the previous year's 71%.

Natural gas prices decreased by about 31% on average for the year, yet only about 2.5% of our reserves were impact, almost all of which returned at today's strip prices. In 2012, we also followed through on our commitment to further strengthen the balance sheet. This was driven our free cash flow and cash received from the successful Algeria tax resolution. By year-end, we repaid all of our borrowings under our $5 billion revolving credit facility reducing our net debt to cap ratio to 34% from 41% and we ended the year with $2.5 billion of cash on hand.

And as we wrap up todays' prepared remarks, I want to thank our employees and contractors for an exceptionally strong operating exploration and finishes results, we delivered for our shareholders again in 2012.

Operator, if you would, let's open it up for questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions). Your first question comes from the line of Brian Singer with Goldman Sachs. Your line is now open.

Brian Singer - Goldman Sachs

A couple of questions on Lucius. When we look at the 910-feet of oil pay there, how is that divided between the Pliocene and Miocene sections and what does it suggest from a resource potential protective both for Lucius and maybe on a rest basis [for].

Al Walker

Brian, I think there is no doubt that we couldn't be anything more than just delighted and tickled with how that well has drilled out. I am going to let, if you don’t mind, I am going to have Doug give you a little more color on that but at the same time, I am not really sure, there is any takeaways for Phobos. I will probably let Bob Daniels answer that, if you don’t mind and if I can, just leave you the impression, I think we are all very excited. We think it means probably lots of good things for us but it may be a little early to start to try to give additional estimates.

So with that, if I can, let me turn it over to this to Doug on the Lucius and then turn it back to Bob Daniels for the Phobos question.

Douglas Hazlett

Sure, thanks, Al. Brian, you are right. We are very excited about Lucius. What we found in the Pliocene and Miocene sands there is very encouraging and exciting. The project is on schedule, on budget and at this point in time, we have not broken out the split. What we can tell you, though, is just to reiterate the guidance that we see the field as a 300 million barrel plus development and we are extremely excited about the options that the Miocene could add to the development plan.

Robert Daniels

Yes, Brian, on the Phobos question. No, we never really had a big concern about sand content in the Pliocene and Miocene down at Phobos. We have got a lot of confidence that we will see a lot of sand down there. It's really the risk down there is whether it is going to be charged coming out through the Hadrian complex and the Phobos. So we will just have to wait and see on that but remember, at Phobos too, we have got a deep objective of also the lower tertiary Wilcox that we have to get down to.

Brian Singer - Goldman Sachs

Great, thanks. Then separately, when you think about your mix of associated gas, the Marcellus gas and dry gas, we recognize you haven’t put out items, but can you talk about your outlook for gas production trajectory? Does the associated gas in Marcellus win out? Or should we expect overall gas volumes to fall going forward?

Robert Daniels

Brain, generally our expectation is that our gas production will be relatively flat. Time to time, it will be up a little bit, primarily driven by the outstanding results we have seen in Its all said by the clients, we have seen similar mature fields like IHUB and our base fields onshore.

Al Walker

Brian, this is Al. We will give you more color in a couple of weeks but our plans are just to maintain the four rigs we have operated there now. We are not taking it down and not taking it up but I don’t think you should expect that industry wide, in this price environment, is going to do a lot with dry gas, but the one dry gas basin, it does have economics of Marcellus.

Operator

Your next question comes from the line of Subash Chandra with Jefferies. Your line is now open.

Subash Chandra - Jefferies

Thanks, good morning. My question on the domestic property. Just curious, some of these huge growers sequentially, Wattenberg and wet Haynesville. So what can we see sustainably on a quarterly basis and on what are the limitations on growth here in the intermediate term, if any?

Chuck Meloy - Senior Vice President, U.S. Onshore Exploration and Production

Subash, this is Chuck. Everywhere we are putting capital, we are seeing outstanding group and we are particularly focused on the liquids activity in Wattenberg, Maverick, West Texas and East Texas. That’s where most of our capital is going and we continue to see growth. We will give you guidance in February where we are headed with regards to the company growth rate but I think that the types of trajectories that you have seen in those assets, in particular if you look back through the operating reports of the kind of trajectory, you would envision the future because that’s the kind of investment we are putting there. The quality of investments continue to be outstanding and the growth rates, particularly on the liquids side has just been remarkable. Our whole expectation here is to deliver very high returns on the drilling programs and I think that’s what we are doing.

Al Walker

I would like to add to that the fact that in addition to the way we are looking at it from a upstream perspective, we also have tried to marry that with the midstream, and that’s why you have seen us do what we have done in the Rockies with both front range express and then the plan that we are bringing on down in the Eagleford area midyear. So our belief is, as we turned from '13 and to '14 to reach that 3 billion barrels of proved reserves target we have out there for the end of '14 that these midstream developments that we have been spending money on we will actually see a lot of growth both from a production and a reserve standpoint onshore which will always, I think, in the near term, be heavily dependent upon the success that we see both at Wattenberg and the Eagleford.

Subash Chandra - Jefferies

Okay, thanks. And the follow-up here on monetizations this year. Maybe you will talk to this in your 2013 guidance but if you can comment on it now, on the Mozambique, are there any other big projects, for instance, in, Tallow talked about selling down TEN, and is that in the cards, for instance, for you guys? And if you can confirm whether TEN is somewhere around $5 billion-project?

Al Walker

Well, it probably is best if I can. I am going to give you my views here, but the better views probably need to come from Bob Gwin, but I think we only have a small interested at TEN, it's very different for than it is for Kosmos, and even though they have the same amount as well as, Tallow, but as it relates to that particular development, I think we are encouraged by what we are seeing with the way the government's reaction to the plan of development and I don't believe, Doug, we have any plans at all in terms of selling down there.

Douglas Hazlett

That's correct. We are very encouraged and working with the partnership and the Ghanaian government with the advancement of the TEN plan. At present we don't see any direction that we would pursue that would involve selling down there, so we're not going to speculate on what are our plans to do, but we are encouraged by it and we have targeted production 2016, and so looking forward to moving that project forward and we see that that capital range in rough estimate is approximate to what we see that the development to cost.

Al Walker

I think, we are in that block.

Subash Chandra - Jefferies

Follow-up on monetization.

Al Walker

On monetization, the other asset to keep an eye on is Brazil. As you know early last year, we had identified result for divestiture soon thereafter around the time we had our investor conference last year, there was discussion of you proposing a potential unitization between the [block] and the Whales Park complex to the Northwest, so we put our process on hold given that that unitization process has taken little while thus far and we want to go ahead and move forward. We decided to hope to get Brazil back on the market and see if we can work some kind of a structure such that any redeterminations around the unitization might be able to be adjusted pro forma sale, but the timing of that is difficult. We are obviously targeting 2013 [our] regulatory approvals etcetera as we saw in BP transaction previously that cause us to think that that it would probably be later in the year before it was actually closed.

Douglas Hazlett

Subash I am sure there are companies that do a good job of actively monetizing, bringing more value, but we got to be at the top of anyone's list. If you go back to '06, and the way we have done that, and just last year looking at what we did with the OCI sale as well as what we did in the non-core area outside of Wattenberg, what we have done with promoting Lucius, and I guess as you will hear more about that in a few weeks when we talked about Heidelberg. I think you can continue to expect that we will be active in the management of our assets and trying where we can to accelerate value.

Subash Chandra - Jefferies

Congrats and thank you.

Operator

Your next question comes from the line of David Tameron with Wells Fargo. Your line is now open.

David Tameron - Wells Fargo

Thanks. I cut out there, Al, So, I don't know if you said anything particularly related to Mozambique, but can just recap where you are at in the monetization process?

Al Walker

Sure. We are looking to sell down 10% working interest going from 36.5% to 26.5%. We are in the process of marketing that with someone else's who also selling and our hope is that we will have something in the coming months to discuss with you in more detail, but our view there is simply if we can find the right consideration with the right terms and conditions, we would be interested in trying to reduce our interest to 26.5% from 36.5%.

David Tameron - Wells Fargo

Okay. Is it ongoing, any backend timeframe as far as when the market is [down by]?

Al Walker

No. I'll let Bob describe if I can. It'd probably be best to let Bob do that.

Robert Daniels

Yes. The only thing I would add is that we have talked in the past and it remains accurate today that we would like to do so around the time of FID, which we have talked about being around time at the end of this year, and so as we move forward it's a matter of getting deeper into the process, find the right partner and then has FID comes together, we would expect it to be in place by then.

Al Walker

David, as you might imagine, we get a lot of inbound interest, and I think our view was to finally formalized the process and invite some people in that we thought could in fact be good partners for us for, in some cases different reasons, and we just started that here at the beginning of January, so we are kind of early into what I would call a quite market of 10%.

David Tameron - Wells Fargo

Okay. Thanks. And then, Barracuda and then Black Probe, can you talk about how we should view that and how that changes your focus going forward? Or did you start to back North and concentrate on that but could you give us some more color on that?

Robert Daniels

Yes, David, this is Bob. We drilled those two down there to see whether or not the liquid potential that we had thought could exist down there. It was actually real and both of those wells were unsuccessful. We found really good sands. We found a lot of good things down in that area but obviously, these two didn’t work. We have got a lot of information now that’s new to us. So we have got to roll into our interpretations and see what it means to us going forward. We have moved back to the North and anticipate the rest of activity. This year we will be focused on the North where we are two (inaudible) now, drilling an appraisal well. We have got some exploratory work to do even farther to the North, some prospects that we have talked about before. So we have got an active program. But anytime we invest that kind of capital and get that information, we need to roll in to our interpretations and see what it all means. We are very disappointed with what we found at this point, (inaudible) will see what it tells us going forward.

David Tameron - Wells Fargo

Okay, and the last question. Brain, I guess, attempted to ask the question but, any guidance you want to give us, I guess February 20th you are doing the Analyst Day, or a conference call, but can you give us any guidance around any change out from prior years as far as staying within cash flow, similar metrics or similar type targets to end goals for Anadarko? Any color you can give us on 2013?

Al Walker

Well, there is really little that we would like to share this morning when we are sharing it, obviously, in detail in two weeks, but I think in prior calls, we have made the comment that we would expect to see a moderate improvement in our level of spending. We would certainly expect to still spend within cash flow. Thankfully the assets that we have are pretty robust from a cash generating capability due to the brent linked focus on oil and the cost controls that we have had in place. So we will be able to increase the budgets there within cash flow and continue to improve the balance sheet as we bring in additional funds from the Algerian side, as much as we did this year.

Robert Daniels

I would only add to that, Dave, is we are an exploration company. You can expect that we will continue to be spending in exploration, the kind of things we have done in the last several years. Whether we can continue to sustain what is an incredible success ratio, at 67% to 70%, will be a difficult dive, but I think one we are prepared to take. I think our guys do a lot better than most of that and that we are, at the end of the day, an exploration company. So you should expect we will probably drill somewhere in the neighborhood of another 25 deepwater wells again this year. We will balance that with some good predictable, repeatable results onshore and in the Gulf of Mexico to give you the kind of the things that we have expected to achieve with the guidance that we gave you back a few years ago over our five-year horizon which ends in '14.

Operator

Your next question comes from the line of Bob Brackett with Bernstein Research. Your line is now open.

Robert Brackett - Bernstein Research

Question on that 3 billion barrels of reserve target for end of 2014. There are some moving parts there. One is that gas price rises, you will rebook some lost reserves. The other is you are just going to go out and spend your F&D and get us certain volume there. The third is taking lumps of reserves off of, say an FID or gas contract for Mozambique. How should I balance those in terms of thinking about CapEx for the next two years?

Al Walker

Well, I think, sort of the watchword on that is, we hope and expect that this year we will start to net our plateau rather our net spend and continue to grow the gross spend. I look at Lucius and I would like to see us do more of that. I think we have got a good shot at doing that with Heidelberg. Bob Daniels does a good job of using third-party money on the exploration to reduce our drive home exposure and yet gives us a lot of swings of the bat. So from a reserve perspective, we are going to continue to spend at about the level we anticipate this year and continue to do enough to be able to get to that point of getting the 3 billion barrels.

Now, Mozambique will be a fairly significant contributor to that for the first time, post FID. Maybe what we should do is give a few other people some chance to give you some more color on that. So let me have Bob Gwin talk a little bit about it from what he sees in his model and then maybe Doug Lawler can talk about it what we see in Mozambique, specifically since that’s the largest contributor.

Robert Gwin

It's essentially more of same across the portfolio, where from a reserves booking standpoint we are doing very well in the Wattenberg field. Obviously with the growth rate we have got there, the economics are robust Eagleford is obviously a very large contributor across the onshore U.S. portfolio. We have been in a very good position to continue to book reserves. Those reserves continue to be liquids related. We talked about the aggregate this year driving up in liquids from 43% to 46%. As we look to the Gulf of Mexico, that's a little lumpier, but obviously we've had a long history there with the expiration projects we had in place and the future sanctioning of place like Harvard following up on Lucius.

We'll be booking oil reserves and then Mozambique is going to be oil indexed and very significant, but that's obviously going to be a significant lump in 2014. That will be proved undeveloped, obviously, and most of the rest what I have been about is focused highly on proved developed as our PUD percentage continues to fall when we think we take a relatively conservative approach on our offset our and our shale bookings.

Shale bookings have [portfolio] in the last year, but they are still a very small percentage overall, so there's a pipeline of bookings there that we think is pretty substantial and even well beyond 2014 as we continue to bring additional trades on in Mozambique and execute the plan around the world.

Robert Brackett - Bernstein Research

Okay. And you book Mozambique, if you have x volume of gas contracts, you book x over three post FID, or x over two or x over four? How do you think about that?

Al Walker

Well, we haven't provided that type of detail yet. I think the key there to note is that the appraisal activity has given us considerable confidence in our reserve resource potential in Mozambique, and we are proceeding with our reserve certification. We expect to have that complete and prospered, and Golfinho/Atum complex this year. That's an important element as we proceed towards FID along with several other issues there that need to be addressed with respect to marketing and how we progress that development, so I think what you can expected is that from your question there will be all of those sources will contribute, and with respect to Mozambique, we are on track and encouraged by what we are seeing there from the appraisal and hopeful to have reserve certification very quickly.

Robert Brackett - Bernstein Research

Great. Then a crude by rail, looks like you are moving some volumes out Wattenberg by rail. Any color there? Who is it? Is it third-party rail? Is it something you are interested in doing more of?

Chuck Meloy

Bob this is Chuck. It is third-party rail. The reason we are doing this to, of course, expand our market exposure and put upward prices on realizations in addition to just the local markets and the markets one that we have now.

Robert Brackett - Bernstein Research

And is that stuff ending up with say [James] or something like that?

Chuck Meloy

It can. Yes.

Operator

Your next question comes from the line of Evan Calio with Morgan Stanley. Your line is now open.

Evan Calio - Morgan Stanley

Morning, guys. Just only a follow-on to prior question on rail. Is it 20,000 contracted in 2013? I mean does that satisfy your takeaway capacity needs here for 2013? You mentioned the rail realization uplift, which is interesting to me and then question whether you think about rail asset infrastructure investment as a consideration given your ability to sell that into your MLP?

Chuck Meloy

Yes. Evan, this is Chuck again. The 20,000 does cover our 2013 and 2014 expectation for production. In addition to what we anticipate locally into the White Cliffs Pipeline, so we are working every element to make sure that we have the ability to export all our crude and we are pacing our development along with those infrastructure additions.

The rationale as I mentioned earlier is to get as broader exposure, not just to cushion, but other even potentially waterborne market, so all that is to keep the market competitive with regard to this gigantic new source of crude volumes.

Evan Calio - Morgan Stanley

Got it. I know you mentioned in your operations report you tested seven and no real color there, any color or kind of guidance of how many rigs you are running in 2013, and when we might get better understanding here on the resource? Thanks.

Al Walker

Evan as w mentioned, I believe on our last call, we are testing those wells now and we are just getting the information we need to make decisions on how we progress. We will give you better color as we get some additional production information. Most of them came online in the last quarter 2012, so still early days and you will hear more about our Utica views as the year progresses.

Operator

Your next question comes from the line of Brian Lively with Tudor, Pickering, Holt. Your line is now open.

Brian Lively - Tudor, Pickering, Holt

Hi, good morning. Question from me on the Eagleford. If you look at the peak volumes of 54,000 barrels a day versus the Q4 average of say, 39,000, what were the drivers of that delta? I am sure some of it just bringing a bunch of wells on it one point in time but seems like still a pretty big delta.

Robert Gwin

Yes, Brian, I think what you ought to read in to the peak number is the capacity to sell volumes. The Eagleford, like many of these other large resource plays continually have constraints on them with regard to the new plants being tied in, pipelines going down for expansion, those type of things. So what we find is, and it is particularly true in the Eagleford. What we find is that our ability to sell our total flow volumes are all often times restricted and every now and then, the stars and moons line up that we can sell our full volume and that’s when you see the peaks.

All that congestion that we see in the Eagleford is slowly getting worked out. The growing pains, if you will, are slowly dissipating. Our big opportunity is coming up in the second quarter of 2013 with the (inaudible) plant. When we get (inaudible), and its export facility in place, it opens whole new avenues for crude and (inaudible) gas to be evacuated from our Eagleford and our uptime is raised to our capacity will improve and you will see really nice gains in our production volumes.

Brian Lively - Tudor, Pickering, Holt

So if I understand correctly, when that plant comes on, you will see a step up inflection point in terms of your sales getting closer to what these daily task numbers are?

Robert Gwin

Yes.

Brian Lively - Tudor, Pickering, Holt

Okay and then I think your comments before were on the Utica but on the Marcellus, the production uplift was pretty strong given the activity levels. What are the leading-edge EURs right now for that Northeast action that you guys are drilling?

Robert Daniels

Right, well across Lycoming and Bradford counties and down in Sullivan county, you are just incredible wells, the economics are strong. It still has a good investment thesis for Anadarko. The EURs continues to deliver really good economics. We were seeing wells with our BCF type EURs and as importantly, any investment decision, we are seeing our cost come down. We are down probably in the order of $2 million per well over just a couple of years ago.

That, in combination with the gas flow rates we are seeing, say 10 million a day per well depending upon where you are in the sweet spot, good EURs and outstanding capital efficiency, we are just getting good returns. I think you will see the Marcellus continue to grow. There is a bunch of infrastructure projects for evacuation there. So all that combined makes it a really good opportunity for us.

Brian Lively - Tudor, Pickering, Holt

Then just last from me, a follow-up on that. Should similar to the discussion on the Eagleford, do you guys have a bunch of pent-up production that’s just ready for infrastructure? So you talk about the bottlenecks getting better but is there are actually shut-in sign or curtailed production at this point?

Robert Daniels

Not really. The pace of completions up there have been such that we were able to sell a good share of our volumes. We haven’t had the percent of downtime, if you will. There are a number of the drilled but not completed wells that are still out there that we are slowly working up that inventory. So that gives you a little bit of pent-up opportunity but it is not that idle capital in regard, you have it behind the choke and you can't sell it.

Operator

Your next question comes from the line of Dave Kistler from Simmons & Co. Your line is now open.

David Kistler - Simmons & Co.

Good morning, guys. Switching over to the Wattenberg for a little bit. With the number of wells that you got drilled identifying both the Niobrara and the Codell, can you talk about if you seeing any deviations in those results and what you are seeing as far as results from the standard laterals and downspacing efforts there?

Chuck Meloy

This is Chuck again. First of all, we are just thrilled with the results from Wattenberg. The production continues to climb. I hope you saw where we produced over 103,000 barrels a day for the quarter and it's the liquids is up 17% just quarter-over-quarter, so the thing is coming along, when we are doing a lot of spacing test. Industry is doing quite a lot of spacing test as well as lateral length test. And we are slowly, slowly pulling into is around 12 wells per section. There will be sections who have 12 wells per section, probably defined about two-thirds Niobrara, third, Codell. We've really pushed the limits lateral length out to 9,000 feet and 10,000 feet. We do see better results with longer wells, the first few longer wells that drilled. With the longer laterals, you have [more], more completions to do so there is a timing element involved, and so we are looking at the optimization of the economics on cost versus lateral length.

The good news is that if you look at the performance, it's really starting to tighten up and we are getting better and better at getting these wells activated and online down-line, the infrastructure is there, the EURs are starting to consolidate around this 350,000 thousand barrels for the wells at about 5,000 or 6,000 foot lateral lengths. So, it's just turned into an outstanding investment opportunity for us. We've essentially done a well with a vertical program in the field and the gone strictly to horizontals. Everything we are doing right now is to find the constraining parameter and then work through it so that we can celebrate the value delivered.

Unidentified Analyst

Appreciate that, and then maybe diving into the cost on that a little bit. In your operations report, you highlighted that on a per well basis you are saving the incremental $250,000 as a result of that tying in the water trunk line. Can you talk about what average well costs are there now with that kind of downtick in the well cost?

Al Walker

First off, I would like to call out our drilling group and just congratulate them on the outstanding performance they have had out in Wattenberg. We continue to learn. We've reduced our spuds, rig release time about 38% year-over-year and our drilling costs are down about 15%, so we are fighting and we are always fighting inflation also service cost and trying to outpace those with efficiency.

One of those is the water on demand process that we have now, where we can deliver water to our rigs to our completions through pipelines [and], so that we have very low cost delivery before we had to put a bunch frac tanks on location, do a lot of trucking to get water to those completions, so we have done away with that cost. We've also done away with that footprint, where there's now many trucks on the road it's a very environmentally friendly type of process that we are undertaking and our goal was to put these Wattenberg wells on line with the forehand right now and we running between 4 million and 5 million on each one of them. We want the average to be on the lower end of that.

Unidentified Analyst

Okay. That's very helpful. I appreciate it. Then one last one, just with a lot of liquids drilling I know a good portion of its oil oriented. You did have some decent ethane rejection that took place in the quarter. Talk about that going forward. I know you have mentioned some of the projects you are working on, but is that something we should anticipate for a couple years or is that going to be cleared up by the projects that you outlined earlier on, on the call?

Al Walker

Well, there was really not an infrastructure issue. The ethane rejection is just purely associated with the economics, and right now particularly in the Rockies, we're better served with selling it is gas as opposed to ethane. These markets move around quite a bit. We've seen this in the past. We are hopeful that the ethane markets will improve, but until they do we are fine with selling it as gas in these liquid-rich projects. We still get the value from propane, butanes and so forth.

So, the economics are still there. We'll deal with the ethane markets, but I think some folks think it's an infrastructure issue that will be resolved. But our plan is really not, it is just markets and we continue to recover, I think, mostly in our Southern region and reject in the Northern just because of economics.

Al Walker

And Dave, if I could, it might be helpful if we had Scott Moore, who handles marketing for us talk a little bit, if you he would, if he would like us to. We do have a constructive view on that thing longer term. So maybe I will just turn it over to Scott.

Scott Moore

I think that he pointed out that in the comments and that we are well situated for long-term growth in that liquids demand. The low cost supply for North American really sets the U.S. chemical sector for being in a strong competitive position long term and our midstream is structure leads us well up for that growth. Obviously that kind of pace of expansion demand is growing back since suppliers run a little faster in the near term and the timing of buildout between crackers fractionation and processing creates near-term imbalances right now. We might consider (inaudible) that thing relative to demand but it will work through that over the next couple of years and long term we really like that outlook.

Al Walker

And I think, just to conclude on that, Dave, we are trying hard to find every opportunity we can to not be captive to Conway and looking for ways to get to Mont Belvieu. If the industry finds solutions for getting things from Conway, the Mont Belvieu in addition, then that’s great. I think we would rather try to take where we can the opportunity to control exactly how our NGLs, in particular, are coming out of our northern areas can get to Mont Belvieu.

David Kistler - Simmons & Co.

Great. Well, I appreciate the additional details, guys. Thank you very much.

Operator

Your next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your line is now open.

Doug Leggate - Bank of America Merrill Lynch

If I could go back to monetization, Al, very quickly. Heidelberg, what kind of working interest would you guys see is appropriate on that and as you go through this monetization phase in 2013 and I guess over the next couple of years, how do you prioritize the use of cash in terms where you like the balance sheet to be and so on? I have got a follow-up for that.

Al Walker

Doug, I think probably looking at what we did at Lucius is a good indication of how we would think about Heidelberg. It is not so much I targeted working interest reduction but rather being able to sell down my working interest to have our future development costs covered. That is the way we think about how we would want to use other people's money. So that when you look at Lucius, you realize that we really have very little net capital invested in something that’s worth $2.8 billion today. I think you should expect we will do more of that. That’s exactly the philosophical way we have approached Heidelberg. Maybe I could turn it over to Doug to give you just a little more view in terms of what we see there because he and Bob have been working quite constructively and while we haven’t turned it over to development, we do have a sense at this point for what the development costs are going to look like.

Douglas Hazlett

Thanks, Al. We are really excited about Heidelberg, Doug. It is going to be another great project for us and we have got it loaded right in the queue behind Lucius. We expect to sanction it this year. As Al mentioned, we haven’t provided any guidance on what we would look to sell down there. The key is to capture the greatest amount of value for the working interest and if we can cover the capital going forward, we will consider that a big win in our program and Bob Daniels and I work real cooperatively and closely on that to manage that third-party spend to capture the most value for Anadarko and bring it forward as quickly as possible.

Doug Leggate - Bank of America Merrill Lynch

Great, thanks. My follow-up, though, if I could jump back to the Gulf of Mexico again, the Lucius and the gas, you drilled the Spartacus unsuccessful well and of course, Lucius now looks to be substantially better. Can you help us join the dots as to what didn’t work at Spartacus and what the read through from Lucius could be to Provost in terms of different horizons and targets and so on?

Robert Daniels

Doug, its Bob. On Spartacus, the sink line separated from Lucius to the North and East and we had a seismic amplitude there that lined up with fault down the closure and we didn’t trap hydrocarbons there. So the seismic amplitude that we thought maybe associated with hydrocarbons was not, and we have a leaky fault there. So we didn’t actually trap any hydrocarbons in it. If you get down to Phobos, we are looking at a four-way structure, both at the Plio-Pleistocene and at the lower tertiary level relatively unfaulted and in fact not faulted in the Plio-Pleistocene. A few minor faults in the lower tertiary but nothing that penetrates on and out. So they are very different play styles between Spartacus and Phobos.

The difference between Phobos and the Lucius complex is, there you got major faults that radiate out from the well counts all the way through the Plio-Pleistocene, and we think there the hydrocarbons were originally migrated into the lower tertiary have leaked and have been trapped immediately in the subsalt section which would be the Pliocene and that's what sets up Hadrian and Lucius to get that same sort of accumulation of Phobos. You are going to have to take the hydrocarbons from Hadrian a Phobos through a syncline and then back up into to full at Lucius and that's what we are testing in the Plio-Pleistocene.

Of course, the of un-faulted lower tertiary Wilcox sets up nicely given that we think that Lucius was [breached] and this one does not look like it should have the same breach capacity.

Doug Leggate - Bank of America Merrill Lynch

That's terrific, Bob. I appreciate the fuller explanation. Last one, guys. I hate to bring it up. Any update you can or you would be prepared to share on Tronox? And I will leave it there.

Al Walker

Well, it's an unexplainable question. I won't blame you for asking, but I am sure someone was going to ask it as well so that's just up on. There is really not much to add at this point that we are just waiting for the judge to come back and maybe if I could I'll let Bobby give you a little more color.

Bobby Reeves

Yes. Thanks, Al. Doug, there is no shareholder here who is more anxious to get a decision from [Judge] than I. We are still very confident in how the case laid out, the testimony that was presented in and all through the closing arguments as well. The last reply briefs were submitted last week and I would love to say we'll have some clarity by somewhere around the second quarter. There is no firm schedule by the court, but hopefully the sooner the better. As we've said before, we still have not put any reserve on this case, because we don't believe a loss is probable, so I think is about a complete update.

Operator

Your next question comes from the line of John Herrlin from Societe Generale. Your line is now open.

John Herrlin - Societe Generale

Yes. It's just a quick one for Chuck. With respect to the price related revision, so I assume mainly dry gas was a lot of that like Wattenberg vertical?

Chuck Meloy

Well, the price related revisions were all associated with dry gas. Now, John, the price from 2012-2011 was substantially different and we dealt with about 275 back in 2012, and well under 2011. So, assuming that we get price to stay generally where they are today, most of those price revisions would come right back to us.

If you look at the non-price related revisions, we also took off our vertical program in Wattenberg as I mentioned earlier. That's something that we don't see as drilling and so we did the right thing we took them off the [books] That impacted our reserve replacement, but it's a one-time deal and we will of course fill in those same reserves with horizontal drilling and substantially more reserves with horizontal drilling as time progresses.

John Herrlin - Societe Generale

Okay. With respect to completion efficiencies are you finding with your well designs. I mean you talked about increasing your lengths. What about the size of fracs survey staying the same, are they going down, are you seeing less profit?

Al Walker

John, we continue to do a lot of experimentation and it's really play-specific which works best and were trying to do is an optimization evaluation of looking at the cost of these completions against UR expectations, because every time you change the parameter in the completion you get a get a different UR responsible, so it's really around optimization, and I think the industry will tell you that the bigger the fracs, the longer, the fracs, the more sand you put in there, the more UR. That makes sense, but comes at a cost, but working the optimization angles and there's all kinds of parameters we are dealing with, frac lengths, frac types, cluster density, you name it, we are trying to optimize around it and doing all the work in each one of these place to get the up to momentum.

John Herrlin - Societe Generale

Okay. Thanks. Last one for me is on the Gulf. Now that the industry is backup to speed to pre-Macondo levels, but you are having any issues in terms of permitting, getting things done with BOEMRE?

Robert Daniels

John, this is Bob. I'll start from the exploration side and if Doug wants to add anything to it, but we are not having issues per se, but we understand is the process they put in place post spill and that process is more time-consuming, more onerous, from a documentation standpoint but it is clear. We understand what we need to have and what the BOEM requires. It means that we have to plan our business much further in advance to start the process and make sure that we have permits in place when we are ready to drill a well, have rigs available. So we are doing an awful lot preplanning. We know exactly where we are going to be drilling in 2013. Well I would say almost exactly, at this point, and we are already looking at 2014 because we have to have lead time to make sure that we have all the permits in place that are required.

Operator

Your next question comes from the line of John Malone from Global Hunter Securities. Your line is now open.

John Malone - Global Hunter Securities

Good morning. I am just following up on John's question about the Gulf of Mexico. Obviously, you had a busy first half. Can you guys give us a stance at the sequencing of the wells you see around the Shenandoah mini basin and in general in the deepwater gulf?

Robert Daniels

Yes, John, this is Bob again. I am glad somebody asked about that. The Shenandoah mini basin, we have got three wells going down there right now. This is playing off a discovery we made in 2009 where we had 300 feet of oil pay and very good reservoir rock properties and good fluids in our Shenandoah one discovery. We found that we were able to get out there and drill our first appraisal well of it and then we got two exploratory wells going with Coronado and Yucatan. Coronado and Shenandoah are both at TD now and we are really pleased with what we are seeing in that Shenandoah mini basin.

Of course, we can't give any details because we are just in the process of acquiring the actual logging and fluid data and that will take several weeks before we would have anything that we could say is definitive. But what we have seen today, we are really encouraged. So I would say that those two are down. Yucatan is a little bit farther behind but it is out of salt and we expect that to continue over the next several months. So look for more information as we complete our final evaluation but we like overseeing today.

John Malone - Global Hunter Securities

Okay, thanks. Just one quick accounting question. You are seeing a bit of bump in SG&A this quarter versus last quarter last year. Is that something we can learn right out going forward? Or is that just this quarter?

John Colglazier

No, John, this is Colglazier. That is actually included in our items affecting comparability on page seven and it’s the $126 million one time impact from the compensation cost associated with the WGP IPO.

John Malone - Global Hunter Securities

Okay, thanks, perfect. Then lastly, just so I understood and heard you guys correctly, you have an actual $4 billion to $5 billion overhead available on your credit facility? Is that correct?

John Colglazier

That is correct. It is fully available.

Operator

Your next question comes from the line of Scott Hanold with RBC Capital Markets. Your line is open.

Scott Hanold - RBC Capital Markets

Yes, thanks, A couple of follow-ups here. On the Wattenberg area, you sold some acreage just south of the Wattenberg area. Have you all done any drilling down there? What can you say about some of the prospect in that acreage drilled at Wattenberg?

Chuck Meloy

Scott, this is Chuck. What we have done is put together a lease package and we sold it to increase activity in the basin. We of course, obtained an overriding royalty position in that from our land grant. So we have a lot of economic value still going for it there. We look at it as very perspective. We are going to focus on is what we view as a big thing and that’s Wattenberg. The reason we are doing that is to continue to accelerate the value of delivery out of Wattenberg.

Al Walker

Scott, this is Al. I think of that as just our ability to use the land grant and a way to do R&D with somebody else's capital. We are very interested to see how that turns out. We do think it is prospective. I think this is gives us some option value.

Scott Hanold - RBC Capital Markets

Okay, so you all have been turning the drilling yourselves down there? Is that fair?

Al Walker

Well, I would say, very limited. Nothing that would be material enough to discuss but I think our view is that in order to do the work and stay focused on the core area of field, we thought this was the best way to do that and be able to test some ideas down there. Keep in mind, outside of Wattenberg, we have more than 500,000 acres. So, we have got a lot here we would like to be able to use and get to know better by using other people's capital.

Scott Hanold - RBC Capital Markets

Okay, do you have more acreage down there? Something works just to do your own developments or I would assume part of that 500,000 is also down there yet? You can easily see, I think on our ops report we have a substantial amount of acreage via the land grants and mineral interest that we have that comes up as well as other additional acreage, so if it were to worse, we have plenty of room down there to go to work.

Scott Hanold - RBC Capital Markets

Okay. Fair enough. And moving over to Marcellus, just so I understand, you had a pretty nice bump in production and was that increased well related to infrastructure specifically, because, it seemed like a really nice up in the quarter.

Al Walker

Well, that is a combination of completing wells and increasing our footprint from an infrastructure perspective. As you know, there's several new pipelines that have come online in the area that's given us addition wallets and we've finished up a bunch of completion that has given us a boost in production as well as the in the Chesapeake operated area, they have also increased their completion count and we're in just in a really good spot, so when they come on and 8 million a day production goes up.

Scott Hanold - RBC Capital Markets

Okay, So, combination of a bunch of factors. Okay. Then in the Haynesville or I guess, I would call the East Texas area, production jumped pretty nicely there as well and that continues to be an area. It looks like you are adding 35 million to 40 million equivalent per quarter and that stuff is still, call it, 70-ish percent the dry gas there. It looks like based on your ops report, is that something as you look forward into 2013 that the liquid still carries economics strong enough?

Al Walker

If you look at the ops report, I think the thing to focus on is our oil volumes essentially doubled and as been our NGL volume, so the play is delivering good economics and we continue to invest on it. There is no dry gas. All the gas production comes along with on some really solid liquids production and we just happened to be in a really nice spot and our team has done a great job of monetizing that asset, delivering a lot of value to Anadarko shareholders.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice. Your line is now open.

Charles Meade - Johnson Rice

Good morning, guys. Thanks for taking for all these questions this morning. Most of mine have been addressed, but there was one follow-up, I thought I'd try on Lucius. Can you share if you are seeing a water level on that western side, or what kind of column you proved up there and then with the appraisal well going down the east side. Now, is that designed so that it could further extend the column?

Robert Lawler

Hey, Charles, this is Doug Lawler. We have not seen water level at this point in time and I would like to stress that the optionality that we have there with the Pliocene development and what the Miocene adds to us, we are very excited about. And the program that we have going forward with additional four wells this year will help to continue to advance the development and the options for upside potential is there. So, like all of our developments and the moment and we are regaining in the Gulf of Mexico, we plan on having optionality and potential for increased volume and additional wells with the facility.

Charles Meade - Johnson Rice

So, one of these future appraisal wells could be still testing further down dip on the different part of the structure is I guess what I am interpreting. Is that fair?

Robert Lawler

Yes.

Charles Meade - Johnson Rice

All right. Great. That was it. Thank you very much guys.

Operator

Your next question comes from the line of Eliot Javanmardi from Capital One Southcoast. Your line is now open.

Eliot Javanmardi - Capital One Southcoast

Thank you. Quick question. Could you just refresh us on the timeline for Phobos [T being] and kind of where you [tiding] and where you guys are in relation to that, also do you have a data room opened for Heidelberg, yet?

Douglas Hazlett

I will start on the Phobos, first, Bob. We know we spud that in December. We said it's going to be about 120-day well. Remember, we've got the dual objectives with the Pliocene and then also the lower tertiary, so we are always and we'll wait until we get the [TD] and get full valuation before we talk about it.

Al Walker

This is Al. As it relates to Heidelberg, we have started a process there, and I think you should expect some time in the coming weeks and not too long after that weeks and months plus, we'll be ready to talk about it, but we are not this morning.

Eliot Javanmardi - Capital One Southcoast

Okay, great and lastly, very high level. Should we expect any slowdown in the ramp up at El Merk or not?

Al Walker

At this point in time, we are sticking with the guidance that we provided previously. We expect first production in the first quarter.

Operator

Your next question comes from the line of Joe Magner with Macquarie Capital. Your line is open.

Joe Magner - Macquarie Capital

Thanks for taking the time. I know we are running late in the call here but I guess following up on some comments that were made regarding the outlook for perhaps the plateauing of net CapEx spend in the coming years? Can you walk through what your priorities might be for any free cash flow that might start to get spit out of the model? Looks like that could start to be substantial. Just curios if you have any thoughts there?

Al Walker

Yes, Joe, this is Al. If we get to a point where I think management feels fairly confident that we have reduced some of our capital intensity in the coming years, I think our first priority would be look at a dividend yield increase. So that would probable be the first step we would go. We have got a lot of work to do in order to get that point. There is an argument, you hope you never get to, Bob Daniels continues to find a lot of things for us to put our development dollars to work on.

One of the things we are seeing is here the ready market, somewhere from post exploration success to appraisal to development that we can start maybe more aggressively looking to bring third-parties in to the process to accelerate our value and not have to be capital-intensive. Once we get that to where the six of us, as management fairly comfortable with it, I will take that recommendation forward to our board and see what they have to say. But that would be sort of, if you were looking down the road, that would be where we headed, if in fact, we convince ourselves with those facts.

Joe Magner - Macquarie Capital

Okay, and you have been in the mode of monetizing as a way to strengthen the balance sheet and bringing capital and funds in some of these future projects. Is there a point where you might be in position to get more creative on how to address the portfolio or look to high-grade the hundred portfolio from an acquisition standpoint? Or is it still harvest what you have got, continue to prove up additional success with the exploration program and then look to balance out your future capital needs? Just curious about, has the thought changed at all?

Al Walker

No, it had not. I think we are the beneficiary of being an exploration company and a pretty darn good one. Our ability to generate are all inventory of opportunities is probably one of the things that makes a unique. Today our inventory looks pretty darn good. I think we feel comfortable about our assets. There is really few things on the margin that we would like to be in and that we are not and my hope is and belief is that we will continue to do things through the drill bit to add that inventory versus going into the M&A market.

Joe Magner - Macquarie Capital

Okay, and then just one last one. In Mozambique resource size is pretty substantial with buyers having various opportunities for LNG sources going forward and a lot of debate and uncertainty about how the pricing of those projects will shake out, and there are some other comments made recently about how Henry Hub or some sort of Henry Hub plus model might start to work its way into the pricing structure. Can you shed any light on how you see things laying out? Or what you might need from that standpoint to move forward with off take for Mozambique gas?

Al Walker

If you don’t mind, Scott is probably best to give you additional color. I think one of the things we find very encouraging and having been a part of some of the early discussions with prospective buyers for the LNG is that there is are very ready market. How it gets priced and the pricing mechanism for that, we are certainly in discovery on that at this point. We feel pretty good about what we are seeing. So, in answering this, because I know Scott will give you better answer that I will, nonetheless, I will tell you that there is nothing so far that’s disappointed us.

Scott Moore

Yes, this is Scott. We are quite encouraged with what we are seeing from the buyers. They like the world class resource, the opportunity to access it, its geographic diversity. We have been marketing this in an oil index perspective. There is much precedent in the market for that and the buyers are familiar with that and structures that they might want us to look at and we need to be competitive with that. But I think we are quite encouraged overall with what we are seeing in the value that we realize for the LNG.

Al Walker

I see we don’t have any additional people in the queue, operator. Is that true?

Operator

Yes, sir. There are no further participants in queue.

Al Walker

All right. Well, let me just close by saying, again, we felt like 2012 was just simply outstanding as outstanding as I can tell you. The management here and employees feel that 13th even be better, maybe even be one of our best years ever. We'll continue to stay focused on being able to generate very strong returns for you and converting resources and accelerating value wherever we can. Think our track record of being able to do that at this point is pretty strong and we are very excited about what '13 is going to bring to us. And in a couple of weeks, we will give you a lot more details, but thank you for being on the phone this morning.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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