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Anadarko Petroleum Corporation (NYSE:APC)

Q1 2009 Earnings Call Transcript

May 7, 2009 10:00 am ET

Executives

John Colglazier – VP, IR and Communications

James Hackett – Chairman, President and CEO

Bob Daniels – SVP, Worldwide Exploration

Al Walker – COO

Charles Meloy – SVP, Worldwide Operations

Clay Bretches – VP, Marketing & Minerals

Analysts

Tom Gardner – Simmons & Company

Ben Dell – Bernstein

David Heikkinen – Tudor Pickering Holt

Doug Leggate – Howard Weil

Brian Singer – Goldman Sachs

David Tameron – Wachovia

Gil Yang – Citigroup

Phil Dodge – Stanford Financial Group

Ray Deacon – Pritchard Capital

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2009 Anadarko Petroleum Corporation earnings conference call. My name is Akiya and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions)

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

John Colglazier

Thank you, Akiya. Good morning, everyone. I'm glad you could join us today for Anadarko's first quarter 2009 conference call. Joining me on the call today are Jim Hackett, our Chairman and CEO and other executives who will be available to answer questions later in the call.

As a reminder, we have posted additional information in our first quarter operations report that's available on our Web site.

Before I turn the call over to Jim, I do need to remind you of certain aspects about the call. This presentation contains our best and most reasonable estimates and information. However, a number of factors could cause actual results to differ materially from what we discussed today.

You should read our full disclosure on forward-looking statements in our presentation, our latest 10-K, other filings and press releases for the risk factors associated with our business. In addition, we'll reference certain non-GAAP measures.

So, be sure to see the reconciliations in our earnings release as well as on our Web site. We encourage you to read the cautionary note to U.S. investors contain in the presentation slides for the call as well.

Also, I'm pleased to announce that Danny Hart will be returning to operations to lead one of our Gulf of Mexico asset teams. And therefore, he is moving out of our groups. I'm sorry to see him go, but sure do appreciate the hard work that he put in. So, should you need any additional questions or assistance following the call, please call myself or Chris Campbell.

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

Jim Hackett

Thanks, John. Good morning, everyone. As you saw in the release, our employee team put together an excellent quarter, operating quarter last quarter. We announced four significant deep water discoveries in our sales volumes exceeded the high end of our guidance. We also maintained a focus on improving our cost structure and effectively managing our capital spending in line with our target range of $4 billion to $4.5 billion. We significantly reduced our onshore rig count where price utilizations are weakest and continue to make improvements in drilling efficiencies throughout our major operated areas onshore. I'll discuss these items in more detail later in the call.

Sales volumes for the quarter were 54 million barrels of oil equivalent, 3 million barrels of oil equivalent above the high end of our guidance. We continue to see strong momentum from our programs in the Rockies, which reported sequential growth of 6% over the fourth quarter of 2008.

Other factors contributing to the growth and sales volumes were averaging more than 900 million cubic feet per day in independence hub, which exceeded our internal estimates. Realizing better frac spreads across the United States which resulted in the recovery of additional NGL volumes and benefiting from the timing of a cargo lifting in Algeria. This production performance was also accompanied by significant progress on our three mega projects.

In Ghana, the partnership continues to move forward with the phase one development at Jubilee, with first production anticipated in late 2010. The plan of development and unitization agreement are currently being reviewed by the Canadian government with approval expected in the second quarter.

Major contracts have been awarded and work is proceeding on the FPSO. In Algeria, Anadarko and our partner El Merk project have awarded the key contracts including those for critical path purposes. The field is expected to add material volumes to Anadarko's production beginning in 2012.

In the Gulf of Mexico, preparations are underway for development drilling to commence in the third quarter to Caesar-Tonga complex, which will be tied back to our constitution spar. This progress keeps the project on schedule to deliver first volumes in early 2011.

As I mentioned earlier, our exploration program delivered strong results in the first quarter. We've announced four high impact discoveries since the beginning of the year. During the yearend earnings call in February, we told you about the Miocene discovery at Heidelberg in the Gulf of Mexico as well as the Mahogany deep discovery offshore Ghana. Appraisals for both wells are scheduled in the second half of 2009. These discoveries were filed closely by the lower tertiary Wilcox discovery at Shenandoah in the Gulf of Mexico and the Tweneboa discovery in Ghana.

Shenandoah encountered approximately 300 feet of net oil pay with reservoir include properties more similar to Miocene reservoirs. An appraisal well is currently scheduled here in 2010. The Tweneboa discovery continues the remarkable success offshore Ghana where Anadarko and our partners are 7 for 7 on exploration and/or appraisal wells.

Tweneboa encountered approximately 70 feet of net pay in a large Turonian age fan, the same age is the sands in the Jubilee field. A Tweneboa appraisal well is currently planned for the second half of 2009. The success of the exploration program reinforces our confidence in the quality of our prospect inventory and our commitment to invest in these longer term growth opportunities.

I should note that approximately 25% of our capital spending in the first quarter was directed toward the exploration component. This program continues to be active in the second quarter. We currently have three sub salt exploration test underway in the Gulf of Mexico.

The Vito prospect is a Miocene test for the projected total depth of 30,500 feet in Mississippi Canyon Block 984 in proximity to several recent industry discoveries. We operate the well with a 20% working interest. We're also drilling the Turtle Lake lower tertiary Wilcox prospect located in Green Canyon Block 847. Turtle Lake is on trend with our recent Shenandoah discovery and we hold a 20% working interest in the prospect.

Finally, we operate the Samurai prospect of Miocene test that we're currently drilling in Green Canyon Block 432, where we have a 33% working interest. The well is located about nine miles from our K2 field and is successful, could potentially be tied into our Marco Polo production facility.

Speaking of K2, we completed drilling the Green Canyon 606 number one during the first quarter and encountered more than 110 feet of net pay confirming the southern extent of the M20 sand, which was the well's primary objective. We expect to complete and bring this well online in the second quarter.

In Brazil, the transocean Deepwater Millennium drill shift continues to drill the quality of prospect in Espirito Santo Basin. As reported to the Brazilian regulatory agency, the well encountered a hydrocarbon shows in the upper zone in the secondary post-salt target. But we still have about 2,000 feet to drill until we reach total depth in the primary pre-salt objective.

Once we complete drilling operations in Qualia [ph] we plan to move the rig to the Gouda prospect, which is also located in the Espirito Santo Basin and has both pre-salt and post-salt objectives.

During our investor conference in March, we announced our plans to drill 12 high impact deep water wells this year. Each targeting gross risk reserves of at least 112 million barrels of oil equivalent.

We've complete one of these wells at Tweneboa and we're currently drilling four others that I just mentioned. So, we still have an exciting 2009 calendar year ahead of us. With seven additional exploration prospects in West Africa, Brazil and Southeast Asia.

Based on our discoveries today, we have increased our 2009 expected net discovered resources to approximately 350 million barrels of oil equivalent, a 50% increase from the estimate we provided in our March investor conference, again validating the depth and quality of our exploration portfolio.

We continue to see positive results in our U.S. onshore exploration program as well. In the Marcellus shale in north central Pennsylvania, our second horizontal well in the Chesapeake joint venture was tested and is currently flowing to sales at about 7.6 million cubic feet per day.

We have two other wells began testing at the end of the first quarter and three that are awaiting completion activities. Given the success of the Marcellus program, we're currently moving the rig to the area to begin drilling in operated horizontal well program beginning in the second quarter.

In the Haynesville shale, we completed in turn to sales of short 1800 foot lateral. We choked the well back to a restricted rate of slightly more than 2 million cubic feet per day and the well is still producing at about the same rate after 30 days of production.

We continue to gather information to gain insight into the performance of this reservoir. In the Maverick Basin in south Texas, we had some good success in the first quarter with our third horizontal well in the Eagle Ford shale that tested rates as high as six million cubic feet equivalent per day with a significant liquid component.

We also completed a Pearsall shale horizontal well with test rate exceeding ten million cubic feet per day. These E&P highlights from the quarter are covered in more detail in our first quarter operations report available on our Web site

One of the more significant key achievements of the quarter was the improvement made to our cost structure as LOE per BOE was well below guidance, driven by our cost savings initiatives and higher sales volumes.

We continue to make excellent progress in our efforts to improve drilling efficiencies. As an example, in Wattenburg during the first quarter, we achieved a spud to spud cycle time of just 66 hours. We're continuing to improve upon that record again this quarter. Overall, in Wattenburg, we cut our spud to spud cycle times by more than 40% over the last year and a half.

Our focus on drilling efficiencies also resulted in fuel records for the quarter in Carthage, Boetscher [ph], Haley and south Texas. We also continue to actively manage our capital spending through these uncertain times. This includes taking action to reduce our U.S. onshore rig fleet.

During the quarter, we paid approximately $25 million in early termination fees, which shows up in the oil and gas transportation and other line in our financial statements. We've reduced our operated onshore rig fleet from an average of 58 in the fourth quarter to an average of 23 in the first quarter, a reduction of approximately 60%.

For the first quarter reported net loss of $0.73 per diluted share and there are items affecting comparability that are broken out in the tables attached to last night's news release. In total, these items increased our net loss by $0.20 per diluted share.

Turning to our balance sheet, as you know, we supplemented our liquidity position by issuing $1.1 billion of five year notes and ten year notes during the first quarter. The net proceeds are being used primarily for the repayment of debt maturing in September of this year. A portion of which we began repurchasing in the open market during the first quarter.

We ended the first quarter with about $2.2 billion of cash and maintain full access to our undrawn $1.3 billion revolving credit facility. We are committed to our world-class exploration program and development of our mega projects.

In recognition of this substantial value generated by the material future reserves and production they can provide, we'll continue to manage our portfolio and balance sheet to ensure that we have ample capital to fund these programs.

Our mega projects have continued to benefit from lower supply chain costs in the current market place and we'll be starting production from late 2010 through 2012. Delivering robust economics when the commodity price curve rebounds with the global economy.

Our operations remain on track to deliver volumes in line with our full-year guidance and we expect to grow sales volumes 1% to 3% in 2009. While spending at least 30% less capital on projects with near-term production than we did in 2008.

There is no question that this is a challenging market environment for the industry. And while Anadarko has continued to perform very well, we too face tough headwinds on the near-term natural gas outlook. We'll remain vigilant to make sure we responsibly manage through this tough period, while continuing to focus on delivering meaningful value to our shareholders, the execution of our growth strategy. With that Akiya, we'll open up the lines up for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Tom Gardner of Simmons and Company. Please proceed.

Tom Gardner – Simmons and Company

Hey, Jim, some operators have been touting multi TCF potential in the Pearsall and Eagle Ford shales in the Maverick Basin. I just wanted to see if this was consistent with Anadarko's view. I know it's early but could you give us a view on your economics in these emerging plays?

Jim Hackett

Tom, I appreciate the question. I might ask Bob Daniels to give us his thoughts on that.

Bob Daniels

Sure. Tom, I think that clearly the multi TCF number from a gas and place number is there without a doubt. I think the key question we're trying to answer is the economics out there. Our drill costs need to come down from where they are, but we're making good progress on that. And then we need to monitor how the wells are going to perform. We've got a couple of Eagle Ford wells online right now and we're bringing on 10 million a day Pearsall well here shortly. And then we'll watch and see how those perform. Meanwhile, we're out there moving a rig in to drill some more wells and some get more data because we do like what we're seeing and we recognize there is a huge resource potential there. Now, it's making it all work.

Jim Hackett

Tom, I think the fact that you got gas prices where they're at kind of foreshadows why Bob is making a comment about drilling costs. I think where you're in a Eagle Ford with little higher liquid content, there is obviously an advantage there today and that revenue stream.

Tom Gardner – Simmons and Company

Thanks for that. Just thinking about your onshore hedging strategy going forward, given the volatility we're seeing in the domestic markets, particularly, the gas market, are you considering becoming more aggressive with respect to you’re your hedging strategy when gas prices climb above marginal costs?

Al Walker

Tom, this is Al Walker. I think you'll continue to see us take a cautious view of natural gas market. I think we're going to take a pessimistic view and hope for the best. I believe that maybe better things are out there. But I wouldn't be surprised to see us continue to take some of the risks we see in natural gas price discovery off the table.

Tom Gardner – Simmons and Company

Got you. And Jim, one last question. I want to address to you given your involvement in some of the organizations such as the API. Given the scope of proposals in Washington, that may affect E&P, just wanted to get your view on which legislative initiatives are likely to get passed under this administration.

Jim Hackett

Well, it's clear that they want some pay force and I think that they appear to believe that there is an easy target there with regard to oil and gas companies. I think that they're running into a bit more resistance on a number of fronts than they thought they would. And, of course, we thought it was a bit hypocritical to be attacking the industry you suggest that you want more domestic security from. So, we're up there fighting the good fight as everyone else hopefully in the industry is continuing to do too. I've always thought the one that had the most risk was really the offshore severance tax issue. But I think that's challengeable too.

The reason why I think that has more risk is simply because it's attached to bigger oil companies than the independents. I think particularly, when you get into the independents it seems that there is a much more receptive political willingness to be flexible. But I think the Gulf of Mexico is viewed as being the territory of bigger companies as well and that's the one that we, of course, have had tremendous results on in the courts and I think because of that, we feel pretty good about our chances to ultimately keep most of the value that is out there.

Tom Gardner – Simmons and Company

Thanks again, guys. I'll hop off.

Operator

Your next question is from the line of Ben Dell from Bernstein. Please proceed.

Ben Dell – Bernstein

Thanks. Hi, guys.

Jim Hackett

Hi, Ben.

Ben Dell – Bernstein

I guess I had really just a question around your international exploration portfolio. When you look at Sierra Leone and your plans there in Liberia, can you give us any update you have any desire to farm down or farm out those assets, whether that's part of the process that you're looking at? And I guess the follow-up, given the success in Ghana, would you consider taking an additional rig? I mean we've heard Devon talk about farming down some of their assets and maybe letting a rig go. It seems the prices are coming off and there is an opportunity there.

Bob Daniels

Ben, this is Bob Daniels. We'll start with Sierra Leone and Liberia. The potential that we see there is the same as what we saw in Ghana pre-drill. The Venus prospect we have in Sierra Leone that we plan on drilling in the second half the year is a look alike to what Jubilee was pre-drill. So we're very excited about the opportunity there. Now, we ended up with a fairly large interest and so we have taken the opportunity to trade some interest to really increase our position in West Africa. We're not laying it off just to layoff interest, but it's actually to spread our opportunity set. To drill those wells, we're going to take the Dolphin out of the Gulf of Mexico as soon as it is done with Samurai and it's going to come over and drill Sierra Leone. It then going to move down into Cote d'Ivoire and we've just been awarded or had government approval on a block in Cote d’Ivoire which will again, same play type. And I guess what I want to say on the overall play out here is all the way from Ghana beyond our Sierra Leone blocks, we see that same type of potential; this play extends through there, the petroleum systems, pervasive through that area. We see a number of these Turonian age fans, all along the margin and we think that the blocks we've picked up are extremely well-positioned to test that concept. And we'll start that with Sierra Leone and the rig moving over there.

Ben Dell – Bernstein

Okay. Great. That's all I had. Thank you.

Operator

Your next question comes from the line of David Heikkinen from Tudor, Pickering Holt. Please proceed.

David Heikkinen – Tudor Pickering Holt

Hi, Bob, just a follow-up on that. Can you give us your working interest now and the blocks in Sierra Leone, Liberian and Cote d'Ivoire?

Bob Daniels

In Sierra Leone, we have 50% working interest. In the Liberian, the three blocks in Liberia, we have a 40% working interest. We were just awarded Liberia block 10 here recently. We're going to have 100% working interest in that. And then in Cote d'Ivoire, we anticipate having about little more than 50% interest in that block. We also anticipate getting additional blocks beyond that through some additional swaps and things that we're in negotiations on.

David Heikkinen – Tudor Pickering Holt

And just thinking also in West Africa, do you have any perspective on the cosmos status or sale or anything you can share with us would be hopeful.

Bob Daniels

I really don't have anything on that.

Jim Hackett

David, we may have something, but we're not going to tell you anyway.

Bob Daniels

Kind of hopeful.

David Heikkinen – Tudor Pickering Holt

And then in Mozambique, this will be my last question, does the exploratory drilling campaign that begins late '09, that is the onshore component. Then you go offshore. Is that the offshore component that begins late '09. Just wanted to make sure I had my guess right.

Bob Daniels

The rig that I mentioned that's coming out of the gulf, it's going to go to Sierra Leone, Cote dI'voire, then it's going to sail around and get to Mozambique either late fourth quarter '09 or early in 2010. We'll start drilling our deep water program at that time with the dolphin. The onshore well needs to be drilled I think before the end of March 2010. We're out looking for the rig and it may spud very late fourth quarter or be in the first quarter of next year. Both programs will start about the same time I guess is the short answer.

David Heikkinen – Tudor Pickering Holt

Alright, thanks.

Operator

Your next question comes from the line of Doug Leggate from Howard Weil. Please proceed.

Doug Leggate – Howard Weil

Thank you, good morning, everybody. Couple of things from me. First of all, on your production guidance for the year, obviously, Q1 was a lot stronger than your guidance, but you haven't changed the full year. I'm guessing that similar CapEx budget and cost coming down, you're getting a little bit more bang of your bucket what you are spending. So, conceptually, can you just talk about why the guidance hasn't been changed and how you're feeling about that right now?

Bob Daniels

I'll let Chuck fill in as well. Maybe in advance of caution, as you know, we've got still production shut in the gulf so the second quarter we guided down to be a little weaker because of that. And still we have the lifting issue, not repeating itself in the second quarter necessarily. But we still feel very good about the momentum. We've got building. And I think we feel good about our numbers and we've got to continue to watch how commodity prices do and how our rig position sits. And I think it's too early in the year to be doing something different, frankly.

Charles Meloy

Doug, we do have a lot of momentum in our program. Rockies has been an outstanding result for us. We continue to see growth in all the major fields out there. The programs that we have underway. I guess the caution we have is we haven't gone through hurricane season yet. So we always leave ourselves a little room for hurricane season. But the momentum is good and I think we're on a glide path to hit our numbers without a lot of risk.

Doug Leggate – Howard Weil

Great. Just a couple of quick follow-ups. In the Rockies, obviously, your spud to spud day circle have come down quite a bit. I guess with the liquids component and some of the fuels you're operating, can you just talk a little about how the break evens look right now and those things? I guess the contrast I'm looking for is Devon yesterday was saying that there's not a whole lot of things you can drill at current gas prices which are MPP [ph] positive. So just give us a run down as to where things look for you guys in the Rockies right now?

Charles Meloy

Our focus has been where we do have the greatest liquid concentration that's in the Wattenberg field, still has very good economics. You may know that recently, we installed the liquids line out of the greater natural buttes which has given us a great uplift. With regard to pricing net backs to the buttes which has improved the economics there. They are challenged across the board. As prices stay down and we've continued to lay down rigs. And in consideration of that. Across the board in the southern, we see the similar activity. We've been focusing on where the liquid concentration is the greatest Carthage, Boetscher, and the Haynesville area continue to show reasonable economics but they continue to be challenged if the prices continue to stay low and we don't see offsetting price decreases in our service cost.

Doug Leggate – Howard Weil

Great. Final one for me is I don't know if you can answer this or not but the Eagle Ford, some of the issues your partner has done there is facing right now, what are the things shaking out for you done there? Has there been any disruption to partner participation funding or that kind of stuff. Is it a possibility you might be able to, would you want to increase your position in that area? That's it for me.

Well, our partners continue to execute the program. They are in a bit of financial trouble but they continue to execute this program. I think they view this as their star asset in their portfolio and have continued to progress the program and as Bob mentioned earlier, with the recent results, I think they have a lot of enthusiasm for this area and with both the Pearsall, IPT that we saw over ten million a day and the results in the Eagle Ford that has been out there, I think you'll continue to see them say this is one of their star assets and execute to what their capacity is.

Doug Leggate – Howard Weil

Okay. So no prospect of you increasing your position down there?

Al Walker

Well, this is Al Walker, I think you might see us whether it's via any particular issues coming out of TXCO and what they do or don't do, that would be a little difficult for us to speculate on. We have a very large acreage position as it currently stands and we think a pretty good area. But opportunistically, we could add some leases in that area, in places that we currently see being equal to or better than the acreage position that we currently have.

Doug Leggate – Howard Weil

Okay, great. Thank you.

Operator

Your next question comes from the line of Brian Singer of Goldman Sachs. Please proceed.

Brian Singer – Goldman Sachs

Thank you, good morning.

Jim Hackett

Good morning, Brian.

Brian Singer – Goldman Sachs

You've drilled I think or just completed two wells in the Marcellus. Can you talk regionally within your acreage blocks, what you think is prospective? And how you're geographically choosing the next few locations, I guess by the end of this year's program, what percent of your acreage will you feel like you'll have a good sense regarding prospectivity?

Bob Daniels

Brian, Bob Daniels again. We've got over 600,000 gross acres out, we think it's right in the guts of the prime Marcellus play. The focus so far has been up in the northeast part of that around in Bradford County primarily and that's been driven by our partner. We have two AMIs out there. The northern one is with the partner Chesapeake, and they've been very active. That's where the two wells that you mentioned have been drilled. We got an additional two wells that have been tested and hooked up that are producing in the same sort of magnitude, so, we're real pleased with that area up there. At the same time, down to the south, we have our operated position and we're going to be taking a rig in and starting drilling our own wells there, our own horizontal wells. We drilled some verticals later in the second quarter or very early in the third.

So we're going to be out there testing that, but given that this is an area that ranges, just for scale, from about Dallas to Houston in size, is where our acreage position sits. It's going to take us some time to actually prove up all of that acreage. Now we do think that we're going to get quite a few wells down. We may have 15 wells to 20 wells down this year, horizontally spread through the area, but it's still a bit very large acreage position. So, we've got a lot of work ahead of us and we're getting after it now.

Brian Singer – Goldman Sachs

Great, thanks. And secondly, when you look at the strong results you and others have seen in the Marcellus, Eagle Ford and Pearsall, how does that impact your longer term natural gas view? And maybe more specifically at Anadarko, your Rockies gas field?

Jim Hackett

I think, Brian, we're all trying to wrestle with what are the efficiencies that we're extracting in the current environment, whether it be from horizontal drilling or better spud-to-spud cycle times, and how the drop in the rig rate actually impacts onshore production and then what happens with the LNG coming in. It's not a model we can easily get our hands on. And that's why I think we want to make sure we stay in a good balance sheet position, in the event that it's worse than we think. But obviously it's very weather dependent, very LNG import dependent. We have a lot of confidence in the drop of rig rates that everybody is experiencing strength in the picture from a supply side. But it's wonderful how responsive this industry is, but we still need the global economy to start moving the other direction to really solve this issue.

Al Walker

Brian, this is Al Walker. I think to add just to Jim's comments briefly, from an asset footprint perspective, I think you will over the next three years to four years see more of our activity headed in the direction of certainly the Marcellus for the reasons that Bob highlighted. I think if that drilling through the course of this year continues on the path that we see it at today and hopefully we'll see even better in the quarters to come, don't be surprised to see us add to our capital allocation to the Marcellus. I think for Anadarko, we'll always want and have a really good, both production and reserve engine in the Rockies. But being able to complement that with Marcellus, Haynesville and prospectively, Maverick, would give us we think a really nice-looking asset footprint onshore and it would also allow us to have very low cost producer in any of those basins, as we look out in any 12-month period how we want to allocate capital.

Brian Singer – Goldman Sachs

And when you think about increasing capital spending in places like the Marcellus, would you think about that leading to an overall increase in the budget or reducing CapEx elsewhere?

Al Walker

It would be a rebalancing. I'm not sure from the numbers we are talking about this year that we didn't see a whole lot of improvement in commodity prices next year that we would be encouraged to take the capital plan above, where we currently are spending. But you would likely see us continue a different mix as we go forward with our onshore drilling activity. That's the point I'm trying to make.

Jim Hackett

We're not in a budget increase mode at this point. We're in a budget control mode.

Brian Singer – Goldman Sachs

Thank you.

Operator

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

David Tameron – Wachovia

Hi, good morning. Jim, just first on the CapEx comment you just made, any chance you decrease, I mean, you've laid down a lot of rigs, you're relatively unhedged for the back half of the year. Any chance your CapEx goes down rather than stays flat for the remainder of the year?

Jim Hackett

I think that's why we gave the range really and I think we're making good progress on it but our view was that to execute on these mega projects and conduct our exploration program, we built up this big inventory that is so attractive that we needed to have the kind of capital available for this year. As we get into 2010, it becomes a little more flexible and we'll update you on that as we get closer to that period.

David Tameron – Wachovia

Could someone rank prospects for me? As I think about big stuff that's drilling I mean where do you put Sierra Leone versus the Gulf of Mexico versus Tweneboa? Can you rank as far as high profile, I guess, highest resource potential on down, just some of the wells over the next nine months you'll be drilling?

Bob Daniels

That's a hard one. We don't typically try to do it that way. What we're looking at is and have said that we're going to drill 12 deep water wells that all have more than 100 million barrel resource potential and we've got one of them down, we've got four drilling now. All of the prospects that we're going to be drilling are excellent prospects. I mean, we've built such a portfolio here that we've been able to high grade and drill the best of the best. And so to say, we like the Gulf of Mexico better than Sierra Leone or something like that just doesn't really make a lot of sense to us. They are different plays. Certainly, what we see in the Gulf of Mexico and the track record we've got there, we just have a lot of confidence, we're going to continue to deliver out of the Gulf of Mexico. West Africa, we see as a huge emerging play, based on the Jubilee success. And then follow on at Odoom, Mahogany Deep, Tweneboa, and then the acreage that we've been able to capture in this trend. We just see that we're going to have an awful lot of good things coming out of West Africa in the future.

And then, of course, we announced the Wahoo discovery last year in Brazil in the pre-salt that we see an awful lot more potential there. So I like all of those areas. And at the end of the year, we should be drilling over in China. And that's a great looking prospect. So, I would just say our inventory is very, very deep, we high grade it and I just will be watching all of the wells because they all have the potential to be very significant.

David Tameron – Wachovia

Okay, let me try one more thing, Bob. Let me go back a few years and take one of Jim's old charts. What are the spiderweb charts if we were to plot that, what would be the high risk, high reward in the upper right hand corner?

Jim Hackett

The high risk, high reward, yes, I guess I would put South China Sea in there. Mozambique is going to be in there, mainly because of just lack of information out there. Our 3D that we shot last year is looking really positive. So, we really like what we're seeing, but nobody's drilled any deep water wells out there, so you got to say that's a frontier basin. But the potential is tremendous.

David Tameron – Wachovia

Thanks for that color. One more question for you, Bob. The Marcellus, at the Analyst Conference at that time, had you guys planned on a rig up there this year or is that something that's based on the recent well results you've changed your plan a little bit and decided to move a rig? How has that thinking changed at all and if so, why?

Bob Daniels

Yes, I think that we always plan that we were going to need to start gathering information on our operated area this year. So, the timing is probably been brought forward a little bit. And then we may be a little more aggressive in acquiring that information because of the positive things we're seeing. But we always did have plans that, we always said, we had to be prudent about learning what the resource plays were and that was going to be our plan this year and so, yes, we were planning on activity up there.

David Tameron – Wachovia

Okay. One more for Al and then I'll jump off. At the conference, I think it was you, Al, you put out a maintenance CapEx target, 65% at 5 and 50 I believe. Was that based on current service costs? Was that based on future service costs? Are those numbers still accurate going forward?

Al Walker

Yes, that was based upon the service costs as we thought we would see them through the course of this year. Probably not the service costs as we would see it if you were thinking about it in the 2010 context. And lot of that had to do with the fact that as we got down to just only a contract only rig fleet, there was a lot that had been done, could have been done, but a lot more to do to improve day rates for the rigs we would have running.

David Tameron – Wachovia

Alright. So, 5 and 50, 65% 2009 number.

Al Walker

Yes, nothing on that has changed.

David Tameron – Wachovia

Okay.

Al Walker

If anything on the completion cost, that we're continuing to see improvement there, but the big ticket, as you know, is more on the rig itself.

David Tameron – Wachovia

Okay. Thanks.

Operator

Your next question comes from the line of Gil Yang of Citigroup. Please proceed.

Gil Yang – Citigroup

Good morning. You've just drilled a new well in K2. Can you tell us what you're learning about K2? Are you extending the down dip water contact? Have you identified the water contact? Have you extended the down dip level of oil? And what about the aerial extent of that reservoir?

Al Walker

Yes, Gil, it is very exciting what we've done here recently in K2. We've drilled two wells. One on the far west side of the field, which extended the contact down the field but we also found the water contact. And then as you move the most recent well would be almost due south of the original development into a new fault block, which has substantially expanded our oil and place position that is proven and known. So, we're filling up the range we indicated, the two to four billion barrels in place. And so now we have a very good picture of the entirety of the field. It is a very exciting area. We found some new sands, as we went off structure which we didn't anticipate, which has continued to grow our view of the field. We should be completing those wells later this year and get some good production performance from them. And that will give us additional information as we move forward.

Gil Yang – Citigroup

And you're thinking of just putting these wells on artificial lift now?

Al Walker

The new wells will just be flowing to the platform with their reservoir pressure. They're going to be very strong wells. If you're referring to the EOR project, I think that we've put that at these prices and cost, we kind of put that in the background. And the field itself, what we would like to look do is look at some artificial lift techniques, either down hole in the wells or actually in the sub-C system. And we're evaluating all of that right now.

Gil Yang – Citigroup

For the new well, you've drilled – where are the new wells you think will flow strongly, is right on the platform?

Al Walker

They'll be the two new wells, the 606 well we just discussed, and the other well is on the west side of the field.

Gil Yang – Citigroup

Okay. And will they have more longevity than the original K2 wells do you think? Because the reservoir different and there is more reservoir pressure?

Al Walker

No, they're in new areas, Gil. So, they shouldn't be depleted. They should have near original reservoir pressure. And we've also seen we've seen through time, more and more water drive support that we didn't see originally.

Gil Yang – Citigroup

Does that just suggest you're pulling on the early wells too hard, and or has something changed in the reservoir?

Al Walker

No, that doesn't suggest we were pulling them too hard. The original wells, you might recall, this is a very large reservoir with a very long column, a very tall column on the whole. And we were producing near the top. And so, as we move down the structure, and we had to shut in with a hurricane down time, we've seen stronger and stronger performance from the water drive, and that improves your reservoir pressure.

Gil Yang – Citigroup

Alright, thanks. Second question I've got is you mentioned that frac spreads in the quarter were very positive helping volume a little bit. Can you give us an idea over the last maybe six months how the frac spreads and volumes, related to each other to your account?

Clay Bretches

Yes, sure, this is Clay. The frac spreads have been positive for the full year. We expected early on, that they would not be. As you remember, they dropped in December near zero. We've actually seen them hovering between $2.00 to $4.00 over the past several months and anticipate they'll continue throughout the year. So, it is has actually been a positive surprise to us on the frac spreads.

Gil Yang – Citigroup

And can you translate that into a volume benefit?

John Colglazier

Yes, this is Colglazier, Gil. When we gave guidance, we thought with the frac spreads that we were anticipating at the beginning of the year, we would – if you will – we would lose around a million, million and a half barrels from it. So, this is going to imply that our NGLs have increased. And I think we've reflected that in our guidance, that it would go up about a million barrels over the year. And bear in mind, too, when we gave initial guidance back in February, we also thought that the 30,000 barrels a day, that is shut in by the third party infrastructure offshore, would be fixed by the end of the first quarter, and that's now moved to the end of the second quarter. So, that's an incremental three million barrel hurdle that we're overcoming, part of the momentum Chuck was talking about earlier.

Gil Yang – Citigroup

Okay. And do you have better confidence that the 2Q target is going to be met than the 1Q target was?

Clay Bretches

Yes. We now see that ANR, with the Anaconda line has now started the prefabrication. We had the permits that are necessary for the MMS, and they'll be mobilizing here within days to begin the work on the line.

Gil Yang – Citigroup

Okay. Great. Thanks. Very helpful.

Operator

(Operator instructions) Your next question comes from the line of Phil Dodge of Stanford Financial Group. Please proceed.

Phil Dodge – Stanford Financial Group

Hey, everybody. Thanks for the comments. Just look at the utilization of Independence hub in the March quarter, a little above what I expected, is that representative of what it will continue or will it come down?

Clay Bretches

Thanks, Phil. We did have a great month in March at the hub. It continues to perform above our expectations. You know, we've been using about 800 million a day for the platform as our expected average run rate, giving ourselves some room for downtime and downstream upsets, et cetera. Realizing this is an incredibly large platform, all pressed, all of its gases compressed. So, it is a very large operation but we've continued to see improvements in the way we run the field. And running over 900 million cubic feet a day on average which is spectacular performance by our field operation. We see in the wells we have, additional capacity above and beyond the current run rate. So, we can foresee it going on for awhile now, and that's very encouraging to our company. It is a great backstop on our production performance.

Phil Dodge – Stanford Financial Group

Do you think it will make that in the June quarter?

Clay Bretches

In the June quarter?

Phil Dodge – Stanford Financial Group

Current quarter.

Clay Bretches

Current quarter, yes. We'll absolutely see that production performance continue through the second quarter.

Phil Dodge – Stanford Financial Group

Okay. And my other question, sort of from a different direction, how high would oil and gas prices have to recover before you would consider raising the 2009 budget?

Jim Hackett

Do you want to take a shot?

Al Walker

This is Al. That is not a part of the equation that we spent much time working on. So I'm afraid we just don't have a good answer for that one.

Phil Dodge – Stanford Financial Group

I hope you have that opportunity.

Jim Hackett

I think that, you know, we probably would keep a little dry powder, actually, if we got a little better recovery because we think we've got real tremendous growth vehicles.

Al Walker

I guess if we were to increase it at all, it would be in places where we see economics onshore being a little more robust than we currently expect them to be.

Phil Dodge – Stanford Financial Group

Where would it be specific? You mentioned the Marcellus. Other areas or would that be the prime?

Al Walker

I think Marcellus would be probably the primary beneficiary of additional capital, if we continue to see the drilling that we have today continuing. And we – we're very optimistic about it because it has such a good break even cost structure. And it is in a premium area for gas prices, and I think followed behind that would be pretty closely our Wattenberg field. And the reason is we produce a lot of associated liquids there, and in the second quarter, a pipeline that we've been waiting for to go online, White Cliff will actually start production which will help our margins coming out of the field quite a bit. Somewhere in the $6 a barrel pick up for us at the well head. So, those are two areas if we had a place to put additional capital, I think that's where you would see it. But for now, I think we're being fairly conservative by the way in which we're allocating capital.

Phil Dodge – Stanford Financial Group

Okay. Thanks very much.

Operator

Your next question comes from the line of Ray Deacon of Pritchard Capital. Please proceed.

Ray Deacon – Pritchard Capital

Yes, hey, I was wondering how many rigs do you plan to run in the Marcellus and the Eagle Ford, Pearsall and the Haynesville for the rest of this year?

Al Walker

We'll start in the second quarter, we'll start with one in the Marcellus, and we'll ramp it up to probably three to four by year end, from a company operating perspective. And of course, Chesapeake operates the remainder of our AMI in there and they're probably in the six to seven range, Bob. Something like that.

Jim Hackett

Towards the end of the year, may get up to 9 or 10.

Al Walker

In the Pearsall, Eagle Ford area, we'll likely just have one, that will be drilling remainder of our prospects out there, and trying to size up the field and look at its forward plan. And the Haynesville, either one or two for the remainder of the year.

Ray Deacon – Pritchard Capital

Okay. Got it. And just one follow-up on the Marcellus. What is your take away in the northeast, and in the other areas, and do you have any plans to build that midstream.

Clay Bretches

Ray, this is Clay Bretches. We're evaluating our take away options right now. There is adequate take away at present. But, as you know, there is a great deal of ramp up in that area. So we're evaluating a number of alternatives. A number of companies that are vying for our business up there. A lot of projects, a lot of expansion projects. And as you know, we're right in the heart of the market center. So, we love the differentials up there.

Ray Deacon – Pritchard Capital

Got it. Thanks.

Operator

At this time, there are no further questions. I would like to turn the presentation back over to Mr. Jim Hackett for closing remarks. Please proceed, sir.

Jim Hackett

Thanks, Akiya, and thanks to all of you on the call. And I hope you have a great day. Appreciate it.

Operator

Thank you for your participation on today's conference. This concludes today's conference. This concludes the presentation. You may now disconnect. And have a great day.

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Source: Anadarko Petroleum Corporation Q1 2009 Earnings Call Transcript
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