Al Walker - President and CEO
Thomas Driscoll - Barclays Capital
Anadarko Petroleum Corporation (APC) Barclays CEO Energy-Power Conference September 12, 2013 9:05 AM ET
Thomas Driscoll - Barclays Capital
Al Walker will be our next speaker this morning. Al is Chairman, President and CEO of Anadarko. He joined Anadarko in 2005. Anadarko has a hand in a lot of exciting plays around the world, from the Niobrara to the Deepwater Gulf of Mozambique and lots of things in between. With that introduction, let me turn it over to Al.
Thanks Tom. As always, it’s a pleasure to come to this conference. It's not only well attended, it's well run. So, thank you for coming and it’s a pleasure to be here. As we had started this morning, I think many of you know, culturally, for a long time we've tried to be a company that is very proud of our employees. We're very proud of the value system that we have at Anadarko and our culture means a lot to us. Consequently we do think despite that sounding like a lot of platitude, it is a differentiating factor for us coupled with the fact that I think we give you very transparent and multi-year views as to where we're going and why we're going in that direction. A lot of value we believe is in that equation and this morning I'd like to spend a little bit of time trying to impress upon you how we see things.
In our world, today we have Chuck Meloy who runs Onshore Exploration and Production, Jim Kleckner who runs our Deepwater Development and Operations, and Bob Daniels who runs Deepwater International Exploration. Simply put, what we think about from a value equation is, in the onshore business that Chuck Meloy runs we see that as our short cycle investing. It's very important, as I have said in different occasions, [inaudible] Mr. Driscoll’s production growth for debt adjusted share, I believe that's a very important metric for not only investors but for companies to be sensitive to, and it's our short oil investing today that is a real focus, I will spend some time on that this morning, but the onshore business largely is where we do our short cycle investment. The deepwater international development activities are typically more intermediate in nature, some are longer and where we have those, we've tried very hard to use third party capital in place of our own capital for the development and so therefore using a very efficient approach to our own capital by improving it through the use of others.
International exploration and deepwater exploration is frankly building for the future. It's what we see as a way of creating that option value and I think Bob Daniels and our exploration organization have done an exceptional job, I’ll throw a few numbers at you as we go through this, but it's really building for the future. I can tell you without any hesitation, through the end of this decade, we don't need additional exploration in the portfolio. But that doesn’t mean we're going to stop drilling, doesn’t mean we are going to stop exploring because I am pretty confident that Bob and Frank and Ernie and our folks in our exploration organization will find deepwater opportunities tomorrow that might be better than the deepwater opportunities we have already. So consequently, what we will continue to do is look to monetize and look to hydrate our portfolio and where appropriate, use third party capital.
Now we do that not only with development we do it with exploration too. As an example, with Phobos this year, which we drilled with ExxonMobil and Plains which is now Freeport we were promoted or we promoted rather ExxonMobil into that. We had a carry then on that particular well and if you recall a few years ago when we had our Lucius discovery we were carried on the exploration there as well and then when we got into development we sold down part of it in order to basically have very little of our capital totally at risk. And so that's sort of the way we think about managing the short, the intermediate and the longer cycles of our capital in our portfolio.
We don't want to let our exploration success cause us to wake up one day and be very long cycled with the way in which cash comes back to us because we know that will work against production growth for debt adjusted share and the ability to grow in the near term. So I think this slide really for me sets up philosophically how we think about running things at Anadarko, how we think about managing that portfolio.
Now production growth is very important from every company's perspective and doing it at a competitive cost is what separates some from others. I think you’ve seen for some time now we're one of the safest in our industry as well as one of the lowest cost. Those come through a lot of effort and culture. We believe that a safety culture is a first important thing on the checklist of things to do and we couple that with trying to be wherever we can the low cost operator in any particular region whether that's onshore or in the deepwater or international.
You’ve also seen us through the years do a pretty good job I think of monetizing things. I made reference to that a few minutes ago. We've to date monetized here recently about $16 billion worth of assets. We continue to try to find ways to use third party capital to improve the rate of return we have on our own portfolio.
Think exercising financial discipline and demonstrating it are two very important things I think if you think back to the company that was created in 2006 through the combination of Anadarko, Kerr-McGee and Western Gas Resources. Those of you that were around then will recall that we were 69% debt to cap on the day on which those transactions closed. As we look at this particular year, particularly in light of where we are now with a closing on our 10% sale in Mozambique to ONGC, we probably will be towards the bottom end of our stated range of 25% to 35% on net debt to cap. We think financial disciplines are very important, I think it’s a great way to consider how you do things, and is a central part of our operating strategy.
Now like many companies, different gas prices give us different growth trajectories and you can see here in this cartoon that 4.50 gas obviously gives us a little bit different growth trajectory but there is probably every company in this conference that can tell you that.
One of the benefits of having a virtually equal mix of oil, liquids and gas, is the ability to take advantage of where the opportunities are. If you think back to 2008, the average gas price for the year in 2008 exceeded $11 per mmbtu, pretty impressive, particularly in light of the fact we're looking at something with a three handle on it today; and not a lot of prospects for being a lot higher than that in the near term. But growth for us in the next three to five years is largely going to be with oil and liquids, some of that's going to be onshore and some of it’s going to be deepwater international. And the -- in the Wattenberg today, we have about 4,000 or more identified drilling locations and in the Eagle Ford play another 2,500. So just in those two alone we can point to a lot of specificity where we see our growth coming from, what the well head margins look like and today there are very few places in the US that give us competitive well head opportunities to look at the deployment of capital, the Marcellus is probably the only dry gas basin today that has some advantage and frankly, with a gas price below $4 in our portfolio, it doesn’t feed all that well and we have a very minimal activity there at this time.
I think you’ll continue to see and I just don’t know where it will come from, exploration success, I believe in the culture, I believe in the process and I believe in the people. I think exploration is something that we talk about; few companies do and do well. I think it’s a hallmark and has been for a long time for Anadarko.
Now if you look at 2013, since we're more than halfway through the year, I think we told you at the beginning of the year that we expected to move into higher margin opportunities. We've done that. We generally are looking between 30% and 100% internal rate of return on the types of things we invest our capital in this year. We have various large oil projects El Merk being one in particular that has come on through the course of this year and it's on track to finish the year with all three trains, which will at the end of the day, and at the end of the year give us about 30,000 net barrels to Anadarko as we go into next year for a full year.
We think this year we'll have about 10% growth in our oil volumes which is impressive given the denominator we work from and if you think back and sometimes knowing where you’ve been is a good indication of where you're going, when you look at the three year and the five year compounded annual growth rate, you'll note that in the five year period, we've grown oil on a compounded basis for five years at 10% and for the last three years, that's just about 9.5%. So as markets changed, and well-head opportunities changed, we were able with the flexibility in our portfolio to move things around, to be able to give us the best type of return on capital opportunities possible. I think that also is a very distinguishing factor and it also speaks to the need and the desire for our part to be very balanced.
Now the next slide gives you some idea, it’s a little busy but its nonetheless important and as you can see, we're fairly concentrated onshore in the US in terms of whether our gross is going to come from, our well as I made referred to a minute ago is largely coming out of the Wattenberg, Eagle Ford and Permian Basin and we have been adding at about $35,000 for flowing barrel production into our mix this year. For those of you that are students of the acquired exploit model, you'll note that that's about half of what companies are paying to acquire the same types of flowing barrel. So, pretty attractive in terms of your ability to do organically. And I think as you’ve heard us talk today, we see like others, a real developing opportunity in the Delaware basin with the Wolf Camp, where today we have now six rigs running, our appraisal work through year in will likely give us a very clear understanding of the type of development activity we're going to look for, for next year and probably also noted that in our most recent press release around our 10% sale to ONGC, we believe that the net after tax proceeds there can be best deployed onshore and this will be one of the places we take it.
Now coming back to the comment I made earlier about where we are in our net debt to cap range, as we approach 25%, obviously, we can't any better than you determine what a commodity debt is going to look like in '14 and '15, but while we're pretty confident of is what our production base being a mix between oil and gas or I should say oil and liquids being fairly similar, we do have a good idea of the kind of where some of the growth's going to come from, but what we're going to have in the way of this additional cash and net of taxes is the ability to invest if we need to because cash flows are not there to invest in high oil margin properties on shore, Wolf Camp being probably one of those, but not the only one. We have quite a few other opportunities in the Powder River that we're seeing, the ability to advance things in both the Eagle Ford and in the DJ Basin with our Wattenberg field. So onshore we see a lot of oil and liquid opportunities that if commodity prices, particularly gas prices are soft and we don't have the cash flow that we thought we might, we will more than halve enough cash because I really am a believe that if you get down much below 25% net debt to cap, you are leveraged to your equity at that point is not fully being appreciated and at some leverage, prudently is better than having it be less than 25%.
Now, we've talked about the Wattenberg a lot, I am sure if you listen to Anadarko or Noble, you may be getting tired of hearing us talk so much about it, but I think in our portfolio today, it is unquestionably the most valuable asset. It has continued to be with the onset of horizontal drilling in this particular play. It’s a field that was historically drilled on vertical wells and wasn’t that long ago people referred to it as the gas field. Today, it's anything but. The liquids cut here between gas condensate and natural gas liquids is very high and being able to drill things horizontally for up to 5,000 feet and some that are now testing 10,000 in a field that historically has been drilled in verticals is really a new day.
We actually have the added advantage as you probably know of having mineral interest throughout this particular area and I think it's -- in our mind, we really do have a different equation than anybody else as a result of that. Roughly 60% of the wells we've drilled this year will be on that [indiscernible] acreage so we get that value pickup that you see here in this graphic and we're converting this as quickly as we can. We're still dealing with a market that had existing infrastructure, I am going to talk about that in a minute, but the need to continue to expand infrastructure to take advantage of the asset is pretty significant.
Talking about this infrastructure, you can see in the graphic here, a lot of work has been done, it gave us a great running start, but as we look down the road, we've been for some time building for the next day whether that's additional cryogenic capacity, gathering capacity and here more recently being a party to not only as anchor ship but an equity owner in front range express which will be built to interconnect into Texas Express which brings us into the Mont Bellevue market for natural gas liquids and moves us away from a Conway midcontinent limited capacity for ethane in particular.
This ability to continue to do this is also being augmented by a looping of the white cliffs pipeline where we also have a small equity interest. This will allow us to evacuate the gas condensate into Cushing where it can be blended with black oil, the Texas Express and the Front Range Express we believe will be operational next year. So that in conjunction with the expansions we have underway and will be starting with a cryogenic facilities, we really do have infrastructure trying to meet what we believe will be a substantial increase in the coming years and you can see that in the green portion of the graphic and that's why you see such a big step up there.
Currently we do have long pressure issues as do Noble, we think we can work through those pretty efficiently, through year-in, but this particular market has seen an incredible amount of activity, not just from Noble and Anadarko but from everybody else. So, we are still sort of constrained in the very near time with line capacity issues where wells were designed to deliver at 80 pounds of pressure and now they around 200 and so just the pure mechanics of that will need to be worked through.
Talking about the Eagle Ford for a minute, in our world, this is a cornerstone asset and clearly one that we believe we're quite successful with. I think you’ve heard us talk in the past about the need to pace infrastructure with the upstream activity. What we've done here for a long time as we've been able to bring 90% to 95% of our wells into production within 45 days of completion which allows us to really take advantage of the fact that the wells are being drilled quicker with less cost and the EURs now are averaging over 600,000 barrels.
With think we have around 2,500 core wells still left to drill and we hope that with the [indiscernible] plant which came online here earlier this year, our ability to extract a higher cut of the liquids and deliver that into Mont Bellevue will continue to make our well head margins here substantially better in the future.
The notion of drilling efficiency and cost control has really probably been one of the true hallmarks of this particular area where in this year we decreased by 33% over 2012 our average cost of drilling wells which is very substantial and if you are not as familiar with it, we are at a part of the Eagle Ford where gas on average is about 35% of the yield with oil or gas condensate accounting for around 40% and the balance being natural gas liquids. Very attractive. You can see in that bottom right hand graphic exactly what I am talking about with respect to the efficiencies we've been able to achieve and you can see on the left graphic what we've been doing on the volume side. So those set up pretty well.
Now moving into our mega projects, we are blessed if you don't mind me using that word, with just a tremendous amount of deepwater success on the exploration side and some of it now moving into development. The first up here is the Lucius which we'll be bringing online next year. This spar was recently put in place in the Gulf of Mexico and we feel very confident that it will be online as anticipated.
Healdsburg which was also recently sanctioned by the partners, we are having a similar spar being built in Pori, Finland that looks just like the Lucius spars, though as you have heard us talk in the past, its designed to or designed, want to build to approach, so a very similar spar will be delivered in the Gulf of Mexico, hopefully with a 2016 delivery for the he Healdsburg. Both of those are 80,000 barrel a day spars and really reflect our key strong project management capabilities to bring these online and on time.
Now recently you’ve heard us talk about what we've done in Mozambique and Mozambique we've done similar to what we've done with Lucius in Healdsburg, we've promoted down the development cost where Anadarko does not have development costs associated with the next phase. In the case of Mozambique and I'll talk a little more about this in a minute, we use cash rather than the carried approach we've done in the US, primarily because Lucius and Healdsburg were US properties and subject to the US Accounting and Tax regime. We were able to do those in a very tax efficient manner. We weren't going to have the exact same approach with the carried interest in Mozambique, and that's why it saw us move to a cash component rather than a carry component. It also allows us to take that case and reinvest it to grow cash flow and grow the rate of return on that cash before we need to actually invest it subsequently in Mozambique.
Gulf of Mexico, as we all have recovered from the moratorium, we've come out of this with some very significant results and I think you’ve heard us talk a lot about Shenandoah-2 recently and I think Shenandoah and that whole mini basin is something that [indiscernible] in our Gulf of Mexico exploration folks are just delighted and very excited about. We had about 1,000 feet of pay in the second Shenandoah well. We also had around 400 feet of pay in the Coronado well and the Ugitan [ph] well, we were at about 120 feet of pay.
Now we're the only company that's in all three of these. So we have a bit of a unique view of what this space might be able to provide in the future and combined with the other stuff that we see in the Gulf of Mexico, we're glad to say we're back to work and actually had a pace today with [indiscernible] where pre-2010.
Looking at some of the stuff we're doing outside the US, Ghana and Algeria continue to be a place where we have very high margins and high oil productions. If you have been following us, you know that we recently had our 10 complex approved by the government of Ghana as the next development there, it's an 80,000 barrel a day facility that we are working with our partners on this, FPSO, we believe will have first production in 2016. And also we've had the last of our TPE resolution payments that have now been received from Algeria, so our past discussions on being able to recover the TPE differences has now been completely resolved.
We also as I mentioned, are very far along and on track with El Merk and bringing [indiscernible] to production is anticipated this year. I've been in country twice already, we'll go back in October, actually go back in to the Sahara along with some of my counterparts, the Sonatrach and the Energy Minister to celebrate the conclusion in a very successful introduction of El Merk into the Algerian oil production mix.
So as we look into next year, we've had about 10% growth this year in our Algerian well and as we look into next year, with a full year production, that's going to continue to go up.
Mozambique, the front end of this week, I was actually in Tokyo. It’s a fairly large LNG conference there. As many of you probably know, we're sort of in that season of talking to potential LNG buyers about off take agreements to the LNG coming out Mozambique. There is tremendous interest amongst the Japanese utility buyers to be able to diversify into Mozambique. We have there an extremely unusual reservoir, very high quality, we're not going to require a lot of wells to be drilled to meet the requirements of the train, probably 10 or less wells will be needed to deliver 750 million cubic feet into a 5 million per annum train. We have ample space on the peninsula where we received 17,000 hectares of land and believe that we can bring this on and [indiscernible] next year.
Now, I know you’ve probably seen that we in ENR reached HOA agreement in December of last year, we continue to progress that. Today we're about 60% on our front end engineering and evaluation works, so the feed work is about 60% complete overall and about 90% complete as it relates to the offshore or subsea architecture. So, good progress, we're seeing a very supportive government. You probably might have seen in August, President Guebuza attended a conference in Aberdeen talking about what he sees as the need for the government to support, to decree law the various agreements that we and our partners will enter into and the need for contracts sanctity to be a critical part of what day the government need to deliver as a part of what we as investors want to see in our investment agreement.
So good progress on all of that. I will say that hope and I made this comment in Tokyo that we'll be announcing some of our HOAs through the course of this year in the next. We have had quite a bit of inbound interest and as I made reference earlier this week, we are looking at a combination of things on a way in which we will contract for that is not going to have to be 100% oil index, the way historically you’ve seen LNG.
On the other hand, the hybrid pricing that we are looking at will essentially give us the same type price at re-gas that we would get if it were oil index. And the Japanese buyers in particular are quite concerned if oil were to go to 200, what that would mean for LNG costs. Now from a rate of return perspective we are looking at gas landing in Tokyo or into other markets on a competitive basis through gas coming out of Gulf of Mexico. So we're real certain that we can get the type of price we need to get the right rate of return and not having a portfolio of buyers or foundational buyers in other projects that are in fact all oil index, gives us as an entry into the market more flexibility.
So, if I can, just to move through a few of these slides and leave a little room here for time for questions. Exploration will be and has always been extremely important part of what we do, but also like the fact that our guys are very commercial. We in the last seven years have spent about $8 billion on exploration capital and we've gotten $8 billion back in various monetization. So we've been working real well with other people's money.
The ability in exploration to develop and produce is not an easy thing and we do that through optimization I made to reference to and you can kind of see in this particular schematics some of the values I just made reference to, one of the things we like to do is divest the things that we don't think are the most optimal for us, and then move on. And so you’ve seen us do that and we'll continue to do that.
The balance sheet I made reference to earlier, you can see as of the end of the second quarter was around 29% net debt to cap and you can apply whatever you think the net proceeds are going to be through the course of this year. We're still in discussions with the government over that. You can see the deals that have been done, but we'll have a fairly attractive amount of additional cash coming on to the balance sheet and that's why I made reference to the fact that we are now down around the bottom end of our range. We doubled our dividend in the third quarter and as we understand and have better clarity around [indiscernible] which I don't have an update on today; I think we'll continue to look for opportunities to increase our dividend yield beyond what we have already.
The ability to do things on a very return focus manner against one of those things that we think about every day. Resource conversions, very, very important and value accelerations. So those are the three things that I think our executive management team focusses on. We look at returns, we look at resource conversion and we look at value acceleration. Our commitment to exploration is how we do, what we do and with that, I'll stop and hope to have a few questions.
Thomas Driscoll - Barclays Capital
I bet I don’t need to ask the first one in here. Question please.
Hi, do you plan to drill a third Shenandoah well next year, and if so what part of the year, approximately when might you drill that? Thanks.
You bet. We will be looking at a lot of things in Shenandoah. We're pretty excited, as you might imagine, with a 1,000 feet of pay, we haven't found the oil water contact yet, so as we roll out our 2014 exploration plans early next year, you can anticipate a lot more activity, not just in Shenandoah but in that mini basin in the aggregate.
Thomas Driscoll - Barclays Capital
I don’t see another hand. Let me ask this. You talked about this at dinner, you elaborated a little bit. You talked about getting towards the lower end of your debt to cap target; talked about acceleration, the question came up about a potential buy back at dinner, I am not sure the question came up on increasing the dividend at dinner, let me give you the opportunity to address those two things if I could.
Okay. Well as it relates to share buybacks, we're not philosophically opposed to it. In fact, many of you may recall in 2008, we announced the share buyback at a time where prices were giving us cash flow that was so significant that as we analyzed it, to use a financial term, it was beyond the efficient frontier of our organization to be able to invest that cash flow.
So what we did at that time is we took what we thought would be the efficient frontier for investing cash flow and anything over and above that amount with buy back stock.
Now as a company we philosophically for a long time believe that if you are going to buy back stock it needs to be somewhere in the 12% to 15% or more range in order to permanently change the capital structure. We are not proponents of or believers in buying back 2% to 3% or 4% of your stock permanently changes the capital structure and we can use that cash in a more efficient way elsewhere in the portfolio.
So today, I don't see an opportunity yet where would have the kind of ability to use cash to buy back that much stock, not opposed to it, because again we've done it in the past and we might find ourselves doing it again. In the near term, I think where we can, we want to increase the dividend yield and the dividend payout associated with our cash flows. I think we'll be a little cautious until we finally get an opinion out of Judge Crawford in terms of when we can do that. But I think once we have the clarity around that, you should expect that we'll continue to find the opportunity in the future to look for ways to increase the dividend yield and I think that more likely than the stock buyback is on the horizon for us.
Thomas Driscoll - Barclays Capital
Thank you, Al. I think we have time for one more.
Hi, I just want to clarify what [inaudible] said before in the presentation about LNG, you said a lot of Japanese utility are interested in buying sort of in the future. So when you said about the pricing is not going to be 100% oil indexed, can you get through that a little bit more detail how you think it's going to work out?
Well I think you’ve seen from a lot of the Gulf of Mexico LNG that's been announced, a hybrid pricing structure that includes in part indexing to a JCC oil component. You also didn’t see a Henry Hub component as well and I think that's where I am pointing you to in terms of the type of contracts that we believe that we’ll be entering into for off take agreements in Mozambique, they'll have a component, they'll be JCC or oil linked and then there will be a component that is Henry Hub based with a constant factor over and above the Henry Hub price. That should lend gas into Japan at competitive price points to the US and because we have lower development costs and because we have such a unique ability from Mozambique to deliver gas at a very competitive price, the types of re-gas prices we would be able to achieve from that give us an extremely attractive rate of return and it also helps the Japanese utility buyers who are trying to get away from having 100% oil indexed pricing formulas.
Thomas Driscoll - Barclays Capital
Thank you very much Al.
Thomas Driscoll - Barclays Capital
Al will be available in the Riverside Suite down the hall, Riverside Ballroom rather.