Anadarko Petroleum Corporation (NYSE:APC)
Wells Fargo Securities Research, Economics & Strategy, 2013 Energy Symposium Conference
December 12, 2013 09:10 AM ET
Robert Daniels - Executive Vice President, International and Deepwater Exploration
David R. Tameron - Wells Fargo
David R. Tameron - Wells Fargo
We are going to keep it moving here. Again for those of you I haven’t met, my name is David Tameron. I head up our E&P efforts on the equity side, out of Denver. And next up we are pleased to have Anadarko. Anadarko, as everybody knows has been a leader in the industry, particularly since a couple of transformative acquisitions back in 2006. And one of the reasons why has been their exploration success.
We are pleased to have Bob Daniels, who heads up -- Executive Vice President. He’s in charge of worldwide exploration. Anadarko posted a 70% exploration success over the last few years, which is as anybody who is familiar with deepwater and offshore knows is just a staggering number.
So with that I will turn it over to Bob and then we will have a little bit of Q&A at the end. Thanks Bob.
Thanks, David and thanks Wells Fargo for hosting this event. Today we will be potentially talking on or making some forward statements, so please read our disclosures and cautionary language.
And I am proud to be -- proud of Anadarko and what we have accomplished. I am proud of our employees, our values and our culture and the portfolio that we’ve assembled using those above things. These are things that differentiate us and they are the reasons that we deliver solid results year-in and year-out.
We are delivering a transparent multi-year capital efficient growth, while continuing to provide our investors with significant option value, with our industry leading commitment to exploration, and the expectation of periodic monetizations of our long-dated assets; we will see some examples of that in the presentation.
Let’s take a look at what makes us different. Our portfolio is comprised of three major components with multiple value levers. The first is our U.S. Onshore, led by Chuck Meloy. The characteristics of U.S. Onshore is short cycle, delivering cash-on-cash for investments, example is Wattenberg where we have a 100% rate of returns on investments. We are focused on liquids-rich areas. We grew our oil volumes 20,000 BOEs per day in 2013 and we benefit from massive and expanding midstream infrastructure that enables us to continue our growth and to receive higher margins.
The second component is our deepwater and international mega projects; that’s run by Jim Kleckner. These are medium term investment, large discrete oil projects. You’ll see several of those. We’ve brought several on line in the past and we got many coming in the future that will deliver tremendous margins to us and that we’ve done some very good deals that enhance the value of those and I’ll show you some examples of Lucius, Heidelberg most recently in Mozambique.
And then off-course we have our exploration success that I am responsible for, that’s building for the future. We are looking for transformational targets and we found some of those over the years. They are play opening opportunities so when we find something we typically have significant running room.
As David mentioned we have over 70% success rate over the last five years, so very good track record. It gives us tremendous optionality. We use farm-outs and promotes both on the exploration side to minimize our risk exposure and also on the discovery side to help pay for our developments. And then we high grade our portfolio and discoveries all the time to make sure that we are investing our capital in the best opportunities.
We've consistently delivered value through our differentiating results over the past several years, like growing our production reserves at very competitive costs, improving our drilling efficiencies and as a result we are one of the safest and lowest cost operators in the industry, achieving that outstanding deepwater exploration and appraisal success which delivered over five billion barrels of net resources during the last six year to Anadarko. We’ve demonstrated our willingness to continuously high grade the portfolio with more than $16 billion worth of monetized assets which enhances the depth and quality of our assets and the opportunity that we invest in.
Maintaining financial discipline has been and will continue to be a central component of our operating strategy. Anadarko is confident in the future. When you look forward to 2020 this is our vision and it’s quite an outlook. We have 5% to 7% production CAGR from projects that we already have in hand, that are being sanctioned or have been sanctioned. We have 4,000 identified drill sites in the Wattenberg and we are looking in more detail at Wattenberg. 2,500 additional drill sites in the Eagle Ford.
And this forward look does not include any additional contributions from future exploration success. So this is things that we have in our hands that we are moving forward with. And there is tremendous value upside on top of this. We can throttle this growth up.
As previously disclosed we are allocating a portion of the proceeds from our Mozambique sell down to the shorter cycle investment opportunities to accelerate growth and resource conversion of our U.S. liquids rich plays. Should gas prices recover we can flip the switch on tens of thousands of drilling locations in our portfolio in dry gas plays, need about a 450 sustained gas environment. And then continued exploration success with play opening opportunities will add significant value.
We are well positioned to deliver this year and into next. It's pretty amazing when you look at what we started with and what’s happened to the industry that we have stayed within our initial guidance range on capital while incorporating more than $400 million in producing property acquisitions through the efficiencies and cost savings that we’ve been able to deliver in our operations.
Our capital is always focused on the highest margin opportunities. We allocate capital on the onshore U.S. territories generating 30% to a 100% plus rates of return. We are advancing our oil mega projects and again we are among the most active deepwater explorers which yield value and optionality. We are delivering strong sales volume growth of 6%, which is 12% on a net debt adjusted per share basis. This includes 6% growth in our oil volumes, representing 14,000 barrels a day of oil increase.
Our U.S. Onshore is a big and growing business with more than 60,000 barrels oil equivalent growth per day this year with higher margin oil growth of more than 20,000 barrels a day. It's driven by the Wattenberg, Eagle Ford, Permian Basin and other liquid-based assets. We are allocating capital, as I said to projects that generate at least 30% rate of return and in some cases above a 100% rates of return. We are adding volumes at $35,000 per flowing barrel, less than half of what comparable acquisition market would pay for those barrels.
Let’s take a look in more detail at Wattenberg. It’s our biggest and most valuable U.S. asset. It’s a massive asset. It’s over a billion barrels of net risked resources. We have over 4,000 horizontal drill sites at 5,000 foot lateral length, averaging about 350,000 barrel recovery per well, with an NPV of about $6.7 million per well, BTAX.
Currently we are optimizing our lateral length spacing and completions. We could extend these laterals to 5,000 feet, upwards of 10,000 feet in some instances, which reduce our well count and increases our EURs. We doubled our well count or our well activity in 2013 to about 325 wells in Wattenberg. This could translate into converting over $2 billion BTAX value this year with an even greater program planned for 2014. Roughly 60% of our wells are drilled on Land Grant acreage, where we own the minerals and therefore collect the royalties.
We recently completed our Wattenberg property exchange. We received 56,000 acres and 8,000 BOEs per day for a $100 million. This helped to consolidate operated acreage and achieve greater operating efficiencies in the core area of our field. We also retained significant value by benefiting from the 21,000 acres of Land Grant acreage that we sent to the other party. And in the midstream we have been expanding our compression gathering and processing. We have an oil rail terminal in service. White Cliffs is being twinned. The Front Range NGL pipeline is expected in service in the first quarter of 2014. And we have our 300 million a day Lancaster cryo plant which is also expected to be in service first quarter of 2014. And we have announced an additional 300 million cubic feet per day of expansion after that.
Another significant driver of our liquids growth is in Eagleford in Texas. We have captured 600 plus million barrels of oil equivalent of net resources, with 2,500 core wells average EURs of 600,000 BOEs per well, with a high liquid composition. We have large scale infrastructure additions this year, like the Brasada plant, which is 200 million cubic feet a day. This enables production and strong growth for years to come in the Eagleford.
We are focused on drilling efficiencies and cost controls. Days of drilling per well decreased over the course of 2012 and continued into 2013 and the average cost of our wells decreased 33% over 2012. Product mix out here is gas, 35%; oil, 40% and NGLs, 25%.
Let’s turn to our international and deepwater portfolio. We generate significant cash and have advanced several key mega projects across the globe. We see strong growth from the seven projects highlighted in the right, approaching an 180,000 barrels a day out into the future. And this does not include things like Shenandoah that we appraised earlier, Yucatan, Coronado discoveries made in 2013, Phobos, Raptor, Horn, Vito, all these discoveries moving through the system are not included in this. These projects are all high margin, big oil.
We continue to look for ways to accelerate value and leverage our capital investments, examples are Lucius, Heidelberg, Mozambique where we sold down a portion of our interest and the forward carries were cashed. Our $2.64 billion Mozambique monetization with the reap-through value of $10 billion to our assets which is about ten times the money we’ve invested in Mozambique is another great example of our commitment to value acceleration. It allows us to bring 2018 plus cash flows to today and gives us the optionality to increase our capital investments in short cycle oil projects beginning in 2014.
In the Gulf of Mexico we have made really big strides. We achieved first production at our Caesar/Tonga development in 2012. Our fourth well there is expected online by year-end 2013. At Lucius we closed the carried interest agreement that enhanced returns for a tax efficient carry to post production.
At Heidelberg we entered into a carried interest agreement in the first quarter where we are going to receive $860 million as a future carry. Our expected capital requirement for the first production for 12.75% working interest is very tax efficient. This tax efficient carry agreement provides $3 billion marker reap-through for APC’s interest in the Heidelberg development.
The Lucius spar was recently installed on location in the Gulf of Mexico and the Heidelberg project was sanctioned and the spar is currently being fabricated for [equipment]. These spars represent our 9th and 10th deepwater floating offshore facilities in the Gulf of Mexico. We employed a strategy of design one and build two. Both spars would be capable of producing 80,000 barrels of oil per day with Lucius coming online in the second half of 2014 and Heidelberg in 2016.
The Shenandoah Basin in the upper left is another area that we are excited about. Our Shenandoah Basin number two well drilled earlier this year saw more than 1,000 feet of high quality net oil pay with no water. And then the Coronado discovery encountered more than 400 net feet of oil pay and Yucatan over 120 feet of net oil pay. Further appraisal activities are being planned in the Basin with an appraisal well at Coronado having just spud.
Another example of portfolio management, we recently more than doubled our working interest in Coronado to 35% and we will assume operatorship after the completion of this next well. At Jubilee in Ghana gas capacity expansion activities are under way. We expect to ramp the FPSO -- ramp to the FPSO’s full capacity by year end. Our TEN, Tweneboa, Enyenra, Ntomme plan of development was approved by the Canadian government this year. This would be our second FPSO, 80,000 barrels a day for TEN and we expect first oil in 2016.
In North Africa Algeria continues to be very significant piece of business for us. We continue to see the benefits of the TPU resolution in 2013. We received the final $700 million related to that resolution this year. And then El Merk is our newest project is doing great. It achieved first oil in the first quarter from the first 65,000 barrels of oil per day train, and the second 65,000 barrel a day train was recently started. The third train is being commissioned and is expected to be online towards the end of the year.
The three trains will produce approximately 30,000 barrels a day net to Anadarko and generate 10% year-over-year growth in 2013 in Algeria and this percentage growth will be significantly higher in 2014 with the benefit of full year’s production from El Merk about 35% year-over-year growth in ’14.
Mozambique’s has been a phenomenal value creation opportunity; it fits well to Anadarko’s strength in deepwater developments and industry leading project execution skills. We said that this could be a 50 million tonnes per annum development. It's going to provide stable production, stable cash flow and stable reserve additions making Mozambique one of the largest LNG developments in the world.
This is a project with superior LNG economics due to several cost advantages. There are very few wells are going to be needed because of the quality of the reservoir and the connectivity. Close proximity to shore, we are about 25 miles from the beech, ample land for expansion, we have over 17,000 acres and off-the-shelf technology with 5 million tonne per annum LNG facilities being planned.
Every single activity in Mozambique is being done with the goal of achieving first production in 2018. We believe this is an attainable goal given the alignment of the Mozambique government and our partnership. Thus far we’ve make good progress driving this project forward and completing things like securing the land for the LNG Park as I mentioned the 17,000 acres, achieving reserves certification for Prosperidade, so significant milestone with the receipt of reserve certification for the initial liquefaction trains associated with the Anadarko operative Prosperidade complex.
We have an HOA in place with Eni the operator of Area Four that enables a collaborative development of a 20 million tonnes per annum from the straddling Prosperidade reservoir. And we’ve issued feed contracts, for offshore gathering Area One and the onshore processing, which are joint. Earlier we announced the monetization for 10% of our Block One working interest for $2.64 billion showing our commitment to value acceleration. The reap-through value was the highest Mozambique marker to-date at over $10 billion. So we are very excited about this opportunity and we anticipate good things to come.
In net exploration we got a great track record of success at Anadarko. We’ve discovered more than 5 billion barrels of net resources since 2004 for the company. Over the last seven years we’ve more than paid for our exploration program, our exploration investments with the discovered assets we have sold along the way. We’ve invested about $8 billion worth of capital over this time frame and we’ve returned $8 billion through exploration, monetization and that does not include the Mozambique monetization.
In 2013 our activity has been focused in the Gulf of Mexico where we anticipate about nine wells being spud at least. West Africa, about five; East Africa 11 or so and then we’ve got some play opening opportunities we are testing in 2013. We are currently drilling the Deep Nansen in the Gulf of Mexico which will be a play opener. Liwan 21-1 in South China sea, which we have been waiting for, again play opener. Paon-2A, it's an exploration well with an appraisal tail in Côte D’Ivoire and we are just staring in New Zealand on our Romney Well the first deepwater test in New Zealand.
We’ve got a very focused exploration strategy. We focused on good petroleum systems. We look for competitive fiscal terms. We understand we have to make money at the end of the day and we want running room. If we have success we want to be able to capitalize on that. And once we identify a concept that works we look are there other places where we can apply those concepts and bring success. Examples are the cretaceous fan play that we have success in West Africa Jubilee and TEN. We’ve moved along the West African Coast and we’ve also taken that concept down to South Africa where we established a very significant position in the deepwater.
And then the Mozambique Basin-Floor Fans play, where we have taken that play concept over to Columbia where we have 8 million acres and have acquired a 3D seismic this year and plan on spudding towards the end of 2014.
Since 2004 as I mentioned we discovered over 5 billion barrels in net resources for Anadarko while investing about $8 billion and monetizing $8 billion worth of assets. Essentially that covered our total capital costs.
But additionally to that we’ve retained significant go forward value. Presently the discoveries we’ve made in that time frame are producing about 200,000 barrels a day from the discoveries that were made and what we retained. That means we have about 4 billion barrels of net resources moving through the system towards development that gives us a lot of value and optionality.
The optionality is we can develop and produce it, we can optimize and leverage it such as we did it at Lucius and Heidelberg or we can divest things that don’t play to our strengths, skill set or strategy and we’ve done all of those frequently.
We’ve made very significant improvements in our net debt-to-cap ratio this year. Year-to-date we’ve closed or announced $4 billion in asset monetizations highlighted by the $2.6 billion partial monetization of Mozambique which is expected to close in the first quarter of 2014.
There is a value acceleration and focus on resource conversion. We moved to within our target 25% to 35% net debt-to-cap range in 2012 ending the year at 34%. We ended Q3, 2013 at 30% and as a result of the Mozambique monetization our net debt-to-cap will drop to 23% about. We view this as a great opportunity to accelerate resource conversion and get a double dip on our NAV.
During the third quarter we’ve doubled our quarterly dividend from $0.09 per share to $0.18 per share payable as of September 25, 2013. This increase in our cash dividend reflects the confidence that we have in our portfolio and its capability to deliver capital efficient growth.
So in conclusion Anadarko is focused on returning, focused on capital allocation, targeting the 30% to 100% rates of returns in the onshore U.S., resource conversion, increase of velocity of how we spend the capital and the activity associated with it, ramping up activity in the plays like Wattenberg, Eagle Ford and the emerging Delaware Basin, Wolfcamp.
Value acceleration, we continue to look for opportunities such as what we did at WGP and also we’ve done at Lucius and Heidelberg and finally continued commitment to exploration as a differentiating factor.
Thanks for your interest in Anadarko.
David R. Tameron - Wells Fargo
Now before we get started I did want -- I had failed to mentioned we have Ross Payne who covers Anadarko on the investment grade and on the debt side, he is sitting here in the front row and then we have Jeremy Smith and Bill Tedesco from Anadarko sitting right here to my right.
You alluded to 2014 and the uptick in capital acceleration. Any more detail you can give us around how we should think about that relation to cash flow and just any more color you can give around that?
Yeah the question has to do with 2014 we haven’t come out with 2014 guidance yet. We’ll roll that out in the first week of March at our investor conference. But we are pretty clear when we came out with the Mozambique transaction that we are going to take the cash proceeds and utilize some of those to continue the Mozambique development. And then another component of it would be focused on cash on cash return.
So increasing our overall investment in short cycle opportunities, mostly onshore U.S. as we talked about that’s where most of the short cycle investments would be. And then where it be would be based on those returns where we get the highest returns, are going to get the most money with the caveat, we will not put additional capital into areas where the return will not come back to us very quickly, meaning if we have infrastructure constrains, if we can’t get increase activity and take away capacity in time we are not going to have fallow capital so that it would go to the next opportunity.
But you can expect to see additional investment and the highest returns opportunity that return short cycle cash on cash for 2014.
Okay let me address the first one on the oil price I am not going to give an absolute number but we are very well protected against downturn in oil prices. When you look at areas we produce and the value realization we are not getting huge differentials. Our Wattenberg area right now is returning over a 100% rate of return at present WTI prices. The Eagleford is about 70%. It’s too early to say out in the Delaware Basin for the Wolfcamp but we like what we are seeing out there. So we’ve got a lot of room relative to WTI where we are still going to make good returns.
As to the deep water and international those are very robust developments, so Lucius, Heidelberg particularly when we look at forward carries that we have in place we are not putting any capital into it. In fact I’d say at both Heidelberg and Lucius we probably have net to Anadarko less than $200 million in each of those and we are going to take that to post production on both of those. So we are very well insulated from price movements downward.
The second one on the WGP, no we don’t think we are getting full credit for the WGP although there is recognition of it where the value is but they don’t roll that through in the Anadarko stock. We have 91% of the WGP shares and that value right now is about $8 billion embedded in Anadarko.
We have said that we would like to have more liquidity into WGP and then we would in the future periodically put more WGP into the market. The ultimate objective is to realize the values for Anadarko’s shareholders make sure that value is realized in one way or another and the second would be to maintain control of the midstream assets within WGP and West. So that would limit the total amount that we would be willing to put into the markets but it's not a real high number that we actually have to control.
As to the spinning up to shareholder I won’t address that at this point but it’s one of the things we would consider. Yeah.
Yeah, on the credit side from what I understand the belief is that it’s waiting on Tronox, waiting to see how that turns out and getting that final judgment there and at least having a number of things to put into the calculations. As to Tronox I don’t have anything else to add that they did in January. It’s with the judge. The judge has no time frame in which he has to release his ruling and his decision and therefore we are -- nothing’s really changed and we have no idea when it may come. It could come tomorrow, it could come much later. It really is a total unknown to us and to everybody at this point. I am sorry.
On the question related to Macondo was, the only thing that Anadarko has left related to Macondo is Clean Water Act and the Clean Water Act it’s based on culpability, culp-based. In the proceeding so far Anadarko’s actually been held as non-culpable. So we actually don’t think that we should have to pay anything in the way of Clean Water Act. But at this point there have been no lead by the EPA relative to coming to Anadarko and saying we want you to pay upon. And of course they are in the process of determining what the level of the spill was and then who was responsible for it, the parties responsible.
Okay, regarding the Colorado elections, they were not counties, they were municipalities. There were five municipalities that passed a, either moratorium, well a moratorium on fraccing under the municipal boundaries. The Colorado Oil and Gas association has filed suit against the municipalities. The State is not in agreement with their ability and jurisdiction to do that.
So from that standpoint it’s to wait to see how those all play out. From the standpoint of frac moratoriums in the State we do anticipate there will be a drive in Colorado to put an initiative or a bound initiative together for next year’s election. There would be a state-wide moratorium and at this point there is lot that they have to go through to get to that point but we and the industry and the governments are working on how to educate the public as effectively as possible about what fraccing is, what it does for the State, the revenues generated by the industry to the State coffers I think we are the number one revenue generators for the State of Colorado, the industry and the jobs created.
In the run up to the previous election we had started that process. We actually saw very good results from it, in the polling that we did. And so think the earlier we start on that process the better the industry is going to be in defeating that one, if it comes up next fall. Thank you again.
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