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Anadarko Petroleum Corporation (APC)

Q2 2007 Earnings Call

July 31, 2007 10:00 am ET

Executives

John Colglazier - Director of IR

Jim Hackett - Chairman & CEO

Al Walker - SVP of Finance & CFO

Clay Bretches - VP Marketing

Karl Kurz - SVP, North America Operations, Midstream & Marketing

Chuck Meloy - SVP, Deepwater and International Operations

Bob Daniels - SVP, Worldwide Exploration

Analysts

Robert Morris - Banc of America

Tom Gardner - Simmons & Company

Gil Yang - Citigroup

John Herrlin - Merrill Lynch

Joe Allman - J.P. Morgan

Brian Singer - Goldman Sachs

Ray Deacon - BMO Capital Markets

Rehan Reshid - FBR Group

Ben Dell - Sanford Bernstein

David Heikkinen - Pickering Partners

Joe Magner - Tristone Capital

David Tameron - Wachovia

Presentation

Operator

Good day, everyone, and welcome to this Anadarko Petroleum Second Quarter 2007 Earnings Release Conference Call. As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. John Colglazier, Director of Investor Relations of Anadarko Petroleum Corporation. Please go ahead sir.

John Colglazier

Thanks Senaula (ph). Good morning, and thank you for joining us today for our 2007 second quarter conference call. Joining me on the call today are Jim Hackett, our Chairman and CEO, Al Walker, our Chief Financial Officer, and other executives who will be available to answer your questions later in the call.

As we do each quarter, we've included a lot of operational and drilling information in our quarterly operations report, which is posted on our website at www.anadarko.com. We'll be talking about the quarter's highlights during today's call. And I also encourage you to read through the report for more detailed information.

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

Also, we will reference a non-GAAP cash flow measures, so be sure to see the reconciliation in our earnings release. We also encourage you to read the cautionary note to U.S. investors contained in the presentation slides for this call.

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

Jim Hackett

Thanks, John, good morning, everybody. Thanks for joining us today. As you saw in the press release, we demonstrated solid financial and operating performance in the second quarter. Building upon the momentum established in the first quarter. Overall, production was inline with our external guidance, costs are under control, and we recently announced the start-up of production from Independence Hub.

This gives us the confidence to raise our production guidance for the second time this year. We now expect our retained properties to produce between 189 and 193 million barrels of oil equivalent in 2007. An increase of 3 million barrels over the previous midpoint. Our performance during the quarter was once again driven by our retained properties.

In total, we produced a little over 47 million barrels of oil equivalent for the three-month period. This performance from those retained properties is inline with the midpoint of the updated supplemental guidance that we provided last quarter. Our performance was driven by both crude oil and NGL production.

While natural gas production continues to be strong, natural gas sales volumes during the quarter went down due to a third party processing plant issue in Wattenberg and prior period adjustments associated with the non-operated Pinedale/Jonah Fields in the Powder River Basin, which included an under delivered position during the second quarter.

These under delivered volumes will be made up beginning next year, as take away capacity is increased. Overcoming these adjustments to reach the midpoint of production guidance demonstrates the strength and diversity of our key portfolio and the strength of second quarter production.

Another positive operational development impacting lower gas volumes include additional NGL extraction for the quarter. We recognize the enhanced value of liquids in the current pricing environment and captured the value optionality by increasing our NGL volumes rather than selling the molecules as natural gas.

We also announced that the Independence Hub came online ahead of schedule in mid July with production from the Atlas field. Followed by the Atlas Northwest and Mondo Northwest fields. We are preparing to bring the Merganser field online in mid August. The Independence Hub facility will be operating intermittently as we tie in wells, complete installation of the full lines, bring new wells on stream and make other adjustments as necessary consistent with major start-ups.

The producers expect to continue bringing wells online one at a time throughout the year. Continuing to ramp-up production toward the hub's capacity of one Bcf per day by the end of 2007. Once the platform is close to peak production, we have set guidance for net volumes using our working interest of 61% of platform throughput, reduced by the applicable one eighth royalties in the approximate 80% run time factor.

Elsewhere in the Gulf of Mexico, we drilled two successful satellite exploration wells in the Boomvang area. The East Breaks 598 and 599 wells will be completed and brought online during the third quarter. Development of the Nansen Northwest discovery is underway with first production expected by the end of the year.

Our exploration program has accelerated since our last conference call. In the Gulf of Mexico, we are currently drilling a lower tertiary prospect at Cortez Bank, in the Keathley Canyon area, about 12 miles west of our Kaskida discovery. This well is expected to reach TD in the third quarter.

In addition, we are testing a middle Miocene objective at the West Tonga prospect in the green canyon area near our previous discoveries at Tonga and Caesar. We expect to TD this well in the third quarter. Internationally, we are very encouraged by the results for our exploration program.

During the second quarter, we announced a large discovery offshore Ghana at the Mahogany-1 exploration well. The well encountered a gross hydrocarbon column of approximately 885 feet of stacked pay. The Belford Dolphin rig is on location and we have spud an additional exploration well on the adjacent 10-OD block.

Offshore Brazil, we recently drilled another successful appraisal at Peregrino. This marks the fifth successful oil penetration of the field. The results of this well confirmed the Southwest extension of the field and provide additional upside potential to the already identified 300 million to 600 million barrels of oil equivalent of estimated gross recoverable resources. Studies are underway to determine the optimum development plan for this newly confirmed potential.

Moving to our onshore operations in the U.S., we continue to see consistent results as we set production records in the greater Natural Buttes area where we're producing approximately 240 million cubic feet a day of gross volumes.

In addition we've made significant progress on the construction of the Chipita processing plant, which at 250 million cubic feet a day will nearly double the processing capacity in the basin with the potential to expand it even further in the future.

Anadarko will operate the Chipita plant with 100% interest. We expect the plant to be operational in the fourth quarter. It will also be the origination point for the new 400 million cubic feet a day Wyoming interstate company, Candelateral Pipeline which is currently under construction and expected to be completed in January 2008.

Together the plant and pipeline will go a long way toward alleviating some of our existing take away issues in the Uinta Basin where we have 30 to 50 million cubic feet a day of net volumes waiting on pipeline and processing capacity additions.

Takeaway capacity expansions, we are also well underway in the Powder River Basin where pipeline constraints are impacting us by about 30 to 40 million cubic feet a day of net volumes. The first phase of the Fort Union Gas gathering system expansion project is on schedule and expected to be completed early in the fourth quarter. This will expand the capacity of the overall system by 240 million cubic feet a day.

In Anadarko's Southern region, we continue to see solid results in the Delaware Basin, where gross operated production rates were around 200 million cubic feet a day in the second quarter. We also recently announced a joint venture with Chesapeake here that creates the opportunity for our companies to jointly maximize value, drive portfolio efficiency and better manage technical risk in a productive, but complex basin.

During the quarter, we announced another significant divestiture involving our interest in Midkiff/Benedum and Chaney Dell Natural Gas Gathering Systems and associated processing plants for approximately $1.85 billion. This divestiture closed last Friday and further validated the value of our portfolio of midstream assets.

We continue to work toward launching our mid-stream MLP. We still anticipate finding the registration documents during the end of the third quarter for $300 to $500 million IPO.

Our de-leveraging plan is progressing very well, with over $12.7 billion of after tax proceeds generated from announced or closed transactions. Putting us on track toward our stated goal of reducing net debt to approximately $12 billion by yearend without the need to issue equity.

Next, I'd like to go over a few of the financial highlights from our second quarter, which was included in our earnings release. Net income was approximately $1.39 per diluted share or $1.38 per diluted share from continuing operations. This includes a non-cash mark-to-market hedging loss at $35 million after tax or $0.08 per diluted share.

We also recorded an after tax charge of $27 million related to our post merger restructuring which reduced income by about $0.06 per diluted share. Net income also includes gains on the sale of certain midstream assets of $126 million after tax or $0.27 per diluted share.

Discretionary cash flow for the quarter as reported was approximately $174 million. However, this includes the effect of approximately $1.1 billion in income tax payments during the quarter, associated with the divestiture program.

Now, I want to take a minute to run through our improving results in regards to our cost structure on a pretax basis. For the second quarter, we out performed in the areas of LOE, G&A, DD&A, and production taxes.

Our lease operating expense was $0.11 below the low end of our guidance at $4.89 per BOE. General administrative costs were $4 million below the low end of guidance when you back out the $41 million restructuring charge. DD&A was $0.55 below the low end of guidance of $13.45 per BOE. And production taxes were also below the low end of guidance at about 10.6% of product revenue.

Oil and gas transportation costs appear to be well above guidance, however there's an offsetting benefit of about $15 million or $0.29 per barrel of higher gathering, processing, and marketing margins due to the higher frac spreads, which appear in the revenue line.

Quarterly interest expense of $314 million was above guidance, but was driven by $37 million of mark-to-market hedging losses. In addition, we recorded $30 million of interest income generated by slightly higher cash balances during the quarter that were embedded in our other cost category, which provided a direct offset to our increased in interest expense.

Looking ahead to the third quarter and full-year guidance, we have again provided some supplemental information that provides insight into what you can expect from our retained assets going forward.

As we did in the first quarter, we've attached a same store comparison to the earnings release. It includes only those assets that we expect to remain in our portfolio post divestiture. As we have previously indicated, we are evaluating a switch from full cost to successful operating accounting. We'll keep you informed as the decision on this conversion draws closer and provide you with additional detail then.

As I mentioned at the top of our call, our strong operational performance to-date, gives us the confidence to raise the midpoint of our external production guidance by 3 million barrels on the retained portfolio.

We have guided the lower third quarter volumes from our retained properties mainly because we have built in down-time in relation to potential weather events, particularly in the Gulf of Mexico.

However, based on our expectations from Independence Hub and progress in the plant and pipeline expansions in the Rockies, we expect to see volumes by year-end in line with our increased supplemental full-year guidance, to between 189 million and 193 million barrels of oil equivalent.

We continue to execute upon our 2007 exploration plans with significant second half activity. We anticipate drilling several high impact exploration wells in the deep water Gulf of Mexico, such as a lower Miocene test at the Atlas prospect, a lower tertiary test at the Green Bay prospect, and anther potential deep water Miocene test in late 2007. In addition, we plan to drill a deep-water sub salt test prior to year-end in the Espirito Santo Basin offshore Brazil.

Regarding our capital guidance, we are proposing to our board of directors an increase of approximately $200 million. This primarily reflects the acceleration and expansion of our gathering and processing capabilities to match our drilling and operating success in the greater Natural Buttes and Powder River Basin areas. And our appraisal activity, as a result of our exploration success, offshore West Africa.

With the increase, we expect the overall CapEx for the year to be in the range of $4.4 to $4.6 billion. We published our current hedging schedule in the second quarter earnings release. All derivatives in place are marked to market through earnings because we did not utilize hedge accounting.

To summarize, it's been less than one year since the mergers closed and we couldn't be more pleased with the results. The pace of improvement and positive momentum is due to the creative and hard work to employees. Our investors have been well served by this effort. The portfolio is performing, our cost structure is improving, and we expect to continue executing upon our strategy.

We have some exciting plans ahead with the ramp-up of production in the Rockies and at the Independence Hub, the coming IPO of our midstream MLP, and active exploration and exploitation programs that are envisioned across the company.

With that, operator, I'd like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Robert Morris with Banc of America.

Robert Morris - Banc of America

Morning, Jim.

Jim Hackett

Hello, Bob.

Robert Morris - Banc of America

Quick question here in your chart on reducing debt. You have still EMP in other of $0.3 billion to $1.7 billion. What might that entail?

Al Walker

Bob, this is Al Walker. Largely we're still looking at that being a MLP and other midstream monetizations.

Robert Morris - Banc of America

Okay.

Al Walker

We may from time to time still consider some other additional assets. But largely today, we would think of that as just being still what we've been talking about with respect to the midstream monetization.

Robert Morris - Banc of America

Okay. Great. That's all I had for now. Thanks.

Jim Hackett

Thanks.

Operator

We'll take our next question from Tom Gardner with Simmons & Company.

Tom Gardner - Simmons & Company

Good morning, guys.

Jim Hackett

Good morning.

Tom Gardner - Simmons & Company

With respect to gas processing revenue, obviously a big gain in attractive market this quarter. Going forward, how predictable do you see this business segment?

Clay Bretches

This is Clay Bretches, Vice President of Marketing. That's a tough call. So much of it depends on the margins and the frac spreads going forward which at best are hard to predict. We believe given the weakness of the gas markets right now and the strength in the liquids markets that for the foreseeable future the frac spreads should be strong.

Tom Gardner - Simmons & Company

Okay. And of these gas-processing assets, are any of these identified to go into this proposed midstream MLP? Can you give us an update there?

Clay Bretches

Yes, they are.

Tom Gardner - Simmons & Company

Moving on to a question regarding staffing. Realizing the quarter before last you had significant personnel restructuring efforts. We are hearing comments from other E&P companies that their people constrained. Can you update us on staffing and retention levels and where you see the greatest challenges and would this be an impediment to growth going forward?

Karl Kurz

Hey, Tom, this is Karl Kurz. We've seen obviously with our restructuring, we saw some involuntary reductions that we'd orchestrated and led, and that was part of our plan. And we have seen increase voluntary attrition. In the last six weeks, I'd say for our company, that's come back to what I call acceptable levels. We do not see staffing being issued for us to execute our plan going forward at this time.

Tom Gardner - Simmons & Company

Great. One last question here, you know, given the recent merger announcement of Global Santa Fe and Transocean, as you know comprises a nice chunk of the deep water rig market. Could you talk a little bit about your rig fleet under contract and how you might be looking to monetize its current discount of leading edge day rates?

Karl Kurz

Tom, its Karl again, I mean obviously we're real pleased with our control of the rigs that we have. It gives us a differential advantage verses a lot of our peers. The merger between Global Santa Fe and Transocean obviously makes a giant in the rig market. We would hope they'd translate into some savings as they create a more efficient entity for the operators. We're still reviewing that to see how it might actually affect us.

We and our current plan and portfolio can utilize our rigs completely with our existing exploration, delineation, and development opportunities. We have the ability to extend some of our contracts as they come up for renewal. So, we can control most of these rigs for quite a bit of time going forward. We also are obviously, and I think few people have known, we've used these rigs to leverage into other opportunities and deals and we'll continue to look to high rate our portfolio with additional opportunities like this.

Jim Hackett

And that's really how we use that leverage, if you will, Tom, instead of trying to remarket it to somebody else. As we use it to get into transactions or to draw up our own portfolio.

Tom Gardner - Simmons & Company

Thanks, Jim, Karl. Appreciate it.

Operator

We'll take our next question from Gil Yang with Citi.

Gil Yang - Citigroup

Good morning, everyone. Could you just give us some sense of what the drivers for the out performance on DD&A and LOE were? Is it just that you gave very conservative guidance or did something that changed that resulted in lower figures?

Chuck Meloy

Go ahead and you can do DD&A….

Jim Hackett

Yes, let me go ahead and touch on DD&A. As we're going through with the divestiture properties, the gains have been greater than we anticipated in several of the cases. And on a full cost related to the direct benefit to the DD&A calculation. In addition to that, as we go throughout the course of the year with our reserved pipeline net we have, as we booked the reserves, it's also coming in at a favorable rate.

Chuck Meloy

And Gil, this is Chuck. On the LOE, I think we're starting to see the advantage of our concentration and focus in our new portfolio where we can get the advantage of economies of scale, and the different regions like in Wattenberg and greater Natural Buttes and kind of concentrate on those, increase our automation, improve our capacity to operate those fields, optimize with midstream on the compression. All those types of things bring you pennies toward the LOE. And we're just marching down those roads and enhancing those margins.

Gil Yang - Citigroup

And Chuck, I think you would have expected that. So, is it just happening faster than you would have thought, or to a larger degree or is the mix shift happening to greater degree than you thought?

Chuck Meloy

It certainly may be a little bit quicker than we thought. We also didn't have, during this quarter we didn't have a very significant work over offshore, which helps us in the big scheme of things. But, you know, our plan is we're executing on our plan, and we're drawing it down.

Gil Yang - Citigroup

Okay. And second question is, in Salt Creek, it looked like you started ramping up CO2 injections. What's changed there, and how far can that go both on the injection and the production side?

Chuck Meloy

This is Chuck again on. In Salt Creek, we've actually initiated injection into what we call phase three and four. We had phases one and two under production now, we've been expanding in to this three and four, which is just south and east the initial following area. And that's increased our ability to inject CO2. And we're just starting to fill that floor space up.

Gil Yang - Citigroup

Okay.

Chuck Meloy

So, it's just the expansion of the flood.

Gil Yang - Citigroup

How many more phases are there to go?

Chuck Meloy

We are up to -- I think we have 15 total phases. We have a ways to go.

Gil Yang - Citigroup

All right. Thanks.

Jim Hackett

Hey, Gil, those phases are spread over many years, too. Probably about a six, seven-year life and we'll be ramping those phases up.

Operator

We'll take our next question from John Herrlin with Merrill Lynch.

John Herrlin - Merrill Lynch

Yeah, hi. Some quick ones from me. With Mahogany and Ghana, no mention of size at all. And when are you planning to delineate that one reserve size?

Bob Daniels

Hello John, this is Bob Daniels. I think we talked about at the beginning of the year, when we started talking our drilling program. We're looking at greater than 100 million barrel target sizes out in West Africa, significantly higher than that. We're very pleased with the results of the first well. We're delineating it right now, essentially the exploration well next door in the trona deep block. That is delineation 6.2 kilometers away from the original well, and down depth. And we think it'll give us some really good information about the Aral extent of this. So, we're very pleased with what we've seen to date; we think we're at the high end of what our estimates were. But we're well within the range of the potential that we filed there.

John Herrlin - Merrill Lynch

Okay. Next one from me is more on the accounting side. Basis blew out in the Rockies, any sort of gain associated with transportation in the quarter?

Clay Bretches

Yeah, this is Clay Bretches again. And the gain is roughly $90 million on the FT.

John Herrlin - Merrill Lynch

Okay. And I guess the last one for me is on the upcoming lease sale, should we expect you to be an aggressive participant?

Jim Hackett

Yeah. We had look at all the lead sales, we work them really hard. We always see things that we like, but we don't really comment ahead of time as to whether we're going to be aggressive or not. If you have to say when we open the biz.

John Herrlin - Merrill Lynch

It's worth a shot, anyway. Thanks very much.

Jim Hackett

Thanks, John.

Operator

We'll take our next question from Joe Allman with J.P. Morgan.

Joe Allman - J.P. Morgan

Hey, good morning, everybody.

Jim Hackett

Good morning Joe.

Joe Allman - J.P. Morgan

In east Texas, that good Horizontal well that you mentioned in your operations update, could you just give us the background of your efforts there? What are you thinking about in terms of Horizontals and what kind of running room do you have with the horizontal program?

Chuck Meloy

Yes, Joe, this is Chuck here. That’s in the Garbage fields in the south central portion of the field. We went into an area that was developed with vertical wells, and that devours on our well through there, had really good results both from the costs incurred, as well as, the production and expected reserve position. We think we have a lot of running room there, particularly as we go into the east side of the fields where there's some wetland issues that we have to deal with. So, setting up on single pad drilling these long horizontal wells would be beneficial to us. Our friends at Devon have done several of these as well and they've been successful. So we see it as kicking off in late '07/'08 program and potentially running for quite a few years after that with the rig or two.

Joe Allman - J.P. Morgan

That's helpful. And then on the additional spending at $200 million increase in CapEx, I know you address the issues generally. But specifically, what in terms of gathering and processing was not your budget before that's now in your budget, and how much of that $200 million is gathering and processing?

Karl Kurz

Joe, a big chunk of that was basically compression in the Powder River. This is Karl again. We have seen outstanding well performance from in the Coalbed methane, mainly the big George formation in the Powder. We had originally forecasted about 55,000 horsepower compressions being installed in 2007. We're probably going to double that amount of horsepower to be installed. So, that's driven the increased capital costs in there.

Joe Allman - J.P. Morgan

Okay, that's helpful. And lastly, in Deep Haley, just give us some more specifics on what you're seeing out there with the Deep Haley program. And the whole idea behind partnering with Chesapeake going forward?

Karl Kurz

The program's doing very well. As Jim mentioned earlier, we're running about 200 million cubic feet a day, gross, on our company operated production. That's inline with our expectations. We tend to -- we are having very good luck with our drilling program. We're expanding it out in the exploration area to the Northwest of Haley Field proper. It has success out there, as well. The deal with the Chesapeake, we put together.

We were two of the stronger players out there. We had a very complementary land position. We felt it was in our best interest to join forces, improve our learning curve, utilize our rigs better, collectively than we had originally or individually. And it just made that lot of sense from a partnership perspective.

Joe Allman - J.P. Morgan

On a net basis, do you see Anadarko becoming more aggressive? And also, have you, earlier on you are seeing lots of variability. Still seeing lots of variability, you could think you've got things kind of figured out.

Karl Kurz

We still see some variability. We hopefully are figuring things out. But with teaming up with Chesapeake, it'll give us wider exposure, so we can smooth out that variability as we team up.

Joe Allman - J.P. Morgan

More aggressive going forward on a net basis?

Karl Kurz

I think we'd be comparable on a net basis. We're just having the -- we'll have about 16 rigs running between us. We have eight now. We're essentially doubling the program from the rig basis. But minimizing, and normalizing our net interest across those rigs.

Joe Allman - J.P. Morgan

All right. Great. Thanks, everybody.

Operator

We'll take our next question from Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Thanks, good morning.

Jim Hackett

Good morning, Brian.

Brian Singer - Goldman Sachs

As you look towards future asset sale opportunities, does the recent strength you've seen so far in the onshore change how strategic to Anadarko, the Gulf of Mexico deepwater assets are, especially when looking at some of the recent discoveries?

Jim Hackett

I am hearing it right, the question is why don't you rephrase that because I am not sure I did understand it.

Brian Singer - Goldman Sachs

Sure, the notion that you've been having pretty decent success in the onshore so far change how strategic the Gulf of Mexico is when looking at future asset sale opportunities?

Jim Hackett

No, we view our success rate in the Gulf of Mexico to be every bit as equal to what we've done in the onshore obviously in very different types of ways. Particularly from a rank exploration standpoint, offshore has been a real bright spot for us.

We'll look at the best opportunities to create more NAV for our shareholders, frankly regardless of location. But we are very focused on our routine what has been a good track record in the deepwater.

Brian Singer - Goldman Sachs

Great. Secondly on the Powder River Basin, you mentioned some improved rates, can you talk to what you're seeing in terms of dewatering times, peak productions rates and declines?

Chuck Meloy

This is Chuck. We've had tremendous success recently in the Powder River's led by our county line unit, which is a legacy Anadarko operated unit. It's climbed from $10 to $20 million cubic feet a day, a couple of years ago, to almost 160 million feet a day, gross a day.

And, where somewhat limited by our export capacity right now. We could even, we think we could even get a little more out of it, as Jim mentioned earlier. Once we get the port union gathering system expansion completed.

Across the field in the big George Coals, we're seeing similar results in our river unit, Powder River Basin unit, etcetera. It's just a, it's coming on strong. We're seeing our dewatering times meet our expectations and the gas rates on a per well basis actually exceed our expectations in many areas.

Brian Singer - Goldman Sachs

Any specifics in terms of how high and how sustainable you're seeing that you've seen the peak rates?

Chuck Meloy

Well, you know, it's early in the day. We're still in the dewatering in the county line unit we're having wells produce over $2 million a day on a per well basis in some areas of the field. So, it's very substantial, very substantial for these shallow coast.

Karl Kurz

And, Brian, this is Karl. Don't forget, I mean, with the constraints in Rockies right now, there's a lot of backpressure on the systems. So, it's really hard to tell what some of these wells will do currently, we're having to buff a lot of compression right now to get things to flow.

Brian Singer - Goldman Sachs

Great. Thank you.

Operator

We'll take our next question from Ray Deacon with BMO Capital Markets.

Ray Deacon - BMO Capital Markets

Yes, hey, I was wondering if you could talk about where Independence Hub volumes are currently and what your plans are going forward as far as how many wells per year you expect to participate, and then how many of those would be deep Miocene wells?

Chuck Meloy

Ray, this is Chuck. We came online in mid-July, as I'm sure you saw in the release. We brought one well on the Atlas well and then followed that with Atlas northwest, and then Mondo northwest field. Those three wells got us up to the $140 to $150 million a day range.

Ray Deacon - BMO Capital Markets

Okay.

Chuck Meloy

And we're currently working to get the two Merganser wells online, which we expect in the mid August timeframe.

Ray Deacon - BMO Capital Markets

Right.

Chuck Meloy

They'll add a comparable volume by late August. What we're expecting, particularly in the next month or month and a half or so with each tie-in and facility tie-in that we have for each well, we shut the platform in. We expect our run times to be less than 50% in August. It'll be up and down as we make those tie-ins and do the minor modifications to the facility, as well.

And going to get the last bit of equipment on the facility that we need for full operations and that we didn't have prior to start-up. And then starting in about late September/October, we should be able to push the rest of the wells into the system more or less one a week as they get tied in. We still have four lines, subsidy lines to tie in. And so, as we go through the course of this year, our runtimes will improve and our rates will increase until right at the end of the year, which we expect to be up to full volume.

Ray Deacon - BMO Capital Markets

Got it. Great. Thanks a lot. And just one more quick one on Greater Natural Buttes. Any comments as far as results from any of the deepening’s, are there any new zones or change to your thoughts on that field?

Chuck Meloy

We do have a deepening program that we're working out there. Most of it is actually deepening from the Wasatch to the Mesa Verde section, which is the section we know well. We are evaluating several deep tests into the Mancos and Black Hawk sections, and probably two by year-end. And we don't have the results on either of those yet.

Ray Deacon - BMO Capital Markets

Got it. Thanks very much.

Operator

We'll take our next question from Rehan Rashid with FBR.

Rehan Reshid - FBR Group

Morning. Just quick thoughts on K2, K2 North. Any timeline for decision on nitrogen injection and also any kind of particular steps or thought processes behind what will it take to approve?

Jim Hackett

We are currently working with our partners in an IPT arrangement for the field, evaluating all the injection options, including nitrogen, which is frankly the front-runner at this point. It's not going to be a fast process. We're doing all the evaluation work to get this done, including cost scoping and simulation type work. We do have a rig coming towards the fourth, early fourth quarter, which will spud one of our downdip wells. And begin that evaluation work to see that the extent of our work column, that'll help us out sizing this thing and the types of development that we need. Our expectation is that we'll make a lot of progress later this year and next year coming to a conclusion on that.

Rehan Reshid - FBR Group

Are there any analogies, globally speaking that gives you comfort that something like this is doable in deeper water and more specifically call it subsalt here?

Jim Hackett

There are no deepwater subsalt analogies in the world. However there's a large number of E1 or nitrogen admissible type bloods. All our modeling to date, using those analogies and the parameters we have in this field, is very encouraging, and we expect good results here.

Rehan Reshid - FBR Group

Okay. Thanks.

Operator

We'll take our next question from Ben Dell with Sanford Bernstein.

Ben Dell - Sanford Bernstein

Hi, guys.

John Colglazier

Hi, Ben.

Ben Dell - Sanford Bernstein

I just had a couple of accounting questions. Your PP&A from a year ago has gone up about 240% and your DD&A has only gone up 190%. I am wondering has something changed in the way you're depreciating your capital base or have you allocated a bunch of that capital from the acquisitions licenses are proven undeveloped?

John Colglazier

Yeah. I think the big driver on that, Ben, is the approximately $13 billion associated with the two acquisitions that we associated with the problem possibles, which therefore go into the unevaluated pool.

Ben Dell - Sanford Bernstein

Okay. Thank you. And just on that, your proven underdeveloped at the end of last year was relatively high as a portion of total reserves. Do you expect that to come down at year-end or sort of increase?

John Colglazier

This is Colglazier again. I would anticipate that being somewhat comparable to what it was at the year-end '06 on an aggregate basis.

Ben Dell - Sanford Bernstein

Okay. Following on the MLP question, out of the income you generated from the sort of gathering, processing and marketing in the quarter, can you give us a rough split of what portion of that would go into the MLP?

Al Walker

Ben, at this point -- this is Al Walker. At this point, until we're ready to file a registration statement and identify which systems and associated assets will go into it, we probably are not really in a position to talk about that.

Benjamin Dell - Sanford Bernstein

Okay, no problem. And just the last question for me. On the lower tertiary, there's been a lot of discussion from people who have bought into the well in Jack that the porosity and permeability maybe don't look that good and there's going to be some challenges develop in the lower tertiary, do you have a feeling when the most likely first production will be from the lower tertiary?

Jim Hackett

You know, Ben, I can just make comment on that. As it -- we don't operate in all those fields, and we were part of the testing process on Jack, and we have to take the operators at their word on what they're saying about things like Cascade coming on as the first one. And we're focusing really on our properties.

Benjamin Dell - Sanford Bernstein

Okay. Great. Thank you very much.

Jim Hackett

Thank you.

Operator

We'll take our next question from David Heikkinen with Pickering Partners.

David Heikkinen - Pickering Partners

Good morning, guys. Could you give us an update as far as how your outlook for F&D costs are this year, given DD&A rates down and Peregrino’s successful southwest extension seems like you could have a low end of original range. Do you have any update there?

Al Walker

David, it's Al Walker. I think the guidance we've given you previously, the best way we can answer your question is we don't see currently any change to that guidance.

David Heikkinen - Pickering Partners

Okay. And then thinking about Independence Hub, 80% uptime, is that for the back half of this year? And then going into next year, what would you expect for a dry gas facility normally in the Gulf of Mexico to run as far as percent uptime?

Chuck Meloy

David, this is Chuck. We're looking probably 50% here in August and September going towards 80% at yearend, and maybe some improvement upon that as we go into '08. And we're not looking for substantial improvement given the number of subsidy wells that are coming into this, the amount of peaking that we have to do and that type of thing. So, 80% is probably a good number for this system until we get it up and running well.

David Heikkinen - Pickering Partners

And then rig availability offshore Ghana after this exploratory well, when do you see additional follow-ups and what's the rig availability there like?

Bob Daniels

Yes, David, this is Bob Daniels again. Right now we are looking to get another rig in there. We're taking the Belford Dolphin after the well that just spud over to the Gulf of Mexico. And then our partners have been pursuing rigs. And they are talking about having another rig in the area about October of this year to drill two to three additional appraisal wells.

We've not finalized the contracts on that rig yet. So, it's still a work in progress, but we are trying to accelerate it and get rigs. There does seem to be some availability for slots. These are fairly short wells, about 30-day wells. And so 90-day slot could get us three wells down.

David Heikkinen - Pickering Partners

Okay. And then down in the weed a little bit. You guys had Floyd Shale well that you were drilling, any update there?

Jim Hackett

Not really any update on it. We've drilled a couple of them. And we’ve tested several for fracking a couple other zones and we're just kind of evaluating, gathering data and evaluating what it says for our acreage position out there and where the next test may need to be drilled.

David Heikkinen - Pickering Partners

Okay. Fair enough. Thanks, guys.

Operator

We'll take our next question from Joe Magner with Tristone Capital.

Joe Magner - Tristone Capital

Good morning. In China, with the results of the latest exploration well on block 436, any change or update on plans to retain the ownership in those blocks?

Bob Daniels

Hello Joe, this is Bob Daniels. The exploratory well was a disappointment to us. We had hoped that we would be able to extend the field. The Petro China is discovering over on to our block, it was a relatively low cost and quick well and it gave us some very good information on the complexity of the reservoirs over there.

As to the overall China asset, this didn't really impact that, although we would have seen a good growth profile had this been successful out of it. So, no change at this point on the China assets.

Joe Magner - Tristone Capital

Okay. Thanks. And there was a comment, been a couple questions asked about it, but in greater Natural Buttes there was a note in the ops update about pilots to improve recoveries. Is that just related to the expansion of the processing plants and the deepening or is there anything else out there that's going on?

Chuck Meloy

Joe, this is Chuck. What we're doing is several pad pilots as well as down spacing pilots, re-frac pilots, there's a number of different ones that we're undergoing. Each of them are showing quite a bit of progress. And we're doing this twinning exercise as well where we are actually taking a Wasatch well and twinning it with a Mesa verde well and completing in the Mesa Verde below it.

And it's also been working out for us. So, we're looking at different ways to exploit the field and each is showing quite a bit of promise.

Joe Magner - Tristone Capital

Okay. Thanks.

Operator

We'll take our next question from David Tameron with Wachovia.

Jim Hackett

David, you there?

David Tameron - Wachovia

Can you hear me okay?

Jim Hackett

Yes.

David Tameron - Wachovia

Sorry, I'm breaking up a little bit. Everything has been asked. But just one quick question. In the Rockies, it looks like your non-op rigs dropped way off in the second quarter verses first quarter. Was that specific field or can you give me a little more color on that?

Chuck Meloy

Yes, David, this is Chuck. What we saw in the Rockies, of course there’s been Spring and early Summer, under federal stipulations as far as lay down of various reasons and environmental reasons and we’ve done that in Powder River and those stipulation begin to – probably begin to drill with their own.

David Tameron - Wachovia

Okay. So no specific play, just kind of the typical winters stips that happen out here?

Chuck Meloy

Typical stip…

David Tameron - Wachovia

All right. Thanks.

Operator

(Operator Instructions) And we'll take a follow-up question from Joe Allman with J.P. Morgan.

Joe Allman - J.P. Morgan

Tough to hear the answer on that last question. I guess the answer was just winter stipulations, that's why the non-operating count was down?

Chuck Meloy

Yes, Joe.

Joe Allman - J.P. Morgan

And then on -- back to east Texas for a second. You know that one well you mentioned in your ops update, is that the only horizontal well you've drilled there? And if not, can you talk about the others?

And then it sounds like with that program you are talking about -- you're focusing on the Cotton Valley Sands. But you've also got a lot of acreage to the west that would be potentially perspective for the Cotton Valley line that others are pursuing, can you talk about your plans for that program, as well?

Chuck Meloy

Joe, it is our first horizontal well and candidly we do have a number of other horizontal prospects we're looking at in east Texas, including the Cotton Valley line and the Austin Chalk in Tyler County.

We've drilled several wells in the Chalk and Tyler counties -- horizontal wells with extended laterals and had tremendous success. Some of our best wells we have in the onshore right now are coming from that area. So we've got a big program that we're working through and targeting both the Chalk and Cotton Valley, different sections in the Cotton Valley.

Joe Allman - J.P. Morgan

Okay, so we should see a step up in activity there as we move forward, I suppose?

Chuck Meloy

Principally in '08.

Joe Allman - J.P. Morgan

And focus mostly on the sands or the lime or both?

Chuck Meloy

Both.

Joe Allman - J.P. Morgan

Okay. Thank you.

Operator

Take our next question from Ray Deacon with BMO.

Ray Deacon - BMO Capital Markets

Yes, hello, just had a question on Algeria. It looked like no change in the allowance you've made there for the year. Is that right? And then just a quick one on any comment on the Maverick Basin in your acreage position there and what you see as the potential for that?

Jim Hackett

In Algeria, Ray, its just there was no change and we continue to pursue our contract remedies as well as we're engaged in discussions actively with the Algerians. On the Maverick Basin, does anybody want to…

Bob Daniels

I'll take that, Ray. Bob Daniels. On the Maverick Basin, I think we've got 5 wells, we had two objectives in each of the wells. We've, again, its like the Floyd Shale, we're mostly acquiring data and seeing what the impact is on the acreage position and where it will really focus our efforts. We've completed most of the wells in the lower zone and now we're moving to the upper zones and starting the completions there. And again, see what kind of results we get, what impact it has on future activities. It's definitely in exploration mode right now. Again, all those plays we're trying to spend minimal dollars to get as much information and see where it takes us from an exploration standpoint.

Ray Deacon - BMO Capital Markets

Got it. Thanks a lot.

John Colglazier

That appears to be the end of the questions. I hope that you all have a good day and we look forward to continuing strong performance in the quarters ahead. Thanks.

Operator

Thank you, ladies and gentlemen, once again that does conclude today's conference. We do appreciate your participation.

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Source: Anadarko Petroleum Q2 2007 Earnings Call Transcript
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