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Anadarko Petroleum Corp. (NYSE:APC)

Q3 2007 Earnings Call

November 06, 2007 10:00 am ET

Executives

John Colglazier - Director of Investor Relations

Jim Hackett - Chairman and Chief Executive Officer

Bob Daniels - Senior Vice President of Worldwide Explorations

Karl Kurz - Chief Operating Officer

Chuck Meloy - Senior Vice President of Worldwide Exploration

Al Walker - Chief Financial Officer

Analysts

Tom Gardner - Simmons and Company

Scott Hanold - RBC

Gil Yang - Citigroup

John Herrlin - Merrill Lynch

David Heikkinen - Tudor Pickering

Brian Singer - Goldman Sachs

Ross Payne - Wachovia Capital Market

David Tameron - Wachovia

Ted Izot - Bear Stearns

Operator

Good day everyone, and welcome to the Anadarko Petroleum Third Quarter 2007 Earning Results Conference Call. Today’s call is being recorded.

At this time for opening remarks and introductions, I’d like to turn the call over to Mr. John Colglazier, Director of Investor Relations for Anadarko Petroleum Corporation. Please go ahead, sir.

John Colglazier

Thanks, Jeremy. Good morning, and thank you for joining us for our third quarter 2007 Earnings Call. Joining me on the call today are Jim Hackett, our Chairman and CEO, and other executives who will be available to answer your questions later in the call.

Consistent with previous reporting periods, we've included a lot of information in our quarterly operations report, which is posted on our website at anadarko.com. We'll be talking about the quarter's highlights during today's call, but I also encourage you to read through the report for more detailed information.

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

Also, we'll reference a non-GAAP cash flow measure. So, be sure to see the reconciliation in our earnings release. We also encourage you to read the cautionary note to US 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, everyone. The results of the third quarter demonstrate strong and consistent performance. We continue to meet or exceed our production guidance and we've raised the mid point of guidance on our retained portfolio twice this year, by a total of 5% or 9 million barrels of oil equivalent.

This is, importantly we've done so while maintaining a strong focus on our cost structure. When we closed the acquisitions in 2006 and initiated the program to optimize our portfolio, we wanted to establish a foundation of assets based on repeatability and predictability.

The quality of our assets and strength of our performance is evident, considering the challenge we overcame during the quarter. We exceeded the mid point of our updated supplemental production guidance by 0.5 million barrels overcoming volume reductions of approximately 700,000 net barrels of oil equivalent, due to infrastructure disruptions in the Rockies, mainly due to a third party compressor station fire. The majority of the reductions were in natural gas production and the portfolio made up for these challenges with better then expected oil and NGL production, which provided the added benefit of generating more than twice the revenue as compared to gas on a BOE basis.

The quarter's performance gives us confidence in our full year 2007 production guidance. It also serves as a stake in the ground as we look to close out the year and continue to grow production by 5% to 9% in 2008, which amounts to about 202 million to 209 million barrels of oil equivalent.

For the remainder of 2007, we have reaffirmed the mid point our guidance at 191 million barrels of oil equivalent from our retained properties. We've also narrowed our full year production guidance to a range of 190 million to 192 million barrels of oil equivalent.

This includes the impact from the disruptions in the Rockies, which are expected to last through mid November. As the portfolio was able to achieve in the third quarter, we expect oil and NGL sales to offset natural gas sales shortfalls in the fourth quarter.

Looking back at the third quarter, crude oil production exceeded the high end of guidance by approximately 7,000 barrels per day driven by offshore production. NGLs were also strong in the quarter exceeding the upper end of guidance by a little more than 2,000 barrels per day.

As we did in the second quarter, we were able to capitalize on the enhanced value of liquid prices and capture greater value by increasing our NGL volumes, rather than selling the molecules as natural gas.

Along the same lines, natural gas sales were slightly below the low end of guidance, mainly due to the fire at the third party operated compressor station and infrastructure disruptions in the Rockies. We talked on several occasions about this year's production constraints in the Rockies.

In that regard, we're pleased to say that our mid stream expansion projects are progressing very well in eastern Utah and in the Powder River Basin of Wyoming. I'll talk more about the progress on that front later in the call and also update you on our risk mitigation program. As John mentioned, there's more detail about our operations in the third quarter operations report that is available on our website.

However, I want to highlight a few other things this morning. One of the most significant accomplishments during the quarter was the startup of production at Independence Hub. Production began on July 19th, and we continue to bring on additional wells and steadily ramp up production toward the Hub's capacity of one billion cubic feet per day by year-end.

Currently, the hub is producing approximately 850 million gross cubic feet per day from 14 wells. The remaining well is expected to be brought on stream by the end of this year.

Going forward, we have set guidance for net volumes of Independence Hub using our average working interest of 60% multiplied by the platform's one BCF per day of capacity, reduced by the applicable one eighth royalty and multiplied by an approximate 80% run time factor.

Also during the quarter, we announced a second discovery off the coast of Ghana. The Hyedua-1 well located on the Deepwater Tano License in approximately 5,000 feet of water is about 3.3 miles southwest and down dip from the Mahogany-1 discovery well, which we announced in the second quarter.

This is a very encouraging discovery. It indicates a large structure extending across the West Cape Three Points Block and onto the Deepwater Tano license, with an estimated combined gross hydrocarbon column of nearly 1,200 feet. Although it's early in the delineation progress, we currently estimate these discoveries have potential gross recoverable resources of between 200 million to one billion barrels of oil.

The partnership has an aggressive appraisal program for 2008 with three additional wells planned around the existing structure and further delineation and exploration drilling activity on the two blocks aimed at multiple follow-on prospects.

During the third quarter, we also ramped up other exploration activity, especially in the Gulf of Mexico. We're currently drilling the West Tonga prospect in the Green Canyon area. This will test the middle Miocene objectives in the vicinity of Caesar in Tonga. We expect to reach target depth in the fourth quarter. Anadarko was the operator with a 38% working interest. We've also spud the Atlas Deep-1 prospect at Walker Ridge block 155.

We're currently drilling to our proposed depth of 32,000 feet to test the Middle to Lower Miocene objective and expect to reach target depth in the fourth quarter. Anadarko will operate the Atlas Deep with a 68% working interest. We anticipate spudding two Miocene and one Lower Tertiary test between now and January. The Terrebonne prospect in the Green Canyon area is a 26,000-foot Miocene test. We have a 33% interest in this.

Sturgis North in the Atwater Valley area is another Miocene test with a proposed depth of 31,500 feet. We have a 25% working interest in that prospect. And Green Bay is a 32,000-foot Lower Tertiary test in the Walker Ridge area that will operate with a 35% working interest. We anticipate all three of these [latter] wells will reach target depth in the first half of 2008. We also recently spud the Deepwater Subsalt test at the Serpa prospect in the Espirito Santos Basins offshore Brazil. Anadarko has a 30% interest in this prospect.

Let's now walk through some of our financial highlights in the third quarter. As I do so, please remember that we recently converted the successful efforts method of accounting, which was discussed in our October 26th conference call, which in effect lowered our previous net income guidance by about $0.41 per share.

For the third quarter net income for continuing operations was $1.10 per diluted share. This includes several non-recurring or non-cash items as were detailed in the news release. To elaborate on a few of these, gains on asset divestitures were $219 million after tax or $0.47 per diluted share. These gains were primarily associated with the $1.85 billion divestiture of the Midkiff-Benedum and Chaney Dell midstream systems.

Also included in that income, was a $17 million restructuring charge after tax or $0.4 per diluted share, associated with the post-merger reactions affecting G&A by $5 million pretax and LOE by $20 million pretax. Discretionary cash flow and continuing operations for the quarter was approximately $718 million.

Approximately $300 million of the recorded current tax expense in the quarter relates to the gain on divestitures and other non-recurring items. Gathering, processing and marketing margins were well above the high-end of guidance at $117 million, compared to a third quarter forecast of $70 million to $90 million.

This was a result of gains from firm transportation as a result of the Rockies natural gas basis widening. In a category of gain on divestitures and other, we also exceeded guidance due through the divestiture of the Midkiff-Benedum and Chaney Dell midstream systems mentioned previously.

During the second quarter conference call, we discussed the improvements in our cost structure and we continue to make progress in the third quarter. With the conversion of successful offers, exploration expense will be shown as a cost category.

The third quarter was in line with revised guidance at $253 million for the quarter. We divided exploration expense into two sub categories, cash and non-cash. The non-cash items are dry hole expense and non-producing leasehold impairment. Dry hole expense for the quarter was approximately $111 million, which included the Cortez Bank prospect, where we encountered some mechanical issues short of the targeted objective.

We are still optimistic about the potential of the unit and are evaluating the data from the two wells drilled to-date and the seismic survey to determine the location for the next well. Non-producing leasehold impairment totaled approximately $86 million for the quarter. Cash items associated with exploration expense, which include exploration overhead, G&G and delay rentals totaled approximately $56 million slightly below the mid point of revised guidance.

As mentioned earlier in the call, volumes for the quarter were favorable to guidance. Oil and gas operating expense was below the low end of revised guidance. It is $5.02 per BOE once you back out the $20 million in restructuring charges.

Going forward, we will continue to focus on margins and profitability. One of the goals we've had earlier communicated to the investment community was to have all G&A costs around $4 per barrel by the fourth quarter of this year and we're pleased that we've reached this goal one quarter early. G&A was approximately $166 million for the quarter, excluding restructuring charges.

DD&A was right in line with our revised guidance, at $14 per barrel of oil equivalent, while production taxes were near the low end of guidance at approximately 12% of wellhead realizations. Oil and gas transportation costs were $2.11 per BOE, which exceeded the high end of guidance.

Notably, since much of this variance is do to market dynamics favorable offsets are embedded in our revenues. Interest expense was $8 million below the low end of revised guidance at $222 million. However, this did include the $32 million pretax interest rate swap gain.

Capital spending totaled $826 million for quarter, well below revised guidance. This is primarily a result of our focus on capital efficiencies and also includes lower than expected expenditures, related to the recent Gulf of Mexico lease sale.

I also want to mention some other accomplishments so far in the fourth quarter. I briefly mentioned that we have made progress in our midstream expansions in the Rockies. The first phase of one of our larger projects the is the 100% owned Chapita Processing Plant in the greater Natural Buttes area of eastern Utah is complete and we expect the plant to be ready for service later this month.

The first phase adds 250 million cubic feet per day of processing capacity, nearly doubling what is currently available in the basin. The plant is also the origination point for the new 400 million cubic feet per day, 128-mile high pressure Kanda lateral pipeline.

We also anticipate the phase one expansion of the Fort Union Gas Gathering System in the Powder River Basin to be in service at the end of November. It will increase the pipeline capacity by 200 million cubic feet per day and release some of the constraints in the Powder River Basin.

You may have seen the news release regarding our filing of the S1 registration statement for the mid stream Master Limited Partnership, which is called Western Gas Partners. We remain in a quiet period so we're unable to discuss the specifics of the MLP today; however, the registration document is available through the SEC's website.

Regarding efforts to further reduce leverage in our balance sheet; we remain on schedule to reduce net debt to about $12 billion by year-end. We recently closed the Qatar divesture and filed a preliminary registration document for the mid stream MLP last month. The proceeds from both of which are dedicated to reducing the balance sheet leverage.

In addition to the reaffirmation of our fourth quarter and full year guidance, it again included with our release, some supplemental information that provides more detail about what you can expect from our retained assets going forward. This information also includes our hedge and basis positions. We have expanded our gas hedge position for 2008 through a series of costless collars. We believe this position, coupled with our anticipated 2008 production levels and basis hedges, will secure the necessary cash flow to fund our capital program for the coming year and at current strip prices, generate significant free cash flow.

For these additional 2008 gas hedges we've established a floor of $7.50 per decatherm and will participate in upside up to about $11 per MMBtu. Overall, we've hedged almost two thirds of our forecasted gas production and about 40% of our forecasted liquids production for 2008.

We've also taken an aggressive approach to minimizing our exposure to wide differentials for our Rockies natural gas, by locking in value for approximately 95% of our 2008 gas production in this geographic area. We've done this through additional basis swaps and firm transportation at around $1.50 per MMBtu differential to Henry Hub and we've expanded this position out to 2010 at even narrower spreads.

To summarize, we're delivering on our guidance and post merger commitments. Operating performance in my mind has been outstanding. And we've also overcome some significant challenges. As we move towards 2008, we are confident we'll continue to deliver 5% to 9% production growth and continue that into the next decade. As an aside, we'll provide more detailed information on our production growth as well as our 2008 capital expenditures program and operating budget in early February.

Now, Jeremy will open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And sir, your first question comes from the line of Tom Gardner with Simmons & Company. You may proceed.

Tom Gardner - Simmons & Company

Good morning, everyone.

Jim Hackett

Good morning, Tom.

Tom Gardner - Simmons and Company

Jim, with respect to the deep-water royalty decision, do you perceive any risk of reprisal by the Department of Interior or anyone else going forward, as a potential fallout or what's your thought there?

Jim Hackett

Yeah, we certainly hope not. I think, if anything, what is happening is that the law of the land is being interpreted by the courts. In America, we view that as a very powerful part of our system. And to think that any legislator would actually use that against the industry, it’s pretty much an anathema of what we believe in as a country.

I will tell you that we expect the MMS to request the Justice Department to appeal the decision. It goes to the same Circuit Court that decided the Santa Fe Schneider case and we hope that we believe that we're living within the law in what we're doing today and we still believe that and we'll pursue the path we need to legally, to continue to insist on that.

Tom Gardner - Simmons & Company

Great, thank you for that and just with regard to your third quarter capital. I mean, I noticed a fall-off there. What are your thoughts there?

Bob Daniels

Yes, Tom, it's Bob Daniels. I could take a little part of that. We’re down about $300 million in the quarter in capital. Part of that is related to the Gulf of Mexico lease sale. We had western and central Gulf sales planned in the third quarter and we aggressively bid on those. We weren't as successful with our bids as we had planned and so some of that money got turned back into our capital pool. Just in commentary about that though, we were, overall, very pleased with the results that we had. We had 26 blocks that we were awarded over 19 prospects in the deepwater Gulf of Mexico and that just adds to our 2.5 million acre position out there.

We are very much targeting specific prospects and they could be drilled quickly that would add to our overall portfolio, specifically Miocene and Lower Tertiary, and we think the lease sale really did that for us, to gain the 19 additional prospects into that inventory. So, while we weren't successful with everything, we're very pleased with what we ended up with and we think that one thing this does is kind of value that 2.5 million acre position that we have in the deepwater and shows how attractive that is to the industry.

Tom Gardner - Simmons & Company

Great. Thanks for that.

Karl Kurz

Tom, this is Karl Kurz, I might add to that. [Chuck], the way his team also demonstrated a lot of capabilities and focus on our operations side by delaying completions and we were able to move capital, like in the Rockies out into the future quarters in a market where it didn't make sense to complete [wells] low price differences. So, some of the capabilities [scenario] and balance in our portfolio is being demonstrated right now.

Tom Gardner - Simmons & Company

Excellent. One last question on Algeria. Just with respect to an update on contract remedies and do you anticipate the legal status of your challenge, progressing to the point of being able to alter your allowance?

Jim Hackett

I'm not sure you what mean by alter our allowance, Tom.

Tom Gardner - Simmons & Company

Just you’ve given guidance with respect to how it should be treated going forward.

Jim Hackett

Okay. I apologize. With regard to the current situation in Algeria, we still fortunately have very good relationships with our partners, still on track and with the government. We just have different views about contract interpretation and one of the parts that you have rights to invoke, that we had previously invoked a year ago on a different piece of legislation, is conciliation.

We have done that, filed that with the government, we'll continue to try to work together to come up with a good commercial solution. Failing that, the next step would be that if the conciliation was unsuccessful, is you could invoke arbitration. So, our plan is to continue to work with the government try to come up with a reasonable answer but to continue to insist on our contract rights, including this current step of conciliation. So, that process will take us through the early part of next year and then we'll have a further update for everyone.

Tom Gardner - Simmons & Company

Thanks, Jim. That's all I have.

Operator

Your next question comes from the line of Scott Hanold with RBC. You may proceed.

Scott Hanold - RBC

Thank you, good morning. I guess where oil prices are right now and you kind of hinted on the fact that you do have some ability to sort of use your diverse asset base to sort of shift dollars where it's advantageous. You did talk a little bit about the fact that NGL volumes, you did increase that where you could. Considering that oil is at $96 right now, is there other things you can do going forward to sort of increase your exposure, say over the next six to 12 months with respect to oil prices?

Karl Kurz

Yeah, Scott, this is Karl again. There are things we can do, I go back, one of the exciting things about our portfolio right now is we have the ability to shift focus and efforts in different areas. Wattenberg is a great field that has basically those wells, initial completions will produce 25% to 30% liquids. And so, right now, with these types of oil prices, and with gas prices improving the margins in the Wattenberg and the economics of Wattenberg are just outstanding.

We also have deepwater completions that we can shift to, that will be able to accelerate some oil production and also we've got some stuff in the Chalk area still. We have assets we've retained that we can increase activity there when oil prices dictate it. So, yes, I would tell you right now we're very aggressive looking at where we can maximize margins with regard to our portfolio.

Scott Hanold - RBC

So, there is added capacity to increase NGL volumes from where you currently are at this point?

Karl Kurz

I wasn't talking about NGLs. NGLs every place we could maximize processing margins we are doing it. We are looking at some future projects that will allow us to capture more value in that regard like installing cryo plants versus the refrigeration plants, and stuff like that. As we think, oil prices will stay strong and process margins stay strong you'll see us look for more opportunities to capture more of that margin but we're maxed out on our processing capabilities right now.

Scott Hanold - RBC

Okay. Thank you.

Operator

And your next question comes from the line of Gil Yang with Citi. You may proceed.

Gil Yang - Citigroup

Hi, good morning. Maybe to follow-up on that Chapita coming online, not only does it give you more throughput in volumes, but does it increase your liquids processing capability?

Karl Kurz

Yes, Chapita will. It's a refrigeration plant and Natural Buttes is a pretty [lean] gas but it's mainly ethane recovery and a little bit of propane. But, like we've been emphasizing, in these types of processing margins, ethane recovery is very profitable. So, it will allow us to increase some yield with regards to ethane in that area.

Jim Hackett

And that just speaks to the question, Gil, that was asked right before that too. As our gas volumes increase, obviously NGLs will increase from those areas that produce NGL capability.

Gil Yang - Citigroup

Right. So there's some untapped potential there?

Jim Hackett

Yes. Right.

Gil Yang - Citigroup

Maybe along those lines again, Gulf of Mexico oil volumes decreased sequentially in the quarter. Looks like, obviously you can maybe shift to move to more oil projects in the future but is that a trend that -- the decline, is that a trend that we should expect to see going forward with ramping up on the gas side?

Chuck Meloy

Gil, this is Chuck. The decline in the third quarter was associated with one well failing the completion, and we have since drilled a sidetrack and anticipate bringing that well back on at Ticonderoga.

Gil Yang - Citigroup

So, it should come back to about $77million, or 77,000 a day?

Chuck Meloy

Gil, I don't have the exact number, but it will recover most of the decline in the third quarter. And you'll see the general [tail off] as we become more gas-dominated in the Gulf. But we have some completions to be done in the Gulf particularly around the constitution, [Ticonderoga] area, which is primarily oil.

Gil Yang - Citigroup

And then the last question from me surrounds methane. I think you drilled 337 wells in the quarter. Do you have a lot of wells that are waiting to be completed and put on line, waiting for the new pipeline to be built?

Karl Kurz

Yeah, Gil, with regards to that, we've got lots of wells that -- it's a dynamic situation in the Rockies with the constrained volumes. There are wells we've brought on, but we know they're being constrained, due to the infrastructure limitations. So, it's not that we have a whole bunch of wells shut in, even though we do have some wells that we will be completing, some new wells we'll be bringing on. But as that Rockies becomes the bottleneck, and we see the line operating pressures decrease, a lot of our current wells that are on that, are currently producing, will increase in volumes.

Gil Yang - Citigroup

Okay. All right. Great, thanks very much.

Operator

And your next question is from the line of John Herrlin of Merrill Lynch. You may proceed.

John Herrlin - Merrill Lynch

Yeah, morning. I'd like to start out with the Gulf of Mexico and I have a bunch of questions. For Northwest Nansen when it comes on in the first quarter, what kind of volumes are you looking for from those four wells?

Karl Kurz

John, we will be ramping it up. The expectation is these wells are capable of over -- between 10,000 and 15,000 barrels of oil and in the order of 50 to 75 million cubic feet of gas a day. All of them combined, and they will be coming back to the Nansen platform, that will start early in '08 and we'll be ramping them up through probably at the end of the second quarter.

John Herrlin - Merrill Lynch

Okay. Great. Regarding Independence Hub, you guys have done a great job there. Do you think the 80% utilization rate is a little conservative?

Karl Kurz

John, it may be. This is a first of a kind facility, we have very long flow lines and [short] peaking times and that type of thing. The duration of the peaking and the frequency is all still to be determined on actual operating conditions. And so we've made our best estimate at this time and hopefully we'll conservative, we will even do a little better.

John Herrlin - Merrill Lynch

Okay. With Atlas and Tonga, could you refresh my memory in terms of what the resource exposure is for you there?

Bob Daniels

Yeah, John, this is Bob Daniels. On Atlas and Tonga, they're both exploratory wells for the Miocene. And we typically target about minimum 100 million barrel resources out there, and these fit right into that. Of course, Tonga West is close into the Caesar and Tonga complex, and so that won't be additive to those. Atlas is very similar to our typical Miocene target out there -- 100 million plus.

John Herrlin - Merrill Lynch

Okay. With Cortez, what happened mechanically?

Bob Daniels

Well, we were unable to reach our objective on the sidetrack, that is the main thing. We were just having all sorts of problems controlling the well, and we realized, as we were getting down close to it that it probably wasn't optimally located. And given the difficulties mechanically, it was best to back off and re-evaluate exactly where we want the location to be. And so that's what we're in the process of doing, we're still very optimistic about the potential out there. We've got a new seismic survey that going to be coming in end of first quarter of next year, which will really help us with the overall image and the ultimate location of a potential 2008 -- potential 2008 well.

John Herrlin - Merrill Lynch

Is that wide azimuth?

Bob Daniels

Yeah, exactly. We're getting a wide azimuth survey from [PGS Silver].

John Herrlin - Merrill Lynch

Okay. Last deepwater one is in Ghana, as you drill more wells and you are partners in the plan to get more next year. Will you better define that range because it's pretty broad between 200 million barrels and one billion?

Bob Daniels

Yeah, it is pretty broad and I think that we do have a three well appraisal program that we've all agreed to, and now we're just trying to secure the rigs for it. That would definitely put some balance to that range, because we're going to be testing some of the limits with that appraisal program. It's not going to be just straight step outs to these. We see an awful lot of potential but we've got to get there with a well bore to actually prove it up. It's a very, very interesting complex and we think that both of those numbers are realistic at this point and the next three wells will really help us an awful lot with what we have.

We're also shooting a 3D right now that -- we have two different 3D volumes, one on the West Cape Three Points and one on the Deep Tano. This new 3D will be over the entire complex, it will have a merged data set, a clean data set that we can incorporate the wells into that again will help with that definition of the resource potential.

Karl Kurz

And John, this is Karl, and with your background you can appreciate this discovery being a stratigraphic play. Basically, they gone up dip and down dip on our two discovery wells and until we go laterally, it's going to be hard to really nail down that reserve profile.

John Herrlin - Merrill Lynch

Appreciate it. Last one for me is on Salt Creek. It looked like you were finally getting more of a response. Is that something we should anticipate going forward?

Jim Hackett

John, the processing performance out there has been very good. CO2, EOR flood is working very well. We're expanding our area that [we are] CO2 flooding and right now we're feel really good about an inclining profile for quite some time.

John Herrlin - Merrill Lynch

Thank you very much.

Karl Kurz

Thank you.

Operator

And your next question comes from the line of David Heikkinen with Tudor Pickering. Go ahead.

David Heikkinen - Tudor Pickering

Good morning. Can you give us an update on any remaining asset sales?

Al Walker

Yeah, David, this is Al Walker. We have a few things that we're still looking onshore to do. We have some properties in the northern Rockies' area that we are in the process of selling. They're pretty much small-end properties from our prospective and cleanup in nature.

So, from a natural gas property sale profile that, in conjunction with some other non-operated interest we probably would be selling. Right now, that is really it in terms of actively looking to market things that we currently own.

David Heikkinen - Tudor Pickering

Okay. Not a big volume of anything, just kind of knits-and-knots and cleanup is what you have left.

Al Walker

Absolutely.

Jim Hackett

It's reflected in the guidance, David, too.

David Heikkinen - Tudor Pickering

Okay. The horizontal drilling in the Carthage area, talking about potentially putting one rig into that with continued success. Can you talk about what zones you're targeting well costs and kind of how much running room you have?

Karl Kurz

David, we drilled one well to date and several operators in the field have drilled a number of wells and they appear to have a very high success rate. Our first well, as mentioned I think in the operating report, is running around 7 million a day when it came online and has a very nice profile to it. We have tons of running room, particularly on the east side of the field. It's the cotton valley. Several sections in the cotton valley and with the results to date, the types of units that we can form in the field we feel like we can easily keep a rig busy and assuming success on that, we would probably expand that program out in nine and ten.

David Heikkinen - Tudor Pickering

Okay. How long did it take you to drill the well? Is it 12 wells you drill with one rig or 20 days, I'm just trying to get a frame of how much inventory you have with the one rig program that could expand?

Karl Kurz

I believe it was around 40 days that would take to drill a well, so that's around eight or nine wells a year.

David Heikkinen - Tudor Pickering

And then on Independence Hub, as you go through some of the cycle time of picking and you talked about this general maintenance of multiple sub C projects. Is there a sketch, is it monthly pigging, monthly schedules that is in that 80% run time. Maybe I'm just trying to get into the mind set of the number that is 80%?

Karl Kurz

David, I'm sure with your background you're familiar that these are very long lines, 30 to 40 [mile] lines and we'll let the well performance dictate actually the pace of digging. Right now, we're on a schedule. It varies by a line and I don't have all of that detail in front of me, but it varies by line and that's just our best assumption given the operating parameters that we have on Hub. With time, we hope to improve it.

David Heikkinen - Tudor Pickering

Are you seeing any liquids from any of the fields?

Karl Kurz

Yes.

David Heikkinen - Tudor Pickering

How much?

Karl Kurz

Not a great deal, but enough to want us to keep the lines clean.

David Heikkinen - Tudor Pickering

Okay. That's it. Thanks, guys.

Operator

(Operator Instructions). And your next question is from the line of Brian Singer with Goldman Sachs. You may proceed.

Brian Singer - Goldman Sachs

Thank you, good morning. Following up on I think it was John Herrlin's question on Cortez Bank. You mentioned the well you decided was not optimally located. When you look at the next well would it be closer to the Kaskida field because the [Kaskida] field does not extend as far out as Cortez Bank and what are your thoughts today on the overall size of the Kaskida area?

Bob Daniels

Yeah, Brian, Bob Daniels again. I don't think that the next well in the Cortez Bank area proper, will be closer to Kaskida personally. I do think that the 3D that we'll get in next spring will help us an awful lot with that. Regarding Kaskida, this hasn't changed our view of what the overall potential of Kaskida is, at all. We view this as a separate prospect in the entire complex out there, that we were testing. And so, we think Kaskida is still there. We've got the well in it. We will probably be drilling an additional well in Kaskida in 2008, also but Cortez Bank, I think we'll be probably be moving away from Kaskida a little bit versus closer back into Kaskida. [That's just my view].

Jim Hackett

And Brian, this is Jim, I just -- I think we have to be a bit careful in going into too much detail, given that the operator will shoot us in the head, if we try to tell you what we think, instead of what the group thinks.

Brian Singer - Goldman Sachs

Sure. Okay. And switching topics then, when you look at your '08 guidance, I guess two questions. One -- and perhaps I missed this, in which case I apologize. But, did you put out a CapEx number and what are you thinking there? And then secondly on CBM, do you have a specific estimate in terms of your net CBM volumes in 08?

John Colglazier

Yeah, Brian, this is John Colglazier. For the guidance on capital, we will roll out in February on our yearend conference call, a detailed operating plan for 2008 consisting of where the volumes are coming from, the individual growth rates for the field, the major fields as well as our capital program and operating budget at that time.

Brian Singer - Goldman Sachs

I guess, I need general thoughts on how costs and capital costs and F&D costs are progressing in terms of directionally, where you see capital spending?

John Colglazier

This is John again. I would say with the capital program, we have lined out internally which, by the way the Board has not opined on the capital budgets yet. We're looking for similar to improving type metrics to this year. Costs were basically flat in aggregate. You have pockets of decreases and in other regions are still in an inflationary-type mode.

Brian Singer - Goldman Sachs

Great, thank you.

Operator

And your next question is from the line of Ross Payne with Wachovia Capital Market. Go ahead.

Ross Payne - Wachovia Capital Market

Good morning, guys. On this last well at Independence Hub, any expectations on what kind of flow rates you're going to get on that? And second of all, what is the average life expectations on these wells tied to Independence?

Karl Kurz

Ross, we expect the well to come on between 50 million and 60 million cubic feet a day. The life expectancy -- we see peaks of 12 to 18 months and then falling off. The thing is, that we're still in the process of ramping up the platform. We haven't reached the peak rate on all wells yet. As Jim mentioned, we're running about 850 million cubic feet a day on a spot basis and we see ourselves getting to the platform capacity probably within a month, mid-December anyway, and that should be about a BCF a day. The last well, the 15th well will contribute to that but it's actually all wells actually coming up a little bit, as that space is made available for the commissioning of the platform.

Ross Payne - Wachovia Capital Market

Okay. Great. That's it for me.

Operator

And your next question is from the line of David Tameron with Wachovia. You may proceed.

David Tameron - Wachovia

Hi, good morning.

John Colglazier

Good morning, David.

David Tameron - Wachovia

Capital spending, the southern region looked like it was down quarter-over-quarter, is that just a result of the Chesapeake joint venture?

Karl Kurz

David, this is Karl, that's correct. That's mostly attributed to the Chesapeake joint venture and as well as a little bit of shifting capital as we optimize portfolios to mainly the Chesapeake joint venture.

David Tameron - Wachovia

Okay. And then, if I just look at volumes quarter-over-quarter looking at that same southern region, what's -- backing out the impact from Chesapeake, kind of what's your expectations going forward, what do you think about production levels from that, if we back out that noise?

Karl Kurz

Well, I think the southern region units are a more mature area. So, we'll see some modest declines in that area. You'll see the Rockies being driven by our growth. So, we expect the southern to still see year-to-year declines for the foreseeable future.

David Tameron - Wachovia

All right, and I apologize, Jim, you just answered Brian’s question about CapEx and it broke up on my end and I missed your comments about that for '08. Are you looking to stay within cash flow or what are the big picture comments for that?

John Colglazier

Yeah, David, this is Colglazier. For 2008, with what we currently see out there with the production profile is that we've lined out to the investment community. We do see with our hedges in place combined with some of the basis hedging that we've done, which by the way, as Jim mentioned, we did do about 95% protection on our basis differentials in the Rockies. And we do see that cash flow at those levels will sustain our capital program for the year and at strip prices we'll have excess cash flow on hand.

David Tameron - Wachovia

Okay. And then, one final question on Algeria. What's the timeframe?

Jim Hackett

I think we had answered that a little bit earlier on one of the questions, but we're in conciliation right now and we'll have an update for you sometime early next year.

David Tameron - Wachovia

Okay. All right, but no impact anticipated for '07 year-end reserves at this point?

Jim Hackett

No. No.

David Tameron - Wachovia

All right, thanks.

Karl Kurz

Thank you.

Operator

And your next question's from the line of Ted Issac with Bear Stearns. Go ahead.

Ted Issac - Bear Stearns

Hi. Good morning, everybody. Question on your debt going forward. You are going to be down to the $12 billion. Whether is that kind of where we should expect to be over the next year or two?

Al Walker

Ted, this is Al Walker, I think we're feeling very comfortable that we'll reach that net 12 by year-end. But I think from there, we continue to see the need to reduce debt beyond that and in early February, in the first quarter when we give you some additional detailed guidance, we'll give you a little more of a path of what we would like to see ourselves doing longer-term, but no, 12 is certainly not a finished number for us.

Jim Hackett

And we think there are ways to work on that through the MLP drop downs etcetera.

Ted Issac - Bear Stearns

Okay.

Jim Hackett

And free cash flow.

Ted Issac - Bear Stearns

Okay. Thanks. I don't know if I kind of jumped on the call a little bit late. Has anybody asked about share repurchases, once you get the debt down or if they haven't or if they even they have I will ask now, would that be a consideration?

Jim Hackett

They have not asked, so it's a new question. But we currently have a lot of internal growth prospects and this two -- second share repurchases are not on the list of things to do. We've got seven billion barrels of oil equivalent of net risk resource potential in the company and I think that serves our investors best to attack that.

Ted Issac - Bear Stearns

Okay.

Al Walker

And let me also add to that. I think when you look at what the return on the investment dollar is for retiring debt, versus the reinvestment opportunity in the capital program, that could bring some of those un-booked barrels forward, the rate of return is far greater by reinvesting in the capital rather than buying back stock.

Ted Issac - Bear Stearns

Okay. Great, thank you. Thank you.

Al Walker

Thank you.

Operator

And at this time, sir, there are no further questions.

Jim Hackett

Okay, I appreciate everybody's time today and thank you for joining us. We look forward to a strong fourth quarter and rewarding 2008 for our investors. Have a great day.

Operator

Thank you for your participation in today's conference, ladies and gentlemen, this does conclude the conference and you may now disconnect. Have a wonderful day.

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Source: Anadarko Petroleum Q3 2007 Earnings Call Transcript
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