Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Anadarko Petroleum Corp. (NYSE:APC)

Q3 2007 Earnings Call

November 06, 200710:00 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 PetroleumThird Quarter 2007 Earning Results Conference Call. Today’s call is beingrecorded.

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

John Colglazier

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

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

Before I turn the call over to Jim, I’d like to remind youthat this presentation contains our best and most reasonable estimates andinformation. However, a number of factors could accuse actual results to differmaterially from what we discuss. You should read our full disclosure onforward-looking statements and our presentation slides, our latest 10-K, otherfilings and press releases for the risk factors associated with our business.

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

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

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

The quarter's performance gives us confidence in our fullyear 2007 production guidance. It also serves as a stake in the ground as welook 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 pointour guidance at 191 million barrels of oil equivalent from our retainedproperties. We've also narrowed our full year production guidance to a range of190 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 toachieve in the third quarter, we expect oil and NGL sales to offset natural gassales shortfalls in the fourth quarter.

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

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

Along the same lines, natural gas sales were slightly belowthe low end of guidance, mainly due to the fire at the third party operatedcompressor 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 streamexpansion projects are progressing very well in eastern Utahand in the Powder River Basin of Wyoming. I'll talk more about the progress onthat front later in the call and also update you on our risk mitigationprogram. As John mentioned, there's more detail about our operations in thethird quarter operations report that is available on our website.

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

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

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

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

This is a very encouraging discovery. It indicates a largestructure extending across the West Cape Three Points Block and onto theDeepwater Tano license, with an estimated combined gross hydrocarbon column of nearly1,200 feet.Although it's early in the delineation progress, we currently estimate thesediscoveries have potential gross recoverable resources of between 200 millionto one billion barrels of oil.

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

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

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

Sturgis North in the Atwater Valley area is another Miocene testwith a proposed depth of 31,500 feet. We have a 25% working interest in thatprospect. And Green Bay is a32,000-foot Lower Tertiary test in the Walker Ridge area that will operate with a35% working interest. We anticipate all three of these [latter] wells willreach target depth in the first half of 2008. We also recently spud theDeepwater Subsalt test at the Serpa prospect in the Espirito Santos Basinsoffshore Brazil.Anadarko has a 30% interest in this prospect.

Let's now walk through some of our financial highlights inthe third quarter. As I do so, please remember that we recently converted thesuccessful efforts method of accounting, which was discussed in our October26th conference call, which in effect lowered our previous net income guidanceby about $0.41 per share.

For the third quarter net income for continuing operationswas $1.10 per diluted share. This includes several non-recurring or non-cashitems 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 dilutedshare. These gains were primarily associated with the $1.85 billion divestitureof the Midkiff-Benedum and Chaney Dell midstream systems.

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

Approximately $300 million of the recorded current taxexpense in the quarter relates to the gain on divestitures and othernon-recurring items. Gathering, processing and marketing margins were wellabove the high-end of guidance at $117 million, compared to a third quarterforecast of $70 million to $90 million.

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

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

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

We are still optimistic about the potential of the unit andare evaluating the data from the two wells drilled to-date and the seismicsurvey to determine the location for the next well. Non-producing leaseholdimpairment totaled approximately $86 million for the quarter. Cash itemsassociated with exploration expense, which include exploration overhead, G&Gand delay rentals totaled approximately $56 million slightly below the midpoint of revised guidance.

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

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

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

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

Capital spending totaled $826 million for quarter, wellbelow revised guidance. This is primarily a result of our focus on capitalefficiencies and also includes lower than expected expenditures, related to therecent Gulf of Mexico lease sale.

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

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

We also anticipate the phase one expansion of the Fort UnionGas Gathering System in the Powder River Basin to be in service at the end of November. Itwill increase the pipeline capacity by 200 million cubic feet per day andrelease some of the constraints in the Powder River Basin.

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

Regarding efforts to further reduce leverage in our balancesheet; we remain on schedule to reduce net debt to about $12 billion byyear-end. We recently closed the Qatardivesture and filed a preliminary registration document for the mid stream MLPlast month. The proceeds from both of which are dedicated to reducing the balancesheet leverage.

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

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

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

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

Now, Jeremy will open it up for questions.

Question-and-AnswerSession

Operator

Thank you, sir. (Operator Instructions). And sir, your firstquestion comes from the line of Tom Gardner with Simmons & Company. You mayproceed.

Tom Gardner - Simmons& Company

Good morning, everyone.

Jim Hackett

Good morning, Tom.

Tom Gardner - Simmonsand Company

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

Jim Hackett

Yeah, we certainly hope not. I think, if anything, what ishappening 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 anylegislator would actually use that against the industry, it’s pretty much an anathemaof what we believe in as a country.

I will tell you that we expect the MMS to request theJustice Department to appeal the decision. It goes to the same Circuit Courtthat decided the Santa Fe Schneider case and we hope that we believe that we'reliving within the law in what we're doing today and we still believe that andwe'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 thirdquarter capital. I mean, I noticed a fall-off there. What are your thoughtsthere?

Bob Daniels

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

We are very much targeting specific prospects and they couldbe drilled quickly that would add to our overall portfolio, specifically Mioceneand Lower Tertiary, and we think the lease sale really did that for us, to gainthe 19 additional prospects into that inventory. So, while we weren'tsuccessful with everything, we're very pleased with what we ended up with andwe think that one thing this does is kind of value that 2.5 million acreposition that we have in the deepwater and shows how attractive that is to theindustry.

Tom Gardner - Simmons& Company

Great. Thanks for that.

Karl Kurz

Tom, this is Karl Kurz, I might add to that. [Chuck], theway his team also demonstrated a lot of capabilities and focus on our operationsside by delaying completions and we were able to move capital, like in the Rockiesout 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 balancein 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 thelegal status of your challenge, progressing to the point of being able to alteryour 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 betreated 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 ontrack and with the government. We just have different views about contractinterpretation and one of the parts that you have rights to invoke, that we hadpreviously invoked a year ago on a different piece of legislation, isconciliation.

We have done that, filed that with the government, we'llcontinue 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 thegovernment try to come up with a reasonable answer but to continue to insist onour contract rights, including this current step of conciliation. So, thatprocess will take us through the early part of next year and then we'll have afurther 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 withRBC. You may proceed.

Scott Hanold - RBC

Thank you, good morning. I guess where oil prices are rightnow and you kind of hinted on the fact that you do have some ability to sort ofuse your diverse asset base to sort of shift dollars where it's advantageous. Youdid talk a little bit about the fact that NGL volumes, you did increase thatwhere you could. Considering that oil is at $96 right now, is there otherthings you can do going forward to sort of increase your exposure, say over thenext 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 havethe ability to shift focus and efforts in different areas. Wattenberg is agreat 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 gasprices improving the margins in the Wattenberg and the economics of Wattenbergare just outstanding.

We also have deepwater completions that we can shift to, thatwill be able to accelerate some oil production and also we've got some stuff inthe Chalk area still. We have assets we've retained that we can increaseactivity there when oil prices dictate it. So, yes, I would tell you right now we'revery aggressive looking at where we can maximize margins with regard to ourportfolio.

Scott Hanold - RBC

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

Karl Kurz

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

Scott Hanold - RBC

Okay. Thank you.

Operator

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

Gil Yang - Citigroup

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

Karl Kurz

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

Jim Hackett

And that just speaks to the question, Gil, that was asked rightbefore that too. As our gas volumes increase, obviously NGLs will increase fromthose 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 Mexicooil volumes decreased sequentially in the quarter. Looks like, obviously youcan maybe shift to move to more oil projects in the future but is that a trendthat -- the decline, is that a trend that we should expect to see going forwardwith ramping up on the gas side?

Chuck Meloy

Gil, this is Chuck. The decline in the third quarter wasassociated with one well failing the completion, and we have since drilled asidetrack 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 mostof the decline in the third quarter. And you'll see the general [tail off] aswe become more gas-dominated in the Gulf. But we have some completions to bedone 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. Ithink you drilled 337 wells in the quarter. Do you have a lot of wells that arewaiting to be completed and put on line, waiting for the new pipeline to bebuilt?

Karl Kurz

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

Gil Yang - Citigroup

Okay. All right. Great, thanks very much.

Operator

And your next question is from the line of John Herrlin ofMerrill 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 Nansenwhen it comes on in the first quarter, what kind of volumes are you looking forfrom those four wells?

Karl Kurz

John, we will be ramping it up. The expectation is thesewells are capable of over -- between 10,000 and 15,000 barrels of oil and inthe 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 secondquarter.

John Herrlin -Merrill Lynch

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

Karl Kurz

John, it may be. This is a first of a kind facility, we havevery long flow lines and [short] peaking times and that type of thing. The durationof the peaking and the frequency is all still to be determined on actualoperating conditions. And so we've made our best estimate at this time andhopefully 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 youthere?

Bob Daniels

Yeah, John, this is Bob Daniels. On Atlas and Tonga,they're both exploratory wells for the Miocene. And we typically target aboutminimum 100 million barrel resources out there, and these fit right into that.Of course, Tonga West is close into the Caesar and Tongacomplex, and so that won't be additive to those. Atlas is very similar to ourtypical 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 controllingthe well, and we realized, as we were getting down close to it that it probablywasn't optimally located. And given the difficulties mechanically, it was bestto back off and re-evaluate exactly where we want the location to be. And sothat's what we're in the process of doing, we're still very optimistic aboutthe potential out there. We've got a new seismic survey that going to be comingin end of first quarter of next year, which will really help us with theoverall 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 [PGSSilver].

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 millionbarrels and one billion?

Bob Daniels

Yeah, it is pretty broad and I think that we do have a threewell appraisal program that we've all agreed to, and now we're just trying tosecure 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 appraisalprogram. It's not going to be just straight step outs to these. We see an awfullot of potential but we've got to get there with a well bore to actually proveit up. It's a very, very interesting complex and we think that both of thosenumbers are realistic at this point and the next three wells will really helpus an awful lot with what we have.

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

Karl Kurz

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

John Herrlin -Merrill Lynch

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

Jim Hackett

John, the processing performance out there has been verygood. CO2, EOR flood is working very well. We're expanding our area that [weare] CO2 flooding and right now we're feel really good about an incliningprofile 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 DavidHeikkinen with Tudor Pickering. Go ahead.

David Heikkinen -Tudor Pickering

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

Al Walker

Yeah, David, this is Al Walker. We have a few things thatwe'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-endproperties from our prospective and cleanup in nature.

So, from a natural gas property sale profile that, inconjunction 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 thatwe currently own.

David Heikkinen -Tudor Pickering

Okay. Not a big volume of anything, just kind of knits-and-knotsand 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 Carthagearea, talking about potentially putting one rig into that with continuedsuccess. Can you talk about what zones you're targeting well costs and kind of howmuch running room you have?

Karl Kurz

David, we drilled one well to date and several operators inthe field have drilled a number of wells and they appear to have a very highsuccess rate. Our first well, as mentioned I think in the operating report, isrunning around 7 million a day when it came online and has a very nice profileto it. We have tons of running room, particularly on the east side of thefield. It's the cotton valley. Several sections in the cotton valley and withthe results to date, the types of units that we can form in the field we feellike we can easily keep a rig busy and assuming success on that, we wouldprobably 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 12wells you drill with one rig or 20 days, I'm just trying to get a frame of howmuch 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 awell, 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 thecycle time of picking and you talked about this general maintenance of multiplesub C projects. Is there a sketch, is it monthly pigging, monthly schedulesthat is in that 80% run time. Maybe I'm just trying to get into the mind set ofthe number that is 80%?

Karl Kurz

David, I'm sure with your background you're familiar thatthese are very long lines, 30 to 40 [mile] lines and we'll let the wellperformance dictate actually the pace of digging. Right now, we're on aschedule. It varies by a line and I don't have all of that detail in front ofme, but it varies by line and that's just our best assumption given theoperating 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 linesclean.

David Heikkinen -Tudor Pickering

Okay. That's it. Thanks, guys.

Operator

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

Brian Singer -Goldman Sachs

Thank you, good morning. Following up on I think it was JohnHerrlin's question on Cortez Bank. You mentioned the well you decided was notoptimally located. When you look at the next well would it be closer to theKaskida field because the [Kaskida] field does not extend as far out as Cortez Bankand 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 nextwell in the Cortez Bank area proper, will be closer to Kaskida personally. I dothink that the 3D that we'll get in next spring will help us an awful lot withthat. Regarding Kaskida, this hasn't changed our view of what the overallpotential of Kaskida is, at all. We view this as a separate prospect in theentire complex out there, that we were testing. And so, we think Kaskida isstill there. We've got the well in it. We will probably be drilling anadditional well in Kaskida in 2008, also but Cortez Bank, I think we'll be probablybe 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 abit careful in going into too much detail, given that the operator will shootus in the head, if we try to tell you what we think, instead of what the groupthinks.

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 whichcase I apologize. But, did you put out a CapEx number and what are you thinkingthere? And then secondly on CBM, do you have a specific estimate in terms ofyour net CBM volumes in 08?

John Colglazier

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

Brian Singer -Goldman Sachs

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

John Colglazier

This is John again. I would say with the capital program, wehave lined out internally which, by the way the Board has not opined on thecapital budgets yet. We're looking for similar to improving type metrics tothis year. Costs were basically flat in aggregate. You have pockets ofdecreases 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 withWachovia Capital Market. Go ahead.

Ross Payne - WachoviaCapital 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? Andsecond 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 and60 million cubic feet a day. The life expectancy -- we see peaks of 12 to 18months and then falling off. The thing is, that we're still in the process oframping up the platform. We haven't reached the peak rate on all wells yet. AsJim mentioned, we're running about 850 million cubic feet a day on a spot basisand 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, the15th well will contribute to that but it's actually all wells actually comingup a little bit, as that space is made available for the commissioning of theplatform.

Ross Payne - WachoviaCapital Market

Okay. Great. That's it for me.

Operator

And your next question is from the line of David Tameronwith 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 wasdown quarter-over-quarter, is that just a result of the Chesapeakejoint venture?

Karl Kurz

David, this is Karl, that's correct. That's mostlyattributed to the Chesapeake jointventure and as well as a little bit of shifting capital as we optimizeportfolios to mainly the Chesapeakejoint venture.

David Tameron -Wachovia

Okay. And then, if I just look at volumesquarter-over-quarter looking at that same southern region, what's -- backingout 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 maturearea. So, we'll see some modest declines in that area. You'll see the Rockiesbeing driven by our growth. So, we expect the southern to still seeyear-to-year declines for the foreseeable future.

David Tameron -Wachovia

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

John Colglazier

Yeah, David, this is Colglazier. For 2008, with what wecurrently see out there with the production profile is that we've lined out tothe investment community. We do see with our hedges in place combined with someof the basis hedging that we've done, which by the way, as Jim mentioned, wedid 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 programfor 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 ofthe questions, but we're in conciliation right now and we'll have an update foryou sometime early next year.

David Tameron -Wachovia

Okay. All right, but no impact anticipated for '07 year-endreserves 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 withBear Stearns. Go ahead.

Ted Issac - BearStearns

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

Al Walker

Ted, this is Al Walker, I think we're feeling very comfortablethat we'll reach that net 12 by year-end. But I think from there, we continueto see the need to reduce debt beyond that and in early February, in the firstquarter when we give you some additional detailed guidance, we'll give you alittle 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 MLPdrop downs etcetera.

Ted Issac - BearStearns

Okay.

Jim Hackett

And free cash flow.

Ted Issac - BearStearns

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

Jim Hackett

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

Ted Issac - BearStearns

Okay.

Al Walker

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

Ted Issac - BearStearns

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 forjoining us. We look forward to a strong fourth quarter and rewarding 2008 forour 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 nowdisconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Anadarko Petroleum Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts