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Anadarko Petroleum Corp. (NYSE:APC)

Q1 FY08 Earnings Call

May 6, 2008, 10:00 AM ET

Executives

John Colglazier - IR

James T. Hackett - Chairman, President and CEO

Charles A. Meloy - Sr. VP, Worldwide Operations

Robert P. Daniels - Sr. VP, Worldwide Exploration

Karl F. Kurz - COO

Clay Bretches - VP of Marketing

Analysts

Thomas Gardner - Simmons & Company

Brian Singer - Goldman Sachs

Gil Yang - Citigroup

Joseph Allman - J.P. Morgan

David Tameron - Wachovia Capital Markets

Joseph Magner - Tristone capital

David Heikkinen - Tudor Pickering & Co

Robert Christensen - Buckingham Research Group

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Anadarko Petroleum Corporation Earnings Conference Call. My name is Sequehana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Mr. John Colglazier, please proceed sir

John Colglazier - Investor Relations

Well, thank you Sequehana. Good morning and thank you for joining us today for Anadarko's first quarter conference 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. As a reminder, we have posted additional information in our first quarter operations report available on our website.

Before I turn the call over to Jim, I need to remind you of certain aspects in our forward-looking statements. This presentation contains our vast and most reasonable estimates and information. However, a number of factors could cause actual results to differ materially from what we discuss. You should read our forward disclosure on forward-looking statements in our presentation slides, our latest 10-K, other filings and press releases for the risk factors associated in our business.

In addition, we will reference our 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 U.S. investors contained in the presentation slides for this call.

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

James T. Hackett - Chairman, President and Chief Executive Officer

Thanks, John and good morning everybody. At our recent investor conference in New York, we detailed our asset portfolio in order to provide insight into the company's value creation potential. So, we are pleased to report 2008 first quarter results, which build upon 2007's performance, and which demonstrates the company's ability to deliver significant organic growth and excellent financial metrics.

This morning, I'll highlight some of the achievements during the first quarter and talk about our expectations for remainder of 2008. For the fifth quarter in a row, our operational performance has met or exceeded projections. We produced 53 million barrels of oil equivalent for the quarter, more than 1 million barrels above the high end of our guidance. This equates to an 8% increase in production from our retained properties versus the first quarter of 2007.

Crude, natural gas and NGL production volumes all contributed to this performance. Our offshore and Rockies properties delivered great results. For example, Independence Hub produced more than 30 million cubic feet per day net above our anticipated run rate during the quarter. And in the Rockies, we achieved record production in the Powder River Basin, where total gross sales volumes topped 700 million cubic feet per day during March, and where we have ongoing Midstream expansion projects, which will facilitate further volume growth over the next several months. And in the Greater Natural Buttes area, where we set a new gross operated production record of 280 million cubic feet per day.

Total recorded sales volumes from Greater Natural Buttes increased about 20% from the fourth quarter of 2007. As was announced recently, production at Independence Hub was shut in on April 8 because of a leak in the facilities export pipeline. Enterprise, which owns the export pipeline, is stated that it expects to have the line repaired by mid May. And we anticipate quickly ramping up production shortly there after. Assuming, we can resume production on schedule, the momentum and performance of our asset portfolio gives us the confidence to reaffirm our full year production guidance of 207 million to 212 million barrels of oil equivalent.

We've had a successful and active quarter in regards to our deepwater Gulf of Mexico development program, the details of which appear in the first quarter ops report. However, I would like to highlight several significant developments for you today. At the offshore gulf Mexico K2 Complex, we reached total depth on the Green Canyon 561#2 development well in early April. The well helped define the extent of the oil bearing reservoirs that are present in the six producing wells. It also encountered new off-structured oil bearing sands. To further evaluate the extent of the sands, the well is currently being side tracked down dipped. We continue to analyze our options for enhanced oil recovery at K2 and now anticipate making recommendation to the partners on the optimum technique for the field's development by year-end.

We have one additional development well to drill in the southern portion of the field in 2008, which will provide additional insight on these future recovery plans. Elsewhere offshore, we have two sanction projects scheduled for start-up in 2008; Power Play and Blind Faith. Our expectations for post production for both remain intact, with Power Play commencing production in the second quarter and Blind Faith in the second half of 2008.

Chevron announced last week an issue with one of the more in lines of Blind Faith. However, we do not expect this issue to have any volume impact as we have always projected a second half 2008 start up. We are also working with Chevron to expand its facilities capacity by 30% to 70,000 barrels of oil equivalent per day.

In other Gulf of Mexico activity, we continue to make drilling progress in the Sturgis North prospect in the out water valley area. Anadarko holds its 25% working interest in the well, which has a miocene objective at just over 26,000 feet. We have three to four additional wells currently scheduled for 2008 in the Gulf of Mexico, with one being a lower tertiary test.

Internationally, we have also had some encouraging results in our exploration program. In the first quarter, our partnership announced a discovery at the Odum-1 well offshore Ghana. The well confirmed to separate and potentially significant oil accumulation in the area. We plan to shoot some additional 3-D seismic to give us a clear view of the size and expected impact of this project.

At the deepwater Mahogany-2 appraisal well, located in the West Cape three points block offshore Ghana, we announced yesterday that we encountered high quality stack reservoir sand stones with approximately 165 feet of net oil bearing pay. The Mahogany-2 well is located approximately 7 miles to the northeast and up dip from the successful Shedua [ph] well on the Deepwater Tano license, indicating gross oil comp [ph] of nearly 1955 feet. We will perform a drill stem test on the Mahogany-2 well to gain a better understanding of fluid and flow characteristics and we anticipate the results will lead us to update or estimate our resource range for the area.

Anadarko holds approximately a 31% interest in the West Cape Three Points Block, where the recent successful wells have been drilled. We will also continue with other components of our appraisal on exploration program offshore Ghana, which includes the anticipated drilling of another five to eight wells. We are working toward our projects sanctioning later this year.

Turning to offshore Brazil, drilling has been suspended short of the primary objective on the deepwater subsalt Serpa on Block 24 near Espirito Santo basin. While the main pre-drill objectives was not reached and active petroleum system was proven in the shallow or subsalt secondary objectives. Anadarko and its partners are evaluating the potential to bring a different rig to the block to complete drilling operations. We hold a 30% working interest in this prospect.

We are also mobilized in the deepwater Millennium drillship in the Gulf of Mexico to execute upon our deepwater subsalt exploration program in Brazil. And are currently targeting up to three additional wildcat wells in 2008.

Turning to our U.S. onshore operations, we anticipate drilling our first exploration well in the Marcellus Shale in the Appalachian Basin of Pennsylvania in the second quarter. As we move forward, the program includes drilling five to ten wells in the play this year. This will help us to better define the potential of our 6000,000 gross acre position in this emerging play.

Those are some of the company's operational highlights and as John said, there is some detail available in the operations report that's posted on the website that may give clarity. Now I would like to walk you through some of the financial results for the quarter.

Discretionary cash flow of continuing operations for the quarter was nearly $1.9 billion compared to our capital expenditures of approximately $1 billion, a good reflection of the capital efficiency of our program. Our strong free cash flow was the primary driver for the retirement of our acquisition facility during the quarter.

Through assets sales and substantial additional free cash flow, we anticipate further improvement to the balance sheet throughout the year. As detailed in the tables attached to our earnings release, there were some items affecting comparability including the non-cash mark-to-market derivative losses. That in total impacted our net income in the quarter by $0.94 per diluted share. In addition to our strong production volume performance for the quarter, we benefited from excellent price realizations, excluding the effects of hedging. We also continued to hold line in our control book cost, even though G&A was higher than guidance in the first quarter, due primarily to $14 million of additional compensation payments from outstanding performance in 2007.

But our full year expectations for both LOE and G&A remain changed from our initial full year guidance. This is reflected in the supplemental information attached to our earnings release. We are increasing 2008 guidance for DD&A, which is driven by greater offshore volumes and for oil and gas cost of product, which is a direct result of stronger commodity prices.

As we stated in our last conference call, we secured basis hedges throughout our producing regions. These protect about a billion cubic feet per day of our Rockies productions, both within the Rockies and for Mid-Continent shipments with base of swaps and firm transportation through 2010 at attractive rates versus today's differentials. The supplemental information attached to the earnings release includes additional detail regarding our hedge and basis positions.

In summary, we are very pleased with our results from the first quarter. We built upon the substantial momentum established in 2007. Given the confidence we have in our production volume growth and our ability to continue to reduce leverage, we expect to deliver 15% or higher annual growth per debt adjusted share in production for several years forward. We believe this performance will place us in the upper quartile of our peer group and provide differentiating value creation for our shareholders.

Before I open it up for questions, I want to remind you that we are not permitted to speak about the IPO of Western Gas Partners. So, please review the amended S1 or the news release if you have any questions.

With that, operator, we will open the lines.

Question And Answer

Operator

[Operator Instructions].Your first question comes from the line of Tom Gardner with Simmons & Company, please proceed.

Thomas Gardner - Simmons & Company

Good morning everyone.

James T. Hackett - Chairman, President and Chief Executive Officer

Morning.

Thomas Gardner - Simmons & Company

Jim, I had a question on Jubilee field, just thinking through possible developments scenarios. I believe the current discussions our peak rates in the 200,000 barrel range, if this near information from the Mahogany-2 takes resource estimates closer to the high side of your estimate what would that likely mean with regard to peak rate development?

James T. Hackett - Chairman, President and Chief Executive Officer

Chuck, you want to answer that? Thanks, Tom.

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Sure Tom, This is Chuck Meloy. When they were in the throws of evaluating the different development options for the field and of course we are taking all the new information into account, we are really excited about the fact that the oil is way up the dip. That opens up the field substantially larger, which require more infrastructure, and so we are taking all that into our IPT team and evaluating that. We've mentioned previously the most likely development is an FPSO. Peak rates and that type of things are still being evaluated. And we will size it properly to match the Eve [ph] field and of course is a bigger gift, but higher the rates.

Thomas Gardner - Simmons & Company

Speaking of FPSOs, can you discuss the level of difficulty in procuring one or several in today's market?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

We are out to tender now, doing the original evaluations and that type of thing. And it appears that we do have a pretty open market to work with. A number of different organizations and opportunities have come to us, we feel pretty good about it and we are anticipating production in the 2010 timeframe and that will give us... so that tells you that we feel markets are pretty good for us right now.

Thomas Gardner - Simmons & Company

Okay. Well, since we have you on the line, can we talk about K2 for a second?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Sure.

Thomas Gardner - Simmons & Company

I think I believe in the past you bracketed the in place volume in the 2 or 4 billion barrel range. What is the impact of the 561#2 appraisal well on that range and can you give us a range of recoveries as you talk about water end or gas injection as in the EOL process?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

This well is real exciting for us. We just completed drilling course and based upon the results of the well and the main horizons, it looks like we'll be in the mid to upper range of the 2 to 4 billion. Now still Tom, a lot of that depends on the next wells, as Jim mentioned earlier in his presentation. So, we still have some uncertainty around them, but we are feeling excited that this thing is big. What we didn't have in that range was the new sands we found and we found those full of oil, all structure and so we are currently drilling a down-dip sidetrack to that well to evaluate how big they are, which could add to our oil in place estimates. And then we will ultimately sidetrack back up there for producing position.

Concerning the recovery factors, we are still in the technical evaluation of those, looking at the alternatives of water and gas injection, must be nitrogen injection. As Jim mentioned, we hope to come to that conclusion towards the end of the year, and make a recommendation of the partners. And given the sensitivity, then I prefer not to suggest what the recovery factors would be.

Thomas Gardner - Simmons & Company

Okay, I can appreciate that. Well, thank you very much.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs. Please proceed.

Brian Singer - Goldman Sachs

Thank you. Good morning.

James T. Hackett - Chairman, President and Chief Executive Officer

Good morning, Brian.

Brian Singer - Goldman Sachs

You haven't been shy in the past of indicating interest in potentially selling long lead time developments, Cesida [ph], Kaskida and Peregrino and how should we think about your priorities when it comes to Ghana or any future deepwater discoveries?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, that I think those fit Brian within the category of being much nearer term in nature and we still I might just for the record, state that we still like the lower tertiary play, which is being one of the assets that we have sold as you mentioned. And we have lot of acreage that has potential there. We found that in the process we are trying to restructure the balance sheet that it made some sense to take off the table some of the longer dated assets of that time and that was actually what Kaskida was driven towards. So, we hope that's a win-win for the seller and the buyer.

In the case of Peregrino, was simply a matter that we've had two other discoveries that came out at the same time and we thought that again, because of some other places that we could put that money that we might be better served and then unsolicited offer to sell the existing development project in Brazil and keep the exploration acreage. So, I think we will be much more selective going forward what we end up divesting of. But I think periodically, it makes some sense to validate the inventory do some of that. And we will continue at look at opportunities related to that as well as small acquisitions.

Brian Singer - Goldman Sachs

Right. And you brought up the balance sheet you know, higher oil and gas prices seem to have allowed you to delever much more quickly than many have expected. How should we think about use of free cash flow going forward?

James T. Hackett - Chairman, President and Chief Executive Officer

In this industry of course, when you have free cash flow, you got to intelligently assess what your staff and your acreage position allows you to do in a quick period or longer dated period. As long as we refurbish the balance sheet, we still get good debt adjusted production per share growth, which we think is the primary metric that drives the valuations. And it builds up dry powder and what we do is incrementally as we announced this year put that towards additional opportunities that we have in the drilling portfolio. So, we are putting money into the southern region. We are putting money into the Rockies, Midstream. We are putting money into plays like the Marcellus to get additional acreage and to drill some additional wells and we took a bigger position in the offshore Gulf of Mexico lease sale because of that refurbishment of the balance sheet. So, we view the efficiency that was created in the first quarter as a way to prepare us not only for the near term, but also prepare us for executing on the portfolio long term so, it's a mix of both.

Brian Singer - Goldman Sachs

Great. And one last numbers question, CBM production ticked up pretty nicely in the first quarter versus the fourth quarter, any seasonality then how we should expect further growth over the course of the next few quarters or do you see a similar levels of increases in 2Q, 3Q, 4Q,?

James T. Hackett - Chairman, President and Chief Executive Officer

Brain, the tick up in the first quarter associated with the expansion of the Fort Union gas gathering system and getting it online. As we go forward, we are still expecting double-digit growth out here. All signs look very, very positive, we've seen the wells dewatering faster than we anticipated. We've seen the peak rates on the well. It's higher than we anticipated here recently. And the whole thing is just working for us. We also see... we also have planned an additional expansion for the Fort Union Gathering System around the middle of the year second quarter. And that'll help pick up our rates and free up some space for the gas production.

Brian Singer - Goldman Sachs

Thank you very much.

Operator

Your next question comes from the line of Gil Yang with Citi. Please proceed.

Gil Yang - Citigroup

Hi. Following along Brian's question there, did we see the full benefit of Fort Union in the first quarter?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, if the expansion was roughly 200 million feet and we filled it up essentially during the course of the first quarter, so Gil, I guess, the answer is partially and not completely.

Gil Yang - Citigroup

Okay. So in the second quarter, we will have sort of... we should have sequential growth, because while the full quarter the Fort Union benefit and then at the end of the quarter you have the other expansion coming on line that would do the same thing again?

James T. Hackett - Chairman, President and Chief Executive Officer

Yes, we'll see it. We'll see production continue to ramp up and then those you know out there, it is a real play gas evacuation and so we'll start seeing the bottlenecks move further downstream, but the production is certainly moving up. We are going to try to keep ahead of that.

Gil Yang - Citigroup

The second expansion that you plan putting in line... on line, is that another 200 million expansion of not?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

No, Gil, it's a 400 million a day expansion.

Gil Yang - Citigroup

400 million, okay. All right, and can you also quantify, of the expansion of the growth in production you saw in the quarter, how much of it was sort of de-bottlenecking from the infrastructure versus drilling activity to drill in... and then the other performance, things which you cited?

James T. Hackett - Chairman, President and Chief Executive Officer

Yeah, let me take the first part and Chuck can take the drilling joint part. We had about 50 million a day in the Powder River behind pipe prior to the initial expansion putting in place and we also had about 70 million a day behind pipe in Natural Buttes before we got the plant in as well as the Candelateral operations, those are gross numbers.

Charles A. Meloy - Sr. Vice President, Worldwide Operations

And Gil, in the Powder, when we drill wells we typically don't see the benefit of those for about a year or two years as we dewater, so most of what you are seeing right now is just associated with gas that is in wells that have already dewatered and are looking for an opportunity to evacuate, so that expansion is due to gas ramp up.

Gil Yang - Citigroup

Okay, great. And if I can go back to K2 for a second, Chuck, I think you mentioned that you were going to drill down dip to test those new sands. With the down-dip well is there any intention of penetrating the K2 reservoir itself as well?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Yes, Yes, we will see the whole section, the Miocene section in the down-dip, so we will get an additional look at all the sands.

Gil Yang - Citigroup

Will that penetration of K2 itself be useful to you or that's not important?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, it's just additional information that we can use to size up the size of the drive mechanism I mean, it's all good information. And... but the primary purpose of it is to get a good evaluation down to potentially as new sands which could add new reserves to our program.

Gil Yang - Citigroup

Okay. And these new sands above or below the K2 reservoir?

James T. Hackett - Chairman, President and Chief Executive Officer

They are in the Miocene section which is the same as the K2 section.

Gil Yang - Citigroup

So these are mixed with it?

James T. Hackett - Chairman, President and Chief Executive Officer

Yes.

Gil Yang - Citigroup

Okay. And finally, if you were to put those on production, to tie them back, presumably to Marco Polo, would you tie them, do you need to bring them all the way back to the Hub or can you tie them onto a line that is another producing line you know, sort of Midstream?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, this well will actually connect to one of the existing flow lines that are out in the field and tied back in the Marco polo. We expect first production early next year.

Gil Yang - Citigroup

Okay, thank you very much.

Operator

Your next question comes from the line of Joe Allman with J.P. Morgan. Please proceed.

Joseph Allman - J.P. Morgan

Yes. Hi everybody. Hey Chuck, could you talk about the cost to develop Jubilee. I know it's early and you haven't figured out development program yet. But could you give us kind of a range of what you are thinking about in terms of development cost?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Well Joe, it is pretty early. And you know, we haven't really decided what we need given the expansion of the field recently. This well has really got us excited; it opens up a great deal of territory. So, we are going through and making plans on how to develop that back to an FPSO and I am sorry, it's just a little early in the game to really pin down the cost. It's a great looking development with super economics so, little early in the game.

Joseph Allman - J.P. Morgan

Got you. And for the Schedule 2 well, how far are you stepping out to sort of figure out how wide this reservoir is?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yes. Joe, this is Bob Daniels. I think it's not as far as this one was from the schedule one. It will be often to the west and north a little bit. But I don't have the exact distance that I can give you right now.

Joseph Allman - J.P. Morgan

Okay, I got it, okay. In terms of fiscal terms, I know that the government said company has a 10% carried working interest, what are the similar other terms of the... what's the royalty, what's going... do they back into a higher interest after a certain point? How would you characterize it fiscal terms?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yeah, Joe, this is actually a tax royalty regime and being the first mover into the country, it's fairly attractive terms and I think we are under a confidentiality agreement on that right now, but it's very attractive terms compared to some of the other areas in the world. So it's not a PSC [ph] were it's going to fluctuate with price, it's a fixed royalty fixed tax regime.

Joseph Allman - J.P. Morgan

Got you. And then from a technical perspective, do you believe... what would you characterize as a biggest risk going forward?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Joe,the reservoir is a very high quality sand stone, really good permeability. And it's a large reservoir, so we'll have to keep energy in the system. But there doesn't... it's a higher quality oil and at very shallow depths, less than 10,000 feet. So well, we should get additional information as we do the DST on this Mahogany-2 well. But it doesn't have a substantial technical risk that is insurmountable at this point, we feel really good about what we are doing here.

Karl F. Kurz - Chief Operating Officer

Joe, this is Carl Kurz. The biggest unknown on the Jubilee field still remains the aerial extent, how do we size this right and find out just how big this thing is. As Chuck said, technically, the reservoir looks fantastic, good quality oil, we've gotten good pressure data. It's a very exciting project, now just to figure out how big it is and get the facility sized right.

Joseph Allman - J.P. Morgan

Got you. And it's Schedule 2, that's going to help you figure out the aerial extent?

Karl F. Kurz - Chief Operating Officer

If you look at the three wells to-date that has been drilled in the field, they basically make a line that runs from the southwest to the northeast. So we basically have gone on strike with the structure and now we want to go perpendicular to that and start getting some aerial extent to these stratographic play and the next two wells will be very exciting to see how far this thing goes out to the sides.

Joseph Allman - J.P. Morgan

And the Mahogany-2... Mahogany-3 and 4 will go the other direction or?

Karl F. Kurz - Chief Operating Officer

Correct.

Joseph Allman - J.P. Morgan

Okay, got it.

Karl F. Kurz - Chief Operating Officer

Basically,these first five wells, the two more will have a big x out there and then we'll be able to present some real map to the sizes and could be. And we have our doom out to the... I think it sits to the north, northeast which gives us more confidence in the area being a good area to play in with the hydrocarbon success we have seen there.

Joseph Allman - J.P. Morgan

Okay, it's helpful. And then just a general question on the overall portfolio especially in the U.S., what you're seeing in terms of drilling and completion cost, what's the latest trend, a lot of operators taking about cost kind of leveling off here?

Karl F. Kurz - Chief Operating Officer

Well, I guess we haven't seen cost level off in the industry. We've been pretty much contained in our cost to lot of long-term service agreements. Well, we are seeing a lot of pressure on tubular right now, we have seen some steel price increases come across pretty consistently last couple of months. I think you're starting to see onshore rig rates also start moving to the upside, but I think we have 75% of our onshore rig termed up. You know our situation with deepwater rigs, our service agreements like for tubulars, we've got five-year type of arrangements, partnerships with some of the mills that give us some differential protection on prices there. So, we're still hoping that 5%, 6% cost increase for us. I think the industry may start to see a little bit higher cost.

Joseph Allman - J.P. Morgan

That's very helpful guys, thank you.

Operator

Your next question comes from the line of David Tameron with Wachovia. Please proceed.

David Tameron - Wachovia Capital Markets

Congratulations on a nice quarter. Couple of questions for you, Jim, if I look at 2008 production target and assuming that Independence Hub is off anticipated mid May. What type of projects do you have to have in the second half of the year to hit your numbers for the full year?

James T. Hackett - Chairman, President and Chief Executive Officer

Chuck, do you want to do that?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

David, the expectation of mid May for I-Hub, the other projects we need to have happen is Power Play needs to come on when expected; Blind Faith needs to come on in the second half. And the performance we've seen in the Rockies needs to continue in. Their performance has been exceptional, has been right on or above the curve as you saw in our first quarter, and we were very excited about how its progress, the guys out in the field were just doing the fantastic job getting the gas to market. And so, we... the primary driver from here on is getting our hub back and the Rockies continue to perform.

David Tameron - Wachovia Capital Markets

Okay. And do you have flexibility in the back end if Independence Hub ends up being off till June, you know, you lose another essentially 1 percentage of all your production. Do you have enough flexibility of program to ramp it up to hit that, is that... or how do you guys look at that if Independence Hub were to stay off longer term?

Karl F. Kurz - Chief Operating Officer

I think you defined longer term as being into June, and --

David Tameron - Wachovia Capital Markets

Yeah. Sorry about that.

Karl F. Kurz - Chief Operating Officer

And I think if it's June, I think there is enough... there is some flexibility in the program to be able to get some of that targets. I'd say if it goes beyond June, then we will have to address that again. I think earlier some made actually how long will take to ramp Independence Hub back up and we really think it should be a couple of days, it should be back up to the capacity.

David Tameron - Wachovia Capital Markets

Okay. I guess a hedge fund or beat me down the longer term definition these days. Can you talk at all about acquisitions, do you feel that you guys need to have any bolt-ons, are you looking for bolt-ons, are you looking for something bigger, I mean are you looking at Chesapeake's package in the Woodford, can you talk little about given how much cash it looks like you will generate of the next couple years, I know what your thoughts are there?

James T. Hackett - Chairman, President and Chief Executive Officer

The way we restructured the portfolio with the resource base we have, some 7 billion barrels of oil equivalent, we feel like we can do this organically from here. And it does not mean we will ignore as I mentioned earlier, selective bolt-on acquisitions, to just help us get to this... to even a better place for investors. So we will look at that but it's not a primary driver for any of our plan strategically or tactically.

David Tameron - Wachovia Capital Markets

Okay, so if I look out the model obviously, you generate a ton of free cash flow. Right now that still are earmarked for bigger project expenditures and some additional pay down of debt? Is that kind of where the cash flow would be applied today?

James T. Hackett - Chairman, President and Chief Executive Officer

Correct.

Karl F. Kurz - Chief Operating Officer

Hey David, this is Karl, I am going to add you know our exploration program has a strong history of success and maintaining some flexibility in our capital program to be able to fund those exploration success that we expect to see in the next few years, is also important to us.

David Tameron - Wachovia Capital Markets

Alright thanks.

Operator

Your next question comes from the line of Joe Magner with Tristone Capital. Please proceed.

Joseph Magner - Tristone capital

Good morning. Just a few follow-up questions sort of on things. In terms of Jubilee, you mentioned that Northwest and the Southeast appraisal well plan, is there anything planned to the northeast, it sounds like there is quite a bit of up-dip structural closure that is yet to be sort of interpreted?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yes, Joe, Bob Daniels here. I think there will be one up to the northeast based on the Mahogany-2, but it wasn't part of the original planning. This was the northeast test. But certainly, given what we've seen here, it does open up more room of to the northeast and we'll require well some point in the future. But that is not one of the presently planned wells. One of the very encouraging things here that we found at the well of course is that it was all oil and that there wasn't a gas cap on it. So, that means perhaps somewhere up we might find that we need to get out and look for.

Remember, we've got another rig coming. The Songa Saturn is going to be leaving after the test on the Mahogany-2, the Blackford Dolphin will be coming in June-July timeframe. We've got five slots on that to drill these appraisal wells and a few development wells right in the depth of it. And then at the end of the year we got the Eric Road [ph] coming in and that will be there for three years to drill the development wells and further appraisal if needed.

Joseph Magner - Tristone capital

Okay. I got to mention that the aerial expansion is one of the biggest unknowns. What was the sort of assumptions on aerial expansion in the initial resource range, where do you think it's gone to now and what's the upper end or is there any sort of range identified with the appraisal program that's lined out right now?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Well, I think we came out previously and said the resources range was... coverable resource was 200 million to 1 billion barrels; that is prior to the Mahogany-2 well. We are going to have to incorporate that into our analysis and we will probably be coming out with a new range about the time we announce the DST results, which is within a month.

Joseph Magner - Tristone capital

Okay, thank you. And moving over to the Rockies, strong growth in the first quarter expected growth out of all the regions there for the next two to three years. Can you provide some additional thoughts around the existing takeaway issues, impact of current projects that are delayed and then thoughts around any additional pipeline that have been proposed and your position in terms of supporting those?

Clay Bretches - Vice President of Marketing

Sure, this is Clay Bretches. To address the current situation, as you know Rex is coming to service and we are somewhere between 750 million to 800 million a day of spare capacity. With the existing growth in the Rockies, we expect that spare capacity to last for a couple of years. I think you may get little dicey 2010, 2011. So, as you correctly mentioned, there are several projects that are being proposed right now, and we are looking at taking firm transportation on a couple of those, looking at some proposals that are out there and we will be evaluating those and making some decisions soon.

Joseph Magner - Tristone capital

Okay, I will leave it there, thanks.

Operator

Your next question comes from the line of David with Tudor Pickering Holt. Please proceed.

David Heikkinen - Tudor Pickering & Co

Hi, this is David Heikkinen. Just a question on the resource potential at Greater Natural Buttes went up 2.3 Ts, can you walk us through the number of locations you see now and kind of the pace of development to develop that asset with the big uptick?

James T. Hackett - Chairman, President and Chief Executive Officer

Definitely, we talked about that at the conference we had in New York. Though it is 9.2 Ts, it's mostly associated with the completion of the 20-acre and 10-acre programs in the core. I believe 7,600 total locations; I can't recall the incremental right off the top of my head, but --

David Heikkinen - Tudor Pickering & Co

So, it doesn't include any of the step-out locations, it is just fairly the infield core, you are not?

James T. Hackett - Chairman, President and Chief Executive Officer

In field core, and its 50% of the 10-acre locations in the core.

David Heikkinen - Tudor Pickering & Co

Okay. And what's your timeframe, do you think by year end you would be assessing the rest of the core and then the step out location, so kind of walk me through that.

James T. Hackett - Chairman, President and Chief Executive Officer

What we are doing primarily is, we are doing several additional 10-acre pilots or pads right now to evaluate the opportunity to fill in the core completely. We are also looking at several Black Hawk test around the core, which will make the expansion of the resource base and the total number of wells required.

David Heikkinen - Tudor Pickering & Co

Okay.Question on K2, the additional plans, is it the same quality of rock and the same oil quality and pressure that you are seeing or is there any difference?

James T. Hackett - Chairman, President and Chief Executive Officer

No, it is generally very much similar to the K2 proper, just off structure we picked up additional sands, which is not unusual. It is a great neighborhood as you know on that part of the world and so as we've going off structure the sand content has increased and we picked up a couple of these other sands that are essentially pinched out before they get up on the high of the K2 structure and so we don't know how far they can off structure, we still have some closure remaining on the structure so we are really excited about the potential.

David Heikkinen - Tudor Pickering & Co

Andthen into Brazil, you got three wildcats this year with the Millennium, you plan on keeping the rig down there, thinking about access to other deepwater prospects that would need a DP vessel. Can you talk about a long-term plans for keeping the rig there and you access to additional prospectivity either farm ends or what you have on the books already and that is it?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Dave, this is Bob Daniels. We've got three wells that were planning on drilling and potentially going back on to Serpa also with the Millennium at the same time, you had exactly what the strategic objective is to try to get access to new opportunities down there. We've got opportunities that were presently evaluating to utilize the rig and to gain an equity interest, we have not made any decisions on any of those at this point, but we are doing the technical evaluation to see whether or not it's something we wanted to do. So, we are seeing the opportunities, we think the rig will leverage us into those opportunities. And right now, we are planning on the rig being there about 24 months. But that will be contingent on getting into those opportunities.

David Heikkinen - Tudor Pickering & Co

Thanks, Bob.

Operator

Your next question comes from the line of Robert Christensen with Buckingham Research Group. Please proceed.

Robert Christensen - Buckingham Research Group

Thank you. Coming to this Marcellus Shale, five to 10 wells this year, how many would be horizontal? How many would be vertical and just a general dispersion of your exploratory plan, are these wells miles and miles apart or in a tightened area?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

Yes, Bob Daniels again. Right now, we've got what we call pilot areas and we're planning on drilling five of those pilot areas. They are spread out, four of those well operate, one of them will be operated by our partner. And I think, of those only one will be a horizontal test initially and part of that is based on the desire to get the data that we need to make the call on that and parts also on the rig capability. Based on success in those five, then we'll decide how many more wells we want to drill around those pilot areas and those will probably be... some of those will be focused towards the horizontal side.

Robert Christensen - Buckingham Research Group

Are you the operator?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

We are the operator of about half of it. We've got about 600,000 acres gross up there; we've got a 50% interest in all of it. And we operate a portion of it and we've got a partner that operates the other portion.

Robert Christensen - Buckingham Research Group

Okay. I guess the final question, I may have missed it, did you ever mention North Louisiana and Haynesville exposure, I know that's the other hard play everyone is running with. I can't remember if you ever commented on that? Thank you.

John Colglazier - Investor Relations

Yes, Bob, this is Colglazier. We haven't commented on it per se except to point out that we do have the two anchor ends that are been out in the industry with a... on a gross basis of about 90,000 acres in the Carthage area and little over 20,000 acres as a non-operator in the Elm Grove area. So from the anchor positions on the Haynesville area, it's been defined we do have a significant position, but we haven't moved forward with anything yet. We are going to sit back and watch what others do before we evaluate it ourselves.

Robert Christensen - Buckingham Research Group

And I guess a final exploratory, on the lower tertiary well that you will drill, would you be operator on that or you just participating with somebody else?

Robert P. Daniels - Senior Vice President, Worldwide Exploration

No, we will be operator on that, and we should start here in the next month I think. It's a good prospect been in the last lease sale that we had a piece of and we put the unit together and are very excited about the potential there, we call it Shenandoah [ph].

Robert Christensen - Buckingham Research Group

Thank you.

Operator

[Operator Instructions]. We have a follow-up question from the line of Gil Yang with Citi. Please proceed.

Gil Yang - Citigroup

Hi, just a couple of follow-up questions. The pressure data for the new discovery, does that suggest that the all three reservoirs are connected or all three wells are connected in Ghana?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Yes, Gil in Ghana, yeah there is good information on the static pressure that we have got communication all the way between the three wells. We are very confident about that gives us the 2000 foot column that we had in the press release.

Gil Yang - Citigroup

Okay. And then flow data would that give you dynamic pressure would that give you the quality of that connection?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

The dynamic data is going to give us the quality of the reservoir and potentially some more information about compartmentalization, but this is going to be a... this test is going to be a fairly short term test, I think it's 24 hours flow test.

Gil Yang - Citigroup

Okay.

Charles A. Meloy - Sr. Vice President, Worldwide Operations

We are not going to give just tremendous amount other than near well bore deliverability.

Gil Yang - Citigroup

Okay. And also you need to comment about preserving the reservoir energy because of a large reservoir. Can you talk... and you said could there be a gapped up you just haven't touched it yet and how do you... these is water drive or is it depletion drive or what do you think the mechanism is?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Gil, that's part of the delineation program we are undertaking right now to define all that. The fluid data we received to date certainly indicates the possibility of a gas cap. So an additional up-dip test may be in the offering as we finish our delineation program to define that. These trends seem to be very continuous as evidenced by the pressure data that Bob mentioned earlier, which will give you a support for water drive. But we will likely supplement that water drive because it's so large and we anticipate some fairly high rates coming from the field and that combination would almost require you to inject water.

Gil Yang - Citigroup

Okay. And then moving on to Independence Hub again, Cheyenne number 3 was going to come on line. Can you talk about is that to replace any declining wells at Cheyenne or other wells or does it increase volumes there to give you a greater share of the production at in the Independence Hub?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Yes. We drilled the well, it came in very successful, we've now completed it and are in the process of hooking it up to the Cheyenne flow line system. It essentially gives us additional capacity, we have plans for that for the next two or three years to maintain our production position in the hub. Our hub volumes, we have roughly 60% of the nameplate capacity. And so we are just planning to continue to keep it filled for as long as possible and we have a schedule of wells through time to do that.

Gil Yang - Citigroup

Okay. So it just increases the longevity of your production there?

Charles A. Meloy - Sr. Vice President, Worldwide Operations

Absolutely.

Gil Yang - Citigroup

Okay, thank you.

Operator

You have a follow-up question from the line David Tameron with Wachovia Capital Markets LIC. Please proceed

David Tameron - Wachovia Capital Markets

Hi. One more question, you mentioned in response to the questions taking about Rockies and pipeline takeaway capacity and realizing your hedge primarily for... at least basis hedge for 2008, if you look at the summer differentials or the weather differentials in the 250 for next winter, what's your take on that?

Karl F. Kurz - Chief Operating Officer

This is Karl Kurz. David, I mean we watch differential as you know, we have basically 100% of our equity covered through firm transportation hedges. Some very good numbers we hedged up in the Mid-Continent that was ranged all the way out to 2010. So, when we see it right now from a short term perspective with regards to our hedges, makes them look very good in the money. We are monitoring it. We do see additional capacity being brought into the equation out there like Clay mentioned earlier with three potential projects. The timing of those is going to be critical. We then get in there by late 2010 or 2011, which will help narrow that differential back down. But, right now, we feel that we've managed our basis exposure very well with regards to the Rockies for at least the next two to three years.

David Tameron - Wachovia Capital Markets

Okay Karl, but if you look at winter 2008 going into 2009, does 250 look like a right... does that feel like a right number to you?

Karl F. Kurz - Chief Operating Officer

Yes, I'm hesitant to tell you our call on the basis market because we are active in managing those markets. And, so for us to state our position with regards to what we think is the right number or wrong number we have... we're one of the largest producers I think would not be wise for us at this point, Dave.

David Tameron - Wachovia Capital Markets

Alright, thanks.

Operator

You have a follow-up question from the line of Robert Christensen with Buckingham Research Group. Please proceed.

Robert Christensen - Buckingham Research Group

What's physically happening this week with the repairs on the Independence Hub?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, Enterprise is the operator as you're aware. The leak that was detected is actually a leak in the bonnet in the riser system. And so, what's physically happening is we are isolating that bonnet, taking it off, and repairing a gasket that's inside that flange in the bonnet and then putting it all back together. We are moving the isolation and place it back online.

Robert Christensen - Buckingham Research Group

Well, that's a description of what is going to happen in general. But what's happening right now? Is that... I'm being little more direct with you, because it's pretty influential with gas markets?

James T. Hackett - Chairman, President and Chief Executive Officer

Well, we are just in the process of doing that, that very operation that I talked about and Enterprise has given a clear indication of when they anticipate to be completed through that process.

Robert P. Daniels - Senior Vice President, Worldwide Exploration

And Bob, let me add, I know we get a lot of questions on moment by moment activities in Independence Hub, it's very sensitive with regards to the gas market. So, we shy away from providing those moment by moment updates, once again because of the sniffing impact it could have on pricing.

Robert Christensen - Buckingham Research Group

Thank you.

Operator

At this time, there are no further questions; I would now like to turn the call over to Mr. Colglazier for closing remarks.

John Colglazier - Investor Relations

Actually I'll let Jim to make the closing remarks.

James T. Hackett - Chairman, President and Chief Executive Officer

Just want to thank you everybody for listening in and we hope you are as pleased as we are with the good results and future plans and hope you have a great day. Bye.

Operator

Thank you for your participation of today's conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: Anadarko Petroleum Corp. Q1 2008 Earnings Call Transcript
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