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Executives

John M. Colglazier - Vice President of Investor Relations & Communications

R. A. Walker - Chief Executive Officer, President and Director

Robert Douglas Lawler - Senior Vice President of International & Deepwater Operations

Charles A. Meloy - Senior Vice President of U.S. Onshore Exploration & Production

Robert G. Gwin - Chief Financial Officer and Senior Vice President of Finance

Robert P. Daniels - Senior Vice President of International & Deepwater Exploration

A. Scott Moore - Vice President of Marketing

Analysts

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

David W. Kistler - Simmons & Company International, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

John Malone - Global Hunter Securities, LLC, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

Eliot Javanmardi - Capital One Southcoast, Inc., Research Division

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Anadarko Petroleum (APC) Q3 2012 Earnings Call October 30, 2012 10:00 AM ET

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2012 Anadarko Earnings Call. [Operator Instructions] I would now like to turn the conference over to John Colglazier, Vice President, Investor Relations and Communications. Please go ahead, sir.

John M. Colglazier

Thanks, Steve. Good morning, everyone. I'm glad you could join us today for Anadarko's third quarter conference call. I'll remind you that today's presentation contains certain forward-looking statements and non-GAAP financial measures, so we encourage you to read our full disclosure and GAAP reconciliations outlined on our website and included in last night's earnings release. Also on our website, we provided a comprehensive summary of our global activities in our Quarterly Operations Report. Our executive leadership is here today and ready to answer your questions later in the call.

And with that, let me turn the call over to Al Walker, our President and CEO.

R. A. Walker

Thanks, John, and good morning. We're mindful this is a difficult morning for many of you in the Northeastern U.S. given the impact of Hurricane Sandy. The safety and well-being of you and your families is certainly in our thoughts today, and we thank you for taking the time this morning to join us.

Apart from the unfortunate weather-related events, it's a pleasure to discuss our quarterly results this morning. And during the third quarter, we continued to meet or surpass our near-term goals while delivering strong operating and financial results, reflecting the benefit of our ongoing efforts to improve efficiency, reduce controllable costs on a per unit basis and, where we can, deliver exceptional portfolio set [ph] with our capital allocations.

Highlights of the quarter include record liquids volume [indiscernible] flow generation. In the third quarter, we achieved sales volumes growth of about 80,000 barrels equivalent per day, representing a 12% increase over the comparable quarter of 2011. Included in this growth was an increase of 41,000 barrels per day of higher-margin liquids sales, resulting in a record 322,000 barrels of daily liquids volumes during the quarter.

We continued to generate free cash flow during the quarter, and when you include the $501 million collected from the Algeria tax resolution, our adjusted free cash flow totaled $516 million. As a result of the strong cash generated year-to-date, we significantly strengthened the balance sheet by reducing borrowings under our revolving credit facility by $1.5 billion and retaining $2.5 billion of cash on hand and improving our net debt-to-cap ratio to 36%.

As I mentioned earlier, we want to highlight the value-enhancing results at 2 of our largest projects. First, in the Wattenberg horizontal program, we increased our estimated recoverable resources in 4 of the fields to a range of 1 billion to 1.5 billion BOE. This increase resulted from the exceptional performance from both the Niobrara and the Codell formations, coupled with identified down-spacing opportunities. Our focus on maximizing the performance and the value of the asset has led to a very positive early result for the drilling off of longer laterals in the field. During the quarter, the Wattenberg horizontal program continued to deliver record sales volumes and rates of return in excess of 100%. As a result, we increased sales volumes in the field by 23% year-over-year, averaging 91,300 BOE per day, despite incurring unexpected shut-ins due to third-party export construction. Our large and growing infrastructure here in the midstream positions us to be in a very competitive opportunity in the future in this field, because we do things that others can't. We have undertaken additional investments to support our future growth in the field through acquiring [ph] positions in the Front Range and Texas Express pipeline and the construction of the Lancaster plant.

The second area of material success was in Mozambique. Here, we had significant increases in our estimated recoverable resources due to the positive results at Golfinho and Atum. We recently completed a 4-well [ph] appraisal drilling program at the Golfinho and Atum, and the successful results enabled us to increase the estimated resources to a range of 15 to 35 Tcf of recoverable natural gas, located entirely on our operated Offshore Area 1 Block. Now we've begun to integrate well testing at this complex and hope to have results from the first flow test at Golfinho 2 in the very near future.

We completed our final well testing in the adjacent Prosperidade complex, with a test of 3 zones as opposed to 2. Each of the 3 zones flowed at facility-constrained rates of around 100 million cubic feet per day, confirming the tremendous sand quality, deliverability and connectivity of these wells. As stated in yesterday's release, in the coming weeks, we expect to announce our FEED contracting for the first of 2 trains of liquefaction development, while planning for future expansions to as many as 10 trains, capable of producing 50 million tons of LNG per annum.

To put some context around that, this project alone has the potential to transform Mozambique from having no LNG today to becoming the world's third-largest exporter [indiscernible].

Overall, we couldn't be more pleased with the performance of our portfolio. Our employees have continued focus and executed safely upon our objective, and we delivered another strong quarter and results year-to-date. As a result, we are increasing our full year sales volumes guidance by 3 million BOE with no corresponding increase to our capital program. At this point, this new range represents 7% volume growth this year, which is consistent with our long-range plan that you've seen [ph] We have targeted per annum. And we continue to be on track to deliver objectives we established a few years ago for year-end 2014, despite a very challenging North American natural gas price environment.

With that, we look forward to taking your questions. Operator, I turn it back to you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Lively with Tudor, Pickering, Holt.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

At Jubilee, it looks like production for the quarter is turning up pretty well. Can you guys just provide some context in terms of where you are at from a remediation standpoint and then how 2013 looks?

R. A. Walker

Sure, we'll be happy to do it. I'm going to let Doug Lawler, who's our Senior Vice President for International and Deepwater Operations, handle that, but you're right, results are very encouraging.

Robert Douglas Lawler

Thanks, Al. We're really pleased with the performance of the acid stimulations that we pumped. To date, we have pumped 5 acid jobs, which have significantly increased our production. We've seen a record production rate at Jubilee in the 86,000 to 88,000 barrels per day range on a gross basis. We look forward to pumping a few more acid jobs in the near future. One is planned for the fourth quarter, and we also look forward to the Phase 1A wells. Initial production there from the first few wells is also scheduled for the fourth quarter. And we anticipate that we'll continue to monitor the performance of the wells, and should the acid jobs, which are proven to be successful, be required, we will continue to implement and execute those in the future.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Any sense of where are expectations right now for 2013 production just for Jubilee?

Robert Douglas Lawler

We haven't provided that guidance as of yet. I just will reiterate that we're very pleased with the performance and anticipate that these new wells from Phase 1A and the continued good performance from the acid jobs will result in really strong rates from Jubilee.

R. A. Walker

And Brian, this is Al, I think we'll probably defer to the operator, Tullow, on expectations of that sort. So if I were you, I would encourage to sort of look into Tullow for that answer.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

We will. In the Niobrara, you guys increasing the resource range, talking about good performance out of both the Niobrara and Codell. Could you break out maybe some of the Niobrara lobes and talk about what you've done to test the different intervals there?

R. A. Walker

Sure, we can talk about that. I'm going to have Chuck Meloy, who handles Onshore E&P, do that. But I think you'll find that we don't really do anything different in any particular zone. But I'm going to let Chuck go into a little more detail there.

Charles A. Meloy

Well, Brian, first, I think the big news there in Wattenberg is the production continues to climb. I don't know if you had the opportunity to look in the operating report to see the tremendous growth rate that we're realizing at Wattenberg. The zones we're producing there both in Niobrara and the Codell, about 2/3 to 3/4 of the wells is currently -- are in Niobrara and the balance are at Codell. We've been testing both the B and C bench generally in the Niobrara and have an outstanding results in both, and we continue to look at various ways to cut across the different zones and stimulate them to continued to increase production EUR from each well. We're going to see continued growth. We have 10 rigs running now, and the production profile is just essentially straight up. And it's really exciting as we crossed over 90,000 barrels a day for the field, and we'll see that continue to climb. Toward the end of the year, we should approach 100,000 barrels a day for the field.

Operator

Your next question comes from the line of Dave Kistler with Simmons & Company.

David W. Kistler - Simmons & Company International, Research Division

Just following up on the Niobrara, in your ops report, you talked about down-spacing potential. If you guys could give us maybe some more color in terms of total locations or what kind of down-spacing pilots you're planning on doing that would be very helpful.

Charles A. Meloy

Yes, Dave, this is Chuck again. We're going through a number of experiments in the various areas of the field to decide how many wells, ultimately, we put in each section. We're going to test up to 16 wells per section -- in total, including the Codell and Niobrara ventures [ph] . And from that data, we'll evaluate even further down-spacing, if it demonstrates that it's the right thing to do. We just see an outstanding performance in these wells, and our EURs are continuing to come in over 350,000 barrels. The other thing we've done, that I think has a lot of opportunity for us, is we're evaluating the various lateral lengths. And so hopefully, we can extend the lateral lengths out so that ultimately, there's fewer wells with even [ph] more section in the pay as a percent of the wells. So we get more exposure to the reserves for fewer wells. All that's going on right now. We won't really know the answer to that for some time. But these permutation [ph] is taking place, and like I said, we're up to around 16 -- we're evaluating 16 wells per section. I know others in the field are continuing to increase headcount, and there's discussion even doubling that. So there's just a ton of opportunity. The system is working extremely well. Our completion teams are doing a fantastic job getting the fracs off, and our drilling guys continue to lower the cost per well each quarter, and we couldn't be happier with how things are doing.

David W. Kistler - Simmons & Company International, Research Division

Great, appreciate that. And then in the past, you've mentioned about selling, potentially, some of your fringe positions around the Niobrara. Is that something that's still on the table, or have the results been so impressive that you want to keep everything you've got in that area?

Charles A. Meloy

I'm sure you're aware that we have a large position in the land grant, and it cuts right through Wattenberg. And so we're constantly doing small farm outs and farm downs in the area that attract industry dollars and leverage our surrounding position. And I think we'll continue to do that both south and north of the field, and that's just an ongoing process. It's just to help expand our capital exposure and get us a few more looks without any more money. We're really focusing right in the gut of Wattenberg today, where our results have been outstanding.

R. A. Walker

I'll go in, if I could. I think your question may be more directed at the JV. If it is, maybe we can address that. If not -- if Chuck handled you correctly where your concern is in terms of just how we're looking at the land itself, that's great. But if you are interested a little more on the joint venture discussions or evolution, we can address that as well.

David W. Kistler - Simmons & Company International, Research Division

That would be helpful.

Robert G. Gwin

The only thing I would add to what Chuck said is that we're no longer looking at a traditional or JV in the central part or the core part of the Wattenberg Field. We're focusing on our own capital dollars in the field, on maximizing the benefit of the infrastructure and takeaway capacity, the processing capacity we've put in place over the last year. And we'll look to, as Chuck mentioned, more traditional monetization vehicles outside of the core Wattenberg, primarily to the south and also some to the north.

David W. Kistler - Simmons & Company International, Research Division

Okay, that's very helpful. One last, just maybe big corporate one and you may not be able to answer it at this point because it's too early, but any kind of early indications towards how to think about '13 CapEx, again, trying to live within cash flow? Any color you can give us would be helpful.

R. A. Walker

Yes, I'm going to have Bob, again, address that one. We do have some early thoughts, and I think as you've seen in the last several years, we've been pretty efficient with our allocation of capital, and you can anticipate that will be the case again in 2013.

Robert G. Gwin

Yes, we don't have any specific numbers to share at this point. We're going to be announcing those in February following request and receipt of approval, in February, from our board. We look probably somewhere around February 25, 26 to have some dialogue with investors. That said, we expect to still spend within cash flow, as we have for the last several years running. We would expect a modest increase in spending year-over-year, and that's driven by continued improvements in production and increases in cash flow year-over-year next year in our base case model. But we look forward to sharing with you greater detail in the future. I think you could look forward to more of the same but expansion of the various programs that are doing so well.

Operator

Your next question comes from line of Doug Leggate from Bank of America.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I got a couple of quick ones, if I may. First of all, the FEED on Mozambique, can you just give us an update on any thoughts on how you might go forward with the project in terms of your ownership? I guess we've been kind of anticipating that maybe you would take a similar route to Lucius before FEED was actually in place. So can you maybe give us any information you can share? And I'll really appreciate it. And I've got a couple of follow-ups, please.

R. A. Walker

Yes, you bet, Doug. And I promise you, we're going to have the operator pronounce your last name correctly next meeting. I bet you never get that. But to your question, yes, I think we've been reasonably consistent in saying between here and FID, we certainly will take a hard look at selling down some of the 36.5% position that we have. The optimal time for that is really a function of market activity. We, as you might expect, get a lot of inbound interest. We are continuing to assess exactly when the timing is best for us. And I would tell you that nothing really has changed on that front. The timing of it, really, is a function of when we see the right terms and conditions and consideration being established with people who are quite keen to get into this part of the world that, in some cases, if not all, are very active in the LNG markets. So I think what we have here and what the country has is a unique opportunity, as I mentioned in my prepared comments, to see a situation that's very unusual, where our country today has no LNG, and sometime in the very near future, we'll be the third largest exporter in the world. So I'm going to let Doug Lawler answer the question related to FEED, but I think you should, as we've said before, continue to expect that at some point between here and FID, there's a good chance that we will sell down some of the 36.5% interest that we have today.

Robert Douglas Lawler

Thanks, Al. We're working very closely, Doug, with the government of Mozambique, and we anticipate that the onshore and the offshore FEED will be awarded imminently. We are nearing final agreement on the land in which the LNG liquefaction facility will be constructed. And so you can expect that FEED to be awarded for both the onshore and offshore very soon. And we look forward to, as Al mentioned, with continued cooperation with the government as we move forward there, that we'll continue to progress towards FID, as we've stated before.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Great. I'm not going to take the zinger on the name, but we'll deal with that one later. But my follow-up is really -- is kind of a 2-tier question, and it's a tough one to answer, I realize. But we've had gas prices up, I guess, 75% from the low earlier this year. You are still fairly gas-levered. You've got a Tronox uncertainty that, I guess, where any idea, I guess, [ph] you could show there will be appreciated, but I'm guessing you can't say much. But the bottom line is you've got a share price which has continued to struggle, and I'm just wondering, I know we've gone backwards and forwards in this for a bit, but at what point do you lose patience with that? And just give me your thoughts as to how you feel about the terrific operational progress but the failure for that to materialize in the stock, and I'll leave it at that.

R. A. Walker

Okay, well, those are very fair comments, as well as observations and questions, so I'm not surprised. You're reflecting some things that I know a lot of people feel and think about. I'm going to let Bobby address the Tronox part of your question. What I will tell you is that yes, we're as frustrated as anybody that the operating success of this company now for quite a number of years, that we're not at the top of the list. We're certainly industry-leading with our operating results and our exploration success. We did see a period of time there, between the resolution with BP and before Tronox became a media event in January, where the share price did quite well. So we have reasons to look back in the fairly recent memory of knowing exactly that there is a share price out there that the markets embraced previously. And consequently, I think the executive management here, as well as the employees, believe that once we get Tronox in the rearview mirror, the market's shown us in the past what they think the value could be, if not more than that. So I guess our reaction is it's frustrating to be where we are given the kind of operating results we've had. And we're just going to have to be very patient with the process that we don't have a lot of control over in terms of the timing of when this court process comes to conclusion and a judgment comes from the bench. So with that, let me let Bobby address the Tronox.

Robert G. Gwin

Sure. Thanks, Al. If you haven't, I think it's worth taking a look again at the 10-Q that was filed yesterday and the extensive disclosure we've provided shareholders about the Tronox dispute. We're still very confident in our case. We still believe a loss is not probable. We're pleased with the testimony through the end of the trial in September. We're gearing up now for closing briefs and closing arguments before Judge Gropper in the second week of December. It would be speculation on my part to tell you when we might get a ruling from the judge, but it could take some time. There's thousands and thousands of pages of written testimony and lots of witnesses over the summer, and we want him to do a good job and provide correct reasons for ruling and findings of fact. We still believe the merits of our case are sound, that we don't believe Kerr-McGee had anything to do with the financial struggles or bankruptcy of Tronox and that Tronox, in fact, was properly capitalized at the time of its spinoff and IPO. So with that, I think there's no new news in that, but we still remain confident in our position.

R. A. Walker

Just to add one thing to that, I think what you've seen us try to do over the things that we do have control is be very value-added and very conscious of being good rate-of-return investors with our portfolio, and from a company perspective and employee perspective, we'll continue to do that. And as the market starts to clear up with its uncertainty associated with one particular event, we'll just see where it goes from there.

Operator

Your next question comes from the line of Scott Hanold with RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC, Research Division

In looking at your guidance, it looks like the oil production was cut a little bit and gas came up a little bit as well. Is that very similar to what we saw last quarter in terms of where you're seeing from some of your non-operators in places like the Marcellus, where they're drawing a little bit more and maybe some infrastructure constraints around the edges, cutting back on the oil a bit?

R. A. Walker

Yes, let me try to bifurcate that if I can. Certainly, on the gas side, the volumes that you're seeing, and others, for us year-to-date are largely through non-operated positions in the Marcellus. We've been surprised by just how productive Chesapeake's been. We see them doing things, frankly, that are well outside of what we anticipated as we budgeted for what our non-op volumes would be for the year, so it's fairly isolated to that. I'm going to let Chuck, if I can, go into a little more detail there, as well as talk about the oil. But we're surprised. I can't say it any other way. It's just higher volumes coming out of the Marcellus than we had anticipated.

Charles A. Meloy

Yes, Scott, the only thing I'll add to -- with Al's comment on the gas is that the Marcellus results really speak to the quality of that resource and the high productivity of those wells in our core areas, which encompasses both the Chesapeake operated and our company operated AMIs. It's just a fantastic resource, and we produce it at a very low cost. So we're excited about the results there. It is a bit of a surprise, just the magnitude of them, because we're now producing almost 1.3 Bcf a day out of that area from a standing start back in 2008 or '09. So it's done extremely well. On the oil side, we continue to grow, and you've seen the increases year-over-year. And the thing that we continue to run against is that, despite our efforts to keep up with the ever-expanding oil and liquids production in our operated areas, particularly in Wattenberg and Maverick, where we've seen a lot of growth just quarter-to-quarter, I think we're up about 8,000 barrels just quarter-to-quarter. As we saw that, we've seen constraints. And it's not always on the oil side, but it has impact on oil. For instance, in Wattenberg, the overland pass NGL line that goes into Conway is being retrofitted for expansion, and there's been a number of shutdowns, which cost us almost 0.5 million barrels of production in Wattenberg just this year. So the capacity of our production is right on our expectations, and we're generally very efficient in getting it out. But occasionally, we see these impacts like overland pass and even down in the Maverick with either gas or natural gas liquid production constraints downstream of our field. And we continue to work those. I think this is part of the growing pains we talked about several quarters ago. These things are growing so rapidly. Nobody anticipated this -- or you can't react as quick as we can grow it. So we've seen just such tremendous results, and that's bumping up against all the natural constraints, all of which are under expansion. And I think that's the great news, is Wattenberg clears 100,000 barrels a day and the Maverick clears 100,000 barrels a day gross. It takes a lot of work to get that product to market, and I think we're proactive in getting it done. We've got a lot of expansions that are underway, as does the industry, that will help us move this product. And we'll see interruptions from time to time. I anticipate seeing some more in the fourth quarter and maybe even into early next year. That's just indicative of the rapid expansion of the production.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. I mean, that all makes sense. And then when you look at some of your operated stuff that has associated gas, I'll pick a recoverable place like the Avalon Shale and the Permian, the East Texas liquids-rich play, are those coming out as expected with the liquids cuts you all want to see? And as a point of context on the East Texas, your data shows that you've been running somewhere around 25% to 30% liquids, and I think when you've kind of laid the play-out in your Analyst Day earlier this year, you were talking about 35-plus percent.

Charles A. Meloy

Yes, the expansion on the liquids, if you just want to talk about the Carthage/Haynesville in particular, we've grown the liquids production year-over-date of almost 37%. So it's running up the curve. We've reallocated investment around the portfolio and taken activity out of that area and put it in the more oil-prone areas as we ramped up rig count in Wattenberg and Maverick. We've seen outstanding results. So we had one rig line that we were drilling in that was a little lean in Carthage, but we've moved away from that area and got right back into what we wanted to do. So I don't see any indication that we ought to change our direction here. We've had outstanding results. We got great economics and low cost of operations, and the liquid yields are sufficient to deliver good economics.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And if I could do just one last one, obviously, we've talked about gas prices now moving up quite a bit. And you indicated your return to the Marcellus is very robust or, at least, performance has been robust. At what point in time, at what price do you guys start to think about whether or not you need to slide a couple of rigs back in the Marcellus? Where is that breakpoint relative to competing for capital against other plays in your portfolio?

R. A. Walker

Scott, that's a question you might imagine we get asked a lot. And certainly, the place that's going to see capital from us first is the dry gas plays, Marcellus. And so I'm going to let Chuck address the Marcellus, but tell you, beyond Marcellus, as just a general comment, I think we need to see a sustained $5 gas before you see us commit a lot of capital back into the gas portion of our portfolio. And that's really driven by getting the kind of rate of return, first off, that we want to see. And second, a portfolio that, frankly, from a competitive perspective, has a lot of other places that can get return without having to chase dry gas that has a lot of volatility around price discovery.

Charles A. Meloy

Scott, specifically, as it relates to the Marcellus, you see really good returns anything north of $4. And the thing we're dealing with up there, as you would imagine, is the same kind of things we're dealing in a lot of these areas, where we're trying to schedule our rig activity with the capability to export our product. So it's not only gas price that drives our activity. It's all the other ancillaries that go along with that. But if it was only on price, I'll suggest that around the $4 mark, maybe little north of that, you'd see rigs pick up and start moving. But that's just a speculation on my part. I don't know how others view that.

Operator

Your next question comes from the line of John Malone with Global Hunter Securities.

John Malone - Global Hunter Securities, LLC, Research Division

Just a couple of deepwater questions on timing. In the Gulf of Mexico, can you give us some sense of -- I know you talked about Coronado and Yucatan total depths and the spud in Phobos. Can you just kind of constrain the timing on those a little bit?

R. A. Walker

You bet, John. I'm going to have Bob Daniels address that, but it's nice to start having Gulf of Mexico exploration questions again, so thanks for asking.

Robert P. Daniels

Yes, John, thanks. We've got 3 wells going up in the Shenandoah mini-basin. We've got our operator at Shenandoah well and then Coronado and Yucatán. They're all kind of about the same place. They've got a ways to go. I would say that probably, the end of the year at the earliest, we'd expect to have something out on those because they do have quite a bit of hole to drill. These are deep wells, 32,000, 33,000 feet below salt -- sub-salt wells. But they're going to take some time. Beyond that, you mentioned Phobos. That will be drilled, as probably spud, towards the end of the year. And we've also got another one called Raptor out in the Eastern Gulf of Mexico that we hope to spud by the end of the year. So quite a bit more activity in the Gulf of Mexico, and we've got a ways to go on the wells we're drilling right now.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. You said you did have a rig lined up for Phobos, correct?

Robert P. Daniels

Yes, we do.

John Malone - Global Hunter Securities, LLC, Research Division

All right. And then one other deepwater, just going over to Africa, you talked a little bit about Cote d'Ivoire and doing some appraisal drilling around Paon. Can you just constrain that as well? What's the plan there, what's the timing? And where does Côte d'Ivoire sort of stand in the broader portfolio? How do you prioritize it?

Robert P. Daniels

Well, of course, we got one well in the Paon discovery well right now. So we have to figure out how big that is. It has the potential to be a significant discovery. We will be appraising it next year. We also plan another exploration well on that block at the same time, so we'll have a 2-well drilling campaign that we're working through the system. As to the exact timing of when that will happen, I don't know when that rig will arrive and start that activity. But we do see good potential there. It's just to the west of the Jubilee area, and the Paon discovery looks like it has some potential to be significant for us. So we will test it, and beyond that, we're going to be moving up into Liberia again, on Block 10, where we anticipate drilling a well up there, and then potentially going back into Sierra Leone and drilling an appraisal well to one of the discoveries that we have up there.

Operator

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

Brian Singer - Goldman Sachs Group Inc., Research Division

Just following up on a couple of the earlier questions. In the Marcellus, in your modestly higher year-on-year total company CapEx plan, should we expect that the Marcellus rig count will increase? And can you talk broadly about the strategic importance of the Marcellus position in the portfolio, given the competition that it has, even with its high return relative to other dry gas plays, with the competition for capital from some of the liquids-rich opportunities?

R. A. Walker

Sure, that's a very understandable question, and we'll go back to Mr. Meloy for that.

Charles A. Meloy

No, we haven't concluded what our 2013 plan looks like today. So this is just, really, speculation if you want to look at it like that. Right now, I don't really anticipate seeing a large rig ramp-up in the Marcellus. We have a very robust program in our liquids-rich plays around the country in Wattenberg and the Eagleford and out in West Texas and Carthage, and those continue to attract capital because of higher returns. As we sit here today, if prices were to rise significantly on the gas side, I would think that you might see a shift in that, but not a substantial shift. I think we're pretty much locked into what we have there. We're planning expansions with the export markets, which will take place in 2013 and beyond. And so we'll continue to feed it capital where we can get good returns. And like I said earlier, it's not just price. It's also a capacity to move the product, and that all kind of starts coming together in late 2013 and '14.

Brian Singer - Goldman Sachs Group Inc., Research Division

I guess from a strategic perspective, and particularly with regards to some of your non-operated acreage, do you see opportunities for monetization in the Marcellus, or do you think that ultimately, you will commit capital to that play in an investable time horizon that you think will be returns-accretive?

R. A. Walker

Yes, Brian, this is Al. I'm going to answer part of that and ask Bob Gwin to answer part of it. As it relates to the Marcellus, we see that, I think the way industry does, as one of the leading onshore gas plays we have in this country. Consequently, today, with gas prices being where they are, we're not really an interested seller, and I'm sure you're not going to be surprised by the comment that there's probably not a deep market, at good price discovery with buyers. So I don't see it really being something today that we're motivated to monetize. I'm going to let Bob talk a little bit more about how the market is for that. But I think in our mind today, we see it as a maintenance mode on how we're developing the play, how we're allocating capital to it. As both Chuck and I said earlier, it is a play that doesn't require the same threshold for price to have even better rates of return in a portfolio that's as deep as ours. So in the near term, it does get a chance to feed on capital a little bit sooner, but I think strategically, we see both the op and the non-op in the Marcellus being a hold position for us. Maybe there's a day when the market gives us a reason to look at it a little differently for monetization. So with that, let me segue to Bob.

Robert G. Gwin

The only thing I'd add there is that as you might expect, we look at assets across our portfolio for monetization opportunities or ways that we might see a disconnect between its value to us within our portfolio and its potential value to others in the market. But we've spent a lot of time looking at Marcellus, given its dry gas. And to Al's point, it's one that you hang onto. That's one of the best gas resources in North America. It's going to be one of the most attractive assets at almost any gas price in North America, and we've got a very significant and attractive position there. So I think that's one of the ones that's a core asset going forward, regardless of the gas price environment. That said, how much capital it's going to attract over time, how many rigs you'll move into the area over time is going to depend upon the rates of return available on the marginal rig compared to other places in the portfolio.

Brian Singer - Goldman Sachs Group Inc., Research Division

That's helpful. And then lastly, on Mozambique, how should we think about Eni's role as a competitor or partner with Anadarko in the LNG -- in LNG development?

R. A. Walker

I would put them more into the partner category. We don't see them as a competitor. We've had very good discussions with Eni. I'm optimistic that we're going to find ourselves on agreement on some pre-unitization terms and conditions that will lead to a more near-term discussion with the government about unitization in general. So I've been very encouraged with the way in which our discussions with Eni have gone. I participated in some of those. And I don't see them as competitor. In fact, anything but. And I think we're, today, much more aligned, and I think our ability to, hopefully, in the very near term, have some additional discussions jointly with the government are pretty likely.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice.

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

I had a couple of quick questions. Going back to the Wattenberg, is there a -- with respect to the resource range being moved up, is there any contribution from an EUR increase for a given size lateral or is this more about more zones and tighter density in those zones?

Charles A. Meloy

Those are [ph] primarily about just the confidence in the results that we've seen. We've seen just outstanding results. We're leaving our per well results around 350,000 per well for about a 5,000-foot lateral. And what we've seen in our testing program, as our laterals extend, you see a proportional increase in EUR. And so we're continuing this experimentation with that, making sure that we got good economics and we're not taking incrementally larger mechanical risk by doing that. But the early returns look good, and we'll continue to test that theory. And I think the other operators in the area are seeing similar results with regard to better EURs with longer laterals. It makes common sense. So right now, we're just planning on the 5,000-footers, but those could creep up with time, and EURs would do likewise.

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

Okay, great. As a follow-up to that, on LOE, you guys -- you mentioned in your prepared comments you've been successful moving that down. Is that -- should we expect more of that going forward? Is this something that's reflective of something that's -- a dynamic that's in play, U.S. onshore or some other place?

R. A. Walker

Charles, it's a tough question. I never like betting with Chuck on the first tee because I always know whatever he's telling me, he's going to do better than that. And I think with LOE, we've seen that over time. We always think we have kind of found ourselves in a position of being as efficient as we can, and then our drillers do certain things or our field personnel do certain things, or Chuck and his guys do certain things. We have a lot of people that have done a lot of things to make this happen. But Chuck's pretty good at fairing on how to squeeze a little more juice. My guess is there may be a little more juice there, but he's done an awfully good job year-to-date, as well as if you go back several years when we put Kerr-McGee and Anadarko and Western Gas together. The success we've had in taking costs out of our system, particularly LOE, I give Chuck a lot of credit for that. So with that, don't bet with him on the first tee.

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

Or this tee, whatever one we might be on, the U.S. onshore tee.

Charles A. Meloy

I'll take your question on this. We've had a lot of success driving down cost. I think it's quite a tribute to our field organizations and their creativity. What we're doing, of course, is using all the tools that are available to us right now, which, inclusive of automation and surveillance tools in the field, it's reduced the need for men to run back and forth to wells all day long. And so we're driving fewer miles, we're maintaining our production better because we can see it on a real-time basis and we can improve the uptime as we move along. The other thing that's helped us immensely is the success that we've had at the Marcellus and Wattenberg and Maverick and these other horizontal plays, which are mostly flowing wells. So our lifting costs are low. We've been able to -- as the mix has changed and we get more and more horizontal flowing wells, it's helped us drive it down. In addition to that, if you look at the company perspective, we haven't had any significant deepwater workovers in a while, and those are big movers in our OpEx. So the combination of incremental flowing wells, good performance of our field organization, operating organizations, are really working to push costs down safely and using all available tools and technologies, as well as the mechanical integrity and capability of our offshore fleet, offshore wells, to not require workovers have been a great combination. And as our volumes grow, our denominator gets bigger, and that's helped it as well. So it's a perfect storm right now. Everything's working in our favor. And I'm really encouraged by the way the organization is performing and the assets are performing. And I think that -- I don't see a huge move down, but I wouldn't be surprised if we see it float down from some quarters, particularly when we don't have major work-over into these.

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

That's great detail and exactly what I was after. And then one last quick hit, I think at one point, you guys were talking about testing Deep Nansen in 2012. Has that kind of been pushed into '13?

Robert P. Daniels

Charles, this is Bob Daniels. It has been pushed into 2013, but we do have that on our drill schedule for next year.

Operator

Your next question comes from the line of Eliot Javanmardi from Capital One Southcoast.

Eliot Javanmardi - Capital One Southcoast, Inc., Research Division

A quick question for you. I wanted to get back to the Gulf of Mexico as well. You had a nice appraisal well at Vito last quarter. I'm just curious if you could provide some color as to how things are progressing and how you expect to bring those volumes to the market. What kind of time frame potentially could we be looking at for that? What looks to be now like a Lucius-size volume base that you have there.

R. A. Walker

Well, if I could, I'm going to let both Bob Daniels, from an exploration standpoint, and Doug Lawler, from an operations development perspective, address your question because there's elements that both need to touch on, if I could. Bob, why don't you start?

Robert P. Daniels

Eliot, on the Vito appraisal, we've had real good success out there. I'd say that's a nice field. It's good, thick sands, very continuous. We've got the structure fairly well pinned down. We've got one more well that's going to be an appraisal well to just prove up the rest of the volumes. But it's been a real good success for us, and we pretty much handed that off to the development team now. They're working with the operator on the development plans. So I'll let Doug talk about that.

Robert Douglas Lawler

Thanks, Bob. But just to echo Bob's comments, we are very encouraged about Vito. It stacks in the line of the continued project and portfolio success that we've had in the Gulf of Mexico. Because of where it sits at present, and the timing, we probably are looking at several years out before we see first production. But the size of it definitely is a commercial resource, and we're very encouraged by it, following the success of Heidelberg and Lucius and just a really, really good run of good oil opportunities in the Gulf of Mexico as we continue to get back to work there.

Operator

Your next question comes from line of Ross Payne from Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Al, can you talk about your general strategy surrounding hedges and where you are for 2013?

R. A. Walker

You bet. I'm going to give you a few comments, and then I'm going to have our VP of Global Marketing, Scott Moore, give you a little more detail. Philosophically, if you're not familiar, but my guess is you probably are, we look at hedging to help us give the cash flow statement a little price insurance. It's really done to ensure balance sheet integrity and to not have big price swings move around on us, because a lot of our capital spending, when we go into a year, we can move, if we need to, into different places. And certain of what we do, certainly from an exploration standpoint, we're not looking into the next 12 to 24 months with what we think prices are going to be. So we don't really want to get in a situation where prices move away from us and we didn't have enough price insurance with our cash flow statement to ensure good balance sheet integrity. So what we try to do is we try to take a fairly measured point with both gas and oil and try to give ourselves some safety nets if prices do things that we don't anticipate, so that we don't put that pressure on the balance sheet. Now specifically, you've seen us in the past, use 3-ways more often than not. We have started using more swaps, and I think you will continue to see us do some of that. We've actually done a little of that this year, and rather than taking all of his thunder away, I'm going to have Scott walk you through what we've done and what we're looking at doing and why.

A. Scott Moore

So just to add to Al's comments on the strategic nature of our hedging, we have added in this quarter to our current natural gas position and for next year, a modest increase on our fixed-price swaps, as well as we initiated a Brent crude oil hedging program both in 3-ways, adding 26,000 barrels a day, 3-ways and 34,000 barrels a day of Brent fixed-price swaps to that program, and we continue to evaluate the forward markets relative to these types of structures for opportunities.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Can you speak to what percentage of your natural gas and oil is currently hedged?

R. A. Walker

For '12 or for '13, Ross?

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

'13.

A. Scott Moore

So in round numbers, we are approaching 1/4 of our crude oil production hedged and not quite half for our natural gas.

R. A. Walker

Our current year-to-date, Ross, is if we can get the kind of price thresholds that we're looking for, I wouldn't be surprised to see us end up at about 50-50. With hedged volumes, we use a variety of derivatives versus an unhedged position, and if we can see that, we're not concerned that we're taking the top off of it and kind of like the price insurance for the reasons I mentioned that it buys us.

Operator

I'm showing there are no further questions at this time. I'll turn the call back over to Al Walker for any closing comments.

R. A. Walker

Okay, well, thank you all. I'll reiterate what I said earlier today. I know a lot of you that are on the phone and some that aren't are going through a very difficult week. Our thoughts are with you. We wish you well as you move through this, both professionally and personally. We hope you and your families are safe, and I will extend, if there's anything we can do, please let us know. We know this is a tragic event. It's got a lot of things still to go before, probably, the market opens again. So your thoughts -- our thoughts, rather, are in the forefront of what we're trying to do this week. We're still trying to run a company, but we know a lot of you are going through some pretty difficult situations. So best wishes with that. And operator, thank you, and we look forward to seeing everybody another quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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