Anadarko Petroleum (APC) Q3 2017 Results - Earnings Call Transcript

Anadarko Petroleum Corp. (NYSE:APC) Q3 2017 Earnings Call November 1, 2017 9:00 AM ET

Executives

Robin H. Fielder - Anadarko Petroleum Corp.

Robert A. Walker - Anadarko Petroleum Corp.

Daniel E. Brown - Anadarko Petroleum Corp.

Robert G. Gwin - Anadarko Petroleum Corp.

Mitchell W. Ingram - Anadarko Petroleum Corp.

Analysts

Evan Calio - Morgan Stanley & Co. LLC

Doug Leggate - Bank of America Merrill Lynch

Paul Sankey - Wolfe Research LLC

Arun Jayaram - JPMorgan Securities LLC

Ryan Todd - Deutsche Bank Securities, Inc.

Charles A. Meade - Johnson Rice & Co. LLC

Brian Singer - Goldman Sachs & Co. LLC

Paul Grigel - Macquarie Capital (USA), Inc.

Michael Stephen Scialla - Stifel, Nicolaus & Co., Inc.

Michael McAllister - MUFG Securities America, Inc.

Robert Alan Brackett - Sanford C. Bernstein & Co. LLC

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Operator

Good morning, and welcome to the Anadarko Petroleum Corporation Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Robin Fielder. Please go ahead.

Robin H. Fielder - Anadarko Petroleum Corp.

Good morning, everyone. We're glad you could join us today for Anadarko's third quarter 2017 conference call. I'd like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. We believe our expectations are based on reasonable assumptions; however, a number of factors could cause results to differ materially from what we discuss. We encourage you to read our full disclosure on forward-looking statements in our SEC filings and the GAAP reconciliations located on our website and attached to yesterday's earnings release. Additionally, we have provided detail in the third quarter operations report on our website.

At this time, I'll turn the call over to Al Walker for some opening remarks.

Robert A. Walker - Anadarko Petroleum Corp.

Thanks, Robin, and good morning. You have likely read our third quarter earnings release and operations report and we look forward to answering your questions in a few minutes. Before we turn to Q&A, I'd like to spend some time discussing a few items: our approach to capital allocation, the benefits of a material scalable asset footprint, and some comments on our objectives and expectations for the coming year. As an early voice on the subject of capital efficiency, we are pleased this appears to have gained traction with many of our investors. Financial discipline has been a foundational principle for Anadarko for more than a decade, and has served us well as we manage the volatility of the market environment. We have always allocated capital seeking to maximize value on a per debt adjusted share basis. Those of you that have followed us over the last decade I'm sure recall our focus on per debt adjusted share metrics in previous investor presentations and conversations.

As you may recall in early 2015 and into 2016, we made it very clear that we were going to focus on and I quote "preserving value and flexibility rather than chasing growth in a lower return environment." We significantly pulled back our activity, reduced our cash costs and began the process of refocusing our portfolio on higher-margin scalable oil assets, with growth as an output, not an objective.

Our capital allocation process was also used to guide our efforts to reposition the portfolio over the past two years. We sold lower margin assets that did not compete for capital which strengthened our liquidity and high graded our opportunities, producing the oil levered higher return material and scalable asset profile we have today.

To illustrate this point, today over half of our sales volume is oil and more than 70% is liquids, resulting in a 34% margin improvement year-over-year. In September, using a portion of the cash balance we built, we announced a share repurchase program for approximately 10% of the outstanding shares and will complete the first $1 billion of the $2.5 billion program this year. We intend to complete the remainder of the repurchase program during 2018.

This month we will be recommending to our board a 2018 capital budget for its consideration along with certain changes to our compensation program directly reflecting our historic approach to capital allocation and debt adjusted returns. We expect to be discussing our 2018 budget and other matters later in November, which is earlier than in previous years. We appreciate the many conversations we've had with investors in recent months to engage in a dialogue about how to best measure and incentivize performance in the sector with strong transparency and comparability.

We recognize with two methods of accounting and disparate applications of capitalizing versus expensing certain items combined with other differences, this is a challenging process for companies and investors.

We think this has been a constructive communications process, and believe the resulting approach should have very good comparability without a lot of noise from adjustments. You should expect us to continue to maintain our focus on capital efficiency, financial discipline and cash returns to shareholders in the years ahead and we hope that will be rewarded. We expect our capital investments in 2018, not including Western Gas's separate budget, will be inside of discretionary cash flow from operations and a $50 by $3 world with meaningful free cash flow from our upstream business.

Our current asset footprint provides us a great deal of confidence to deliver these results. We believe the changes that we made to our portfolio have positioned us to deliver results across cycles and to be industry leading in today's challenging and volatile operating environment. You can expect we will continue to direct a high percentage of our capital investments towards the Delaware, DJ, and deepwater Gulf of Mexico due to the attractive economics they produce.

We often get asked the question, when will Anadarko be in full development mode in the Delaware, given our recent focus has been on capturing operatorship across the majority of our position in Reeves and Loving Counties. Frankly, in addition to focusing our drilling activity on capturing operatorship, our investments have been directed toward building one of the broadest and most integrated infrastructure positions in the basin, which is an important and critical factor in a successful long-term development program. Our comprehensive build-out plan includes blocking up acreage to improve wellhead economics with longer laterals, and utilizing our tankless battery design which has proven so successful in the DJ. Going tankless is much more cost effective over the longer term, significantly reduces emissions and improves safety by reducing the number of trucks on the road. Building this network correctly requires material capital commitments in the short-term, which we are making in 2017 and 2018.

With the expansive position we have in the Delaware Basin, we are implementing a phased approach, where we expect to see incremental oil volumes towards the back half of 2018 facilitated by the anticipated start-up of the first two regional oil treating facilities. The integrated development approach is all about enhancing value and returns rather than focusing on near-term growth. And today's infrastructure investment will be levered across multiple producing zones over many years, which continues to improve returns over time.

These are the kind of investments that will continue to drive Anadarko's competitive advantage in the years ahead. Through the increased application of technology, we expect to further improve breakevens across the portfolio in order to manage oil price volatility and improve profitability. To that end, even in the face of unprecedented hurricanes in the Gulf during the quarter, the three Ds delivered attractive growth.

Looking ahead, we feel we're on target to hit our exit rates for this year from the three Ds as they form the foundation for our 2018 program and profitability. As we continue to work to achieve operational excellence, we will remain focused on our key tenets of efficient capital allocation, thoughtful portfolio management and financial discipline to appropriately balance value and growth. We look forward to sharing more with you about our 2018 plans in the coming weeks.

With that, we'll open up the lines for your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. The first question will come from Evan Calio of Morgan Stanley. Please go ahead.

Evan Calio - Morgan Stanley & Co. LLC

Hey, good morning, guys.

Robert A. Walker - Anadarko Petroleum Corp.

Morning, Evan.

Evan Calio - Morgan Stanley & Co. LLC

Yes. Al, you discussed your approach to capital allocation and discipline in your opening comments and you've elected to return more cash to shareholders recently with the buyback. Yet given the shift, what are your thoughts on tempering the 15% longer-term growth rate in favor of returning a greater portion of cash flow to investors? Or what are your thoughts on that topic?

Robert A. Walker - Anadarko Petroleum Corp.

Well, that's an understandable question. The 15% CAGR I think you're referring to that we'd put out earlier, as you well know, is driven off of a five-year assumption at $50 for WTI. We also have been particularly focused as we looked at that on returns and capital discipline as a part of it. And when we announce our capital plan and once our board approves that plan, I think you can understand a little more at that time the details around it.

Consequently, I don't think at this juncture talking about the compounded annual growth is as important as making sure that we give you the type of returns in a $50 world that this budget we believe, if ratified, will provide. So, growth at this point is really going to be, as I said earlier, an output, not an input.

Evan Calio - Morgan Stanley & Co. LLC

So, when you're kind of approaching potentially addressing that number, here you're starting off with a cash return threshold or a percentage amount on a commodity price and then kind of building up from there, is that at least the process we should think?

Robert A. Walker - Anadarko Petroleum Corp.

We're not using cash return per se. It's certainly one of the variables. Think of it as a multi-variable equation of which that would be one of the components.

Evan Calio - Morgan Stanley & Co. LLC

Great. Maybe second if I could, you guys continue to turn fewer wells than you spud in both the DJ and the Delaware. I know the Delaware rig count peaked in the quarter in the operatorship capture mode. But when should we expect that building backlog to be drawn down, and how do you draw it? Should we expect rigs to drop off into 2018 or adding completion crews? Any thoughts there? Looks like (10:48) your rig backlog's up to over – exiting the year at over 100 wells in the Delaware.

Daniel E. Brown - Anadarko Petroleum Corp.

Evan, this is Danny Brown. I'll try and field that. So, you have seen us, as we've gone through the operatorship capture program, a consequence of that was building up a drilled well inventory as you're noting. We should see that start to pull down, actually even toward the back half, back end of this year. So through the fourth quarter, I think you should anticipate seeing a pretty significant increase of wells delivered to sale even in this quarter as we finish out some of the infrastructure.

Al mentioned in his opening comments the fact that we're building two fairly substantial regional oil treating facilities as we build out the overall infrastructure backbone throughout the basin. That's going to allow us, as we move into 2018, to continue to draw down that inventory as we move through next year. So anticipate seeing that starting next quarter and then continuing on into 2018.

Evan Calio - Morgan Stanley & Co. LLC

Great. About the DJ, same question as it relates to that build.

Daniel E. Brown - Anadarko Petroleum Corp.

Yes. So, anticipate the same. We should be in a position where we start to more evenly balance in the DJ the drilled wells – the wells that we're drilling and delivering sort of on a quarterly basis versus the wells that we're completing and ultimately delivering to sales. Now, we have seen some increase in drilled well inventory. We shouldn't see any more increase from where we are now. We should draw that down slightly. The newer completions that you likely noted that's delivering significantly higher production than we had in the past is putting us in a scenario where we need to stay a little bit further away between the drilling rigs and completions crews. And so there's going to be some sort of I would say lingering additional drilled well inventory, but that should be stable. And moving forward, we should see sort of similar delivery from a drilled well to wells going to sales from here on out.

Evan Calio - Morgan Stanley & Co. LLC

Great. Thanks guys. Look forward to call in December.

Daniel E. Brown - Anadarko Petroleum Corp.

Thank you.

Operator

The next question will come from Doug Leggate of Bank of America. Please go ahead.

Doug Leggate - Bank of America Merrill Lynch

Thanks. Good morning, everybody. Thanks for taking my questions. I'll just do a quick follow-up to Evan. The November book is posted as well as your operations report and it still shows a 15% CAGR. So I assume that's not changing?

Robert A. Walker - Anadarko Petroleum Corp.

To your question specifically, Doug, I think when we roll out our capital plan, we'll give you a little more clarity about what that looks like. If you recall, pardon me, that 15% CAGR was premised earlier in the year when we looked at a $50 oil world and a $3 gas world and that was over a five-year period. So as we're thinking about our capital plans for 2018, I think the most important thing for this morning is that it will be – all of our capital planning and budget will be inside of discretionary cash flow next year, again, premised on that $50 by $3. And consequently, I think you'll see in a few weeks our views around some of the things this morning, until we've got a chance to visit with our board, we're going to be a little more this morning until you've got a chance to visit with our board, we're going to be a little more vague on. But I don't think you should think of the 15% compounded annual growth as an input number. It'd be an output number.

Doug Leggate - Bank of America Merrill Lynch

Got it. Well, I guess the root of my question, I'm hoping that doesn't really qualify as a question, Al. So, the root of my question is really that oil isn't $50; it's $55 and Brent's above $60. So I'm just curious, what is your thought on the priority for the allocation of incremental cash flow beyond the $50 and $3 case?

Robert A. Walker - Anadarko Petroleum Corp.

Okay. Well, let Bob and I both kind of tag team you on that one. And certainly at this point, we have to manage to some sort of constant and hopefully we're conservative with that constant. And if, you're right and that were – let's say the forward curve holds, then it'll look like we'll have more cash flow through the course of the year. And Bob, with that, why don't you do address the question?

Robert G. Gwin - Anadarko Petroleum Corp.

Yeah. Doug, I think – I know you know this and just to make sure everyone does, I mean, we're levered to the price of oil by about every $1 is roughly $100 million of cash flow. And if we are providing clarity what things look like from a cash flow to spending in 2018 at $50 oil, I think folks should expect that if that means if oil's $60, then we've got $1 billion more of free cash flow. That incremental price realization versus budget does not result in increased spending under the way we're looking at the world.

Doug Leggate - Bank of America Merrill Lynch

Okay. I appreciate that. My follow-up, hopefully a quick one. You guys took a fairly sizable write-off, historical write-off I guess in addition to Warrior and Phobos. Côte d'Ivoire is now gone. I'm just wondering if you could square away the thoughts for us as to why those, particularly Côte d'Ivoire no longer competes for capital and what that says about the rule of exploration going forward in the portfolio. And I'll leave it there. Thanks.

Robert A. Walker - Anadarko Petroleum Corp.

Okay. The role of exploration, let me hit that one first. Today, we are still very involved with exploration in the Gulf of Mexico where we can tie back to existing infrastructure. I don't see that changing. There'll be certain things that will continue to want to progress for option value in the next decade, Colombia being one of those. But as we looked at the commercial characteristics of the things that we did take a charge for this quarter, it was our assessment that we just didn't feel that the commercial quality there was sufficient in order to attract capital and that's what resulted in our actions.

Doug Leggate - Bank of America Merrill Lynch

Does Paon and the related assets, are they held for sale? I mean, could they still realize value through disposal Al, or is it written off completely?

Robert A. Walker - Anadarko Petroleum Corp.

That's a question at this point, we're still looking at what we want to do with the government, so I can't answer you specifically. There's some things that we're considering. I think at this point, the way I would look at it is we're not anticipating nor would we expect to put additional capital towards it.

Doug Leggate - Bank of America Merrill Lynch

Okay. Thanks, guys.

Robert A. Walker - Anadarko Petroleum Corp.

Thank you.

Operator

The next question comes from Paul Sankey of Wolfe Research. Please go ahead.

Paul Sankey - Wolfe Research LLC

Hi, Al. Good morning.

Robert A. Walker - Anadarko Petroleum Corp.

Good morning.

Paul Sankey - Wolfe Research LLC

Again, I appreciate that you're working towards the December call, but you just mentioned that the growth target is more of an output of the various measures that you use, and then said it's not specifically cash returns per se. I guess what you're saying is that it's a combination of things. Could you just again talk more about that combination and how you're hoping to fit them together into an outlook, which I think was sort of signaled with the buyback to an extent. And could you talk a bit more about what that buyback was intended to signal? Thank you.

Robert A. Walker - Anadarko Petroleum Corp.

Yeah, you bet. What we're trying to do is right now, and Bob, I'll ask you if you'd like to, to talk a little bit about the corporate development side of this equation. But we didn't see things in the market that we thought were a better use of the cash. We though buying back our stock was a particularly good use of cash. I know Bob or I are both in different settings have always talked about the fact that if we were to buy back stock, it would be something of this magnitude where it'd be around 10%, so we permanently change the capital structure.

If we are in a world that we were talking about earlier where we had additional $1 billion of free cash flow next year, we'll continue to look at ways to most efficiently return that. I don't think you could anticipate at this point – you should anticipate, rather, at this point, that would mean additional capital spending on our part. So, I think best way I can answer you, Paul, is that if we get into a situation where we have a whole lot more cash than we anticipate today, we'll look for different ways beyond share buybacks in order to bring some of that cash back to the shareholder.

Paul Sankey - Wolfe Research LLC

Yeah, great. Understand. And then could you just talk about debt levels? Because that does remain somewhat relatively elevated if we look at the biggest names, whether or not – how hard was it to decide whether to pay down debt or to buy back stock? Thank you.

Robert G. Gwin - Anadarko Petroleum Corp.

Paul, this is Bob. It wasn't very difficult at this stage to decide between stock and debt, because we'd be buying back debt at a premium and we felt that we were buying back stock at a significant discount. I think though it's fair to say that as we move forward, we've got to consider the entire capital structure as a potential use of proceeds for free cash flow. Because certainly, we understand that the debt structure of the company has an impact. Beyond benefiting shareholders from a return on equity standpoint, it certainly has an impact sometimes on the way you trade across cycles. And so debt reductions are certainly on the table with free cash flow in the future. But leverage is not a concern to us in an absolute sense because of our liquidity position and the fact that we have very few near-term maturities.

We've got a $900 million slug coming up in 2019 and that's about it over the course of the next several years. So, it's an area that we consider, but it's not something that we would say is on the short list today. But we've still got a material cash position. After the share buyback is completed, and as I mentioned, we expect to be inside of cash flow and hopefully, with any improvement in the commodity, which I think is certainly a possibility with some recent change we've seen in the market and with what sounds like a sector that's much more focused on capital discipline, we might see some more free cash flow and then we can focus more significantly on returns to shareholders. And obviously, if we pay down debt, that benefits the shareholders directly from an economic standpoint, buying back some of their company for them.

Robert A. Walker - Anadarko Petroleum Corp.

And Paul, what I'd like to add to that is...

Paul Sankey - Wolfe Research LLC

Yeah.

Robert A. Walker - Anadarko Petroleum Corp.

...I think today what we're trying to do is position the company to do well in a world that's $45 to $60. We don't anticipate a sustained environment above $60 and we see enough reasons to be concerned that if the current OPEC and non-OPEC nations were to change their posture on what they're doing with supply, that we could find ourselves, for some period of time, running back down to around $45. So we kind of think of that as the range that we want to operate in. And if we're in a period where, to our earlier comments about throwing off an extra $1 billion of free cash flow, then we'll address that for all the reasons we talked about earlier. If we find ourselves back into a $45 world because this production finds its way back into the market and market becomes oversupplied again, we want to be prepared for that.

Paul Sankey - Wolfe Research LLC

That's great. Thank you. And thank you for the additional time that you guys give for Q&A. I appreciate it. Thank you.

Robert A. Walker - Anadarko Petroleum Corp.

You bet.

Operator

The next question will come from Arun Jayaram from JPMorgan. Please go ahead.

Arun Jayaram - JPMorgan Securities LLC

Yeah Bob, I was wondering if you could go through kind of the mechanics of the buyback you have and accelerated share repurchase program. I was wondering if you could go through the mechanics of that. We did note, looking at your Q, that the share count's down a little bit, so just trying to understand perhaps how much of the buyback has been executed at this point.

Robert G. Gwin - Anadarko Petroleum Corp.

I'll be happy to, Arun. None of the buyback is reflected in any of the third quarter numbers. So third quarter numbers appear prior to the buyback. The reason for that is we entered into the share repurchase agreement, the accelerated agreement with an investment bank early in October. So it's a fourth quarter dynamic. It will be completed during the fourth quarter under the terms of the contract that we entered into with that bank. And what we essentially do is give the bank $1 billion when we enter into the agreement, and the number of shares that they ultimately deliver to us is going to be determined on the achieved share price in the market. And so what we negotiated was that over the period of time that they have to complete the repurchase, there will be an arithmetic average of the volume weighted average price achieved over that period of time. And we will – and then our net price is a discount that we negotiated with the bank to that volume weighted average price.

That'll determine the number of shares which will be reported in the fourth quarter, or in the fourth quarter numbers. And from an Anadarko perspective, that's why we can say with certainty the share repurchase will be concluded during the fourth quarter in its entirety. And we don't know – we've gotten some questions I'll go ahead and answer in case anyone else is wondering. We don't know the current status of exactly how many shares that bank has been able to repurchase or how active they are in the market day to day because that's their book to manage over the course of the contract period which expires later this year.

Arun Jayaram - JPMorgan Securities LLC

Great, great. Al my follow-up is just, you've highlighted the $2.5 billion buyback. How do you balance that versus opportunities that you may see perhaps in the Delaware Basin, where obviously there's a big package on the market? I think $30,000 an acre is not the right number, but if we saw something – if the market came down to $20 million to $25 million, how do you balance an acquisition in the Delaware versus the buyback?

Robert A. Walker - Anadarko Petroleum Corp.

Understandable question, Arun. I think it really comes back to when we buy it, is that full cycle use of cash, would it compete with something in our portfolio? So it's going to have to be a real attractive asset that has exceptionally good productivity and EUR. So that the full cycle acquisition and development would compete well for capital. I know Bob's in this market every day, and we've looked at this stuff a lot, so let me let him elaborate.

Robert G. Gwin - Anadarko Petroleum Corp.

Yeah, I mean, one thing I want to point out, Arun, relative to your question is on the $2.5 billion, the incremental $1.5 billion, we're going to execute on that anyway. So that incremental $1.5 billion isn't judged relative to acquisition opportunities. We made the decision that we were going to buy back $2.5 billion outside of what we might choose to spend on an acquisition, if we see something that's attractively priced and fits our model. So the incremental $1.5 billion, we have every intent of completing.

On the incremental cash that we have, relative to your question, we haven't seen the acquisition market be attractive for us. That's not to criticize the decisions others have made, but we've got a big material footprint in the basin. As Al points out, the economics are very attractive to us, with the midstream infrastructure position that Al talked about that we're building out this year and next. We've got the ability to leverage some additional upstream assets. If some are available and they're attractive to us on a full cycle rate of return basis, then that could be a use of the incremental cash, but I wanted to point out, it's beyond the aggregate $2.5 billion buyback, not in lieu of that.

Arun Jayaram - JPMorgan Securities LLC

That's great. Al, just to clarify, I believe you mentioned on the call that the five-year outlook is based on $50 WTI. I believe it should be $55. Could you just clarify that, that's for (25:52)?

Robert A. Walker - Anadarko Petroleum Corp.

Yeah. That was a – yeah, earlier in the year, we talked about it at $50 and you're correct in terms of the number.

Arun Jayaram - JPMorgan Securities LLC

Okay. Thanks a lot.

Operator

The next question will come from Ryan Todd of Deutsche Bank. Please go ahead.

Ryan Todd - Deutsche Bank Securities, Inc.

Great, thanks. Maybe first off a question – kind of a follow-up question on the international and offshore exploration business. As you look back over the stretch over the past few years, other than probably a shift in strategy towards more infrastructure-led efforts going forward, what have you learned over the past couple years and how will that change possibly the way you do business going forward and how you allocate capital in the business strategies? And how much capital do you think you need to deploy kind of on a run rate basis in exploration to make that worthwhile and value accretive to the company?

Robert A. Walker - Anadarko Petroleum Corp.

Well, I think exploration as you think about it in the years ahead is largely going to be in the Gulf of Mexico, where we're tying back to existing infrastructure. And I might have Mitch just talk for a minute about what we've been able to do around Horn Mountain just to give you an example of why that's attractive to us and why it competes well for capital versus a Delaware that might – you might think would be at the top of the food chain for attracting capital because Horn Mountain was a production facility we picked up from Freeport-McMoRan along with the prospective (27:31) development and exploration potential around it. So, Mitch if you would.

Mitchell W. Ingram - Anadarko Petroleum Corp.

Right. Thanks, Ryan. Just on Horn Mountain, we've had two wells as you've seen in the operations report. The SSO4 (27:43) is producing 16,000 barrels per day and we've successfully taken on SSO5 (27:48) in just around 80 days and it's producing 8,000 barrels per day just in the one zone. So we're really excited about that and seeing progress on the second zone coming through the next few months. In addition to that, as Al mentioned, all the tieback opportunities around Horn Mountain. We're anticipating in 2018 we'll have around five wells and we plan to tie back into that, and there's a mix of development wells and exploration wells. So we're excited about the opportunity around Horn Mountain and we'll see that coming through in 2018.

Robert A. Walker - Anadarko Petroleum Corp.

And Ryan, I'd be remiss if I didn't and also point out, I mean exploration for us is not just deepwater Gulf of Mexico, but it's also onshore U.S. Lower 48, and there, like many of our competitors, we're always looking for other opportunities to do things organically and to put new plays together, where the entry cost is substantially lower than some of the more popular plays that we all are familiar with these days.

So U.S. onshore as well as Gulf of Mexico I think will be areas that will still be active. There's a big role for exploration to play. And I mentioned earlier that we'll continue to look at the opportunities we have in Colombia, which will be probably late next year or early 2019 before we drill the first well there.

So consequently, it still has a role. I just wouldn't say it's been a historical role. And I think that is reflective in when we talk about the 3Ds and where the capital allocation's going and then what we're trying with achieve with that. But there is another decade out there and it's not too far off. And we want to make sure we do some things that provide us some option value for the future.

Ryan Todd - Deutsche Bank Securities, Inc.

Great. Thanks. That's helpful. And then maybe one on the U.S. onshore and the DJ Basin. Can you talk about some of the drivers of the strong performances that you saw in the DJ Basin in the quarter? What you're seeing on well performance relative to the historical type curves that you've given, whether there's enough confidence at this point that that better performance would be reflected in a forward looking guidance whenever you update the 2018 outlook.

Daniel E. Brown - Anadarko Petroleum Corp.

I appreciate that, Ryan. This is Danny again. Yeah, we've been very, very pleased with what we've seen in DJ, particularly with the new completions technique that we've employed on about 70 wells in that basin. We have several months of data now, and it shows that we've got significant incremental performance through that completion technique with those wells. As we're able to get a little more data on that, certainly, as you have seen us do historically, we will update our type curves. And I think as we move forward and roll out our 2018 plans and put out new type curves for the various areas that we're working, wouldn't surprise me if you see us update that one as well. The performance increase has been substantial and we couldn't be more pleased with what we're seeing.

Robert A. Walker - Anadarko Petroleum Corp.

Yeah, Ryan, you've heard us, and heard a lot of our competitors talking about the use of big data and the use of artificial intelligence, and in particular, machine learning. I think all of us are in very early innings. We probably talk a little less publically about that than some, but our ability to use data as a sector is very early innings in terms of just its application. I think we're all trying to either develop this on a proprietary basis or working in joint ventures with people who are data mining in other sectors a lot. And so I'm pretty optimistic that our ability as an industry to lower our breakevens will largely come in the future from technological advances and the applications of technology that we've not historically either used or used fully.

And a lot of this – I know it probably isn't a surprise to you, but sometimes I find it's surprising to others. It's we have a lot of data. It's just we don't transmit that data on a broad enough frequency or a Wi-Fi frequency that allows us to actually do something to manipulate that data on the backend. And so, while we all have a lot of data, the ability to not only collect, but transmit that data into a process that can actually use the data is one of the real encumbrances that I think we're all dealing with and trying to figure out how to best overcome. Some of this is easy and some of it's a little bit harder, but I do think the breakevens as a sector are downward on its pressure, simply because of the way we're all going to use technology to its advantage.

Ryan Todd - Deutsche Bank Securities, Inc.

Great. Thanks. I appreciate the color.

Robert A. Walker - Anadarko Petroleum Corp.

You bet.

Operator

The next question will come from Charles Meade of Johnson Rice. Please go ahead.

Charles A. Meade - Johnson Rice & Co. LLC

Good morning, Al, to your whole team there as well. I wanted to ask a question about the transition in the Delaware Basin from the operator capture mode to the more development mode. And I think you've given us some pieces already, particularly talking about this tankless midstream system that's going to help you out with your volumes in the back half of 2018. But are there other guideposts that you're thinking about that you could share with us that we could look at maybe in the first half of the year to gauge your progress on that?

Robert A. Walker - Anadarko Petroleum Corp.

You bet. I'm going to have Danny give you a little longer explanation, but I think you just – you hit on something I believe we do really well, and I apologize if it sounds overly braggadocious. It's not intended to be. But I think we learned and understood from our success in the DJ how to integrate upstream and midstream spending so that we're not drilling a lot of wells and sitting around waiting on a pipeline to connect and cash flow to start.

In the Delaware, because we're not only just dealing with a hydrocarbon stream that's liquid and one it's gas or multiple liquids, we're also dealing with a lot of water. And so, our ability to actually move a lot of these various fluids and gas properties in a way that is efficient, and we're not sitting there with a bunch of frontend capital that's waiting for other capital to connect it, or being dependent upon a third party to actually do that, is part of what we believe will be an important, or a very integral part of our story, as the Delaware gets developed out. These regional centers, and I'm going to have Danny talk a little bit about, are probably not as well understood, and I think will actually come into play. As I made the comments earlier, it's not just for now, but it is for the future and the other zones out there that we see. So, Danny, if you would?

Daniel E. Brown - Anadarko Petroleum Corp.

Yeah. No. Appreciate that. Charles, I appreciate the question. As we look at 2018, I think really we're anticipating that's going to be a year of transition for us within the Delaware Basin. And I'll almost say, in some ways we can look at that from an infrastructure standpoint and then a drilling and completion standpoint. On the drilling and completion side, as you know, we spent most of 2017 working through our operator capture program. We've got all those AFEs out now, and we have to continue and finalize the drilling and completion and ultimately delivery to sales of all of those wells we've worked through that program.

And so that's going to take us into 2018, and I think you'll see us transition into a more of a multi-pad development scenario toward the back half of the year as being our normal course of business as we work through that operatorship capture program. You'll see us deliver some well pads, multi-well pads earlier in the year, but I really think that's going to be more of a phenomenon that you start to see us transition to toward the back half of 2018.

But from an infrastructure standpoint, I would say that we are fully employing the learnings that we saw within the DJ Basin over into Delaware, just as Al suggested. And these regional oil treating facilities are going to be a major piece of that. When you think about that, we are, from a well level standpoint, we're moving away from atmospheric tanks, we're moving away from combustors, we're moving away from flares, far fewer moving parts, far fewer trucks on the road, lower emissions, all which should drive, frankly, decreased risk for us and increased operational performance through that infrastructure system.

So we think we've seen through our experience in the DJ basin that these work really, really well, and that's what we're moving toward from an infrastructure perspective. So as those regional treating facilities come online as we move into 2018, sort of toward the middle of the year, you should see us start to flow the wells that we've done through the operator capture program, as well as set ourselves up for the multi-well pads that we'll be transitioning into. So it's really going to form of a backbone of how we develop that field and should deliver a significant incremental – you should see significant incremental delivery as we move through 2018, and particularly in the back half of 2018, as those systems get put in place.

Charles A. Meade - Johnson Rice & Co. LLC

That's helpful, Danny. It sounds like a lot of capital on the frontend as well, but capital well spent. If I could give you one other question, Danny, perhaps this is best for you. It's maybe a simple question, but hard to know. The 40% uplift you guys have seen with these new completions in the DJ, do you have a sense of how much of that is acceleration versus incremental EUR? And if you don't know now, do you have a guess on when you might know?

Daniel E. Brown - Anadarko Petroleum Corp.

Yeah. So I think that clearly we need to continue to see the data, but our feeling is, is that this is incremental EUR where we're going to be able to increase the recovery factor that we've seen in the areas that we're developing. But we haven't updated our type curve yet. We need to understand this longer, but I'll say we've got in some cases three, four, five months of data on this now and it's looking really good and we're very encouraged by what we're seeing.

Charles A. Meade - Johnson Rice & Co. LLC

Thanks for that color.

Operator

The next question will come from Brian Singer of Goldman Sachs. Please go ahead.

Brian Singer - Goldman Sachs & Co. LLC

Thank you. Good morning.

Robert A. Walker - Anadarko Petroleum Corp.

Morning, Brian.

Brian Singer - Goldman Sachs & Co. LLC

First question's on the Gulf of Mexico. There are a few moving parts between weather delays and some of the non-commercial conclusions from the appraisal drilling that you highlighted. But can you just talk to your broad goal of keeping production flat in the Gulf via tiebacks, oil production that is, and any changes on the margin to your ability and interest in executing on that goal?

Robert A. Walker - Anadarko Petroleum Corp.

Yeah, Brian. I think, at this point, as you've seen over the last year since we bought the Freeport-McMoRan properties and we've been able to use the now 10 producing facilities that we have in the Gulf, our hope is that the GOM will be flat and that will be a cash flow provider to the two onshore activities that we've been talking about, although the DJ provides positive cash flow today and only the Delaware is cash flow deficient. I think you just should be thinking of the GOM for us in the near term as we're going to hold it flat. We think we have very attractive economics to drill out what we've got there. It's not only as big a decline as the onshore unconventionals are and we feel like it's a really good leg of the stool for us for the reasons that we've talked about a lot and don't see anything today to be discouraged about it. I hope that helps a little bit.

Brian Singer - Goldman Sachs & Co. LLC

It does. That's great. And then that's flat with the kind of 130,000 barrels a day or so of where you expect your exit. Is that the right bogey?

Robert A. Walker - Anadarko Petroleum Corp.

That's correct.

Brian Singer - Goldman Sachs & Co. LLC

Okay. Great. And then one of the other comments that you made, and I think it goes to some of the returns or corporate returns improvement relates to margins and that margins are on track to improve. It's easy for us to see the impact that asset sales have to change the production mix and the impact that that has on price realizations. But can you talk about the scope for operating cost reductions per BOE and how much might be due from mixed shift from asset sales versus say same store sales efficiency gains at RemainCo Anadarko?

Robert A. Walker - Anadarko Petroleum Corp.

Yeah, I think you'll see some of this to a greater degree when we talk about specifically our plans for next year. And I'm glad we're able to do that in the month of November this time because I think there's a lot of interest in it.

Simple things like thinking of going from trucks to pipe. You know, that's just a cost savings right there that's pretty substantial. Pretty easy to see, but you got to spend the money upfront to move it off. If you were just thinking about this only in a growth scenario, you'd just truck everything and you'd grow your volumes through your trucking. Long term, that's not going to be good for your margins and moving into a pipe is good for both the environment as well because you get the trucks off the road and all that comes with that. And it also helps you with your cost.

And then another way to think about it is two, in the Delaware, we've really only been drilling single wells out there, so our well costs, once we move to pad development, again you're going to see the drilling costs and the completion costs come down as we move into that pad environment. So those would be the two easiest things for me to point to.

As I've said and you've heard me say many, many times, we're not in the revenue business. We're in the margin business. And we do find ourselves oftentimes whipped around by what the revenue line does, because of the commodity, and we can't contract our cost fast enough. But we are mindful that we are in the margin business and that's why we look at all of our cash cost combined and think about it not just in one singular line like LOE or G&A. You got to look at all the cash combined, because everybody's got different methods of accounting. Or we have two methods of accounting and different policies and approaches on how we capitalize versus expense. So if we roll all the cash costs together and think about it as a margin business, I think we're doing okay on that, but we do recognize that we have to keep a pretty good eye on it.

Brian Singer - Goldman Sachs & Co. LLC

Got it. And then just to follow up on that, for Anadarko specifically, is the extent of the savings going to come more in looking at your LOE and how that could fall versus the 8.25 (41:40) or so per BOE that I think you're at in Q3 or will it come more on the CapEx capitalized front in terms of lower CapEx per BOE?

Robert A. Walker - Anadarko Petroleum Corp.

I think you're going to see it – I'm going to answer you this way. I think you really have to look at all of us on a total cash basis and not on a line item basis, because some of our peers might capitalize 30%, 40% of their G&A. They may or may not capitalize their LOE; some do, some don't. Everybody's got a little bit different approach to that. And so consequently, I think I would encourage people to look at the total cash costs rather than a line item specifically. But I do think from a cash cost perspective for Anadarko, you would anticipate in the Delaware that we're going to be able to bring that down, and it will probably be most obvious to you if you're just looking at it in LOE.

Brian Singer - Goldman Sachs & Co. LLC

Thank you.

Operator

The next question will come from Paul Grigel of Macquarie. Please go ahead.

Paul Grigel - Macquarie Capital (USA), Inc.

Hi. Good morning. Al, going back to the comment on the incentives changes, will these changes involve both your short-term and long-term plans? And will the debt adjusted per share focus span both of those plans?

Robert A. Walker - Anadarko Petroleum Corp.

Well, I think as you're thinking about compensation, I made comments in the opening remarks that – and those of you that have been following us for a long time know as you've seen it in our materials, we've always thought about things on a debt adjusted basis or per share debt adjusted basis, simply because it was our early view on work that we did that it had the highest our R-squared to share price performance, and consequently it was the metric that we focused on for that reason, because it said a lot of things about the efficiency of how you're using your capital. We never chose to use it as a part of our comp program because it's kind of a complicated and clumsy discussion to have broadly defined with the your employees, because it sounds okay if you're talking to finance folks, but it's a mouthful, if you're trying to explain it to somebody in the field.

So while we've thought about that from how we allocate capital, the compensation programs haven't gone that next step. Now, I know you know this, and it's pretty simple. But if we don't issue stock or we don't issue debt, it's the same number at the end of the year relative to what we've been doing. So for a company that other than buying Freeport-McMoRan has only issued stock in the last 10 years for that and we've actually not used debt even though we've ended up having to pay out unfortunately over $10 billion on two particular instances, I don't think the way we've compensated for that issue or thought about that compensation issue is any different than if we'd been running on a debt per share basis, debt adjusted.

So, I hope that helps you a little bit. I think the comp program for us will reflect the things that we're hearing shareholders tell us on the use of how they want to see production and reserve growth measured using that per debt adjusted share basis. And I think there's a capital efficiency number that we intend to also talk about when we roll out our budget. So, think of that as a trailer, and the movie ought to be pretty good.

Paul Grigel - Macquarie Capital (USA), Inc.

Okay. No, appreciate that additional color. And then as a follow-up, with the growing focus on margins and returns, and with some of the resent upside volatility within that $45 to $60 dollar range that you've stated, and even just a previous comment about kind of managing top line revenue within that, what is the willingness to hedge, and has that changed as part of this clarification on the returns focus and return to capital that you guys have stated here?

Robert A. Walker - Anadarko Petroleum Corp.

Well, as you've seen from the supplemental information with the earnings release, we've had some hedging activity or derivative activity associated with natural gas, but not a great deal as it relates to oil. I'd say that's always a work in progress.

Philosophically, we don't really like to be more than 50% hedged in either of the two principal commodities. So even if we found ourselves willing to put some sort of price floor underneath oil, we'd still find ourselves oftentimes not exceeding that 50% threshold if we went in and actually use a greater degree of derivative activity than you've seen to date.

Paul Grigel - Macquarie Capital (USA), Inc.

And is there a view that if you want to have a set return to shareholders each year, be that cash flow or on a percentage basis, that that hedging program could be additive to that process in terms of creating certainty year after year?

Robert A. Walker - Anadarko Petroleum Corp.

You know, that's an interesting comment. I think that might go under the category of, would you hedge to drill a well. And I guess the answer there is we don't. I appreciate hedging as a return of cash, but I'd have to think through that a little bit more. In all fairness, Paul, I'm not sure if I was an investor that I would want you to be hedging as a return of cash any more than I want you to hedge in order to drill a well (46:47).

Paul Grigel - Macquarie Capital (USA), Inc.

It's certainly a debate between managing the manufacturing process and the balance sheet as well. But appreciate the time.

Robert A. Walker - Anadarko Petroleum Corp.

You bet. Thank you.

Operator

The next question will come from Mike Scialla of Stifel. Please go ahead.

Michael Stephen Scialla - Stifel, Nicolaus & Co., Inc.

Yeah, good morning. Thanks. Al, you mentioned you are looking at other onshore opportunities. Just wanted to get your thoughts on the Powder River Basin. It looks like you've increased your permits there this year. Just wondering, what would need to happen there for that to become part of the 2018 plan or is that viewed more as a potential divestiture candidate at this point?

Robert A. Walker - Anadarko Petroleum Corp.

You know, as it relates to 2018, I think you should expect that we will continue to be a Delaware, DJ, deepwater Gulf of Mexico spender of capital. We think we see clarity and good returns. It's very economic. It's part of the things we've been messaging over the last year. It's what we're moving to and away from dry gas. Whether it's things that we can do or might do more of on the margin, there's always things you're going to experiment with, and I think the one thing that we always have to be mindful of is we wanted to have a material, scalable asset that attracts capital. If we can't get to a material, scalable footprint, then we're probably likely to sell it.

Michael Stephen Scialla - Stifel, Nicolaus & Co., Inc.

Got you. Okay. And then just wanted to get some comments on Mozambique. Looks like you're making some pretty good progress there with the SPAs. Just want to see if you could give us little more color on the line of sight to FID there.

Robert A. Walker - Anadarko Petroleum Corp.

You bet. I'm going to have Mitch add some additional comments, but I've been very, very pleased with what Mitch and his organization's been able to do on the sale and purchase agreement front. Those SPAs are coming together and a very critical part of why and when we would take FID, but not by itself the only one, but certainly a critical step. So, Mitch, you might want to take just a minute or two on that, if you would.

Mitchell W. Ingram - Anadarko Petroleum Corp.

Okay, Mike. I'll just give you a quick update. Obviously the key element for us for some time has been getting the marine concessions approved. As we've indicated in the past, once we'd achieved that, we'd anticipated some SPAs going through the approval process. You've now seen the first one in terms of PTT, and we're really pleased that that's been done for a large volume over a large period of time. And that really starts to support our long-term development going forward for FID.

As we've indicated in the ops report, we're aiming for just over 8 million tonnes, and all those discussions are ongoing with the key buyers to enable us to get there. In addition to that, we're engaged actively with our project financing team, and they're fully engaged and willingness to provide support for that. So once we've got all those in place in terms of the SPAs at the volumes we've indicated and project financing in place, then we'll be ready to take FID.

Michael Stephen Scialla - Stifel, Nicolaus & Co., Inc.

Got you. Thank you very much.

Operator

The next question comes from Michael McAllister of MUFG. Please go ahead.

Michael McAllister - MUFG Securities America, Inc.

Good morning, everyone. Thank you for taking my question. Looking at slide 4 on your conference call slides and the build-out of the, I guess the oil treating facilities, that 120,000 BOPD, that's by mid-2018?

Daniel E. Brown - Anadarko Petroleum Corp.

That's correct. That would be two regional oil treating facilities, each with 60,000 barrels a day of capacity.

Michael McAllister - MUFG Securities America, Inc.

And will that just serve APC and Partner's production?

Daniel E. Brown - Anadarko Petroleum Corp.

That's correct.

Michael McAllister - MUFG Securities America, Inc.

Okay. And then similar note in the DJ Basin with the Latham plant, and the agreements to move gas, it looks like about 1 Bcf a day could be moved out of there by the end of 2019, is that correct?

Robert A. Walker - Anadarko Petroleum Corp.

You know, that's – I'm not sure. We'll have to come back and give you an answer on that one. I'm not sure it's quite that much. Maybe about half of that. Yeah. We're all kind of looking around going maybe 400 Mcf to 500 Mcf a day, but it's a not a B a day.

Michael McAllister - MUFG Securities America, Inc.

Well, just on top of, like as an expansion. I would assume that you have the ability to move about 600 Mcf now. I guess what I'm trying to get to is it looks like you're setting up infrastructure-wise to double production in the DJ by the end of 2019.

Robert A. Walker - Anadarko Petroleum Corp.

Yeah. Well, I think what you can think of is the Latham plant's going to add us about 400 Mcf a day of incremental capacity over and above what we've got now. And we're anticipating that that's going to serve our needs as we move forward through 2018, 2019 and into the future for the growth that we're anticipating from that asset, really getting ahead of our upstream development activity just like you'd see us do in Delaware and just like we've done it historically.

Michael McAllister - MUFG Securities America, Inc.

Right. I'm just trying to get at – I'm trying to figure out what the capacity is going to be by the end of 2019 in both regions, and it looks as if you could triple production in the Delaware, and in the DJ, it looks like you could double infrastructure-wise. I'm not claiming that this is what you're going to do upstream-wise, but at least the facilities are there.

Daniel E. Brown - Anadarko Petroleum Corp.

Yeah. So, if you add that 400 Mcf, I agree. You're getting sort of (52:42) 1 Bcf of takeaway within the Greater DJ area and that's going to I think set us up for growth just as you're contemplating.

Michael McAllister - MUFG Securities America, Inc.

Okay. That's all I have.

Robert A. Walker - Anadarko Petroleum Corp.

But I want to be sure before you (52:40). You're only talking about the incremental 400 Mcf from the two cryos, right?

Michael McAllister - MUFG Securities America, Inc.

Correct.

Robert A. Walker - Anadarko Petroleum Corp.

Yeah. Then I think Danny has answered your question correctly then. I just wanted to make sure you weren't thinking like there's a B a day coming incrementally, but it will be in the aggregate.

Michael McAllister - MUFG Securities America, Inc.

Correct. No. I'm with you. Thank you.

Robert A. Walker - Anadarko Petroleum Corp.

Okay. All right.

Operator

The next question comes from Bob Brackett of Bernstein. Please go ahead.

Robert Alan Brackett - Sanford C. Bernstein & Co. LLC

Yeah. Question on the 2018 plan potentially. Can you think about what level of CapEx would keep production flat at the corporate level?

Robert G. Gwin - Anadarko Petroleum Corp.

Yeah, Bob, it's Bob Gwin. I don't have that number for you directly. I mean, it's relatively low, because as Al points out, we're free cash flowing out of all the assets other than the Delaware. And so, the maintenance capital, these are relatively low capital intensive assets in the Gulf of Mexico for instance, North Africa, West Africa, very low capital intensive. So if you solve – we don't really solve for that because you might allocate capital inefficiently to try to keep it flat, if that was a goal. So that's why I don't have an answer for you specifically.

Robert Alan Brackett - Sanford C. Bernstein & Co. LLC

Okay.

Robert G. Gwin - Anadarko Petroleum Corp.

The money that's going into growth is going into the Delaware and the DJ obviously, and there's some money going into the Gulf of Mexico to keep it flat. But for the most part, it's a free cash flow profiling asset and you'd never dial it back to maintenance alone because that destroys future value and the only reason to obviously have future value and growth is to increase returns to shareholders in the future. So I mean, it's not the most efficient way you'd run the railroad.

Robert Alan Brackett - Sanford C. Bernstein & Co. LLC

Yeah. A follow-on, the deepwater rig schedule, you're going to see a rig sort of drop every year for the next several. Where will those rigs be allocated? Will they end up in the deepwater GOM? Will one end up drilling development wells in Mozambique? How do you think about allocating those deepwater rigs?

Robert A. Walker - Anadarko Petroleum Corp.

I think for the most part, today our expectation is they'll all be in the GOM. Obviously, the well we're going to drill in Columbia is going to require us to do something just a little bit to change that rig to be able to drill in that depth of water. It might be one of the rigs that we currently have in the Gulf of Mexico, so we're in conversations with several people about that. But beyond that, I think we were looking at development drilling for FID or from post-FID in Mozambique. We could probably pick up a market rig at that point.

Robert Alan Brackett - Sanford C. Bernstein & Co. LLC

Got you. Thank you.

Operator

The next question comes from Jeff Campbell of Tuohy Brothers. Please go ahead.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Good morning.

Robert A. Walker - Anadarko Petroleum Corp.

Hi, Jeff.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

There's been a lot of good questions asked. So, I'll just pick up one. I was just wondering conceptually, it sounds like you were saying that, but I just want to make sure. Conceptually do we think of Ghana as a free cash flow asset? And do you sort of look at continuing to, after the border decision that was made, do you consider continuing to invest in that asset something analogous to drilling offset wells in the Gulf of Mexico in terms of the risk profile and what you expect to get from the investment?

Robert A. Walker - Anadarko Petroleum Corp.

Yeah, the short answer to your question, Jeff, is yes. Ghana is an asset we think of as free cash flow. In fact the only asset that we have in the portfolio today that we would invest in that's not free cash flowing is Delaware. Algeria and Ghana in particular if you're looking at the international are very free cash flowing. There's things that we're going to do both with TEN and the greater Jubilee area that requires some capital, but not so much capital that I would dismiss the comment I just made.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Great. That's helpful. Thanks. That's all I wanted to ask. Thank you.

Robert A. Walker - Anadarko Petroleum Corp.

You bet. Thank you.

Robert A. Walker - Anadarko Petroleum Corp.

It's the top of the hour. I know it's a full day of earnings calls today, and appreciate those that chose to join ours this morning, and we'll look forward to seeing each of you hopefully in the coming weeks. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.