Analysis: Anadarko’s upstream smorgasbord

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[Context: On April 12, Chevron (NYSE: CVX) announced a $33bn bid for Anadarko Petroleum (NYSE: APC) at $65 share in cash stock. With assumed debt, the total enterprise value is $50bn. In its press announcement, Chevron noted it would divest $15bn to $20bn between 2020 to 2022. Out of Anadarko’s US assets, Chevron highlighted only the Delaware Basin and Deepwater Gulf of Mexico. Presumably, everything else is up for sale–and could be of interest to PE-backed upstream management teams. Below is detailed description of Anadarko’s US assets, which the company provided in its February 10-K filing with the SEC. Further details, advisors and related links are below.]


Anadarko 10-K Filing

EXPLORATION AND PRODUCTION PROPERTIES AND ACTIVITIES

ANADARKO’S EXPLORATION AND PRODUCTION PROPERTIES AND ACTIVITIES

United States

Anadarko’s U.S. operations include oil and natural-gas exploration and production in the U.S. onshore and deepwater Gulf of Mexico.

2018 U.S. OPERATIONS

U.S. Onshore Anadarko’s U.S. onshore properties include significant oil and natural-gas plays located in Texas, Colorado, Wyoming, and Utah.

U.S. ONSHORE OIL AND NATURAL-GAS EXPLORATION AND PRODUCTION OPERATIONS

Activities in the U.S. onshore during 2018 primarily focused on optimizing wellbore and completion design, improving cost structure, delivering efficient production, and maximizing margin per barrel. The Company also focused on building out infrastructure within its premier positions in the Delaware and DJ basins, while enhancing its acreage position in the Powder River basin. Throughout 2018, the Company continued its efforts to explore for U.S. onshore opportunities that compete within Anadarko’s portfolio. In addition, during 2018 the Company divested its nonoperated interests in Alaska. In 2019, the Company expects to continue its horizontal drilling programs in the Delaware and DJ basins, while commencing appraisal activity within the Powder River basin.

The Company also has fee ownership of mineral rights, known as the Land Grant, under 7.3 million acres that pass through Colorado and Wyoming and into Utah. Management considers the Land Grant a significant competitive advantage for Anadarko as it enhances the Company’s economic returns from production, offers drilling opportunities for the Company without expiration, and allows the Company to earn royalty revenue from third-party activity on Land Grant acreage.

Delaware Basin Anadarko operates approximately 750 wells and owns interests in approximately 450 nonoperated wells in the Delaware basin. The Company’s 2018 drilling activity primarily targeted the Wolfcamp shale play, while also testing the liquids-rich Bone Spring tight sands. Having secured operatorship on a majority of its legacy joint venture acreage, the Company continued to build out one of the most expansive and integrated infrastructure positions in the region, primarily in Reeves and Loving counties. In 2018, the Company focused on securing sufficient oil takeaway capacity, ending the year with approximately 46% of its Delaware basin operated oil volume being sold at Gulf Coast markets via the Enterprise pipeline. This capacity is expected to increase to 100% when the Cactus II pipeline is in full service. Anadarko ended 2018 with eight operated drilling rigs and five completion crews.

The successful Wolfcamp shale delineation program continues to deliver encouraging results across the majority of Anadarko’s acreage position. Anadarko is testing multiple zones within the Wolfcamp shale and several development concepts for increased efficiency. Included in these development concepts are multi-well pads, extended laterals, enhanced completion designs, and optimized horizontal-well spacing. The Company expects the Wolfcamp shale play to provide substantial opportunity for Anadarko’s future activity in the basin.

The Reeves and Loving ROTFs and the first train at the Mentone natural-gas processing plant were placed into service in 2018, adding 120 MBbls/d and 200 MMcf/d of nameplate oil and gas processing capacity to the area. See Midstream Properties and Activities for additional discussion on the significant infrastructure added during 2018 to facilitate growth from this asset.

DJ Basin Anadarko operates approximately 3,400 vertical wells and 1,700 horizontal wells in the Niobrara and Codell formations in the DJ basin. Horizontal drilling results in the field continue to be strong, with enhanced economics realized through the Company’s ownership of the Land Grant and operational efficiencies in drilling and completions.

Anadarko continues to drive drilling efficiencies in its DJ basin operations. In 2018, the Company increased its horizontal lateral length by approximately 16% and improved its footage drilled per rig-day by approximately 30% from 2017. The Company ended 2018 with four operated drilling rigs and two completion crews.

The sixth COSF train was placed in service during the third quarter of 2018, adding 30 MBbls/d of oil-stabilization capacity. Construction activities have commenced at the Latham plant, which will deliver 400 MMcf/d of increased natural-gas processing capacity. See Midstream Properties and Activities for additional discussion.

Powder River Basin In the southern Powder River basin, Anadarko’s acreage is mainly located in Converse County, Wyoming. The field contains the Turner, Niobrara, and Mowry formations that hold both liquids and natural gas. In 2018, the Company invested $181 million on lease acquisitions, accumulating a 300,000 gross-acre position in the southern Powder River basin area, with significant stacked-oil potential.

Greater Natural Buttes The Greater Natural Buttes area in eastern Utah is a tight-gas asset. The Company uses cryogenic and refrigeration processing facilities in this area to extract NGLs from the natural-gas stream. There was minimal activity in this field during 2018 due to capital being allocated to higher-margin projects.

Gulf of Mexico Anadarko owns a working interest in 231 blocks in the Gulf of Mexico, operates 10 active floating platforms, and holds interests in 34 fields. The Company continued an active deepwater development and exploration program in the Gulf of Mexico during 2018, and continues to take advantage of existing infrastructure to cost-effectively develop known resources. The Company plans to operate up to two floating drillships and two platform rigs in 2019.

GULF OF MEXICO OIL AND NATURAL-GAS EXPLORATION AND PRODUCTION OPERATIONS

Development
Horn Mountain (100% working interest)
At Horn Mountain, the Company is successfully executing on its tie-back strategy as oil production continues to exceed expectations. The third development well was drilled in the fourth quarter of 2017 and encountered 42 feet of high-quality oil pay with favorable structural position and good connectivity to existing wells. This well was completed in the first quarter of 2018 and came online in the second quarter of 2018. A platform rig program is currently underway at the spar. The lower platform-rig day rate provides capital-efficient opportunities to increase oil rates in the field. Horn Mountain continues to outperform expectations with total facility gross oil production up by more than 400% since its acquisition in late 2016.

Marlin (100% working interest)
At Marlin, the first tie-back development well was drilled and completed in the King field in the fourth quarter of 2017. The well was brought online in the first quarter of 2018. The Company drilled a second tie-back development well in the Dorado field in the first quarter of 2018. The well encountered 35 feet of high-quality Miocene oil pay and was completed and brought online in the third quarter of 2018. Marlin continues to produce at or near its highest oil rates since the facility was acquired in late 2016.

Additionally, the Company leveraged its infrastructure position to generate revenue with production-handling and cost-sharing agreements on third-party volume. The Crown and Anchor field, which is owned and operated by third parties, was successfully tied back to Marlin and began producing in the second quarter of 2018.

Holstein (100% working interest)
At Holstein, the Company certified the permanently installed platform drilling rig and initiated a four-well drilling program in the fourth quarter of 2017. The first two wells came online in the third quarter of 2018, and the third development well was drilled during the fourth quarter of 2018. Results for the third well were in line with expectations and first production is expected in the first quarter of 2019. Based on the success of this program, the Company plans to drill additional wells in 2019.

Caesar Tonga (33.75% working interest)
At Caesar/Tonga, the Company completed its eighth development well in the second quarter of 2018. The well was tied back to Anadarko’s Constitution Spar and came online in the third quarter of 2018. This field continues to produce at or near record-high oil production rates.

Constellation (33.33% working interest)
At Constellation, the Company successfully drilled and completed the first development well in the second quarter of 2017. The well was tied back to Anadarko’s Constitution spar and first production was achieved in early 2019.

Lucius (48.9% working interest)
At Lucius, the Company successfully drilled the ninth development well in the third quarter of 2018 and encountered 230 net feet of oil pay in two Pliocene sands. The well was completed and brought online in the fourth quarter of 2018. Spud-to-first-production cycle time was 71 days, a Company record for a deepwater subsea well.

The Company entered into an agreement with partners to expand the Lucius unit to encompass the adjacent Hadrian North discovery in late 2017. The first Hadrian North expansion well concluded drilling in the third quarter of 2018. The well encountered 200 net feet of oil pay in two Pliocene sands and was completed in the fourth quarter of 2018. A second well, originally drilled by the previous operator, was also completed in the fourth quarter of 2018. First production from the North Hadrian two-well expansion is expected by mid-2019.

K2 Complex (41.8% working interest)
At the K2 Complex, the Company successfully drilled and completed the twelfth development well in the second quarter of 2018. The well encountered 220 net feet of oil pay in three Miocene sands and was brought online in the second quarter of 2018 as a tie-back to the Marco Polo facility.

Exploration and Appraisal
The Company continues to create value through successful working interest farmdowns of existing acreage, while also increasing its position through lease sale participation for additional acreage. The Music City and the Sugar exploration wells were drilled in the first quarter of 2018 and were unsuccessful.

2019 Outlook

The Company plans to continue focusing on returning capital directly to its investors. The Company demonstrated this focus in 2018 by increasing its quarterly cash dividend from $0.05 to $0.30 per share, expanding its authorized Share-Repurchase Program to $5 billion, and increasing its debt-reduction program to $2 billion. As of December 31, 2018, the Company had repurchased 65 million shares of its common stock for an average price of $57.69 per share. The Company expects to complete the remaining $1.25 billion of authorized share repurchases by mid-year 2020. As of December 31, 2018, Anadarko had retired more than $600 million of debt and plans to repay $900 million of debt maturing in the first half of 2019. An additional $500 million of debt reduction is anticipated through mid-year 2020. These actions demonstrate the cash-flow-generating strength of the Company’s asset portfolio and the Company’s ongoing commitment to capital efficiency and returns.

At the end of 2018, the Company announced the planned contribution and sale of substantially all of its midstream assets not owned by WES, which are largely associated with Anadarko’s two premier U.S. onshore oil plays in the Delaware and DJ basins, to WES for approximately $4.0 billion, with approximately $2.0 billion of cash proceeds and the balance to be paid in WES common units. This transaction is expected to increase WES’s cash distributions paid to Anadarko in 2019 and reduce Anadarko’s future midstream capital funding requirements associated with the divested assets. Additionally, WES announced that a wholly owned subsidiary of WGP will merge with and into WES to simplify its structure and lower the weighted-average cost of capital for the midstream entity via the elimination of incentive distribution rights. These transactions are expected to close in the first quarter of 2019 and should result in enhanced liquidity of Anadarko’s residual ownership of WGP securities.

The Company’s 2019 capital program is consistent with the Company’s focus on enhancing shareholder value by delivering attractive cash returns on invested capital in a $50 oil (for both WTI and Brent) and $3 natural-gas (Henry Hub) price environment while advancing the development of the Company’s core assets. Anadarko currently estimates a 2019 capital spending range of $4.3 billion to $4.7 billion, excluding WES. Anadarko expects to allocate approximately 70% of this 2019 capital investment to the U.S. onshore upstream and midstream resource plays; 16% to conventional oil plays in the deepwater Gulf of Mexico, Algeria, and Ghana; 10% to future value areas, which includes 6% to exploration and 4% to Mozambique LNG activities, excluding post-FID incremental spend; and 4% to corporate activities. The Company’s asset footprint and strong balance sheet are intended to perform through commodity cycles.

– Delaware Basin Anadarko plans to allocate approximately $1.4 billion toward upstream activities. The successful expansion of the Company’s infrastructure footprint, including oil gathering and treating facilities throughout West Texas, is paving the way to transition to multi-well pad development. This phased development approach is expected to deliver incremental oil sales volume in 2019.

– DJ Basin Anadarko expects to invest approximately $1.3 billion on upstream activities, with continued development of its minerals-interest ownership and infrastructure-advantaged position in the Wattenberg field. Anadarko expects to deliver incremental oil sales volume from the DJ basin in 2019.

– Powder River Basin Anadarko expects to invest approximately $250 million toward upstream activities, including appraisal and delineation of its 300,000 gross acre position in the southern Powder River basin primarily targeting the Turner formation.

– Gulf of Mexico Anadarko expects to allocate approximately $500 million toward its deepwater Gulf of Mexico operations. Although the capital allocation is lower than in 2018, the Company plans to deliver a similar number of wells in 2019 and maintain production levels around 140 MBOE/d. The majority of these investments are expected to be directed toward high-return oil development opportunities near operated infrastructure at Constellation, Holstein, Horn Mountain, K2, Lucius, and North Hadrian.

– International Anadarko plans to allocate approximately $200 million toward its international operations in Algeria and Ghana. The investment in Ghana will be focused on adding incremental wells to optimize capacity at the Jubilee and TEN FPSO vessels.

– Exploration The Company’s exploration investments in 2019 are expected to total approximately $250 million. Exploration spending will primarily be focused on identifying material and scalable opportunities in the U.S. onshore and tie-back opportunities near existing operated facilities in the deepwater Gulf of Mexico.

– LNG The Company expects to invest approximately $200 million in the Mozambique LNG project in 2019 on pre-FID activities. This includes Anadarko’s portion of the cost associated with ongoing site preparation for the shared onshore facilities. The Company remains on track for making a final investment decision in the first half of 2019, and anticipates adjusting its capital investment expectations associated with the Mozambique LNG project if the project is sanctioned.

WES currently estimates a 2019 total capital spending range of $1.3 to $1.4 billion. WES capital investment will be primarily focused in the DJ and Delaware basins, with over 90% of the estimated 2019 total capital expenditures allocated to these two basins.

Total Company

– The Company’s oil sales volume averaged 385 MBbls/d, representing a 9% increase from 2017, primarily due to increased volume from the DJ and Delaware basins, partially offset by the divestiture of certain U.S. onshore assets in 2017.

– The Company’s overall oil sales-volume product mix increased to 58% in 2018, compared to 53% in 2017. The overall liquids sales-volume product mix increased to 73% in 2018, compared to 67% in 2017.
U.S. Onshore

– Total sales volume in the Delaware basin averaged 109 MBOE/d, representing a 68% increase from 2017, and oil sales volume in the Delaware basin increased 27 MBbls/d, representing a 71% increase from 2017, primarily due to continued drilling and completion activities.

– In the Delaware basin, the Reeves and Loving County ROTFs were completed, with 138 total wells flowing into the facilities by the end of 2018. In addition, the first train at the WES-owned Mentone natural-gas processing plant was placed in service during the fourth quarter, adding 200 MMcf/d of natural-gas processing capacity.

– Oil sales volume in the DJ basin increased 14 MBbls/d, representing a 17% increase from 2017, primarily due to continued drilling and completion activities.

– In the DJ basin, the sixth COSF train was placed in service, adding 30 MBbls/d of oil-stabilization capacity.

– The Company received net proceeds of approximately $370 million from the divestiture of its nonoperated interest in Alaska.
Gulf of Mexico

– Oil sales volume averaged 121 MBbls/d, remaining relatively flat compared to 2017, primarily due to natural production declines and planned downtime at various platforms, partially offset by new wells coming online at Horn Mountain, Holstein, Marlin, and Caesar Tonga.

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