ANADARKO PETROLEUM CORP 3RD QTR 2011 FORM 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

or

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from    to    

Commission File No. 1-8968

ANADARKO PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   76-0146568
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046

(Address of principal executive offices)

Registrant’s telephone number, including area code (832) 636-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Company’s common stock as of September 30, 2011, is shown below:

 

Title of Class   Number of Shares Outstanding
Common Stock, par value $0.10 per share   497,971,511


Table of Contents

TABLE OF CONTENTS

 

 

PART I        Page  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Income for the Three and Nine Months
Ended September 30,  2011 and 2010

     2   
 

Consolidated Balance Sheets as of September 30, 2011, and December 31, 2010

     3   
 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2011

     4   
 

Consolidated Statements of Comprehensive Income for the Three and Nine
Months Ended September  30, 2011 and 2010

     5   
 

Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2011 and 2010

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2.

  Management’s Discussion and Analysis      33   
 

Financial Results

     38   
 

Operating Results

     48   
 

Liquidity and Capital Resources

     50   
 

Regulatory Matters, Environmental and Additional Factors Affecting Business

     54   
 

Critical Accounting Estimates

     55   
 

Recent Accounting Developments

     55   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      55   

Item 4.

  Controls and Procedures      57   
PART II           

Item 1.

  Legal Proceedings      58   

Item 1A.

  Risk Factors      62   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      66   

Item 6.

  Exhibits      67   


Table of Contents

PART I. FINANCIAL INFORMATION

Item  1. Financial Statements

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
       

millions except per-share amounts

     2011        2010        2011        2010  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues and Other

           

Natural-gas sales

   $ 840       $ 809       $ 2,564       $     2,692   

Oil and condensate sales

     1,905         1,298         5,948         4,138   

Natural-gas liquids sales

     377         227         1,080         736   

Gathering, processing, and marketing sales

     262         182         750         643   

Gains (losses) on divestitures and other, net

     (185)         34         (214)         84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,199         2,550         10,128         8,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Costs and Expenses

           

Oil and gas operating

     262         207         730         590   

Oil and gas transportation and other

     217         220         633         607   

Exploration

     307         296         722         649   

Gathering, processing, and marketing

     214         134         590         466   

General and administrative

     293         273         806         686   

Depreciation, depletion, and amortization

     932         962         2,902         2,845   

Other taxes

     375         240         1,132         809   

Impairments

     183         20         287         147   

Deepwater Horizon settlement and related costs

     4,042                4,055          
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,825         2,354         11,857         6,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income (Loss)

     (3,626)         196         (1,729)         1,492   

Other (Income) Expense

           

Interest expense

     206         218         642         642   

(Gains) losses on commodity derivatives, net

     (230)         (200)         (317)         (1,052)   

(Gains) losses on other derivatives, net

     854         221         939         656   

Other (income) expense, net

     40         (129)         (2)         (106)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     870         110         1,262         140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (Loss) Before Income Taxes

     (4,496)         86         (2,991)         1,352   

Income Tax Expense (Benefit)

     (1,468)         94         (762)         660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income (Loss)

     (3,028)         (8)         (2,229)         692   

Net Income Attributable to Noncontrolling Interests

     23         18         62         42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income (Loss) Attributable to Common Stockholders

   $     (3,051)       $ (26)       $     (2,291)       $ 650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per Common Share:

           

Net income (loss) attributable to common stockholders—basic

   $ (6.12)       $     (0.05)       $ (4.60)       $ 1.30   

Net income (loss) attributable to common stockholders—diluted

   $ (6.12)       $ (0.05)       $ (4.60)       $ 1.30   

Average Number of Common Shares Outstanding—Basic

     498         496         498         495   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average Number of Common Shares Outstanding—Diluted

     498         496         498         496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends (per Common Share)

   $ 0.09       $ 0.09       $ 0.27       $ 0.27   

See accompanying Notes to Consolidated Financial Statements.

 

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ANADARKO PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,      December 31,  
millions    2011      2010  

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 3,487       $ 3,680   

Accounts receivable, net of allowance:

     

Customers

     1,169         1,032   

Others

     2,259         1,391   

Other current assets

     689         572   
  

 

 

    

 

 

 

Total

     7,604         6,675   
  

 

 

    

 

 

 

Properties and Equipment

     

Cost

     58,185         54,815   

Less accumulated depreciation, depletion, and amortization

     20,069         16,858   
  

 

 

    

 

 

 

Net properties and equipment

     38,116         37,957   

Other Assets

     1,510         1,616   

Goodwill and Other Intangible Assets

     5,832         5,311   
  

 

 

    

 

 

 

Total Assets

   $ 53,062       $ 51,559   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current Liabilities

     

Accounts payable

   $ 2,446       $ 2,726   

Accrued expenses

     1,259         1,097   

Current portion of long-term debt

     141         291   

Deepwater Horizon settlement and related costs

     4,017         —    
  

 

 

    

 

 

 

Total

     7,863         4,114   
  

 

 

    

 

 

 

Long-term Debt

     12,808         12,722   

Other Long-term Liabilities

     

Deferred income taxes

     8,670         9,861   

Asset retirement obligations

     1,584         1,529   

Other

     2,638         1,894   
  

 

 

    

 

 

 

Total

     12,892         13,284   
  

 

 

    

 

 

 

Equity

     

Stockholders’ equity

     

Common stock, par value $0.10 per share

     

(1.0 billion shares authorized, 515.5 million and 513.3 million shares issued as of September 30, 2011, and December 31, 2010, respectively)

     51         51   

Paid-in capital

     7,845         7,496   

Retained earnings

     12,023         14,449   

Treasury stock (17.5 million and 17.1 million shares as of September 30, 2011, and December 31, 2010, respectively)

     (794)         (763)   

Accumulated other comprehensive income (loss)

     (501)         (549)   
  

 

 

    

 

 

 

Total Stockholders’ Equity

     18,624         20,684   

Noncontrolling interests

     875         755   
  

 

 

    

 

 

 

Total Equity

     19,499         21,439   
  

 

 

    

 

 

 

Total Liabilities and Equity

   $     53,062       $     51,559   
  

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

    Total Stockholders’ Equity              
    Common
Stock
    Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive

Income (Loss)
    Non-
controlling
Interests
    Total
Equity
 

millions

             

Balance at December 31, 2010

  $     51       $ 7,496       $ 14,449       $     (763)      $ (549)      $ 755       $     21,439    

Net income (loss)

    —         —         (2,291)        —         —         62         (2,229)   

Common stock issued

    —         155         —         —         —         —         155    

Dividends—common

    —         —         (135)        —         —         —         (135)   

Repurchase of common stock

    —         —         —         (31)        —         —         (31)   

Sale of subsidiary units (1)

    —         32         —         —         —         269         301    

Conversion of subordinated limited partner units to common units (2)

    —         162         —         —         —         (162)        —    

Contributions from (distributions to) noncontrolling interest owners and other, net

    —         —         —         —         —         (49)        (49)   

Reclassification of previously deferred derivative losses to net income

    —         —         —         —                —           

Adjustments for pension and other postretirement plans

    —         —         —         —         41         —         41    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

  $ 51       $     7,845       $ 12,023       $ (794)      $ (501)      $     875       $ 19,499    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Paid-in capital and noncontrolling interests includes $18 million and $9 million, respectively, of tax associated with subsidiary equity transactions that occurred during the current year.

(2) 

Includes $82 million of tax associated with subsidiary equity transactions that occurred prior to the conversion of subordinated limited partner units to common units.

 

See accompanying Notes to Consolidated Financial Statements.

 

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ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
millions   2011      2010     2011     2010  

Net Income (Loss)

  $     (3,028)      $     (8)      $     (2,229)      $     692   

Other Comprehensive Income (Loss), net of taxes

       

Reclassification of previously deferred derivative losses to net income (1)

                      13   

Adjustments for pension and other postretirement plans:

       

Net gain (loss) incurred during period (2)

    —         —         —         (21)   

Prior service credit (cost) incurred during period (3)

    —         —         —         (4)   

Amortization of net actuarial loss and prior service cost to net periodic benefit cost (4)

    14              41        31   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments for pension and other postretirement plans

    14              41         
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    16        14        48        19   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

    (3,012)              (2,181)        711   

Comprehensive Income Attributable to Noncontrolling Interests

    23        18        62        42   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss) Attributable to Common Stockholders

  $ (3,035)      $ (12)      $ (2,243)      $ 669   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Net of income tax benefit (expense) of $(1) million and $(2) million for the three months ended September 30, 2011 and 2010, respectively, and $(4) million and $(7) million for the nine months ended September 30, 2011 and 2010, respectively.

(2) 

Net of income tax benefit (expense) of zero for the three months ended September 30, 2011 and 2010, and zero and $12 million for the nine months ended September 30, 2011 and 2010, respectively.

(3) 

Net of income tax benefit (expense) of zero for the three months ended September 30, 2011 and 2010, and zero and $2 million for the nine months ended September 30, 2011 and 2010, respectively.

(4) 

Net of income tax benefit (expense) of $(8) million and $(5) million for the three months ended September 30, 2011 and 2010, respectively, and $(24) million and $(17) million for the nine months ended September 30, 2011 and 2010, respectively.

 

See accompanying Notes to Consolidated Financial Statements.

 

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ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months  Ended
September 30,
 
millions          2011                  2010        

Cash Flows from Operating Activities

     

Net income (loss)

   $     (2,229)       $ 692   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     

Depreciation, depletion, and amortization

     2,902         2,845   

Deferred income taxes

     (1,195)         (142)   

Dry hole expense and impairments of unproved properties

     423         473   

Impairments

     287         147   

(Gains) losses on divestitures, net

     243         (12)   

Unrealized (gains) losses on derivatives, net

     767         (66)   

Deepwater Horizon settlement and related costs

     4,055          

Other

     151         145   

Changes in assets and liabilities:

     

(Increase) decrease in accounts receivable

     (939)         15   

Increase (decrease) in accounts payable and accrued expenses

     215         (293)   

Other items—net

     (88)         126   
  

 

 

    

 

 

 

Net cash provided by (used in) operating activities

     4,592         3,932   
  

 

 

    

 

 

 

Cash Flows from Investing Activities

     

Additions to properties and equipment and dry hole costs

     (4,110)         (3,563)   

Acquisition of midstream businesses

     (802)         —    

Divestitures of properties and equipment and other assets

     75         44   

Other—net

     (52)         (30)   
  

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     (4,889)         (3,549)   
  

 

 

    

 

 

 

Cash Flows from Financing Activities

     

Borrowings, net of issuance costs

     1,051         3,199   

Repayments of debt

     (1,154)         (1,173)   

Repayment of midstream subsidiary note payable to a related party

     —          (1,599)   

Increase (decrease) in accounts payable, banks

     39         (70)   

Dividends paid

     (135)         (136)   

Repurchase of common stock

     (31)         (35)   

Issuance of common stock, including tax benefit on stock option exercises

     57         90   

Sale of subsidiary units

     328         97   

Distributions to noncontrolling interest owners

     (57)         (36)   

Other financing activities

            (24)   
  

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     107         313   
  

 

 

    

 

 

 

Effect of Exchange Rate Changes on Cash

     (3)         (9)   
  

 

 

    

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     (193)         687   

Cash and Cash Equivalents at Beginning of Period

     3,680         3,531   
  

 

 

    

 

 

 

Cash and Cash Equivalents at End of Period

   $ 3,487       $ 4,218   
  

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Summary of Significant Accounting Policies

General  Anadarko Petroleum Corporation is engaged in the exploration, development, production, and marketing of natural gas, crude oil, condensate, and natural gas liquids (NGLs). In addition, the Company engages in the gathering, processing, and treating of natural gas, and the transporting of natural gas, crude oil, and NGLs. The Company also participates in the hard minerals business through its ownership of non-operated joint ventures and royalty arrangements. Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.

Basis of Presentation  The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s Consolidated Balance Sheets as of September 30, 2011, and December 31, 2010, the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2011 and 2010, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and the Consolidated Statement of Equity for the nine months ended September 30, 2011. Certain prior-period amounts have been reclassified to conform to the current-period presentation.

In preparing financial statements in accordance with accounting principles generally accepted in the United States, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties and equipment; proved reserves; goodwill; intangible assets; asset retirement obligations; litigation reserves; environmental liabilities; pension assets, liabilities, and costs; income taxes; and fair values. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates.

Recently Issued Accounting Standards Not Yet Adopted  The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that further addresses fair-value-measurement accounting and related disclosure requirements. The ASU clarifies the FASB’s intent regarding the application of existing fair-value-measurement accounting and disclosure requirements, changes fair-value-measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair-value measurements. The ASU is required to be adopted on a prospective basis by Anadarko beginning January 1, 2012. The Company does not expect adoption of this ASU to have an impact on its consolidated financial statements, other than requiring revised disclosures, where appropriate.

In September 2011, the FASB issued an ASU that permits an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for goodwill impairment testing purposes. Thus, determining a reporting unit’s fair value is not required unless, as a result of a qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount. This ASU is effective for periods beginning after December 15, 2011. Adoption of this ASU will have no impact on the Company’s consolidated financial statements.

 

2.

Deepwater Horizon Events

Background, Settlement, and BP Indemnification  In April 2010, the Macondo well in the Gulf of Mexico, in which Anadarko holds a 25% non-operating leasehold interest, discovered hydrocarbon accumulations. During suspension operations, the well blew out, an explosion occurred on the Deepwater Horizon drilling rig, and the drilling rig sank, resulting in the release of hydrocarbons into the Gulf of Mexico. Eleven people lost their lives in the explosion and subsequent fire, and others sustained personal injuries. The Macondo well was plugged on September 19, 2010.

BP Exploration & Production Inc. (BP), the operator of Mississippi Canyon Block 252 in which the Macondo well is located (Lease), is funding claims and coordinating cleanup efforts. BP invoiced the Company $6.1 billion for what BP considered to be Anadarko’s proportionate share of actual costs and anticipated near-term future costs related to these activities. Anadarko withheld payment to BP for all Deepwater Horizon event-related invoices pending the completion of various ongoing investigations into and litigation regarding the cause of the well blowout, explosion, and subsequent release of hydrocarbons.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Deepwater Horizon Events (Continued)

 

In October 2011, the Company and BP entered into a settlement agreement, mutual releases, and agreement to indemnify, whereby the Company and BP agreed to a mutual release of claims against each other relating to the Deepwater Horizon events (Settlement Agreement). Pursuant to the Settlement Agreement, the Company has agreed to pay $4.0 billion in cash and transfer its interest in the Lease to BP (subject to required governmental approvals of the transfer), and BP has agreed to accept this consideration in full satisfaction of its claims against Anadarko for $6.1 billion of invoices issued to date and to forgo reimbursement for all future costs arising from the Deepwater Horizon events, including future costs under the Operating Agreement (OA). In addition, BP has fully indemnified Anadarko against all claims, causes of action, losses, costs, expenses, liabilities, damages, or judgments of any kind arising out of the Deepwater Horizon events, related damage claims arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and associated damage-assessment costs, and any claims arising under the OA. This indemnification has been guaranteed by BP Corporation North America Inc. (BPCNA) and in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. Under the Settlement Agreement, BP does not indemnify the Company against fines and penalties, punitive damages, shareholder, derivative, or security laws claims, or certain other claims. The Company believes that costs associated with non-indemnified items, individually or in the aggregate, will not materially impact the Company’s consolidated financial position, results of operations, or cash flows.

Liability Accrual  As of September 30, 2011, the Company has recorded a liability for Deepwater Horizon-related settlement costs of approximately $4.0 billion, which includes the cash payment to be remitted to BP in accordance with the Settlement Agreement, as well as Deepwater Horizon event-related legal fees. These legal fees were previously recorded in general and administrative expenses in the Consolidated Statements of Income and have been reclassified for all periods presented to conform to the current-period presentation.

Below is a discussion of the Company’s current analysis, under applicable accounting guidance, of its potential liability for (i) amounts invoiced by BP under the OA (OA Liabilities), (ii) OPA-related environmental costs, and (iii) other contingent liabilities. Accounting rules require loss recognition only where a potential loss is considered probable and can be reasonably estimated.

The Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and other potential liabilities. The Company may be required to recognize a liability for these amounts in advance of or in connection with recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c. The Company has not recorded a liability for any costs that are subject to indemnification by BP.

OA Liabilities  Under the Settlement Agreement, all amounts deemed by BP to have been due under the OA, as well as all future amounts that otherwise would be invoiced to Anadarko under the OA, have been satisfied.

OPA-Related Environmental Costs  BP, Anadarko, and other parties, including parties that do not own an interest in the Lease, such as the drilling contractor, have received correspondence from the United States Coast Guard (USCG) referencing their identification as a “responsible party or guarantor” (RP) under OPA. Under OPA, RPs, including Anadarko, may be jointly and severally liable for costs of well control, spill response, and containment and removal of hydrocarbons, as well as other costs and damage claims related to the spill and spill cleanup. The USCG’s identification of Anadarko as an RP arises as a result of Anadarko’s status as a co-lessee in the Lease.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Deepwater Horizon Events (Continued)

 

Applicable accounting guidance requires the Company to accrue an environmental liability if it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Under accounting guidance applicable to environmental liabilities, a liability is presumed probable if the entity is both identified as an RP and associated with the environmental event. The Company’s co-lessee status in the Lease and the subsequent identification and treatment of the Company as an RP satisfies these standards and therefore establishes the presumption that the Company’s potential environmental liabilities related to the Deepwater Horizon events are probable. Given that such liabilities are probable, the Company must separately assess and estimate the Company’s allocable share of gross estimated OPA-related environmental costs.

As BP funds OPA-related environmental costs, any potential joint and several liability for these costs is satisfied for all RPs, including Anadarko. This bears significance in that once these costs are funded by BP, such costs are no longer analyzed as OPA-related environmental costs, but are instead analyzed as OA Liabilities. As discussed above, Anadarko has agreed with BP to settle its current and future OA Liabilities. Thus, potential liability to the Company for OPA-related environmental costs can only arise where BP does not, or otherwise is unable to fund all of the OPA-related environmental costs. Under this scenario, the joint and several nature of the liability for these costs could cause the Company to recognize a liability for OPA-related environmental costs. However, the Company is fully indemnified by BP against these costs (including guarantees by BPCNA or BP p.l.c.).

Gross OPA-Related Environmental Cost Estimate  In prior periods, the Company provided an estimated range of gross OPA-related environmental costs for all identified RPs. This estimate was comprised of spill-response costs and OPA damage claims and was derived from cost information received by the Company from BP. As a result of the Settlement Agreement, the Company no longer expects to receive cost and claims data related to the Deepwater Horizon events. Accordingly, the OPA-related environmental cost estimate included in BP’s public releases is the best data available to the Company and therefore herein and hereafter will be utilized by the Company in its accounting analysis.

Based on information included in BP p.l.c.’s public release on October 25, 2011, the range of gross OPA-related environmental costs is estimated to be $7.0 billion to $11.0 billion, excluding (i) amounts BP has already funded, which constitute settled OA Liabilities; (ii) amounts that cannot reasonably be estimated by BP, which include NRD claims and other litigation damages; and (iii) non-OPA-related fines and penalties that may be assessed against Anadarko, including assessments under the Clean Water Act (CWA). The Company believes that actual gross OPA-related environmental costs may vary from those estimated by BP p.l.c. in its public releases, perhaps materially from the above cost estimate.

Allocable Share of Gross OPA-Related Environmental Costs  Under applicable accounting guidance, the Company is required to estimate its allocable share of gross OPA-related environmental costs based on the Company’s estimate of the allocation method and percentage that may ultimately apply to it. To date, BP has paid all Deepwater Horizon event-related costs, which satisfies the Company’s potential liability for these costs. Additionally, BP has repeatedly stated publicly and in prior congressional testimony that it will continue to pay these costs. BP’s funding and public commentary has continued subsequent to the release of BP’s own investigation report, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling’s final report, and the Deepwater Horizon Joint Investigation Team final report, which the Company considers to be significant positive indications in assessing the likelihood of BP continuing to fund all of these costs. Based on BP’s stated intent to continue funding these costs, the Company’s assessment of BP’s financial ability to continue funding these costs, and the impact of BP’s settlements with both of its OA partners, the Company believes the likelihood of BP not continuing to satisfy these claims to be remote. Accordingly, at September 30, 2011, the Company considers zero to be its allocable percentage share of gross OPA-related environmental costs and, consistent with applicable accounting guidance, continues to have a liability accrual of zero for these amounts.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Deepwater Horizon Events (Continued)

 

Other Contingencies

Penalties and Fines  These costs include amounts that may be assessed as a result of potential civil and/or criminal penalties under various federal, state, and/or local statutes and/or regulations as a result of the Deepwater Horizon events, including, for example, the CWA, the Outer Continental Shelf Lands Act, the Migratory Bird Treaty Act, and possibly other federal, state, and local laws. The foregoing does not represent an exhaustive list of statutes and regulations that potentially could trigger a penalty or fine assessment against the Company.

To date, no penalties or fines have been assessed against the Company. However, on December 15, 2010, the United States Department of Justice (DOJ), on behalf of the United States, filed a civil lawsuit in the United States District Court in New Orleans, Louisiana (Louisiana District Court) against several parties, including Anadarko Petroleum Corporation and Anadarko E&P Company LP (AE&P), a subsidiary of Anadarko, seeking an assessment of civil penalties under the CWA in an amount to be determined by the Louisiana District Court. The DOJ complaint seeks separate penalty assessments against both Anadarko Petroleum Corporation and AE&P (based on a temporary interest that AE&P at one time held in the Lease). In April 2011, the Company moved to dismiss AE&P from the DOJ lawsuit because the effective date of AE&P’s transfer of its interest in the Lease to Anadarko Petroleum Corporation pre-dated the Deepwater Horizon events. The Company currently believes it is probable that AE&P will not be found liable for CWA penalties upon the presentation of evidence. The Company believes the outcome of this decision will not have a material impact on Anadarko’s potential liability.

Although Anadarko was named in the DOJ civil lawsuit, its status as a defendant does not mean that Anadarko will be assessed a CWA penalty in that action. First, the Company has a defense to liability under the CWA based on the location from which the discharge occurred. If the court finds that the discharge of hydrocarbons came from the vessel (which includes the riser pipe), the Company may not be liable under the CWA because it neither owned nor operated the Deepwater Horizon drilling rig. Second, because CWA penalties, in practice, are generally assessed on a party-specific basis and take into account several factors including the party’s degree of fault, the Company considers its lack of direct involvement in the operation of the drilling rig and the spill itself significant in concluding that losses from CWA penalty assessments are not probable. This view was reinforced by the Louisiana District Court’s decision that dismissed all negligence claims against the Company based on the court’s finding that the Company did not exercise operational control over the events that led to the oil spill. Accordingly, the Company does not consider a CWA penalty assessment to be probable and, therefore, has not recorded a liability for potential CWA penalties at September 30, 2011.

In addition to concluding that any liability for CWA penalties is not probable, the Company currently cannot estimate the amount of any potential penalty. The CWA sets forth subjective criteria, including degree of fault and history of prior violations, which influence CWA penalty assessments. Thus, as a result of the subjective nature of CWA penalty assessments, the Company currently cannot estimate the amount of any such penalty. However, given the Company’s lack of direct operational involvement in the event, as recently confirmed by the Louisiana District Court, the Company believes that its potential exposure to CWA penalties will not materially impact the Company’s consolidated financial position, results of operations, or cash flows.

Natural Resource Damages  This category includes future damage claims that may be made by federal and/or state natural resource trustee agencies at the completion of injury assessments and restoration planning. Natural resources generally include land, fish, water, air, wildlife, and other such resources belonging to, managed by, held in trust by, or otherwise controlled by, the federal, state, or local government.

The NRD-assessment process is led by government agencies that act as trustees of natural resources on behalf of the public. Government agencies involved in the process include the Department of Commerce, the Department of the Interior (DOI), and the Department of Defense. These governmental departments, along with the five affected states – Alabama, Florida, Louisiana, Mississippi, and Texas – are referred to as the “Co-Trustees.” The Co-Trustees continue to conduct injury assessment and restoration planning.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.

Deepwater Horizon Events (Continued)

 

The DOJ civil lawsuit filed against BP, the Company, and others seeks unspecified damages for injury to federal natural resources. Not all of the Co-Trustees were a party to this lawsuit; however, during the second quarter of 2011, the states of Alabama and Louisiana each filed NRD-related state law claims against the Company in the Louisiana District Court. The Company filed a motion to dismiss all of the claims in both of these complaints in June 2011. The Court heard oral arguments on these and other parties’ motions in September 2011 and has taken the motions under advisement.

NRD claims are generally sought after the damage assessment and restoration planning is completed, which may take several years. Thus, the Company remains unable to reasonably estimate the magnitude of any NRD claim. The Company anticipates that BP will satisfy any NRD claim, which eliminates any potential liability to Anadarko for such costs. In the event any NRD damage claim is made directly against Anadarko, the Company is fully indemnified by BP against such claims (including guarantees by BPCNA or BP p.l.c.).

Civil Litigation Damage Claims  Numerous civil lawsuits have been filed against BP and other parties, including the Company, by, among others, fishing, boating, and shrimping enterprises and industry groups; restaurants; commercial and residential property owners; certain rig workers or their families; the State of Alabama and several of its political subdivisions; the DOJ; environmental non-governmental organizations; the State of Louisiana and certain of its political subdivisions; and certain Mexican states. Many of the lawsuits filed assert various claims of negligence, gross negligence, and violations of several federal and state laws and regulations, including, among others, OPA; the Comprehensive Environmental Response, Compensation, and Liability Act; the Clean Air Act; the CWA; and the Endangered Species Act; or challenge existing permits for operations in the Gulf of Mexico. Generally, the plaintiffs are seeking actual damages, punitive damages, declaratory judgment, and/or injunctive relief.

In August 2010, the United States Judicial Panel on Multidistrict Litigation created Multidistrict Litigation No. 2179 (MDL) to administer essentially all pretrial matters for litigation filed in federal court involving Deepwater Horizon event-related claims. Federal Judge Carl Barbier presides over this MDL in the Louisiana District Court. The Louisiana District Court has issued a number of case-management orders that establish a schedule for procedural matters, discovery, and trial of certain of the MDL cases. The parties to the MDL are actively engaged in discovery. In May 2011 and September 2011, Judge Barbier heard oral arguments on the numerous motions to dismiss filed by the multiple defendants named in this litigation. While a number of the motions remain pending, Judge Barbier has dismissed all maritime and state law claims filed against the Company by private plaintiffs seeking damages for economic loss. All negligence claims filed by these private plaintiffs against the Company have been dismissed based upon Judge Barbier’s finding that the Company did not exercise operational control over the events that led to the oil spill. In a separate order, Judge Barbier reached similar findings and dismissed all claims against the Company filed by private plaintiffs alleging personal injury caused by exposure to oil, fumes or other contaminants from the blowout or the chemical dispersants used during the post-spill cleanup operations. Judge Barbier further found that federal law exclusively applies to the private plaintiffs’ claims for property damage and economic loss and dismissed all state law claims against the Company asserting liability for such damages and losses. Only OPA claims asserted by private plaintiffs seeking economic loss damages against the Company remain. The Company, pursuant to the Settlement Agreement, is fully indemnified by BP against such OPA claims.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.  Deepwater Horizon Events (Continued)

 

The Louisiana District Court has scheduled a February 2012 trial in Transocean’s Limitation of Liability case in the MDL. This trial is to be the first phase of a three-phase trial, each phase designed to address different issues. The first phase of the trial is to determine certain liability issues and the liability allocation among the parties alleged to be involved in or liable for the Deepwater Horizon events. In April 2011, the Company filed its answer in this Limitation of Liability case and cross-claimed against affiliates of BP and Transocean Ltd. (Transocean), Halliburton Energy Services, Inc. (Halliburton), Cameron International Corporation (Cameron), and other third-party defendants. Transocean, Halliburton, and Cameron subsequently filed cross-claims against the Company, and BP filed a motion to stay the litigation in the MDL between BP and the non-operating OA parties. In the motion to stay, BP argued that the cross-claims asserted against BP by the Company and the other non-operating OA party are covered by the dispute resolution procedures under the OA and should be stayed. As a result of the Settlement Agreement, a mutual release of all claims, including those that could have been made in arbitration, was agreed to by the Company and BP. The Company has also assigned all rights, title, and interest to all claims that have been or could be asserted against third parties, including cross-claims filed against other third-party defendants, to BP, with the exception of rights to claims the Company may assert under its insurance policies.

Two separate class action complaints were filed in June and August 2010, in the United States District Court for the Southern District of New York (New York District Court) on behalf of purported purchasers of the Company’s stock between June 9, 2009, and June 12, 2010, against Anadarko and certain of its officers. The complaints allege causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, the Company’s liability related to the Deepwater Horizon events. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs. In November 2010, the New York District Court consolidated the two cases and appointed The Pension Trust Fund for Operating Engineers and Employees’ Retirement System of the Government of the Virgin Islands (Virgin Islands Group) to act as Lead Plaintiff. In January 2011, the Lead Plaintiff filed its Consolidated Amended Complaint. Prior to filing its Consolidated Amended Complaint, the Lead Plaintiff requested leave from the New York District Court to transfer this lawsuit to the United States District Court for the Southern District of Texas. The Company opposes the Lead Plaintiff’s request to transfer the case to the District Court for the Southern District of Texas. The parties have submitted briefs to the New York District Court concerning the transfer of venue issue. In March 2011, the Company moved to dismiss the Consolidated Amended Complaint of the Lead Plaintiff, and in April 2011, the Lead Plaintiff filed its opposition to the motion to dismiss. The motion to transfer and motion to dismiss remain under advisement of the New York District Court.

Also in June 2010, a shareholder derivative petition was filed in the 152nd Judicial District Court of Harris County, Texas (Harris County District Court), by a shareholder of the Company against Anadarko (as a nominal defendant), certain of its officers, and current and certain former directors. The petition alleged breaches of fiduciary duties, unjust enrichment, and waste of corporate assets in connection with the Deepwater Horizon events. The plaintiffs sought certain changes to the Company’s governance and internal procedures, disgorgement of profits, and reimbursement of litigation fees and costs. In November 2010, the Harris County District Court granted Anadarko’s Motion to Dismiss for Lack of Jurisdiction and Special Exceptions, and granted the plaintiffs 120 days to file an Amended Petition. In March 2011, the plaintiffs filed an Amended Petition. The Company filed Special Exceptions and a Motion to Dismiss the Amended Petition in April 2011. In June 2011, the Harris County District Court heard oral arguments on these matters and granted the motion to dismiss. The time for the plaintiffs to appeal has expired.

In September 2010, a purported shareholder made a demand of the Company’s Board of Directors (Board) to investigate allegations of breaches of duty by members of management. The Board duly considered the demand, and in January 2011 determined that it would not be in the best interest of the Company to pursue the issues alleged in the demand letter.

Given the early stages of these proceedings, the Company currently cannot assess the probability of losses, or reasonably estimate a range of any potential losses, related to ongoing proceedings. The Company intends to vigorously defend itself, its officers, and directors in all proceedings, and will avail itself of any and all indemnities provided by BP against civil damages.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.  Deepwater Horizon Events (Continued)

 

Remaining Liability Outlook    It is reasonably possible that the Company may recognize additional Deepwater Horizon event-related liabilities for potential fines and penalties, shareholder claims, and certain other claims not covered by the indemnification provisions of the Settlement Agreement; however, the Company does not believe that any potential liability attributable to the foregoing items, individually or in the aggregate, will have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

The Company will continue to monitor the MDL and other legal proceedings discussed above as well as federal investigations related to the Deepwater Horizon events, including the investigation by the United States Chemical Safety Board. The Company cannot predict the nature of evidence that may be discovered during the course of legal proceedings and investigations, the timing of discovery, or the timing of completion of any legal proceedings or investigations. Although the Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and certain other potential liabilities, the Company may be required to recognize a liability for these amounts in advance of or in connection with recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c.

Insurance and Other Recoveries    The Company carries insurance to protect against potential financial losses. At the time of the Deepwater Horizon events, the Company’s insurance coverage applied to gross covered costs up to a level of approximately $710 million, less up to $60 million of deductibles. Based on Anadarko’s 25% non-operated leasehold interest in the Lease, the Company estimates its net insurance coverage will total not less than $178 million, less deductibles of $15 million. The Company has not recognized a receivable for any potential insurance recoveries in its Consolidated Balance Sheets, but expects to recover, at a minimum, the first $163 million of insured costs under its then-existing insurance policy. At this time, recovery of these amounts is not considered probable because the Company has not yet filed a claim. The Company also carries directors’ and officers’ insurance which covers certain risks associated with certain of the above-described legal proceedings.

As part of the Settlement Agreement, BP has agreed that, to the extent it receives value in the future from claims that it has asserted or could assert against third parties arising from or relating to the Deepwater Horizon events, it will make cash payments (not to exceed $1.0 billion in the aggregate) to Anadarko, on a current and continuing basis, of 12.5% of the aggregate value received by BP in excess of $1.5 billion. Any payments received by the Company pursuant to this arrangement will be accounted for as a reimbursement of the $4.0 billion payment made by the Company to BP as part of the Settlement Agreement.

 

3.  Acquisitions

In May 2011, Anadarko increased its ownership interest in a natural-gas processing plant (Wattenberg Plant), located in northeast Colorado, by acquiring an additional 93% interest for $576 million. Anadarko operates and now owns a 100% interest in the Wattenberg Plant.

In February 2011, Western Gas Partners, LP (WES), a consolidated subsidiary of the Company, acquired a natural-gas processing plant and related gathering systems (Platte Valley), located in northeast Colorado, for $302 million.

These acquisitions, along with future expansion plans, align Anadarko’s natural-gas processing capacity with the Company’s anticipated production growth in the Rocky Mountains Region (Rockies). In addition, these acquisitions position the Company to improve field recoveries and realize operational cost efficiencies.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.  Acquisitions (Continued)

 

The Wattenberg Plant and Platte Valley acquisitions constitute business combinations and were accounted for using the acquisition method. The following summarizes the preliminary fair value of assets acquired and liabilities assumed at the acquisition dates:

 

millions       

Properties and equipment

   $ 298  

Intangible assets

     165  

Deferred income taxes

     31  

Other assets

     4  

Other liabilities

     (21

Goodwill

     362  
  

 

 

 

Total assets acquired and liabilities assumed

     839  
  

 

 

 

Less: Fair value of Anadarko’s pre-acquisition 7% equity interest in the Wattenberg Plant

     37  
  

 

 

 

Acquisition of midstream businesses

     802  
  

 

 

 

Loss on Anadarko’s preexisting contracts with the previous Wattenberg Plant owner

     76  
  

 

 

 

Total consideration paid

   $             878  
  

 

 

 

All fair-value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired properties and equipment is based on market and cost approaches. Intangible assets consist of customer contracts, the fair value of which was determined using an income approach. Deferred tax assets represent the tax effects of differences in the tax basis and acquisition-date fair values of assets acquired and liabilities assumed. Liabilities assumed include asset retirement obligations existing at the date of acquisition, and were valued consistent with the Company’s policy for estimating its asset retirement obligations.

Assets acquired and liabilities assumed are included within the midstream reporting segment, except for $335 million of goodwill and a portion of the related deferred tax asset recognized in connection with the Wattenberg Plant acquisition, which are included in the oil and gas exploration and production reporting segment. Goodwill of $469 million related to the Wattenberg Plant acquisition is amortizable for tax purposes.

Goodwill from these acquisitions is included in the oil and gas exploration and production reporting segment and the midstream reporting segment based on the increase in fair value to each of the respective reporting segments. The increase in fair value to these reporting segments is derived from improved NGLs volume retention from equity production and the alignment of Company-controlled natural-gas processing capacity with future production growth plans in the Rockies. Goodwill is not subject to amortization, but will be subject to annual impairment testing (or more frequent testing as circumstances dictate). At September 30, 2011, the Company had $5.6 billion of goodwill allocated as follows: $5.4 billion to oil and gas exploration and production; $102 million to other gathering and processing; $59 million to WES gathering and processing; and $5 million to transportation.

Prior to the Wattenberg Plant acquisition, the Company was party to natural-gas processing contracts with the previous Wattenberg Plant owner. As a result of the acquisition, these preexisting contracts were terminated, causing the Company to recognize a $76 million loss, which is included in gains (losses) on divestitures and other, net in the Consolidated Statements of Income for the nine months ended September 30, 2011. This loss represents the aggregate amount by which the contracts were unfavorable as compared to current market transactions for the same or similar services at the date of the Company’s acquisition of the Wattenberg Plant.

The Company also recognized a gain of $21 million from the acquisition-date fair-value remeasurement of its pre-acquisition 7% equity interest in the Wattenberg Plant. The gain is included in gains (losses) on divestitures and other, net in the Consolidated Statements of Income for the nine months ended September 30, 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.  Acquisitions (Continued)

 

Results of operations attributable to the Wattenberg Plant and Platte Valley acquisitions are included in the Company’s Consolidated Statements of Income from the dates acquired. The amounts of revenue and earnings included in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2011, and the amounts of revenue and earnings that would have been recognized had the acquisitions occurred on January 1, 2010, are not material.

4.  Inventories

The major classes of inventories, included in other current assets, are as follows:

 

     September 30,      December 31,  
millions    2011      2010  

Crude oil

   $ 133      $ 126  

Natural gas

     34        64  

NGLs

     60        61  
  

 

 

    

 

 

 

Total

   $ 227      $ 251  
  

 

 

    

 

 

 

5.  Properties and Equipment

Suspended Exploratory Drilling Costs  The Company’s capitalized suspended well costs at September 30, 2011, and December 31, 2010, were $1.2 billion and $935 million, respectively. The increase in suspended exploratory drilling costs during 2011 primarily relates to the capitalization of costs associated with successful exploration drilling in Mozambique, Ghana and Brazil. For the nine months ended September 30, 2011, $32 million of exploratory well costs previously capitalized as suspended well costs for greater than one year were charged to dry hole expense and $116 million of capitalized suspended well costs were reclassified to proved properties.

Management believes projects with suspended exploratory drilling costs exhibit sufficient quantities of hydrocarbons to justify potential development and is actively assessing whether reserves can be attributed to these areas. If additional information becomes available that raises substantial doubt regarding the economic or operational viability of any of these projects, the associated costs will be expensed at the time such information becomes available.

Impairments  Impairment expense for the three and nine months ended September 30, 2011, was $183 million and $287 million, respectively. During the third quarter of 2011, the Company recognized impairments of $93 million related to United States offshore properties and $87 million related to the Company’s investment in Venezuelan assets due to changes in expected recoverable reserves in these areas. At September 30, 2011, the Company’s after-tax net investment in the Venezuelan assets was $38 million. During the second quarter of 2011, the Company recognized impairments of $100 million related to United States onshore properties due to a change in projected cash flows resulting from the Company’s intent to divest of the properties. All of these assets are included in the oil and gas exploration and production operating segment and were impaired to fair value, estimated using Level 3 fair-value inputs.

Impairment expense for the three and nine months ended September 30, 2010, was $20 million and $147 million, respectively, including $114 million recognized in the second quarter of 2010 related to a production platform included in the oil and gas exploration and production operating segment that remains idle with no identifiable plans for use, and for which a limited market currently exists. The platform was impaired to fair value, estimated using Level 3 fair-value inputs.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.  Properties and Equipment (Continued)

 

Assets Held for Sale   During the third quarter of 2011, the Company began marketing certain onshore domestic properties from both the oil and gas exploration and production operating segment and the other midstream operating segment in order to redirect its operating activities and capital to other areas. At September 30, 2011, net properties and equipment, goodwill and other intangible assets, and other long-term liabilities on the Company’s Consolidated Balance Sheets included $273 million, $42 million, and $6 million, respectively, associated with assets held for sale. The Company also recognized losses on assets held for sale of $268 million related to oil and gas exploration and production operating segment properties and $31 million related to other midstream operating segment properties. The assets were impaired to fair value, estimated using Level 3 fair-value inputs, with resulting losses included in gains (losses) on divestitures and other, net in the Consolidated Statements of Income for the three and nine months ended September 30, 2011.

6.  Noncontrolling Interests

In March and September 2011, WES issued approximately four million and six million common units to the public, respectively, raising net proceeds of $130 million and $198 million, respectively, which increased the noncontrolling interest component of total equity.

In August 2011, the WES subordinated limited partner units held by Anadarko converted to common limited partner units on a one-for-one basis. Upon this conversion, $162 million related to pre-conversion changes in the Company’s ownership interest in WES was transferred from noncontrolling interests to paid-in capital. Additionally, $32 million was recorded to paid-in capital as a result of WES’s third-quarter issuance of common units. The Company’s net income (loss) attributable to common stockholders, together with the above-described increases to Anadarko’s paid-in capital, for the three and nine months ended September 30, 2011, totaled $(2,857) million and $(2,097) million, respectively. At September 30, 2011, Anadarko’s ownership interest in WES consists of a 43.3% limited partner interest, a 2% general partner interest, and incentive distribution rights.

7.  Derivative Instruments

Objective and Strategy   The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks.

Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Henry Hub for natural gas and Cushing for oil. Basis swaps are used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).

Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest-rate changes. The fair value of this swap portfolio increases (decreases) when interest rates increase (decrease).

The Company does not apply hedge accounting to any of its derivative instruments. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. Accumulated other comprehensive loss balances of $113 million ($72 million after tax) and $125 million ($79 million after tax) at September 30, 2011, and December 31, 2010, respectively, relate to interest-rate derivatives that were previously subject to hedge accounting.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Derivative Instruments (Continued)

 

Oil and Natural-Gas Production/Processing Derivative Activities  Below is a summary of the Company’s derivative instruments at September 30, 2011, related to its Oil and Natural-Gas Production/Processing Activities. The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below are NYMEX Cushing prices.

 

             2011                      2012                      2013          

Natural Gas

        

Three-Way Collars (thousand MMBtu/d)

     480         500        450  

Average price per MMBtu

        

Ceiling sold price (call)

   $ 8.29       $ 9.03      $ 6.57  

Floor purchased price (put)

   $ 6.50       $ 6.50      $ 5.00  

Floor sold price (put)

   $ 5.00       $ 5.00      $ 4.00  

Fixed-Price Contracts (thousand MMBtu/d)

     90                   

Average price per MMBtu

   $ 6.17       $       $   

Basis Swaps (thousand MMBtu/d)

     45                   

Average price per MMBtu

   $ (1.74)       $       $   

 

MMBtu—million British thermal units

MMBtu/d—million British thermal units per day

 

             2011                      2012          

Crude Oil

     

Three-Way Collars (MBbls/d)

     126        2  

Average price per barrel

     

Ceiling sold price (call)

   $ 99.95      $ 92.50  

Floor purchased price (put)

   $ 79.29      $ 50.00  

Floor sold price (put)

   $ 64.29      $ 35.00  

 

MBbls/d—thousand barrels per day

A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

Marketing and Trading Derivative Activities  In addition to the positions in the above tables, the Company also engages in marketing and trading activities, which include physical product sales and related derivative transactions used to manage commodity-price risk. At September 30, 2011, and December 31, 2010, the Company had fixed-price physical transactions related to natural gas totaling 28 billion cubic feet (Bcf) and 32 Bcf, respectively, offset by derivative transactions for 15 Bcf and 28 Bcf, respectively, for net positions of 13 Bcf and 4 Bcf, respectively.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Derivative Instruments (Continued)

 

Interest-Rate Derivatives  In December 2008 and January 2009, Anadarko entered into interest-rate swap contracts as a fixed-rate payor to mitigate the interest-rate risk associated with anticipated 2011 and 2012 debt issuances. Due to rising interest rates thereafter, the fair value of the swap contracts increased and, in 2009, the Company revised the swap contract terms to increase the weighted-average interest rate of the swap portfolio from approximately 3.25% to approximately 4.80%, and realized a $552 million gain. During the third quarter of 2011, in order to better align the swap portfolio with the anticipated timing of future debt refinancing, the Company extended the swap maturity dates from October 2011 to June 2014 for interest-rate swaps with an aggregate notional principal amount of $1.85 billion. In connection with these extensions, the swap interest rates were also adjusted.

A summary of outstanding interest-rate swaps at September 30, 2011, is presented below.

 

millions except percentages    Reference Period      Weighted-Average  
Interest Rate

Notional Principal Amount: 

                        Start                                     End                    

$         150

     October 2011    October 2041    4.65 %

$         250

     October 2012    October 2022    4.91 %

$         750

     October 2012    October 2042    4.80 %

$         750

     June 2014    June 2024    6.00 %

$      1,100

     June 2014    June 2044    5.57 %

Effect of Derivative InstrumentsBalance Sheet  The fair value of the Company’s derivative instruments is presented below.

 

          Gross
Derivative Assets
     Gross
Derivative Liabilities
 

millions

Derivatives

  

        Balance Sheet        
Classification

   September 30,
2011
     December 31,
2010
     September 30,
2011
      December 31, 
2010
 

Commodity

              
   Other Current Assets    $ 428       $ 444       $ (81)       $ (274)   
   Other Assets      166         242         (9)         (56)   
   Accrued Expenses             89         (17)         (131)   
   Other Liabilities             26         (8)         (28)   
     

 

 

    

 

 

    

 

 

    

 

 

 
     599         801         (115)         (489)   
     

 

 

    

 

 

    

 

 

    

 

 

 

Interest Rate and Other

              
   Accrued Expenses      —          —          (185)         (190)   
   Other Liabilities      —          —          (987)         (45)   
     

 

 

    

 

 

    

 

 

    

 

 

 
     —          —          (1,172)         (235)   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

      $ 599       $ 801       $ (1,287)       $ (724)   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Derivative Instruments (Continued)

 

Effect of Derivative InstrumentsStatement of Income  The realized and unrealized gain or loss amounts and classification of derivative instruments for the respective three and nine months ended September 30 are as follows:

 

          (Gain) Loss  

millions

Derivatives

  

        Classification of (Gain)        

Loss Recognized

   Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
       Realized       Unrealized          Total          Realized       Unrealized          Total      

Commodity

               
  

Gathering, Processing,
and Marketing Sales
(1)

   $     $ (3)      $ (2)      $ 17      $ (8)      $  
  

(Gains) Losses on Commodity
Derivatives, net

     (71)        (159)        (230)        (155)        (162)        (317)   

Interest Rate
and Other

               
  

(Gains) Losses on Other
Derivatives, net

     —         854        854              937        939   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative (Gain) Loss, net

   $ (70)      $ 692      $ 622      $ (136)      $ 767      $ 631   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

          (Gain) Loss  

millions

Derivatives

  

        Classification of (Gain)        
Loss Recognized

   Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 
       Realized       Unrealized          Total          Realized       Unrealized          Total      

Commodity

               
  

Gathering, Processing,
and Marketing Sales
(1)

   $ —       $ (4)      $ (4)      $     $ (9)      $ (8)   
  

(Gains) Losses on Commodity
Derivatives, net

     (157)        (43)        (200)        (339)        (713)        (1,052)   

Interest Rate
and Other

               
  

(Gains) Losses on Other
Derivatives, net

     —         221         221         —         656         656    
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative (Gain) Loss, net

   $ (157)      $ 174      $ 17      $ (338)      $ (66)      $ (404)   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Represents the effect of marketing and trading derivative activities.

Credit-Risk Considerations  The financial integrity of exchange-traded contracts is assured by NYMEX or the Intercontinental Exchange through systems of financial safeguards and transaction guarantees and is subject to nominal credit risk. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact of a counterparty’s creditworthiness on fair value. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure. The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Derivative Instruments (Continued)

 

In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across all derivative types. At September 30, 2011, $340 million of the Company’s $1.3 billion gross derivative liability balance, and at December 31, 2010, $394 million of the Company’s $724 million gross derivative liability balance, would have been eligible for setoff against the Company’s gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across commodity and interest-rate derivatives, as settlement timing differs.

Some of the Company’s derivative instruments are subject to provisions that may require collateralization of the Company’s obligations. However, most of the Company’s derivative counterparties maintain secured positions with respect to the Company’s derivative liabilities under the Company’s $5.0 billion senior secured revolving credit facility (the $5.0 billion Facility), the available capacity of which is sufficient to secure potential obligations to such counterparties.

Unsecured derivative obligations may require immediate settlement or full collateralization if certain credit-risk-related provisions are triggered, such as the Company’s credit rating declining to a level below investment grade by major credit rating agencies. For these counterparties, the aggregate fair value of all derivative instruments with credit-risk-related contingent features for which a net liability position existed was $10 million (net of collateral) at September 30, 2011 and December 31, 2010, and is included in accrued expenses on the Company’s Consolidated Balance Sheets.

Fair Value  Fair value of futures contracts is based on quoted prices in active markets for identical assets or liabilities, which represent Level 1 inputs. Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, implied market volatility and discount factors. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments.

The following tables set forth, by input level within the fair-value hierarchy, the fair value of the Company’s derivative financial assets and liabilities.

 

$000,000 $000,000 $000,000 $000,000 $000,000 $000,000
September 30, 2011                                          
millions        Level 1              Level 2              Level 3            Netting (1)          Collateral            Total      

Assets:

                 

Commodity derivatives

                 

Financial institutions

   $      $ 466       $ —        $ (84)       $ (5)       $ 379   

Other counterparties

     —          131         —          (11)         —          120   

Interest-rate and other derivatives

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

   $      $ 597       $ —        $ (95)       $ (5)       $ 499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                 

Commodity derivatives

                 

Financial institutions

   $ (3)       $ (88)       $ —        $ 84        $      $ (2)   

Other counterparties

     —          (24)         —          11          —          (13)   

Interest-rate and other derivatives

     —          (1,172)         —          —          110         (1,062)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ (3)       $ (1,284)       $ —        $ 95        $ 115       $ (1,077)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Derivative Instruments (Continued)

 

December 31, 2010                                         
millions        Level 1              Level 2              Level 3            Netting (1)         Collateral            Total      

Assets:

                

Commodity derivatives

                

Financial institutions

   $      $ 557       $ —        $ (298)      $ (15)       $ 247   

Other counterparties

     —          241         —          (148)        —          93   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative assets

   $      $ 798       $ —        $ (446)      $ (15)       $ 340   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

                

Commodity derivatives

                

Financial institutions

   $ (2)       $ (333)       $ —        $ 298       $ —        $ (37)   

Other counterparties

     —          (154)         —          148         —          (6)   

Interest-rate and other derivatives

     —          (235)         —          —         15         (220)   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total derivative liabilities

   $ (2)       $ (722)       $ —        $ 446       $ 15       $ (263)   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

8.  Debt and Interest Expense

Debt  The following presents the Company’s outstanding debt and capital lease obligations. All of the Company’s outstanding debt is senior unsecured.

 

$ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
     September 30, 2011      December 31, 2010  
millions     Principal         Carrying  
Value
     Fair
    Value    
       Principal          Carrying  
Value
     Fair
    Value    
 

Long-term notes and debentures

   $ 13,952       $ 12,226       $ 13,752       $ 14,237       $ 12,488       $ 13,459   

WES borrowings

     500         494         503         299         299         299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 14,452       $ 12,720       $ 14,255       $ 14,536       $ 12,787       $ 13,758   

Capital lease obligations

     229         229         N/A          226         226         N/A    

Less: Current portion of long-term debt

     141         141         134         289         291         296   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 14,540       $ 12,808       $ 14,121       $ 14,473       $ 12,722       $ 13,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.

Debt and Interest Expense (Continued)

 

Debt Activity  The following presents the Company’s debt activity during the nine months ended September 30, 2011.

 

millions     Principal         Carrying  
Value
   

Description

Balance at December 31, 2010

  $ 14,536      $ 12,787     

Borrowings

    560        560     

WES credit facility

Repayments(1)

    (389)        (389)     

WES credit facility and WES term loan    

Other, net

    —            

Changes in debt premium or discount

 

 

 

   

 

 

   

Balance at March 31, 2011

  $ 14,707      $ 12,966     
 

 

 

   

 

 

   

Issuance

    500        494     

WES 5.375% Senior Notes due 2021

Repayments(1)

    (470)        (470)     

WES credit facility

Other, net

    —            

Changes in debt premium or discount

 

 

 

   

 

 

   

Balance at June 30, 2011

  $ 14,737      $ 12,998     
 

 

 

   

 

 

   

Borrowings

    10        10     

WES credit facility

Repayments(1)

    (285)        (285)     

6.875% Senior Notes due 2011

    (10)        (10)     

WES credit facility

Other, net

    —            

Changes in debt premium or discount

 

 

 

   

 

 

   

Balance at September 30, 2011

  $ 14,452      $ 12,720     
 

 

 

   

 

 

   

 

(1) 

Debt repayment activity includes both scheduled repayments and retirements before scheduled maturity.

Anadarko Revolving Credit Facility and Letter of Credit Facility  During the third quarter of 2011, the Company entered into an agreement with a financial institution to provide up to $400 million of letters of credit (the LOC Facility). Compensating balances deposited at the financial institution provide for reduced fees under the LOC Facility. These compensating balances may be withdrawn at any time, resulting in higher fees under the LOC Facility. At September 30, 2011, cash and cash equivalents includes $325 million of demand deposits serving as compensating balances. The LOC Facility also requires the Company to maintain a senior debt revolving credit facility with minimum commitments of at least $1.0 billion and the availability to issue letters of credit of at least $400 million.

In August 2011, the Company amended the $5.0 billion Facility to reduce the maintenance costs and to lower the interest rates under the facility. At September 30, 2011, the $5.0 billion Facility was undrawn with available capacity of $4.6 billion ($5.0 billion undrawn capacity, less $400 million of letter-of-credit capacity maintained pursuant to the terms of the LOC Facility).

WES Revolving Credit Facility  During the first quarter of 2011, WES borrowed $310 million under its $450 million senior unsecured revolving credit facility, primarily to fund the Platte Valley acquisition. In March 2011, WES entered into a five-year, $800 million senior unsecured revolving credit facility (RCF), which amended and restated the $450 million senior unsecured revolving credit facility, and borrowed $250 million under the RCF to repay a senior unsecured term loan. Also during the first quarter of 2011, WES repaid $139 million of borrowings under its RCF primarily from proceeds related to its public offering of four million common units, which raised net proceeds of $130 million. During the second quarter of 2011, WES repaid the outstanding RCF borrowings with net proceeds from the public offering of $500 million 5.375% Senior Notes due 2021. At September 30, 2011, WES was in compliance with all covenants contained in the RCF, had no outstanding borrowings under the RCF, and had the full $800 million of RCF borrowing capacity available.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.  Debt and Interest Expense (Continued)

 

Interest Expense  The following summarizes the amounts included in interest expense.

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
millions            2011                      2010                      2011                      2010          

Current debt, long-term debt, and other(1)

   $ 245       $ 235       $ 743       $ 642   

Loss on early debt retirements and commitment
termination
(2)

     —          17         —          89   

Capitalized interest

     (39)         (34)         (101)         (89)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

   $ 206       $ 218       $ 642       $ 642   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Included in the three and nine months ended September 30, 2010, is $7 million and $9 million, respectively, of unamortized debt issuance costs associated with the retirement of the midstream subsidiary note payable to a related party (Midstream Subsidiary Note).

(2) 

Loss on early debt retirements in 2010 is the result of repurchasing $1.0 billion aggregate principal amount of debt due 2011 and 2012. Also included in the three and nine months ended September 30, 2010, is $17 million for commitment and structuring costs associated with a contemplated term-loan facility.

 

9.

Stockholders’ Equity

The reconciliation between basic and diluted EPS from continuing operations attributable to common stockholders is as follows:

 

0,000,000 0,000,000 0,000,000 0,000,000
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
millions except per-share amounts        2011              2010              2011              2010      

Income (loss):

           

Net income (loss) attributable to common stockholders

   $ (3,051)       $ (26)       $ (2,291)       $ 650   

Less: Distributions on participating securities

     —          —          —           

Less: Undistributed income allocated to participating securities

     —          —          —           
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic

   $ (3,051)       $ (26)       $ (2,291)       $ 645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ (3,051)       $ (26)       $ (2,291)       $ 645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares:

           

Average number of common shares outstanding—basic

     498         496         498         495   

Dilutive effect of stock options and performance-based stock awards

     —          —          —           
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of common shares outstanding—diluted

     498         496         498         496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Excluded (1)

     12         12         12          

Income (loss) per common share:

           

Basic

   $ (6.12)       $ (0.05)       $ (4.60)       $ 1.30   

Diluted

   $ (6.12)       $ (0.05)       $ (4.60)       $ 1.30   

Dividends per common share

   $ 0.09       $ 0.09       $ 0.27        $ 0.27   

 

(1) 

Inclusion of the average shares for these awards would have had an anti-dilutive effect.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.

Commitments

In May 2011, Anadarko entered into two five-year lease agreements for deepwater drilling rigs. The rigs are expected to be delivered in late 2013 and early 2014. The lease obligations total approximately $1.2 billion, with aggregate future annual minimum lease payments of $30 million in 2013, $209 million in 2014, $238 million in 2015, and $715 million for the remaining lease term.

In October 2011, the Company and BP entered into the Settlement Agreement, pursuant to which the Company has agreed to pay $4.0 billion in cash and transfer its interest in the Lease to BP (subject to required governmental approvals of the transfer), and BP has agreed to accept this consideration in full satisfaction of its claims against Anadarko for $6.1 billion of invoices issued to date and to forgo reimbursement for all future costs arising from the Deepwater Horizon events, including future costs under the OA. In addition, BP has fully indemnified Anadarko against all claims, causes of action, losses, costs, expenses, liabilities, damages, or judgments of any kind arising out of the Deepwater Horizon events, related OPA damage claims, NRD claims and associated damage-assessment costs, and any claims arising under the OA. This indemnification has been guaranteed by BPCNA and in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. See Note 2 for additional information.

 

11.

Contingencies

The following discussion of the Company’s contingencies excludes the Deepwater Horizon events discussed in Note 2.

General  The Company is a defendant in a number of lawsuits and is involved in governmental proceedings arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims, and environmental claims. The Company has also been named as a defendant in various personal injury claims, including claims by employees of third-party contractors alleging exposure to asbestos, silica, and benzene while working at refineries previously owned by acquired companies. While the ultimate outcome and impact to the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

Litigation  The Company is subject to various claims by its royalty owners in the regular course of business as an oil and gas producer, including disputes regarding measurement, post-production costs and expenses, and royalty valuations. The Company and certain of its subsidiaries (collectively, the Anadarko Defendants) were named as defendants in a case styled U.S. of America ex rel. Harrold E. Wright v. AGIP Petroleum Co., et al. filed in September 2000 in the United States District Court for the Eastern District of Texas, Lufkin Division. This lawsuit generally alleged that the Anadarko Defendants and other industry defendants violated the False Claims Act by knowingly undervaluing natural gas in connection with royalty payments on production from federal and Indian lands. In June 2011, the Company finalized its settlement of this litigation for approximately $19 million that was previously expensed. The settlement has been approved by the United States government and resolves all claims related to this litigation, as well as several related administrative matters, against the Anadarko Defendants.

SM Energy has alleged that AE&P breached a Joint Exploration Agreement (JEA) originally executed between Anadarko and TXCO Energy Corp. (TXCO) in March 2008 relating to an oil and gas development project in Maverick, Dimmitt, Webb and LaSalle Counties in the Eagleford shale in South Texas. SM Energy is a party to the JEA through two letter agreements with TXCO dated April of 2008, to which Anadarko consented. SM Energy contends that Anadarko is required under the agreements to tender to them a proportionate share of the leasehold interests that Anadarko acquired in TXCO’s bankruptcy proceeding in February 2010. The arbitration hearing related to this dispute was held in September 2011. If the Company does not prevail in this matter, Anadarko could be obligated to sell a portion of its leasehold interest in the JEA to SM Energy or pay damages. The Company is vigorously defending this matter.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.

Contingencies (Continued)

 

In January 2009, Tronox Incorporated (Tronox), a former subsidiary of Kerr-McGee Corporation (Kerr-McGee), which is a current subsidiary of Anadarko, and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (Bankruptcy Court). Subsequently, in May 2009, Tronox and certain of its affiliates filed a lawsuit against Anadarko and Kerr-McGee asserting a number of claims, including claims for actual and constructive fraudulent conveyance (Adversary Proceeding). Tronox alleges, among other things, that it was insolvent or undercapitalized at the time it was spun off from Kerr-McGee. Tronox seeks, among other things, to recover an unspecified amount of damages, including interest, from Kerr-McGee and Anadarko, as well as litigation fees and costs. Anadarko and Kerr-McGee moved to dismiss the complaint in its entirety. In March 2010, the Bankruptcy Court issued an opinion granting in part and denying in part Anadarko’s and Kerr-McGee’s motion to dismiss the complaint. Notably, the Bankruptcy Court dismissed, with prejudice, Tronox’s request for punitive damages relating to the fraudulent-conveyance claims. The Bankruptcy Court granted Tronox leave to replead certain of its common law claims, and Tronox filed an amended complaint in April 2010. In May 2010, Anadarko and Kerr-McGee moved to dismiss certain claims in the amended complaint. In May 2011, the Bankruptcy Court dismissed two claims against Anadarko for conspiracy and aiding and abetting, and declined to dismiss a breach of fiduciary duty claim against Kerr-McGee. In August 2011, Tronox filed a motion for partial summary judgment on the issue of whether damages in the Adversary Proceeding are limited to the amount of Tronox’s environmental and tort creditor claims. Kerr-McGee and Anadarko filed a response and cross-motion in September 2011. Expert discovery is ongoing. The Adversary Proceeding is set for trial in April 2012.

The United States government was granted authority to intervene in the Adversary Proceeding, and it has asserted separate claims against Anadarko and Kerr-McGee under the Federal Debt Collection Procedures Act. Anadarko and Kerr-McGee have moved to dismiss the claims of the United States government, but that motion has been stayed by the Bankruptcy Court.

In August 2010, the Bankruptcy Court entered a Stipulation and Agreed Order among Tronox, Anadarko, and Kerr-McGee authorizing the rejection of the Master Separation Agreement (together with all annexes, related agreements, and ancillary agreements to it, the MSA). Anadarko and Kerr-McGee filed Proofs of Claim, which included claims for damages arising from the MSA rejection. In January 2011, the Bankruptcy Court entered a Stipulation and Agreed Order approving a settlement of Anadarko and Kerr-McGee’s rejection damage claims against Tronox. The settlement provided Anadarko a general unsecured claim against Tronox. In February 2011, in settlement of its claim, Anadarko received shares of Tronox stock, which were assigned to a financial institution in exchange for $46 million, included as a credit to general and administrative expenses in the Company’s Consolidated Statements of Income for the nine months ended September 30, 2011. The Company will continue to monitor the impact that the rejection of the MSA may have on other litigation and other proceedings, including the Adversary Proceeding, and will assess the impact of future events on the Company’s consolidated financial position, results of operations, and cash flows.

In February 2011, in accordance with Chapter 11 of the United States Bankruptcy Code, Tronox emerged from bankruptcy pursuant to an August 2010 Bankruptcy Court approved Plan of Reorganization (Plan). The terms of the Plan, which were confirmed by the Bankruptcy Court in the third quarter of 2010, contemplate that the claims of the United States government (together with other federal, state, local, or tribal governmental entities having regulatory authority or responsibilities for environmental laws, the Governmental Entities) related to Tronox’s environmental liabilities will be settled through certain environmental response trusts and a litigation trust (Anadarko Litigation Trust). The Plan provides that the Governmental Entities will receive, among other things, 88% of the proceeds from the Adversary Proceeding. Additionally, certain creditors asserting tort claims against Tronox may receive, among other things, 12% of the proceeds from the Adversary Proceeding. Certain documents central to the Plan and the Adversary Proceeding were approved by the Bankruptcy Court in the fourth quarter of 2010 and in February 2011, including the Environmental Claims Settlement Agreement, the Tort Claims Trust Agreement, the Environmental Response Trust Agreement, and the Anadarko Litigation Trust Agreement (ALTA). In accordance with the Plan, the Adversary Proceeding will be prosecuted by the Anadarko Litigation Trust. Pursuant to the ALTA, the Anadarko Litigation Trust was “deemed substituted” for Tronox in the Adversary Proceeding as the party in such litigation. For purposes of this Form 10-Q, references to “Tronox” after February 2011 refer to the Anadarko Litigation Trust.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.

Contingencies (Continued)

 

In addition, in July 2009, a consolidated class action complaint was filed in the New York District Court on behalf of purported purchasers of Tronox’s equity and debt securities between November 21, 2005, and January 12, 2009 (Class Period), against Anadarko, Kerr-McGee, several former Kerr-McGee officers and directors, several former Tronox officers and directors, and Ernst & Young LLP (collectively, the Securities Defendants). The complaint alleges causes of action arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) for purported misstatements and omissions regarding, among other things, Tronox’s environmental-remediation and tort claim liabilities. The plaintiffs allege, among other things, that these purported misstatements and omissions are contained in certain of Tronox’s public filings, including filings made in connection with Tronox’s initial public offering. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs. Anadarko, Kerr-McGee, and other defendants moved to dismiss the consolidated class action complaint and in August 2010 moved to dismiss an amended consolidated class action complaint that had been filed in July 2010. The New York District Court issued the second of two opinions and orders on the motions (Orders). Following the Orders, only the plaintiffs’ Section 20(a) claims under the Exchange Act remain against Anadarko and Kerr-McGee. The plaintiffs’ claims against Anadarko are limited to the period beginning on August 10, 2006, through the end of the Class Period. In August 2011, plaintiffs filed a motion for class certification. The Securities Defendants filed briefs in opposition to class certification in September 2011. The court denied class certification in October 2011 and has requested the parties to re-brief the class certification motion. The discovery process is ongoing.

Discovery and motions are still underway in the Tronox proceedings. The Company does not consider a loss related to this matter to be probable; however, a loss is possible, and such loss, if realized, could have a material adverse effect on the Company. At this time the Company cannot reasonably estimate a range of potential losses related to the proceedings described above because the amount of potential damages will depend on circumstances that have not yet occurred, including the outcome of expert testimony and certain determinations to be made by the Bankruptcy Court. The Company intends to continue to vigorously defend itself, its officers, and its directors in these proceedings.

Deepwater Drilling Moratorium and Other Related Matters  In May and July 2010, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), previously known as the Minerals Management Service, an agency of the DOI, issued directives requiring lessees and operators of federal oil and gas leases in the Outer Continental Shelf regions of the Gulf of Mexico and Pacific Ocean to cease drilling all new deepwater wells, including wellbore sidetracks and bypasses, through November 30, 2010 (the Moratorium). Anadarko ceased all drilling operations in the Gulf of Mexico in accordance with the Moratorium, which resulted in the suspension of operations of two operated deepwater wells (Lucius and Nansen) and one non-operated deepwater well (Vito). The Moratorium was lifted effective October 12, 2010. In July and August 2011, the DOI issued drilling permits to Anadarko for the Heidelberg appraisal well, the Cheyenne East exploration well near the Independence Hub facility, and a development well in the Nansen field. Drilling activity at these locations is expected to begin in late 2011. Anadarko is awaiting additional DOI approvals for other exploration plans and drilling permits.

As a result of the Moratorium and additional inspection and safety requirements issued by the BOEMRE in May and June 2010, the Company provided notification of force majeure to drilling contractors of four of the Company’s contracted deepwater rigs in the Gulf of Mexico. Some of the contracts have provisions that authorize contract termination by either party if force majeure conditions continue for a specified number of consecutive days.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.

Contingencies (Continued)

 

In June 2010, the Company gave written notice of termination to the drilling contractor of a rig placed in force majeure in May 2010, and filed a lawsuit in the United States District Court for the Southern District of Houston, Texas (Houston, Texas District Court) against the drilling contractor seeking a judicial declaration that the Company’s interpretation of the drilling contract was correct and that the contract terminated on June 19, 2010. The drilling contractor filed an Original Answer in July 2010 denying the Moratorium constituted a force majeure event and asserted that Anadarko had breached the drilling contract. If the Company does not prevail in its claim, the Company could be obligated to pay the rig contract rate from the contract-termination date through March 2011, the end of the original contract term. The disputed rental for the contract period is $116 million; however, any potential damages would be reduced by, among other things, amounts resulting from the drilling contractor’s ability to mitigate damages by leasing the drilling rig to another third party, as well as cost savings realized by the drilling contractor as a result of not operating the drilling rig for the entire original contract period. At September 30, 2011, the Company has not recognized a liability for costs associated with this dispute as management believes payment related to this matter is not probable. The Company intends to vigorously pursue this claim.

In September 2010, the Company gave written notice of termination to another drilling contractor of a rig that had previously been placed in force majeure, and the Company filed a lawsuit in the Houston, Texas District Court against the drilling contractor seeking a judicial declaration that the Company’s interpretation of the drilling contract was correct and that the contract terminated on September 18, 2010. The drilling contractor filed a Motion to Dismiss and an Original Answer in October 2010. The Houston, Texas District Court, acting on its discretion, converted the Motion to Dismiss into a Motion for Summary Judgment and entered a scheduling order for submission of briefs during February and March 2011. In May 2011, the Company and the drilling contractor mutually agreed to dismiss all claims related to this dispute. The resolution of this dispute did not have an impact on Anadarko’s consolidated financial position, results of operations, or cash flows.

 

12.

Income Taxes

The following is a summary of income tax expense (benefit) and effective tax rates.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
millions except percentages    2011      2010      2011      2010  

Income tax expense (benefit)

   $     (1,468)           $         94          $         (762)           $         660      

Effective tax rate

     33 %         109 %         25 %         49 %   

The Company reported a loss before income taxes for the three and nine months ended September 30, 2011. As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect. The decrease from the 35% statutory rate for the three and nine months ended September 30, 2011, is primarily attributable to tax expense associated with the accrual of the Algerian exceptional profits tax (which is non-deductible for Algerian income tax purposes), U.S. tax on foreign income, foreign tax rates in excess of the U.S. statutory rate and valuation allowances on foreign losses. The decrease from the 35% statutory rate for the nine months ended September 30, 2011, is also attributable to items resulting from business acquisitions. The decrease from the 35% statutory rate for the three and nine months ended September 30, 2011, is partially offset by U.S. income tax benefits associated with foreign losses and the restructuring of foreign operations, state income taxes, and other items.

The increase from the 35% statutory rate for the three and nine months ended September 30, 2010, is primarily attributable to tax expense associated with the accrual of the Algerian exceptional profits tax, U.S. tax on foreign income, foreign tax rates in excess of the U.S. statutory rate, valuation allowances on foreign losses, and unfavorable resolution of tax contingencies. The increase from the 35% statutory rate for the three and nine months ended September 30, 2010, is partially reduced by U.S. income tax benefits associated with foreign losses, the federal manufacturing deduction, and other items.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13.

Supplemental Cash Flow Information

The following presents cash paid for interest (net of amounts capitalized) and income taxes, as well as non-cash investing transactions.

 

     Nine Months Ended
September 30,
 
millions          2011                  2010        

Cash paid:

     

Interest

   $         708      $         579  

Income taxes

   $ 238      $ 209  

Non-cash investing activities:

     

Fair value of properties and equipment received in non-cash exchange transactions

   $ 4      $ 32  

Gain related to the fair-value remeasurement of Anadarko’s pre-acquisition 7% equity interest in the Wattenberg Plant

   $ 21      $   

 

14.

Segment Information

Anadarko’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences and unique technology, distribution, and marketing requirements. The Company’s three reporting segments are oil and gas exploration and production, midstream, and marketing. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs. The midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production. The marketing segment sells most of Anadarko’s production, as well as third-party purchased volumes.

During the first quarter of 2011, the chief operating decision maker (CODM) began separately assessing the performance of, and resource allocation to, the WES operating segment. As a result, the midstream operating segment was separated into two operating segments, WES and other midstream activities. The WES and other midstream activities operating segments are aggregated into a single midstream reporting segment due to similar financial and operating characteristics.

To assess the performance of Anadarko’s operating segments, the CODM analyzes income (loss) before income taxes, interest expense, exploration expense, depreciation, depletion, and amortization (DD&A), impairments, Deepwater Horizon settlement and related costs, and unrealized (gains) losses on derivative instruments, net, less net income attributable to noncontrolling interests (Adjusted EBITDAX). The Company’s definition of Adjusted EBITDAX excludes interest expense to allow for assessment of segment operating results without regard to Anadarko’s financing methods or capital structure. Anadarko’s definition of Adjusted EBITDAX also excludes exploration expense, as exploration expense is not an indicator of operating efficiency for a given reporting period. However, exploration expense is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. Anadarko’s definition of Adjusted EBITDAX also excludes Deepwater Horizon settlement and related costs as these costs are outside the normal operations of the Company. See Note 2 for a discussion of Deepwater Horizon Events. Finally, unrealized (gains) losses on derivative instruments, net are excluded from Adjusted EBITDAX because unrealized (gains) losses are not considered a measure of asset operating performance. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions to stockholders.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14.

Segment Information (Continued)

 

Adjusted EBITDAX may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) attributable to common stockholders and other performance measures, such as operating income or cash flows from operating activities. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) before income taxes.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
millions    2011       2010      2011      2010  

Income (loss) before income taxes

   $         (4,496)       $ 86       $         (2,991)       $ 1,352   

Exploration expense

     307         296         722         649   

DD&A

     932         962         2,902         2,845   

Impairments

     183         20         287         147   

Deepwater Horizon settlement and related costs(1)

     4,042                4,055          

Interest expense

     206         218         642         642   

Unrealized (gains) losses on derivative instruments, net(2)

     692         174         767         (66)   

Less: Net income attributable to noncontrolling interests

     23         18         62         42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Adjusted EBITDAX

   $ 1,843       $         1,740       $ 6,322       $         5,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the third quarter of 2011, the Company revised the definition of Adjusted EBITDAX to exclude the Deepwater Horizon settlement and related costs. The prior periods have been adjusted to reflect this change.

(2) 

In the fourth quarter of 2010, the Company revised the definition of Adjusted EBITDAX to exclude the impact of unrealized (gains) losses on derivative instruments, net. The prior periods have been adjusted to reflect this change.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Segment Information (Continued)

 

The following presents selected financial information for Anadarko’s reporting segments. Information presented below as “Other and Intersegment Eliminations” includes results from hard-minerals non-operated joint ventures and royalty arrangements, and corporate, financing, and certain hedging activities.

 

Intersegment Intersegment Intersegment Intersegment Intersegment
millions   Oil and Gas
Exploration
& Production
    Midstream     Marketing     Other and
Intersegment
Eliminations
    Total  

Three Months Ended September 30, 2011:

         

Sales revenues

  $         1,801      $         76      $         1,507      $         —       $         3,384   

Intersegment revenues

            1,244                251                (1,386)                (109)                —    

Gains (losses) on divestitures and other, net

            (193)                (31)                —                 39                (185)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other

            2,852                296                121                (70)                3,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses(1)

            955                210                143                53                1,361   

Realized (gains) losses on derivatives, net

            —                 —                 —                 (71)                (71)   

Other (income) expense, net

            —                 —                 —                 40                40   

Net income attributable to noncontrolling interests

            —                 23                —                 —                 23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other

            955                233                143                22                1,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (gains) losses on derivatives, net included in marketing revenue

            —                 —                 (3)                —                 (3)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAX

  $         1,897      $         63      $         (25)      $         (92)      $         1,843   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2010:

         

Sales revenues

  $         1,318      $         45      $         1,153      $         —       $         2,516   

Intersegment revenues

            950                198                (1,051)                (97)                —    

Gains (losses) on divestitures and other, net

            (3)                —                 —                 37                34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other

            2,265                243                102                (60)                2,550   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses(1)

            723                152                116                83                1,074   

Realized (gains) losses on derivatives, net

            —                 —                 —                 (157)                (157)   

Other (income) expense, net

            —                 —                 —                 (129)                (129)   

Net income attributable to noncontrolling interests

            —                 18                —                 —                 18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other

            723                170                116                (203)                806   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (gains) losses on derivatives, net included in marketing revenue

            —                 —                 (4)                —                 (4)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAX

  $         1,542      $         73      $         (18)      $         143      $         1,740   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Operating costs and expenses exclude exploration expense, DD&A, impairments, and Deepwater Horizon settlement and related costs since these expenses are excluded from Adjusted EBITDAX. For the three months ended September 30, 2010, $25 million has been reclassified from the oil and gas exploration and production segment to the midstream segment to properly reflect the previously reported amounts.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Segment Information (Continued)

 

Intersegment Intersegment Intersegment Intersegment Intersegment
millions   Oil and Gas
Exploration
& Production
    Midstream     Marketing     Other and
Intersegment
Eliminations
    Total  

Nine Months Ended September 30, 2011:

         

Sales revenues

  $         5,668      $         238      $         4,436      $         —       $         10,342   

Intersegment revenues

            3,699                684                (4,066)                (317)                —    

Gains (losses) on divestitures and other, net

            (307)                (11)                —                 104                (214)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other

            9,060                911                370                (213)                10,128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses(1)

            2,739                575                414                163                3,891   

Realized (gains) losses on derivatives, net

            —                 —                 —                 (153)                (153)   

Other (income) expense, net

            —                 —                 —                 (2)                (2)   

Net income attributable to noncontrolling interests

            —                 62                —                 —                 62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other

            2,739                637                414                8                3,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (gains) losses on derivatives, net included in marketing revenue

            —                 —                 (8)                —                 (8)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAX

  $         6,321      $         274      $         (52)      $         (221)      $         6,322   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2010:

         

Sales revenues

  $         4,117      $         145      $         3,947      $         —       $         8,209   

Intersegment revenues

            3,259                630                (3,593)                (296)                —    

Gains (losses) on divestitures and other, net

            (15)                —                 —                 99                84   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other

            7,361                775                354                (197)                8,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses(1)

            2,169                501                349                139                3,158   

Realized (gains) losses on derivatives, net

            —                 —                 —                 (339)                (339)   

Other (income) expense, net

            —                 —                 —                 (106)                (106)   

Net income attributable to noncontrolling interests

            —                 42                —                 —                 42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other

            2,169                543                349                (306)                2,755   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (gains) losses on derivatives, net included in marketing revenue

            —                 —                 (9)                —                 (9)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAX

  $         5,192      $         232      $         (4)      $         109      $         5,529   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Operating costs and expenses exclude exploration expense, DD&A, impairments, and Deepwater Horizon settlement and related costs since these expenses are excluded from Adjusted EBITDAX. For the nine months ended September 30, 2010, $57 million has been reclassified from the oil and gas exploration and production segment to the midstream segment to properly reflect the previously reported amounts.

 

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15.

Pension Plans and Other Postretirement Benefits

The Company has non-contributory U.S. defined-benefit pension plans, including both qualified and supplemental plans, and a foreign contributory defined-benefit pension plan. The Company also provides certain health care and life insurance benefits for certain retired employees. Retiree health care benefits are generally funded by contributions from the retiree, and in certain circumstances, contributions from the Company. The Company’s retiree life insurance plan is noncontributory.

During the nine months ended September 30, 2011, the Company made contributions of $269 million to its funded pension plans, $8 million to its unfunded pension plans, and $13 million to its unfunded other postretirement benefit plans. Contributions to funded plans increase plan assets while contributions to unfunded plans are used to fund current benefit payments. During the remainder of 2011, the Company expects to contribute approximately $3 million to its funded pension plans, approximately $21 million to its unfunded pension plans, and approximately $5 million to its unfunded other postretirement benefit plans.

The following sets forth the Company’s pension and other postretirement benefit costs.

 

     Pension Benefits      Other Benefits  
     Three Months Ended
September 30,
     Three Months Ended
September 30,
 
millions    2011      2010      2011      2010  

Components of net periodic benefit cost

           

Service cost

   $         20       $         17       $         3       $         3   

Interest cost

             21                 21                 4                 4   

Expected return on plan assets

             (21)                 (21)                 —                  —    

Amortization of net actuarial loss (gain)

             22                 14                 —                  (1)   

Amortization of net prior service cost (credit)

             —                  1                 —                  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $         42       $         32       $         7       $         6   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pension Benefits      Other Benefits  
     Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
millions    2011      2010      2011      2010  

Components of net periodic benefit cost

           

Service cost

   $         59       $         52       $         7       $         7   

Interest cost

             64                 63                 12                 12   

Expected return on plan assets

             (64)                 (62)                 —                  —    

Amortization of net actuarial loss (gain)

             64                 49                 —                  (2)   

Amortization of net prior service cost (credit)

             1                 2                 —                  (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $         124       $         104       $         19       $         16   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has made in this report, and may from time to time otherwise make in other public filings, press releases, and management discussions, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company’s operations, economic performance, and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, marketing and midstream activities, and also include those statements preceded by, followed by, or that otherwise include the words “may,” “could,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Anadarko undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

These forward-looking statements involve risk and uncertainties. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the following risks and uncertainties:

 

   

the Company’s assumptions about the energy market;

 

   

production levels;

 

   

reserve levels;

 

   

operating results;

 

   

competitive conditions;

 

   

technology;

 

   

the availability of capital resources, capital expenditures, and other contractual obligations;

 

   

the supply and demand for, the price of, and the commercializing and transporting of natural gas, crude oil, natural gas liquids (NGLs), and other products or services;

 

   

volatility in the commodity-futures market;

 

   

the weather;

 

   

inflation;

 

   

the availability of goods and services;

 

   

drilling risks;

 

   

future processing volumes and pipeline throughput;

 

   

general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business;

 

   

legislative or regulatory changes, including retroactive royalty or production tax regimes; hydraulic-fracturing regulation; deepwater drilling and permitting regulations; derivatives reform; changes in state, federal, and foreign income taxes; environmental regulation; environmental risks; and liability under federal, state, foreign, and local environmental laws and regulations;

 

   

the ability of BP Exploration & Production Inc. (BP) to meet its indemnification obligations to the Company for, among other things, damage claims arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and associated damage-assessment costs, and any claims arising under the Operating Agreement (OA) for the Macondo well, as well as the ability of BP Corporation North America Inc. (BPCNA) and BP p.l.c. to guarantee such indemnification obligations;

 

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the outcome of events in the Gulf of Mexico and the impact of remaining claims related to the Deepwater Horizon events, including, but not limited to, fines, penalties and punitive damages for which the Company is not indemnified by BP, and the Company’s ability to successfully collect insurance proceeds;

 

   

the legislative and regulatory changes that may impact the Company’s Gulf of Mexico and international offshore operations resulting from the Deepwater Horizon events;

 

   

the Company’s ability to fully resume drilling operations in the Gulf of Mexico;

 

   

current and potential legal proceedings, environmental or other obligations related to or arising from Tronox Incorporated (Tronox);

 

   

civil or political unrest in a region or country;

 

   

the creditworthiness and performance of the Company’s counterparties, including financial institutions, operating partners, and other parties;

 

   

volatility in the securities, capital, or credit markets;

 

   

the Company’s ability to successfully monetize select assets, repay its debt, and the impact of changes in the Company’s credit ratings;

 

   

disruptions in international crude oil cargo shipping activities;

 

   

electronic, cyber and physical security breaches;

 

   

the supply and demand, technological, political, and commercial conditions associated with long-term development and production projects in domestic and international locations;

 

   

the outcome of proceedings related to the Algerian exceptional profits tax; and

 

   

other factors discussed below and elsewhere in “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” included in the Company’s 2010 Annual Report on Form 10-K, the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31 and June 30, 2011, this Form 10-Q, and in the Company’s other public filings, press releases, and discussions with Company management.

The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this report in Part I, Item 1, the information set forth in Risk Factors under Part II, Item 1A as well as the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of the 2010 Annual Report on Form 10-K, and the information set forth in the Risk Factors under Part I, Item 1A of the 2010 Annual Report on Form 10-K. Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.

OVERVIEW

Anadarko is among the world’s largest independent oil and natural-gas exploration and production companies. Anadarko is engaged in the exploration, development, production, and marketing of natural gas, crude oil, condensate, and NGLs. The Company also engages in the gathering, processing, and treating of natural gas, and the transporting of natural gas, crude oil, and NGLs. The Company operates worldwide, including activities in the United States, Algeria, Brazil, East and West Africa, China, Indonesia, and New Zealand.

 

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Deepwater Horizon Settlement and Indemnity

In October 2011, the Company and BP entered into a settlement agreement, mutual releases, and agreement to indemnify, whereby the Company and BP agreed to a mutual release of claims against each other relating to the Deepwater Horizon events (Settlement Agreement). Pursuant to the Settlement Agreement, the Company has agreed to pay $4.0 billion in cash and transfer its interest in the Mississippi Canyon Block 252 lease (Lease) to BP (subject to required governmental approvals of the transfer), and BP has agreed to accept this consideration in full satisfaction of its claims against Anadarko for $6.1 billion of invoices issued to date and to forgo reimbursement for all future costs arising from the Deepwater Horizon events, including future costs under the OA. In addition, BP has fully indemnified Anadarko against all claims, causes of action, losses, costs, expenses, liabilities, damages, or judgments of any kind arising out of the Deepwater Horizon events, related OPA damage claims, NRD claims and associated damage-assessment costs, and any claims arising under the OA. This indemnification has been guaranteed by BPCNA and in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. Under the Settlement Agreement, BP does not indemnify the Company against fines and penalties, punitive damages, shareholder, derivative, or security laws claims, or certain other claims. The Company believes that costs associated with any non-indemnified items, individually or in the aggregate, will not materially impact the Company’s consolidated financial position, results of operations, or cash flows. Refer to Note 2—Deepwater Horizon Events in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for discussion and analysis of these events.

Operating Highlights

Significant operating highlights during the third quarter of 2011 include the following:

Overall

 

   

Anadarko’s third-quarter sales volumes totaled 660 thousand barrels of oil equivalent per day (MBOE/d), representing a 5% increase over the third quarter of 2010.

 

   

Anadarko achieved liquid sales volumes of 281 MBOE/d, representing a 10% increase over the third quarter of 2010.

United States Onshore

 

   

The Company’s Rocky Mountains Region (Rockies) achieved third-quarter sales volumes of 304 MBOE/d, representing an 11% increase over the third quarter of 2010, with liquids sales volumes increasing 28% over the same period.

 

   

The Company’s Southern and Appalachia Region achieved third-quarter sales volumes of 143 MBOE/d, representing a 12% increase over the third quarter of 2010, primarily due to increased drilling in the Eagleford and Marcellus shales.

Gulf of Mexico

 

   

The Company’s Gulf of Mexico third-quarter sales volumes were 120 MBOE/d, representing a 19% decrease from the third quarter of 2010.

 

   

Anadarko and its partners finalized a unitization agreement to develop the Lucius field. Anadarko will operate the unit with a 35% working interest.

 

   

The Company received drilling permits for the Heidelberg appraisal well, the Cheyenne East exploration well near the Independence Hub facility, and a development well in the Nansen field.

 

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International

 

   

The Company’s International third-quarter sales volumes were 78 MBOE/d, representing a 27% increase from the third quarter of 2010 primarily due to the start of liftings in Ghana in 2011.

 

   

The Barquentine-2 appraisal well (36.5% working interest) encountered more than 230 net feet of natural-gas pay in high-quality Oligocene-age reservoirs located in Mozambique’s Offshore Area 1 of the Rovuma Basin.

 

   

The Camarão exploration well (36.5% working interest) encountered approximately 240 net feet of natural-gas pay in a reservoir with previously announced discoveries in the Offshore Area 1 of the deepwater Rovuma Basin in Mozambique. In addition, the Camarão well discovered approximately 140 net feet of natural-gas pay in shallower Miocene and Oligocene sand packages.

 

   

The Akasa-1 exploration well (30.875% working interest) encountered 108 net feet of primarily high-quality, oil-bearing pay from Turonian-aged sand packages located in the West Cape Three Points Block offshore Ghana.

 

   

The Tweneboa-4 well (18% working interest) in the Deepwater Tano Block offshore Ghana was successfully tested, which resulted in sustained flow rates of approximately 3.5 MBOE/d of condensate and 30 million cubic feet per day (MMcf/d) of natural gas.

 

   

The Enyenra-3A appraisal well (18% working interest) confirmed an updip extension of the Enyenra oil field and encountered 56 net feet of oil pay in the Deepwater Tano Block offshore Ghana.

Financial Highlights

Significant financial highlights during the third quarter of 2011 include the following:

 

   

Anadarko’s net loss attributable to common stockholders for the third quarter of 2011, including the $4.0 billion effect of the Settlement Agreement, totaled $3.1 billion.

 

   

The Company generated $1.5 billion of cash flows from operations and ended the quarter with $3.5 billion of cash on hand.

 

   

The Company amended its $5.0 billion senior secured revolving credit facility (the $5.0 billion Facility) to reduce maintenance costs and to lower applicable interest rates under the facility by 125 basis points on borrowings and 30 basis points on undrawn amounts.

 

   

The Company entered into an agreement with a financial institution to provide up to $400 million of letters of credit (the LOC Facility) which lowered the Company’s cost to issue letters of credit.

 

   

Anadarko modified and extended swap maturity dates from October 2011 to June 2014 for certain of its interest-rate swaps with an aggregate notional principal amount of $1.85 billion to better align the swap portfolio with the anticipated timing of future debt issuances and adjusted the interest rates on these swaps.

 

   

The Company recognized losses of $299 million on assets held for sale, and impairments of $183 million, which related to onshore United States properties and the Company’s investment in Venezuelan assets.

Gulf of Mexico Deepwater Drilling Update

In July and August 2011, the Bureau of Ocean Energy Management, Regulation and Enforcement, an agency of the Department of the Interior (DOI), issued drilling permits to Anadarko for the Heidelberg appraisal well, the Cheyenne East exploration well near the Independence Hub facility, and a development well in the Nansen field. Drilling activity at these locations is expected to begin in late 2011. Anadarko is awaiting additional DOI approvals for other exploration plans and drilling permits. See Note 11—Contingencies—Deepwater Drilling Moratorium and Other Related Matters in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional information on the Moratorium.

 

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Table of Contents

The following discussion pertains to Anadarko’s results of operations, financial condition, and changes in financial condition. Any increases or decreases “for the three months ended September 30, 2011,” refers to the comparison of the three months ended September 30, 2011, to the three months ended September 30, 2010, and any increases or decreases “for the nine months ended September 30, 2011,” refers to the comparison of the nine months ended September 30, 2011, to the nine months ended September 30, 2010. The primary factors that affect the Company’s results of operations include, among other things, commodity prices for natural gas, crude oil, and NGLs; sales volumes; the Company’s ability to discover additional oil and natural-gas reserves; the cost of finding such reserves; and operating costs.

RESULTS OF OPERATIONS

Selected Data

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
millions except per-share amounts    2011       2010      2011      2010  

Financial Results

           

Revenues and other

   $     3,199       $     2,550       $     10,128       $     8,293   

Costs and expenses

     6,825         2,354         11,857         6,801   

Other (income) expense

     870         110         1,262         140   

Income tax expense (benefit)

     (1,468)         94         (762)         660   

Net income (loss) attributable to common stockholders

   $     (3,051)       $     (26)       $     (2,291)       $     650   

Net income (loss) per common share attributable to common stockholders—diluted

   $     (6.12)       $     (0.05)       $     (4.60)       $     1.30   

Average number of common shares outstanding—diluted

     498         496         498         496   

Operating Results

           

Adjusted EBITDAX(1)

   $     1,843       $     1,740       $     6,322       $     5,529   

Sales volumes (MMBOE)

     61         58         185         179   

 

MMBOE—millions of barrels of oil equivalent

(1) 

See Operating Results—Segment Analysis—Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a U.S. Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income (loss) before income taxes, which is presented in accordance with GAAP.

 

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FINANCIAL RESULTS

Net Income (Loss) Attributable to Common Stockholders  For the third quarter of 2011, Anadarko’s net loss attributable to common stockholders totaled $3.1 billion, or $6.12 per share (diluted), compared to a net loss attributable to common stockholders of $26 million, or $0.05 per share (diluted) for the third quarter of 2010. For the nine months ended September 30, 2011, Anadarko’s net loss attributable to common stockholders totaled $2.3 billion, or $4.60 per share (diluted), compared to net income attributable to common stockholders of $650 million, or $1.30 per share (diluted) for the same period of 2010. Anadarko’s net loss for the three and nine months ended September 30, 2011 includes the effects of the $4.0 billion Settlement Agreement with BP related to the Deepwater Horizon events.

Sales Revenues and Volumes

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
millions except percentages    2011      vs. 2010      2010      2011      vs. 2010      2010  

Sales Revenues

                 

Natural-gas sales

   $     840         4%        $     809       $     2,564         (5)%        $     2,692   

Oil and condensate sales

     1,905         47            1,298         5,948         44              4,138   

Natural-gas liquids sales

     377         66            227         1,080         47              736   
  

 

 

       

 

 

    

 

 

       

 

 

 

Total

   $     3,122         34          $     2,334       $     9,592         27            $     7,566   
  

 

 

       

 

 

    

 

 

       

 

 

 

Anadarko’s sales revenues for the three months ended September 30, 2011, increased primarily due to higher commodity prices and increased liquids sales volumes. Anadarko’s sales revenues for the nine months ended September 30, 2011, increased primarily due to higher prices for crude oil and NGLs, as well as increased liquids sales volumes, partially offset by lower average natural-gas prices.

 

     Three Months Ended September 30,  
millions    Natural
Gas
     Oil and
Condensate
     NGLs      Total  

2010 sales revenues

   $     809       $     1,298       $     227       $     2,334   

Changes associated with sales volumes

     14         106         32         152   

Changes associated with prices

     17         501         118         636   
  

 

 

    

 

 

    

 

 

    

 

 

 

2011 sales revenues

   $     840       $     1,905       $     377       $     3,122   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30,  
     Natural
Gas
     Oil and
Condensate
     NGLs      Total  

2010 sales revenues

   $     2,692       $     4,138       $     736       $     7,566   

Changes associated with sales volumes

     24         232         96         352   

Changes associated with prices

     (152)         1,578         248         1,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

2011 sales revenues

   $     2,564       $     5,948       $     1,080       $     9,592   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
Sales Volumes    2011      vs. 2010      2010      2011      vs. 2010      2010  

Barrels of Oil Equivalent
(MMBOE except percentages)

                 

United States

     53         2 %          53         162         2 %          160   

International

            27                    23         18             19   
  

 

 

       

 

 

    

 

 

       

 

 

 

Total

     61         5             58         185         4              179   
  

 

 

       

 

 

    

 

 

       

 

 

 

Barrels of Oil Equivalent per Day
(MBOE/d except percentages)

                 

United States

     582         2 %          568         595         2 %          584   

International

     78         27             61         83         18              71   
  

 

 

       

 

 

    

 

 

       

 

 

 

Total

         660         5                 629             678         4                  655   
  

 

 

       

 

 

    

 

 

       

 

 

 

Sales volumes represent actual production volumes adjusted for changes in commodity inventories. Anadarko employs marketing strategies to minimize market-related shut-ins, maximize realized prices, and manage credit-risk exposure. For additional information, see Other (Income) Expense—(Gains) Losses on Commodity Derivatives, net. Production of natural gas, crude oil, and NGLs usually is not affected by seasonal changes in demand.

Natural-Gas Sales Volumes, Average Prices, and Revenues

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
     2011      vs. 2010      2010      2011      vs. 2010      2010  

United States

                 

Sales volumes—Bcf

     209         2 %          205         638         1 %          632   

                            MMcf/d

     2,271         2             2,234         2,336         1              2,316   

Price per Mcf

   $     4.02         2           $ 3.94       $     4.02         (6)           $     4.26   

Natural-gas sales revenues (millions)

   $     840         4           $ 809       $     2,564         (5)           $ 2,692   

 

Bcf—billion cubic feet

MMcf/d—million cubic feet per day

The Company’s natural-gas sales volumes increased 37 MMcf/d and 20 MMcf/d for the three and nine months ended September 30, 2011, respectively. Increases during these periods were as follows: 66 MMcf/d and 64 MMcf/d, respectively, from increased drilling in the Rockies primarily in the Greater Natural Buttes area and the Wattenberg field, and 53 MMcf/d and 45 MMcf/d, respectively, in the Southern and Appalachia Region from increased drilling in the Marcellus shale. These increases were partially offset by lower sales volumes in the Gulf of Mexico of 82 MMcf/d and 89 MMcf/d, respectively, primarily due to natural production declines, downtime for scheduled maintenance and well testing across all facilities, and weather-related downtime. For the nine months ended September 30, 2011, the increase was also partially offset by lower sales volumes in the Gulf of Mexico that resulted from 2010 price-related royalty relief that does not apply for 2011.

The average natural-gas price Anadarko received increased for the three months ended September 30, 2011, primarily due to increased demand and lower year-over-year natural-gas inventory levels. The average natural-gas price Anadarko received decreased for the nine months ended September 30, 2011, primarily due to the industry’s supply growing at a faster pace than demand in 2011 relative to 2010.

 

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Table of Contents

Crude-Oil and Condensate Sales Volumes, Average Prices, and Revenues

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
     2011      vs. 2010      2010      2011      vs. 2010      2010  

United States

                 

Sales volumes—MMBbls

     12         (1) %          13         36         (1) %          37   

                            MBbls/d

     129         (1)              131         132         (1)              133   

Price per barrel

   $     94.02         29             $     72.65       $     96.84         31            $     73.85   

International

                 

Sales volumes—MMBbls

            27 %                  23         18 %           19   

                            MBbls/d

     78         27               61         83         18              71   

Price per barrel

   $     109.69         45            $     75.83       $     108.47         43            $     75.66   

Total

                 

Sales volumes—MMBbls

     20         8 %           18         59         6 %           56   

                            MBbls/d

     207         8               192         215         6              204   

Total price per barrel

   $     99.92         36            $     73.67       $     101.35         36            $     74.48   

Oil and condensate sales
revenues (millions)

   $     1,905         47            $     1,298       $     5,948         44            $     4,138   

 

MMBbls—million barrels

MBbls/d—thousand barrels per day

Anadarko’s crude-oil and condensate sales volumes increased 15 MBbls/d for the three months ended September 30, 2011. This increase was attributable to sales-volume increases of 17 MBbls/d resulting from the 2011 start of production in Ghana and the timing of cargo liftings in Algeria, and 7 MBbls/d in the Rockies resulting from increased drilling at Wattenberg. Additionally, the Eagleford shale and Permian basin areas increased sales volumes approximately 150%, contributing to an additional 7 MBbls/d in the Southern and Appalachia Region during the period. Partially offsetting these increases was a 13 MBbls/d sales-volume decline in the Gulf of Mexico which resulted from natural production declines, downtime for scheduled maintenance and well testing, and weather-related downtime. For the nine months ended September 30, 2011, crude-oil and condensate sales volumes increased 11 MBbls/d for the reasons discussed above, with cumulative nine-month geographic sales-volume increases as follows: 12 MBbls/d from Ghana; 8 MBbls/d primarily from the Eagleford shale and Permian basin; and 5 MBbls/d from Wattenberg. These sales-volume increases were partially offset by lower sales volumes of 12 MBbls/d in the Gulf of Mexico, as discussed above.

Anadarko’s average crude-oil price received increased for the three and nine months ended September 30, 2011, as a result of increased global demand, as well as supply disruptions and unrest in the Middle East and North Africa. The crude-oil price realized by the Company was enhanced by the widening differential between West Texas Intermediate and Brent crude, as approximately 70% of Anadarko’s crude-oil sales volumes are sold based on prices that are either directly indexed to, or highly correlated to, Brent crude.

 

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Table of Contents

Natural-Gas Liquids Sales Volumes, Average Prices, and Revenues

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
     2011      vs. 2010      2010      2011      vs. 2010      2010  

United States

                 

Sales volumes—MMBbls

            14 %                 20         13 %          18   

                            MBbls/d

     74         14             65         74         13             65   

Price per barrel

   $     55.47         46           $     38.11       $     53.48         30           $     41.23   

Natural-gas liquids sales revenues (millions)

   $     377         66           $     227       $     1,080         47           $     736   

NGLs sales represent revenues from the sale of product derived from the processing of Anadarko’s natural-gas production. The Company’s NGLs sales volumes increased by 9 MBbls/d for the three and nine months ended September 30, 2011. These increases were the result of the Company’s increased focus on liquids-rich areas and expanded horizontal drilling programs at Wattenberg. Also, the current-year NGLs sales-volume increases were aided by operational improvements that decreased maintenance downtime relative to 2010.

The average NGLs price increased for the three and nine months ended September 30, 2011, primarily due to higher crude-oil prices and sustained global petrochemical demand.

Gathering, Processing, and Marketing Margin

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     Inc/(Dec)      Inc/(Dec)  
millions except percentages    2011      vs. 2010      2010      2011      vs. 2010      2010  

Gathering, processing, and marketing sales

   $     262         44 %        $     182       $     750         17 %        $     643   

Gathering, processing, and marketing expenses

     214         60             134         590         27             466   
  

 

 

       

 

 

    

 

 

       

 

 

 

Margin

   $     48         —            $     48       $     160         (10)           $