Anadarko buys $225 million in GOM assets from Hess

Nearly 23 million barrels of oil equivalent added to company’s production

Petroleum News Houston Staff

Anadarko Petroleum, just days after its stock price was hammered on disclosure of missed production targets, said June 9 it had acquired $225 million worth of Amerada Hess properties on the Gulf of Mexico’s aging continental shelf. The acquisition gives the big Houston independent an additional 4,000 barrels of oil and 57,000 million cubic feet of natural gas, adding about 2.5 million barrels of oil equivalent to the company’s 2003 volumes.

Anadarko paid $9 per barrel of oil equivalent for the 26 fields it got from Hess. They have estimated proved reserves of nearly 23 million barrels of oil equivalent, 60 percent of which is natural gas. About $190 million of the purchase price was allocated to proved reserves, with the remaining $35 million going to unproven potential that will be evaluated over the next several years, Anadarko said.

“These are high quality assets with excellent profit margins and a lot of upside,” said Robert Allison, Anadarko’s chief executive officer. “There’s considerable opportunity for reserve additions and production growth on these properties.”

Production volumes down

“While we believe the shortfalls in Algeria and Qatar are temporary, the production issues in the Gulf of Mexico will affect us next year as well,” Allison said. “We are still targeting strong production growth in 2004.”

In the gulf, the company said it experienced lower-than-expected production, primarily due to performance from three fields — Hickory, Tanzanite and Pardner.

In the Hickory and Tanzanite fields, the company added, natural gas production dropped unexpectedly from two high-volume wells due to downhole mechanical failures. Following recompletion of the Hickory well to a higher zone, production was restored at lower rates.

Meanwhile, Anadarko opted to produce two new wells in the Hickory and Tanzanite fields from zones that are deeper than the initial targets in order to maximize recoveries, delaying production from the original target zones. However, reserve estimates for the fields will not be significantly affected, the company added.

Also, the company’s Pardner field recently came on production at rates much lower than anticipated. Technical studies are under way to understand why the well is not producing as expected and to determine if a repair can be made to increase the volumes, Anadarko said.

Delays in pipeline projects

In Qatar, start-up delays at the Al Rayyan field, mainly due to weather, will reduce expected volumes for the second quarter of 2003 and the full year, Anadarko said. The field is currently producing more than 20,000 barrels of oil per day gross. However, production is expected to end the year at 25,000 barrels a day, rather than 35,000 barrels a day as previously forecast, the company said.

“Lately, we’ve seen some property acquisitions that offer better returns for our shareholders, so we may choose to add projects to our portfolio that would let us achieve our target,” Allison said prior to announcing the Hess property acquisition.

The company said it had identified more than 50 development opportunities in the Hess properties, including production enhancements, recompletions and low risk development wells, and as many as 10 exploration prospects that could be drilled over the next few years. The exploration prospects are located in high potential deep shelf gas plays, Anadarko said.

More than 60 percent of the Hess reserves are concentrated within three fields: South Timbalier blocks 172 and 190, 205 and 206 and South Pass 89.

“The key producing fields lie within our active fairway, which means we expect to benefit from operational efficiencies,” Allison said.

Cash flow from the properties for the remainder of 2003 is projected to be $75 million, generating a cash margin of more than $29 per million barrels of oil equivalent based on the current Nymex forward curve for oil and gas prices, the company said, adding that it financed the acquisition with available cash and credit facilities.

Some properties to be sold

“Our aim is to focus on our key assets and reduce costs,” Allison said. “At the end of the year, we expect to have fewer Gulf of Mexico fields but higher margins. This is an ongoing strategy that has allowed us to high-grade our portfolio, increase cash margins per barrel and add growth potential.”

Hess, which has been high-grading its portfolio and attempting to reduce debt, announced several property sales June 9 that included the sale of gulf properties to Anadarko. Hess also said it would swap part of its holdings in the UK North Sea Scott and Telford fields to EnCana for $17 million and EnCana’s 22.5 percent share in the Shell-operated deepwater Llano project in the gulf. Hess has sold about $500 million in assets during the second quarter.

Despite coming up short on production, Anadarko said it expects current commodity prices for oil and gas to more than offset the effect of the reduced sales volumes.

Anadarko said it expects to earn $311 million, or $1.24 per share for the second quarter of 2003, with expected cash flow from operating activities of $740 million. That compares with the previous estimates of $1.15 per share of earnings and cash flow from operating activities of $710 million.

For the full year, the company said it expects earnings of about $1.46 billion, or $5.77 per share, and cash flow from operating activities of about $3.24 billion. That compares with the previous estimates of $1.39 billion, or $5.51 per share of earnings and cash flow from operating activities of $3.16 billion.