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Anadarko rumors abound Company announces layoffs; CEO Allison has no comment on rumored sale Petroleum News-Houston
Speculation over a possible sale of big U.S. independent Anadarko Petroleum, fueled by company layoffs and CEO Robert Allison’s no comment on the rumored sale, has reached a feverish pitch.
Rumors began spreading July 29 after several industry analysts reported that Anadarko was going to release as many as 35 land rigs to help spruce up its balance sheet for a possible sale of the company.
Two days later, on July 31, Anadarko disclosed that it was going to lay off about 400 employees and contractors, or 10.5 percent of its workforce, and close offices in Midland and Amarillo, Texas. Admitting that its costs were too high, the company said the step would remove about $100 million in annual overhead.
On the same day Anadarko separately released 2003 second-quarter earnings, reiterating its cost-saving initiative plus a plan to reduce its debt by $300 million. Later the company said it would sell an additional $100 million in non-core properties. Canada to get 15 more rigs The Anadarko story reached the boiling point during an August 1 conference call when an unhappy Allison defended the company’s record and lambasted the analysts and news reporters who contended that Anadarko was preparing for a massive cutback in its drilling program. He said the assertion was “cockamamie” and a “huge misconception.”
Anadarko plans to release just 10 to 15 rigs, which it typically does after front-loading its drilling program during the first half of the year, Allison said. Moreover, he added, the company would add up to 15 rigs in Canada during the coming winter drilling season, where Anadarko had mapped out one of its most aggressive 2003 campaigns, including US$363 million to explore its Canadian properties.
“This has everything to do with financial discipline and nothing to do with the depth of our drilling program,” Allison said, adding that by mid-year Anadarko had spent over half its budget and “clearly had to slow down. We don’t have the cash to reduce debt and maintain spending. It’s that simple.”
However, Allison was more evasive when it came to the issue of selling the company: “I have no comment on those rumors. I can’t.” Speculation that Shell a suitor Several analysts believe that Shell could be a suitor, bidding around $10 billion for Anadarko.
So the speculation continues. At least one investment banking firm, Friedman Billings Ramsey, already has devised an Anadarko sale model for its clients. It concludes: “we would guess that a potential buyer would have a very hard time justifying a dilutive acquisition of a $17 billion company at current prices, where production and reserves are having a very difficult time growing.”
However, despite reporting lower 2003 second-quarter production rates compared to a year earlier and reducing its sights for 2004, Anadarko still believes it can achieve an annual growth rate down the road of 4 to 10 percent, depending on project timing. The company also managed to increase production in the 2003 second quarter versus the first quarter.
Still, acquisition-minded Anadarko admitted it was suffering from growing pains. Allison said the company simply hired too many people on a wrong assumption that commodity prices could sustain capital budgets of $3-to $4 billion.
“We made a mistake and we’ve corrected it,” Allison said. Anadarko was top heavy In effect, he said, Anadarko was top heavy with employees who were not directly associated with finding hydrocarbons. He said “layers of management” have been peeled back so exploration and production managers can now report to him directly.
In addition to laying off employees and contractors, five Anadarko executive officers elected to retire: Mike Cochran, senior vice president of strategy and planning; Bruce Stover, senior vice president of worldwide business development; Paul Taylor, vice present of investor relations; Bill Sullivan, executive vice present of exploration and production; and Rex Alman, senior vice president of the company’s Algerian operations.
“This has been a very painful effort to go through internally … to better focus the organization on finding oil and gas,” Allison said. After cuts are completed, Anadarko will have about 3,400 employees worldwide.
Allison said removing $100 million in overhead “will allow us to be more efficient at reinvesting capital and managing the portfolio, which should give us better margins and returns.” Company will maintain capital expenditure budget However, Anadarko said it would maintain its 2003 capital expenditure budget of $2.7 billion, $200 million of which earlier went to acquiring Amerada Hess properties on the Gulf of Mexico’s continental shelf. But the company intends to spend just under cash flow in the future to keep its “powder dry” in the event Anadarko decides to make another acquisition or take advantage of other opportunities, Allison said.
Costs related to the cutbacks will cost Anadarko pre-tax $40 million, $35 mill of which will be expensed in the third quarter, the company said.
Despite a seemingly drastic step to get its balance sheet in order, Anadarko’s earnings and prospects for growth appear to be sound.
The company reported 2003 second-quarter profit of $301 million or $1.20 per share, compared to net income of $239 million or 93 cents per share for the same period last year. Cash flow from operations was $710 million compared to $543 million.
The increase in earnings and cash flow was due largely to higher commodity prices. Oil production during the second quarter actually fell to 190,000 barrels per day compared to 205,000 barrels per day in the prior year quarter, while daily natural gas volumes dropped to 1.74 billion cubic feet versus 1.79 bcf for the same period last year. However, a sizeable portion of the production decline was due to last year’s property sales, the company explained.
Anadarko also noted that production increased between the 2003 first and second quarters “and we should continue to ramp up sequentially.”
Company debt at the end of the 2003 second quarter stood at $5.616 billion, up from $5.471 billion at year-end 2002 but still a respectable 42 percent of market capitalization. The balance sheet will show a 38 or 39 percent debt-to-cap ratio by year-end, Allison pledged.
“These initiatives are an important step in an ongoing effort to improve operating and financial performance and control costs,” Allison said.
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