Anadarko Petroleum Corp. has slashed its annual overhead by $100 million, or 15%, by eliminating 400 staff and contract positions, closing offices in Amarillo and Midland, Tex., and focusing its spending "on finding and producing oil and natural gas."
Half of the proposed savings will come from personnel reductions, including elimination of currently vacant positions.
"The remaining $50 million in cuts include across-the-board reductions in general overhead, closing offices in Midland and Amarillo, and consolidating office space at the company's headquarters in The Woodlands," a planned community north of Houston, said company executives.
"Anadarko is a financially strong company with high-quality assets in North America and internationally, which offer excellent prospects for future growth. However, our cost structure is too high, and we're taking action now to cut costs and be more competitive," said Robert J. Allison Jr., Anadarko's chairman, president, and CEO.
Previously, it was a point of pride with Allison that Anadarko avoided massive layoffs through some of the severest economic slumps in the oil and gas business, so as to be prepared for the rebound (OGJ, Oct. 22, 2001, p. 64).
Regarding the recent cost-cutting measure, he said, "The decision to reduce staff is a difficult but necessary step in order to make Anadarko a leaner, stronger, and more efficient company. This company can continue to grow profitably because we're redeploying our people to focus on our highest value exploration and production opportunities."
In March, Allison as chairman, assumed the positions as president and CEO, following the resignation of John N. Seitz, who formerly held those two offices. No reason was given for Seitz's resignation (OGJ Online, Mar. 25, 2003). Allison served as CEO of Anadarko during 1986-2001 and has served as chairman since Anadarko became an independent company in 1986.
Takeover speculated
Anadarko's July 31 announcement rattled the oil service industry, since Anadarko earlier this year had the biggest US drilling program, employing the most rigs. And it ignited speculation that the company, one of the largest US-based independents, might become a takeover target.
As is usual in the industry, Anadarko refused to comment on reports by news media and analysts that it may be in contact with several potential buyers, including the Royal Dutch/Shell Group, ENI SPA of Italy, ExxonMobil Corp., and BP PLC.
"We certainly believe [a sale] is an option, although we don't currently anticipate anyone paying a significant premium to current stock price levels," said Robert S. Morris, an analyst with Banc of America Securities LLC (BAS), New York, on July 31.
However, in another report released the next day, Morris said, "Overall, we believe it unlikely that a third-party suitor will step in with a premium bid to acquire Anadarko, and in the meantime, the company's stock continues to trade at premium to its peers with the lower production growth guidance [a recurring event over the past year]."
Anadarko "has made several curious moves in the last week" that is "fueling the takeover speculation," said William Featherstone, executive director of oil and gas exploration research at UBS Investment Research, UBS Warburg LLC, New York.
"We have been fielding numerous client inquires with regards to the potential sale of Anadarko, given the stock's underperformance over the last 2 years and the recent return of 65-year-old Bob Allison to the position of CEO," Featherstone said in a July 31 evaluation of the company. "Four of the top seven corporate officers have 'resigned' in the last month, leaving a hole in the management team and presumably 'cleaning up' the cost structure."
He said, "We believe the most likely buyer, given [Anadarko's] size would be a major oil company." However, Anadarko's "anemic growth profile" in the last few years "would not likely bolster an acquirer's production profile," said Featherstone. Besides, he said, the majors are targeting a return on average capital employed "well above" Anadarko's estimated 8.5% for 2004.
Drilling declines
James K. Wicklund, an oil services analyst in the Houston office of BAS, said the company "shook up the market," sparking speculation "that between 7 and 44 rigs could be dropped by one oil company." Anadarko "did have more rigs drilling than any other company in the US, so it does get noticed," he said.
"We did drop seven land rigs this week because, as we've said before, our drilling budget was front-loaded," an Anadarko representative told OGJ on Aug. 1. "That's the nature of our business. We were down to 25 rigs at the end of last year before going back up to 66." The company already has spent $1.5 billion of its current $2.5 billion worldwide capital budget, she said.
Anadarko's US land drilling "is easy to turn on or off," she said. "It's primarily on land that we own or control." Meanwhile, she said, Anadarko's international and Gulf of Mexico drilling programs "are not affected," while the company plans to double the number of rigs it has working in Canada "to about 15" by the end of this year.
In its July 31 announcement, Anadarko made no mention of any plans to reduce its drilling operations. However, it said Bill Sullivan, executive vice-president of exploration and production, had resigned.
It also reported that 70% of the 400 positions to be eliminated are in "departments supporting the company's exploration and production efforts," with the other 30% to be taken from E&P. Most of the layoffs "will take effect immediately," said company officials. Anadarko previously had 3,400 employees worldwide.
However, some analysts were disappointed in Anadarko's apparent reticence about some of its plans during an Aug. 1 conference call.
"While admitting that it had and will continue to lay down rigs in the onshore US, management would not specify how many would ultimately be let go. Management also essentially sidestepped the CEO succession question and provided 'no comment' regarding a potential sale of the company," said Morris. Having "already released 8 rigs recently," Anadarko officials during their conference call "did intimate that the figure could be as high as 20," he said.
A much smaller East Texas independent producer told OGJ, "Rumors are flying, as rumors usually do, that even $5/Mcf gas isn't enough to keep domestic drillers busy. I received a call yesterday from a local drill[ing] contractor; he was attempting to keep numerous rigs working [that were] just let go by a large domestic producer.
"Some evidence also exists with the numerous layoffs and forced retirements on many personnel in our domestic producing ranks. Is it because the natural gas commodity futures are being viewed as going too soft, now causing many a domestic producing company to prepare today for an expected downturn in our domestic production earnings?" he wondered.
"The proof will be in the domestic onshore rig count. If it begins to drop, and soon, then we may expect to see a firming natural gas price. Otherwise, we may have drilled into that ominous surplus once coined 'the bubble.'"
However, Wicklund said, "We do not think this is the beginning of a trend, but rather one company that got way off track. Generally, more companies are announcing increases in drilling budgets."
Moreover, said Wicklund, "One point has been ignored. Anadarko was listed as the most active oil company in the US, with about 50 rigs running just a few weeks ago. That gives Anadarko about 4% of the market. If the most active company has only 4% of the capacity, then the breadth and depth of the active drillers is dramatic."
Anadarko announced July 31 that some executives elected to retire, including Mike Cochran, senior vice-president, strategy and planning; Bruce Stover, senior vice-president, worldwide business development; and Paul Taylor, vice-president, investor relations. Rex Alman, senior vice-president, Algeria, resigned.