OGJ Top 10 Independents No. 2: Anadarko Petroleum focusing on growth through the drillbit

Anadarko Petroleum Corp., Houston, has drawn attention lately for its acquisitions of other companies, but Chairman and CEO Robert J. Allison Jr. emphasizes that Anadarko still remains focused on growing production through the drillbit.

"We haven't changed our stripes. We still grow by the drillbit, and that is our plan," Allison said, attributing his company's escalation in earnings per share from 1999 to 2000 to a comb i nation of increased production and higher commodity prices.

"Our production is up 10% [from] first quarter 2001 [to] second quarter 2001," Allison said. "We intend to increase production by double-digit percentage numbers for 3 years."

Growth and profit indexes

Allison maintains a company's future financial performance can be predicted by its finding costs and its reserve replacement ratio. He sees finding costs as a profitability index and reserve replacement rates as a growth index.

"If you aren't more than replacing what you produce each year with new reserves, you are shrinking. You are going out of businessellipse.We have had 19 consecutive years in which we replaced production with new reserves," Allison said.

He also said industry observers should look at 5-year averages, "because often the money you spend doesn't occur in the same year as when you add the reserves."

Although acknowledging that Wall Street watches earnings and return on capital employed, Allison said reserves, asset value, and production growth are "hugely important."

Building reserves

Anadarko's refusal to lay off employees when commodity prices cratered has contributed to the company's existing portfolio, which is evenly split between oil and gas, Allison said.

"When oil prices went to $10/bbl and gas was $2/Mcf, and you didn't have the cash flow to drill wells, we kept our people looking for oil and gas. In effect, we built up an inventory of drillable prospects that we are now able to drill," Allison said.

He considers Anadarko lucky because it owns over 18 million net acres of oil and gas leases in North America alone. "We've got lots of places to drillellipsethe industry, however, is not in good shape. The industry needs places to drill."

Counting its nonoperated wells, Anadarko had 100 rigs running in North America during September.

Portfolio

Anadarko's portfolio is divided into three categories, with 10% of the budget spent on what are considered "home run," long-term projects such as the North Slope, the Mackenzie Delta, or the Republic of Georgia. These offer high-risk, high-reward potential.

The second category involves high-potential, near-term projects, such as wildcats in the Bossier play of East Texas or shallow-water exploration in the Gulf of Mexico.

The bulk of the budget is spent on the third category, or the "bread-and-butter" projects with low-risk and immediate impact, such as exploitation of the shallow-water Gulf of Mexico or Alpine field in Alaska, he said.

"We work very hard on balance in this portfolio. There are very few other independents that do much exploration at all. They are mostly in low-risk, immediate-impact plays, and they exploit," he said.

Expectations

Anadarko hopes to add to the 2.8 billion bbl of oil that it has already found in Algeria. The company recently acquired exploration rights to 2.6 million acres on Blocks 404, 208, and 211 in that country. This involves different territory from the undeveloped acreage under the original production-sharing agreement with Algeria's state-owned Sonatrach.

For rank wildcat potential, Allison pointed to the Black Sea off Georgia, where a well has yet to be drilled. Anadarko has shot seismic there and is very encouraged that the geology is similar to that of the Caspian Sea, he said.

Challenges

Although he considers price volatility a challenge, Allison adds that it's only one of the many challenges the industry faces. Anadarko plans on projects 5-10 years out, so it takes a longer-term view of pricing "than just what is on the screen today.

"Perhaps a bigger challenge is our government's reluctance to open up federal acreage for drilling-and the horrendously complicated, time-consuming, and expensive permitting process," he said.

Nevertheless, Anadarko will continue its efforts to grow through the drill bit, Allison said, adding that the company has positioned itself with "the people, the technology, the acres, and the rigs to get it done."