Anadarko says accounting error prompts $1.7 billion writedown

Sam Fletcher
OGJ Online

HOUSTON, Jan. 30 -- Anadarko Petroleum Corp.'s stock dropped $3, or 6.3%, to an opening price of $44.40/share Wednesday after the Houston independent announced an additional non-cash pre-tax $1.7 billion writedown of US oil and gas properties late Tuesday to correct a mistake in its third quarter 2001 earnings report.

The stock price seemed to recover somewhat, moving up to $45/share early in the session after a short delay because of heavy trading, company officials reported.

The corrective writedown, totaling $1.08 billion after tax or $4.33/share fully diluted, resulted from an error in calculating a required writedown of the book value of US oil and gas properties acquired by Anadarko in its July 2000 merger with Union Pacific Resources Inc., officials said. Combined with Anadarko's previously announced ceiling-test accounting charge for Canadian and South American properties, it will total $2.53 billion, or $1.57 billion after tax and $6.26/share fully diluted.

That will raise Anadarko's third quarter loss to nearly $1.4 billion from the $270 million loss previously reported and increase debt to 43% of its total capitalization, up from 39% previously reported.

It also will produce a financial loss for the full year, officials said. Anadarko's financial and operating results for 2001 are scheduled to be released Thursday.

However, it will have no effect on Anadarko's current operations or future plans. "Cash flow is unchanged, and the company's ability to carry out its 2002 capital program is unaffected by the non-cash impairments," said John N. Seitz, Anadarko's president and CEO. "The high-quality oil and gas reserves Anadarko has built over the past 40 years are not affected by this action."

The mistake was discovered last week as the company was preparing yearend reports. "We made an isolated error, and we corrected it as promptly and forthrightly as possible," said Mike Rose, Anadarko CFO. "We have reviewed the miscalculation with our outside auditing firm and with our board of directors."

As a result of the writedown correction, officials said, future expenses for depreciation, depletion, and amortization (DD&A) will be reduced and fourth quarter 2001 earnings will increase. "At current production rates, net income should increase by about $100 million annually for the next several years as a result of reduced DD&A related to this impairment of US properties," they said.

The complicated ceiling test involved in the company's miscalculation is prescribed under US Securities and Exchange Commission rules for exploration and production companies like Anadarko that use the full-cost method of accounting. It sets a limit on the book value of oil and gas properties based on current after-tax value on future net revenues from proved reserves.

Those future revenues are calculated based on estimated future production volumes at whatever oil and gas prices are in effect on the last day of the quarter, extended over the estimated life of the reserves. A prescribed 10% discount is applied to those revenues. Future income taxes, calculated from existing tax rates, also are deducted to determine a ceiling value for those properties.

That calculated ceiling then is compared with the current book value of the properties minus any applicable deferred income tax liability. If the current book value exceeds that ceiling, a writedown is required.

"In effect, the actual tax basis for the UPR properties was lower than what had been used in making the earlier calculations of future income taxes," Anadarko said.

When the mistake was discovered and proper tax calculations were compiled, Anadarko then "thoroughly reviewed its internal processes and recalculated ceiling test for every quarterly period since July 2000. There was only one instance -- the third quarter of 2001 -- where a ceiling test impairment was required," officials said.

Anadarko notified its directors and its outside auditing firm, KPMG LLP, who concurred with the finds and subsequent correction. The company soon will file a revised report including the corrected writedown with the SEC, officials said.

Contact Sam Fletcher at [email protected]