Anadarko takes $827 million charge for third quarter
By the OGJ Online Staff
HOUSTON, Oct. 19 -- Anadarko Petroleum Corp., Houston, Friday said it would take a noncash, pretax charge of $827 million in the third quarter as a result of low natural gas prices and unusually high differentials for heavy oil at the end of the quarter.
Excluding the charge ($483 million after-tax, or $1.81 per share, diluted), Anadarko said it expects its recurring third quarter results to be above Wall Street analysts's recent estimates. Third quarter results will be reported Oct. 25.
The charge reflects a $464 million after-tax impairment of the carrying value of oil and gas properties in western Canada and a $19 million after-tax impairment of the carrying value of assets in Argentina and Brazil.
The charge will have no significant effect on Anadarko's capital structure. Capitalization at the end of the second quarter, before the write-down, was 37% debt and 63% equity. Debt is expected to be about 39% of total capitalization following the write-down.
Robert J. Allison Jr., Anadarko chairman and CEO, said, "We continue to be enthusiastic about our business in Canada, and this write-down will not have a significant effect on our operations there."
Anadarko said while the write-down will give it a significant loss in the third quarter, the resulting reduction of future expenses for depreciation, depletion, and amortization will increase net income by $50 million/year for the next several years at current production rates.
The impairment is the result of applying what is known as a "ceiling test" under US Securities & Exchange Commission rules for exploration and production companies that use the "full-cost" accounting method.
Under the ceiling test, the company compares the net capitalized costs of its oil and gas properties on a country-by-country basis against the present value (assuming a 10% discount rate) of future net cash flows from those reserves, generally using commodity prices on the last day of the quarter, held flat for the life of the reserves. If the net capitalized costs exceed this valuation, the company must record a non-cash write-down equal to the difference.
Allison said, "The price deck the SEC requires us to use in this ceiling test isn't representative of today's market environment, but that's the rule, and we have to follow it.
"Furthermore, those low prices do not represent what the market believes the reserves are worth. This write-down effectively values our Canadian proved reserves at less than 60¢/Mcfe, which is about half what companies have recently paid for Canadian reserves."