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Anadarko's award-winning year

With valuable exploration acreage in the US and overseas, and oil and gas production on the rise, Anadarko is one of 2010's prime acquisition targets, writes NJ Watson

Over the past three years, Anadarko Petroleum has successfully reinvented itself. It bought two of its biggest competitors, Kerr-McGee and Western Gas Resources; it completed numerous divestitures; exceeded its production targets; and restored its balance sheet. And in September, it announced one of last year's 10 biggest discoveries, Venus, offshore Sierra Leone (PE 12/09 p16).

Platts named the Houston independent oil and gas firm as 2009's energy company of the year. Anadarko's head, James Hackett, won Platts' chief executive of the year award.

In what is expected to be a year of industry consolidation (see p7), Anadarko could be among the most attractive acquisitions. Following ExxonMobil's surprise $41bn purchase of US shale-gas specialist XTO Energy, Anadarko's robust US gas portfolio should make it a coveted target. The company was the second-largest gas producer in the US in the first half of last year, with output of 2.325bn cubic feet a day (cf/d), just behind BP's 2.337bn cf/d.

A good time to buy

Analysts say now is a good time to buy US gas assets: commodity prices are weak, with supply outstripping demand. Share prices are low because of the difficult trading conditions, although many companies have recouped some of 2009's losses – Anadarko shares were trading at around $65 in mid-January, more than double its 52-week low of $31.15, in March 2009.

US natural gas prices fell to a seven-year low of $2.65/m Btu in September, as domestic production boomed and the economic downturn undermined demand. Prices have since recovered to above $6.00/m Btu (see Figure 5, p38), because of lower output and higher demand – the result of cold weather and gradual economic recovery. Oppenheimer, a US brokerage, expects US natural gas to trade in a $5-7/m Btu range in 2010.

However, US natural gas reserves are rising, as technology improvements and falling costs add to the country's unconventional-gas resource base. The Colorado School of Mines' Potential Gas Committee says the country now has more than 2,000 trillion cf of gas reserves available.

At the same time, access to new energy resources abroad remains difficult for international oil companies, making North American oil and gas investments more attractive. "The oil and gas industry is ripe for consolidation and a more stable price environment around $6/m Btu could accelerate this trend," says Fadel Gheit, managing director of oil and gas research at Oppenheimer. "All exploration and production companies are targets." And acquirers will be prepared to pay a premium to stock prices of 30-40%, he claims.

Anadarko is one of the largest gas producers in the Rocky Mountains region and has more than 1m acres in emerging shales in the south. It is active in the Bossier, Haley, Carthage, Chalk, South Texas and Ozona areas of Texas, the Marcellus Shale in Pennsylvania, and the Hugoton area of southern Kansas. It holds over 0.6m gross acres in the Marcellus Shale alone, acreage it says holds 30 trillion cf of gross gas reserves.

In mid-January, Anadarko agreed, with Newfield Exploration, to buy the assets of bankrupt TXCO Resources in the Maverick basin in southwest Texas, a large portion of which are in the emerging Eagle Ford Shale gas play, for about $310m. Anadarko will acquire more than 80,000 net acres in the basin from TXCO for $93m and increase its operated working interest in these properties to 75%. Anadarko is already operator of a large number of Maverick-basin properties, so the transaction "makes a lot of sense" for the company, a spokesman says.

But Anadarko is not just a US gas player. In early December, it made a fifth successful deep-water find of 2009 – a Gulf of Mexico (GOM) prospect called Lucius – which could contain 100m barrels of oil equivalent (boe). It is the GOM's largest independent producer, with a gross acreage of about 3.3m. In the third quarter, net production in the deep-water GOM amounted to 162,000 boe/d.

In mid-December, it made its second pre-salt discovery in Brazil, at the Itaipu prospect, in Devon Energy-operated block BM-C-32 of the Campos basin. It holds a 33.3% working interest; Devon holds 40% and SK Energy 26.7%. "The positive results of this well and the success of our other pre-salt activities in Brazil's Campos basin give us a number of reasons to be excited about the area's substantial resource opportunities," says Bob Daniels, head of international exploration.

Devon is planning to sell its US GOM and international operations to focus on North American onshore assets. But Anadarko's Hackett has said his company would not be seeking to buy any of Devon's Brazilian assets.

Earlier last year, the company successfully drilled the Mahogany-4 appraisal well offshore Ghana (PE 12/09 p18), which encountered more than 140 feet of net oil pay. These results extend the overall productive boundary of the greater Jubilee field, where Anadarko holds a 23.5% working interest; first oil is expected in the fourth quarter.

Despite the improvements, but like its rivals, Anadarko endured a rough year in 2009. Its latest results – for the third quarter, released in November – showed a loss of $52m, or $0.11 a share. This was not as steep as the loss of $0.33 a share analysts had expected and was better than the second-quarter loss of $0.56 a share, but it was still significantly below the year-ago period's $1.62 a share.

Production volumes in the quarter averaged 0.616m boe/d, which was roughly unchanged from the previous quarter, but up by 12% over third-quarter 2008, because of the strength of its US operations, where oil and gas production rose by 32% and 8%, respectively. The overall mix was 58% gas and 42% liquids, 89% domestic and 11% foreign. Full-year production for 2009 is now expected to have amounted to 220m boe, up by 7% over the 2008 level.

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