Item 1A. Risk Factors
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
The Company has made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with Company management, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company’s operations, economic performance and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, marketing and midstream activities and those statements preceded by, followed by or that otherwise include the words “may,” “could,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Anadarko undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
These forward-looking statements involve risk and uncertainties. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the following risks and uncertainties:
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the Company’s assumptions or expectations regarding energy markets;
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production levels;
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reserve levels;
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operating results;
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competitive conditions;
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technology;
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the availability of capital resources, capital expenditures and other contractual obligations;
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the supply and demand for and the price of natural gas, oil, NGLs and other products or services;
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volatility in the commodity-futures market;
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the weather;
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inflation;
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the availability of goods and services;
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drilling risks;
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future processing volumes and pipeline throughput;
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general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business;
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legislative or regulatory changes, including retroactive royalty or production tax regimes, hydraulic-fracturing regulation, derivatives reform, changes in state and federal corporate taxes, environmental regulation, environmental risks and liability under federal, state, foreign and local environmental laws and regulations;
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current and potential legal proceedings, environmental or other obligations arising from Tronox Incorporated (Tronox);
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the securities, capital or credit markets;
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our ability to repay debt;
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the outcome of any proceedings related to the Algerian exceptional profits tax; and
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other factors discussed below and elsewhere in this Form 10-K and in the Company’s other public filings, press releases and discussions with Company management.
Oil, natural-gas and NGLs prices are volatile. A substantial or extended decline in prices could adversely affect our financial condition and results of operations.
Prices for oil, natural gas and NGLs can fluctuate widely. Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our oil, natural gas and NGLs. Historically, the markets for oil, natural gas and NGLs have been volatile and may continue to be volatile in the future. The factors influencing the prices of oil, natural gas and NGLs are beyond our control. These factors include, among others:
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domestic and worldwide supply of, and demand for, oil, natural gas and NGLs;
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volatile trading patterns in the commodity-futures markets;
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the cost of exploring for, developing, producing, transporting and marketing oil, natural gas and NGLs;
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weather conditions;
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the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) and other producing nations to agree to and maintain production levels;
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the worldwide military and political environment, uncertainty or instability resulting from the escalation or additional outbreak of armed hostilities or further acts of terrorism in the United States, or elsewhere;
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the effect of worldwide energy conservation efforts;
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the price and availability of alternative and competing fuels;
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the price and level of foreign imports of oil, natural gas and NGLs;
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domestic and foreign governmental regulations and taxes;
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the proximity to, and capacity of, natural-gas pipelines and other transportation facilities; and
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general economic conditions worldwide.
The long-term effect of these and other factors on the prices of oil, natural gas and NGLs are uncertain. Prolonged or substantial declines in these commodity prices may have the following effects on our business:
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adversely affecting our financial condition, liquidity, ability to finance planned capital expenditures and results of operations;
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reducing the amount of oil, natural gas and NGLs that we can produce economically;
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causing us to delay or postpone some of our capital projects;
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reducing our revenues, operating income and cash flows;
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reducing the amounts of our estimated proved oil and natural-gas reserves;
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reducing the carrying value of our oil and natural-gas properties;
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reducing the standardized measure of discounted future net cash flows relating to oil and natural-gas reserves; and
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limiting our access to sources of capital, such as equity and long-term debt.
Our domestic operations are subject to governmental risks that may impact our operations.
Our domestic operations have been, and at times in the future may be, affected by political developments and are subject to complex federal, state, tribal, local and other laws and regulations such as restrictions on production, permitting, changes in taxes, deductions, royalties and other amounts payable to governments or governmental agencies, price or gathering-rate controls, hydraulic fracturing and environmental protection regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state, tribal and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws, including environmental and tax laws, and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. For example, currently proposed federal legislation, that, if adopted, could adversely affect our business, financial condition and results of operations, includes the following:
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Climate Change. Climate-change legislation establishing a “cap-and-trade” plan for green-house gases (GHGs) has been approved by the U.S. House of Representatives. It is not possible at this time to predict whether or when the U.S. Senate may act on climate-change legislation. The U.S. Environmental Protection Agency (EPA) has also taken recent action related to GHGs. Based on recent developments, the EPA now purports to have a basis to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act.
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Taxes. The U.S. President’s Fiscal Year 2011 Budget Proposal includes provisions that would, if enacted, make significant changes to United States tax laws. These changes include, but are not limited to, (i) eliminating the immediate deduction for intangible drilling and development costs, (ii) eliminating the deduction from income for domestic production activities relating to oil and natural-gas exploration and development, and (iii) implementing certain international tax reforms.
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Hydraulic Fracturing. The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural-gas industry in the hydraulic-fracturing process. Currently, regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements. This legislation, if adopted, could establish an additional level of regulation and permitting at the federal level.
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Derivatives. The U.S. Congress is currently considering derivatives reform legislation focusing on expanding Federal regulation surrounding the use of financial derivative instruments, including credit default swaps, commodity derivatives and other over-the-counter derivatives. Among the recommendations included in the proposals are the requirements for centralized clearing or settling of such derivatives as well as the expansion of collateral margin requirements for certain derivative market participants.
Our debt and other financial commitments may limit our financial and operating flexibility.
As of December 31, 2009, our total debt was approximately $12.7 billion, which included a $1.6 billion note payable from a midstream subsidiary to a related party. We also have various commitments for operating leases, drilling contracts and transportation and purchase obligations for services and products. Our financial commitments could have important consequences to our business. For example, they could:
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increase our vulnerability to general adverse economic and industry conditions;
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limit our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments on our debt or to comply with any restrictive terms of our debt;
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limit our flexibility in planning for, or reacting to, changes in the industry in which we operate; and
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place us at a competitive disadvantage compared to our competitors that have less debt and fewer financial commitments.
A downgrade in our credit rating could negatively impact our cost of and ability to access capital.
As of December 31, 2009, Standard and Poor’s (S&P) and Moody’s Investors Service (Moody’s) rated our debt at “BBB-” and “Baa3,” respectively, both with a stable outlook. Although we are not aware of any current plans of S&P or Moody’s to lower their respective ratings on our debt, we cannot be assured that our credit ratings will not be downgraded. A downgrade in our credit ratings could negatively impact our cost of capital or our ability to effectively execute aspects of our strategy. If we were to be downgraded, it could be difficult for us to raise debt in the public debt markets and the cost of that new debt could be much higher than our outstanding debt. The only outstanding debt we have that contains credit-rating-downgrade triggers that would accelerate the maturity date of the outstanding debt is a $1.6 billion midstream note held by one of our subsidiaries, the maturity of which could accelerate if our senior unsecured credit rating were to be rated below BB- by S&P or Ba3 by Moody’s. The $1.6 billion midstream note is unconditionally guaranteed by Anadarko and, jointly and severally, by certain midstream subsidiaries. In addition, a downgrade in our credit ratings to below investment grade could result in additional collateralization requirements related to financial derivative liabilities with certain counterparties. At December 31, 2009, the Company had liabilities of $146 million subject to credit-rating-downgrade triggers. See Note 8-Derivative Instruments in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
We are, and in the future may become, involved in legal proceedings related to Tronox and, as a result, may incur substantial costs in connection with those proceedings.
Prior to its acquisition by Anadarko, Kerr-McGee, through an initial public offering and spin-off transaction, disposed of its chemical manufacturing business. A new publicly traded corporation, Tronox, resulted from this transaction. After the Tronox initial public offering and spin off, Kerr-McGee was acquired by Anadarko and as a result became a subsidiary of Anadarko. Under the terms of a Master Separation Agreement, which was entered into in connection with the Tronox initial public offering, Kerr-McGee agreed to reimburse Tronox for certain qualifying environmental-remediation costs associated with those businesses, subject to certain limitations and conditions and up to a maximum aggregate amount of $100 million. However, as described below, Tronox and third parties have claimed that Kerr-McGee and Anadarko have additional liability for costs allegedly attributable to the facilities and operations owned by Tronox and for Kerr-McGee’s activities prior to the date Anadarko acquired Kerr-McGee.
In January 2009, Tronox and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. In connection with these bankruptcy cases, Tronox filed a lawsuit against Anadarko and Kerr-McGee asserting a number of claims, including claims for actual and constructive fraudulent conveyance. Tronox alleges, among other things, that it was insolvent or undercapitalized at the time it was spun off from Kerr-McGee. Tronox seeks to recover an unspecified amount of damages, including interest, from Kerr-McGee and Anadarko as well as punitive damages, and litigation fees and costs. In addition, Tronox seeks to equitably subordinate and/or disallow all claims asserted by the Company in the bankruptcy cases.
The United States filed a motion to intervene in the Tronox lawsuit, asserting that it has an independent cause of action against Anadarko, Kerr-McGee and Tronox under the Federal Debt Collection Procedures Act relating primarily to environmental cleanup obligations allegedly owed to the United States by Tronox. That motion to intervene has been granted, and the United States is now a co-plaintiff against Anadarko and Kerr-McGee in Tronox’s pending bankruptcy litigation.
In addition, a consolidated class action complaint has been filed in the United States District Court for the Southern District of New York on behalf of purported purchasers of Tronox’s equity and debt securities between November 21, 2005 and January 12, 2009 against Kerr-McGee, Anadarko and others. The complaint alleges causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, Tronox’s environmental-remediation and tort claim liabilities. The plaintiffs allege that these purported misstatements and omissions are contained in certain of Tronox’s public filings, including filings made in connection with Tronox’s initial public offering. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs.
The adverse resolution of any proceedings related to Tronox could subject us to significant monetary damages and other penalties, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
For additional information regarding the nature and status of these and other material legal proceedings, please see Legal Proceedings under Item 3 of this Form 10-K.
Our proved reserves are estimates. Any material inaccuracies in our reserve estimates or assumptions underlying our reserve estimates could cause the quantities and net present value of our reserves to be overstated or understated.
There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond our control that could cause the quantities and net present value of our reserves to be overstated. The reserve information included or incorporated by reference in this report represents estimates prepared by our internal engineers. The procedures and methods for estimating the reserves by our internal engineers were reviewed by independent petroleum consultants. Estimation of reserves is not an exact science. Estimates of economically recoverable oil and natural-gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, any of which may cause these estimates to vary considerably from actual results, such as:
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historical production from an area compared with production from similar producing areas;
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assumed effects of regulation by governmental agencies;
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assumptions concerning future oil and natural-gas prices, future operating costs and capital expenditures; and
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estimates of future severance and excise taxes, workover and remedial costs.
Estimates of reserves based on risk of recovery and estimates of expected future net cash flows prepared by different engineers, or by the same engineers at different times, may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and the variance may be material. The discounted cash flows included in this report should not be construed as the current market value of the estimated oil and natural-gas reserves attributable to our properties. In accordance with SEC requirements effective January 1, 2010, the estimated discounted future net cash flows from proved reserves are based upon average 12-month sales prices using the average beginning-of-month price, while actual future prices and costs may be materially higher or lower.
Failure to replace reserves may negatively affect our business.
Our future success depends upon our ability to find, develop or acquire additional oil and natural-gas reserves that are economically recoverable. Our proved reserves generally decline when reserves are produced, unless we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. We may be unable to find, develop or acquire additional reserves on an economic basis. Furthermore, if oil and natural-gas prices increase, our costs for finding or acquiring additional reserves could also increase.
Poor general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the United States mortgage market and a declining real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy.
These factors, combined with volatile oil, natural-gas and NGLs prices, declining business and consumer confidence, and increased unemployment, have precipitated an economic slowdown and a recession. Concerns
about global economic conditions have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad continues to deteriorate, or if an economic recovery is slow or prolonged, demand for petroleum products could continue to diminish or stagnate, which could impact the price at which we can sell our oil, natural gas and NGLs, affect our vendors’, suppliers’ and customers’ ability to continue operations, and ultimately adversely impact our results of operations, liquidity and financial condition.
Our results of operations could be adversely affected by asset impairments.
As a result of mergers and acquisitions, at December 31, 2009 we had approximately $5.3 billion of goodwill on our balance sheet. Goodwill is not amortized, but instead must be tested at least annually for impairment, and more frequently when circumstances indicate likely impairment, by applying a fair-value-based test. Goodwill is considered impaired to the extent that its carrying amount exceeds its implied fair value. Various factors could lead to goodwill impairments that could have a substantial negative effect on our profitability, such as if the Company is unable to replace the value of its depleting asset base or if other adverse events, such as lower sustained oil and gas prices, reduce the fair value of the associated reporting unit.
We are subject to complex laws and regulations relating to environmental protection that can adversely affect the cost, manner and feasibility of doing business.
Our operations and properties are subject to numerous federal, state, tribal, local and foreign laws and regulations relating to environmental protection from the time projects commence until abandonment. These laws and regulations govern, among other things:
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the amounts and types of substances and materials that may be released;
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the issuance of permits in connection with exploration, drilling, production and midstream activities;
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the protection of endangered species;
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the release of emissions;
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the discharge and disposition of generated waste materials;
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offshore oil and gas operations;
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the reclamation and abandonment of wells and facility sites; and
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the remediation of contaminated sites.
In addition, these laws and regulations may impose substantial liabilities for our failure to comply with them or for any contamination resulting from our operations. Future environmental laws and regulations, such as proposed legislation regulating climate change, may negatively impact our industry. The cost of meeting these requirements may have an adverse effect on our financial condition, results of operations and cash flows. For a description of certain environmental proceedings in which we are involved, see Legal Proceedings under Item 3 of this Form 10-K.
We are vulnerable to risks associated with our offshore operations that could negatively impact our operations and financial results.
We conduct offshore operations in the Gulf of Mexico, Ghana, Mozambique, Brazil, China and other countries in West Africa. Our operations and financial results could be significantly impacted by conditions in some of these areas, such as the Gulf of Mexico, because we explore and produce extensively in those areas. As a result of this activity, we are vulnerable to the risks associated with operating offshore, including those relating to:
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hurricanes and other adverse weather conditions;
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oil field service costs and availability;
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compliance with environmental and other laws and regulations;
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terrorist attacks, such as piracy;
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remediation and other costs resulting from oil spills or releases of hazardous materials; and
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failure of equipment or facilities.
In addition, we are currently conducting some of our exploration in the deep waters (greater than 1,000 feet) of the Gulf of Mexico, where operations are more difficult and costly than in shallower waters. The deep waters in the Gulf of Mexico lack the physical and oilfield service infrastructure present in its shallower waters. As a result, deepwater operations may require a significant amount of time between a discovery and the time that we can market our production, thereby increasing the risk involved with these operations.
Further, production of reserves from reservoirs in the Gulf of Mexico generally declines more rapidly than from reservoirs in many other producing regions of the world. This results in recovery of a relatively higher percentage of reserves from properties in the Gulf of Mexico during the initial few years of production and, as a result, our reserve replacement needs from new prospects may be greater there than for our operations elsewhere. Also, our revenues and return on capital will depend significantly on prices prevailing during these relatively short production periods.
We operate in other countries and are subject to political, economic and other uncertainties.
Our operations outside the United States are based primarily in Algeria, Brazil, China, Cote d’Ivoire, Ghana, Indonesia, Liberia, Mozambique and Sierra Leone. As a result, we face political and economic risks and other uncertainties with respect to our international operations. These risks may include, among other things:
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loss of revenue, property and equipment as a result of hazards such as expropriation, war, piracy, acts of terrorism, insurrection and other political risks;
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transparency issues in general and, more specifically, the U.S. Foreign Corrupt Practices Act and other anti-corruption compliance issues;
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increases in taxes and governmental royalties;
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unilateral renegotiation of contracts by governmental entities;
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difficulties enforcing our rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations;
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changes in laws and policies governing operations of foreign-based companies;
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foreign-exchange restrictions; and
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international monetary fluctuations and changes in the relative value of the U.S. dollar as compared with the currencies of other countries in which we conduct business.
For example, in 2006, the Algerian parliament approved legislation establishing an exceptional profits tax on foreign companies’ Algerian oil production and issued regulations implementing this legislation. In response to the Algerian government’s imposition of the exceptional profits tax, we notified Sonatrach of our disagreement with the collection of the exceptional profits tax. In February 2009, we initiated arbitration against Sonatrach with regard to the exceptional profits tax. For additional information, see Note 15-Other Taxes of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Our international operations may also be adversely affected by laws and policies of the United States affecting foreign trade and taxation.
Realization of any of the factors listed above could materially and adversely affect our financial position, results of operations and cash flows.
Our commodity-price-risk management and trading activities may prevent us from benefiting fully from price increases and may expose us to other risks.
To the extent that we engage in commodity-price-risk management activities to protect our cash flow from commodity price declines, we may be prevented from realizing the full benefits of price increases above the levels of the derivative instruments used to manage price risk. In addition, our commodity-price-risk management and trading activities may expose us to the risk of financial loss in certain circumstances, including instances in which:
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our production is less than the hedged volumes;
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there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement;
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the counterparties to our hedging or other price-risk management contracts fail to perform under those arrangements; or
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a sudden unexpected event materially impacts oil and natural-gas prices.
The credit risk of financial institutions could adversely affect us.
We have exposure to different counterparties, and we have entered into transactions with counterparties in the financial services industry, including commercial banks, investment banks, insurance companies, investment funds and other institutions. These transactions expose us to credit risk in the event of default of our counterparty. Deterioration in the credit markets may impact the credit ratings of our current and potential counterparties and affect their ability to fulfill their existing obligations to us and their willingness to enter into future transactions with us. We have exposure to these financial institutions through our derivative transactions. In addition, if any lender under our credit facility is unable to fund its commitment, our liquidity will be reduced by an amount up to the aggregate amount of such lender’s commitment under our credit facility.
We may not be insured against all of the operating risks to which our business is exposed.
Our business is subject to all of the operating risks normally associated with the exploration for and production, gathering, processing and transportation of oil and gas, including hurricanes, blowouts, cratering and fire, any of which could result in damage to, or destruction of, oil and natural-gas wells or formations or production facilities and other property and injury to persons. As protection against financial loss resulting from these operating hazards, we maintain insurance coverage, including certain physical damage, employer’s liability, comprehensive general liability and worker’s compensation insurance. However, we are not fully insured against all risks in all aspects of our business, such as political risk, business-interruption risk and risk of major terrorist attacks and piracy. The occurrence of a significant event against which we are not fully insured could have a material adverse effect on our financial position.
Material differences between the estimated and actual timing of critical events may affect the completion of and commencement of production from development projects.
We are involved in several large development projects. Key factors that may affect the timing and outcome of such projects include:
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project approvals by joint-venture partners;
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timely issuance of permits and licenses by governmental agencies;
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weather conditions;
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manufacturing and delivery schedules of critical equipment; and
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commercial arrangements for pipelines and related equipment to transport and market hydrocarbons.
Delays and differences between estimated and actual timing of critical events may affect the forward-looking statements related to large development projects.
The oil and gas exploration and production industry is very competitive, and some of our exploration and production competitors have greater financial and other resources than we do.
The oil and gas business is highly competitive in the search for and acquisition of reserves and in the gathering and marketing of oil and gas production. Our competitors include national oil companies, major oil and gas companies, independent oil and gas companies, individual producers, gas marketers and major pipeline companies, as well as participants in other industries supplying energy and fuel to industrial, commercial and individual consumers. Some of our competitors may have greater and more diverse resources upon which to draw than we do. If we are not successful in our competition for oil and gas reserves or in our marketing of production, our financial condition and results of operations may be adversely affected.
The high cost or unavailability of drilling rigs, equipment, supplies, personnel and other oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget, which could have a material adverse effect on our business, financial condition or results of operations.
Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs of rigs, equipment, supplies and personnel are substantially greater and their availability may be limited. Additionally, these services may not be available on commercially reasonable terms. The high cost or unavailability of drilling rigs, equipment, supplies, personnel and other oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget, which could have a material adverse effect on our business, financial condition or results of operations.
Our drilling activities may not be productive.
Drilling for oil and natural gas involves numerous risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. The costs of drilling, completing and operating wells are often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:
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unexpected drilling conditions;
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pressure or irregularities in formations;
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equipment failures or accidents;
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fires, explosions, blow-outs and surface cratering;
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marine risks such as capsizing, collisions and hurricanes;
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title problems;
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other adverse weather conditions; and
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shortages or delays in the delivery of equipment.
Certain of our future drilling activities may not be successful and, if unsuccessful, this failure could have an adverse effect on our future results of operations and financial condition. While all drilling, whether developmental or exploratory, involves these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. Because of the percentage of our capital budget devoted to high-risk exploratory projects, it is likely that we will continue to experience significant exploration and dry hole expenses.
We have limited control over the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital and lead to unexpected future costs.
Our ability to sell our natural-gas and crude-oil production could be materially harmed if we fail to obtain adequate services such as transportation.
The marketability of our production depends in part upon the availability, proximity and capacity of pipeline facilities and tanker transportation. If any of the pipelines or tankers become unavailable, we would be required to find a suitable alternative to transport the gas and oil, which could increase our costs and/or reduce the revenues we might obtain from the sale of the gas and oil.
Provisions in our corporate documents and Delaware law could delay or prevent a change of control of Anadarko, even if that change would be beneficial to our stockholders.
Our restated certificate of incorporation and by-laws contain provisions that may make a change of control of Anadarko difficult, even if it may be beneficial to our stockholders, including provisions governing the classification, nomination and removal of directors, prohibiting stockholder action by written consent and regulating the ability of our stockholders to bring matters for action before annual stockholder meetings, and the authorization given to our Board of Directors to issue and set the terms of preferred stock.
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
We may reduce or cease to pay dividends on our common stock.
We can provide no assurance that we will continue to pay dividends at the current rate or at all. The amount of cash dividends, if any, to be paid in the future will depend upon their declaration by our Board of Directors and upon our financial condition, results of operations, cash flow, the levels of our capital and exploration expenditures, our future business prospects and other related matters that our Board of Directors deems relevant.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could reduce our competitiveness and prospects for future success.
The successful implementation of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management team. The loss of key members of our management team, including James T. Hackett, our Chairman and Chief Executive Officer, could have an adverse effect on our business. We entered into an employment agreement with Mr. Hackett to secure his employment with us. We do not carry key man insurance. Our exploratory drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced explorationists, engineers and other professionals. Competition for such professionals is intense. If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.
Item 1B.
Item 1B. Unresolved Staff Comments
The Company has no outstanding or unresolved SEC staff comments.
Item 3.
Item 3. Legal Proceedings
GENERAL The Company is a defendant in a number of lawsuits and is involved in governmental proceedings arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. The Company has also been named as a defendant in various personal injury claims, including claims by employees of third-party contractors alleging exposure to asbestos, silica and benzene while working at refineries (previously owned by predecessors of acquired companies) located in Texas, California and Oklahoma. While the ultimate outcome and impact on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or cash flow of the Company.
TRONOX PROCEEDINGS In January 2009, Tronox and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. In connection with those bankruptcy cases, Tronox filed a lawsuit against Anadarko and Kerr-McGee asserting a number of claims, including claims for actual and constructive fraudulent conveyance. Tronox alleges, among other things, that it was insolvent or undercapitalized at the time it was spun off from Kerr-McGee. Tronox seeks, among other things, to recover an unspecified amount of damages, including interest, from Kerr-McGee and Anadarko as well as punitive damages, and litigation fees and costs. In addition, Tronox seeks to equitably subordinate and/or disallow all claims asserted by Anadarko and Kerr-McGee in the bankruptcy cases. Anadarko and Kerr-McGee have moved to dismiss the complaint in its entirety. That motion has been briefed and argued, and is currently awaiting decision by the Court.
The United States filed a motion to intervene in the Tronox lawsuit, asserting that it has an independent cause of action against Anadarko, Kerr-McGee and Tronox under the Federal Debt Collection Procedures Act relating primarily to environmental cleanup obligations allegedly owed to the United States by Tronox. That motion to intervene has been granted, and the United States is now a co-plaintiff against Anadarko and Kerr-McGee in Tronox’s pending bankruptcy litigation. Anadarko and Kerr-McGee have moved to dismiss the United States’ intervention complaint, but that motion currently has been stayed by order of the Court.
Tronox and the United States have entered into an agreement that contemplates, among other things, that the United States will receive an 88% interest in any recovery from the claims against Anadarko and Kerr-McGee that Tronox has asserted in the litigation described above. The remaining 12% interest in any recovery will be distributed to certain persons who have filed tort claims against the Tronox debtors in the bankruptcy cases. That agreement is subject to certain contingencies, including various levels of governmental approvals, definitive and final documentation, and final approval from the Court. That agreement could be opposed by other interested parties, including Anadarko and Kerr-McGee. Therefore, it is unclear whether this or any other such agreement between Tronox and the United States will be approved or implemented, or what, if any, effect such an agreement might have on the course, cost or outcome of the bankruptcy litigation.
In addition, a consolidated class action complaint has been filed in the United States District Court for the Southern District of New York on behalf of purported purchasers of Tronox’s equity and debt securities between November 21, 2005 and January 12, 2009 against Kerr-McGee, Anadarko and others. The complaint alleges causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, Tronox’s environmental-remediation and tort claim liabilities. The plaintiffs allege that these purported misstatements and omissions are contained in certain of Tronox’s public filings, including in connection with Tronox’s initial public offering. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs.
These proceedings are at a very early stage and the Company intends to defend itself vigorously.
OTHER MATTERS The Company is subject to other legal proceedings, claims and liabilities which arise in the ordinary course of its business. In the opinion of Anadarko, the liability with respect to these actions will not have a material effect on the consolidated financial position, results of operations or cash flow of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 2009.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name
Age at End
of 2010
Position
James T. Hackett
Chairman of the Board and Chief Executive Officer
R. A. Walker
President and Chief Operating Officer
Robert P. Daniels
Senior Vice President, Worldwide Exploration
Robert G. Gwin
Senior Vice President, Finance and Chief Financial Officer
Charles A. Meloy
Senior Vice President, Worldwide Operations
Robert K. Reeves
Senior Vice President, General Counsel and Chief Administrative Officer
M. Cathy Douglas
Vice President and Chief Accounting Officer
Mr. Hackett was named Chief Executive Officer in December 2003 and assumed the additional role of Chairman of the Board in January 2006. He also served as President from December 2003 to February 2010. Prior to joining Anadarko, he served as President and Chief Operating Officer of Devon Energy Corporation following its merger with Ocean Energy, Inc. in April 2003. Mr. Hackett served as President and Chief Executive Officer of Ocean Energy, Inc. from March 1999 to April 2003 and as Chairman of the Board from January 2000 to April 2003. He currently serves as a director of Fluor Corporation and Halliburton Company and serves as Chairman of the Board of the Federal Reserve Bank of Dallas.
Mr. Walker was named Chief Operating Officer in March 2009 and assumed the additional role of President in February 2010. He previously served as Senior Vice President, Finance and Chief Financial Officer from September 2005 until his appointment as Chief Operating Officer. Prior to joining Anadarko, he served as Managing Director for the Global Energy Group of UBS Investment Bank from 2003 to 2005. He has served as a director of Temple- Inland, Inc. since November 2008. Since August 2007, he has also served as a director of Western Gas Holdings, LLC, the general partner of WES, and served as the general partner’s Chairman of the Board from August 2007 to September 2009.
Mr. Daniels was named Senior Vice President, Worldwide Exploration in December 2006, Senior Vice President, Exploration and Production in 2004 and Vice President, Canada in 2001. Prior to this position, he served in various managerial roles in the Exploration Department for Anadarko Algeria Company, LLC. He has worked for the Company since 1985.
Mr. Gwin was named Senior Vice President, Finance and Chief Financial Officer in March 2009 and had previously served as Senior Vice President since March 2008. He also has served as Chairman of the Board of Western Gas Holdings, LLC since October 2009 and as a director since August 2007. Mr. Gwin also served as President of Western Gas Holdings, LLC from August 2007 to September 2009 and as Chief Executive Officer of Western Gas Holdings, LLC from August 2007 to January 2010. He joined Anadarko in January 2006 as Vice President, Finance and Treasurer. Prior to joining Anadarko, he served as President and CEO of Prosoft Learning Corporation from November 2002 to November 2004 and as Chairman from November 2002 to February 2006, and prior to that served as its Chief Financial Officer from August 2000 to November 2002. Previously, Mr. Gwin spent 10 years at Prudential Capital Group in merchant banking roles of increasing responsibility, including serving as Managing Director with responsibility for the firm’s energy investments worldwide.
Mr. Meloy was named Senior Vice President, Worldwide Operations in December 2006 and had served as Senior Vice President, Gulf of Mexico and International Operations since the acquisition of Kerr-McGee in August 2006. Prior to joining Anadarko, he served Kerr-McGee as Vice President of Exploration and Production from 2005 to 2006, Vice President of Gulf of Mexico Exploration, Production and Development from 2004 to 2005, Vice President and Managing Director of Kerr-McGee North Sea (U.K.) Limited from 2002 to 2004 and Vice President of Gulf of Mexico Deep Water from 2000 to 2002. Mr. Meloy has also served as a director of Western Gas Holdings, LLC since February 2009.
Mr. Reeves was named Senior Vice President, General Counsel and Chief Administrative Officer in February 2007. He had previously served as Senior Vice President, Corporate Affairs & Law and Chief Governance Officer since 2004. Prior to joining Anadarko, he served as Executive Vice President, Administration and General Counsel of North Sea New Ventures from 2003 to 2004, and as Executive Vice President, General Counsel and Secretary of Ocean Energy, Inc. and its predecessor companies from 1997 to 2003. He has also served as a director of Key Energy Services, Inc., a publicly traded oilfield services company, since October 2007, and as a director of Western Gas Holdings, LLC since August 2007.
Ms. Douglas was named Vice President and Chief Accounting Officer in November 2008 and had served as Corporate Controller from September 2007 to March 2009. She served as Assistant Controller from July 2006 to September 2007. Ms. Douglas also served as Director, Accounting, Policy and Coordination from October 2006 to September 2007 and Financial Reporting and Policy Manager from January 2003 to October 2006. She joined Anadarko in 1979.
Officers of Anadarko are elected at an organizational meeting of the Board of Directors following the annual meeting of stockholders, which is expected to occur on May 18, 2010, and hold office until their successors are duly elected and shall have qualified. There are no family relationships between any directors or executive officers of Anadarko.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of January 31, 2010, there were approximately 15,680 record holders of Anadarko common stock. The common stock of Anadarko is traded on the New York Stock Exchange. The following shows information regarding the closing market price of and dividends declared and paid on the Company’s common stock by quarter for 2009 and 2008.
The amount of future common stock dividends will depend on earnings, financial condition, capital requirements and other factors, and will be determined by the Board of Directors on a quarterly basis. For additional information, see Liquidity and Capital Resources-Uses of Cash-Dividends under Item 7 and Note 11-Stockholders’ Equity and Note 12-Stock-Based Compensation in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Common Stock Repurchase Table In August 2008, the Company announced a share-repurchase program to purchase up to $5 billion in shares of common stock. The program replaces a prior share-repurchase program and is authorized to extend through August 2011; however, the program does not obligate Anadarko to acquire any specific number of shares and may be discontinued at any time. The following table sets forth information with respect to repurchases by the Company of its shares of common stock during the fourth quarter of 2009.
(1) During the fourth quarter of 2009, all purchased shares related to stock received by the Company for the payment of withholding taxes due on employee stock plan share issuances, which are not within the scope of the Company’s share-repurchase program.
PERFORMANCE GRAPH
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative five-year total return to stockholders on Anadarko’s common stock relative to the cumulative total returns of the S&P 500 index and two 11-company peer groups. The companies included in the 2009 peer group are Apache Corporation, Chevron Corporation, ConocoPhillips, Devon Energy Corporation, EOG Resources, Inc., Hess Corporation, Marathon Oil Corporation, Noble Energy, Inc., Occidental Petroleum Corporation, Pioneer Natural Resources Company and Plains Exploration and Production Company. The companies included in the 2008 peer group are Apache Corporation, ConocoPhillips, Devon Energy Corporation, EnCana Corporation, EOG Resources Inc., Hess Corporation, Marathon Oil Corporation, Noble Energy Inc., Occidental Petroleum Corporation, Pioneer Natural Resources Company and Talisman Energy Inc. The peer-group change from the 2008 peer group to the 2009 peer group was based on the Company’s decision to focus the comparison on U.S.-based companies which vary in size - some larger, some smaller than Anadarko - as well as to remove those companies whose equity performance may be affected by factors that do not affect Anadarko’s equity performance.
Comparison of 5 Year Cumulative Total Return Among
Anadarko Petroleum Corporation, the S&P 500 Index,
the 2008 Peer Group and the 2009 Peer Group
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the Company’s common stock, in the index and in the peer groups on December 31, 2004 and its relative performance is tracked through December 31, 2009.
Item 6.
Item 6. Selected Financial Data
(1) Commodity derivative activity previously reported in Sales Revenues, has been reclassified to Other (income) expense. See Basis of Presentation in Note 1-Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
* Consolidated for Anadarko and its subsidiaries. Certain amounts for prior years have been reclassified to conform to the current presentation. Factors that materially affect the comparability of this information are disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this report in Item 8, and the information set forth in Risk Factors under Item 1A.
OVERVIEW
Anadarko Petroleum Corporation is among the world’s largest independent oil and natural-gas exploration and production companies. Anadarko is engaged in the exploration, development, production and marketing of natural gas, crude oil, condensate and NGLs. The Company also engages in the gathering, processing, treating and transporting of natural gas. The Company’s operations are located in the United States, Algeria, Brazil, China, Cote d’Ivoire, Ghana, Indonesia, Mozambique, Sierra Leone and several other countries.
Anadarko achieved its key operational objectives in 2009 by increasing sales volumes by 7% year-over-year, while spending 35% less on near-term projects, reducing lease operating expenses per unit by more than 20% year-over-year, and adding 314 million barrels of oil equivalent (BOE) of proved reserves before price revisions and divestitures. Anadarko ended 2009 with approximately $3.5 billion of cash on hand and retains the availability of its undrawn $1.3 billion revolving credit agreement (RCA), along with access to credit markets. Management expects this liquidity position and cash flow from operations to position the Company to satisfy its 2010 operational objectives and capital commitments.
MISSION AND STRATEGY
Anadarko’s mission is to deliver a competitive and sustainable rate of return to shareholders by exploring for, acquiring and developing oil and natural-gas resources vital to the world’s health and welfare. Anadarko employs the following strategy to achieve this mission:
•
identify and commercialize resources;
•
explore in high-potential, proven basins;
•
employ a global business development approach; and
•
ensure financial discipline and flexibility.
Developing a portfolio of primarily unconventional resources provides the Company a stable base of capital-efficient, predictable and repeatable development opportunities which, in turn, positions the Company for consistent growth at competitive rates.
Exploring in high-potential, proven and emerging basins worldwide provides the Company with differential growth. Anadarko’s exploration success creates value by expanding its future resource potential, while providing the flexibility to manage risk by monetizing discoveries.
Anadarko’s global business development approach transfers core skills across the globe to discover and develop world-class resources that are accretive to the Company’s net asset value. These resources help form an optimized, global portfolio where both surface and subsurface risks are actively managed.
A strong balance sheet is essential for the development of the Company’s assets and the ability to manage through commodity price cycles. Maintaining financial discipline enables the Company to capitalize on the flexibility of its global portfolio, while allowing the Company to pursue new strategic and tactical growth opportunities.
OPERATING HIGHLIGHTS
Significant 2009 operational highlights by area include:
United States Onshore
•
The Company’s Rocky Mountain region achieved total-year production of approximately 250 thousand barrels of oil equivalent per day (MBOE/d), representing a 15% increase over 2008.
•
The Company reduced spud-to-spud cycle times in its onshore operating areas by 30% year-over-year relative to 2008.
•
In the Marcellus shale, the Company spud 11 and completed six operated horizontal wells and participated in 40 new horizontal wells and 12 completions as a non-operating partner.
Gulf of Mexico
•
The Company’s Gulf of Mexico region achieved production of 151 MBOE/d, representing a 13% sales-volume increase over 2008.
•
The Company announced five deepwater discoveries in the Gulf of Mexico at Heidelberg (44.25% WI), Shenandoah (30% WI), Samurai (33.3% WI), Vito (20% WI) and Lucius (50% WI).
•
The Company declared four deepwater wells as dry holes and expensed approximately $27 million of additional well costs associated with properties that were pending further evaluation as of December 31, 2008.
International
•
The Company announced two deepwater discoveries offshore Ghana and one deepwater discovery in each of offshore Sierra Leone and Brazil.
•
The Company announced successful appraisal wells offshore Ghana and Brazil.
•
The Ghanaian government formally approved the Jubilee field Phase I Plan of Development and Unitization Agreement. Jubilee remains on schedule to achieve first production during the fourth quarter of 2010.
•
All major contracts were awarded for development of the El Merk project in Algeria’s Block 208. First production is scheduled for late 2011.
•
The Company declared two dry holes in Indonesia and one dry hole in each of Brazil, Cote d’Ivoire, China, and Mozambique, and expensed approximately $22 million of additional well costs associated with properties that were pending further evaluation as of December 31, 2008.
FINANCIAL HIGHLIGHTS
Significant 2009 financial highlights include:
•
The Company generated $3.9 billion of cash flow from continuing operating activities compared to $6.4 billion in 2008 due to lower average commodity prices for the year and ended the year with $3.5 billion of cash on hand.
•
The Company completed two public debt offerings generating net proceeds of $2.0 billion, and repaid debt of $1.6 billion, including the repayment of $1.4 billion in aggregate principal amount of floating-rate notes due in 2009.
•
The Company completed a public offering of 30 million shares of common stock at $45.50 per share generating net proceeds of approximately $1.3 billion.
•
The Company reversed its $735 million accrued liability for potential royalties and interest related to the Deepwater Royalty Relief Act (DWRRA) dispute.
The following discussion pertains to Anadarko’s financial condition, results of operations and changes in financial condition. Unless noted otherwise, the following information relates to continuing operations and any increases or decreases “for the year ended December 31, 2009” refer to the comparison of the year ended December 31, 2009, to the year ended December 31, 2008. Similarly, any increases or decreases “for the year ended December 31, 2008” refer to the comparison of the year ended December 31, 2008, to the year ended December 31, 2007. The primary factors that affect the Company’s results of operations include, among other things, commodity prices for natural gas, crude oil and NGLs, sales volumes, the Company’s ability to discover additional oil and natural-gas reserves, as well as the cost of finding reserves and costs required for continuing operations. Unless the context otherwise requires, the terms “Anadarko” or “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. Following is an index by major category of discussion including a brief description of contents:
Page
Financial Results - comparative discussion of financial results of operations
Operating Results - discussion of business activities
Liquidity and Capital Resources - discussion of sources and uses of cash, outlook on operations and
material financial arrangements, obligations and commitments
Critical Accounting Estimates - discussion of significant judgments and estimates
Recent Accounting Developments - discussion of accounting guidance effective in future periods
RESULTS OF CONTINUING OPERATIONS
Selected Data
(1) Commodity derivative activity previously reported in Sales revenues, has been reclassified to Other (income) expense. See Basis of Presentation in Note 1-Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
(2) See Operating Results-Segment Analysis-Adjusted EBITDAX below for a description of Adjusted EBITDAX, which is not a U.S. Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income (loss) from continuing operations before income taxes, which is presented in accordance with GAAP.
(3) Sales volumes for 2007 include 15 MMBOE associated with properties that were divested during 2007.
FINANCIAL RESULTS
Income (Loss) from Continuing Operations Attributable to Common Stockholders Anadarko’s loss from continuing operations attributable to common stockholders for 2009 totaled $135 million, or $0.28 per share (diluted), compared to income from continuing operations attributable to common stockholders for 2008 of $3.2 billion, or $6.78 per share (diluted). Anadarko had income from continuing operations attributable to common stockholders in 2007 of $3.8 billion, or $7.99 per share (diluted).
Sales Revenues
Anadarko’s sales revenues for the year ended December 31, 2009, decreased due to lower commodity prices, partially offset by increased production volumes. The increase for the year ended December 31, 2008, was due to higher commodity prices, partially offset by lower 2008 sales volumes, attributable to 2007 property divestitures.
Analysis of Oil and Gas Operations Sales Revenues and Volumes
The following table provides a summary of the effects of changes in volumes and prices on Anadarko’s sales revenues for the year ended December 31, 2009, compared to 2008 and 2007.
The following table provides Anadarko’s sales volumes for the year ended December 31, 2009, compared to 2008 and 2007.
Sales volumes represent actual production volumes adjusted for changes in commodity inventories. Anadarko employs strategies to manage volumes and mitigate the effect of price volatility, which is likely to continue in the future. Production of natural gas, crude oil and NGLs is usually not affected by seasonal swings in demand.
Natural-Gas Sales Volumes, Average Prices and Revenues
Bcf-billion cubic feet
MMcf/d-million cubic feet per day
The Company’s daily natural-gas sales volumes increased 168 MMcf/d for the year ended December 31, 2009, primarily due to increased production in the Rocky Mountain Region (Rockies) of 138 MMcf/d due to positive results from base production resulting from dewatering coalbed methane wells and higher production uptime due to favorable weather. An increase in production in the Gulf of Mexico of 54 MMcf/d related to favorable weather conditions as compared to hurricane-related downtime experienced during 2008. Also, runtime at Independence Hub increased during 2009 as compared to 2008 when export pipeline repair work resulted in downtime, partially offset by a decrease in production due to scheduled maintenance at Independence Hub. These increases were partially offset by a 24 MMcf/d decrease in the Southern Region resulting from natural production declines experienced while drilling programs were shifted from established fields to emerging shale plays.
Anadarko’s daily natural-gas sales volumes increased for the year ended December 31, 2008, excluding 2007 divested property volumes of 156 MMcf/d. The increase was primarily due to higher sales volumes in the Gulf of Mexico of 175 MMcf/d as a result of the start up of the Independence Hub and increased production in the Rockies of 162 MMcf/d due to improved drilling efficiencies allowing for more overall drilling, partially offset by decreased production in the Southern Region of 44 MMcf/d.
The average natural-gas price Anadarko received decreased for the year ended December 31, 2009. This decrease was primarily due to higher year-over-year natural-gas production and storage volumes coupled with lower United States demand for natural gas, triggered by the economic downturn in the United States.
Anadarko’s average natural-gas price increased for the year ended December 31, 2008. The increase was primarily attributable to lower year-over-year natural-gas storage volumes coupled with lower liquefied natural-gas volumes available to the United States consumer, both of which were caused principally by increased demand in both Europe and Asia.
Crude-Oil and Condensate Sales Volumes, Average Prices and Revenues
MMBbls-million barrels
MBbls/d-thousand barrels per day
Anadarko’s daily crude-oil and condensate sales volumes increased for the year ended December 31, 2009, primarily due to higher crude-oil sales volumes of 8 MBbls/d in the Gulf of Mexico and 3 MBbls/d in the Rockies. The increase in the Gulf of Mexico is attributable to additional production that came online during the fourth quarter of 2008, and favorable weather conditions as compared to 2008, which was impacted by export pipeline repair work and hurricane-related disruptions. The Rockies increase is attributable to production efficiencies related to an oil pipeline that was placed in service in 2009. These increases were offset by lower Algerian crude-oil sales volumes of 6 MBbls/d due to the timing of cargo liftings and variances in OPEC quotas.
Anadarko’s daily crude-oil and condensate sales volumes decreased for the year ended December 31, 2008, excluding 2007 divested property volumes of 15 MBbls/d, primarily due to lower crude-oil sales volumes of 13 MBbls/d in the Gulf of Mexico attributable to pipeline repairs resulting from 2008 hurricane activity, lower crude-oil sales volumes of 7 MBbls/d in Algeria, primarily from lower production due to maintenance, a statutory shutdown and production constraints implemented by OPEC during the fourth quarter of 2008, and lower crude-oil sales volumes of 3 MBbls/d in Alaska, partially offset by higher crude-oil sales volumes of 5 MBbls/d in the Rockies.
The average crude-oil price Anadarko received decreased for the year ended December 31, 2009, primarily due to increased spare OPEC production capacity coupled with decreased global demand, particularly in the United States, Europe and Japan as a result of the economic downturn. Anadarko’s average crude-oil price increased for the year ended December 31, 2008. Crude-oil prices were strong in the first half of 2008, primarily due to limited excess production capacity, heightened geopolitical tension and increased demand in Asia.
Natural-Gas-Liquids Sales Volumes, Average Prices and Revenues
NGLs sales represent revenues from the sale of product derived from the processing of Anadarko’s natural-gas production. The Company’s daily NGLs sales volumes increased for the year ended December 31, 2009, primarily attributable to a new processing train placed in service during the second quarter of 2009 at the Chipeta natural-gas processing plant, increased gas production in the Rockies, and improved recoveries in the Southern Region.
Anadarko’s daily NGLs sales volumes were down for the year ended December 31, 2008, primarily due to a 4 MBbls/d decrease associated with the 2007 divestitures.
The average NGLs price decreased for the year ended December 31, 2009, primarily due to decreased global petrochemical demand as a result of the economic downturn. For the year ended December 31, 2008, average NGLs prices increased primarily due to increased global petrochemical demand for the first three quarters of 2008. NGLs production is dependent on natural-gas and NGLs prices as well as the economics of the processing of natural gas to extract NGLs.
Gathering, Processing and Marketing Margin
For the year ended December 31, 2009, gathering, processing and marketing margin decreased $171 million. The decrease was primarily due to lower prices for natural gas, NGLs and condensate, which led to reduced gas processing margins, lower margins associated with firm transportation contracts due to price differentials between supply and market areas, and unrealized losses on derivatives related to gas-storage activity which is seasonal in nature, i.e., the margin realized on the future sale of stored volumes covered by these derivative instruments will more than offset the recorded unrealized losses. These amounts were partially offset by increases in crude-oil marketing margins, and in NGLs marketing margins primarily due to inventory write-downs to market value taken in the fourth quarter of 2008.
For the year ended December 31, 2008, gathering, processing and marketing margin decreased $180 million. The decrease resulted from lower marketing sales of $231 million primarily due to lower margins on firm transportation contracts and decreased third-party-marketing activity, a write-down of storage inventory due to lower commodity prices in the fourth quarter of 2008 and lower gathering and processing sales of $174 million, primarily due to lower volumes as a result of the 2007 divestitures. These amounts were partially offset by a $183 million decrease in costs associated with gathering and processing operations, primarily due to 2007 divestitures, a $39 million decrease in marketing transportation costs, and a reduction of accrued expenses related to a prior period of $29 million.
Gains (Losses) on Divestitures and Other, net
Gains on divestitures in 2009 were $44 million, primarily related to proceeds from the sale of oil and gas properties in Qatar. Gains on divestitures in 2008 were $1.2 billion, primarily related to the divestiture of certain oil and gas properties in Brazil, onshore United States and the Gulf of Mexico. Gains on divestitures in 2007 related primarily to the Company’s asset-realignment program. During 2007, net gains of $4.1 billion related to divestitures of oil and gas properties and net gains of $574 million related to the divestiture of certain gathering and processing facilities. For additional information, see Operating Results-Divestitures below.
In 2008, gains (losses) on divestitures and other, net includes a net $82 million ($52 million after tax) reduction related to corrections resulting from the analysis of property records after the adoption of the successful efforts method of accounting. This net amount includes a reduction of $163 million related to 2007. Management concluded that this misstatement was not material to 2007 interim and annual results, or to the 2008 period, and corrected the error in the first quarter of 2008.
Reversal of Accrual for DWRRA Dispute
On March 17, 2006 Kerr-McGee Oil and Gas Corp (KMOG) filed a lawsuit styled Kerr-McGee Oil and Gas Corp. v. C. Stephen Allred, Assistant Secretary for Land & Minerals Mgt. and the Dept of the Interior (Kerr-McGee v. Allred) in the U.S. District Court for the Western District of Louisiana against the Department of the Interior (DOI) for injunctive and declaratory relief with respect to the DOI’s claims for additional royalties on the eight leases listed in the order issued by the DOI in 2006. In May 2007, KMOG filed a motion for summary judgment with the District Court for the Western District of Louisiana which ruled in favor of KMOG in October 2007. The DOI appealed the decision to the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit). In January 2009, a three-judge Fifth Circuit panel unanimously affirmed the District Court’s ruling in favor of KMOG. At the end of March 2009, the DOI filed a petition for rehearing by the full Fifth Circuit (en banc), which was denied on April 14, 2009. On July 13, 2009, the DOI filed a petition for a writ of certiorari with the U.S. Supreme Court, which was denied on October 5, 2009.
Based on the U.S. Supreme Court’s denial of the DOI’s petition for review by the court, Anadarko reversed its $657 million accrued liability for royalties that could have been owed on leases listed in the 2006 Order, similar orders to pay issued in 2008 and 2009, and other deepwater Gulf of Mexico leases with similar price-threshold provisions. In addition, the Company reversed its $78 million accrued liability for unpaid interest on these amounts.
Effective October 1, 2009, royalties and interest are no longer being accrued for deepwater Gulf of Mexico leases with price-threshold provisions. For more information on the DWRRA dispute, see Note 14-Contingencies-Deepwater Royalty Relief Act in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Costs and Expenses
For the year ended December 31, 2009, oil and gas operating expenses decreased primarily as a result of cost savings programs initiated in response to the reduction in oil and gas prices experienced from 2008 into 2009. Cost savings were achieved through operating efficiencies, deferral of certain workovers and vendor negotiations. Additional reductions were due to lower production handling rates in the Gulf of Mexico, and a decrease in outside-operated expenses in Alaska and Algeria. For the year ended December 31, 2008, oil and gas operating expenses increased primarily due to workovers and other field initiatives implemented to capture the increase in product prices from 2007 to 2008. Expenses for 2008 also included a full year of operations at Independence Hub. These amounts were partially offset by a decrease in costs associated with 2007 property divestitures.
For the year ended December 31, 2009, oil and gas transportation and other expenses increased due to incremental transportation fees paid on increasing volumes in the Rockies, new processing agreements in certain areas of both the Rockies and Southern Region and drilling rig contract termination fees paid during the year. These increases were partially offset by a decline in certain fees related to surface owner agreements and certain processing agreements that are tied to product prices. For the year ended December 31, 2008, oil and gas transportation and other expenses increased due to incremental transportation fees paid on increasing volumes in the Rockies, new processing agreements in certain areas of both the Rockies and Southern Region, a full year of demand fees at Independence Hub and an increase in certain fees tied to product prices.
Exploration expense decreased by $262 million for the year ended December 31, 2009, primarily due to lower impairments of unproved properties of $205 million and lower geological and geophysical expense of $87 million. The decrease in impairments of unproved properties related primarily to Gulf of Mexico properties, partially offset by an increase in unproved property impairments in China. The decrease in geological and geophysical expense was primarily related to seismic data which was acquired and expensed in 2008 for Mozambique and Indonesia. Exploration expense increased by $464 million for the year ended December 31, 2008, primarily due to a $337 million impairment of unproved properties in the Gulf of Mexico, a $55 million impairment of unproved properties in Trinidad, a $40 million impairment of unproved properties in Brazil, and a $34 million increase in geological and geophysical costs, primarily related to the acquisition of seismic data for Mozambique.
NM-not meaningful
For the year ended December 31, 2009, general and administrative (G&A) expense increased primarily due to bonus plan expense. The increase was primarily related to a supplemental bonus plan, the payment of which was triggered by the Company’s total-shareholder-return performance relative to a group of peer companies. The performance resulted in significantly increased market value relative to the peer-group-average performance, and all non-officer employees qualified for prescribed payments under the plan. For the year ended December 31, 2008, G&A expense decreased primarily due to a decrease in employee severance and termination benefits, lower compensation expense and a decrease in contract labor expense, partially offset by higher pension plan expenses.
For the year ended December 31, 2009, depreciation, depletion, and amortization (DD&A) expense increased $338 million primarily due to a $237 million increase attributable to higher sales volumes and to $84 million of higher accumulated costs associated with acquiring, finding and developing oil and gas reserves. For the year ended December 31, 2008, DD&A expense increased $354 million primarily due to a $416 million increase attributable to oil and gas properties due to higher costs associated with acquiring, finding and developing oil and gas reserves. This increase was partially offset by a decrease of approximately $43 million due to lower sales volumes and a decrease in depreciation of other properties and equipment of $28 million primarily due to divestitures.
For the year ended December 31, 2009, other taxes decreased primarily due to lower commodity prices, which resulted in lower United States production and severance taxes of $343 million, Algerian exceptional profits tax of $269 million, and Chinese windfall profits tax of $60 million as well as decreased ad valorem taxes of $32 million. For the year ended December 31, 2008, other taxes increased primarily due to increased production and severance taxes of $194 million, Chinese windfall profits tax of $55 million and ad valorem taxes of $43 million. These increases were triggered primarily by higher commodity prices and were partially offset by a decrease in the Algerian exceptional profits tax expense attributable to a change in the estimate of the 2006 exceptional profits tax recognized during the first quarter of 2007.
Impairments for the year ended December 31, 2009, related to $86 million of marketing operating segment assets, $22 million of oil and gas exploration and production operating segment properties in the United States
and $7 million of midstream operating segment assets. The marketing operating segment impairments related to the impairment of firm transportation contracts and LNG facility-site properties. Impairments for the year ended December 31, 2008, related to $113 million of oil and gas exploration and production operating segment properties in the United States, $98 million of midstream operating segment assets and $12 million of marketing operating segment assets. The oil and gas exploration and production operating segment and midstream operating segment impairments were primarily a result of lower commodity prices at year-end 2008. The marketing operating segment impairments related to the impairment of firm transportation contracts.
Other (Income) Expense
Anadarko’s gross interest expense decreased for the year ended December 31, 2009, primarily due to the reversal of $78 million of previously accrued interest expense related to the DWRRA dispute, lower interest expense of $70 million due to the partial retirement of the Midstream Subsidiary Note Payable to a Related Party and lower interest expense of $60 million due to the retirement of $1.4 billion in aggregate principal amount of Floating-Rate Notes during 2009, partially offset by interest expense of $108 million on $2.0 billion of debt issued in 2009. Anadarko’s gross interest expense decreased for the year ended December 31, 2008, primarily due to lower average debt levels in 2008 and decreases in average floating interest rates. For additional information see Operating Results-Divestitures and Liquidity and Capital Resources-Uses of Cash-Debt Repayment below and Interest-Rate Risk under Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risks are attributable to fluctuations in energy prices and interest rates. These fluctuations can affect revenues and cash flow from operating, investing and financing activities. The Company’s risk-management policies provide for the use of derivative instruments to manage these risks. The types of derivative instruments utilized by the Company include futures, swaps, options and fixed-price physical-delivery contracts. The volume of commodity derivative instruments utilized by the Company may vary from year to year and is governed by risk-management policies with levels of authority delegated by the Board of Directors. Both exchange and over-the-counter traded commodity derivative instruments may be subject to margin deposit requirements, and the Company may be required from time to time to deposit cash or provide letters of credit with exchange brokers or its counterparties in order to satisfy these margin requirements. For additional information see Liquidity and Capital Resources-Uses of Cash-Margin Deposits under Part II, Item 7 of this Form 10-K.
For information regarding the Company’s accounting policies and additional information related to the Company’s derivative and financial instruments, see Note 1-Summary of Significant Accounting Policies, Note 8-Derivative Instruments and Note 10-Debt and Interest Expense in the Notes to Consolidated Financial Statements under Item 8
Item 8. Financial Statements and Supplementary Data
ANADARKO PETROLEUM CORPORATION
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
ANADARKO PETROLEUM CORPORATION
REPORT OF MANAGEMENT
Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the Company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. In preparing its consolidated financial statements, the Company includes amounts that are based on estimates and judgments that Management believes are reasonable under the circumstances. The Company’s financial statements have been audited by KPMG LLP, an independent registered public accounting firm appointed by the Audit Committee of the Board of Directors. Management has made available to KPMG LLP all of the Company’s financial records and related data, as well as the minutes of the stockholders’ and Directors’ meetings.
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Anadarko’s internal control system was designed to provide reasonable assurance to the Company’s Management and Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This assessment was based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we believe that as of December 31, 2009 the Company’s internal control over financial reporting is effective based on those criteria.
KPMG LLP has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2009.
/s/ JAMES T. HACKETT
James T. Hackett
Chairman and Chief Executive Officer
/s/ ROBERT G. GWIN
Robert G. Gwin
Senior Vice President, Finance and
Chief Financial Officer
February 23, 2010
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anadarko Petroleum Corporation:
We have audited Anadarko Petroleum Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Anadarko Petroleum Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Anadarko Petroleum Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Anadarko Petroleum Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated February 23, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
February 23, 2010
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anadarko Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of Anadarko Petroleum Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anadarko Petroleum Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Anadarko Petroleum Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
February 23, 2010
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(1) Net of income tax benefit (expense) of $(12) million, $(8) million, and $(3) million for the year ended December 31, 2009, 2008, and 2007, respectively.
(2) Net of income tax benefit (expense) of $70 million, $107 million, and $(23) million for the year ended December 31, 2009, 2008, and 2007, respectively.
(3) Net of income tax benefit (expense) of $(17) million, $(5) million, and $(7) million for the year ended December 31, 2009, 2008, and 2007, respectively.
(4) Net of income tax benefit (expense) of zero, $2 million, and $(2) million for the year ended December 31, 2009, 2008, and 2007, respectively.
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies
General Anadarko Petroleum Corporation is engaged in the exploration, development, production, and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs). The Company also engages in the gathering, processing, treating and transporting of natural gas, as well as participates in the hard minerals business through its ownership in non-operated joint ventures and royalty arrangements. The terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.
Basis of Presentation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of Anadarko and entities in which it holds a controlling financial interest. Undivided interests in oil and gas joint ventures are consolidated on a proportionate basis. All intercompany transactions have been eliminated. Investments in non-controlled entities over which Anadarko exercises significant influence are accounted for under the equity method. Other investments are carried at cost. Certain amounts for prior periods have been reclassified to conform to the current presentation.
The Company changed the manner in which gains and losses on commodity derivatives, used to economically hedge production, are presented within the Consolidated Statements of Income to provide enhanced transparency into asset-operating performance. Previously, all realized and unrealized gains and losses on commodity derivatives were reported in gas sales, oil and condensate sales, or NGLs sales. (Gains) losses on commodity derivatives are now presented as a separate line item on the Consolidated Statements of Income. Prior periods have been reclassified to conform to this presentation. See Derivative Instruments below.
Use of Estimates In preparing financial statements in accordance with accounting principles generally accepted in the United States, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Management reviews its estimates periodically, including those related to the carrying value of properties and equipment, proved reserves, goodwill, intangible assets, asset retirement obligations, litigation reserves, environmental liabilities, pension assets and liabilities and costs, income taxes, and fair values. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates.
Fair Value Fair value is defined as the price that would be received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based upon the degree to which they are observable. The three levels of the fair-value-measurement hierarchy are as follows:
Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).
Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 - inputs that are not observable from objective sources, such as the Company’s internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in the Company’s internally developed present value of future cash flows model that underlies the fair-value measurement).
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
In determining fair value, the Company utilizes observable market data when available, or models that incorporate observable market data. In addition to market information, the Company incorporates transaction-specific details that, in management’s judgment, market participants would take into account in measuring fair value.
In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based upon the lowest level of input that is significant to the fair-value measurement. For Anadarko, recurring fair-value measurements are performed for interest-rate derivatives, commodity derivatives, investments in trading securities and pension assets.
The carrying amount of cash and cash equivalents, accounts receivable and accounts payable reported on the balance sheet approximates fair value.
Nonfinancial assets and liabilities initially measured at fair value include certain assets and liabilities acquired in a business combination, impaired long-lived assets (asset groups), intangible assets and goodwill, and asset retirement obligations and exit or disposal costs.
Revenues The Company recognizes sales revenues for gas, oil and condensate, and NGLs based on the amount of each product sold to purchasers when delivery to the purchaser has occurred and title has transferred. This occurs when product has been delivered to a pipeline or a tanker lifting has occurred. The Company follows the sales method of accounting for natural-gas production imbalances. If the Company’s sales volumes for a well exceed the estimated remaining recoverable reserves of the well, a liability is recognized. No receivables are recorded for those wells on which the Company has taken less than its proportionate share of production.
Realized gains and losses on derivative instruments that received cash flow hedge accounting treatment are included in gas sales, oil and condensate sales and NGLs sales. The Company discontinued hedge accounting effective January 1, 2007, as discussed in Derivative Instruments below.
The Company enters into buy/sell arrangements for a portion of its crude-oil production. Under these arrangements, barrels are sold at prevailing market prices at a location, and in an additional transaction entered into in contemplation of the sale transaction with the same third party, barrels are re-purchased at a different location at the market prices prevailing at that location. The barrels are then sold at prevailing market prices at the re-purchase location. These arrangements are often required by private transporters. In these transactions, the re-purchase price is more than the original sales price with the difference representing a transportation fee. Other buy/sell arrangements are entered in order to shift the ultimate sales point of the Company’s production to a more liquid location, thereby avoiding potential marketing fees and other market-price reductions. In these transactions, the sales price in the field and the re-purchase price are each at prevailing market prices at the respective locations. Anadarko uses these buy/sell arrangements in its marketing and trading activities and, as such, reports these transactions in the income statement on a net basis.
Anadarko provides gathering, processing, treating, and transportation services pursuant to a variety of contracts. Under these arrangements, the Company receives fees, or retains a percentage of products or a percentage of the proceeds from the sale of products and recognizes revenue at the time the services are performed or product is sold. These revenues are included in gathering, processing and marketing sales.
Marketing margins related to the Company’s production are included in gas sales, oil and condensate sales and NGLs sales. Marketing margins related to sales of commodities purchased from third parties, as well as realized and unrealized gains and losses on such marketing activities, are included in gathering, processing and marketing sales.
Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
Inventories Commodity inventories are stated at the lower of average cost or market.
Properties and Equipment Properties and equipment are stated at cost less accumulated depreciation, depletion and amortization (DD&A). Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gain or loss is recognized in gains (losses) on divestitures and other, net.
Oil and Gas Properties The Company applies the successful efforts method of accounting for oil and gas properties. Under successful efforts, exploration costs such as exploratory geological and geophysical costs, delay rentals and exploration overhead are charged against earnings as incurred. Acquisition costs and costs of drilling exploratory wells are capitalized pending determination of whether proved reserves can be attributed to the area as a result of drilling the well. If management determines that commercial quantities of hydrocarbons have not been discovered, capitalized costs associated with exploratory wells are charged to exploration expense. Acquisition costs of unproved leaseholds are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment, based on the Company’s current exploration plans, and a valuation allowance is provided if impairment is indicated. Unproved oil and gas properties with individually insignificant lease acquisition costs are amortized on a group basis (thereby establishing a valuation allowance) over the average terms of the leases, at rates that provide for full amortization of unsuccessful leases upon lease expiration or abandonment. Costs of expired or abandoned leases are charged against the valuation allowance, while costs of productive leases are transferred to proved oil and gas properties. Costs of maintaining and retaining undeveloped leaseholds, as well as amortization of individually insignificant leases and impairment of unsuccessful leases, are included in exploration expense.
Capitalized Interest Interest is capitalized as part of the historical cost of developing and constructing assets for significant projects. Significant oil and gas investments in unproved properties, significant exploration and development projects for which DD&A expense is not currently recognized, and exploration or development activities that are in progress qualify for interest capitalization. Interest is capitalized until the asset is ready for service. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment, along with other capitalized costs related to that asset.
Asset Retirement Obligations An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing of abandonment.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
Impairments Properties and equipment, net of salvage value, are reviewed for impairment at the lowest level for which identifiable cash flows are independent of cash flows from other assets when facts and circumstances indicate that their net book values may not be recoverable. In performing this review, an undiscounted cash flow test is performed on the impairment unit. If the sum of these undiscounted estimated future net cash flows is less than the net book value of the property, an impairment loss is recognized for the excess, if any, of the property’s net book value over its estimated fair value.
Depreciation, Depletion and Amortization Costs of drilling and equipping successful exploratory wells, development wells, costs to construct or acquire facilities other than offshore platforms and associated asset retirement costs are depreciated using the unit-of-production method based on total estimated proved developed oil and gas reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved leaseholds and costs to construct or acquire offshore platforms and associated asset retirement costs, are depleted using the unit-of-production method based on total estimated proved developed and undeveloped reserves. Mineral properties are depleted using the unit-of-production method. All other properties are stated at historical acquisition cost, net of allowance for impairment, and depreciated using the straight-line method over the useful lives of the assets, which range from 3 to 15 years for furniture and equipment, up to 40 years for buildings, and up to 47 years for gathering facilities.
Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price of a business over the estimated fair value of the assets acquired and liabilities assumed. The Company assesses the carrying amount of goodwill by testing the goodwill for impairment annually, unless facts and circumstances make it necessary to test more frequently. During 2009, the Company changed its annual goodwill impairment testing date from January 1 to October 1. As a result, goodwill was tested for impairment at both January 1 and October 1 in 2009. The impairment test requires an allocation of goodwill and all other assets and liabilities to business levels referred to as reporting units. A reporting unit is an operating segment or a component that is one level below an operating segment. Anadarko has allocated goodwill to three reporting units: oil and gas exploration and production, gathering and processing, and transportation. The fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense.
Changes in goodwill may result from, among other things, impairments, future acquisitions or future divestitures.
Other intangible assets represent contractual rights obtained in connection with a business combination that had favorable contractual terms relative to market as of the acquisition date. Other intangible assets are amortized over their estimated useful lives and are reviewed for impairment whenever impairment indicators are present. See Note 7.
Derivative Instruments Anadarko utilizes derivative instruments in its marketing and trading activities and to manage price risk attributable to the Company’s forecasted sales of oil, natural-gas and NGLs production. Anadarko also periodically utilizes derivatives to manage its exposure associated with natural-gas processing, interest rates and foreign currency exchange rates. All derivatives that do not satisfy the normal purchases and sales exception criteria are carried on the balance sheet at fair value and are included in other current assets, other assets, accrued expenses or other long-term liabilities, depending on the derivative position and the expected timing of settlement. To the extent a legal right of offset with a counterparty exists, the Company reports derivative assets and liabilities on a net basis. Anadarko has exposure to credit risk to the extent the derivative-instrument counterparty is unable to satisfy its settlement commitment. The Company actively monitors the creditworthiness of each counterparty and assesses the impact, if any, on its derivative positions.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
Through the end of 2006, Anadarko applied hedge accounting to certain commodity and interest-rate derivatives whereby gains and losses on these instruments were recognized in earnings in the same period in which the specifically identified hedged transactions affected earnings. Effective January 1, 2007, Anadarko discontinued its application of hedge accounting to all derivatives. As a result of this change, both realized and unrealized gains and losses on derivative instruments are recognized on a current basis. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income as of December 31, 2009 and will be reclassified to earnings in future periods as the economic transactions to which the derivatives relate affect earnings. See Note 8.
Accounts Payable Accounts payable includes property expenditure accruals of $741 million and $579 million at December 31, 2009 and 2008, respectively. Also included in accounts payable at December 31, 2009 and 2008 are liabilities of $252 million and $391 million, respectively, representing the amount by which checks issued, but not presented to the Company’s banks for collection, exceed balances in applicable bank accounts, and changes in these liabilities are reflected in cash flows from financing activities.
Legal Contingencies The Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of its business. Except for legal contingencies acquired in a business combination, which are recorded at fair value, the Company accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These estimates are adjusted as additional information becomes available or circumstances change. See Note 14.
Environmental Contingencies Except for environmental contingencies acquired in a business combination, which are recorded at fair value, the Company accrues for losses associated with environmental-remediation obligations when such losses are probable and can be reasonably estimated. Accruals for estimated losses from environmental-remediation obligations are recognized no later than the time of the completion of the remediation feasibility study. These accruals are adjusted as additional information becomes available or as circumstances change. Costs of future expenditures for environmental-remediation obligations are not discounted to their present value. Recoveries of environmental-remediation costs from other parties are recorded at undiscounted value as assets when receipt is deemed probable. See Note 14.
Pension Plans, Other Postretirement Benefits and Employee Savings Plans The Company measures pension plan assets at fair value. Pension plans are actuarially evaluated, incorporating the use of various assumptions. Critical assumptions for pension and other postretirement plans include the discount rate and the expected rate of return on plan assets (for funded pension plans). Other assumptions involve demographic factors such as retirement, mortality, turnover and the rate of compensation increases. The Company evaluates assumptions annually and modifies the assumptions as necessary. See Note 20.
Noncontrolling Interests Noncontrolling interests represent third-party ownership in the net assets of the Company’s consolidated subsidiaries and are presented as a component of equity. Changes in Anadarko’s ownership interests in subsidiaries that do not result in deconsolidation are recognized in equity. See Note 3.
Income Taxes The Company files various United States federal, state and foreign income tax returns. Deferred federal, state and foreign income taxes are provided on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company recognizes a tax benefit from an uncertain position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position and will record the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority. See Note 16.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation The Company accounts for stock-based compensation at fair value. The Company grants various types of stock-based awards including stock options, non-vested equity shares (restricted stock awards and units) and performance-based awards. The fair value of stock option awards is determined using the Black-Scholes option-pricing model. Restricted stock awards and units are valued using the market price of Anadarko common stock on the grant date. For performance-based awards, the fair value of the market-condition portion of the award is measured using a Monte Carlo simulation, and the performance-condition portion is measured at the market price of Anadarko common stock on the grant date. Liability-classified awards are remeasured at estimated fair value at the end of each period based on the specifications of each plan. The Company records compensation cost, net of estimated forfeitures, for stock-based compensation awards over the requisite service period. As each award vests, an adjustment is made to compensation cost for any difference between the estimated forfeitures and the actual forfeitures related to the vested awards. For equity awards that contain service and market conditions, compensation cost is recorded using the straight-line method. If the requisite service period is satisfied, compensation cost is not adjusted unless the award contains a performance condition. If an award contains a performance condition, expense is recognized only for those shares that ultimately vest using the per-share fair value measured at the grant date. See Note 12.
Discontinued Operations The Company’s Canadian operations have been classified as discontinued operations for 2007 and 2008. Unless otherwise indicated, information presented in the notes to the financial statements relates only to Anadarko’s continuing operations. See Note 2.
Earnings Per Share The Company’s basic earnings per share (EPS) amounts have been computed based on the average number of shares of common stock outstanding for the period and include the effect of any participating securities as appropriate. Diluted EPS includes the effect of the Company’s outstanding stock options, restricted stock awards, restricted stock units and performance-based stock awards if the inclusion of these items is dilutive. Diluted net loss per share for the year ended December 31, 2009, does not assume an increase in the average number of shares outstanding from future stock option exercises, unvested restricted stock or performance-based stock awards because the inclusion of shares attributable to these sources would have an anti-dilutive effect. See Note 11.
Changes in Accounting Principles The Company adopted a new fair-value-measurement standard as of January 1, 2008. The standard defines fair value, establishes a framework for measuring fair value under existing accounting pronouncements that require fair-value measurements and expands fair-value-measurement disclosures. The Company elected to implement the standard with the one-year deferral permitted for nonfinancial assets and nonfinancial liabilities, except those nonfinancial items recognized or disclosed at fair value on a recurring basis (at least annually). The deferral period ended on January 1, 2009. Accordingly, the Company now applies the fair-value framework to nonfinancial assets and nonfinancial liabilities initially measured at fair value, such as assets and liabilities acquired in a business combination, impaired long-lived assets (asset groups), intangible assets and goodwill, and initial recognition of asset retirement obligations and exit or disposal costs. Also, during the fourth quarter of 2009, Anadarko adopted a standard that requires expanded fair-value-measurement disclosures related to pensions.
The Company adopted a new standard for its derivative instruments and hedging activities, effective January 1, 2009. The standard does not change the Company’s accounting for derivatives, but requires enhanced disclosures regarding the Company’s methodology and purpose for entering into derivative instruments, accounting for derivative instruments and related hedged items (if any), and the impact of derivative instruments on the Company’s consolidated financial position, results of operations and cash flows. See Note 8.
The Company adopted new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of subsidiaries, effective January 1, 2009. Specifically, these standards require the
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
recognition of noncontrolling interests (formerly referred to as minority interests) as a component of total equity. Prior to January 1, 2009, the share of a subsidiary’s net assets allocable to minority interest investors was reported outside of equity. These standards also establish a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and specifically provide that dispositions of subsidiary stock are required to be accounted for as equity transactions with no gain or loss recognized upon disposal. Finally, consolidated net income and comprehensive income are presented to include amounts attributable to both the parent and noncontrolling interests. All prior periods have been conformed to the current-year presentation.
The Company adopted a new accounting standard for business combinations, effective January 1, 2009. The standard applies prospectively to the Company for future business combinations. The standard expands the definition of what qualifies as a business, thereby increasing the scope of transactions that qualify as business combinations. Furthermore, under the standard, changes in estimates of income tax liabilities existing at the date of, or arising in connection with, past business combinations are accounted for as adjustments to current-period income as opposed to adjustments to goodwill. The adoption of the standard had no impact on the Company’s consolidated financial position, results of operations or cash flows.
The Company adopted a new standard on determining whether instruments granted in share-based payment transactions constitute participating securities, effective January 1, 2009. This standard addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore included in the allocation of earnings for purposes of computing EPS. Unvested share-based payment awards, whether paid or unpaid, that contain nonforfeitable rights to dividends or dividend equivalents constitute participating securities and are included in the computation of EPS. The Company’s restricted stock awards and restricted stock units contain nonforfeitable rights to dividends, thereby qualifying these instruments as participating securities and requiring the underlying securities to be taken into account for purposes of computing EPS. However, because the Company’s restricted stock awards and restricted stock units do not participate in losses, these instruments were not taken into account for purposes of calculating EPS for the year ended December 31, 2009. All prior periods have been conformed to the current-year presentation. See Note 11.
The Company adopted a new standard on subsequent events, effective April 1, 2009. The standard defines subsequent events as either recognized subsequent events (events that provide additional evidence about conditions at the balance sheet date) or nonrecognized subsequent events (events that provide evidence about conditions that arose after the balance sheet date). Recognized subsequent events are recorded in the financial statements for the current period presented, while nonrecognized subsequent events are not. Both types of subsequent events require disclosure in the consolidated financial statements if nondisclosure of such events causes the financial statements to be misleading. The adoption of this standard had no impact on the financial statements of the Company. The Company has evaluated subsequent events through February 23, 2010.
During the third quarter of 2009, the Company changed its annual goodwill impairment testing date from January 1 to October 1 of each year. This change ensures the completion of the annual goodwill impairment test prior to the end of the annual reporting period, thereby aligning impairment testing procedures with year-end financial reporting. Accordingly, management considers this accounting change preferable. This change did not accelerate, delay, avoid, or cause an impairment charge, nor did this change result in adjustments to previously issued financial statements. The Company completed its annual goodwill impairment test during the fourth quarter of 2009, with no impairment indicated.
In December 2009, Anadarko adopted revised oil and gas reserve estimation and disclosure requirements. The primary impact of the new disclosures for Anadarko is to align the definition of proved reserves with the Securities and Exchange Commission (SEC) Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008. The accounting standards update revised the definition of proved oil and gas reserves to require that the average, first-day-of-the-month price during the 12-month period preceding the end of
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies (Continued)
the year rather than the year-end price, must be used when estimating whether reserve quantities are economical to produce. This same 12-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows. The rules also allow for the use of reliable technology to estimate proved oil and gas reserves, if those technologies have been demonstrated to result in reliable conclusions about reserve volumes. The unaudited supplemental information on oil and gas exploration and production activities for 2009 has been presented following these new reserve estimation and disclosure rules, which may not be applied retrospectively. The 2006, 2007, and 2008 data are presented in accordance with the Financial Accounting Standards Board (FASB) oil and gas disclosure requirements effective during those respective periods. However, historical information has been reclassified to conform to the geographic areas required to be disclosed in 2009 under the revised accounting standard. Adoption of the new rules had no effect on the 2009 consolidated financial statements. The effect of applying the new reserve estimation requirements did not significantly impact 2009 net proved reserve volumes, nor will the requirements have a material impact on depletion expense in future periods.
Recently Issued Accounting Standards Not Yet Adopted In June 2009, the FASB issued amendments to the consolidation standard applicable to variable interest entities. The amendments reduce the previously required quantitative consolidation analysis, and require ongoing reassessments of whether the Company is the primary beneficiary of a variable interest entity. This standard requires enhanced disclosures about an enterprise’s involvement with a variable interest entity. This standard is effective for the first annual reporting period beginning after November 15, 2009. The adoption of this standard will not have an impact on the Company’s consolidated financial position, results of operations or cash flows, other than the expanded disclosures.
2. Divestitures and Other
Gains (Losses) on Divestitures and Other During 2009, 2008 and 2007, the Company closed several unrelated property divestiture transactions, realizing proceeds of approximately $176 million, $2.5 billion, and $11.1 billion before income taxes, respectively. During 2009, 2008 and 2007, net gains on divestitures were $44 million, $1.2 billion, and $4.7 billion, respectively. The 2009 gains included $29 million primarily related to divestitures of certain oil and gas properties in Qatar.
In December 2009, Anadarko entered into a non-monetary exchange for certain oil and gas properties in the Rockies area. The properties received were recorded at fair value of approximately $230 million and the properties conveyed were accounted for as a retirement as the conveyance did not significantly affect the depletion rate of the properties.
During 2008, the Company entered into an agreement to divest its 50% interest in the Peregrino field, offshore Brazil, and certain related assets. The Peregrino divestiture closed in December 2008. Anadarko received approximately $1.4 billion in net after-tax cash proceeds from the sale, recognizing a gain of approximately $800 million. In connection with the sale of its interest in the Peregrino field, Anadarko may receive contingent consideration in future periods. Contingent consideration is based on the value of oil produced from properties subject to the sale transaction. The Company has not recorded any amounts for this contingent consideration. Additionally, the Company has cash on deposit with the Brazilian federal court pending a decision regarding the appropriate rate of tax on the sale of the Peregrino field.
The 2007 gains included $4.1 billion related to the divestiture of certain oil and gas properties and $0.6 billion related to the divestiture of certain gathering and processing facilities.
In 2008, gains (losses) on divestitures and other, net included a net $82 million ($52 million after tax) reduction related to corrections resulting from analysis of property records after the adoption of the successful efforts method of accounting. This net amount included a reduction of $163 million related to 2007. Management
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
2. Divestitures and Other (Continued)
concluded that this misstatement was not material relative to 2007 interim and annual results, or to the 2008 periods, and corrected the error in the first quarter of 2008.
Discontinued Operations In November 2006, Anadarko sold its wholly owned subsidiary, Anadarko Canada Corporation. The results of Anadarko’s Canadian operations have been classified as discontinued operations in the consolidated statements of income and cash flows for 2008 and 2007 primarily related to adjustments to an indemnity obligation provided by the Company to the purchaser, as well as expenses associated with finalizing exit activities. See Note 14.
Severance and Asset-Realignment Expenses During 2007, general and administrative expense included charges of $85 million associated with employee severance and benefits arising from the Company’s post-acquisition asset-realignment and restructuring efforts initiated in the fourth quarter of 2006. These expenses were not material in 2008 or 2009.
During 2007, oil and gas operating expense included charges of $20 million for employee-related severance costs associated with field operations. At December 31, 2008, there was no remaining liability.
3. Noncontrolling Interest
During the second quarter of 2008, Western Gas Partners, LP (WES) completed its initial public offering of 20.8 million common units (representing a 38.4% limited partner interest) for net proceeds of $321 million ($343 million less $22 million for underwriting discounts and structuring fees). WES is a limited partnership formed by Anadarko to own, operate, acquire and develop midstream assets. Anadarko contributed assets to WES in exchange for an aggregate 59.6% initial limited partner interest (consisting of common and subordinated limited partner units) in WES, a 2% general partner interest and incentive distribution rights (IDRs). IDRs entitle the holder to specified increasing percentages of cash distributions as WES’s per-unit cash distributions increase. In addition, Anadarko maintains control over the assets owned by WES through ownership of the general partner. Proceeds from the offering were used to reduce debt.
All proceeds from the sale of the common units to the public is reported as noncontrolling interests in the consolidated balance sheet, including $29 million that will be transferred to paid-in capital if and when the WES subordinated units convert to common units. The results of operations and financial position of WES are included in the consolidated financial statements of Anadarko. The portion of WES’ results of operations that is attributable to common units held by the public (units not held by Anadarko) is recorded as noncontrolling interests.
In December 2009, WES issued 6.9 million common units representing limited partner interests to the public. This offering raised proceeds of approximately $120 million and was recorded as noncontrolling interests. Anadarko holds an aggregate 54.8% limited partner interest in WES as of December 31, 2009.
4. Inventories
The major classes of inventories, which are included in other current assets, are as follows:
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
5. Properties and Equipment
A summary of the cost of properties and equipment by function follows:
During 2009, the Company recognized total impairments of $41 million related to long-lived assets. This includes $22 million related to the oil and gas exploration and production operating segment, which was triggered by the current economic and commodity price environment. In addition, certain midstream operating segment assets were impaired by $7 million due to reduced operating activity, and an LNG facility site, included in the marketing operating segment, was impaired by $12 million. All assets were impaired to fair value resulting in Level 3 measurements, and, along with current-year depreciation, reduced the net book value to $26 million.
During 2008 and 2007, the Company recognized impairments of $211 million and $51 million, respectively. Impairments in 2008 included $113 million associated with United States properties included in the oil and gas exploration and production operating segment, and $98 million associated with certain gathering and processing facilities in the United States included in the midstream operating segment. These impairments resulted primarily from lower commodity prices at year-end 2008.
Suspended Exploratory Drilling Costs If an exploratory well provides evidence as to the existence of sufficient quantities of hydrocarbons to justify potential completion as a producing well, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas (generally, deepwater and international locations) depending upon, among other things, the amount of hydrocarbons discovered, the outcome of planned geological and engineering studies, the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan and, the requirement for government sanctioning in certain international locations before proceeding with development activities.
At the end of each quarter, management reviews the status of all suspended exploratory drilling costs in light of ongoing exploration activities - in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, any associated suspended exploratory drilling costs are expensed in that period.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
5. Properties and Equipment (Continued)
The following table presents the amount of suspended exploratory drilling costs relating to continuing operations at December 31 for each of the last three years, and changes in those amounts during the years then ended. The table excludes amounts capitalized and subsequently reclassified to proved oil and gas properties or charged to expense in the same year.
The following table presents the total amount of suspended exploratory drilling costs as of December 31, 2009 by geographic area, including the year the costs were originally incurred.
Well costs that have been suspended for longer than one year are associated with eight projects. The majority of these costs is associated with deepwater Gulf of Mexico projects and is suspended pending the completion of an economic evaluation including, but not limited to, results of additional appraisal drilling, facilities, infrastructure, well-test analysis, additional geological and geophysical data and approval of a development plan. The international projects with costs suspended for longer than one year are primarily suspended pending the results of additional appraisal drilling, which is currently ongoing. Management believes these projects with suspended exploratory drilling costs exhibit sufficient quantities of hydrocarbons to justify potential development and is actively pursuing efforts to assess whether reserves can be attributed to their respective areas. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time.
6. Investments
Noncontrolling Mandatorily Redeemable Interests In 2007, Anadarko contributed certain of its oil and gas properties ($1.0 billion fair value at date of contribution) and gathering and processing assets ($1.9 billion fair value at date of contribution), to newly formed unconsolidated entities in exchange for noncontrolling mandatorily redeemable interests. The common equity of the investee entities is 95% owned by third parties that
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
6. Investments (Continued)
also maintain operational control over the assets. Distributions to the interest holders, including Anadarko, are payable quarterly. Subsequent to their formation, the investee entities loaned Anadarko an aggregate of $2.9 billion. These loans were funded through third-party equity contributions to the investee entities. The Company accounts for its investment in these entities under the equity method of accounting. Anadarko has legal right of setoff and intends to net-settle its obligations under each of the notes payable to the investees and the distributable fair value of its interest in the corresponding investee entity. Accordingly, the investments and the obligations are presented net on the consolidated balance sheet with the excess of the notes payable to investee entities over the aggregate investment carrying amounts included in other long-term liabilities-other for all periods presented.
The noncontrolling mandatorily redeemable interests entitle Anadarko to a LIBOR-based preferred return on the value of the contributed assets plus a common return consisting of a 5% participation in profits, losses and any residual value of the investee entities. At December 31, 2009, the priority return rates applicable to Anadarko’s interests were 0.78% for Anadarko’s interest in the oil and gas investee entity and 0.70% for Anadarko’s interests in gathering and processing investee entities. Anadarko’s interest in these entities also provides the Company with limited consent rights with respect to certain matters, such as acquisition and disposition of assets and incurrence of debt. Anadarko may redeem its noncontrolling interests, and the owners of the controlling interests may cause a redemption of Anadarko’s interests, in 2022 and thereafter. Anadarko’s interests are mandatorily redeemable in 2037.
The notes issued by Anadarko have 35-year terms and variable LIBOR-based interest rates that fluctuate with Anadarko’s credit rating. At December 31, 2009, the applicable interest rate for all above-described notes was 1.25%. Interest on the notes is due quarterly, while principal is due at maturity, subject to the net-settlement provisions. The notes are equal in seniority to Anadarko’s other unsecured unsubordinated indebtedness. The note with the oil and gas entity contains a maximum 67% debt-to-capitalization covenant. Proceeds from the notes were used to repay a portion of Anadarko’s indebtedness related to its 2006 acquisitions. Anadarko recognized gains of approximately $443 million and $300 million on the exchange with the oil and gas investee entity and the gathering and processing investee entities, respectively, in 2007.
At December 31, 2009, the carrying amount of these investments was $2.8 billion, while the carrying amount of notes payable to the investee entities was $2.9 billion. Other (income) expense for 2009, 2008 and 2007 included interest expense on the notes payable to the investee entities of $57 million, $123 million and $102 million, respectively, and equity in earnings from Anadarko’s investments in the investee entities of $(42) million, $(89) million and $(98) million, respectively.
Midstream Financing Arrangement As further discussed in Note 10, in December 2007, Anadarko and an entity formed by a group of unrelated third-party investors (the Investor) formed Trinity Associates LLC (Trinity). Trinity was initially capitalized with a $100 million cash contribution from Anadarko in exchange for Class A member and managing member interests in Trinity and a $2.2 billion cash contribution from the Investor in exchange for a Class B member cumulative preferred interest. Trinity invested $100 million in a U.S. Government securities money market fund and loaned $2.2 billion to a wholly owned subsidiary of Anadarko, Midstream Holding. The Company used all of the loan proceeds received by Midstream Holding to repay a portion of the Company’s indebtedness related to the 2006 acquisitions. See Note 10 for additional information about the Midstream Subsidiary Note Payable to a Related Party.
Through its Class A member and managing member interests, Anadarko has significant influence over Trinity and accounts for its investment in Trinity under the equity method of accounting. Trinity’s earnings, which consist primarily of interest income from the Midstream Holding note and the government money market fund investment, are to be allocated first to the Investor’s Class B member interest until its cumulative preferred return is satisfied, with the remaining earnings allocated to Anadarko’s Class A member interest. Anadarko
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
6. Investments (Continued)
absorbs first-dollar losses of Trinity, if any, until its Class A member capital account in Trinity is reduced to zero. As of December 31, 2009, the carrying amount of Anadarko’s investment in Trinity was $100 million and is included in other assets. Investment earnings are included in other (income) expense and were not material.
Other During the fourth quarter of 2008, Anadarko changed the method of accounting for its investment in Petroritupano, S.A. (Petroritupano), a Venezuelan mixed company, to the cost method. The Company determined that it was no longer appropriate to account for the investment under the equity method. At December 31, 2009 and 2008, the Company’s investment in Petroritupano is included in other assets.
7. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by segment for 2009 and 2008 are as follows:
During 2008, the carrying amount of goodwill increased $327 million largely attributable to revisions in estimates of deferred tax liabilities recorded upon the acquisitions of Kerr-McGee Corporation (Kerr-McGee) and Western Gas Resources, Inc. (Western). None of Anadarko’s goodwill is deductible for tax purposes.
Intangible assets subject to amortization at December 31, 2009 and 2008 are as follows:
Costs associated with acquired drilling contract intangibles were initially capitalized as intangible assets. Amortization of these costs is recorded to oil and gas properties as exploratory and development drilling costs and ultimately expensed through depletion. In 2009, 2008 and 2007, $2 million, $35 million and $81 million,
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
7. Goodwill and Other Intangible Assets (Continued)
respectively, of drilling contract intangible value was amortized and recorded to oil and gas properties. Drilling contract intangibles relate to the Company’s oil and gas exploration and production operating segment.
The Company recognized impairments of $74 million, $12 million and zero for 2009, 2008 and 2007, respectively, related to certain transportation contracts included in intangible assets due to changes in price differentials at specific locations. These assets were impaired to fair value, determined using a discounted cash flow approach, which incorporates market-based inputs that represent a Level 2 fair-value measurement. Amortization expense for the transportation contracts was $13 million, $26 million and $28 million for 2009, 2008 and 2007, respectively. The transportation contract impairments and amortization relate to the marketing operating segment.
Costs associated with offshore platform leases were capitalized as intangible assets. Amortization expense for the offshore platform lease intangibles was $2 million, $7 million and $19 million for 2009, 2008 and 2007, respectively. Offshore platform lease intangibles relate to the Company’s oil and gas exploration and production operating segment.
The estimated aggregate amortization expense for all intangible assets for the next five years is $3 million, $5 million, $6 million, $1 million, and $1 million, respectively.
8. Derivative Instruments
Objective and Strategy The Company is exposed to commodity price and interest-rate risk, and management considers it prudent to periodically reduce the Company’s exposure to cash flow variability resulting from commodity price changes and interest-rate fluctuations. Accordingly, the Company enters into certain derivative instruments in order to manage its exposure to these risks.
Futures, swaps and options are used to manage the Company’s cash flow exposure to commodity price risk inherent in the Company’s oil and gas production and gas-processing operations (Oil and Gas Production/Processing Derivative Activities). Futures contracts and commodity swap agreements are used to fix the price of expected future oil and gas sales at major industry trading locations, such as Henry Hub, Louisiana for gas and Cushing, Oklahoma for oil. Basis swaps are used to fix or float the price differential between the product price at one market location versus another. Options are used to establish a floor and a ceiling price (collar) for expected future oil and gas sales. Derivative instruments are also used to manage commodity price risk inherent in customer pricing requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).
The Company may also enter into physical-delivery sales contracts to manage cash flow variability. These contracts call for the receipt or delivery of physical product at a specified location and price, which may be fixed or market-based.
Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to mitigate the Company’s existing or anticipated exposure to unfavorable interest-rate changes.
The Company does not apply hedge accounting to any of its derivative instruments. The application of hedge accounting was discontinued by the Company for periods beginning on or after January 1, 2007. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings in future periods as the economic transactions to which the derivatives relate are recorded in earnings.
The accumulated other comprehensive loss balances related to commodity derivatives at December 31, 2009 and December 31, 2008, were $10 million ($7 million after tax) and $22 million ($14 million after tax), respectively. The accumulated other comprehensive loss balances related to interest-rate derivatives at
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
8. Derivative Instruments (Continued)
December 31, 2009 and December 31, 2008, were $141 million ($89 million after tax) and $163 million ($104 million after tax), respectively.
Oil and Gas Production/Processing Derivative Activities Below is a summary of the Company’s derivative instruments related to its oil and gas production as of December 31, 2009. The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below reflect a combination of NYMEX Cushing and London Brent Dated prices.
MMBtu-million British thermal units
MMBtu/d-million British thermal units per day
MBbls/d-thousand barrels per day
A three-way collar is a combination of three options: a sold call, a purchased put and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (i.e., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.
Marketing and Trading Derivative Activities In addition to the positions in the above tables, the Company also engages in marketing and trading activities, which include physical product sales and derivative transactions entered into to reduce commodity price risk associated with certain physical product sales. At December 31, 2009 and December 31, 2008, the Company had outstanding physical transactions for 46 billion cubic feet (Bcf) and 51 Bcf, respectively, offset by derivative transactions for 17 Bcf and 34 Bcf, respectively, for net positions of 29 Bcf and 17 Bcf, respectively.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
8. Derivative Instruments (Continued)
Interest-Rate Derivatives As discussed in Note 10, during 2009, Anadarko issued fixed-rate senior notes in the aggregate principal amount of $2.0 billion. In advance of certain of these debt issuances, Anadarko entered into derivative financial instruments, effectively hedging the U.S. Treasury portion of the coupon rate on a portion of this debt. These derivative instruments were settled concurrently with the associated debt issuances, resulting in a realized loss of $16 million for the year ended December 31, 2009, reflected in (gains) losses on other derivatives, net.
As of December 31, 2009, the Company had scheduled debt maturities of approximately $3.5 billion in 2011 and 2012. In anticipation of refinancing a portion of these maturing debt obligations, in December 2008 and January 2009 Anadarko entered into interest-rate swap agreements to hedge a portion of the fixed interest rate it would pay on an aggregate notional principal amount of $3.0 billion, over a reference term of either 10 years or 30 years, beginning in 2011 and 2012. The swap instruments include a provision that requires both the termination of the swaps and cash settlement in full at the start of the reference period. A summary of the swaps detailing the outstanding notional principal amounts and the associated reference periods is shown in the table below.
Increases in the reference U.S. Treasury rates since contract inception have increased the value of this swap portfolio to Anadarko, the fixed-rate payor. During the second quarter of 2009, the Company revised the contractual terms of this swap portfolio to increase the weighted-average interest rate it is required to pay from approximately 3.25% to approximately 4.80%, and realized $552 million in cash. This realized gain was recorded to (gains) losses on other derivatives, net, as were unrealized gains of $57 million, for the year ended December 31, 2009, which were attributable to further fair-value changes of the Company’s swap portfolio.
The Company’s interest-rate derivative positions outstanding as of December 31, 2009, are as follows:
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
8. Derivative Instruments (Continued)
Effect of Derivative Instruments-Balance Sheet The fair value of all oil and gas and interest-rate derivative instruments not designated as hedging instruments (including physical-delivery sales contracts) is included in the table below.
Effect of Derivative Instruments-Statement of Income The unrealized and realized gain or loss amounts and classification related to derivative instruments not designated as hedging instruments are as follows:
* Represents the effect of marketing and trading derivative activities.
The unrealized gain or loss amounts and classification related to derivative instruments included in the table above not designated as hedging instruments are as follows:
Credit-Risk Considerations The financial integrity of exchange-traded contracts are assured by NYMEX or the Intercontinental Exchange through their systems of financial safeguards and transaction guarantees and are subject to nominal credit risk. Over-the-counter traded swaps, options and futures contracts expose the Company
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
8. Derivative Instruments (Continued)
to counterparty credit risk. The Company monitors the creditworthiness of each of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact, if any, of counterparties’ creditworthiness on fair value. The Company has the ability to require cash collateral or letters of credit to mitigate credit-risk exposure. The Company also routinely exercises its contractual right to net realized gains against realized losses when settling with its counterparties.
The Company’s net asset derivatives recorded at fair value on the balance sheet include amounts attributable to agreements entered into with financial institutions. Approximately $442 million of the Company’s $495 million gross derivative asset balance at December 31, 2009 was attributable to open positions with financial institutions. The Company has netting and setoff agreements with each of these counterparties, which permit the net settlement of these gross derivative assets against gross derivative liabilities with this same group of counterparties. As of December 31, 2009, $321 million of the Company’s $541 million gross derivative liability balance is permitted to offset the gross derivative asset balance. The table below includes the financial impact of our netting arrangements on the fair value of the Company’s outstanding derivative positions.
Certain of the Company’s derivative instruments contain provisions requiring either full or partial collateralization of the Company’s obligations, or the immediate settlement of all such obligations in the event of a downgrade in the Company’s credit rating to a level below investment grade from major credit rating agencies. The aggregate fair value of all derivative instruments with credit-risk-related contingent features for which a net liability position existed on December 31, 2009 was $146 million. This amount represents the amount that the Company would have to either collateralize or cash settle in the event the Company’s credit rating was downgraded to a level below investment grade and the credit-risk-related features of such instruments were exercised.
Fair Value The fair value of commodity-futures contracts are based on inputs that are quoted prices in active markets for identical assets or liabilities, resulting in Level 1 categorization of such measurements. The valuation of physical-delivery purchase and sale agreements, over-the-counter financial swaps and three-way collars are based on similar transactions observable in active markets or industry-standard models that primarily rely on market-observable inputs. Substantially all of the assumptions for industry-standard models are observable in active markets throughout the full term of the instrument. Therefore, the Company categorizes these measurements as Level 2.
The following tables set forth, by level within the fair-value hierarchy, the fair value of the Company’s financial assets and liabilities.
December 31, 2009
(1) Represents the impact of netting assets, liabilities and collateral with counterparties with which the right of setoff exists. Cash collateral held by counterparties from Anadarko was $105 million at December 31, 2009. Anadarko held no cash collateral from counterparties at December 31, 2009.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
8. Derivative Instruments (Continued)
December 31, 2008
(1) Represents the impact of netting assets, liabilities and collateral with counterparties with which the right of setoff exists. Cash collateral held by counterparties was $10 million at December 31, 2008. Cash collateral held by Anadarko from counterparties was $3 million at December 31, 2008.
9. Asset Retirement Obligations
The majority of Anadarko’s asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The following table provides a rollforward of the asset retirement obligations. Liabilities settled include settlement payments for obligations as well as obligations that were assumed by the purchasers of divested properties. Revisions to estimated liabilities during the period relate primarily to changes in estimates of asset retirement costs and include, but are not limited to, revisions of estimated inflation rates, changes in property lives and the expected timing of settling asset retirement obligations.
At December 31, 2009 and 2008, long-term asset retirement obligations of $1.4 billion were included in other long-term liabilities.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
10. Debt and Interest Expense
The fair value of debt is the estimated amount the Company would have to pay to repurchase its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available.
Except for Anadarko’s Midstream Subsidiary Note Payable to a Related Party (see following discussion), none of the Company’s notes, debentures or credit agreements contain credit-rating-downgrade triggers that result in accelerating debt maturity. All of the Company’s debt, with the exception of the WES credit facility, is senior unsecured debt of the Company. As of December 31, 2009, the Company had approximately $340 million in undrawn letters of credit.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
10. Debt and Interest Expense (Continued)
The net unamortized debt discount, represented in the previous table, of $1.8 billion as of December 31, 2009 and 2008 is being amortized to interest expense over the terms of the related debt. See Note 6 for Anadarko’s notes payable to certain investees that do not affect the reported debt balance.
The following table presents the debt activity of the Company for 2009 and 2008.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
10. Debt and Interest Expense (Continued)
In October 2006, the Company received $500 million of proceeds from a private offering of Zero-Coupon Senior Notes due 2036 with an aggregate principal amount at maturity of $2.4 billion. The Company presents the note in long-term debt. The carrying amount as of December 31, 2009 includes $30 million, $28 million and $28 million related to accretion expense recognized in 2009, 2008 and 2007, respectively. The notes were issued with a yield to maturity of 5.24%, and the holder has an option to put the notes back to the Company annually, starting in 2010, at the accreted value, which approximates carrying value. If the put option is exercised in 2010, the Company intends to refinance the debt under its Revolving Credit Agreement (RCA).
Midstream Subsidiary Note Payable to a Related Party In December 2007, Anadarko and the Investor formed Trinity, with initial capitalization totaling $2.3 billion. Note 6 provides additional information regarding Anadarko’s interest in Trinity. Trinity extended a $2.2 billion loan to a wholly owned subsidiary of Anadarko, referred to herein as Midstream Holding, which holds and operates substantially all of Anadarko’s midstream assets, directly and through its subsidiaries. The Company used all of the loan proceeds received by Midstream Holding to repay a portion of the Company’s indebtedness related to the 2006 acquisitions.
The principal balance owed by Midstream Holding to Trinity is reflected in the accompanying consolidated balance sheet as Midstream Subsidiary Note Payable to a Related Party. The loan has an initial maturity date of December 27, 2012, subject to renewals for additional five-year periods on market terms at the time of renewal. Interest on the loan is based on three-month LIBOR plus a margin. The rate in effect at the beginning of 2010 is 1.32%.
Midstream Holding may repay the loan in whole or in part at any time prior to maturity. In December 2008, Anadarko provided a parental guaranty for the payment of principal and interest on the remaining balance of the Midstream Subsidiary Note Payable to a Related Party in exchange for the removal of various covenants in the loan agreement, including a ceiling on the maximum ratio of debt-to-earnings before interest, taxes, depreciation and amortization as defined in the loan agreement. Midstream Holding was in compliance with all previously existing covenants as of the date the Anadarko parental guaranty was provided. The amended loan agreement requires customary representations and warranties and affirmative and negative covenants, and includes the same financial covenants as the RCA discussed below. The Midstream Subsidiary Note Payable to a Related Party has the same priority with respect to the payment of principal and interest as Anadarko’s other debt.
Following a sale or transfer of assets to third parties or other entities within the Anadarko consolidated group, Midstream Holding and/or its subsidiaries will be required to repay a portion of the loan principal. Further, maturity of the loan could be accelerated if Anadarko’s senior unsecured credit rating were to be rated below “BB-” by Standard and Poor’s (S&P) or “Ba3” by Moody’s Investors Service (Moody’s). As of December 31, 2009, the Company was in compliance with all covenants, and S&P and Moody’s rated the Company’s debt at “BBB-” and “Baa3”, respectively.
Anadarko Revolving Credit Agreement In March 2008, the Company entered into a $1.3 billion, five-year RCA with a syndicate of United States and foreign lenders. Under the terms of the RCA, the Company can, under certain conditions, request an increase in the borrowing capacity under the RCA up to a total available credit amount of $2.0 billion. The RCA has a maximum 65% debt-to-capitalization covenant. The RCA terminates in March 2013. As of December 31, 2009, the Company had no outstanding borrowings under the RCA. Anadarko was in compliance with existing covenants and the full amount of the RCA was available for borrowing at December 31, 2009.
WES Revolving Credit Facility In October 2009, Anadarko’s consolidated subsidiary, WES, entered into a three-year senior unsecured revolving credit facility (RCF) with a group of banks. The aggregate initial commitments of the lenders under the RCF are $350 million and are expandable to a maximum of $450 million.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
10. Debt and Interest Expense (Continued)
The RCF matures in October 2012. The RCF contains various customary covenants including a limitation on debt to earnings before interest, taxes, depreciation and amortization and a minimum interest coverage requirement. As of December 31, 2009, WES had no outstanding borrowings under the RCF. WES was in compliance with existing covenants at December 31, 2009.
Scheduled Maturities Total maturities related to debt for the five years ending December 31, 2014 are shown below.
Interest Expense The following table summarizes the amounts included in interest expense.
(1) Included in 2009 is the reversal of the $78 million liability for unpaid interest related to the DWRRA dispute. See Note 14.
(2) Included in 2008 is additional capitalized interest related to a prior period of $16 million.
See Note 6 for interest expense incurred on certain notes payable to unconsolidated affiliates which is reported in other (income) expense.
11. Stockholders’ Equity
Common Stock In August 2008, the Company announced a $5 billion share-repurchase program under which shares may be repurchased either in the open market or through privately negotiated transactions. The program is authorized to extend through August 2011 and replaced the $1 billion stock-buyback program authorized in 2005. The repurchase program does not obligate Anadarko to acquire any specific number of shares and may be discontinued at any time. During 2008, Anadarko purchased 10 million shares of common stock for $600 million under the program through purchases in the open market and under share-repurchase agreements. During 2009 and 2007, no shares were repurchased under the programs in effect at those times.
In May 2009, Anadarko completed a public offering of 30 million shares of common stock at $45.50 per share. After deducting the underwriting discount and other offering costs of $28 million, net proceeds to the Company were approximately $1.3 billion. Net proceeds from the offering were used for general corporate purposes, including capital expenditures.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
11. Stockholders’ Equity (Continued)
The changes in the Company’s shares of common stock are as follows:
The number of shares of common stock issued and outstanding presented in the table above excludes 4 million shares held by the Anadarko Petroleum Corporation Executives and Directors Benefits Trust, a grantor trust associated with the Company’s obligations under certain of its pension and deferred-compensation plans.
For all periods presented, quarterly dividends of nine cents per share were paid to holders of common stock. As of December 31, 2009, the covenants contained in certain of the Company’s credit and lease agreements provided for a maximum debt-to-capitalization ratio of 65%. The covenants do not specifically restrict the payment of dividends; however, the impact of dividends paid on the Company’s debt-to-capitalization ratio must be considered in order to ensure covenant compliance. Based on these covenants, as of December 31, 2009, retained earnings of approximately $13.3 billion were not limited as to the payment of dividends.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
11. Stockholders’ Equity (Continued)
The reconciliation between basic and diluted EPS from continuing operations attributable to common stockholders is as follows:
All prior-period EPS data presented above have been adjusted retrospectively to conform to the requirements of a new accounting standard, which addresses whether instruments granted in share-based payment transactions constitute participating securities. For 2009, basic EPS was not impacted by the two-class method because the Company’s participating securities are not obligated to share in the losses of the Company, and diluted EPS was not impacted because the inclusion of these securities would have had an anti-dilutive effect. Basic and diluted EPS, as previously reported, decreased $0.08 and $0.06, respectively, in 2008 and decreased $0.08 and $0.06, respectively, in 2007 under the two-class method.
For 2009, 2008 and 2007, awards for 14.2 million, 7.6 million and 6.6 million average shares, respectively, of common stock were excluded from the diluted EPS calculation because the inclusion of these shares would have had an anti-dilutive effect.
See Note 12 for information related to common stock issued under stock-based compensation plans.
Preferred Stock In the second quarter of 2008, Anadarko redeemed and subsequently retired its 5.46% Series B Cumulative Preferred Stock for $45 million. Holders of the shares were entitled to receive, when and as declared by the Board of Directors, cumulative cash dividends at an annual rate of $5.46 per share.
Dividends of $27.30 per share for 2008 and $54.60 per share for 2007 (equivalent to $2.73 and $5.46, respectively, per Depositary Share) were paid to holders of preferred stock.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
12. Stock-Based Compensation
The Company generally issues new shares to satisfy employee share-based payment plans. At December 31, 2009, 24 million shares of the 35 million shares of Anadarko common stock originally authorized for awards under the active share-based compensation plans remain available for future issuance. The number of shares available is reduced by awards granted. A summary of stock-based compensation cost is presented below:
For 2009, 2008 and 2007, $12.3 million, $9.4 million and $23.4 million, respectively, in excess tax benefits were included in cash flow from financing activities. Cash received from stock option exercises for 2009, 2008 and 2007 was $22.3 million, $14.1 million and $88.7 million, respectively.
Equity-Classified Awards
Stock Options Certain employees may be granted options to purchase shares of Anadarko common stock with an exercise price equal to, or greater than, the fair market value of Anadarko common stock on the date of grant. These stock options vest over service periods ranging from three to four years and will terminate at the earlier of seven years from the date of grant or the date of exercise.
Nonemployee directors may be granted nonqualified stock options with an exercise price equal to the fair market value of Anadarko common stock on the date of grant. These stock options vest over a one-year service period from the date of grant and terminate at the earlier of ten years from the date of grant or the date of exercise.
The fair value of stock option awards is determined using the Black-Scholes option-pricing model. The expected life of the option is estimated based upon historical exercise behavior. The expected forfeiture rate is estimated based upon historical forfeiture experience. The volatility assumption was estimated based upon expectations of volatility over the life of the option as measured by historical and implied volatility. The risk-free interest rate was based on the U.S. Treasury rate for a term commensurate with the expected life of the option. The dividend yield was based upon a 12-month average dividend yield. The Company used the following weighted-average assumptions to estimate the fair value of stock options granted during 2009, 2008 and 2007.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
12. Stock-Based Compensation (Continued)
A summary of stock option activity for the year ended December 31, 2009 is presented below:
The weighted-average grant-date fair value of stock options granted during 2009, 2008 and 2007 was $15.23, $13.93 and $16.51, respectively, using the Black-Scholes option-pricing model. The total intrinsic value of stock options exercised during 2009, 2008 and 2007 was $24.3 million, $12.5 million and $78.9 million, respectively, based on the difference between the market price at the exercise date and the option price. As of December 31, 2009, there was $64.2 million of total unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 2.1 years.
Restricted Stock Certain employees may be granted restricted stock in the form of restricted stock awards or restricted stock units. Restricted stock is subject to forfeiture restrictions and cannot be sold, transferred or disposed of during the restriction period. The holders of restricted stock awards have the same rights as a stockholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares. A restricted stock unit is equivalent to a restricted stock award except that unit holders receive cash dividend equivalents during the restriction period and do not have the right to vote the units. Restricted stock vests over service periods ranging from the date of grant up to four years and is not considered issued and outstanding until it vests.
Nonemployee directors are granted deferred shares that are held in a grantor trust by the Company and become payable when the director ceases to serve on the Board of Directors.
A summary of restricted stock activity for the year ended December 31, 2009 is presented below:
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
12. Stock-Based Compensation (Continued)
The weighted-average grant-date fair value of restricted stock granted during 2008 and 2007 was $61.20 and $52.53, respectively. The total fair value of restricted shares vested during 2009, 2008 and 2007 was $122.0 million, $110.3 million and $119.1 million, respectively, based on the market price at the vesting date. As of December 31, 2009, there was $126.2 million of total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted-average period of 1.6 years.
Performance-Based Share Awards Key officers of the Company were provided Performance Unit Award Agreements in 2004, 2005 and 2006 with three-year performance periods ending December 2007, 2008 and 2009, respectively. The number of shares of common stock to be issued was determined based on a market objective and a performance objective, with both objectives equally weighted. The number of shares of common stock to be issued with respect to the market objective was determined by comparing the Company’s total shareholder return to the total shareholder return of a predetermined group of peer companies over the performance period. The number of shares of common stock to be issued with respect to the performance objective was determined based on the Company’s return on capital over the performance period. The fair value per share for the performance-based objective is $31.54, $47.14 and $49.86 for the agreements related to the three-year periods ending December 2007, 2008 and 2009, respectively. The table below summarizes these awards:
(1) No shares were issued to current key officers. Shares shown as issued reflect shares issued to certain key officers whose employment with the Company terminated prior to the end of the performance period and the determination of actual performance.
(2) In November 2007, the Company cancelled, without value and with the consent of the key officers, the outstanding 2005 and 2006 Performance Unit Award Agreements.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
12. Stock-Based Compensation (Continued)
In November 2007, in place of the cancelled awards, two new Performance Unit Award Agreements were provided to key officers. The number of shares of common stock awarded under these agreements is based solely on a comparison of the Company’s total shareholder return to the total shareholder return of a predetermined group of peer companies over performance periods ranging from one to three years. The table below summarizes these awards:
(1) Recognized incremental compensation cost of $7 million attributable to the modification of the cancelled awards.
(2) No shares of common stock were issued to current key officers. Shares shown as issued reflect shares issued to certain key officers whose employment with the Company terminated prior to the end of the performance period and the determination of actual performance.
(3) During 2010, 336,865 shares were awarded to current key officers for the performance periods that ended December 2009.
As of December 31, 2009, there was $2.6 million of total estimated unrecognized compensation cost related to performance-based share awards, which is expected to be recognized over a weighted-average period of one year.
Liability-Classified Awards
Value Creation Plan As a part of its employee compensation program, the Company offers an incentive compensation program that generally provides non-officer employees the opportunity to earn cash bonus awards based on the Company’s total shareholder return for the year, compared to the total shareholder return of a predetermined group of peer companies. As of December 31, 2009, the Company has accrued approximately $105 million for the 2009 performance period.
Performance-Based Unit Awards In November 2008 and 2009, key officers of the Company were provided Performance Unit Award Agreements with a two-year performance period ending December 31, 2010 and 2011, respectively, and a three-year performance period ending December 31, 2011 and 2012, respectively. The vesting of these units is based solely on comparing the Company’s total shareholder return to the total shareholder return of a predetermined group of peer companies over the specified performance period. Each performance unit represents the value of one share of the Company’s common stock. At the end of each performance period, the value of the vested performance units, if any, will be paid in cash. As of December 31, 2009, the liability under Performance Unit Award Agreements was $16.7 million, and there was $38.4 million of total estimated unrecognized compensation cost related to these awards, which is expected to be recognized over a weighted-average period of two years.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
13. Commitments
Leases The Company has $2.5 billion in long-term drilling rig commitments that satisfy operating lease criteria. The Company also has various commitments under noncancelable operating lease agreements of $0.9 billion for production platforms and equipment, buildings, facilities and aircraft. These operating leases expire at various dates through 2024. Certain of these operating leases contain residual value guarantees at the end of the lease term; however, at December 31, 2009, no material liabilities were accrued for these guarantees. At December 31, 2009, future minimum lease payments under existing operating leases are as follows:
Total rent expense, net of sublease income, amounted to $188 million in 2009, $226 million in 2008 and $229 million in 2007. Total rent expense includes contingent rent expense related to processing fees of $39 million, $32 million and $6 million in 2009, 2008 and 2007, respectively.
Drilling Rig Commitments Anadarko has entered into various agreements to secure a portion of the drilling rigs necessary to execute its drilling plans over the next several years. The table of future minimum lease payments above includes approximately $2.3 billion related to 5 offshore drilling vessels and $186 million related to certain contracts for onshore United States drilling rigs. The portion of these lease payments associated with exploratory wells and development wells, net of amounts billed to partners, will initially be capitalized as a component of oil and gas properties, and either depreciated in future periods or written off as exploration expense.
Production Platforms During 2004, Anadarko and a group of energy companies (Atwater Valley Producers Group) executed agreements with third parties for the dedication, processing and gathering of natural-gas and condensate production from several natural-gas fields in the deepwater Gulf of Mexico. Third parties constructed and own Independence Hub, a semi-submersible platform in the deepwater Gulf of Mexico. Anadarko became operator of the platform structure upon mechanical completion in 2007.
The table of future minimum lease payments above includes $72 million related to the monthly demand charges due under the above-described agreements. The agreements do not contain any purchase options, purchase obligations or value guarantees.
Spar Platform and Production Vessel Leases Anadarko has operating leases related to certain spar platforms in the Gulf of Mexico and a floating production, storage and offloading vessel in China. The table of future minimum lease payments above includes approximately $450 million for these agreements. These agreements also contain residual value guarantees totaling $37 million at the end of the lease periods.
Buildings The table of future minimum lease payments above includes the Company’s lease payment obligations of $99 million related to office building leases, including the corporate office building located in Denver, Colorado. In December 2009, the Company exercised its purchase option under a lease covering two
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
13. Commitments (Continued)
corporate office buildings in The Woodlands, Texas (The Woodlands lease). The Woodlands lease contained various covenants including covenants regarding the Company’s financial condition. The Company was in compliance with these covenants at the time it exercised its purchase option.
Aircraft The table of future minimum lease payments above includes the Company’s lease payment obligations of $11 million related to aircraft leases. Some of these leases provide for a residual value guarantee for any deficiency resulting from a sale of aircraft for less than the sale option amount (approximately $31 million in the aggregate). In addition, the Company is entitled to any proceeds from a sale of an aircraft in excess of the sale option amount.
Other Equipment Leases Included in the table of future minimum lease payments above are lease payments of approximately $243 million related to equipment associated with various gas gathering and processing systems. In the event the Company does not purchase the equipment at the end of the leases, the Company may be required to make payments in connection with residual value guarantees for a total of up to $54 million.
Other Commitments In the normal course of business, the Company enters into other contractual agreements to purchase natural gas or crude oil, pipeline capacity, storage capacity, utilities and other services. Aggregate future payments under these contracts total $4.3 billion, of which $1.6 billion is expected to be paid in 2010, $890 million in 2011, $560 million in 2012, $311 million in 2013, $154 million in 2014 and $705 million thereafter.
The Company is obligated for approximately 27% of the construction costs of a floating production, storage and offloading vessel (FPSO) that will be used in the Company’s Ghana operations. Construction of the FPSO is expected to be complete in the first half of 2010, and the Company’s share of total construction costs is estimated to be approximately $224 million. At December 31, 2009, the Company has accrued a net liability of $129 million representing Anadarko’s net share of construction costs incurred to date, less amounts funded by Anadarko through loans and other payments to the contractor of approximately $60 million. The Company’s obligation for construction costs is reported net of amounts previously funded as Anadarko has a contractual right to offset collection of the loans made by Anadarko against the Company’s construction cost obligation.
Sale of Future Hard Minerals Royalty Revenues In 2004, the Company conveyed a limited-term non-participating royalty interest, which was carved out of the Company’s existing royalty interests, that entitles a third party to receive future coal and trona royalty revenue over an 11-year period. Additionally, the third party is entitled to receive 5% of the aggregate royalties earned during the first ten years of the agreement that exceed $400 million. The specified cumulative future amount that the third-party investor expects to receive, prior to the 5% of any excess royalties described above, is $100 million. This amount and the payment timing are subject to change based upon the actual royalties received by the Company during the term of the agreement. The third party relies solely on royalty payments to recover its investment; therefore, the third party bears the risk associated with the royalties being insufficient to recover the original investment over the term of the agreement.
Proceeds from this transaction were accounted for as deferred revenues and classified as liabilities on the balance sheet. The deferred revenues are amortized to other sales on a unit-of-revenue basis over the term of the agreement. For each of the years 2009, 2008 and 2007, the Company amortized $16 million of deferred revenues to other sales revenues related to this agreement.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
14. Contingencies
General Litigation charges of $24 million, $112 million and $56 million were expensed during 2009, 2008 and 2007, respectively. The Company is a defendant in a number of lawsuits and is involved in governmental proceedings, including, but not limited to, royalty claims, contract claims and environmental claims. The Company has also been named as a defendant in various personal injury claims, including claims by employees of third-party contractors alleging exposure to asbestos, silica and benzene while working at refineries (previously owned by predecessors of acquired companies) located in Texas, California and Oklahoma. While the ultimate outcome and impact on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
Litigation The Company is subject to various claims from its royalty owners in the regular course of business as an oil and gas producer, including disputes regarding measurement, post-production costs and expenses and royalty valuations. The Company was named as a defendant in a case styled U.S. of America ex rel. Harold E. Wright v. AGIP Company, et al. filed in September 2000 in the U.S. District Court for the Eastern District of Texas, Lufkin Division. Kerr-McGee was also named as a defendant in this legal proceeding. This lawsuit generally alleges that the Company, including Kerr-McGee, and other industry defendants knowingly undervalued natural gas in connection with royalty payments on production from federal and Indian lands. Based on the Company’s present understanding of these various governmental and False Claims Act proceedings, the Company believes that it has substantial defenses to these claims and is vigorously asserting such defenses. However, if the Company is found to have violated the False Claims Act, the Company could be subject to a variety of damages, including treble damages and substantial monetary fines. The discovery process is ongoing. The court has entered an order whereby the case will be tried in phases. The claims against the Company have yet to be set for trial. The Company is currently in settlement discussions with the U.S. government in efforts to globally resolve this litigation against Anadarko and Kerr-McGee, as well as any related administrative actions. Management has accrued a liability for only the settlement amount. The Company believes that an additional loss is unlikely to have a material adverse effect on Anadarko’s consolidated financial position, results of operations or cash flows.
Deepwater Royalty Relief Act In 1995, the United States Congress passed the Deepwater Royalty Relief Act (DWRRA) to stimulate exploration and production of oil and natural gas by providing relief from the obligation to pay royalties on certain federal leases located in the deep waters of the Gulf of Mexico. The Company currently owns interests in several deepwater Gulf of Mexico leases granted during the 1996-2000 time period (some originally owned by Kerr-McGee). After the passage of the DWRRA, the Minerals Management Service (MMS), an agency of the Department of the Interior (DOI), inserted price thresholds into leases issued in 1996, 1997 and 2000 that effectively eliminated the DWRRA royalty relief if these price thresholds were exceeded. The Company’s 1998 and 1999 leases did not contain price-threshold provisions.
In January 2006, the DOI issued an order (the 2006 Order) to Kerr-McGee Oil and Gas Corporation (KMOG), a subsidiary of Kerr-McGee, to pay oil and gas royalties and accrued interest on KMOG’s deepwater Gulf of Mexico production associated with eight 1996, 1997 and 2000 leases, for which KMOG considered royalties to be suspended under the DWRRA. On March 17, 2006, KMOG filed a lawsuit styled Kerr-McGee Oil and Gas Corp. v. C. Stephen Allred, Assistant Secretary for Land & Minerals Mgt. and the Dept of the Interior (Kerr-McGee v. Allred) in the U.S. District Court for the Western District of Louisiana against the DOI for injunctive and declaratory relief with respect to the DOI’s claims for additional royalties on the eight leases listed in the 2006 Order. In May 2007, KMOG filed a motion for summary judgment with the District Court for the Western District of Louisiana which ruled in favor of KMOG in October 2007. The DOI appealed the decision to the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit). In January 2009, a three-judge Fifth Circuit panel unanimously affirmed the District Court’s ruling in favor of KMOG. At the end of March 2009, the DOI filed a petition for rehearing by the full Fifth Circuit (en banc) which was denied on April 14, 2009. The DOI filed a petition for a writ of certiorari with the U.S. Supreme Court which was denied on October 5, 2009.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
14. Contingencies (Continued)
The MMS issued two additional orders to Anadarko in 2008 and 2009 to pay “past-due” royalties and interest covering several deepwater Gulf of Mexico leases, including certain leases contained in the 2006 Order. Generally, the orders issued in 2008 and 2009 cover time periods not included in the 2006 Order. Anadarko has filed administrative appeals of the 2008 and 2009 orders with the MMS and the appeals are currently stayed pending a final non-appealable judgment of Kerr-McGee v. Allred. The MMS has approved Anadarko’s request to “self-bond” the appeal of the order issued in 2008 in lieu of filing a letter of credit or other surety instrument. Anadarko is awaiting a response from the MMS on its request to “self-bond” the appeal of the 2009 order.
Based on the U.S. Supreme Court’s denial of the DOI’s petition for review by the court, Anadarko reversed its $657 million accrued liability for royalties in September 2009 that could be owed on leases listed in the 2006 Order, similar orders to pay issued in 2008 and 2009, and other deepwater Gulf of Mexico leases with similar price-threshold provisions. The Company’s accrued liability of $657 million related to royalties on production from January 2003 through September 2009, including a $165 million liability related to pre-acquisition contingencies recorded in purchase accounting. In addition, the Company reversed its $78 million accrued liability for interest on these unpaid royalty amounts, substantially all of which related to post-acquisition periods.
Guarantees and Indemnifications Under the terms of the Master Separation Agreement entered into between Kerr-McGee and Tronox Incorporated (Tronox), a former wholly owned subsidiary that held Kerr-McGee’s chemical business, Kerr-McGee agreed to reimburse Tronox for 50% of certain qualifying environmental-remediation costs incurred and paid by Tronox and its subsidiaries before November 28, 2012, subject to certain limitations and conditions. The reimbursement obligation is limited to a maximum aggregate reimbursement of $100 million. As of December 31, 2009, the Company has a $95 million liability recorded for the guarantee obligation.
The Company is guarantor for specific financial obligations of a trona mining affiliate. The investment in this entity is accounted for under the equity method. The Company has guaranteed a portion of amounts due under a term loan. The Company’s guarantee under the term loan expires in 2010, coinciding with the maturity of that agreement. The Company would be obligated to pay $15 million under the term loan if the affiliate defaulted on the obligation. No liability has been recorded for this guarantee as of December 31, 2009.
In connection with its various acquisitions, the Company routinely indemnifies the former officers and directors of acquired companies in respect to acts or omissions occurring prior to the effective date of the acquisition. The Company also agrees to maintain directors’ and officers’ liability insurance on these individuals with respect to acts or omissions occurring prior to the acquisition, generally for a period of six years. No liability has been recognized for these indemnifications.
The Company also provides certain indemnifications in relation to dispositions of assets. These indemnifications typically relate to disputes, litigation or tax matters existing at the date of disposition. In connection with the 2006 sale of its Canadian subsidiary, the Company indemnified the purchaser for potential future audit adjustments that may be imposed by the Canadian taxing authorities for tax years prior to the sale. During 2008, the purchaser notified Anadarko that $90 million of the indemnity is no longer relevant as a result of the effective settlement of the underlying contingent obligation. Accordingly, the Company reversed a portion of its recorded liability. At December 31, 2009, other long-term liabilities included a $49 million liability for this contingency. The Company believes it is probable that the remaining indemnification will be settled with the purchaser in cash.
Other The Company is subject to other legal proceedings, claims and liabilities which arise in the ordinary course of its business. In the opinion of Anadarko, the liability (if any) with respect to these claims will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state and local laws and regulations. As of December 31, 2009, the Company’s balance sheet included a $96 million liability for remediation and reclamation obligations. The Company continually monitors the remediation and reclamation process and the liability recorded.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
15. Other Taxes
Taxes incurred, other than income taxes, are as follows:
In July 2006, the Algerian parliament approved legislation establishing an exceptional profits tax on foreign companies’ Algerian oil production. In December 2006, implementing regulations regarding this legislation were issued. These regulations provide for an exceptional profits tax imposed on gross production at rates of taxation ranging from 5% to 50% based on average daily production volumes for each calendar month in which the price of Brent crude averages over $30 per barrel, retroactively effective to August-2006 production. Uncertainty existed at that time as to whether the exceptional profits tax would apply to the full value of production or only to the value of production in excess of $30 per barrel. In 2006, Anadarko recorded a $103 million accrual for the tax, assuming the tax would be applied only to the amounts in excess of $30 per barrel.
In January 2007, Sonatrach, the national oil and gas company of Algeria, advised Anadarko that it would begin collecting the exceptional profits tax from Anadarko’s share of production commencing with March 2007 liftings, including for the prior months since the new tax went into effect. In April 2007, ALNAFT, an agency under the control of the Algerian Ministry of Energy and Mines responsible for overseeing the Algerian hydrocarbons industry, issued the Application Procedure further defining the procedure and conditions under which the exceptional profits tax is applied and the methodology for its calculation. The Application Procedure and other information supplied by Sonatrach revealed that the exceptional profits tax applied to the full value of production rather than to the amounts in excess of $30 per barrel. This was evidenced by changes in the Company’s crude-oil lifting schedule, which was conveyed to Anadarko by Sonatrach. As a result, Anadarko changed the measurement basis for the exceptional profits tax liability in the first quarter of 2007 to reflect the application of the tax rate to the full value of production. On that measurement basis, the Company recognized production tax expense of $379 million, $648 million and $705 million for 2009, 2008 and 2007, respectively. Of the 2007 amount, $87 million, or $0.19 per diluted share, was related to 2006 sales and income from continuing operations.
In response to the Algerian government’s imposition of the exceptional profits tax, the Company has notified Sonatrach of its disagreement with the collection of the exceptional profits tax, based on the Company’s interpretation of the Production Sharing Agreement (PSA), which provides for fiscal stability through several provisions that require Sonatrach to pay all taxes and royalties. To facilitate discussions between the parties in an effort to resolve the dispute, on October 31, 2007, the Company initiated a conciliation proceeding on the exceptional profits tax as provided in the PSA. Any recommendation issued by a conciliation board (Conciliation Board) arising out of the conciliation proceeding is non-binding on the parties. The Conciliation Board issued its non-binding recommendation on November 26, 2008, which the Company received on December 1, 2008. On February 15, 2009, the Company initiated arbitration against Sonatrach with regard to the exceptional profits tax. In conformance with the terms of the PSA, a notice of arbitration was submitted to Sonatrach.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
16. Income Taxes
Components of income tax expense (benefit) are as follows:
Total income taxes differed from the amounts computed by applying the statutory income tax rate to income (loss) from continuing operations before income taxes. The sources of these differences are as follows:
(1) Exceptional profits tax is not deductible for Algerian income tax purposes.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
16. Income Taxes (Continued)
Certain tax effects have been recorded directly to the balance sheet at December 31, 2009 and 2008. Tax effects related to internal restructuring of certain foreign operations in prior years have been recorded to other long-term liabilities and are being recognized in the income statement over the estimated life of the related properties. During 2008 and 2007, liabilities of $47 million and $184 million, respectively, were recorded to other long-term liabilities. During 2009, $51 million of the liabilities recorded in prior years were reversed to income. As of December 31, 2009, the balance in other long-term liabilities related to the restructuring of certain foreign operations was $93 million. This balance will be recognized into tax expense in future periods.
Additionally, the Company recorded increases in tax liabilities of approximately $310 million and $16 million for 2008 and 2007, respectively, related to certain acquired subsidiaries for years prior to their acquisition by the Company. The increased tax liabilities were due to completion of audits and administrative appeals, filing amended returns, re-evaluation of contingencies, re-establishment of deferred income tax liabilities related to prior acquisitions and changes to the tax basis of acquired assets and liabilities. Accordingly, these liabilities were recorded with an offsetting increase in goodwill.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2009 and 2008 are as follows:
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
16. Income Taxes (Continued)
Changes to the valuation allowance, due to a change in judgment about the realizability of the related deferred assets in future years, were $10 million for 2009.
Current taxes receivable (payable) are as follows:
Tax carryforwards at December 31, 2009, which are available for utilization on future income tax returns, are as follows:
Changes in the balance of unrecognized tax benefits excluding tax interest and penalties are as follows:
Included in the balance of unrecognized tax benefits are potential benefits of $6 million that would affect the effective tax rate on income from continuing operations if recognized. Also included in the balance at December 31, 2009 are $23 million related to tax positions for which the ultimate deductibility is highly certain but the timing of such deductibility is uncertain. The Company estimates that $3 to $8 million of unrecognized tax benefits related to adjustments to taxable income, credits and associated interest previously recorded pursuant
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
16. Income Taxes (Continued)
to the accounting standard for accounting for uncertainty in income taxes will reverse within the next 12 months due to the expiration of statutes of limitation and audit settlements.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2009 and 2008, the Company had approximately $16 million and $28 million, respectively, of accrued interest related to uncertain tax positions. During 2009 and 2008, the Company recognized $(6) million and $8 million, respectively, in income tax expense (benefit) for interest and penalties.
The following is a list of tax years subject to examination by major tax jurisdiction:
17. Statements of Cash Flows Supplemental Information
In cash flow from operating activities for 2007, the changes reported as other items-net include increases in other long-term liabilities-other of $619 million related to operating activities.
The following table presents amounts of cash paid for interest (net of amounts capitalized) and income taxes, including amounts related to discontinued operations, and non-cash transactions.
(1) Includes $378 million and $2.3 billion in 2008 and 2007, respectively, related to taxable gains on divestitures. Also, 2008 includes $567 million of federal income tax refunds.
18. Major Customers
The Company’s natural gas is sold to interstate and intrastate gas pipelines, direct end-users, industrial users, local distribution companies and gas marketers. Crude oil and condensate are sold to marketers, gatherers and refiners. NGLs are sold to direct end-users, refiners and marketers. These purchasers are located in the United States and China. The majority of the Company’s receivables are paid within two months following the month of purchase.
The Company conducts credit analyses of customers prior to making any sales to new customers or increasing credit for existing customers. Based upon these analyses, the Company may require a standby letter of credit or a financial guarantee. As of December 31, 2009 and 2008, accounts receivable are shown net of allowance for uncollectible accounts of $11 million and $24 million, respectively.
In 2009, 2008 and 2007, there were no sales to individual customers that exceeded 10% of the Company’s total sales revenues.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
19. Segment Information
Anadarko’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed because of the nature of their products and services, as well as unique technology, distribution and marketing requirements. The Company’s three reportable operating segments are oil and gas exploration and production, midstream, and marketing. The exploration and production segment explores for and produces natural gas, crude oil, condensate and NGLs. The midstream segment engages in gathering, processing, treating and transporting Anadarko and third-party oil and gas production. The marketing segment sells most of Anadarko’s production, as well as production purchased from third parties.
To assess the operating results of Anadarko’s segments, the chief operating decision maker (CODM) analyzes income from continuing operations before income taxes, interest expense, exploration expense, DD&A and impairments less net income attributable to noncontrolling interests (Adjusted EBITDAX). Anadarko’s definition of Adjusted EBITDAX excludes exploration expense, as exploration expense is not an indicator of operating efficiency for a given reporting period, but is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A expense and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance, because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Anadarko’s financing methods or capital structure. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make distributions to stockholders.
Adjusted EBITDAX may not be comparable to similarly titled measures used by other companies. Adjusted EBITDAX should be considered in conjunction with income (loss) from continuing operations attributable to common stockholders and other performance measures, such as operating income or cash flow from operating activities. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from continuing operations before income taxes.
The Company’s accounting policies for individual segments are the same as those described in the summary of significant accounting policies, with the following exception: certain intersegment commodity contracts may meet the Generally Accepted Accounting Principles (GAAP) definition of a derivative instrument, which would be accounted for at fair value under GAAP. However, Anadarko accounts for such intersegment arrangements as executory contracts. Additionally, intersegment asset transfers are accounted for at historical cost basis, and do not give rise to gain or loss recognition.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
19. Segment Information (Continued)
The following table presents selected financial information for Anadarko’s operating segments. Information presented below as “Other and Intersegment Eliminations” includes results from hard minerals non-operated joint ventures and royalty arrangements, operating activities that are not considered operating segments, as well as corporate, financing and certain hedging activities.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
19. Segment Information (Continued)
(1) Operating costs and expenses exclude exploration, DD&A and impairment expenses since they are excluded from Adjusted EBITDAX.
The following table shows Anadarko’s sales revenues and other (based on the origin of the sales) and net properties and equipment by geographic area:
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans
Pension Plans and Other Postretirement Benefits The Company has non-contributory defined-benefit pension plans, including both qualified and supplemental plans, and a foreign contributory defined-benefit pension plan. The Company also provides certain health care and life insurance benefits for retired employees. Retiree health care benefits are funded by contributions from the Company and the retiree. The Company’s retiree life insurance plan is noncontributory.
In 2009, the Company made contributions of $144 million to its funded pension plans, $19 million to its unfunded pension plans and $16 million to its unfunded other postretirement benefit plans. Although reported benefit obligations exceed the fair value of pension and other postretirement plan assets at December 31, 2009, the Company monitors the funded status of its funded pension and other postretirement benefit plans to ensure that plan funds are sufficient to continue paying benefits. Contributions to the funded plans increase the plan assets while contributions to unfunded plans are used for current benefit payments. The Company expects to contribute up to $114 million to its funded pension plans in 2010. In addition, the Company expects to contribute $19 million to its unfunded pension plans and $19 million to its unfunded other postretirement benefit plans in 2010.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans (Continued)
The following table sets forth changes in the benefit obligations and fair value of plan assets for the Company’s pension and other postretirement benefit plans for the years ended December 31, 2009 and 2008, as well as the funded status of the plans and amounts recognized in the financial statements as of December 31, 2009 and 2008.
The accumulated benefit obligation for all defined-benefit pension plans was $1.5 billion and $1.2 billion as of December 31, 2009 and 2008, respectively. For the Company’s defined-benefit pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $1.6 billion, $1.4 billion and $897 million, respectively, as of December 31, 2009, and $1.2 billion, $1.1 billion and $699 million, respectively, as of December 31, 2008.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans (Continued)
The following table sets forth the Company’s pension and other postretirement benefit cost and amounts recognized in other comprehensive income (before tax benefit).
The estimated portion of net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2010, is $54 million, of which $52 million represents amortization of net actuarial losses and $2 million represents amortization of net prior service cost.
Following are the weighted-average assumptions used by the Company in determining the pension and other postretirement benefit obligations as of December 31, 2009 and 2008:
The discount-rate assumption used by the Company is meant to reflect the interest rate at which the pension and other postretirement obligations could effectively be settled on the measurement date. The Company currently uses a yield curve analysis to support the discount-rate assumption for the plans. This analysis involves the creation of a hypothetical Aa spot yield curve represented by a series of high-quality, non-callable, marketable bonds, then discounts the projected cash flows from each plan at interest rates on the created curve specifically applicable to the timing of each respective cash flow. The present values of the cash flows are then accumulated, and a weighted-average discount rate is calculated by imputing the single discount rate that equates
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans (Continued)
to the total present value of the cash flows. The consolidated discount-rate assumption is determined by evaluating the weighted-average discount rates determined for each of the Company’s significant pension and postretirement plans.
Following are the weighted-average assumptions used by the Company in determining the net periodic pension and other postretirement benefit cost for 2009, 2008 and 2007:
Plan Assets
Investment Policies and Strategies The Company has adopted a balanced, diversified investment strategy, with the intent of maximizing returns without exposure to undue risk. Investments are typically made through investment managers across several investment categories (Domestic Large and Small Cap, International, Domestic Fixed Income, Real Estate, Hedge Funds and Private Equity), with selective exposure to Growth/Value investment styles. Performance for each investment is measured relative to the appropriate index benchmark for its category. Target asset-allocation percentages by major category are 45%-55% equity securities, 20%-30% fixed income and up to 25% in a combination of other investments such as real estate, hedge funds and private equity. Investment managers have full discretion as to investment decisions regarding all funds under their management to the extent permitted within investment guidelines.
There are no direct investments in Anadarko securities included in plan assets; however, there may be indirect investments in Anadarko securities through the plans’ mutual fund investments. The expected long-term rate of return on plan assets assumption was determined starting with the year-end 2009 pension investment balances by category and projected target asset allocations for 2010. The expected return for each of these categories was determined by using capital-market projections. Anadarko’s expected long-term rate of return for U.S. defined-benefit pension plan assets is a blended average of the projected long-term returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based upon historical returns. Equity returns are generally developed as the sum of inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for the expected effect on returns from changing yields. Other asset class returns are derived from their relationship to the equity and bond markets. Consideration was also given to current market conditions.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans (Continued)
The fair value of the Company’s pension plan assets as of December 31, 2009 by asset category and level within the fair-value hierarchy are as follows:
Investments in securities traded in active markets are measured based on quoted prices and are included as Level 1 measurements in the table above. Investments presented as Level 2 measurements include investments in funds where fair value is estimated using the net asset value, which is based on the fair value of the underlying assets that are traded in active markets and have quoted market prices. Fair value of investments included as Level 3 measurements are estimates based on the net asset values, but the underlying assets are not traded in active markets.
The following table sets forth a summary of changes in the fair value of the Level 3 assets for the year ended December 31, 2009.
Risks and Uncertainties The plan assets include various investment securities. Investment securities are exposed to various risks, such as interest-rate, credit and market risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities could significantly impact the plan assets.
The plan assets may include securities with contractual cash flows, such as asset-backed securities, collateralized mortgage obligations and commercial mortgage-backed securities, including securities backed by subprime mortgage loans. The value, liquidity and related income of those securities are sensitive to changes in economic conditions, including real estate value, delinquencies or defaults, or both, and may be adversely affected by shifts in the market’s perception of the issuers and changes in interest rates.
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
20. Pension Plans, Other Postretirement Benefits and Employee Savings Plans (Continued)
Benefit payments, which reflect expected future service as appropriate, are expected to be paid as follows:
For December 31, 2008 and 2009 balances, a 9% annual rate of increase in the per-capita cost of covered health care benefits was assumed for 2009 and 2010, respectively, decreasing gradually to 5% in 2017 and 2018, respectively, and later years. The assumed health care cost trend rate has a significant effect on the cost and obligation amounts reported for the health care plan. A 1% change in the assumed health care cost trend rate over the projected period would have the following effects:
Employee Savings Plan The Company has employee savings plans (ESP) which are defined-contribution plans. The Company matches a portion of employees’ contributions. Participation in the ESP is voluntary and all regular employees of the Company are eligible to participate. The Company charged to expense plan contributions of $34 million, $43 million and $25 million for 2009, 2008 and 2007, respectively.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL QUARTERLY INFORMATION
(Unaudited)
Quarterly Financial Data
The following table shows summary quarterly financial data for 2009 and 2008. The Company changed the manner in which gains and losses on commodity derivatives used to economically hedge production are presented within the Consolidated Statements of Income. Previously, all realized and unrealized gains and losses on commodity derivatives were reported in sales revenues. For all periods presented, realized and unrealized gains and losses on commodity derivatives are included within income (loss) from continuing operations.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL QUARTERLY INFORMATION
(Unaudited)
Quarterly Financial Data (Continued)
(1) In March 2008, gains (losses) on divestitures and other, net included a net $82 million reduction related to corrections resulting from analysis of property records after the adoption of the successful efforts method of accounting. This net amount included reductions of $75 million and $88 million related to the first and second quarters of 2007, respectively. Management concluded that this misstatement was not material relative to 2007 interim and annual results, or to the 2008 periods, and corrected the error in the first quarter of 2008. After considering the effect of income taxes, the adjustments recorded in the first quarter of 2008 related to the adoption of the successful efforts method of accounting in the third quarter of 2007, reduced net earnings for the year ended December 31, 2008 by $52 million.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
In December 2009, Anadarko adopted revised oil and gas reserve estimation and disclosure requirements. The primary impact of the new disclosures is to conform the definition of proved reserves with the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008. The accounting standards update revised the definition of proved oil and gas reserves to require that the average, first-day-of-the-month price during the 12-month period before the end of the year rather than the year-end price, must be used when estimating whether reserve quantities are economical to produce. This same 12-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows. The rules also allow for the use of reliable technology to estimate proved oil and gas reserves if those technologies have been demonstrated to result in reliable conclusions about reserve volumes. The unaudited supplemental information on oil and gas exploration and production activities for 2009 has been presented in accordance with the new reserve estimation and disclosure rules, which may not be applied retrospectively. The 2006, 2007 and 2008 data are presented in accordance with FASB oil and gas disclosure requirements effective during those periods. However, historical information has been reclassified to conform to the geographic areas required to be disclosed for 2009 under the revised accounting standard. Disclosures by geographic area include the United States and International geographic areas, which are located primarily in Algeria, China and Ghana. The effect of applying the new definition of reliable technology and other non-price related aspects of the updated rules did not significantly impact 2009 net proved reserve volumes. Less than 1% of the Company’s total proved reserves, as of year-end 2009, were added as a result of pressure-gradient analyses, well-control and seismic reliable technologies. The effect of applying the 12-month average price, versus the 2009 year-end price, decreased the net remaining reserve volumes by less than 3% of total proved reserves. The standardized measure of discounted future net cash flows for 2009 decreased by $8.3 billion as a result of using the 12-month average price rather than the year-end 2009 price.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Oil and Gas Reserves
The reserve disclosures that follow reflect estimates of proved reserves, proved developed reserves and proved undeveloped reserves, net of royalty interests, of natural gas, crude oil, condensate and NGLs owned at year end and changes in proved reserves during the last three years. Natural-gas volumes are in billions of cubic feet (Bcf) at a pressure base of 14.73 pounds per square inch and volumes for oil, condensate and NGLs are in millions of barrels (MMBbls). Total volumes are in millions of barrels of oil equivalent (MMBOE). For this computation, one barrel is assumed to be the equivalent of 6,000 cubic feet of gas. NGLs are included with oil and condensate reserves and associated shrinkage has been deducted from the gas reserves.
International reserves are calculated in accordance with the terms of their respective agreements using the economic interest method. The international reserves include estimated quantities allocated to Anadarko for recovery of costs and income taxes and Anadarko’s net equity share after recovery of such costs.
The estimates of proved reserves are made using available geological and reservoir data as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional data. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions as well as changes in the expected recovery rates associated with infill drilling.
During 2009, Anadarko added 70 MMBOE of proved reserves primarily as the result of successful drilling in the United States and at international locations. Reserve revisions for 2009 include an increase of 212 MMBOE primarily related to large onshore natural-gas plays, such as the Greater Natural Buttes and Pinedale fields, as a result of successful infill drilling (where the reserve bookings for the infill wells are treated as a positive revision). The revisions include a decrease of 39 MMBOE driven by lower gas pricing. Sales and acquisitions of proved reserves in place were 24 and 32 MMBOE, respectively, related to onshore domestic assets. In 2008, Anadarko added 102 MMBOE of proved reserves primarily as the result of successful drilling in the Rockies and developments and appraisals in the deepwater Gulf of Mexico. Reserve revisions for 2008 included an increase of 188 MMBOE primarily as a result of successful infill drilling related to the large onshore natural-gas plays, such as the Greater Natural Buttes, Wattenberg and Pinedale fields, in addition to positive revisions to the Peregrino field offshore Brazil which was sold in 2008, partially offset by a decrease of 102 MMBOE related to price impacts for oil and NGLs. Sales of proved reserves in place for 2008 totaled 137 MMBOE, related to properties located in the United States and Brazil. During 2007, sales of proved reserves in place associated with the Company’s asset-realignment program totaled 620 MMBOE. Excluding the effect of divestitures, the Company added approximately 252 MMBOE of proved reserves in 2007. Reserve adds were primarily driven by successful drilling in coalbed methane and conventional plays and successful infill drilling onshore in the United States, as well as the initial recognition of proved reserves for the Peregrino development offshore Brazil.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Oil and Gas Reserves (Continued)
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Oil and Gas Reserves (Continued)
(1) Revisions of prior estimates for 2009, 2008 and 2007 include 125 MMBOE, 158 MMBOE and 109 MMBOE, respectively, of additions generated by Anadarko’s infill drilling programs.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Capitalized Costs
Capitalized costs include the cost of properties, equipment and facilities for oil and gas-producing activities. Capitalized costs for proved properties include costs for oil and gas leaseholds where proved reserves have been identified, development wells, and related equipment and facilities, including development wells in progress. Capitalized costs for unproved properties include costs for acquiring oil and gas leaseholds where no proved reserves have been identified, including costs of exploratory wells that are in the process of drilling or in active completion, and costs of exploratory wells suspended or waiting on completion. Capitalized costs associated with activities of the Company’s midstream and marketing segments, and other corporate activities are not included.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Amounts reported as costs incurred include both capitalized costs and costs charged to expense during the year for oil and gas property acquisition, exploration and development activities. Costs incurred also include new asset retirement obligations established in the current year, as well as increases or decreases to the asset retirement obligations resulting from changes to cost estimates during the year. Exploration costs include the costs of drilling and equipping successful exploration wells, as well as dry hole costs, leasehold impairments, geological and geophysical expenses, and the costs of retaining undeveloped leaseholds. Development costs include the costs of drilling and equipping development wells, and construction of related production facilities. Costs associated with activities of the Company’s midstream and marketing segments, and other corporate activities are not included.
(1) Includes purchase price adjustments related to finalizing the allocation of fair value to unproved properties acquired with the Kerr-McGee and Western acquisitions in 2006 of $(608) million and $124 million associated with properties in the United States and international areas, respectively.
(2) Includes purchase price adjustments related to finalizing the allocation of fair value to proved properties acquired with the Kerr-McGee and Western acquisitions in 2006 of $(613) million and $13 million associated with properties in the United States and international areas, respectively.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Results of Operations for Producing Activities
Results of operations for producing activities consist of all activities within the Oil and Gas Exploration & Production segment. Net revenues from production include only the revenues from the production and sale of gas, oil, condensate and NGLs. Gains on property dispositions represent net gains on sales of oil and gas properties. Reversal of accrual for DWRRA dispute represents reversal of the liability accrued for potential additional royalties due on leases subject to litigation with the Department of Interior as described in Note 14 to the consolidated financial statements. Production costs are those incurred to operate and maintain wells and related equipment and facilities used in oil and gas operations. Exploration expenses include dry hole costs, leasehold impairments, geological and geophysical expenses, and the costs of retaining undeveloped leaseholds. Income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting costs, which include DD&A allowances, after giving effect to permanent differences. The results of operations exclude general office overhead and interest expense attributable to oil and gas activities.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Results of Operations for Producing Activities (Continued)
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Standardized Measure for Discounted Future Net Cash Flows
Estimates of future net cash flows from proved reserves of gas, oil, condensate and NGLs for 2009 are computed using the average first-day-of-the-month price during the 12-month period for 2009 and using year-end prices for 2008 and 2007. Prices used for all periods are adjusted only for fixed and determinable amounts under provisions in existing contracts. Estimated future net cash flows for all periods presented are reduced by estimated future development, production, abandonment and dismantlement costs based on existing costs, assuming continuation of existing economic conditions, and by estimated future income tax expense. These estimates also include assumptions about the timing of future production of proved reserves, and timing of future development, production costs, and abandonment and dismantlement. Income tax expense, both U.S. and foreign, is calculated by applying the existing statutory tax rates, including any known future changes, to the pretax net cash flows giving effect to any permanent differences and reduced by the applicable tax basis. The effect of tax credits is considered in determining the income tax expense. The 10-percent discount factor is prescribed by GAAP.
The present value of future net cash flows does not purport to be an estimate of the fair market value of Anadarko’s proved reserves. An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money and the risks inherent in producing oil and gas. Significant changes in estimated reserve volumes or commodity prices could have a material effect on the Company’s consolidated financial statements.
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Anadarko’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the Company’s disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2009.
Management’s Annual Report on Internal Control Over Financial Reporting
See Management’s Assessment of Internal Control Over Financial Reporting under Item 8 of this Form 10-K.
Attestation Report of the Registered Public Accounting Firm
See Report of Independent Registered Public Accounting Firm under Item 8 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in Anadarko’s internal controls over financial reporting during the fourth quarter of 2009 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
See Anadarko Board of Directors, Corporate Governance-Board of Directors, Corporate Governance-Committees of the Board and Section 16(a) Beneficial Ownership Reporting Compliance in the Anadarko Petroleum Corporation Proxy Statement (Proxy Statement), for the Annual Meeting of Stockholders of Anadarko Petroleum Corporation to be held May 18, 2010 (to be filed with the Securities and Exchange Commission prior to April 9, 2010), each of which is incorporated herein by reference.
See list of Executive Officers of the Registrant under Item 4 of this Form 10-K, which is incorporated herein by reference.
The Company’s Code of Business Conduct and Ethics and the Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (Code of Ethics) can be found on the Company’s internet website located at www.anadarko.com. Any stockholder may request a printed copy of the Code of Ethics by submitting a written request to the Company’s Corporate Secretary. If the Company amends the Code of Ethics or grants a waiver, including an implicit waiver, from the Code of Ethics, the Company will disclose the information on its internet website. The waiver information will remain on the website for at least 12 months after the initial disclosure of such waiver.
Item 11.
Item 11. Executive Compensation
See Corporate Governance-Board of Directors-Compensation and Benefits Committee Interlocks and Insider Participation, Corporate Governance-Board of Directors-Director Compensation, Corporate Governance-Director Compensation Table for 2009, Compensation and Benefits Committee Report on 2009 Executive Compensation, Compensation Discussion and Analysis and Executive Compensation in the Proxy Statement, each of which is incorporated herein by reference. The Compensation and Benefits Committee Report and related information incorporated by reference herein shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See Security Ownership of Certain Beneficial Owners and Management in the Proxy Statement, which is incorporated herein by reference.
EQUITY COMPENSATION PLAN TABLE The following table sets forth information with respect to the equity compensation plans available to directors, officers and employees of the Company as of December 31, 2009:
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Corporate Governance - Board of Directors and Transactions with Related Persons in the Proxy Statement, each of which is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
See Independent Auditor in the Proxy Statement, which is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) Exhibits The following documents are filed as a part of this report or incorporated by reference:
(1) The consolidated financial statements of Anadarko Petroleum Corporation are listed on the Index to this report, page 62.
(2) Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith or designated by asterisks (**) and are furnished herewith; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
 Management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
The total amount of securities of the registrant authorized under any instrument with respect to long-term debt not filed as an exhibit does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments to the Securities and Exchange Commission.
(b) Financial Statement Schedules Financial statement schedules have been omitted because they are not required, not applicable or the information is included in the Company’s consolidated financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANADARKO PETROLEUM CORPORATION
February 23, 2010
By:
/s/ ROBERT G. GWIN
(Robert G. Gwin, Senior Vice
President, Finance and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2010.
Name and Signature
Title
(i) Principal executive officer:*
JAMES T. HACKETT
(James T. Hackett)
Chairman of the Board and Chief Executive Officer
(ii) Principal financial officer:
/s/ ROBERT G. GWIN
(Robert G. Gwin)
Senior Vice President, Finance and Chief Financial Officer
(iii) Principal accounting officer:
/s/ M. CATHY DOUGLAS
(M. Cathy Douglas)
Vice President and Chief Accounting Officer
(iv) Directors:*
ROBERT J. ALLISON, JR.
JOHN R. BUTLER, JR.
LUKE R. CORBETT
H. PAULETT EBERHART
PETER J. FLUOR
PRESTON M. GEREN III
JOHN R. GORDON
JAMES T. HACKETT
PAULA ROSPUT REYNOLDS
* Signed on behalf of each of these persons and on his own behalf:
By:
/s/ ROBERT G. GWIN
(Robert G. Gwin, Attorney-in-Fact)