Anadarko Petroleum Corporation Business Information, Profile, and History

Company Perspectives:

At Anadarko, we strive for excellence in all that we do. We hire the best people in the business, then challenge and reward them for their efforts. We provide them training, technology and resources to do the job right. Our very low turnover rate is a true competitive advantage, helping us earn the reputation as a world-class oil and gas exploration and production company.

Everywhere we operate, we manage our assets in a manner that protects the environment and the health and safety of employees, contractors, neighboring communities, customers and partners. And we give back to the communities in which we work.

Our goals are to provide the energy that fuels economic growth and improves lifestyles and, in so doing, to deliver an attractive financial return for Anadarko shareholders.

History of Anadarko Petroleum Corporation

Anadarko Petroleum Corporation is the largest independent oil and natural gas exploration and production company in the United States. The company's North American operations include drilling facilities in the Anadarko Basin; Wyoming; Alberta, Canada; and the Gulf of Mexico. Although 75 percent of the company's reserves are in North America, since the early 1990s it has developed a substantial overseas presence, establishing operations in Algeria, the Red Sea, and Peru. Between its domestic and international holdings, the company owns total proven reserves of more than 2.3 billion barrels of oil and oil equivalent.

Domestic Growth and Expansion: 1959-70

Anadarko was created in 1959 as a wholly owned subsidiary of Panhandle Eastern Pipe Line Company. At that time, Federal Power Commission (FPC) rules placed lower price limits on gas produced from properties owned by pipeline companies than on gas produced from independently owned properties. Panhandle owned a substantial amount of gas-producing property, located primarily in the Anadarko Basin, a gas-rich region covering parts of the Texas and Oklahoma panhandles and southwestern Kansas. Since regulations prevented Panhandle from charging the market price for the gas it produced, the company sought ways to skirt these price ceilings. Efforts in the courtroom failed, leaving the creation of a wholly owned subsidiary for gas exploration and production as the only option. Anadarko Production Company was officially incorporated in June 1959, with Panhandle owning all of its stock. Headquarters for the new company were established in Liberal, Kansas; Frederick Robinson was named chairperson, and Robert Harkins became company president.

Since properties developed by Anadarko were not subject to FPC pipeline pricing regulations, all of Panhandle's undeveloped properties were transferred to its new subsidiary. Although its gas properties that were already developed remained under FPC jurisdiction, Panhandle's oil producing properties were not subject to the same pricing rules. Therefore, they were transferred to Anadarko as well. By the end of 1959, Anadarko had drilled 17 wells in the Anadarko Basin, 14 of which were development wells, all of which were producers. One of the three exploratory wells was also a producer. Before its first full year of operation had ended, Anadarko had spent $2.5 million on exploration and had purchased 27 Texas panhandle producing gas wells.

Anadarko signed its first major long-term contract in 1960, a 20-year agreement with Pioneer Natural Gas Company to provide gas from the Red Cave formation in the Texas panhandle to several communities in the area. The following year, the company built an 84-mile pipeline in Kansas. The pipeline carried gas from the Spivey Grabs Field in Kingman and Harper counties to the Skelly Oil Refinery in El Dorado. Anadarko continued to grow quickly over the next few years, mainly by exploiting its rich properties on its home turf, the Anadarko Basin. Between 1962 and 1964, the company doubled its sales of natural gas, from 27 billion cubic feet to 53 billion. Its oil sales doubled over the same period, from 911,000 to 1.8 million barrels.

By the mid-1960s, Anadarko's future growth clearly depended on expansion outside the Anadarko Basin. Toward this end, in August 1965, the company purchased Ambassador Oil Corporation of Fort Worth, Texas, for $12 million. In purchasing Ambassador, Anadarko acquired assets that included undeveloped leases and proven oil and gas reserves totaling about 600,000 acres, located in 19 states and Canada. Most of Ambassador's personnel were retained, and because of its more central location, Ambassador's Fort Worth offices were designated as Anadarko's new headquarters. While this transfer was taking place, Anadarko President Harkins died, and Richard O'Shields was named to replace him.

In 1968, O'Shields was promoted to executive vice-president of parent Panhandle Eastern, and R.C. Dixon succeeded him as Anadarko's top officer. Although the bulk of its operations were still taking place in the Anadarko Basin, the company was quite active in other places, particularly Alberta, Canada, where it was participating in seven oil wells near the Bantry West Field. This Alberta development program also included the acquisition of producing properties with 1.4 million barrels of estimated reserves. By 1969, 12 percent of parent company Panhandle's net income was being generated by Anadarko.

The Search for New Reserves: 1970-80

Anadarko's involvement in offshore exploration began in 1970. That year, the company acquired a one-eighth working interest in drilling rights to nine property blocks in the Gulf of Mexico. In 1971, Robert Stephens succeeded Dixon as Anadarko's president, and under Stephens, the company placed increasing emphasis on offshore operations, developing its own methods for collecting and analyzing geological and geophysical information used to evaluate potential offshore drilling leases. Of the Gulf of Mexico properties in which Anadarko had working interests, 24 blocks showed oil or gas in exploratory drilling between 1971 and 1976, and ten of them proved commercially productive.

In 1972, Panhandle created Pan Eastern Exploration Company, a new wholly owned subsidiary. All of Panhandle's remaining producing properties were transferred to Pan Eastern, which was to be operated by Anadarko. Pan Eastern spent $29 million on leases and drilling in its first year of existence and produced 116 billion cubic feet of gas from its Anadarko Basin reserves. Pan Eastern became part of Anadarko in 1981 and was eventually renamed APX Corporation in 1987. Anadarko's headquarters were moved from Fort Worth to Houston in 1974. Two years later, when Stephens left the company, his replacement was Robert Allison, Jr., a petroleum engineer whom Stephens had brought on board as vice-president of operations.

Anadarko closed its second decade of operation by breaking the $100 million revenue barrier for the first time in 1978. By 1979, the company was contributing about 30 percent of Panhandle's net income. Around that time, Anadarko sought to expand its activities in the Gulf of Mexico, as higher gas prices resulting from the passage of the Gas Policy Act of 1978 created a major boom in gas exploration. Anadarko joined this boom by entering a farm-in arrangement with Amoco Corporation, in which Anadarko was to operate a project until a discovery was made. After the discovery, Amoco would have the option of re-entering the project as a half-interest partner. Located on Matagorda Island, the block (Matagorda 623) became a producer in early 1980. The group, consisting of Anadarko, Amoco, and Champlin Petroleum Company (to whom Anadarko had sold 25 percent of its deal with Amoco), then bid on a neighboring block that geophysical testing had shown to be promising. In 1982, the first well at Matagorda 622 was completed, and the block was found to have huge gas reserves. The Matagorda 622/623 blocks taken together represented a huge find for Anadarko, and the discovery sparked new interest in the Gulf of Mexico among many wildcat drillers.

The 1980s: Formation of Anadarko Petroleum Company

During this time, the company's onshore projects continued to operate successfully as well. A producing natural gas and oil-like condensate discovery well, 100 percent owned and operated by Anadarko, was completed in San Patricio County, Texas, in 1982. By the mid-1980s, Anadarko was clearly the most important subsidiary of Panhandle, accounting for 37 percent of Panhandle's 1984 profit while contributing only 11 percent of its revenue. Panhandle management recognized that the price of its stock was not reflecting the true value of the company, given the impressive results being turned in by Anadarko. As a result, management decided to spin Anadarko off to Panhandle's stockholders, in order to discourage potential takeover attempts. Anadarko Petroleum Corporation was created in 1985, and all of Anadarko Production Company's oil and gas assets were handed over to the new company.

However, one major obstacle prevented the spinoff from taking place immediately. In 1975, Panhandle had entered a 20-year contract with Sonatrach, Algeria's national energy company, to import liquefied natural gas from that country during the gas shortages of that period. By the time Algeria began shipping the gas in 1982, however, conditions in the United States had changed, and there was no longer a market for the wildly overpriced Algerian gas. Panhandle suspended deliveries, leading to an international squabble between the two companies, during which Panhandle could not spin off any assets, including Anadarko. In 1986, when Panhandle received word that a takeover attempt by a Texas investment group was imminent, attention to the Sonatrach negotiations was heightened and the dispute was settled, with Sonatrach receiving six million shares of Panhandle stock and $300 million in cash. Anadarko then became an independent company, taking APX Corporation, Anadarko Petroleum of Canada, and other exploration and production subsidiaries with it.

Although the spinoff was essentially a friendly one, it was not entirely without conflict. Late in 1986, Anadarko sued its former parent over contracts the company felt were unfair. Under the terms of the contracts, Anadarko sold gas to Panhandle at below-market prices, an agreement made when Anadarko's board was still dominated by Panhandle officials. The Federal Energy Regulatory Commission eventually freed Anadarko from those agreements. For 1986, its first year as an independent company, Anadarko had net income of $10.1 million on revenue of $205.7 million.

By 1987, Anadarko had natural gas reserves of 1.7 trillion cubic feet, of which only 200 to 250 million cubic feet per day were being produced. In order to make better use of its reserves, in February of that year, the company launched a program of infill drilling at its Hugoton Field property in southwestern Kansas. Infill drilling involved the addition of a second well at an existing unit capable of tapping deeper gas reserves. Infill gas could be sold at a higher price than gas produced by the original well at a site. By early 1989, the company had drilled 146 infill wells. In addition to beefing up its exploration activities, Anadarko grew through acquisition during its first few years on its own. Among its purchases were certain oil producing properties in western Texas from Parker & Parsley Developments Partners, a regional energy company. By 1989, the company's revenue had grown to $361 million.

Global Expansion in the Early 1990s

Ground was broken in Houston in 1991 for Anadarko Towers, the company's new headquarters building and the first major commercial office building started in that city in over five years. Anadarko's revenue slipped to $336.6 million in 1991, but rebounded slightly to $375 million the following year. However, the company's earnings dropped further, sinking to $27 million, half that reported in 1990. In early 1993, Anadarko became the first foreign-owned company to discover oil in Algeria. The company had initially entered that country in 1989, the first year it was opened to foreign investment. Along with two European partners in the venture, Anadarko maintained drilling rights to a 5.1 million-acre area in the Sahara Desert. Anadarko's interest in the venture was 50 percent. Sonatrach, Algeria's national oil and gas enterprise, in turn retained over 10 percent ownership of Anadarko's common stock.

Later in 1993, Anadarko teamed up with Amoco and Phillips Petroleum in discovering a huge shallow-water oil field in the Gulf of Mexico. The field, called Mahogany, was thought to hold at least 100 million barrels of oil, 37.5 percent of which was owned by Anadarko. For fiscal 1993, Anadarko reported record-high net income of $117 million on revenue of $476 million. For the 12th consecutive year, the company more than matched its production volumes of oil and gas with new proved reserves. Anadarko increased its exploration activities in the Gulf in early 1994. In April, the company paid $98 million for 26 different Gulf properties in a Minerals Management Service lease sale, hoping to repeat the success of Mahogany. Like Mahogany, the properties were nearly all "sub-salt plays," or potential finds located under salt formations. Anadarko also announced further oil discoveries in the deserts of Algeria, and development of those properties was accelerated.

In the short period since its spinoff from Panhandle Eastern, Anadarko's rate of success at wildcat drilling was remarkable. Its wealth of natural gas reserves in the Hugoton Basin also gave the company a great deal of control over its production, a huge advantage in an industry susceptible to market fluctuations. Anadarko was expected to become an even larger force among independent energy companies, if its discoveries of oil and gas in the Gulf of Mexico and Algeria continued into the late 1990s.

New Opportunities at Home and Abroad: 1995-2002

Anadarko's Algerian operations began to reap significant dividends by 1995, when new discoveries increased the company's total reserves in the region to approximately one billion barrels. In addition to these proven reserves, the company's overall success rate in the country, where six of its nine wells had struck oil, made the prospect of future discoveries seem extremely promising. Although the company expected lingering political unrest in Algeria to hamper its operations to some extent, it still hoped to be producing in excess of 30,000 barrels of crude per day within a year after obtaining its exploitation license.

Buoyed by its success in North Africa, Anadarko began exploring other overseas opportunities during the mid-1990s, most notably in the Red Sea. In the fall of 1995 the company entered into a production agreement with the Energy Ministry in Eritrea, in East Africa. With an initial investment of $28.5 million, the company planned to utilize the same computer technology used to analyze salt structures in the Gulf of Mexico to explore similar deposits in the Red Sea, where Eritrea's offshore reserves were still largely untapped. The company expanded its international operations even further the following year, when it entered into an agreement with Perupetro, the state oil company of Peru, to begin preliminary exploration of the country's Ucayali Basin.

However, Anadarko's overseas expansion efforts hit a snag in the late 1990s, when a steep decline in oil and natural gas prices took a significant bite out of Anadarko's revenues. The company's earnings fell by nearly 80 percent for the first quarter of 1998, with overall sales declining by 14 percent. Seeking to salvage something from the drop in prices, Anadarko began to look into expansion opportunities closer to home. In March 1998, the company acquired several new oil fields in Oklahoma from the Occidental Petroleum Corporation. With the cost of reserves down to $6 a barrel, the company was able to make the acquisition for only $120 million, while the addition of these new operations doubled the company's oil reserves in the Anadarko Basin.

The company began to experience a turnaround in July 1998, when it uncovered a reserve of more than 140 million barrels of oil in the Gulf of Mexico. In addition to being Anadarko's largest discovery in nearly two decades, the success also granted some much needed legitimacy to the company's subsalt exploration technology, paving the way for future discoveries in the Gulf and in the Red Sea.

In order to sustain such ambitious expansion, however, the company needed to bolster its operations. To this end, in April 2000 Anadarko announced its intention to acquire the Union Pacific Resources Group. The deal, worth more than $4.4 billion, promised to make the combined entity the largest oil and gas company in North America. In February 2001, the company further increased its presence in the Canadian oil market with the acquisition of Berkley Petroleum in Alberta for $777 million. In July of that year the company also acquired Gulfstream Resources Canada for $137 million. The latter deal gave Anadarko three offshore drilling sites off the coast of Qatar, with proven reserves of more than 70 million barrels of oil. Perhaps most significantly, the deal represented Anadarko's first substantial foray into the Middle East.

Anadarko suffered a setback in January 2002, when an internal accounting error resulted in the announcement of a net loss of $1.35 billion for the third quarter of 2001, substantially higher than the previously expected loss of $270 million. However, the loss did not prevent the company from pursuing further opportunities for growth, and by October 2002, it was able to invest more than $200 million to acquire two substantial oil fields in Wyoming, a state where potential reserves were estimated to exceed 500 million barrels. With this latest acquisition, Anadarko's position as the largest independent oil producer in the United States seemed more secure than ever.

Principal Subsidiaries: RME Petroleum Company; RME Holding Company; Anadarko Canada Energy Ltd.; Anadarko Canada Corporation; RME Land Corp.; Anadarko Algeria Company, LLC.

Principal Competitors: BP p.l.c.; Burlington Resources, Inc.; Exxon Mobile Corporation.

Chronology

• Key Dates:
• 1959: Anadarko Production Company is formed as a subsidiary of Panhandle Eastern Pipe Line Company.
• 1960: Anadarko enters into 20-year agreement with the Pioneer Natural Gas Company.
• 1965: The company acquires Ambassador Oil Corporation and moves its headquarters to Fort Worth, Texas.
• 1985: Anadarko Petroleum Corporation is formed as an independent company.
• 1993: Anadarko discovers oil in Algeria.
• 2000: Anadarko acquires Union Pacific Resources.
• 2001: Anadarko acquires Berkley Petroleum Corporation.