Record-setting production, continued cost cutting and asset sales led Anadarko Petroleum Corp. (NYSE: APC) to a better-than-expected second quarter as it trudged through current market conditions.

The company reported a net loss of $692 million for second-quarter 2016, compared to a $61 million profit posted for the same period last year. It was an improvement from the $1 billion loss reported for first-quarter 2016 as oil prices work to recover from levels that dipped into the high $20s in January.

Revenue fell to $1.9 billion in the second quarter, down 27% from a year earlier.

Despite posting a loss, Anadarko’s production in the Delaware and Denver-Julesburg (D-J) basins increased along with volumes at three operated facilities in the U.S. Gulf of Mexico (GoM).

Now the wait is on for demand to rise as U.S. production falls—two ingredients for an oil price recovery as Anadarko CEO Al Walker sees it. The company has a trough of cash it can use if conditions merit increased production.

The company could ramp up activity, specifically in its “highest-quality U.S. onshore” assets as it looks to grow revenue. For Anadarko, $60 oil appears to be the trigger point for increased activity, Walker said.

Accounting for the lingering impacts of the downturn, Piper Jaffray analysts called it a “good quarter” for Anadarko with earnings per share and cash flow “above expectations and positive forward guidance.”

The positive take was shared by Wells Fargo Securities analysts who deemed Anadarko “well-positioned in the second half with strong liquidity and balance sheet initiatives keeping net leverage under control.”

‘Unique Positions’

The company continues to build upon its success onshore, where in the Delaware Basin of West Texas record sales were about 45,000 barrels of oil equivalent per day (boe/d).

In the GoM, the Lucius and Caesar/Tonga fields also saw record production as the deepwater Shenandoah-5 appraisal well hit more than 1,040 net ft of oil pay in the second quarter, extending the field farther east.

“Our unique positions in the D-J and Delaware Basins combined with the tieback opportunities in the Gulf of Mexico give us strong line-of-sight for attractive capital-efficient, short-cycle oil investments as crude prices recover,” Walker said during a conference call July 27.

Positive portfolio performance prompted Anadarko to increase its full-year divestiture-adjusted sales-volume guidance by 2 MMboe.

In addition, Anadarko said it ended the quarter with about $1.4 billion cash on hand and closed about $2.5 billion in asset sales. The company is targeting $3.5 billion in asset sales for the entire year.

How proceeds are used depends on the direction oil prices take, among other considerations.

The company’s short-term strategy is to retire debt. However, an improvement in oil prices could cause the company to consider increased spending in its most attractive onshore U.S. assets. WTI prices were down to about $42.15/bbl on July 27 after falling from about $50/bbl earlier this summer.

Destination: $60

Walker sees the falling U.S. oil supply, which peaked at about 9.6 MMbbl/d, as a source of optimism.

Walker expects production to bottom out at about 8 MMbbl/d, probably sometime in fourth-quarter 2016, with demand exceeding expectations.

“Given this dynamic, I am now encouraged that a sustained $60 oil price environment is likely to emerge as we move into 2017,” Walker said on a conference call July 27.

He added, “The more we feel comfortable about that sustained $60 price environment, the more likely you will see us increase capital.”

That would give the company enough fuel—cash margins—to push onshore production.

“The improved balance sheet resulting from the divestitures should provide APC the flexibility to start completing iDUCs [intentionally drilled but uncompleted wells] if oil prices improve,” Simmons & Co. analysts said in a note.

Anadarko has about 230 iDUCs. The company, like many of its peers, decided not to complete some of its wells until commodity prices improve to desired levels.

Walker sees the recovery as being demand driven rather than supply-constrained. Although he admits to being bearish on oil price expectations in the past, Walker said “clearly, in our estimation, the ingredients are there for a recovery to sustain a $60 price environment next year.”

In The Spotlight

Other quarterly highlights, as reported by Anadarko, included:

  • Onshore US
    • The Delaware Basin saw a 41 Mboe/d sales-volume record for the quarter. The producer also reduced drilling costs-per-foot by 16% compared to second-quarter 2015 and reported a 52% average lateral-length increase over 2014; and
    • In the D-J Basin, Anadarko reported a 243 Mboe/d sales-volume record; 30% drilling costs-per-foot reduction; and 15% lease operation expense/boe savings compared to first-quarter 2016.
  • Gulf of Mexico
    • Sales volumes surpassed the 80 Mbbl/d nameplate capacity at the Lucius platform. The Constitution spar had a production record of 65 Mbbl/d, while its K2 complex hit an eight-year-high production rate of 28 Mbbl/d.
    • New exploration opportunities exist in the Shenandoah area, where there are plans for another appraisal well—the results of which will factor into a final investment decision. “The quality and thickness of the reservoir combined with the excellent fluid properties make Shenandoah a unique Lower Tertiary opportunity,” Anadarko said.
  • International
    • First oil is expected in third-quarter 2016 at the TEN Field offshore Ghana. Anadarko reported the development is 97% complete with installation, hook-up and commissioning on schedule; and
    • Production is also expected to increase to about 85 Mbbl/d in second-half 2016 at the adjacent Jubilee Field, where Anadarko and its partners have decided to convert the FPSO into a permanently moored facility. Work is expected to be completed in first-half 2017.

Velda Addison can be reached at vaddison@hartenergy.com.

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