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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 1-8968
ANADARKO PETROLEUM CORPORATION
17001 NORTHCHASE DRIVE, HOUSTON, TEXAS 77060-2141
(281) 875-1101
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INCORPORATED IN THE STATE OF DELAWARE EMPLOYER IDENTIFICATION NO. 76-0146568
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.10 per share
Preferred Stock Purchase Rights
The above Securities are listed on the New York Stock Exchange.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ____.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on January 29, 1999 was $3,246,000,000.
The number of shares outstanding and entitled to vote of the Company's
common stock as of January 29, 1999 is shown below:
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TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.10 per 120,453,338
share
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PART OF
FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE
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Part I Portions of the Anadarko Petroleum Corporation 1998 Annual
Report to Stockholders.
Part III Portions of the Proxy Statement, dated March 22, 1999, for
the Annual Meeting of Stockholders of Anadarko Petroleum
Corporation to be held April 29, 1999.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business
General 2
Proved Reserves and Future Net Cash Flows 2
Volumes and Prices 3
Properties and Activities -- United States 4
Properties and Activities -- International 12
Drilling Programs 16
Drilling Statistics 16
Productive Wells 17
Segment and Geographic Information 17
Employees 17
Regulatory and Legislative Developments 17
Additional Factors Affecting Business 17
Title to Properties 17
Capital Spending 17
Ratios of Earnings to Combined Fixed Charges and Preferred
Stock Dividends 18
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Executive Officers of the Registrant 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 70
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management 70
Item 13. Certain Relationships and Related Transactions 70
PART IV
Item 14. Exhibits and Reports on Form 8-K 71
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PART I
ITEM 1. BUSINESS
GENERAL
Anadarko Petroleum Corporation is one of the world's largest independent
oil and gas exploration and production companies with 935.1 million energy
equivalent barrels (MMEEBs) of proved reserves as of December 31, 1998.
The Company's reserve mix shifted in 1998, primarily due to recent
discoveries in the Gulf of Mexico's sub-salt trend and continued development
activity onshore the U.S., which resulted in a significant increase in natural
gas reserves. As of year-end 1998, natural gas reserves accounted for 47% of the
Company's total proved reserves, compared to 41% at year-end 1997.
About 74% of the Company's total proved reserves are located in the U.S.,
primarily in the mid-continent (Kansas, Oklahoma and Texas) area, offshore in
the Gulf of Mexico and in Alaska. During 1998, 97% of the Company's production
was located in the U.S. The Company also owns and operates gas gathering systems
in its U.S. core producing areas.
Overseas, Anadarko is developing crude oil reserves in Algeria's Sahara
Desert and has commenced oil production. At year-end 1998, the Company had 245
million barrels (MMBbls) of proved crude oil reserves in Algeria, which accounts
for 26% of Anadarko's total proved reserves. First oil production from the Hassi
Berkine South (HBNS) Field began in May 1998. Development of other commercial
fields in Algeria is underway and production is expected to increase
substantially over the next several years. The Company also participates in
other international exploration projects in Eritrea, the North Atlantic Margin
and Tunisia.
The principal subsidiaries of Anadarko include: Anadarko Algeria
Corporation (Anadarko Algeria); Anadarko Energy Services Company; and, Anadarko
Gathering Company. Unless the context otherwise requires, the terms "Anadarko"
or "Company" refer to Anadarko and its subsidiaries. The Company's corporate
offices are located at 17001 Northchase Drive, Houston, Texas 77060-2141, where
the telephone number is (281) 875-1101.
A discussion of key issues that face Anadarko and the industry are included
in the narrative on pages 6 through 17 of the Anadarko Petroleum Corporation
1998 Annual Report to Stockholders (Annual Report), which is incorporated herein
by reference.
PROVED RESERVES AND FUTURE NET CASH FLOWS
As of December 31, 1998, Anadarko had proved reserves of 2.65 trillion
cubic feet (Tcf) of natural gas and 494.0 MMBbls of crude oil, condensate and
natural gas liquids (NGLs). Combined, these proved reserves are equivalent to
935.1 MMBbls of oil or 5.61 Tcf of gas. The Company's reserves have grown
significantly over the past three years, due to substantial natural gas reserves
discovered in the Gulf of Mexico and onshore U.S., crude oil reserves discovered
in Algeria and Alaska and acquisitions of producing properties. At year-end
1998, Anadarko's total proved reserves were comprised of 47% natural gas and 53%
crude oil, condensate and NGLs.
As of December 31, 1998, Anadarko had proved developed reserves of 1.64 Tcf
of natural gas and 163.7 MMBbls of crude oil, condensate and NGLs. Proved
developed reserves comprise 47% of the total proved reserves on an energy
equivalent barrel basis.
The Company's estimates of proved reserves and proved developed reserves
owned at December 31, 1998, 1997 and 1996 and changes in proved reserves during
the last three years are contained in the Supplemental Information on Oil and
Gas Exploration and Production Activities (Supplemental Information) in the
Anadarko Petroleum Corporation 1998 Consolidated Financial Statements
(Consolidated Financial Statements) under Item 8 of this Form 10-K Annual Report
(Form 10-K). The Company files annual estimates of certain proved oil and gas
reserves with the Department of Energy, which are within 5% of these amounts.
Also contained in the Supplemental Information in the Consolidated
Financial Statements are the Company's estimates of future net cash flows,
discounted future net cash flows before income taxes, and discounted future net
cash flows after income taxes from proved reserves.
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Proved oil and gas reserves are the estimated quantities of natural gas,
crude oil, condensate and NGLs which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Reserves are
considered proved if economical producibility is supported by either actual
production or conclusive formation tests. Reserves which can be produced
economically through application of improved recovery techniques are included in
the "proved" classification when successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based. Proved developed
oil and gas reserves can be expected to be recovered through existing wells with
existing equipment and operating methods.
The Company emphasizes that the volumes of reserves are estimates which, by
their nature, are subject to revision. The estimates are made using all
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 performance data.
VOLUMES AND PRICES
The following table shows the Company's annual production volumes. Volumes
for natural gas are in billion cubic feet (Bcf) at a pressure base of 14.73
pounds per square inch (psi) and volumes for oil, condensate and NGLs are in
thousands of barrels (MBbls). Total volumes are in MMEEBs. For this computation,
six thousand cubic feet (Mcf) of gas is the energy equivalent of one barrel of
oil, condensate or NGLs.
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1998 1997 1996
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UNITED STATES
Natural gas (Bcf) 176.7 178.7 164.9
Oil and condensate (MBbls) 9,752 9,083 6,702
Natural gas liquids (MBbls) 6,640 5,467 3,514
Total (MMEEBs) 45.8 44.3 37.7
ALGERIA*
Oil and condensate (MBbls) 1,374 -- --
Total (MMEEBs) 1.4 -- --
TOTAL
Natural gas (Bcf) 176.7 178.7 164.9
Oil and condensate (MBbls) 11,126 9,083 6,702
Natural gas liquids (MBbls) 6,640 5,467 3,514
Total (MMEEBs) 47.2 44.3 37.7
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* In May 1998, production commenced from the Company's operations in Algeria.
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The following table shows the Company's annual average wellhead sales
prices and average production costs.
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1998 1997 1996
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UNITED STATES
Sales price
Natural gas (per Mcf) $ 1.92 $ 2.30 $ 2.13
Oil and condensate (per barrel) 11.44 18.03 20.21
Natural gas liquids (per barrel) 10.29 14.64 16.86
Production cost (per EEB) 3.64 3.56 3.22
ALGERIA*
Sales price
Oil and condensate (per barrel) $11.99 -- --
Production cost (per EEB) 4.72 -- --
TOTAL
Sales price
Natural gas (per Mcf) $ 1.92 $ 2.30 $ 2.13
Oil and condensate (per barrel) 11.51 18.03 20.21
Natural gas liquids (per barrel) 10.29 14.64 16.86
Production cost (per EEB) 3.67 3.56 3.22
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* In May 1998, production commenced from the Company's operations in Algeria.
Additional information on volumes, prices and markets is contained in
Analysis of Volumes and Prices and Marketing Strategies under Item 7 of this
Form 10-K. Information on major customers is contained in Note 10 of the Notes
to Consolidated Financial Statements under Item 8 of this Form 10-K.
PROPERTIES AND ACTIVITIES -- UNITED STATES
U.S. reserves comprise 74% of Anadarko's total proved reserves, compared to 74%
in 1997 and 79% in 1996.
ONSHORE
OVERVIEW The Company's onshore reserves comprise about 52% of total proved
reserves. These reserves are located principally in Kansas, Oklahoma, Texas and
Alaska. In 1998, average production from the Company's onshore properties was
334 million cubic feet per day (MMcf/d) of gas and 38,000 barrels of liquids per
day, or 73% of the Company's total production volumes. Anadarko has 1,355,000
gross (540,000 net) undeveloped lease acres and 1,073,000 gross (824,000 net)
developed lease acres onshore in the U.S.
The accompanying map illustrates by state Anadarko's undeveloped and
developed net acreage, number of net producing wells and other data relevant to
its onshore oil and gas operations.
HUGOTON EMBAYMENT One of Anadarko's largest assets is its reserves in the
Hugoton Embayment, located in southwest Kansas and the Oklahoma and Texas
panhandles. Currently, Anadarko controls about one million lease acres in this
area and operates about 2,750 wells. Anadarko's net production from the Hugoton
Embayment in 1998 was 84.4 Bcf of gas and 1.45 MMBbls of oil and condensate, or
about 33% of the Company's total production volumes.
In 1998, Anadarko only drilled 118 conventional wells, seven horizontal
wells and recompleted 24 wells in the area due to lower oil and gas prices. By
comparison, 1997 activity included 177 conventional wells, 49 horizontal wells
and 55 recompletions. It should be noted that the 1997 activity was
exceptionally high as a result of a special initiative to increase domestic
production growth.
Anadarko's activities in the Hugoton Embayment are concentrated on two
areas: the shallow gas fields in southwest Kansas and the Oklahoma and Texas
panhandles and the deeper oil and gas zones below the shallow gas production.
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ONSHORE MAP (GRAPHIC MATERIAL OMITTED)
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NET NET NET
DEVELOPED UNDEVELOPED PRODUCING
ACRES ACRES WELLS
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ONSHORE:
United States
Alaska* 302 244,554 --
Colorado 3,003 5,057 --
Kansas* 355,126 60,412 1,594
Mississippi* 326 35,041 --
Montana 162 250 --
Nebraska 96 139 --
New Mexico 14,930 1,900 129
North Dakota 40 -- --
Oklahoma* 249,055 89,254 1,033
Texas* 184,126 60,611 2,197
Utah* 15,123 14,240 42
Wyoming 1,359 29,030 --
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OFFICE LOCATIONS:
United States
Anchorage, Alaska
Houston, Texas
Midland, Texas
Liberal, Kansas
*Drilling activities were conducted in these areas in 1998.
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Highlights from Anadarko's deep drilling program in the Hugoton Embayment
during 1998 included the discovery of a new interval in the prolific Chester
formation. The Smith AF-1 well, which was drilled in the Lorena Field of Beaver
County, Oklahoma, tested 1.5 MMcf/d of gas and 82 barrels of oil per day (BOPD)
and confirmed the presence of the Basal Chester reservoir. In 1998, the Company
drilled six wells in the Lorena Field, five of which were successful and were
producing 7.5 MMcf/d of gas and 617 BOPD at year-end 1998.
In Seward County, Kansas, Anadarko continued a major delineation program in
the Archer Field targeting the deeper St. Louis formation. While traditionally
more prolific than other zones in the area, the St. Louis interval is more
difficult to image with seismic. Data obtained as part of a 3-D seismic
acquisition program in 1997 was instrumental in allowing the Company to identify
prospects. During 1998, a total of 14 wells were drilled in the St. Louis
formation. During 1999, Anadarko plans to shoot an additional 34 square miles of
3-D seismic data in an effort to extend the Archer and Lorena Fields.
In 1998, Anadarko obtained approximately 180 square miles of seismic
information on acreage acquired in 1997 as part of a joint venture with Mobil
Exploration and Production, U.S., Inc. Anadarko serves as operator of the 50/50
partnership.
Over the last five years, Anadarko has drilled more than 600 wells (gross)
in the Hugoton Embayment. In addition to development drilling, Anadarko's
operations in this area have benefited from acquisitions of producing
properties, gas gathering systems and waterflood operations.
CENTRAL OKLAHOMA Anadarko more than doubled its acreage position in Central
Oklahoma's Golden Trend area in 1998 after acquiring 37,000 gross acres from OXY
USA, Inc. The $118 million purchase gave the Company working interests in five
oil and gas fields with net production of 2,600 BOPD and 5.4 MMcf/d of gas, as
well as an interest in an eight-inch, 120-mile CO(2) pipeline. Prior to the
acquisition, Anadarko operated about 300 oil and gas wells in the Golden Trend
area and had interests in 31,000 gross acres. The OXY purchase added 370
producing and injection wells. Aside from the additional production volumes, the
OXY purchase offers Anadarko opportunities to build on its success in a
traditionally gas-producing area. The properties contain proved reserves of 19.2
MMEEBs and Anadarko has identified a significant number of additional prospects
that could increase reserves and production of oil and gas in the future. With
the purchase of the pipeline, Anadarko becomes the only CO(2) provider in the
area. In addition to using CO(2) for its own tertiary recovery operations, the
Company is marketing CO(2) to third parties.
At year-end 1998, gross production from the Company's 286 Golden Trend
wells was 31.1 MMcf/d of gas and 900 BOPD. In the last five years, Anadarko has
drilled 100 wells in the Golden Trend and implemented a 40-acre infill drilling
program. Since 1994, the Company has drilled 31 increased density wells,
including 22 in 1998 alone. Value is added to the Company's Golden Trend assets
through the Anadarko-operated Antioch Gathering System. The system has 130 miles
of pipe and connects over 200 wells in the area. During 1998, the Antioch system
moved an average of 28 MMcf/d of gas and 300 BOPD.
PERMIAN BASIN Drilling activity during 1998 declined from record levels
achieved in 1997, due directly to low oil prices. Anadarko drilled 94 Permian
Basin wells in 1998 (39 primary and 55 secondary). About 130 wells planned for
1998 were deferred. Net oil production from the area at year-end 1998 was 10,700
BOPD, approximately 35% of the Company's total oil production volumes.
In the Permian Basin, Anadarko holds interests in 227,000 gross (137,000
net) lease acres and operates about 2,800 active wells. In 1998, Anadarko
increased its acreage position in the Permian Basin by acquiring an additional
14,800 net acres.
A field extension program which was started in 1994 in the Ketchum Mountain
(Clearfork) Field of Irion County, Texas, continued in 1998 as the Company
successfully completed 19 producing wells. During 1998, Field production peaked
at 3,360 BOPD. Anadarko owns an 89% working interest in the Ketchum Mountain
Unit and a 97% working interest in the extension area.
Permian Basin activity during 1998 was also focused on infill drilling and
secondary recovery operations at the Company's TXL North and TXL South Units in
Ector County, Texas. In 1998, a total of 47 wells were drilled in the two units,
which had combined gross production at year-end of 5,100 BOPD (3,250 BOPD net).
Anadarko has a 79% working interest in the TXL North Unit and a 66% working
interest in the TXL South Unit.
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EAST TEXAS Anadarko continued to build on its success in the Bossier Sand Play
in 1998, with the completion of 36 wells in the Dew West and Mimms Creek Fields
of Freestone County, Texas. Year-end gross production from the Bossier Play, the
Company's third largest onshore gas field, was 50 MMcf/d of gas, compared to an
average of 5.4 MMcf/d of gas in 1997. The Company owns approximately 26,000
gross acres in the Bossier Sand Play and had an average of five rigs running in
1998.
GULF COAST Along the Gulf Coast of Texas, Anadarko has been active in several
exploration plays. Using 3-D seismic data and advanced processing techniques,
the Company is evaluating the exploration potential of several plays.
In the Wilcox Play of Jim Hogg County, Texas, Anadarko has a 33% working
interest in about 28,000 gross undeveloped acres.
The Company has an interest in approximately 2,000 gross undeveloped acres
held by production in the Hartburg Play, located in Orange County, Texas.
Anadarko's working interest varies from 25%-50%.
Along the upper Texas coast, Anadarko has been developing reserves in the
Yegua Trend since the early 1990s. The Company has an average 50% working
interest in about 12,000 gross lease acres in the Play.
COAL-BED METHANE Anadarko is developing coal-bed methane acreage in the Helper
Field, located in Carbon County, Utah. During 1998, Anadarko drilled 12 wells on
state and private leases, increasing the number of producing wells to 39. The
Helper Field was producing 7.6 MMcf/d (gross) at year-end with gas production
continuing to increase. An Environmental Impact Statement (EIS) is near
completion on the Company's federal leases that contain 12,500 gross acres
within the Helper Field. Completion of the EIS will allow Anadarko to continue
development of the Helper Field and drill up to 60 wells over the next three
years. Anadarko has a 100% working interest in the project.
GATHERING AND PROCESSING
GAS GATHERING SYSTEMS Anadarko owns and operates five major gas gathering
systems in the nation's mid-continent area: the Antioch Gathering System in the
Southwest Antioch Field of Oklahoma; the Hemphill Gathering System, located in
Hemphill County, Texas; the Sneed System in the West Panhandle Field of Texas;
the Hugoton Gathering System in southwest Kansas; and the Dew Gathering System
in East Texas, the first phase of which was completed in 1998. The Company's
gathering systems have more than 2,500 miles of pipeline connecting about 2,000
wells and have more than 500 MMcf/d of gas gathering capacity. In addition,
Anadarko owns interests in nine other smaller gas gathering systems.
GAS PROCESSING FACILITIES The Company's last fully-owned and operated gas
processing facility, the Sneed Gas Processing Plant in the West Panhandle Field
of Texas, was closed in 1997. The Company also sold its remaining interests in
three other plants in 1997. These decisions, together with the closing of the
Company's Panther Creek Gas Processing Plant in 1996, were based upon a strategy
to take advantage of excess capacity in more modern and efficient plants owned
by third parties in the mid-continent. This strategy resulted in an increase in
NGL product recoveries due to the improved efficiency of the newer processing
facilities. Anadarko's NGLs sales volumes increased 21% in 1998 compared to
1997.
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ALASKA
Anadarko is active in two geographic areas in Alaska -- the North Slope and the
Cook Inlet of south central Alaska. Overall, the Company had interests in
596,000 gross lease acres in Alaska at year-end 1998.
NORTH SLOPE Development of the Alpine Field, discovered by Anadarko and its
partner ARCO Alaska, Inc. in 1994, continued in 1998 and is about 40% complete.
Progress continued on the construction of gravel surfaces at the drilling pads
and airstrip. As a result of the project, which began in the winter of
1997-1998, personnel now remain on site year-round to conduct drilling and
development operations. Production modules are currently being built at
fabrication yards in Corpus Christi, Texas, and Nikiski on the Kenai Peninsula
of south central Alaska. The modules will be sea lifted to the North Slope this
summer with site installation scheduled for the 1999-2000 winter season.
In early 1998, one extension well at Alpine was drilled, the results of
which have not been released. In addition, the Field's first two horizontal
wells were drilled and tested. Among the many benefits of horizontal drilling
are more efficient recovery of reserves, fewer wells required for full field
development, lower project costs and minimal environmental impact. In fact,
Alpine is being developed much like an offshore field, with no roads or bridges
connecting to existing infrastructure. Operations will affect only 100 acres out
of the 40,000-acre productive limits of the Alpine Field -- or one-quarter of 1%
of the total surface area. The Company's development program for 1999 calls for
drilling 15 wells from the first of the Field's two pad locations. Anadarko owns
a 22% working interest in the ARCO Alaska-operated Alpine Field. The Alpine
Field is expected to begin producing at an initial rate of 40,000 BOPD (gross)
in mid-2000, ramping up to 70,000 BOPD (gross) in mid-2001. Anadarko and ARCO
Alaska also jointly hold six offshore lease blocks in the Beaufort Sea west of
the Alpine Field.
In August 1998, Anadarko announced an agreement with the Arctic Slope
Regional Corporation (ASRC) that gives the Company exclusive access to more
lands for exploration than any other oil company operating in the state. The
agreement, which covers the Foothills region of the state, provides Anadarko
with exploration rights to 2.2 million gross acres that ASRC has under title
currently. Additionally, the Company has exploration rights to an additional
900,000 gross acres now held by the Bureau of Land Management. From that 900,000
gross acres, ASRC will eventually claim title to about 240,000 gross acres as
part of its land selection rights under the Alaska Native Claims Settlement Act.
Following initial exploration work, Anadarko has the exclusive option to lease
the 2.2 million acres from ASRC and the exclusive option to acquire a lease on
the 240,000 acres when selected by ASRC. Future phases of the agreement will be
based on a work commitment by Anadarko.
In the summer of 1998, Anadarko added to its acreage position on the North
Slope by investing $8.1 million (net) to acquire 26 tracts covering 123,000
gross acres in State Lease Sale 87. The area covered by the lease sale, called
the Central Arctic State Sale Area, is located on the North Slope south of the
Alpine, Kuparuk and Prudhoe Bay Fields and east of the National Petroleum
Reserve -- Alaska (NPRA). Anadarko was the third most active bidder in the sale
and holds 20 of the tracts alone. The remaining six are held in partnership with
Petrofina Delaware, Inc.
Anadarko's Sale 87 acreage and the Alpine discovery are strategically
located near the Northeastern Planning Area of the NPRA. Anadarko and its
partners are conducting a 3-D seismic acquisition program in the NPRA in
preparation for an expected 1999 NPRA lease sale.
COOK INLET In the third quarter of 1998, Anadarko completed its first
Company-operated well in Alaska. The Lone Creek No. 1 well on the Moquawkie
Prospect flowed 10.6 MMcf/d of gas at a flowing tubing pressure of 925 psi from
53 feet of perforations at a depth of approximately 2,400 feet. This represents
one of the best shallow gas tests in the area. Located about 40 miles west of
Anchorage on lands leased from Cook Inlet Region, Inc., the well also
encountered several other possible gas zones, which total about 180 feet of
additional net pay, but have not yet been tested. Anadarko and ARCO Alaska each
have a 50% interest in the discovery. The venture is reviewing development plans
for the Lone Creek discovery, which may include additional drilling and
installation of facilities necessary to produce this and subsequent wells. The
well is located within five miles of a 16-inch natural gas pipeline. The
partners also hold approximately 56,000 gross leasehold acres in the Moquawkie
Prospect area and 178,000 gross acres total in the Cook Inlet area, which
includes an option on 16,000 gross acres not yet exercised.
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OFFSHORE
OVERVIEW At year-end 1998, about 22% of the Company's proved reserves were
located offshore in the Gulf of Mexico. Production volumes from these properties
were 176 MMcf/d of gas and 6,500 BOPD at year-end 1998. The Company's production
from the Gulf of Mexico increased during 1998 as new discoveries were brought on
line and enhancements were made to producing platforms. At year-end 1998,
Anadarko owned an average 50% working interest in 126 lease blocks representing
182,000 gross (56,000 net) acres in developed properties and 514,000 gross
(276,000 net) acres in undeveloped properties offshore.
The accompanying map illustrates the Company's undeveloped and developed
net acres, number of producing net wells and other data relevant to its offshore
properties.
EXPLORATION Anadarko is active in exploration projects in conventional,
sub-salt and deepwater plays in the Gulf of Mexico. In 1998, the Company drilled
five offshore exploration wells (two sub-salt and three conventional).
Major sub-salt discoveries were announced at Anadarko's Tanzanite and
Hickory prospects offshore Louisiana. After being drilled to 14,350 feet, the
Tanzanite No. 1 discovery well encountered a 600-foot sand with 427 feet of
continuous hydrocarbon pay. The reservoir rock is of high quality with excellent
porosity and permeability. During testing operations, Tanzanite flowed 21,917
BOPD and 29.7 MMcf/d of gas, a Company record. Additional drilling and refined
seismic imaging will be required to determine the true areal extent of the main
reservoir and the extent of other pay zones. Construction and design work for a
platform is now underway, with first production slated to begin in the third
quarter of 2000. Anadarko has a 100% working interest in the Tanzanite discovery
which is located on Eugene Island Block 346, about 75 miles offshore Louisiana
in 314 feet of water. One development well and one wildcat well at Tanzanite are
currently drilling.
In the fourth quarter of 1998, Anadarko announced a discovery at Hickory,
its second success of the year in the sub-salt play. Located on Grand Isle Block
116 in 320 feet of water, Hickory encountered 300 feet of net hydrocarbon pay in
multiple sands. On its way to a total depth of 21,600 feet, the discovery well
penetrated an 8,000-foot section of salt, which is believed to be the thickest
ever drilled in the Gulf of Mexico. A development well was spudded from the same
surface location in November 1998 to help develop the reservoir. Design work has
already started on a platform in anticipation of possible first production in
the second half of 2000. Anadarko serves as operator of Grand Isle Blocks 110,
111 and 116 and has a 50% working interest. Partners include Shell Oil Company
(37.5%) and Ocean Energy (12.5%).
During 1999, Anadarko expects to drill up to four exploration wells on its
sub-salt prospects in the Gulf of Mexico. The Company is completing several
imaging projects that will help determine its next sub-salt drilling prospects.
Anadarko has identified about 20 sub-salt prospects across its holdings in the
Gulf.
Conventional offshore exploration projects in 1998 included the A-7 well at
East Cameron 157, which discovered new reserves that were fault-separated from
the main field. The A-7 well was completed at a rate of 40 MMcf/d of gas and
1,100 barrels of condensate per day (BCPD). Anadarko has a 100% working interest
in the Block which is located off the Louisiana coast.
At High Island Block 376, the B-5 extended-reach well was completed and
placed on production at 4 MMcf/d of gas. The completion of a compressor package
at the platform during the fourth quarter more than doubled the Company's output
to 21 MMcf/d of gas. Anadarko owns a 100% working interest in the B-5 well and a
33.8% working interest in the Field.
9
<PAGE> 11
In addition to offshore properties in the conventional and sub-salt plays,
Anadarko also has working interests in 34 deepwater lease blocks, 26 of which
are Company-operated. Seismic data were acquired over several of the deepwater
blocks during 1998. Lease blocks in the deepwater Gulf of Mexico are held for
10-year terms and can be easily deferred for later drilling.
DEVELOPMENT Anadarko's 1998 work program combined projects to bring recent
discoveries on line and enhance production from existing platforms.
The Agate Field, discovered in 1996 by Anadarko and its partner Phillips
Petroleum (operator), was placed on production in the third quarter of 1998.
Field production is from one sub-sea well, located at Ship Shoal Block 361 about
70 miles offshore Louisiana. The well was tied back to the Mahogany platform,
which is six miles to the east, through a sub-sea completion. Average gross
production from Agate in 1998 was 1,940 BOPD and 12 MMcf/d of gas. Anadarko has
a 50% working interest in the Block. Additional development wells are being
evaluated.
At the Phillips-operated Mahogany platform (Ship Shoal Block 349/359), the
A-4, A-5 and A-7 wells were completed in the main pay zone ("P" sand) during
1998. Year-end gross production from the platform was 26 MMcf/d of gas and
13,700 BOPD. Anadarko has a 37.5% working interest in the Mahogany Field.
Much of the 1998 work program in the Gulf of Mexico centered on improving
production from existing platforms, particularly at the Matagorda Island 622/623
Complex, located offshore Texas. Construction of a new pipeline that connects
the platform to the El Paso Energy-operated Tomcat system was completed. The
seven-mile tie-in alleviated a major production bottleneck and increased volumes
from 270 MMcf/d of gas just prior to the start of the pipeline project to a
current rate of 360 MMcf/d of gas. During 1998, the C-2 sidetrack well was
completed at the Complex and placed on production at 65.6 MMcf/d of gas and 453
BCPD. Anadarko owns a 37.5% interest in the Amoco-operated Complex.
10
<PAGE> 12
OFFSHORE MAP (GRAPHIC MATERIAL OMITTED)
<TABLE>
<CAPTION>
NET NET NET
DEVELOPED UNDEVELOPED PRODUCING
ACRES ACRES WELLS
----------- ----------- -----------
OFFSHORE:
United States
<S> <C> <C> <C>
Florida -- 39,827 --
Louisiana 21,883 132,529 32
Mississippi -- 16,594 --
Texas 34,351 86,433 27
</TABLE>
<PAGE> 13
PROPERTIES AND ACTIVITIES -- INTERNATIONAL
OVERVIEW Over the past few years, Anadarko has devoted a larger portion of its
capital expenditures to international exploration ventures. Development work is
underway in Algeria and exploration activities are being conducted in Eritrea,
the North Atlantic Margin and Tunisia. Studies are also underway in other
prospective areas around the world. In May 1998, the Company's first production
from Algeria commenced. See Additional Factors Affecting Business -- Foreign
Operations Risk under Item 7 of this Form 10-K.
ALGERIA Anadarko's largest international venture involves development of liquid
hydrocarbons discovered by the Company in Algeria's Sahara Desert. Since 1989,
Anadarko has drilled 40 successful wells (13 exploration and 27 delineation) and
has submitted Commerciality Reports for 11 fields in Algeria. The Company has
booked proved reserves of 245 MMBbls (net) of crude oil as of year-end 1998, up
33% from 184 MMBbls (net) at year-end 1997. The Company estimates that more than
2.0 billion barrels (gross) of crude oil and condensate have been discovered to
date on its portion of the lease area.
As of December 31, 1998, the Company's cumulative net investment in Algeria
was $557 million (including capitalized interest and overhead), about $156
million of which was spent in 1998. Anadarko plans to invest about $99 million
in Algeria in 1999. At the end of 1998, the Company had 3.4 million gross (1.3
million net) acres in Algeria.
The accompanying map illustrates the Company's developed and undeveloped
acreage, number of productive wells and other data relevant to its properties in
Algeria.
Anadarko's interest in the production sharing agreement (PSA) relating to
the four company-operated blocks is 50% before participation at the exploitation
stage by SONATRACH, the national oil and gas enterprise of Algeria. The Company
has two partners, each with a 25% interest in the Algerian venture, also prior
to participation by SONATRACH; they are LASMO Oil (Algeria) Limited, a
wholly-owned subsidiary of LASMO plc, and Maersk Olie Algeriet AS, a
wholly-owned subsidiary of Maersk Olie Og Gas AS, a company in the Danish A.P.
Moeller group. Under the terms of the PSA, liquid hydrocarbons that are
discovered, developed and produced will be shared by SONATRACH, Anadarko and its
two partners. SONATRACH is responsible for 51% of development and production
costs. In addition, Anadarko and its partners are entitled to recover a portion
of exploration costs out of production in the exploitation phase. SONATRACH is
the beneficial owner of 9.9% of Anadarko's outstanding common stock.
During 1998, Anadarko and its partners commenced first oil production and
recorded the highest level of drilling activity since work began in the program
in 1989. First oil production began on May 4, 1998 from Stage I facilities at
the HBNS Field. Oil produced from the HBNS Field is sold as Saharan Blend, a
very high quality crude that provides refiners with large quantities of premium
products like jet and diesel fuel. From May to November 1998, production from
the HBNS Field averaged 18,700 BOPD (gross). In December 1998, production from
the HBNS Field increased to an average of 38,000 BOPD (gross) with the start-up
of SONATRACH's new 30-inch oil pipeline. In 1999, Anadarko expects gross
production to average about 60,000 BOPD. During 1998, about 1.4 MMBbls of oil
were produced net to Anadarko. Two cargoes of crude were lifted in 1998 and sold
to major refiners in southern Europe. Other partners lifted separate cargoes.
Anadarko expects to lift between eight to ten cargoes of crude oil from its
operations in Algeria during 1999. In late 1998, bids were received for
construction of Stage II production facilities at the HBNS Field. By the end of
1999's first quarter, Anadarko expects to award an Engineering, Procurement and
Construction contract for the Stage II facilities, which will expand production
from the HBNS Field to 135,000 BOPD (gross) beginning in 2001.
In 1998, Anadarko and its partners completed 21 exploration, delineation
and development wells on Blocks 404 and 208. By comparison, the group drilled 33
total wells in the project between 1991-1997. Up to five drilling rigs were
active in field delineation and development drilling during 1998. Of the 21
wells drilled in 1998, 18 were successful. One exploration well was drilled and
was successful -- the El Merk North (EMN) Field discovery, which was announced
in March 1998. The EMN No. 1 well encountered 36 meters (119 feet) of net pay in
the Triassic formation and flowed 21,395 BOPD, the highest flow rate achieved by
Anadarko and its partners in Algeria. A deeper gas and condensate zone was also
successfully tested. In addition, ten delineation wells were drilled in 1998
with eight successful. Ten development wells also were drilled with nine
successful.
12
<PAGE> 14
ALGERIA MAP (GRAPHIC MATERIAL OMITTED)
ALGERIA
Undeveloped Acreage - 3.3 million acres (1.3 million net to Anadarko)
Producing Acreage (HBNS Field) - 57,000 acres (14,000 net to Anadarko)
Productive Wells - 45 (17 net to Anadarko)
Fields discovered to date shown graphically
EL BIAR Field (formerly HBN)
BRSE/BSFN ROD Field*
SFNE Field*
BSF Field*
HBNS Field*
HBNSE Field
RBK Field*
QBN Field
BKNE Field*
QOUBBA Field (formerly BKE)*
EKT Field*
EME/EMK/EMN Field*
Blocks shown graphically
401a
402a*
404*
208*
211
245
*Drilling activities were conducted in these areas in 1998.
<PAGE> 15
Political unrest continues in Algeria. Anadarko is closely monitoring the
situation and has taken reasonable and prudent steps to ensure the safety of
employees and the security of its facilities in the remote regions of the Sahara
Desert. Anadarko is presently unable to predict with certainty any effect the
current situation may have on activity planned for 1999 and beyond. However, the
situation has not had any material effect to date on the Company's operations.
ERITREA In September 1995, Anadarko signed an agreement with the government of
the State of Eritrea for offshore exploration on a 6.7 million-acre area in the
Red Sea, known as the Zula Block. This acreage position was expanded in late
1997 with the signing of a second PSA for 2.3 million acres. This area is called
the Edd Block and is contiguous with the Zula Block, giving Anadarko exploration
rights on 9.0 million gross acres in Eritrea. In 1998, Anadarko and its partners
drilled two unsuccessful exploration wells on the Zula Block. The venture's
third exploration well began drilling on the Edd Block in January 1999. Anadarko
serves as operator and holds a 50% interest in both the Zula and Edd
concessions. The remaining interests are held by Agip Eritrea B. V. with 30% and
Burlington Resources Eritrea Limited with 20%.
Border disputes between Eritrea and Ethiopia continue. The Company is
closely monitoring this situation and has taken reasonable and prudent steps to
ensure the safety of employees and the security of its facilities in Eritrea.
Anadarko presently is unable to predict with certainty any effect the current
situation may have on activity planned for 1999 and beyond. However, the
situation has not had any material effect to date on the Company's operations.
NORTH ATLANTIC MARGIN During 1997, Anadarko established an exploration presence
in the North Atlantic Margin, located north and west of Scotland and offshore
Ireland. Through two separate bid rounds, Anadarko and its partners were awarded
five exploration areas totaling about 1.2 million gross acres.
Anadarko has been studying the exploration potential in this area since
1995. During 1997, Anadarko and its partners were awarded three tranches in the
United Kingdom's 17th Bid Round and two exploration areas in the Irish Bid
Round. Anadarko will participate in its first exploration well on Tranche 61
which is expected to begin drilling in the first half of 1999. Anadarko has a
7.5% interest in the well. Anadarko and its partners have a significant amount
of 2-D and 3-D seismic data and expect to drill several exploration targets over
the next four years. Anadarko has an average interest of 30% in the exploration
areas.
TUNISIA In 1997, Anadarko became a 50% partner (prior to a back-in by the
Tunisian government) in Agip S.p.A.'s Jenein Nord Block -- a 384,000 gross acre
exploration area in Tunisia near the Algerian border. The Jenein Nord Block is
contiguous with the Company's Blocks 401a and 402a in Algeria (operated by BHP
Algeria). Several exploration leads have been identified and exploration
drilling is expected to begin in mid-1999.
PERU The Company has decided not to continue its exploration efforts on Block
84 in Peru at this time. Anadarko served as operator of the exploration venture
with a 100% interest.
JORDAN Anadarko has decided not to pursue exploration efforts on the Safawi
Block in the Hashemite Kingdom of Jordan. Anadarko operated the exploration
venture with a 50% interest.
15
<PAGE> 16
DRILLING PROGRAMS
The Company's 1998 drilling program again focused on known oil and gas
provinces onshore and offshore North America and Algeria. Onshore activity was
concentrated in Kansas, Oklahoma, the Texas panhandle, the Permian Basin of west
Texas, Alaska and Utah. Exploration activity consisted of 25 wells onshore in
the U.S., three wells offshore in the Gulf of Mexico, 16 wells in Algeria, and
one well in Eritrea. Development activity included 341 wells onshore in the
U.S., six wells offshore in the Gulf of Mexico and 10 wells in Algeria.
DRILLING STATISTICS
The following table shows the results of the oil and gas wells drilled and
tested:
<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
------------------------------ ------------------------------
PRODUCTIVE DRY HOLES TOTAL PRODUCTIVE DRY HOLES TOTAL TOTAL
---------- --------- ----- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1998
United States 7.1 13.1 20.2 245.1 30.4 275.5 295.7
Algeria 5.1 1.1 6.2 2.0 0.5 2.5 8.7
Eritrea -- 0.5 0.5 -- -- -- 0.5
---- ---- ---- ----- ---- ----- -----
Total 12.2 14.7 26.9 247.1 30.9 278.0 304.9
---- ---- ---- ----- ---- ----- -----
1997
United States 6.1 3.1 9.2 433.8 50.9 484.7 493.9
Algeria 3.8 2.0 5.8 0.7 -- 0.7 6.5
---- ---- ---- ----- ---- ----- -----
Total 9.9 5.1 15.0 434.5 50.9 485.4 500.4
---- ---- ---- ----- ---- ----- -----
1996
United States 5.3 5.8 11.1 163.5 37.9 201.4 212.5
Algeria 2.0 0.5 2.5 -- -- -- 2.5
Indonesia 1.0 -- 1.0 -- -- -- 1.0
---- ---- ---- ----- ---- ----- -----
Total 8.3 6.3 14.6 163.5 37.9 201.4 216.0
---- ---- ---- ----- ---- ----- -----
</TABLE>
The following table shows the number of wells in the process of drilling or
in active completion stages and the number of wells suspended or waiting on
completion as of December 31, 1998:
<TABLE>
<CAPTION>
UNITED
STATES ALGERIA TOTAL
------------ ----------- ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
WELLS IN THE PROCESS OF DRILLING OR IN ACTIVE
COMPLETION
Exploration 3 2.5 -- -- 3 2.5
Development 7 3.6 2 0.5 9 4.1
WELLS SUSPENDED OR WAITING ON COMPLETION
Exploration 4 3.0 -- -- 4 3.0
Development 34 28.9 -- -- 34 28.9
</TABLE>
16
<PAGE> 17
PRODUCTIVE WELLS
As of December 31, 1998, the Company owned productive wells as follows:
<TABLE>
<CAPTION>
UNITED STATES ALGERIA TOTAL
------------- ----------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- --- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil wells* 5,191 2,910 45 17 5,236 2,927
Gas wells* 2,848 2,144 -- -- 2,848 2,144
----- ----- -- -- ----- -----
Total 8,039 5,054 45 17 8,084 5,071
----- ----- -- -- ----- -----
- ---------------
* Includes wells containing multiple completions
Oil wells 74 26 -- -- 74 26
Gas wells 230 135 -- -- 230 135
</TABLE>
SEGMENT AND GEOGRAPHIC INFORMATION
Information on operations by segment and geographic location is contained
in Note 11 of the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K.
EMPLOYEES
As of December 31, 1998, the Company employed 1,476 persons. The Company's
employees are not represented by any union. Relations between the Company and
its employees are considered to be satisfactory and the Company has had no work
stoppages or strikes.
REGULATORY AND LEGISLATIVE DEVELOPMENTS
See Regulatory Matters under Item 7 of this Form 10-K.
ADDITIONAL FACTORS AFFECTING BUSINESS
See Additional Factors Affecting Business under Item 7 of this Form 10-K.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time properties believed to be suitable for
drilling operations are acquired by the Company. Prior to the commencement of
drilling operations, a thorough title examination of the drill site tract is
conducted and curative work is performed with respect to significant defects, if
any, before proceeding with operations. A thorough title examination has been
performed with respect to substantially all leasehold producing properties owned
by the Company. Anadarko believes the title to its leasehold properties is good
and defensible in accordance with standards generally acceptable in the oil and
gas industry subject to such exceptions which, in the opinion of counsel
employed in the various areas in which the Company has conducted exploration
activities, are not so material as to detract substantially from the use of such
properties. The leasehold properties owned by the Company are subject to
royalty, overriding royalty and other outstanding interests customary in the
industry. The properties may be subject to burdens such as liens incident to
operating agreements and current taxes, development obligations under oil and
gas leases and other encumbrances, easements and restrictions. Anadarko does not
believe any of these burdens will materially interfere with its use of these
properties.
CAPITAL SPENDING
See Capital Expenditures, Liquidity and Long-term Debt under Item 7 of this
Form 10-K.
17
<PAGE> 18
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratios of earnings to combined fixed charges and preferred
stock dividends for the years ended December 31, 1998, 1997 and 1996 were 0.05,
3.04 and 3.34, respectively. As a result of the Company's net loss in 1998, the
Company's earnings did not cover combined fixed charges and preferred stock
dividends by $101 million in 1998. These ratios were computed by dividing
earnings by fixed charges. For this purpose, earnings include income before
income taxes and fixed charges. Fixed charges include interest and amortization
of debt expenses, the estimated interest component of rentals and preferred
stock dividends. See Management's Discussion and Analysis of Financial Condition
and Results of Operations under Item 7 of this Form 10-K.
ITEM 2. PROPERTIES
See information appearing under Item 1 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
KANSAS AD VALOREM TAX The Natural Gas Policy Act of 1978 allowed a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on the Federal Energy Regulatory
Commission (FERC) ruling that the Kansas ad valorem tax was such a tax, the
Company collected the Kansas ad valorem tax.
Background of Present Litigation FERC's ruling regarding the ability of
producers to collect the Kansas ad valorem tax was appealed to the United States
Court of Appeals for the District of Columbia Circuit (D.C. Circuit). The Court
held in June 1988 that FERC failed to provide a reasoned basis for its findings
and remanded the case to FERC.
Ultimately, the D.C. Circuit issued a decision on August 2, 1996 ruling
that producers must refund all Kansas ad valorem taxes collected relating to
production since October 1983. The Company filed a petition for writ of
certiorari with the Supreme Court. That petition was denied on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest at
issue which has not been paid to date, assuming that the October 1983 effective
date remains in effect, is about $42.7 million (pretax) as of December 31, 1998.
FERC Proceedings Depending on future FERC orders, the Company could be required
to pay all or part of the amounts claimed by all pipelines (which might include
PanEnergy) pending further potential review by FERC or the courts.
PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit in the
Federal District Court for the Southern District of Texas against PanEnergy
seeking declaration that pursuant to prior agreements Anadarko is not required
to issue refunds to PanEnergy for the principal amount of $14 million (pretax)
and, if the petition for adjustment is denied in its entirety by FERC with
respect to PanEnergy refunds, interest in an amount of $27.1 million (pretax) as
of December 31, 1998. The Company also seeks from PanEnergy the return of
$816,000 of the $830,000 (pretax) charged against income in 1993 and 1994. In
response to a motion filed by PanEnergy, the United States District Court issued
an order on March 17, 1998 staying the litigation, pending the exercise by FERC
of its regulatory jurisdiction.
FERC Order of October 13, 1998 On October 13, 1998, FERC issued a final order
on Anadarko's complaint. The order declares that Anadarko Production Company
(now an affiliate of Duke Energy) is responsible as first seller for making
refunds of Kansas ad valorem tax reimbursements collected from 1983 through
August 1, 1985. The Company estimates this amount to be as much as $26 million.
The Company is responsible to make refunds for reimbursements it collected as
first seller from August 1, 1985 through 1988. The Company estimates this amount
to be as much as $16 million. The FERC order states that whether Anadarko
Production Company or the Company is entitled to reimbursement from another
party for the refunds ordered is a matter to be pursued in an appropriate
judicial forum. On January 15, 1999, FERC issued an order denying a request for
rehearing filed by PanEnergy and reaffirming the October 1998 order. FERC
18
<PAGE> 19
may, in the near future, issue an order based upon the above allocation
regarding when the refunds must be paid and the specific refund amount. The
issue of reimbursement will now be pursued in U.S. District Court.
Kansas Corporation Commission (KCC) Proceeding On April 30, 1998, the Company's
subsidiary, Anadarko Gathering Company (AGC), filed a petition with the KCC to
clarify AGC's rights and obligations, if any, related to the payment by first
sellers of Kansas ad valorem tax refunds. The refunds at issue relate to sales
made by Anadarko Production Company, a PanEnergy affiliate, through facilities
known as the Cimmaron River System during the time period from 1983 to 1988. AGC
purchased the Cimmaron River System from Centana, the successor of Anadarko
Production Company in 1995. The petition, among other things, asks the KCC to
determine whether AGC or Anadarko Production Company is responsible for the
payment or distribution of refunds received from first sellers to Anadarko
Production Company's former customers and requests guidance concerning the
disposition of refunds received that are attributable to sales made to Anadarko
Production Company customers that did not reimburse Anadarko Production Company
for Kansas ad valorem taxes during the relevant time periods. This matter is
presently being pursued before the KCC. The KCC staff is expected to issue a
recommendation upon Anadarko's petition in this matter by March 15, 1999.
Anadarko's net income for 1997 included a $1.8 million charge (pretax)
related to the Kansas ad valorem tax refunds. This charge reflects all principal
and interest which may be due at the conclusion of all regulatory proceedings
and litigation to parties other than PanEnergy. The Company is unable at this
time to predict the final outcome of this matter and no provision for liability
(excluding the amounts recorded in 1993, 1994 and 1997) has been made.
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 the
Company, the liability with respect to these actions will not have a material
effect on the Company.
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
AGE AT END
NAME OF 1999 POSITION
---- ---------- --------
<S> <C> <C>
Robert J. Allison, Jr. 60 Chairman of the Board, President and Chief
Executive Officer
John N. Seitz 48 Executive Vice President, Exploration and
Production
Charles G. Manley 55 Senior Vice President, Administration
Michael E. Rose 52 Senior Vice President, Finance and Chief Financial
Officer
Rex Alman III 48 Vice President, Domestic Operations
Michael D. Cochran 57 Vice President, Exploration
James R. Larson 49 Vice President and Controller
Richard A. Lewis 55 Vice President, Human Resources
J. Stephen Martin 43 Vice President and General Counsel
Mark L. Pease 43 Vice President, Algeria
Gregory M. Pensabene 49 Vice President, Government Relations
Albert L. Richey 50 Vice President and Treasurer
Richard J. Sharples 52 Vice President, Marketing
Bruce H. Stover 50 Vice President, Worldwide Business Development
William D. Sullivan 43 Vice President, International Operations
A. Paul Taylor, Jr. 50 Vice President, Corporate Communications
</TABLE>
19
<PAGE> 20
Mr. Allison was named Chairman and Chief Executive Officer effective
October 1986. In January 1993, he was elected the additional position of
President. He has worked for the Company since 1973.
Mr. Seitz was named Executive Vice President, Exploration and Production,
and a member of the Company's Board of Directors during 1997. He was named
Senior Vice President, Exploration in 1995 and Vice President, Exploration in
January 1993. He has worked for the Company since 1977.
Mr. Manley was named Senior Vice President, Administration in 1993. He has
worked for the Company since 1974.
Mr. Rose was named Senior Vice President, Finance and Chief Financial
Officer in 1993. He has worked for the Company since 1978.
Mr. Alman was named Vice President, Domestic Operations in 1997. Prior to
that, he was Vice President, Operations, U.S. Onshore in 1995 and Vice
President, Engineering in 1993. He has worked for the Company since 1976.
Dr. Cochran was named Vice President, Exploration in 1997. Prior to that,
he was Manager of Technology and Exploration Studies. He has been with the
Company since 1987.
Mr. Larson was named Vice President and Controller in 1995. He had served
as the Company's Controller since 1986. He has worked for the Company since
1983.
Mr. Lewis was named Vice President, Human Resources in 1995. He joined the
Company in 1985 as Manager of Employee Relations.
Mr. Martin was named Vice President and General Counsel in 1995. He joined
the Company as an attorney in 1987.
Mr. Pease was named Vice President, Algeria in 1998. Prior to this
position, he served as General Manager, Algeria since 1993. He joined the
Company in 1979 as an engineer.
Mr. Pensabene joined Anadarko in 1997 as Vice President, Government
Relations. Prior to joining Anadarko, he was a partner in various law firms in
Washington, D.C.
Mr. Richey was named Vice President and Treasurer in 1995. He joined
Anadarko as Treasurer in 1987.
Mr. Sharples joined Anadarko as Vice President, Marketing in 1993. Prior to
joining Anadarko, he served as Vice President of Marketing with Maxus Energy
Corporation.
Mr. Stover was named Vice President, Worldwide Business Development in
1998. He was named Vice President, Acquisitions in 1993. He has worked for the
Company since 1980.
Mr. Sullivan was named Vice President, International Operations in 1998.
Prior to this position, he served as Vice President, Algeria since 1995 and Vice
President, Operations, U.S. Onshore since 1993. He has worked for the Company
since 1981.
Mr. Taylor was named Vice President, Corporate Communications in 1987. He
has worked for the Company since 1986.
All officers of Anadarko are elected in April of each year at an
organizational meeting of the Board of Directors to 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.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information on the market price and cash dividends declared per share of
common stock is included in the Stockholders' Information in the Annual Report,
which is incorporated herein by reference.
As of December 31, 1998, there were approximately 5,322 direct holders of
Anadarko common stock. The following table sets forth the amount of dividends
paid on Anadarko common stock during the two years ended December 31, 1998.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
thousands ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998 $4,496 $6,029 $6,083 $5,922
1997 $4,553 $4,401 $4,479 $4,493
</TABLE>
The amount of future common stock dividends will depend on earnings,
financial condition, capital requirements and other factors, and will be
determined by the Directors on a quarterly basis.
For additional information, see Dividends under Item 7 and Note 8 of the
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
See Summary Financial Data on page 3 of the Annual Report, which is
incorporated herein by reference.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL RESULTS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996
millions except per share amounts ------ ------ ------
<S> <C> <C> <C>
Revenues $560.3 $675.1 $570.1
Costs and expenses 567.6 469.8 373.4
Interest expense 57.7 41.0 39.0
Net income (loss) available to common stockholders $(49.3) $107.3 $100.7
Earnings (loss) per share -- basic $(0.41) $ 0.90 $ 0.85
Earnings (loss) per share -- diluted $(0.41) $ 0.89 $ 0.85
</TABLE>
NET INCOME AND REVENUES For 1998, Anadarko reported a net loss available to
common stockholders of $49.3 million, or 41 cents per share (diluted), compared
to 1997 net income of $107.3 million, or 89 cents per share (diluted). Revenues
for 1998 were down 17% to $560.3 million compared to 1997 revenues of $675.1
million. The decrease in revenues and net income was due to the steep decline in
crude oil, natural gas and natural gas liquids (NGLs) prices, higher operating
expenses, increased administrative and general costs, higher interest expense,
and preferred stock dividends. Anadarko's 1998 performance was also adversely
affected by a non-cash charge during the fourth quarter of $70 million before
taxes ($45 million after taxes) to impair all exploration activity in Peru and
Jordan, as well as two dry holes drilled on the Zula Block in Eritrea. Excluding
the impairment, Anadarko's net loss for 1998 was $4.7 million, or 4 cents per
share (diluted).
Anadarko's 1996 net income was $100.7 million (85 cents per share), which
included a gain of $19.4 million ($12.3 million after income taxes) on the sale
of the Company's Indonesia interests and was partially offset by provisions for
impairments of other international properties of $5.4 million ($3.4 million
after income taxes). Revenues for 1996 were $570.1 million. The increases in
revenues and net income in 1997 compared to 1996 reflect higher production
volumes of crude oil, natural gas and NGLs coupled with higher natural gas
prices.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
1998 1997 1996
millions ------ ------ ------
<S> <C> <C> <C>
Operating expenses $160.5 $154.7 $115.3
Administrative and general 94.9 73.6 67.7
DD&A 204.5 198.8 167.2
Other taxes 37.7 42.7 37.2
(Gains) and impairments related to international properties,
net 70.0 -- (14.0)
------ ------ ------
Total $567.6 $469.8 $373.4
------ ------ ------
</TABLE>
COSTS AND EXPENSES During 1998, Anadarko's costs and expenses (excluding the
impairment) increased 6% over 1997 primarily due to increased levels of
activity. Anadarko pays close attention to costs, focusing on cost controls,
cost savings plans and the application of new technology to field production
operations. During 1998, costs and expenses were up largely due to these
reasons:
(1) Operating expenses increased $5.8 million (4%) due to costs associated
with the commencement of production in Algeria and the acquisition of
oil and gas producing properties in the U.S.
(2) Administrative and general expenses were up $21.3 million (29%),
reflecting increased costs associated with first production from
Algeria, expenses related to reducing future administrative and general
costs, and other expenses associated with the Company's growing
workforce.
(3) Depreciation, depletion and amortization (DD&A) expense rose $5.7
million (3%) due primarily to the production volume increase.
22
<PAGE> 23
Costs and expenses for 1997 increased 26% over 1996, including the effect
of the 1996 sale of the Company's Indonesia interests. In addition, costs and
expenses were impacted by the following factors:
(1) Operating expenses increased $39.4 million (34%) due primarily to
higher levels of drilling activity and revised NGLs contracts that
provide for processing through third-parties.
(2) Administrative and general expenses were up $5.9 million (9%) due to
higher costs associated with the Company's growing workforce.
(3) DD&A expense was up $31.6 million (19%) due primarily to the 18%
increase in U.S. production volumes from core areas of operation
compared to 1996.
INTEREST EXPENSE
<TABLE>
<CAPTION>
1998 1997 1996
millions ------ ------ ------
<S> <C> <C> <C>
Gross interest expense $ 82.4 $ 62.1 $ 56.0
Capitalized interest (24.7) (21.1) (17.0)
------ ------ ------
Net interest expense $ 57.7 $ 41.0 $ 39.0
------ ------ ------
</TABLE>
INTEREST EXPENSE Anadarko's gross interest expense has increased over the past
three years due primarily to higher levels of borrowings for capital
expenditures, including producing property acquisitions. Gross interest expense
in 1998 was up 33% compared to 1997 primarily due to higher average borrowings
in 1998. Gross interest expense in 1997 increased 11% compared to 1996 also
primarily due to higher average borrowings during 1997. See Liquidity and
Long-term Debt.
ANALYSIS OF VOLUMES AND PRICES
ANNUAL VOLUMES AND AVERAGE PRICES
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
NATURAL GAS (BCF) 176.7 178.7 164.9
MMcf/d 484 490 450
Price per Mcf $ 1.92 $ 2.30 $ 2.13
CRUDE OIL AND CONDENSATE (MBBLS) 11,126 9,083 6,702
MBbls/d 30 25 18
Price per barrel $11.51 $18.03 $20.21
NATURAL GAS LIQUIDS (MBBLS) 6,640 5,467 3,514
MBbls/d 18 15 10
Price per barrel $10.29 $14.64 $16.86
TOTAL ENERGY EQUIVALENT BARRELS (MMEEBS) 47.2 44.3 37.7
</TABLE>
- ---------------
Bcf -- billion cubic feet
MBbls -- thousand barrels
MBbls/d -- thousand barrels per day
Mcf -- thousand cubic feet
MMcf/d -- million cubic feet per day
MMEEBs -- million energy equivalent barrels
NATURAL GAS Anadarko's natural gas production volumes in 1998 were essentially
level with 1997. Anadarko's natural gas volumes in 1997 increased 8% compared to
1996 production primarily due to increased drilling activity in its core U.S.
onshore and offshore areas of operations. The Company's average wellhead gas
price in 1998 was down 17% from 1997. Anadarko's average wellhead gas price in
1997 had increased 8% from 1996.
23
<PAGE> 24
Natural gas markets were volatile in 1998, with the Company's average
monthly price fluctuating from a high of $2.16 per Mcf in January 1998 to a low
of $1.55 per Mcf in September 1998. Prices for natural gas weakened
significantly in 1998 due to a lack of cold weather in major population centers
in the northeast. Natural gas markets were also volatile in 1997, with the
Company's average monthly price fluctuating from a high of $3.84 per Mcf in
January 1997 to a low of $1.61 per Mcf in March 1997. Anadarko employs marketing
strategies to help manage production and sales volumes and mitigate the effect
of the price volatility that is likely to continue. See Marketing
Strategies -- Use of Derivatives.
QUARTERLY NATURAL GAS VOLUMES AND AVERAGE PRICES
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
FIRST QUARTER
Bcf 44.0 42.3 43.7
MMcf/d 489 470 480
Price per Mcf $2.02 $2.66 $1.96
SECOND QUARTER
Bcf 42.2 43.8 40.4
MMcf/d 463 481 444
Price per Mcf $1.98 $1.85 $2.04
THIRD QUARTER
Bcf 45.7 45.4 39.8
MMcf/d 497 494 433
Price per Mcf $1.82 $2.02 $1.95
FOURTH QUARTER
Bcf 44.8 47.2 41.0
MMcf/d 487 513 446
Price per Mcf $1.88 $2.67 $2.56
</TABLE>
CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS Due primarily to initial
production from Algeria and an acquisition of producing properties in central
Oklahoma, Anadarko's crude oil and condensate production in 1998 increased 22%
from 1997. The 1997 oil and condensate production volumes increased 36% compared
to 1996, due primarily to increased drilling activity in the Permian Basin and
first production from the Mahogany Field.
Anadarko's average crude oil price for 1998 decreased 36% compared to 1997.
Crude oil prices weakened significantly in 1998 due to several factors,
including: continued lack of cold weather, higher storage inventories and
perceptions of the impact of increased quotas from the Organization of Petroleum
Exporting Countries (OPEC). Crude oil prices in 1997 were down 11% compared to
1996.
Generally, the Company's oil production is sold on a monthly basis as it is
produced. Production of oil usually is not affected by seasonal swings in demand
or in market prices.
The Company's NGLs sales volumes in 1998 increased 21% compared to 1997
primarily due to the restructuring of processing agreements in late 1997. NGLs
production volumes in 1997 increased 56% compared to 1996 volumes. The 1998
average NGLs price was down 30% compared to 1997. By comparison, 1997 NGLs
prices were 13% below 1996.
24
<PAGE> 25
MARKETING STRATEGIES
NATURAL GAS The U.S. natural gas market has grown significantly throughout the
last 10 years and management believes continued growth to be likely. Natural gas
prices have been extremely volatile and are expected to continue to be so.
Management believes the Company's excellent portfolio of exploration and
development prospects should position Anadarko to continue to participate in
this growth. Anadarko's wholly-owned marketing subsidiary -- Anadarko Energy
Services Company (AES) -- is a full-service marketing company offering supply
assurance, competitive pricing and services tailored to its customers' needs.
Most of the Company's gas production is sold through AES. AES also purchases and
sells third-party gas in the Company's market areas.
AES sells natural gas under a variety of contracts and may also receive a
service fee related to the level of reliability and service required by the
customer. AES has expanded its marketing capabilities to move larger volumes of
gas into and out of the "daily" gas market to take advantage of any price
volatility. Included in this strategy is the use of leased natural gas storage
facilities and various hedging strategies to better manage price risk associated
with natural gas sales. See Use of Derivatives.
CRUDE OIL AND CONDENSATE Anadarko's revenues are derived from production in the
U.S. and Algeria. Presently, most of the Company's U.S. crude oil production is
sold on 30-day "evergreen" contracts with prices based on postings plus a
premium. Initial production from the HBNS Field in Algeria began in May 1998.
Oil from the HBNS Field is lifted by tanker load and sold as Saharan Blend to
customers primarily in the Mediterranean area. Saharan Blend is a very high
quality crude that provides refiners with large quantities of premium products
like high quality jet and diesel fuel. In 1998, the company lifted two cargoes
from Algeria. AES purchases and sells third-party crude oil and condensate in
the Company's market areas.
GAS GATHERING SYSTEMS AND PROCESSING PLANTS Anadarko's investment in gas
gathering operations allows the Company to better manage its gas production,
improve ultimate recovery of reserves, enhance the value of reserves and expand
marketing opportunities. The Company has invested $119 million to build or
acquire gas gathering systems over the last five years. Anadarko owns and
operates five major gas gathering systems in the Company's core producing areas.
The Company's overall gas gathering capacity is more than 500 MMcf/d and serves
about 2,000 wells. Approximately 80% of the gas flowing through these systems is
from Anadarko-operated wells.
During 1997, the Company shut down its last fully owned and operated gas
processing facility. The Company also sold its interests in three other plants
during 1997. The Company has elected to have its gas processed by third parties,
increasing the Company's net NGLs production volumes. The increased revenues
were partially offset by higher operating expenses.
USE OF DERIVATIVES Anadarko produces, purchases and sells natural gas, crude
oil, and NGLs. As a result, Anadarko's financial results can be significantly
affected by changes in these commodity prices. Anadarko uses derivative
financial instruments to hedge the Company's exposure to changes in the market
price of natural gas and crude oil, to provide methods to fix the price for
natural gas independently of the physical purchase or sale and to manage
interest rates. Commodity financial instruments also provide methods to meet
customer pricing requirements while achieving a price structure consistent with
the Company's overall pricing strategy. While commodity financial instruments
are intended to reduce the Company's exposure to declines in the market price of
natural gas and crude oil, the commodity financial instruments may also limit
Anadarko's gain from increases in the market price of natural gas and crude oil.
As a result, gains and losses on commodity financial instruments are generally
offset by similar changes in the realized price of natural gas and crude oil.
Gains and losses are recognized in revenues for the periods to which the
commodity financial instruments relate. Anadarko's commodity financial
instruments currently are comprised of futures, swaps and options contracts. See
Notes 1 and 6 of the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K.
While the volume of derivative commodity instruments utilized by the
Company to hedge its market price risk can vary during the year within the
boundaries of its established policy guidelines, the fair value of those
instruments at December 31, 1998 and 1997 was, in the judgment of the Company,
immaterial. Additionally, through the use of sensitivity analysis the Company
evaluates the potential effect that reasonably possible near term changes in the
market prices of natural gas and crude oil may have on the fair value of the
25
<PAGE> 26
Company's derivative commodity instruments. Based upon an analysis utilizing the
actual derivative contractual volumes and assuming a 10% adverse movement in
commodity prices, the potential decrease in the fair value of the derivative
commodity instruments at December 31, 1998 and 1997 does not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company also evaluated the potential effect that reasonably possible
near term changes in interest rates may have on the fair value of the Company's
interest rate swap agreement. Based upon an analysis utilizing the actual
interest rate in effect as of December 31, 1998 and 1997 and assuming a 10%
increase in interest rates, the potential decrease in the fair value of the
derivative interest swap instrument at December 31, 1998 and 1997 does not have
a material effect on the financial position or results of operations of the
Company.
OPERATING RESULTS
DRILLING ACTIVITY During 1998, Anadarko participated in a total of 402 gross
wells, including 192 oil wells, 149 gas wells and 61 dry holes. This compares to
646 gross wells (401 oil wells, 182 gas wells and 63 dry holes) in 1997 and 283
gross wells (166 oil wells, 65 gas wells and 52 dry holes) in 1996. The decline
in activity during 1998 is a direct result of lower commodity prices.
The Company's 1998 exploration and development drilling program is
discussed in Properties and Activities under Item 1 of this Form 10-K.
DRILLING PROGRAM ACTIVITY
<TABLE>
<CAPTION>
GAS OIL DRY TOTAL
----- ----- ---- -----
<S> <C> <C> <C> <C>
1998 EXPLORATORY
Gross 8 13 24 45
Net 6.1 6.1 14.7 26.9
1998 DEVELOPMENT
Gross 141 179 37 357
Net 121.0 126.1 30.9 278.0
1997 EXPLORATORY
Gross 3 14 9 26
Net 2.0 7.9 5.1 15.0
1997 DEVELOPMENT
Gross 179 387 54 620
Net 149.6 284.9 50.9 485.4
</TABLE>
- ---------------
Gross: total wells in which there was participation.
Net: working interest ownership.
RESERVE REPLACEMENT Drilling activity is not the best measure of success for an
exploration and production company. Anadarko focuses on growth and
profitability. Reserve replacement is the key to growth and future profitability
depends on the cost of finding oil and gas reserves. The Company believes its
performance in both areas is excellent. For the 17th consecutive year, Anadarko
more than replaced annual production volumes with proved reserves of natural
gas, crude oil, condensate and NGLs, stated on an energy equivalent barrel (EEB)
basis.
During 1998, Anadarko's worldwide reserve replacement was 581% of total
production, which was a record 47.2 MMEEBs. The Company's worldwide reserve
replacement in 1997 was 341% of total production, which was 44.3 MMEEBs. The
Company's worldwide reserve replacement in 1996 was 299% of total production.
Over the last five years, the Company's annual reserve replacement has averaged
359% of annual production volumes.
Anadarko continues to increase its energy reserves in the U.S. while the
nation's energy reserves have been declining over the past ten years. In 1998,
the Company replaced 462% of its U.S. production volumes with U.S. reserves.
This compares to a U.S. reserve replacement of 206% of production volumes in
1997. The
26
<PAGE> 27
Company's U.S. reserve replacement for the five-year period 1994-1998 was 249%
of production. By comparison, the most recent published U.S. industry average
(1993-1997) was 99%. (Source: Department of Energy) Anadarko's U.S. reserve
replacement performance for the same period 1993-1997 was 183% of production.
Industry data for 1998 are not yet available.
COST OF FINDING Cost of finding results in any one year can be misleading due
to the long lead times associated with exploration and development. A better
measure of cost of finding performance is over a five-year period. Anadarko has
consistently outperformed the industry in average finding costs. For the period
1994-1998, Anadarko's worldwide finding cost was $3.17 per EEB. The Company's
U.S. finding performance for the same period was $3.61 per EEB. Industry data
for 1998 are not yet available. For comparison purposes, the most recent
published five-year average (1993-1997) for the industry shows worldwide finding
cost was $3.99 per EEB and U.S. finding cost was $5.05 per EEB. (Source: Arthur
Andersen and J.S. Herold) For the same five-year period of 1993-1997, Anadarko's
worldwide finding cost was $3.28 per EEB and its U.S. finding cost was $3.88 per
EEB. The Company's low finding costs are due to the success of Anadarko's
exploration programs.
For 1998, Anadarko's worldwide finding cost was $3.13 per EEB compared to
$4.28 per EEB in 1997 and $2.76 per EEB in 1996. Anadarko's U.S. finding cost
for 1998 was $3.11 per EEB compared to $4.79 per EEB in 1997 and $3.23 per EEB
in 1996.
PROVED RESERVES At the end of 1998, Anadarko's proved reserves were 935.1
MMEEBs compared to 708.0 MMEEBs at year-end 1997 and 601.3 MMEEBs at year-end
1996. Reserves increased by 32% in 1998 compared to 1997 primarily due to
exploration and development drilling in both the U.S. and overseas and producing
property acquisitions. Anadarko's proved reserves have grown by 78% over the
past three years, primarily as a result of successful exploration projects in
Algeria, the Gulf of Mexico and Alaska, as well as successful exploitation and
development drilling programs in major domestic fields in core areas onshore and
offshore and producing property acquisitions.
The Company's proved natural gas reserves at year-end 1998 were 2.65
trillion cubic feet (Tcf) compared to 1.73 Tcf at year-end 1997 and 1.82 Tcf at
year-end 1996. Anadarko's proved U.S. gas reserves have increased 44% since
year-end 1995, reflecting two major discoveries in the Gulf of Mexico's sub-salt
trend and continued development activity onshore U.S. Anadarko's crude oil,
condensate and NGLs reserves at year-end 1998 increased 18% to 494.0 million
barrels (MMBbls) compared to 419.7 MMBbls at year-end 1997 and 297.8 MMBbls at
year-end 1996. Crude oil reserves have risen by 125% over the last three years
primarily due to large discoveries in Algeria, the Gulf of Mexico and Alaska.
Crude oil, condensate and NGLs reserves comprise 53% of the Company's proved
reserves at year-end 1998 compared to about 59% at year-end 1997 and 50% at
year-end 1996.
The Company emphasizes that the volumes of reserves are estimates which, by
their nature, are subject to revision. The estimates are made using all
available geologic and reservoir data as well as production performance data.
These estimates are reviewed annually and revised, either upward or downward, as
warranted by additional performance data.
At December 31, 1998, the present value (discounted at 10%) of future net
revenues from Anadarko's proved reserves was $3.1 billion, before income taxes,
and was $2.2 billion, after income taxes, (stated in accordance with the
regulations of the Securities and Exchange Commission and Financial Accounting
Standards Board). The 1998 estimated present value of future net revenues, after
income taxes, increased 10% compared to 1997 primarily due to additions of
proved reserves related to successful exploration and development drilling
worldwide, partially offset by significantly lower natural gas and crude oil
prices at year-end 1998. See Supplemental Information on Oil and Gas Exploration
and Production Activities in the Consolidated Financial Statements under Item 8
of this Form 10-K.
The present value of future net revenues 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.
27
<PAGE> 28
ACQUISITIONS AND DIVESTITURES
The Company's strategy also includes an active asset acquisition and
divestiture program. During 1996-1998, Anadarko acquired through purchases and
trades 47.8 MMEEBs of proved reserves for $180 million. During the same time
period, the Company sold properties, either as a strategic exit or by asset
rationalization in existing core areas, with proceeds totaling $52 million.
Reserves associated with these sales and trades were 19.7 MMEEBs.
In 1998, Anadarko acquired reserves of 38.7 MMEEBs in several transactions
totaling $143 million. The largest acquisition was a package of working
interests in five oil and gas fields in the Anadarko Basin of central Oklahoma,
a core operating area of the Company for 20 years, which was purchased from OXY
USA, Inc. for $118 million. The five oil and gas fields cover 37,000 gross acres
with 370 producing and injection wells. Anadarko's 1998 net production from
these fields was about 2.6 MBbls/d and 5.4 MMcf/d of gas. The acquisition also
included an interest in a 120-mile, eight-inch diameter pipeline that delivers
CO(2) to the fields and primarily serves third parties.
In 1997, acquisitions of producing properties totaled $31.0 million and 8.0
MMEEBs. The largest acquisition was a package of properties in the West
Panhandle Field of Texas for $18.5 million, which accounted for 4.2 MMEEBs of
proved reserves. This purchase provided the Company producing properties with
significant development potential as well as settling a disputed claim on
revenues. During 1997, Anadarko sold reserves of about 1 MMEEBs in several
transactions with sales proceeds totaling $6.2 million. The largest component
was the sale of the Company's Norden Ltd. Partnership in Colorado in late 1997
for $5.8 million.
During 1996, Anadarko sold reserves of 18.7 MMEEBs, of which 17.7 MMEEBs
were attributed to the Company's interests in Indonesia. Total proceeds from
divestitures in 1996 amounted to $41 million. In 1996, acquisitions of producing
properties totaled $5.3 million and 1.1 MMEEBs. The largest acquisition was a
package of properties in the Oklahoma panhandle portion of the Hugoton
Embayment.
RECENT DEVELOPMENTS
Under the full cost method of accounting, a non-cash charge to earnings
related to the carrying value of the Company's oil and gas properties on a
country-by-country basis may be required when prices are low. Whether the
Company will be required to take such a charge depends on the prices for crude
oil and natural gas at the end of any quarter, as well as the effect of both
capital expenditures and changes to proved reserves during that quarter. If a
non-cash charge were required, it would reduce earnings for the quarter, which
would result in lower DD&A expense in future periods.
Prices for crude oil and natural gas were significantly lower at year-end
1998 compared to year-end 1997. Since the end of 1998, gas prices have continued
to fall. If the current pricing environment continues or worsens, the Company
may be required to take a non-cash charge against earnings during the first
quarter of 1999.
28
<PAGE> 29
PRODUCING PROPERTIES AND LEASES
The Company owns 2,927 net producing oil wells and 2,144 net producing gas
wells worldwide. The following schedule shows the number of developed and
undeveloped acres in which Anadarko held interests at December 31, 1998.
ACREAGE
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
--------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
thousands ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
United States
Onshore 1,073 824 1,355 540 2,428 1,364
Offshore 182 56 514 276 696 332
----- ----- ----- ----- ----- -----
Total 1,255 880 1,869 816 3,124 1,696
----- ----- ----- ----- ----- -----
Algeria 57* 14* 3,308 1,331 3,365 1,345
Eritrea -- -- 9,000 4,500 9,000 4,500
Jordan -- -- 4,200 2,100 4,200 2,100
North Atlantic Margin -- -- 1,208 359 1,208 359
Peru -- -- 2,557 2,557 2,557 2,557
Tunisia -- -- 384 96 384 96
</TABLE>
- ---------------
* Developed acreage for Algeria relates only to the area with an Exploitation
License, which is the HBNS Field.
REGULATORY MATTERS
ENVIRONMENTAL AND SAFETY The Company's oil and gas operations and properties
are subject to numerous federal, state and local laws and regulations relating
to environmental protection of most oil and gas projects from commencement to
abandonment. These laws and regulations govern, among other things, the amounts
and types of substances and materials that may be released into the environment,
the issuance of permits in connection with exploration, drilling and production
activities, the release of emissions to the atmosphere, discharge and
disposition of generated waste materials, offshore oil and gas operations, the
reclamation and abandonment of well and facility sites and the remediation of
contaminated sites. In addition, these laws and regulations may impose
substantial liabilities for the Company's failure to comply with them or for any
contamination resulting from the Company's operations.
Anadarko takes the issue of environmental stewardship very seriously and
works diligently to comply with applicable environmental and safety rules and
regulations. Compliance with such laws and regulations has not had a material
effect on the Company's operations or financial condition in the past. However,
because environmental laws and regulations are becoming increasingly more
stringent, there can be no assurances that such laws and regulations or any
environmental law or regulation enacted in the future will not have a material
effect on the Company's operations or financial condition.
For a description of certain environmental proceedings in which the Company
is involved, see Note 16 of the Notes to Consolidated Financial Statements under
Item 8 of this Form 10-K.
OTHER Regulatory agencies in certain states and countries have authority to
issue permits for seismic exploration and the drilling of wells, regulate well
spacing, prevent the waste of oil and gas resources through proration and
regulate environmental matters.
Operations conducted by the Company on federal oil and gas leases must
comply with numerous regulatory restrictions, including various
nondiscrimination statutes. Additionally, certain operations must be conducted
pursuant to appropriate permits issued by the Bureau of Land Management and the
Minerals Management Service under the Department of Interior. In addition to the
standard permit process, federal leases and most international concessions
require a complete environmental impact assessment prior to authorizing an
exploration or development plan.
29
<PAGE> 30
ADDITIONAL FACTORS AFFECTING BUSINESS
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 Algerian
properties, and those statements preceded by, followed by or that otherwise
include the words "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. Such
statements are subject to various risks and uncertainties, and actual results
could differ materially from those expressed or implied by such statements due
to a number of factors in addition to those discussed elsewhere in this Form
10-K and in the Company's other public filings, press releases and discussions
with Company management, including:
COMMODITY PRICING AND DEMAND Crude oil prices continue to be affected by
political developments worldwide, pricing decisions and production quotas of
OPEC and the volatile trading patterns in the commodity futures markets. Natural
gas prices also continue to be highly volatile. In periods of sharply lower
commodity prices, the Company may curtail production and capital spending
projects, as well as delay or defer drilling wells in certain areas because of
lower cash flows. Changes in crude oil and natural gas prices can impact the
Company's determination of proved reserves and the Company's calculation of the
standardized measure of discounted future net cash flows relating to oil and gas
reserves. In addition, demand in the U.S. and worldwide may affect the Company's
level of production.
EXPLORATION AND OPERATING RISKS The Company's business is subject to all of the
operating risks normally associated with the exploration for and production of
oil and gas, including blowouts, cratering and fire, each of which could result
in damage to or destruction of oil and gas wells or formations or production
facilities and other property and injury to persons. As protection against
financial loss resulting from these operating hazards, the Company maintains
insurance coverage, including certain physical damage, employer's liability,
comprehensive general liability and worker's compensation insurance. Although
Anadarko is not fully insured against all risks in its business, the Company
believes that the coverage it maintains is customary for companies engaged in
similar operations. The occurrence of a significant event against which the
Company is not fully insured could have a material adverse effect on the
Company's financial position.
DEVELOPMENT RISKS The Company is increasingly involved in large development
projects. Key factors that may affect the timing and outcome of such projects
include: project approvals by joint venture partners; timely issuance of permits
and licenses by host country governmental agencies; manufacturing and delivery
schedules of critical equipment; and commercial arrangements for pipelines and
related equipment to transport and market hydrocarbons. In large development
projects, these uncertainties are usually resolved, but delays and differences
between estimated timing and actual timing of critical events are commonplace
and may, therefore, affect the forward-looking statements related to large
development projects.
DOMESTIC GOVERNMENTAL RISKS The domestic operations of the Company have been,
and at times in the future may be, affected by political developments and by
federal, state and local laws and regulations such as restrictions on
production, changes in taxes, royalties and other amounts payable to governments
or governmental agencies, price or gathering rate controls and environmental
protection regulations.
FOREIGN OPERATIONS RISK The Company's operations in areas outside the U.S. are
subject to various risks inherent in foreign operations. These risks may
include, among other things, loss of revenue, property and equipment as a result
of hazards such as expropriation, war, insurrection and other political risks,
increases in taxes and governmental royalties, renegotiation of contracts with
governmental entities, changes in laws and policies governing operations of
foreign-based companies, currency restrictions and exchange rate fluctuations
and other uncertainties arising out of foreign government sovereignty over the
Company's international operations. The Company's international operations may
also be adversely affected by laws and policies of the
30
<PAGE> 31
United States affecting foreign trade and taxation. To date, the Company's
international operations have not been materially affected by these risks.
COMPETITION 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. The Company's competitors include the major oil companies,
independent oil and gas concerns, 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.
YEAR 2000 Overview The Year 2000 issue relates to the inability of certain
computers and software applications to correctly recognize and process date
sensitive information for the Year 2000 and beyond. Without correction, the
computers and software applications could fail or create erroneous information.
The Company has established a Year 2000 Compliance Program focused on minimizing
disruptions of the Company's operations as a result of the millennium change.
Since this problem could affect the Company's systems, as well as the systems of
its business partners, the Program focuses on the internal systems and external
services considered most critical to Anadarko's continuing operations.
Since 1993, the Company has enhanced its scientific processing
capabilities, implemented new business systems and upgraded its network
infrastructure. These information systems were purchased from leading suppliers
of technology, most of which are representing their products to be Year 2000
compliant. The Company is in the process of testing third-party hardware and
software for compliance, which should be completed by mid-year 1999. Any
necessary replacements of non-compliant computer equipment and software are
underway and should also be completed by mid-year 1999.
Embedded system inventories for domestic and internal operations were
completed on schedule by year-end 1998. Contract instrumentation specialists are
assessing the inventories of equipment and will develop remediation and test
plans by the end of first quarter 1999. All embedded systems are expected to be
compliant by the end of the third quarter of 1999.
The Company is assessing the readiness of its business partners, including
joint-venture operators and outside-operated pipeline and processing facilities
as well as suppliers of goods and services. Interruptions in these services
could disrupt Anadarko's production and delivery of oil, gas and NGLs early in
2000. Analysis and review of key business partners is underway. Natural gas
affiliates providing gathering, transportation and processing services are being
contacted to determine Year 2000 compliance at inter-connect and sales points.
Operations personnel have begun the development of critical vendor and
commodities lists and are assessing the suppliers and availability of goods and
services in these areas. These efforts should be completed by the end of the
third quarter of 1999.
Contingency Planning The Company will develop contingency plans to provide
business continuity and to address operations, safety and environmental
concerns. This effort has begun and is expected to be complete by the end of the
third quarter of 1999.
Estimated Cost The total cost of testing, remediation and contingency planning
is expected to be approximately $5 million, which will be funded by operating
cash flows. This estimate does not include the Company's share of potential Year
2000 costs as a result of participation in partnerships in which Anadarko is not
the operator. As of December 31, 1998, the Company had spent less than $1
million for the Year 2000 project. These expenditures include costs to establish
Year 2000 testing facilities, inventory field automation equipment domestically
and internationally, and purchase Year 2000 scanning software. In total, the
Company expects to spend $3.5 million to test internal systems, upgrade and
replace hardware and software, and complete field automation testing. The
remaining $1.5 million is for replacement of any non-compliant field automation
equipment discovered during testing, instrumentation consulting services and
contingency planning. Anadarko's Year 2000 Program is an on-going process that
may result in changes to cost estimates and schedules as testing and business
partner assessment progresses.
Risks The Company expects to have all internal systems and computer equipment
Year 2000 compliant prior to the millennium change. The Company is relying on
its business partners and suppliers to be Year 2000 ready as well. Failure of
significant third parties to complete their Year 2000 compliance projects could
interrupt the supply of materials and contract services needed for oil and gas
operations. Disruptions to oil and
31
<PAGE> 32
gas transportation networks controlled by third-party carriers could result in
reduced production volumes delivered to market. Risk associated with foreign
operations may increase with the uncertainty of Year 2000 compliance by foreign
governments and their supporting infrastructures. Such occurrences could have a
material adverse effect on the Company's business, results of operations and
financial condition. However, the Year 2000 Program is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 issue.
KANSAS AD VALOREM TAX The Natural Gas Policy Act of 1978 allowed a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on the Federal Energy Regulatory
Commission (FERC) ruling that the Kansas ad valorem tax was such a tax, the
Company collected the Kansas ad valorem tax. FERC's ruling regarding the ability
of producers to collect the Kansas ad valorem tax was appealed to the United
States Court of Appeals for the District of Columbia Circuit (D.C. Circuit). The
Court held in June 1988 that FERC failed to provide a reasoned basis for its
findings and remanded the case to FERC.
Ultimately, the D.C. Circuit issued its decision on August 2, 1996 ruling
that producers must refund all Kansas ad valorem taxes collected relating to
production since October 1983. The Company filed a petition for writ of
certiorari with the Supreme Court. That petition was denied on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest at issue
which has not been paid to date assuming that the October 1983 effective date
remains in effect, is about $42.7 million (pretax) as of December 31, 1998.
For a description of the court proceedings that have occurred, additional
action taken by FERC and litigation filed by the Company as a result of the D.C.
Circuit 1996 decision, see information appearing under Kansas Ad Valorem Tax
under Item 3 of this Form 10-K.
CAPITAL EXPENDITURES, LIQUIDITY AND LONG-TERM DEBT
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
1998 1997 1996
millions ------ ------ ------
<S> <C> <C> <C>
Exploration $257.3 $184.8 $141.8
Development 343.5 346.4 148.9
Acquisitions of producing properties 143.2 31.0 5.3
Gathering and other 57.5 36.0 64.0
Interest and overhead 115.5 88.0 67.2
------ ------ ------
Total $917.0 $686.2 $427.2
------ ------ ------
</TABLE>
CAPITAL EXPENDITURES Anadarko's total capital spending in 1998 was $917
million, an increase of 34% over 1997 capital spending of $686 million and up
115% over 1996 capital spending of $427 million. Anadarko's record capital
investment program in 1998 reflects increased activities in all core areas of
operation during the year. The largest categories of capital spending in 1998,
1997 and 1996 were for exploration and development activities in the U.S. and
overseas. The Company funded its capital investment program in 1998, 1997 and
1996 primarily through cash flow, plus increases in long-term debt, issuance of
preferred stock and proceeds from property sales.
Capital spending for 1999 has been set at about $410 million, a 55%
decrease from 1998. The reduced capital budget is driven by continued low prices
for crude oil and natural gas. The 1999 budget includes $97 million for
exploration, $197 million for development, $15 million for gas gathering and
other, and $101 million for capitalized interest and overhead.
In addition to its 1999 capital spending budget, Anadarko expects to
complete a financing arrangement of approximately $150 million that will be used
for expenditures to develop the Tanzanite and Hickory gas discoveries in the
Gulf of Mexico. These funds will be earmarked for development drilling and
construction of platforms and production facilities in order to bring both
Fields on production by the fall of 2000.
The Company believes that cash flows, development financing for Tanzanite
and Hickory, and existing or available credit facilities will provide the
majority of funds to meet its capital and operating requirements for
32
<PAGE> 33
1999. The Company will continue to evaluate funding alternatives, including
property sales and additional borrowing, to secure other funds for capital
development.
LIQUIDITY AND LONG-TERM DEBT At year-end 1998, Anadarko's total debt was $1.43
billion. This compares to year-end 1997 total debt of $956 million. Anadarko's
total debt has increased primarily because of capital requirements related to
development operations in Algeria, the Gulf of Mexico and Alaska, exploration
activities and acquisitions of producing properties.
In January 1998, Anadarko issued $100 million principal amount of 6.625%
Debentures due 2028. The proceeds were used to fund capital spending projects in
core operating areas.
In March 1998, Anadarko filed a shelf registration statement with the
Securities and Exchange Commission (SEC) that permits the issuance of up to $500
million in debt and equity securities. Net proceeds, terms and pricing of
offerings of securities issued under the shelf registration statement will be
determined at the time of the offerings.
In April 1998, the Company's Revolving Credit and 364-day Credit Agreements
were amended. The Revolving Credit Agreement provides for $225 million principal
amount and the 364-day Credit Agreement provides for $175 million principal
amount. The Revolving Credit Agreement expires in 2002. During 1998, 1997 and
1996, there were no outstanding borrowings under these Agreements.
In April 1998, the Board of Directors approved a two-for-one stock split.
The stock split was effected by way of a stock dividend. The distribution date
was July 1, 1998 to stockholders of record on June 15, 1998.
In May 1998, Anadarko issued $200 million of 5.46% Series B Cumulative
Preferred Stock in the form of two million Depositary Shares, each Depositary
Share representing 1/10th of a share of the 5.46% Series B Cumulative Preferred
Stock. The preferred stock has no stated maturity and is not subject to a
sinking fund or mandatory redemption. The shares are not convertible into other
securities of the Company. Anadarko has the option to redeem the shares at $100
per Depositary Share on or after May 15, 2008. Holders of the shares are
entitled to receive, when, and as declared by the Board of Directors, cumulative
cash dividends at an annual dividend rate of $5.46 per Depositary Share. The
proceeds from the offering were used to reduce commercial paper and bank
borrowings and provide capital for Anadarko's 1998 capital expenditures. The
preferred stock was issued under the Company's shelf registration statement.
In October 1998, the Company filed a registration statement with the SEC
that permits the issuance of Anadarko common stock under the Anadarko Dividend
Reinvestment and Stock Purchase Plan (DRIP). The DRIP offers the opportunity to
reinvest dividends and provides an alternative to traditional methods of buying,
holding and selling Anadarko common stock. The DRIP provides the Company with a
means of raising additional capital for general corporate purposes through the
sale of common stock under the DRIP.
In October 1998, the Board of Directors adopted a Stockholders Rights Plan,
which replaced the Rights Plan that expired on October 20, 1998. Under the
Rights Plan, the Rights attached automatically to each outstanding share of
common stock on November 10, 1998. Each Right, at the time it becomes
exercisable and transferable apart from the common stock, entitles stockholders
to purchase from the Company 1/1000th of a share of a new series of junior
participating preferred stock at an exercise price of $175. The Right will be
exercisable only if a person or group acquires 15% or more of common stock or
announces a tender offer or exchange offer the consummation of which would
result in ownership by a person or group of 15% or more of the common stock. The
Rights distribution is not taxable to stockholders. The Board of Directors may
elect to exchange and redeem the Rights. The Rights will expire on November 10,
2008.
In November 1997, the Company issued $100 million principal amount of 7%
Debentures due 2027. Net proceeds from the offering were used to repay floating
interest rate debt.
Anadarko's net cash from operating activities in 1998 was $240 million
compared to $362 million in 1997 and $315 million in 1996.
33
<PAGE> 34
NEW ACCOUNTING PRINCIPLE
ACCOUNTING FOR DERIVATIVES Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and for Hedging Activities",
provides guidance for accounting for derivative instruments and hedging
activities. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The Company has not yet completed an evaluation of the impact of the
provisions of SFAS No. 133.
DIVIDENDS
In 1998, Anadarko paid $22.5 million in dividends to its common
stockholders (3.75 cents per share in the first quarter, and 5 cents per share
in the second, third and fourth quarters). The dividend amount was $17.9 million
in 1997 (3.75 cents per share per quarter) and $17.8 million in 1996 (3.75 cents
per share per quarter). Anadarko has paid a dividend to its common stockholders
continuously since becoming an independent company in 1986.
In 1998, the Company also paid $7.1 million in preferred stock dividends
related to the preferred stock issued in May 1998.
The Company's Bank Credit Agreements require a minimum balance of $650
million to be maintained in stockholders' equity. As a result, the amount of
retained earnings available for dividends as of December 31, 1998 was $609.5
million. 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.
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANADARKO PETROLEUM CORPORATION
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Management 36
Independent Auditors' Report 37
Statement of Income, Three Years Ended December 31, 1998 38
Balance Sheet, December 31, 1998 and 1997 39
Statement of Stockholders' Equity, Three Years Ended
December 31, 1998 40
Statement of Cash Flows, Three Years Ended December 31, 1998 41
Notes to Consolidated Financial Statements 42
Supplemental Quarterly Information 61
Supplemental Information on Oil and Gas Exploration and
Production Activities 62
</TABLE>
35
<PAGE> 36
ANADARKO PETROLEUM CORPORATION
REPORT OF MANAGEMENT
The Management of Anadarko Petroleum Corporation is responsible for the
preparation and integrity of all information contained in the accompanying
consolidated financial statements. The financial statements have been prepared
in conformity with generally accepted accounting principles appropriate in the
circumstances. In preparing the financial statements, Management makes informed
judgments and estimates.
Management maintains and relies on the Company's system of internal
accounting controls. Although no system can ensure elimination of all errors and
irregularities, this system is designed to provide reasonable assurance that
assets are safeguarded, transactions are executed in accordance with
Management's authorization and accounting records are reliable as a basis for
the preparation of financial statements. This system includes the selection and
training of qualified personnel, an organizational structure providing
appropriate delegation of authority and division of responsibility, the
establishment of accounting and business policies for the Company and the
conduct of internal audits.
The Board of Directors pursues its responsibility for the consolidated
financial information through its Audit Committee, which is composed solely of
Directors who are not officers or employees of Anadarko. The Audit Committee
recommends to the Board of Directors the selection of independent auditors and
reviews their fee arrangements. The Audit Committee meets periodically with
Management, the internal auditors and the independent auditors to review that
each is carrying out its responsibilities. The internal and independent auditors
have full and free access to the Audit Committee to discuss auditing and
financial reporting matters.
We believe that Anadarko's policies and procedures, including its system of
internal accounting controls, provide reasonable assurance that the financial
statements are prepared in accordance with the applicable securities laws.
/s/ ROBERT J. ALLISON
Robert J. Allison, Jr.
Chairman, President and
Chief Executive Officer
/s/ MICHAEL E. ROSE
Michael E. Rose
Senior Vice President and
Chief Financial Officer
36
<PAGE> 37
ANADARKO PETROLEUM CORPORATION
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
[/s/ KPMG LLP]
Houston, Texas
January 28, 1999
37
<PAGE> 38
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------- -------- -------- --------
thousands except per share
amounts
<S> <C> <C> <C>
REVENUES
Gas sales $353,130 $417,973 $362,599
Oil and condensate sales 133,096 168,591 139,936
Natural gas liquids and other 74,028 88,575 67,611
-------- -------- --------
Total 560,254 675,139 570,146
-------- -------- --------
COSTS AND EXPENSES
Operating expenses 160,520 154,657 115,308
Administrative and general 94,914 73,569 67,673
Depreciation, depletion and amortization 204,499 198,821 167,183
Other taxes Note 12 37,709 42,774 37,205
(Gains) and impairments related to international properties,
net Notes 2 and 5 70,000 -- (13,986)
-------- -------- --------
Total 567,642 469,821 373,383
-------- -------- --------
Operating Income (Loss) (7,388) 205,318 196,763
INTEREST EXPENSE Notes 5 and 6 57,699 40,959 38,973
-------- -------- --------
Income (Loss) before Income Taxes (65,087) 164,359 157,790
INCOME TAXES Note 13 (22,899) 57,041 57,070
-------- -------- --------
NET INCOME (LOSS) $(42,188) $107,318 $100,720
-------- -------- --------
Preferred Stock Dividends Note 7 7,098 -- --
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $(49,286) $107,318 $100,720
-------- -------- --------
PER COMMON SHARE
Net income (loss) - basic Notes 1 and 8 $ (0.41) $ 0.90 $ 0.85
Net income (loss) - diluted Notes 1 and 8 $ (0.41) $ 0.89 $ 0.85
Dividends Note 8 $ 0.1875 $ 0.15 $ 0.15
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Note 8 120,103 119,434 118,495
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- ----------- ---------- ----------
thousands
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents Note 3 $ 17,008 $ 8,907
Accounts receivable 181,491 177,157
Inventories Note 4 25,860 28,564
Prepaid expenses 5,569 4,366
---------- ----------
Total 229,928 218,994
---------- ----------
PROPERTIES AND EQUIPMENT
Original cost 5,488,721 4,669,251
Less accumulated depreciation, depletion and amortization 2,107,183 1,914,472
---------- ----------
Net properties and equipment -- based on the full cost
method of accounting for oil and gas properties Note 5 3,381,538 2,754,779
---------- ----------
DEFERRED CHARGES 21,524 18,692
---------- ----------
$3,632,990 $2,992,465
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Trade and other $ 227,988 $ 202,822
Banks 26,723 22,102
Accrued expenses
Interest 15,210 13,607
Taxes and other 18,805 13,799
---------- ----------
Total 288,726 252,330
---------- ----------
LONG-TERM DEBT Note 6 1,425,392 955,733
---------- ----------
DEFERRED CREDITS
Deferred income taxes Note 13 522,953 546,792
Other Notes 8 and 14 136,463 120,830
---------- ----------
Total 659,416 667,622
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00
(2,000,000 shares authorized, 200,000 and no shares issued
as of December 31, 1998 and 1997, respectively) 200,000 --
Common stock, par value $0.10
(200,000,000 shares authorized, 122,436,712 and
121,771,988 shares issued as of December 31, 1998 and
1997, respectively) 12,244 6,134
Paid-in capital 361,390 353,125
Retained earnings (as of December 31, 1998, $609,456,000 was
not restricted as to the payment of dividends) 756,971 828,787
Deferred compensation (9,461) (11,203)
Executives and Directors Benefits Trust, at market value
(2,000,000 shares as of December 31, 1998 and 1997) (61,688) (60,063)
Treasury stock (20 and no shares as of December 31, 1998 and
1997, respectively) -- --
---------- ----------
Total 1,259,456 1,116,780
---------- ----------
COMMITMENTS AND CONTINGENCIES Notes 10, 14, 15 and 16 -- --
---------- ----------
$3,632,990 $2,992,465
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------- ---------- ---------- ----------
thousands
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of year $ -- $ -- $ --
Preferred stock issued Note 7 200,000 -- --
---------- ---------- ----------
Balance at end of year 200,000 -- --
---------- ---------- ----------
COMMON STOCK
Balance at beginning of year 6,134 6,098 6,047
Common stock issued 52 36 51
Two-for-one stock split Note 8 6,058 -- --
---------- ---------- ----------
Balance at end of year 12,244 6,134 6,098
---------- ---------- ----------
PAID-IN CAPITAL
Balance at beginning of year 353,125 335,848 304,125
Common stock issued 17,023 21,027 22,035
Revaluation to market for Executives and Directors
Benefits Trust 1,625 (3,750) 9,688
Two-for-one stock split Note 8 (6,058) -- --
Preferred stock issued Note 7 (4,325) -- --
---------- ---------- ----------
Balance at end of year 361,390 353,125 335,848
---------- ---------- ----------
RETAINED EARNINGS
Balance at beginning of year 828,787 739,395 656,455
Net income (loss) (42,188) 107,318 100,720
---------- ---------- ----------
786,599 846,713 757,175
Dividends paid -- preferred (7,098) -- --
Dividends paid -- common (22,530) (17,926) (17,780)
---------- ---------- ----------
Balance at end of year 756,971 828,787 739,395
---------- ---------- ----------
DEFERRED COMPENSATION
Balance at beginning of year (11,203) (3,444) (2,808)
Issuance of restricted stock (1,668) (10,065) (2,463)
Amortization of restricted stock 3,410 2,306 1,827
---------- ---------- ----------
Balance at end of year (9,461) (11,203) (3,444)
---------- ---------- ----------
EXECUTIVES AND DIRECTORS BENEFITS TRUST
Balance at beginning of year (60,063) (63,813) (54,125)
Revaluation to market (1,625) 3,750 (9,688)
---------- ---------- ----------
Balance at end of year (61,688) (60,063) (63,813)
---------- ---------- ----------
TREASURY STOCK
Balance at beginning of year -- (4) --
Purchase of treasury stock (115) (802) (693)
Issuance of treasury stock 115 806 689
---------- ---------- ----------
Balance at end of year -- -- (4)
---------- ---------- ----------
STOCKHOLDERS' EQUITY Note 8 $1,259,456 $1,116,780 $1,014,080
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------- --------- --------- ---------
thousands
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (42,188) $ 107,318 $ 100,720
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 204,499 198,821 167,183
Amortization of restricted stock 1,145 2,306 1,827
Deferred U.S. income taxes (22,618) 48,276 54,231
Impairments of international properties 70,000 -- 5,400
--------- --------- ---------
210,838 356,721 329,361
(Increase) decrease in accounts receivable (4,334) 49,667 (98,881)
(Increase) decrease in inventories 2,704 (4,024) (9,681)
Increase (decrease) in accounts payable -- trade and
other and accrued expenses 31,775 (37,030) 89,634
Other items -- net (1,341) (3,377) 4,108
--------- --------- ---------
Net cash provided by operating activities 239,642 361,957 314,541
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to properties and equipment (916,975) (686,232) (427,234)
Proceeds from the sale of assets to be leased, net 24,115 88,325 --
Sales and retirements of properties and equipment 5,585 8,389 46,178
--------- --------- ---------
Net cash used in investing activities (887,275) (589,518) (381,056)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to debt 569,659 224,684 200,000
Retirements of debt (100,000) -- (142,959)
Issuance of preferred stock 195,675 -- --
Increase in accounts payable, banks 4,621 4,107 5,146
Dividends paid (29,628) (17,926) (17,780)
Issuance of common stock 15,407 10,998 19,623
Issuance of treasury stock, net -- 4 (4)
--------- --------- ---------
Net cash provided by financing activities 655,734 221,867 64,026
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,101 (5,694) (2,489)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,907 14,601 17,090
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,008 $ 8,907 $ 14,601
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF 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 terms "Anadarko" and "Company" refer to Anadarko
Petroleum Corporation and its subsidiaries. The principal subsidiaries of
Anadarko are: Anadarko Algeria Corporation (Anadarko Algeria), Anadarko Energy
Services Company and Anadarko Gathering Company.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES The consolidated financial
statements include the accounts of Anadarko and its subsidiaries. All
significant intercompany transactions have been eliminated. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances. Certain amounts for prior years
have been restated to conform to the current presentation. In preparing
financial statements, Management makes informed judgments and estimates that
affect the reported amounts of assets and liabilities as of the date of the
financial statements and affect the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these estimates.
REVENUES Natural gas and NGLs revenues generally are recorded using the sales
method, whereby the Company recognizes revenues based on the amount of gas and
NGLs sold to purchasers on its behalf. Oil and condensate revenues are recorded
using the entitlements method.
USE OF DERIVATIVES Anadarko uses derivative financial instruments to reduce the
Company's exposure to changes in the market price of natural gas and crude oil,
to fix the price for natural gas and crude oil independently of the physical
purchase or sale, and to manage interest rates. Commodity financial instruments
also provide methods to meet customer pricing requirements while achieving a
price structure consistent with the Company's overall pricing strategy. The
types of commodity derivative financial instruments currently used by Anadarko
are futures, swaps and options.
Anadarko utilizes the hedge or deferral method of accounting for commodity
derivative financial instruments (with the exception of certain written options)
whereby gains and losses on these hedging instruments are realized and recorded
as revenues on the income statement when the related natural gas or oil volumes
have been produced, purchased or delivered. As a result, gains and losses on
commodity financial instruments are generally offset by similar changes in the
realized prices of natural gas and crude oil. Unrealized gains and losses on
these hedging instruments are deferred and recorded as assets or liabilities on
the balance sheet at fair market value as of the balance sheet date. The
unrealized gains and losses include derivatives related to January activities
deferred as of December 31 and exclude certain written options recognized during
the year. All volumes shown exclude January hedges not open and written options
recognized. To qualify as hedging instruments, these instruments must be highly
correlated to anticipated future sales such that the Company's exposure to the
risks of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines in market
prices of natural gas and crude oil, the commodity financial instruments may
also limit Anadarko's gain from increases in the market price of natural gas and
crude oil.
Written options that are not combined with other offsetting instruments are
not classified as hedges. Unrealized losses on these written options, offset by
any option premiums received for these written options, are charged to the
income statement as a reduction to revenues on a current basis.
Interest income resulting from the Company's interest rate swap agreement
is included in interest expense on a current basis. The swap agreement
effectively converts a portion of the Company's fixed interest rate debt to
variable interest rate debt. See Note 6.
42
<PAGE> 43
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
PROPERTIES AND EQUIPMENT The Company uses the full cost method of accounting
for exploration and development activities as defined by the United States
Securities and Exchange Commission (SEC). Under this method of accounting, the
costs for unsuccessful, as well as successful, exploration and development
activities are capitalized as properties and equipment. This includes any
internal costs that can be directly identified with exploration and development
activities, but does not include any costs related to production, general
corporate overhead or similar activities.
The sum of net capitalized costs and estimated future development and
dismantlement costs is amortized using the unit-of-production method. Excluded
from amounts subject to amortization are costs associated with unevaluated
properties and major development projects. On a country-by-country basis, should
the net capitalized costs exceed the estimated present value of future net cash
flows from proved oil and gas reserves, such excess costs would be charged to
current expense. Gain or loss on the sale or other disposition of oil and gas
properties is not recognized unless significant amounts of oil and gas reserves
are involved.
All other properties and equipment are stated at original cost, which does
not purport to represent replacement or market values.
ENVIRONMENTAL CONTINGENCIES The Company accrues for environmental contingencies
when liabilities are likely to occur and reasonable estimates can be made. These
estimates are not discounted. In accordance with full cost accounting rules, the
Company provides for environmental clean up costs associated with oil and gas
activities as a component of its depreciation, depletion and amortization
expense. Recoveries from third parties for environmental liabilities are not
recognized unless collection is probable.
INTEREST CAPITALIZED The Company capitalizes interest on borrowed funds related
to oil and gas expenditures that are not subject to amortization until
completion of evaluation or development activities.
INCOME TAXES The Company files a U.S. consolidated federal income tax return.
Deferred federal, state and foreign income taxes are provided on all significant
temporary differences, except for those essentially permanent in duration,
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
ACCOUNTS PAYABLE, BANKS This account represents credit balances to the extent
that checks issued have not been presented to the Company's banks for payment.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation
under the intrinsic value method. Under this method, the Company records no
compensation expense for stock options granted when the exercise price of
options granted is equal to the fair market value of Anadarko's common stock on
the date of grant. See Note 8.
EARNINGS PER SHARE The Company's basic earnings (loss) per share (EPS) amounts
have been computed based on the average number of common shares outstanding.
Diluted EPS amounts include the effect of the Company's outstanding stock
options under the treasury stock method. See Note 8.
2. DISPOSITION OF FOREIGN SUBSIDIARY
In 1996, Anadarko sold its wholly-owned subsidiary, Anadarko Indonesia
Company, Jabung. As a result, the Company recorded a gain of $19,385,000 and
U.S. income tax expense of $7,040,000 on the sale.
43
<PAGE> 44
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. CASH AND CASH EQUIVALENTS
As of December 31, 1998 and 1997, cash and cash equivalents included
$331,000 and $270,000, respectively, held by the Anadarko Petroleum Corporation
Executives and Directors Benefits Trust. See Note 8.
4. INVENTORIES
Materials and supplies and natural gas inventories are stated at the lower
of average cost or market. Natural gas, when sold from inventory, is charged to
expense using the average-cost method. Oil inventory is stated at market value.
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
1998 1997
thousands ------- -------
<S> <C> <C>
Materials and supplies $20,231 $27,332
Oil, stored in inventory 3,816 --
Natural gas, stored in inventory 1,813 1,232
------- -------
$25,860 $28,564
------- -------
</TABLE>
5. PROPERTIES AND EQUIPMENT
A summary of the original cost of properties and equipment by
classification follows:
<TABLE>
<CAPTION>
1998 1997
thousands ---------- ----------
<S> <C> <C>
Oil and gas properties $5,155,260 $4,378,545
Gathering facilities 143,989 132,608
Plant facilities 13,283 13,286
General properties 176,189 144,812
---------- ----------
$5,488,721 $4,669,251
---------- ----------
</TABLE>
Oil and gas properties are amortized using the unit-of-production method.
All other properties are depreciated on the straight-line basis over the useful
lives of the assets, which range from three to 25 years.
Oil and gas properties include costs of $353,647,000 and $343,789,000 at
December 31, 1998 and 1997, respectively, which were excluded from capitalized
costs being amortized. These amounts represent costs associated with unevaluated
properties and major development projects. Anadarko excludes all costs on a
country-by-country basis until proved reserves are found or until it is
determined that the costs are impaired. All excluded costs are reviewed
quarterly to determine if impairment has occurred.
During 1998 and 1996, the Company made provisions for impairments of
international properties of $70,000,000 and $5,400,000, respectively, which were
related to oil and gas properties. These impairments related to all exploration
activity in Peru, Jordan, China and other international locations, as well as
two dry holes drilled on the Zula Block in Eritrea.
Total interest costs incurred during 1998, 1997 and 1996 were $82,415,000,
$62,096,000 and $55,985,000, respectively. Of these amounts, the Company
capitalized $24,716,000, $21,137,000 and $17,012,000 during 1998, 1997 and 1996,
respectively. Capitalized interest is included as part of the cost of oil and
gas properties. The capitalization rates are based on the Company's weighted
average cost of borrowings used to finance the expenditures.
In addition to capitalized interest, the Company also capitalized internal
costs of $90,774,000, $66,899,000 and $50,213,000 during 1998, 1997 and 1996,
respectively. These internal costs were directly related to exploration and
development activities and are included as part of the cost of oil and gas
properties.
44
<PAGE> 45
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
PRINCIPAL
------------------------
1998 1997
thousands ---------- --------
<S> <C> <C>
Commercial Paper* $ 367,892 $125,733
Notes Payable, Banks* 257,500 30,000
8 3/4% Notes due 1998 -- 100,000
8 1/4% Notes due 2001 100,000 100,000
6 3/4% Notes due 2003 100,000 100,000
5 7/8% Notes due 2003 100,000 100,000
7 1/4% Debentures due 2025 100,000 100,000
7% Debentures due 2027 100,000 100,000
6.625% Debentures due 2028 100,000 --
7.73% Debentures due 2096 100,000 100,000
7 1/4% Debentures due 2096 100,000 100,000
---------- --------
$1,425,392 $955,733
---------- --------
</TABLE>
- ---------------
* The average rates in effect at December 31, 1998 and 1997 were 5.87% and
6.04%, respectively, for the Commercial Paper. The average rate in effect for
both December 31, 1998 and 1997 was 5.95% for the Notes Payable, Banks.
Anadarko has noncommitted lines of credit from several banks. The general
provisions of these lines of credit provide for Anadarko to borrow funds for
terms and rates offered from time to time by the banks. There are no fees
associated with these lines of credit.
The Company has a commercial paper program that allows Anadarko to borrow
funds, at rates as offered, by issuing notes to investors for terms of up to 270
days.
The commercial paper and notes payable to banks have been classified as
long-term debt in accordance with Statement of Financial Accounting Standards
(SFAS) No. 6, "Classification of Short-term Obligations Expected to be
Refinanced," under the terms of Anadarko's Bank Credit Agreements.
In early 1999, Anadarko entered into a $135,000,000 Credit Agreement which
matures in April 2001 with a commercial bank. The interest rate is based upon
the prime rate, federal funds rate or eurodollar rate. The agreement provides
for commitment fees on the unused balance at a rate based on the Company's
long-term debt rating.
In December 1998, Anadarko entered into a Long Term Multiple Advance Note
which matures in April 2000 with a commercial bank. Interest rates are based
upon an agreed rate or the London Interbank Offered Rate. As of December 31,
1998, the Company had outstanding borrowings of $150,000,000 under this
agreement.
In March 1998, Anadarko filed a shelf registration statement with the SEC
that permitted the issuance of up to $500,000,000 in debt and equity securities.
Net proceeds, terms and pricing of offerings of securities issued under the
shelf registration statement will be determined at the time of the offerings.
Anadarko has used similar shelf registration statements since 1989 to provide
added flexibility in financing strategies. In May 1998, $200,000,000 in
preferred stock was issued under the shelf registration statement. See Note 7.
In January 1998, Anadarko issued $100,000,000 principal amount of 6.625%
Debentures due 2028. The proceeds were used to fund capital spending projects in
core operating areas.
In November 1997, Anadarko issued $100,000,000 principal amount of 7%
Debentures due 2027. Net proceeds from the offering were used to repay floating
interest rate debt.
The Company has a $225,000,000 Revolving Credit Agreement and a
$175,000,000 364-day Credit Agreement with a group of eight commercial banks.
Interest rates are based on either the reference rate, the
45
<PAGE> 46
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED)
rate of certificate of deposit, the eurodollar rate or a combination thereof.
The agreements provide for commitment fees on the unused balances at a rate
based on the Company's long-term debt rating. The Revolving Credit Agreement
will expire in 2002. During 1998 and 1997, there were no outstanding borrowings
under these Agreements.
During 1998 and 1997, the Company had available $20,000,000 in a bank line
of credit which was not used. The maximum interest rate for loans against the
line was the reference rate of the bank. The line of credit is renewable
annually, but may be withdrawn at any time by the bank. In 1998 and 1997,
Anadarko maintained an average daily compensating balance of $1,000,000 for this
line of credit.
Total sinking fund and installment payments related to long-term debt for
the five years ending December 31, 2003 are shown below. The payments related to
the redemption of the commercial paper and notes payable to banks are included
in the amounts shown in a manner consistent with the terms for repayment of
Anadarko's Bank Credit Agreements.
<TABLE>
<CAPTION>
thousands
<S> <C>
1999 $ --
2000* 250,000
2001 350,392
2002 225,000
2003 200,000
</TABLE>
- ---------------
* Includes the 7 1/4% Debentures due 2025 which are shown because of the
Debenture holders' one-time redemption rights in 2000.
The following information discloses the fair value of the Company's
financial instruments:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
thousands --------------- ----------
<S> <C> <C>
1998
Cash and cash equivalents $ 17,008 $ 17,008
Long-term debt (including interest rate swap) 1,425,392 1,456,183
Commodity derivative financial instruments
Asset 4,240 4,240
Liability (16,476) (16,476)
1997
Cash and cash equivalents $ 8,907 $ 8,907
Long-term debt (including interest rate swap) 955,733 990,571
Commodity derivative financial instruments
Asset 3,664 3,664
Liability (741) (741)
</TABLE>
CASH AND CASH EQUIVALENTS The carrying amount reported on the balance sheet
approximates fair value.
LONG-TERM DEBT The fair value of long-term debt at December 31, 1998 and 1997
is the value the Company would have to pay to retire the debt, including any
premium or discount to the debt holder for the differential between stated
interest rate and year-end market rate. The fair values are based on quoted
market prices from Standard and Poor's Bond Guide and, where such quotes were
not available, on the average rate in effect at year-end.
COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS Anadarko uses commodity derivative
financial instruments -- futures, swaps and options -- to fix a price
independent of the timing of the physical purchase or sale, to fix a
46
<PAGE> 47
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED)
price differential (basis) between the price of gas at Henry Hub and the price
at the market locations at which Anadarko purchases and sells oil and gas
(market locations), to hedge the fixed price or fixed basis pricing requirements
of Anadarko's customers and suppliers, and to hedge the value of gas in storage
or gas owed to or due from pipelines. The fair value of derivative financial
instruments reflects the estimated amounts that the Company would receive or pay
to settle the contracts as of December 31. Dealer quotes are available for the
majority of the Company's derivatives.
COMMODITY FUTURES Anadarko generally uses commodity futures contracts to fix
the price of gas delivered to Henry Hub or oil delivered to Cushing. Futures
contracts have settlement guaranteed by the New York Mercantile Exchange (NYMEX)
and have nominal credit risk.
At year-end 1998, Anadarko had open natural gas futures contracts related
to sales totaling 60 billion British thermal units per day (BBtu/d) related to
sales for February through March 1999 and 10 BBtu/d related to sales for April
through August 1999. The Company had open fixed price natural gas futures
contracts of 62 BBtu/d for February through March 1999. Anadarko had open crude
oil futures contracts related to sales of 7 thousand barrels per day (MBbls/d)
for February through March 1999 and 1 MBbls/d for April 1999.
At year-end 1997, Anadarko had open natural gas futures contracts related
to customer and supplier pricing requirements totaling 30 BBtu/d related to
sales for February through March 1998 and 20 BBtu/d for April through August
1998.
COMMODITY SWAPS Anadarko generally uses commodity swap agreements with
third-parties to fix the price of gas and oil at its market locations. In
addition, Anadarko uses basis swap agreements to fix the price differential
between the price of gas at Henry Hub and the price of gas at its market
locations. These energy swap agreements expose the Company to third-party credit
risk to the extent the third-parties are unable to meet their monthly settlement
commitment to the Company. The Company monitors the credit standing of the
third-parties and anticipates they will be able to fully satisfy their
contractual obligations.
At year-end 1998, Anadarko had open basis swap agreements for the Company's
gas sales averaging 30 BBtu/d for 1999 which were offset by open basis swap
agreements of like amounts for the same periods, thus eliminating the risk to
Anadarko from future price changes related to this position. The Company also
had open basis swap agreements for the Company's gas sales averaging 718 BBtu/d
for February through March 1999 and 64 BBtu/d for April through December 1999.
The Company also had fixed price swap agreements of 4 BBtu/d for February
through March 1999. In addition, the Company had open gas swaps related to
customer and supplier gas pricing requirements of 351 BBtu/d for February
through March 1999, 90 BBtu/d for April through December 1999, 31 BBtu/d for
January through December 2000 and 20 BBtu/d for January through December 2001.
At year-end 1997, Anadarko had open basis swap agreements for the Company's
gas sales averaging 30 BBtu/d for 1998 and 1999 which were offset by open basis
swap agreements of like amounts for the same periods, thus eliminating the risk
to Anadarko from future price changes related to this position. Anadarko also
had open gas swap agreements for the Company's gas sales averaging 58 BBtu/d for
February through March 1998, 8 BBtu/d for April through October 1998 and 20
BBtu/d for January 1999. The Company also had open gas swap agreements related
to customer and supplier gas pricing requirements of 56 BBtu/d for February
through March 1998, 15 BBtu/d for April through December 1998 and 28 BBtu/d for
January through March 1999.
COMMODITY OPTIONS The Company generally uses commodity options to fix a floor
and a ceiling for prices (a "collar") on its sales volumes. The Company also has
used options to "straddle" a price, effectively setting a price above the then
present market price at which the Company is willing to fix its sales price and
a price below the then present market price at which the Company is willing to
fix its purchase price for third party supply. Like futures, NYMEX options have
settlement guaranteed and have nominal credit risk.
47
<PAGE> 48
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED)
At year-end 1998, Anadarko had open NYMEX options for the Company's gas
sales of 35 BBtu/d for puts and 27 BBtu/d for calls during February and March
1999. Anadarko also had open NYMEX gas options for its customers of 5 BBtu/d for
puts and 23 BBtu/d for calls for February through March 1999, 11 BBtu/d for puts
for April through December 1999, 11 BBtu/d for calls for April through October
1999 and 11 BBtu/d for puts for January through March 2000. In addition, the
Company had open crude oil options of 14 MBbls/d for puts and 10 MBbls/d for
calls during February 1999.
At year-end 1997, Anadarko had open NYMEX options for the Company's gas
sales of 1.5 BBtu/d for both puts and calls during April through November 1998
in order to fix a price range on gas sales. Anadarko had open NYMEX gas options
for its customers of 10 BBtu/d for puts and 25 BBtu/d for calls for February
through March 1998 and 5 BBtu/d for calls for April through July 1998. In
addition, the Company had open crude oil options of 1.7 MBbls/d for both puts
and calls during February through March 1998.
INTEREST RATE SWAP During 1996, Anadarko entered into a 10-year swap agreement
with a notional value of $100,000,000 whereby the Company receives a fixed
interest rate and pays a floating interest rate indexed to 3-month LIBOR. This
agreement was entered into to offset a portion of the effect of the Company's
fixed rate long-term debt. The fair value of the interest rate swap is based
upon a market quote from a commercial bank and is the approximate amount
Anadarko would have received if the agreement was terminated at year-end.
7. PREFERRED STOCK
In May 1998, Anadarko issued $200,000,000 of 5.46% Series B Cumulative
Preferred Stock in the form of two million Depositary Shares, each Depositary
Share representing 1/10th of a share of the 5.46% Series B Cumulative Preferred
Stock. The preferred stock has no stated maturity and is not subject to a
sinking fund or mandatory redemption. The shares are not convertible into other
securities of the Company.
Anadarko has the option to redeem the shares at $100 per Depositary Share
on or after May 15, 2008. Holders of the shares are entitled to receive, when,
and as declared by the Board of Directors, cumulative cash dividends at an
annual dividend rate of $5.46 per Depositary Share. The proceeds from the
offering were used to reduce commercial paper and bank borrowings and provide
capital for Anadarko's 1998 capital expenditures. The preferred stock was issued
under the Company's shelf registration statement.
During 1998, dividends of $35.49 per share (equivalent to $3.549 per
Depositary Share) were paid to holders of preferred stock.
48
<PAGE> 49
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. COMMON STOCK AND STOCK OPTIONS
Following is a schedule of the changes in the Company's shares of common
stock:
<TABLE>
<CAPTION>
1998 1997 1996
thousands ------- ------ ------
<S> <C> <C> <C>
SHARES OF COMMON STOCK ISSUED
Beginning of year 60,886 60,526 60,016
Two-for-one stock split 61,035 -- --
Exercise of stock options 348 149 413
Issuance of restricted stock 51 148 39
Issuance of shares for employee savings plan 99 63 58
Issuance of shares for Dividend Reinvestment and Stock
Purchase Plan 18 -- --
------- ------ ------
End of year 122,437 60,886 60,526
------- ------ ------
SHARES OF COMMON STOCK HELD IN TREASURY
Beginning of year -- -- --
Issuance of shares for employee savings plan (2) (13) (12)
Purchase of treasury stock 2 13 12
------- ------ ------
End of year -- -- --
------- ------ ------
SHARES OF COMMON STOCK HELD FOR EXECUTIVES AND DIRECTORS
BENEFITS TRUST
Beginning of year 1,000 1,000 1,000
Two-for-one stock split 1,000 -- --
------- ------ ------
End of year 2,000 1,000 1,000
------- ------ ------
SHARES OF COMMON STOCK OUTSTANDING AT END OF YEAR 120,437 59,886 59,526
------- ------ ------
</TABLE>
In April 1998, the Board of Directors approved a two-for-one stock split,
effected in the form of a stock dividend. The distribution date was July 1, 1998
to stockholders of record on June 15, 1998. Excluding the table above, all share
and per share information have been restated to reflect the stock split.
For the second, third and fourth quarters of 1998, dividends of 5 cents per
share were paid to holders of common stock. In the first quarter of 1998 and in
each quarter of 1997 and 1996, dividends of 3.75 cents per share were paid to
holders of common stock. Under the most restrictive provisions of the various
credit agreements, which limit the payment of dividends by the Company, retained
earnings of $609,456,000, $466,780,000 and $364,080,000 were not restricted as
to the payment of dividends at December 31, 1998, 1997 and 1996, respectively.
In October 1998, the Company filed a registration statement with the SEC
that permits the issuance of Anadarko common stock under the Anadarko Dividend
Reinvestment and Stock Purchase Plan (DRIP). The DRIP offers the opportunity to
reinvest dividends and provides an alternative to traditional methods of buying,
holding and selling Anadarko common stock. The DRIP provides the Company with a
means of raising additional capital for general corporate purposes through the
sale of common stock under the DRIP.
In October 1998, the Board of Directors adopted a Stockholders Rights Plan,
which replaced the Rights Plan that expired on October 20, 1998. Under the
Rights Plan, the Rights attached automatically to each outstanding share of
common stock on November 10, 1998. Each Right, at the time it becomes
exercisable and transferable apart from the common stock, entitles stockholders
to purchase from the Company 1/1000th of a share of a new series of junior
participating preferred stock at an exercise price of $175. The Right will be
exercisable only if a person or group acquires 15% or more of common stock or
announces a tender offer or exchange offer the consummation of which would
result in ownership by a person or group of 15% or more of the common stock. The
Rights distribution was not taxable to stockholders. The Board of Directors may
elect to exchange and redeem the Rights. The Rights will expire on November 10,
2008.
49
<PAGE> 50
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. COMMON STOCK AND STOCK OPTIONS -- (CONTINUED)
During 1998, 1997 and 1996, the Company acquired treasury stock only as a
result of stock option exercises, restricted stock transactions or buyback of
shares, which were unsolicited from stockholders.
As of December 31, 1998 and 1997, the Company had 2,000,000 shares of
common stock in the Anadarko Petroleum Corporation Executives and Directors
Benefits Trust (Trust) to secure present and future unfunded benefit obligations
of the Company. These benefit obligations are provided for under pension plans
and deferred compensation plans for certain employees and non-employee Directors
of the Company. The obligations included in Deferred Credits -- Other are
$15,988,000 and $16,288,000 as of December 31, 1998 and 1997, respectively. The
shares issued to the Trust are not considered outstanding for quorum or voting
calculations, but the Trust receives dividends. Under the treasury stock method,
the shares are not included in the calculation of EPS. The fair market value of
these shares is included in common stock and paid-in capital and as a reduction
to stockholders' equity. See Note 15.
Key employees may be granted options to purchase shares of Anadarko common
stock and other stock related awards under the 1993 Stock Incentive Plan. Stock
options are granted at the fair market value of Anadarko stock on the date of
grant and have a maximum term of 11 years from the date of grant.
In addition, the 1993 Stock Incentive Plan provides that up to 1,600,000
shares of common stock may be granted as restricted stock. Generally, restricted
stock is subject to forfeiture restrictions and cannot be sold, transferred or
disposed of during the restriction period. The holders of the restricted stock
have all the rights of 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 such shares. During 1998, 1997 and 1996, the Company issued
57,100, 296,000 and 78,900 shares, respectively, of restricted stock with a
weighted-average grant date fair value of $32.47, $34.06 and $31.71,
respectively.
Non-employee Directors may be granted non-qualified stock options under the
1998 Director Stock Plan. Stock options are granted at the fair market value of
Anadarko stock on the date of grant and have a maximum term of ten years from
the date of grant. Prior to 1998, non-employee Directors were granted non-
qualified stock options under the 1988 Stock Option Plan for Non-Employee
Directors, which terminated in October 1998.
The 1987 Stock Option Plan terminated pursuant to its terms in 1997. Some
of the option grants made prior to the termination are still outstanding.
Outstanding grants will terminate ten years from the date of grant unless
exercised earlier.
Anadarko and a key officer of the Company have a Performance Share
Agreement under the 1993 Stock Incentive Plan. The Agreement provides for
issuance of up to 300,000 shares of common stock of the Company at the end of a
four or eight-year period contingent upon the Company's achievement of
predetermined objectives. During each of the years ended December 31, 1998, 1997
and 1996, annual expense of $2,000,000 was recognized under the Agreement. The
fair value of the performance shares is not determinable at this time since the
shares to be issued are contingent upon the Company's achievement of the
objectives.
50
<PAGE> 51
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. COMMON STOCK AND STOCK OPTIONS -- (CONTINUED)
Unexercised stock options are included in the diluted EPS using the
treasury stock method. Information regarding the Company's stock option plans is
summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
options in thousands ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
SHARES UNDER OPTION AT BEGINNING
OF YEAR 6,756 $26.20 5,743 $23.04 4,806 $19.07
Granted 2,267 $35.35 1,324 $37.90 1,866 $29.42
Exercised (499) $17.16 (299) $17.24 (912) $15.18
Surrendered or expired (6) $37.97 (12) $28.79 (17) $22.31
----- ----- -----
SHARES UNDER OPTION AT END OF
YEAR 8,518 $29.16 6,756 $26.20 5,743 $23.04
----- ----- -----
Options exercisable at December
31 5,028 $25.48 4,292 $21.85 3,543 $20.09
----- ----- -----
Shares available for future
grant at end of year 1,159 2,828 4,444
----- ----- -----
Weighted-average fair value of
options granted during the
year $11.84 $13.37 $11.96
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
PRICES AT YEAR END (YEARS) PRICE AT YEAR END PRICE
-------- ----------- ----------- --------- ----------- ---------
options in thousands
<S> <C> <C> <C> <C> <C>
$14.91 - $23.50 2,343 4.55 $19.63 2,343 $19.63
$23.84 - $31.81 2,544 7.37 $27.79 1,944 $27.98
$31.94 - $35.94 2,315 9.32 $35.28 50 $31.94
$36.31 - $37.97 1,316 8.84 $37.89 691 $37.82
----- ---- ------ ----- ------
Total 8,518 7.35 $29.16 5,028 $25.48
----- ---- ------ ----- ------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Expected option life - years 4.91 5.11 6.35
Risk-free interest rate 5.13% 6.18% 6.13%
Dividend yield 0.57% 0.60% 0.70%
Volatility 29.98% 28.76% 31.47%
</TABLE>
SFAS No. 123 "Accounting for Stock-based Compensation" defines a fair value
method of accounting for an employee stock option or similar equity instrument.
SFAS No. 123 allows an entity to continue to
51
<PAGE> 52
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. COMMON STOCK AND STOCK OPTIONS -- (CONTINUED)
measure compensation costs for these plans using Accounting Principles Board
Opinion (APB) No. 25 and related interpretations. Anadarko has elected to
continue using APB No. 25 for accounting for employee stock compensation plans.
Accordingly, no compensation expense is recognized for stock options granted
with an exercise price equal to the market value of Anadarko stock on the date
of grant. If compensation expense for the Company's stock option plans had been
determined using the fair-value method in SFAS No. 123, the Company's net income
and EPS would have been as shown in the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
thousands except per share amounts -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) available to common As reported
stockholders $(49,286) $107,318 $100,720
Pro forma $(61,564) $ 99,928 $ 96,099
Basic EPS As reported $ (0.41) $ 0.90 $ 0.85
Pro forma $ (0.51) 0.84 $ 0.81
Diluted EPS As reported $ (0.41) $ 0.89 $ 0.85
Pro forma $ (0.51) $ 0.83 $ 0.81
</TABLE>
The reconciliation between basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED For the Year Ended
DECEMBER 31, 1998 December 31, 1997
------------------------------ ------------------------------
PER SHARE Per Share
LOSS SHARES AMOUNT Income Shares Amount
thousands except per share amounts -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (loss) available to common
stockholders $(49,286) 120,103 $(0.41) $107,318 119,434 $0.90
------ -----
Effect of dilutive stock options -- -- -- 820
-------- ------- -------- -------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed
conversion $(49,286) 120,103 $(0.41) $107,318 120,254 $0.89
-------- ------- ------ -------- ------- -----
<CAPTION>
For the Year Ended
December 31, 1996
------------------------------
Per Share
Income Shares Amount
thousands except per share amounts -------- ------- ---------
<S> <C> <C> <C>
BASIC EPS
Income (loss) available to common
stockholders $100,720 118,495 $0.85
-----
Effect of dilutive stock options -- 695
-------- -------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed
conversion $100,720 119,190 $0.85
-------- ------- -----
</TABLE>
For the year ended December 31, 1998, there were 881,000 common stock
equivalents related to outstanding stock options that were not included in the
computation of diluted EPS, since they had an anti-dilutive effect.
9. STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
The amounts of cash paid (received) for interest (net of amounts
capitalized) and income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- ------- -------
<S> <C> <C> <C>
Interest $ 56,593 $39,617 $36,197
Income taxes paid (received) $(11,454) $12,068 $ 8,484
</TABLE>
52
<PAGE> 53
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS
Anadarko Algeria has a Production Sharing Agreement (PSA) with SONATRACH,
the national oil and gas enterprise of Algeria. SONATRACH is the beneficial
owner of 9.9% of the Company's outstanding common stock. The PSA gives Anadarko
Algeria the right to explore for and produce liquid hydrocarbons in Algeria,
subject to the sharing of production with SONATRACH. Anadarko Algeria has two
partners in the PSA. The Company also has a minority interest in a PSA covering
two additional blocks in the same region, which are operated by BHP Petroleum
(Algerie) Inc., where an exploration program is underway. Approximately $26,000,
$438,000 and $60,000 was paid to SONATRACH in 1998, 1997 and 1996, respectively,
for charges related to reservoir studies, laboratory services, well testing
services and equipment usage. During 1998 and 1997, $32,091,000 and $7,911,000,
respectively, was received and $25,854,000 and $7,129,000 was included in
accounts receivable as of December 31, 1998 and 1997, respectively, from
SONATRACH for joint interest billings of development costs in Algeria under the
PSA. Through December 31, 1998, the amounts received from SONATRACH have been
paid in Algerian dinars, the local currency, which are used by the Company to
make payments in Algeria.
Anadarko and partners have a $177,000,000 Engineering, Procurement and
Construction (EPC) contract with Brown & Root Condor, a company jointly owned by
Brown & Root and affiliates of SONATRACH. For the years ended December 31, 1998,
1997 and 1996, approximately $43,463,000, $107,049,000 and $21,933,000,
respectively, was paid to Brown & Root Condor under the EPC contract.
Political unrest continues in Algeria. Anadarko is closely monitoring the
situation and has taken reasonable and prudent steps to ensure the safety of
employees and the security of its facilities in the remote regions of the Sahara
Desert. Anadarko is presently unable to predict with certainty any effect the
current situation may have on activity planned for 1999 and beyond. However, the
situation has not had any material effect on the Company's operations to date.
The Company's activities in Algeria also are subject to the general risks
associated with all foreign operations.
In 1998, 1997 and 1996, the Company paid Houston Advanced Research Center
(HARC) $150,000, $20,000 and $50,000, respectively, for seismic imaging
projects. John R. Butler, Jr., a Director of the Company, serves as Chairman,
President and CEO of HARC.
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, Canada, France and Mexico. The
majority of the Company's receivables are paid within two months following the
month of purchase.
The Company generally performs a credit analysis of customers prior to
making any sales to new customers. Based upon this credit analysis, the Company
may require a standby letter of credit or a financial guarantee.
In 1998, sales to CoEnergy Trading Co. were $144,320,000, sales to
Proliance Energy LLC were $67,713,000 and sales to Texaco Trading &
Transportation Company were $65,552,000, each of which accounted for more than
10% of the Company's total 1998 revenues. In 1997, sales to CoEnergy Trading Co.
were $200,368,000, sales to Texaco Trading & Transportation Company were
$78,816,000 and sales to Proliance Energy LLC were $75,808,000, each of which
accounted for more than 10% of the Company's total 1997 revenues. In 1996, sales
to Texaco Trading & Transportation Company were $64,444,000, which accounted for
more than 10% of the Company's total 1996 revenues.
53
<PAGE> 54
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operations primarily relate to oil and gas production
activities. Accordingly, they are considered one business segment. The following
table shows Anadarko's revenues (based on the origin of the sales) and net
properties and equipment by geographic area:
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- -------- --------
<S> <C> <C> <C>
REVENUES
United States $543,336 $674,872 $570,022
Algeria 16,918 267 124
-------- -------- --------
Total $560,254 $675,139 $570,146
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
thousands ---------- ----------
<S> <C> <C>
NET PROPERTIES AND EQUIPMENT
United States $2,787,177 $2,292,254
Algeria 556,548 404,942
Other international 37,813 57,583
---------- ----------
Total $3,381,538 $2,754,779
---------- ----------
</TABLE>
12. OTHER TAXES
Significant taxes other than income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
thousands ------- ------- -------
<S> <C> <C> <C>
Production and severance $16,266 $22,092 $19,457
Ad valorem 17,171 17,035 14,137
Payroll and other 4,272 3,647 3,611
------- ------- -------
Total $37,709 $42,774 $37,205
------- ------- -------
</TABLE>
13. INCOME TAXES
Income tax expense, including deferred amounts, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- ------- -------
<S> <C> <C> <C>
CURRENT
Federal $ (2,162) $ 6,964 $ 2,849
State (637) 1,801 (10)
Foreign 400 -- --
-------- ------- -------
Total (2,399) 8,765 2,839
-------- ------- -------
DEFERRED
Federal (21,998) 46,816 51,075
State (620) 1,460 3,156
Foreign 2,118 -- --
-------- ------- -------
Total (20,500) 48,276 54,231
-------- ------- -------
Total income taxes $(22,899) $57,041 $57,070
-------- ------- -------
</TABLE>
54
<PAGE> 55
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. INCOME TAXES -- (CONTINUED)
Total income taxes were different than the amounts computed by applying the
statutory income tax rate to Income (Loss) before Income Taxes. The sources of
these differences are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- -------- --------
<S> <C> <C> <C>
Income (Loss) before Income Taxes
Domestic $ (839) $179,754 $172,483
Foreign (64,248) (15,395) (14,693)
-------- -------- --------
Total $(65,087) $164,359 $157,790
-------- -------- --------
Statutory tax rate 35% 35% 35%
Tax computed at statutory rate $(22,780) $ 57,526 $ 55,227
Adjustments resulting from:
State income taxes (net of federal income tax benefit) (817) 2,120 2,045
Oil and gas credits (1,683) (1,743) (367)
Foreign taxes (net of federal income tax benefit) 1,637 -- --
Other -- net 744 (862) 165
-------- -------- --------
Total income taxes $(22,899) $ 57,041 $ 57,070
-------- -------- --------
Effective tax rate 35% 35% 36%
-------- -------- --------
</TABLE>
The tax benefit of compensation expense for tax purposes in excess of
amounts recognized for financial accounting purposes has been credited directly
to stockholders' equity. For 1998, 1997 and 1996 the tax benefit amounted to
$3,339,000, $1,864,000 and $5,055,000, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities (assets) at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
thousands --------- --------
<S> <C> <C>
Oil and gas exploration and development costs $ 749,849 $609,793
Other 14,640 18,643
--------- --------
Gross deferred tax liabilities 764,489 628,436
--------- --------
Net operating loss carryforwards (152,279) --
Alternative minimum tax credit carryforward (31,040) (28,501)
Other (58,217) (53,143)
--------- --------
Gross deferred tax assets (241,536) (81,644)
--------- --------
Net deferred tax liabilities $ 522,953 $546,792
--------- --------
</TABLE>
The Company has determined that it is more likely than not that the
deferred tax assets will be realized and a valuation allowance for such assets
is not required.
55
<PAGE> 56
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. INCOME TAXES -- (CONTINUED)
Net operating loss and alternative minimum tax credit carryforwards at
December 31, 1998, which are available for future utilization on federal and
foreign income tax returns, are as follows:
<TABLE>
<CAPTION>
Regular Alternative
Foreign Federal Minimum
Tax Tax Tax Expiration
thousands -------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net operating loss -- domestic $ -- $292,700 $265,500 2018
Net operating loss -- foreign $131,100 $ -- $ -- 2003
Alternative minimum tax credit $ -- $ 31,000 $ -- Unlimited
General business tax credit $ -- $ 1,300 $ -- 2006-2012
</TABLE>
The net operating losses and tax credits have reduced deferred federal
income tax expense.
14. LEASE COMMITMENTS
The Company has various commitments under non-cancelable operating lease
agreements for buildings, facilities and equipment, the majority of which expire
at various dates through 2014. The leases are expected to be renewed or replaced
as they expire. At December 31, 1998, future minimum rental payments due under
operating leases are as follows:
<TABLE>
<CAPTION>
thousands
<S> <C>
1999 $ 28,024
2000 23,835
2001 20,450
2002 15,351
2003 11,467
Later years 111,671
--------
Total minimum lease payments $210,798
--------
</TABLE>
Total rental expense amounted to $37,430,000, $24,797,000 and $12,702,000
in 1998, 1997 and 1996, respectively.
In 1998 and 1997, the Company entered into sale-leaseback agreements
totaling $112,440,000 (net) involving 177 natural gas compressors in Anadarko's
major mid-continent gathering systems. Proceeds from these transactions were
used for general corporate purposes. The related leases are being accounted for
as operating leases. The gains of $77,980,000 were deferred and are being
amortized over the lease terms as a reduction to operating expense. As of
December 31, 1998 and 1997, Deferred Credits -- Other includes $63,760,000 and
$57,800,000, respectively, related to the long-term portion of the deferred
gains.
56
<PAGE> 57
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. PENSION PLANS, OTHER POSTRETIREMENT BENEFITS AND EMPLOYEE SAVINGS PLAN
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has a defined
benefit pension plan and an equalization plan which are non-contributory pension
plans. The Company also provides certain health care and life insurance benefits
for retired employees. Health care benefits are funded by contributions from the
Company and the retiree, with the retiree contributions adjusted per the
provisions of the Company's health care plans. The Company's retiree life
insurance plan is non-contributory.
The following table sets forth the Company's pension and other
postretirement benefits changes in benefit obligation, fair value of plan
assets, funded status and amounts recognized in the financial statements as of
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------- ---------------------
1998 1997 1998 1997
thousands -------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 75,352 $ 61,462 $ 27,297 $ 23,012
Service cost 5,503 4,551 1,883 1,516
Interest cost 5,086 4,562 1,959 1,708
Plan amendments (3,738) -- -- --
Increase due to change in actuarial
assumptions 10,466 5,870 3,783 1,661
Benefit payments and settlements (4,812) (1,093) (600) (600)
-------- -------- -------- --------
Benefit obligation at end of year $ 87,857 $ 75,352 $ 34,322 $ 27,297
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year $ 60,894 $ 50,844 $ -- $ --
Actual return on plan assets 6,595 11,131 -- --
Employer contributions 1,012 12 600 600
Benefit payments (3,891) (1,093) (600) (600)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 64,610 $ 60,894 $ -- $ --
-------- -------- -------- --------
Funded status of the plan $(23,247) $(14,458) $(34,322) $(27,297)
Unrecognized actuarial (gain) loss 8,631 1,077 (1,438) (5,410)
Unrecognized prior service cost (1,909) 1,662 -- --
Unrecognized initial asset (3,615) (4,143) -- --
-------- -------- -------- --------
Total recognized $(20,140) $(15,862) $(35,760) $(32,707)
-------- -------- -------- --------
TOTAL RECOGNIZED AMOUNTS IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Accrued benefit liability $(20,140) $(15,862) $(35,760) $(32,707)
Intangible asset (1,699) (2,601) -- --
-------- -------- -------- --------
Total recognized $(21,839) $(18,463) $(35,760) $(32,707)
-------- -------- -------- --------
</TABLE>
Following are the weighted-average assumptions used by the Company in
determining the accumulated pension and postretirement benefit obligations as of
December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
1998 1997 1998 1997
percent ------ ------ ----- -----
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 6.75% 7.25%
Long-term rate of return on plan assets 8.0% 8.0% N/A n/a
Rates of increase in compensation levels 5.0% 5.0% 5.0% 5.0%
</TABLE>
57
<PAGE> 58
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. PENSION PLANS, OTHER POSTRETIREMENT BENEFITS AND EMPLOYEE SAVINGS
PLAN -- (CONTINUED)
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 5% for 2001 and later years.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------- ------------------------
1998 1997 1996 1998 1997 1996
thousands ------- -------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost $ 5,503 $ 4,551 $ 4,484 $1,883 $1,516 $1,664
Interest cost 5,086 4,562 3,945 1,959 1,708 1,680
Actual return on plan assets (6,595) (11,131) (5,603) -- -- --
Amortization values and deferrals 2,092 7,741 2,481 (189) (359) (134)
------- -------- ------- ------ ------ ------
Net periodic benefit cost $ 6,086 $ 5,723 $ 5,307 $3,653 $2,865 $3,210
------- -------- ------- ------ ------ ------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $10,458,000, $6,995,000 and $0, respectively, as
of December 31, 1998, and $11,472,000, $8,618,000 and $0, respectively, as of
December 31, 1997. The Company's benefit obligations under the unfunded pension
plans are secured by the Anadarko Petroleum Corporation Executives and Directors
Benefits Trust. See Note 8.
Anadarko's Non-employee Director Pension Plan was terminated effective
January 1, 1998. The Directors were granted phantom shares equal to the value of
the accumulated benefit on the date of termination.
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plan. A 1% change in the assumed health
care cost trend rate would have the following effects:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
thousands ----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components $ 759 $ (618)
Effect on postretirement benefit obligation $5,061 $(4,200)
</TABLE>
EMPLOYEE SAVINGS PLAN The Company has an employee savings plan (ESP) that is a
defined contribution plan. The Company matches a portion of employees'
contributions with shares of the Company's common stock. 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 $5,254,000,
$4,618,000 and $4,076,000 during 1998, 1997 and 1996, respectively.
FOREIGN PLANS The Company has a pension plan for certain non-resident foreign
nationals. Employees make contributions to the plan. The Company makes
contributions to the plan, if necessary, based on actuarial information.
Participation in the plan is voluntary. The Company's contributions were
$808,000 and $372,000 during 1998 and 1997, respectively.
The Company has an employee savings plan for certain non-resident foreign
nationals. The Company matches contributions with shares of the Company's common
stock. Participation in the plan is voluntary. The Company's contributions were
$223,000 and $101,000 during 1998 and 1997, respectively.
58
<PAGE> 59
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
16. CONTINGENCIES
ENVIRONMENTAL On December 17, 1993, the Company received a notice from the
Department of Justice in the State of California indicating the Company may be a
potentially responsible party (PRP) for the study, cleanup and closure of the
waste facility owned by Geothermal, Inc. in Middletown, California (the GI
site). Anadarko's records indicate the disposal of a limited number of barrels
of drilling mud at the GI site in 1982. During the first quarter of 1994, the
Company, along with other PRPs, became a party to a Cost Sharing, Joint Defense
and Confidentiality Agreement, effective October 20, 1993. The Company believes
its share of costs in connection with the cleanup of the GI site will be
approximately $35,000 to $70,000 and will not have a material effect on its
financial position, cash flows or results of operations.
New technology has recently been developed which could result in closure of
the GI site at substantial cost reductions. A pilot study of this technology is
currently underway. The California Water Quality Control Board has agreed to
defer a final closure decision until the completion of the pilot study in early
2000.
KANSAS AD VALOREM TAX The Natural Gas Policy Act of 1978 allowed a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on the Federal Energy Regulatory
Commission (FERC) ruling that the Kansas ad valorem tax was such a tax, the
Company collected the Kansas ad valorem tax.
Background of Present Litigation FERC's ruling regarding the ability of
producers to collect the Kansas ad valorem tax was appealed to the United States
Court of Appeals for the District of Columbia Circuit (D.C. Circuit). The Court
held in June 1988 that FERC failed to provide a reasoned basis for its findings
and remanded the case to FERC.
Ultimately, the D.C. Circuit issued a decision on August 2, 1996 ruling
that producers must refund all Kansas ad valorem taxes collected relating to
production since October 1983. The Company filed a petition for writ of
certiorari with the Supreme Court. That petition was denied on May 12, 1997.
Anadarko estimates that the maximum amount of principal and interest at
issue which has not been paid to date, assuming that the October 1983 effective
date remains in effect, is about $42,700,000 (pretax) as of December 31, 1998.
FERC Proceedings Depending on future FERC orders, the Company could be required
to pay all or part of the amounts claimed by all pipelines (which might include
PanEnergy) pending further potential review by FERC or the courts.
PanEnergy Litigation On May 13, 1997, the Company filed a lawsuit in the
Federal District Court for the Southern District of Texas against PanEnergy
seeking declaration that pursuant to prior agreements Anadarko is not required
to issue refunds to PanEnergy for the principal amount of $14,000,000 (pretax)
and, if the petition for adjustment is denied in its entirety by FERC with
respect to PanEnergy refunds, interest in an amount of $27,100,000 (pretax) as
of December 31, 1998. The Company also seeks from PanEnergy the return of
$816,000 of the $830,000 (pretax) charged against income in 1993 and 1994. In
response to a motion filed by PanEnergy, the United States District Court issued
an order on March 17, 1998 staying the litigation, pending the exercise by FERC
of its regulatory jurisdiction.
FERC Order of October 13, 1998 On October 13, 1998, FERC issued a final order
on Anadarko's complaint. The order declares that Anadarko Production Company
(now an affiliate of Duke Energy) is responsible as first seller for making
refunds of Kansas ad valorem tax reimbursements collected from 1983 through
August 1, 1985. The Company estimates this amount to be as much as $26,000,000.
The Company is responsible to make refunds for reimbursements it collected as
first seller from August 1, 1985 through 1988. The Company estimates this amount
to be as much as $16,000,000. The FERC order states that whether Anadarko
Production Company or the Company is entitled to reimbursement from another
party for the refunds ordered is a matter to be pursued in an appropriate
judicial forum. On January 15, 1999, FERC issued an order denying a request for
rehearing filed by PanEnergy and reaffirming the October 1998 order. FERC
59
<PAGE> 60
ANADARKO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
16. CONTINGENCIES -- (CONTINUED)
may, in the near future, issue an order based upon the above allocation
regarding when the refunds must be paid and the specific refund amount. The
issue of reimbursement will now be pursued in U.S. District Court.
Kansas Corporation Commission (KCC) Proceeding On April 30, 1998, the Company's
subsidiary, Anadarko Gathering Company (AGC), filed a petition with the KCC to
clarify AGC's rights and obligations, if any, related to the payment by first
sellers of Kansas ad valorem tax refunds. The refunds at issue relate to sales
made by Anadarko Production Company, a PanEnergy affiliate, through facilities
known as the Cimmaron River System during the time period from 1983 to 1988. AGC
purchased the Cimmaron River System from Centana, the successor of Anadarko
Production Company, in 1995. The petition, among other things, asks the KCC to
determine whether AGC or Anadarko Production Company is responsible for the
payment or distribution of refunds received from first sellers to Anadarko
Production Company's former customers and requests guidance concerning the
disposition of refunds received that are attributable to sales made to Anadarko
Production Company customers that did not reimburse Anadarko Production Company
for Kansas ad valorem taxes during the relevant time periods. This matter is
presently being pursued before the KCC. The KCC is expected to issue a
recommendation upon Anadarko's petition in this matter by March 15, 1999.
Anadarko's net income for 1997 included a $1,800,000 charge (pretax)
related to the Kansas ad valorem tax refunds. This charge reflects all principal
and interest which may be due at the conclusion of all regulatory proceedings
and litigation to parties other than PanEnergy. The Company is unable at this
time to predict the final outcome of this matter and no provision for liability
(excluding amounts recorded in 1993, 1994 and 1997) has been made in the
accompanying financial statements.
60
<PAGE> 61
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL QUARTERLY INFORMATION
(UNAUDITED)
QUARTERLY FINANCIAL DATA
The following table shows summary quarterly financial data for 1998 and
1997. See Management's Discussion and Analysis of Financial Condition and
Results of Operations under Item 7 of this Form 10-K.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
thousands except per share amounts -------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Operating revenues $147,001 $137,526 $140,191 $135,536
Operating income (loss), pretax 23,335 20,282 15,715 (66,720)*
Net income (loss) $ 7,015 $ 4,341 $ 464 $(54,008)*
Net income (loss) available to common stockholders $ 7,015 $ 2,703 $ (2,266) $(56,738)*
Earnings (loss) per common share - basic $ 0.06 $ 0.02 $ (0.02) $ (0.47)*
Earnings (loss) per common share - diluted $ 0.06 $ 0.02 $ (0.02) $ (0.47)*
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1997
Operating revenues $171,345 $139,002 $158,717 $206,075
Operating income, pretax 63,203 29,771 38,130 74,213
Net income $ 34,434 $ 13,774 $ 17,092 $ 42,018
Net income available to common stockholders $ 34,434 $ 13,774 $ 17,092 $ 42,018
Earnings per common share - basic $ 0.29 $ 0.12 $ 0.14 $ 0.35
Earnings per common share - diluted $ 0.29 $ 0.11 $ 0.14 $ 0.35
</TABLE>
- ---------------
* Anadarko's fourth quarter 1998 operating loss includes a non-cash charge of
$70,000,000 ($44,590,000 after income taxes) to impair certain international
properties. Excluding this impairment, Anadarko's fourth quarter net
operating income (pretax) was $3,280,000, net loss was $9,418,000 and net
loss available to common stockholders was $12,148,000, which was $0.10 per
common share (diluted).
61
<PAGE> 62
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
OIL AND GAS PRODUCTION
The following is historical revenue and cost information relating to the
Company's oil and gas operations. Excluded from amounts subject to amortization
as of December 31, 1998 and 1997 are $353,647,000 and $343,789,000,
respectively, of costs associated with unevaluated properties and major
development projects. The majority of the evaluation activities are expected to
be completed within five years.
COSTS EXCLUDED FROM AMORTIZATION
<TABLE>
<CAPTION>
YEAR COSTS INCURRED EXCLUDED
-------------------------------------- COSTS AT
PRIOR DEC. 31,
YEARS 1996 1997 1998 1998
thousands ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Property acquisition $39,059 $ 7,276 $20,352 $ 37,939 $104,626
Exploration 20,300 27,421 52,648 112,039 212,408
Capitalized interest 6,858 5,766 9,153 14,836 36,613
------- ------- ------- -------- --------
Total $66,217 $40,463 $82,153 $164,814 $353,647
------- ------- ------- -------- --------
</TABLE>
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
thousands ---------- ----------
<S> <C> <C>
UNITED STATES
Capitalized
Unproved properties $ 232,320 $ 174,371
Proved properties 4,337,068 3,753,890
Plant facilities 13,283 13,286
---------- ----------
4,582,671 3,941,547
Accumulated depreciation, depletion and amortization 1,980,535 1,812,560
---------- ----------
Net capitalized costs 2,602,136 2,128,987
---------- ----------
ALGERIA
Capitalized
Unproved properties 85,077 145,124
Proved properties 464,545 249,237
---------- ----------
549,622 394,361
Accumulated depreciation, depletion and amortization 4,418 --
---------- ----------
Net capitalized costs 545,204 394,361
---------- ----------
OTHER OVERSEAS
Capitalized
Unproved properties 36,250 55,923
---------- ----------
Net capitalized costs 36,250 55,923
---------- ----------
TOTAL
Capitalized
Unproved properties 353,647 375,418
Proved properties 4,801,613 4,003,127
Plant facilities 13,283 13,286
---------- ----------
5,168,543 4,391,831
Accumulated depreciation, depletion and amortization 1,984,953 1,812,560
---------- ----------
Net capitalized costs $3,183,590 $2,579,271
---------- ----------
</TABLE>
62
<PAGE> 63
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- -------- --------
<S> <C> <C> <C>
UNITED STATES -- Capitalized
Property acquisition
Exploration $ 31,690 $ 22,292 $ 20,920
Development 143,186 31,036 5,335
Exploration 171,072 111,959 106,602
Development 312,846 276,266 132,139
-------- -------- --------
658,794 441,553 264,996
-------- -------- --------
ALGERIA -- Capitalized
Property acquisition
Exploration -- 178 --
Exploration 86,979 83,860 49,343
Development 64,403 87,422 29,459
-------- -------- --------
151,382 171,460 78,802
-------- -------- --------
OTHER OVERSEAS -- Capitalized
Property acquisition
Exploration 2,415 2,085 --
Exploration 47,107 35,322 18,659
Development -- -- 470
-------- -------- --------
49,522 37,407 19,129
-------- -------- --------
TOTAL -- Capitalized
Property acquisition
Exploration 34,105 24,555 20,920
Development 143,186 31,036 5,335
Exploration 305,158 231,141 174,604
Development 377,249 363,688 162,068
-------- -------- --------
$859,698 $650,420 $362,927
-------- -------- --------
</TABLE>
63
<PAGE> 64
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following schedule includes only the revenues from the production and
sale of gas, oil, condensate and NGLs. Results of operations from oil and gas
marketing and gas gathering are excluded. The income tax expense is calculated
by applying the current statutory tax rates to the revenues after deducting
costs, which include depreciation, depletion and amortization (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
production.
<TABLE>
<CAPTION>
1998 1997 1996
thousands -------- -------- --------
<S> <C> <C> <C>
UNITED STATES
Net revenues from production
Gas and oil sold to consolidated affiliates $297,927 $379,982 $316,127
Third-party sales of gas, oil, condensate and NGLs 223,246 274,308 229,398
-------- -------- --------
521,173 654,290 545,525
Production (lifting) costs 166,731 157,847 121,461
Depreciation, depletion and amortization* 179,183 181,163 149,488
-------- -------- --------
175,259 315,280 274,576
Income tax expense 61,276 111,711 98,368
-------- -------- --------
Results of operations $113,983 $203,569 $176,208
-------- -------- --------
*DD&A rate per net equivalent barrel $ 3.91 $ 4.09 $ 3.96
-------- -------- --------
ALGERIA
Net revenues from production
Third-party sales of oil $ 16,474 $ -- $ --
-------- -------- --------
16,474 -- --
Production (lifting) costs 6,492 -- --
Depreciation, depletion and amortization* 4,418 -- --
-------- -------- --------
5,564 -- --
Income tax expense 3,514 -- --
-------- -------- --------
Results of operations $ 2,050 $ -- $ --
-------- -------- --------
*DD&A rate per net equivalent barrel $ 3.22 $ -- $ --
-------- -------- --------
TOTAL
Net revenues from production
Gas and oil sold to consolidated affiliates $297,927 $379,982 $316,127
Third-party sales of gas, oil, condensate and NGLs 239,720 274,308 229,398
-------- -------- --------
537,647 654,290 545,525
Production (lifting) costs 173,223 157,847 121,461
Depreciation, depletion and amortization* 183,601 181,163 149,488
-------- -------- --------
180,823 315,280 274,576
Income tax expense 64,790 111,711 98,368
-------- -------- --------
Results of operations $116,033 $203,569 $176,208
-------- -------- --------
*DD&A rate per net equivalent barrel $ 3.89 $ 4.09 $ 3.96
-------- -------- --------
</TABLE>
64
<PAGE> 65
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
OIL AND GAS RESERVES
The following table shows estimates prepared by the Company's engineers of
proved reserves and proved developed 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. Volumes for natural gas 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 energy equivalent barrels (MMEEBs). For this
computation, one barrel is the equivalent of six thousand cubic feet of gas.
NGLs are included with oil and condensate reserves and the associated shrinkage
has been deducted from the gas reserves.
Algerian reserves are shown in accordance with the PSA. The reserves
include estimated quantities allocated to Anadarko for recovery of costs and
Algerian taxes and Anadarko's net equity share after recovery of such costs.
Anadarko's reserves increased in 1998 primarily from exploration and
development drilling and purchases in place. Anadarko's reserves increase was
offset partially by a negative reserve revision caused by lower natural gas and
crude oil prices at year-end 1998 compared to year-end 1997. The Company's
reserves increased in 1997 primarily from exploration and development drilling
and improved recovery. The Company's reserves increased in 1996 primarily from
exploration and development drilling and improved recovery.
The Company emphasizes that the volumes of reserves shown below are
estimates which, by their nature, are subject to revision. The estimates are
made using all 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 performance data.
65
<PAGE> 66
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
OIL AND GAS RESERVES -- (CONTINUED)
<TABLE>
<CAPTION>
NATURAL GAS OIL, CONDENSATE AND NGLS TOTAL
(BCF) (MMBBLS) (MMEEBS)
------------------------- ----------------------------------- -----------------------------------
U.S. INDONESIA TOTAL U.S. ALGERIA INDONESIA TOTAL U.S. ALGERIA INDONESIA TOTAL
----- --------- ----- ----- ------- --------- ----- ----- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
DECEMBER 31, 1995 1,843 -- 1,843 126.7 92.5 -- 219.2 433.8 92.5 -- 526.3
Revisions of prior
estimates (17) -- (17) 11.4 -- -- 11.4 8.5 -- -- 8.5
Extensions, discoveries
and other additions 152 47 199 36.2 31.8 9.9 77.9 61.9 31.8 17.7 111.4
Improved recovery 6 -- 6 9.4 -- -- 9.4 10.4 -- -- 10.4
Purchases in place 5 -- 5 0.4 -- -- 0.4 1.1 -- -- 1.1
Sales in place (3) (47) (50) (0.4) -- (9.9) (10.3) (1.0) -- (17.7) (18.7)
Production (165) -- (165) (10.2) -- -- (10.2) (37.7) -- -- (37.7)
----- --- ----- ----- ----- ---- ----- ----- ----- ----- -----
DECEMBER 31, 1996 1,821 -- 1,821 173.5 124.3 -- 297.8 477.0 124.3 -- 601.3
Revisions of prior
estimates (95) -- (95) 13.2 -- -- 13.2 (2.7) -- -- (2.7)
Extensions, discoveries
and other additions 164 -- 164 38.6 59.8 -- 98.4 66.1 59.8 -- 125.9
Improved recovery 6 -- 6 19.9 -- -- 19.9 20.8 -- -- 20.8
Purchases in place 18 -- 18 5.0 -- -- 5.0 8.0 -- -- 8.0
Sales in place (5) -- (5) (0.1) -- -- (0.1) (1.0) -- -- (1.0)
Production (179) -- (179) (14.5) -- -- (14.5) (44.3) -- -- (44.3)
----- --- ----- ----- ----- ---- ----- ----- ----- ----- -----
DECEMBER 31, 1997 1,730 -- 1,730 235.6 184.1 -- 419.7 523.9 184.1 -- 708.0
Revisions of prior
estimates (70) -- (70) (32.0) -- -- (32.0) (43.7) -- -- (43.7)
Extensions, discoveries
and other additions 1,028 -- 1,028 36.5 62.3 -- 98.8 207.9 62.3 -- 270.2
Improved recovery 15 -- 15 6.7 -- -- 6.7 9.1 -- -- 9.1
Purchases in place 121 -- 121 18.6 -- -- 18.6 38.7 -- -- 38.7
Production (177) -- (177) (16.4) (1.4) -- (17.8) (45.8) (1.4) -- (47.2)
----- --- ----- ----- ----- ---- ----- ----- ----- ----- -----
DECEMBER 31, 1998 2,647 -- 2,647 249.0 245.0 -- 494.0 690.1 245.0 -- 935.1
----- --- ----- ----- ----- ---- ----- ----- ----- ----- -----
PROVED DEVELOPED RESERVES
December 31, 1995 1,737 -- 1,737 77.5 -- -- 77.5 367.0 -- -- 367.0
December 31, 1996 1,654 -- 1,654 100.6 -- -- 100.6 376.2 -- -- 376.2
December 31, 1997 1,597 -- 1,597 122.6 -- -- 122.6 388.7 -- -- 388.7
December 31, 1998 1,640 -- 1,640 119.5 44.2 -- 163.7 392.9 44.2 -- 437.1
</TABLE>
66
<PAGE> 67
ANADARKO PETROLEUM CORPORATION
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(UNAUDITED)
DISCOUNTED FUTURE NET CASH FLOWS
Estimates of future net cash flows from proved reserves of gas, oil,
condensate and NGLs were made in accordance with SFAS No. 69, "Disclosures about
Oil and Gas Producing Activities." The amounts were prepared by the Company's
engineers and are shown in the following table. The estimates are based on
prices at year-end.
Under the full cost method of accounting, a non-cash charge to earnings
related to the carrying value of the Company's oil and gas properties on a
county-by-county basis may be required when prices are low. Whether the Company
will be required to take such a charge depends on the prices for crude oil and
natural gas at the end of any quarter, as well as the effect of both capital
expenditures and changes to proved reserves during that quarter. If a non-cash
charge were required, it would reduce earnings for the quarter, which would
result in lower DD&A expense in future periods.
Prices for crude oil and natural gas were significantly lower at year-end
1998 compared to year-end 1997. Since the end of 1998, gas prices have continued
to fall. If the current pricing environment continues or worsens, the Company
may be required to take a non-cash charge against earnings during the first
quarter of 1999.
Gas prices are escalated only for fixed and determinable amounts under
provisions in some contracts. Estimated future cash inflows are reduced by
estimated future development and production costs based on year-end cost levels,
assuming continuation of existing economic conditions, and by estimated future
income tax expense. 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 are considered in
determining the income tax expense.
At December 31, 1998, the present value (discounted at ten percent) of
future net revenues from Anadarko's proved reserves was $3.1 billion, before
income taxes, and $2.2 billion, after income taxes, (stated in accordance with
the regulations of the Securities Exchange Commission and the Financial
Accounting Standards Board). The after income taxes increase of 10 percent in
1998 compared to 1997 is primarily due to the additions of proved reserves
related to successful exploration and development drilling and purchases in
place, partially offset by significantly lower natural gas and crude oil prices
at year-end 1998.
The present value of future net revenues 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.
67
<PAGE> 68
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
<TABLE>
<CAPTION>
1998 1997 1996
millions ------- ------ -------
<S> <C> <C> <C>
UNITED STATES
Future cash inflows $ 7,393 $6,500 $11,076
Future production and development costs 2,690 2,494 2,908
------- ------ -------
Future net cash flows before income taxes 4,703 4,006 8,168
10% annual discount for estimated timing of cash flows 2,209 1,944 3,907
------- ------ -------
Discounted future net cash flows before income taxes 2,494 2,062 4,261
Future income taxes, net of 10% annual discount 698 654 1,450
------- ------ -------
Standardized measure of discounted future net cash flows
relating to oil and gas reserves 1,796 1,408 2,811
------- ------ -------
ALGERIA
Future cash inflows 2,694 3,092 3,263
Future production and development costs 988 743 813
------- ------ -------
Future net cash flows before income taxes 1,706 2,349 2,450
10% annual discount for estimated timing of cash flows 1,066 1,382 1,441
------- ------ -------
Discounted future net cash flows before income taxes 640 967 1,009
Future income taxes, net of 10% annual discount 214 364 417
------- ------ -------
Standardized measure of discounted future net cash flows
relating to oil and gas reserves 426 603 592
------- ------ -------
TOTAL
Future cash inflows 10,087 9,592 14,339
Future production and development costs 3,678 3,237 3,721
------- ------ -------
Future net cash flows before income taxes 6,409 6,355 10,618
10% annual discount for estimated timing of cash flows 3,275 3,326 5,348
------- ------ -------
Discounted future net cash flows before income taxes 3,134 3,029 5,270
Future income taxes, net of 10% annual discount 912 1,018 1,867
------- ------ -------
Standardized measure of discounted future net cash flows
relating to oil and gas reserves $ 2,222 $2,011 $ 3,403
------- ------ -------
</TABLE>
68
<PAGE> 69
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
<TABLE>
<CAPTION>
1998 1997 1996
millions ------ ------- -------
<S> <C> <C> <C>
UNITED STATES
Beginning of year $1,408 $ 2,811 $ 1,449
Sales and transfers of oil and gas produced, net of
production costs (354) (496) (399)
Net changes in prices and development and production costs (412) (2,443) 1,730
Extensions, discoveries, additions and improved recovery,
less
related costs 1,002 330 452
Development costs incurred during the period 26 30 53
Revisions of previous quantity estimates (225) (148) 161
Purchases of minerals in place 96 11 14
Sales of minerals in place -- -- (11)
Accretion of discount 206 426 206
Net change in income taxes (44) 797 (836)
Other 93 90 (8)
------ ------- -------
End of year 1,796 1,408 2,811
------ ------- -------
ALGERIA
Beginning of year 603 592 285
Sales and transfers of oil and gas produced, net of
production costs (10) -- --
Net changes in prices and development and production costs (514) (491) 260
Extensions, discoveries, additions and improved recovery,
less
related costs 45 253 166
Development costs incurred during the period 91 88 29
Accretion of discount 97 101 50
Net change in income taxes 150 52 (203)
Other (36) 8 5
------ ------- -------
End of year 426 603 592
------ ------- -------
TOTAL*
Beginning of year 2,011 3,403 1,734
Sales and transfers of oil and gas produced, net of
production costs (364) (496) (399)
Net changes in prices and development and production costs (926) (2,934) 1,990
Extensions, discoveries, additions and improved recovery,
less
related costs 1,047 583 618
Development costs incurred during the period 117 118 82
Revisions of previous quantity estimates (225) (148) 161
Purchases of minerals in place 96 11 14
Sales of minerals in place -- -- (11)
Accretion of discount 303 527 256
Net change in income taxes 106 849 (1,039)
Other 57 98 (3)
------ ------- -------
End of year $2,222 $ 2,011 $ 3,403
------ ------- -------
</TABLE>
- ---------------
* Excludes changes in the standardized measure of discounted future net cash
flows for Indonesia reserves which were both added and sold during 1996.
69
<PAGE> 70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Anadarko Board of Directors and Section 16(a) Beneficial Ownership
Reporting Compliance in the Anadarko Petroleum Corporation Proxy Statement,
dated March 22, 1999 (Proxy Statement), which is incorporated herein by
reference.
See list of Executive Officers of the Registrant appearing under Item 4 of
this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
See Anadarko Board of Directors -- Director Compensation and Compensation
and Benefits Committee Report on 1998 Executive Compensation in the Proxy
Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Stock Ownership in the Proxy Statement, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Transactions with Management and Others in the Proxy Statement, which
is incorporated herein by reference.
70
<PAGE> 71
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 35.
(2) Exhibits not incorporated by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits
not so designated are incorporated herein by reference to a prior
filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
3(a) Restated Certificate of Incorporation of 19(a)(i) to Form 10-Q 1-8968
Anadarko Petroleum Corporation, dated for quarter ended September 30,
August 28, 1986 1986
(b) By-laws of Anadarko Petroleum 3(b) to Form 10-Q 1-8968
Corporation, as amended for quarter ended
June 30, 1996
4(a) Rights Agreement, dated as of October 29, 4.1 to Form 8-A dated October 1-8968
1998, between Anadarko Petroleum 30, 1998
Corporation and The Chase Manhattan Bank,
Rights Agent
(b) Indenture, dated as of May 10, 1988, 4(a) to Form S-3 Registration 33-21094
between Anadarko Petroleum Corporation Statement
and Continental Illinois National Bank
and Trust Company of Chicago, Trustee
(c) First Supplemental Indenture, dated as of 4(d) to Form 10-K 1-8968
November 15, 1991, between Anadarko for year ended
Petroleum Corporation and Continental December 31, 1991
Bank, National Association, Trustee
(d) Amendment to Credit Agreement, dated as 4(a) to Form 10-Q 1-8968
of April 17, 1998 for quarter ended
March 31, 1998
(e) Indenture, dated as of March 1, 1995, 4(a) to Form 10-Q 1-8968
between Anadarko Petroleum Corporation for quarter ended
and the Chase Manhattan Bank, N.A., June 30, 1995
Trustee
(f) Distribution Agreement, dated as of March 4(b) to Form 10-Q 1-8968
9, 1995, for $300,000,000 Medium-Term for quarter ended
Notes, Series A June 30, 1995
(g) Indenture, dated as of September 1, 1997, 4(j) to Form 10-K 1-8968
between Anadarko Petroleum Corporation for year ended
and Harris Trust and Savings Bank, December 31, 1997
Trustee
10(a) (i) Tax Sharing Agreement, dated September 19(c)(i) to Form 10-Q 1-8968
30, 1986, among Panhandle Eastern for quarter ended
Corporation, Centana Energy Corporation September 30, 1986
and Anadarko Petroleum Corporation
(ii) Spin-Off Agreement, dated September 30, 10(a)(iii) to Form 10-K for 1-8968
1986, between Panhandle Eastern year ended December 31, 1988
Corporation and Anadarko Petroleum
Corporation
(iii) Global Settlement Agreement between 28(a) to Form 10-Q 1-8968
Panhandle Eastern Corporation and for quarter ended
Anadarko Petroleum Corporation, dated March 31, 1989
March 31, 1989
</TABLE>
71
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
10(a) (iv) Agreement for Exploration and 10 to Form 10-Q 1-8968
Exploitation of Liquid Hydrocarbons for quarter ended
between Anadarko Algeria Corporation and March 31, 1997
SONATRACH, dated October 23, 1989
(Confidential treatment requested for
certain provisions pursuant to Rule 24b-2
under the Securities Exchange Act of
1934)
(v) Agreement Concerning the Method of 10(a)(i) to Form 10-Q for 1-8968
Application of the Contract signed on quarter ended September 30,
October 23, 1989 between SONATRACH and 1998
Anadarko Algeria Corporation
(vi) Amendment No. 1 to the Agreement for the 10(a)(ii) to Form 10-Q for 1-8968
Exploration and Exploitation of Liquid quarter ended September 30,
Hydrocarbons between SONATRACH and 1998
Anadarko Algeria Corporation signed
October 23, 1989
DIRECTOR AND EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10(b) (i) Director Deferred Compensation Plan of 10(b)(viii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation, effective year ended December 31, 1986
January 1, 1987
(ii) Amendment to Anadarko Petroleum 10(b)(ii) to Form 10-K for year 1-8968
Corporation Director Deferred ended December 31, 1997
Compensation Plan
(iii) Director Deferred Compensation Agreement 19(a)(i) to Form 10-Q for 1-8968
between Anadarko Petroleum Corporation quarter ended March 31, 1987
and each Director Electing to Participate
(iv) First Amendment to Director Deferred 10(b)(iv) to Form 10-K for year 1-8968
Compensation Agreement 1987, 1988, 1989 ended December 31, 1997
and 1990 Plan Years
(v) Anadarko Petroleum Corporation 1988 Stock 19(b) to Form 10-Q for quarter 1-8968
Option Plan for Non-Employee Directors ended September 30, 1988
(vi) Anadarko Petroleum Corporation Amended 99 - Attachment A to Form 10-K 1-8968
and Restated 1988 Stock Option Plan for for year ended December 31,
Non-Employee Directors 1993
(vii) Amendment to Anadarko Petroleum 10(b)(vii) to Form 10-K for 1-8968
Corporation 1988 Stock Option Plan for year ended December 31, 1997
Non-Employee Directors
(viii) Second Amendment to Anadarko Petroleum 10(b)(viii) to Form 10-K for 1-8968
Corporation 1988 Stock Option Plan for year ended December 31, 1997
Non-Employee Directors
(ix) 1998 Director Stock Plan of Anadarko 99 - Attachment A to Form 10-K 1-8968
Petroleum Corporation, effective January for year ended December 31,
30, 1998 1997
(x) Anadarko Petroleum Corporation and 19(c)(ix) to Form 10-Q for 1-8968
Participating Affiliates and Subsidiaries quarter ended September 30,
Annual Override Pool Bonus Plan, as 1986
amended October 6, 1986
(xi) Second Amendment to Anadarko Petroleum 10(b)(ii) to Form 10-K for year 1-8968
Corporation and Participating Affiliates ended December 31, 1987
and Subsidiaries Annual Override Pool
Bonus Plan
</TABLE>
72
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
10(b) (xii) Restatement of the Anadarko Petroleum Post Effective Amendment No. 1 33-22134
Corporation 1987 Stock Option Plan (and to Forms S-8 and S-3, Anadarko
Related Agreement) Petroleum Corporation 1987
Stock Option Plan
(xiii) First Amendment to Restatement of the 10(b)(xii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation 1987 Stock year ended December 31, 1997
Option Plan
(xiv) 1993 Stock Incentive Plan 10(b)(xii) to Form 10-K for 1-8968
year ended December 31, 1993
(xv) First Amendment to Anadarko Petroleum 99 - Attachment A to Form 10-K 1-8968
Corporation 1993 Stock Incentive Plans for year ended December 31,
1996
(xvi) Second Amendment to Anadarko Petroleum 10(b)(xv) to Form 10-K for year 1-8968
Corporation 1993 Stock Incentive Plan ended December 31, 1997
(xvii) Anadarko Petroleum Corporation 1993 Stock 10(a) to Form 10-Q for quarter 1-8968
Incentive Plan Stock Option Agreement ended March 31, 1996
(xviii) Form of Anadarko Petroleum Corporation 10(b)(xvii) to Form 10-K for 1-8968
1993 Stock Incentive Plan Stock Option year ended December 31, 1997
Agreement
(xix) Form of Anadarko Petroleum Corporation 10(b)(xviii) to Form 10-K for 1-8968
1993 Stock Incentive Plan Restricted year ended December 31, 1997
Stock Agreement
(xx) Anadarko Petroleum Corporation 1993 Stock 10(b) to Form 10-Q for quarter 1-8968
Incentive Plan Performance Share ended March 31, 1996
Agreement
(xxi) Form of Anadarko Petroleum Corporation 10(b)(xx) to Form 10-K for year 1-8968
1993 Stock Incentive Plan Performance ended December 31, 1997
Share Agreement
(xxii) Annual Incentive Bonus Plan 10(b)(xiii) to Form 10-K for 1-8968
year ended December 31, 1993
(xxiii) Key Employee Change of Control Contract 10(b)(xxii) to Form 10-K for 1-8968
year ended December 31, 1997
(xxiv) Executive Deferred Compensation Plan of 10(b)(xii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation and year ended December 31, 1987
Participating Subsidiaries and
Affiliates, effective October 1, 1986
(xxv) Executive Deferred Compensation Plan of 10(b)(vi) to Form 10-K for year 1-8968
Anadarko Petroleum Corporation, effective ended December 31, 1986
January 1, 1987
(xxvi) Amendment to Anadarko Petroleum 10(b)(xxv) to Form 10-K for 1-8968
Corporation Executive Deferred year ended December 31, 1997
Compensation Plan
(xxvii) Executive Deferred Compensation Agreement 19(a)(ii) to Form 10-Q for 1-8968
between Anadarko Petroleum Corporation quarter ended March 31, 1987
and each Executive Electing to
Participate
</TABLE>
73
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
10(b) (xxviii) First Amendment to Executive Deferred 10(b)(xxvii) to Form 10-K for 1-8968
Compensation Agreement 1987, 1988, 1989 year ended December 31, 1997
and 1990 Plan Years
(xxix) Amendments to Executive Deferred 10(b)(xv) to Form 10-K for year 1-8968
Compensation Agreement between Anadarko ended December 31, 1987
Petroleum Corporation and each Executive
Electing to Participate
(xxx) Anadarko Retirement Restoration Plan, 10(b)(xix) to Form 10-K for 1-8968
effective January 1, 1995 year ended December 31, 1995
(xxxi) Anadarko Savings Restoration Plan, 10(b)(xx) to Form 10-K for year 1-8968
effective January 1, 1995 ended December 31, 1995
(xxxii) Amendment to Amended and Restated 10(b)(xxxi) to Form 10-K for 1-8968
Anadarko Savings Restoration Plan year ended December 31, 1997
(xxxiii) Plan Agreement for the Management Life 10(b)(xxi) to Form 10-K for 1-8968
Insurance Plan between Anadarko Petroleum year ended December 31, 1995
Corporation and each Eligible Employee,
effective July 1, 1995
* (xxxiv) Anadarko Petroleum Corporation Estate
Enhancement Program
* (xxxv) Estate Enhancement Program Agreement
between Anadarko Petroleum Corporation
and Eligible Executives
*12 Computation of Ratios of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
*13 Portions of the Anadarko Petroleum
Corporation 1998 Annual Report to
Stockholders
*21 List of Significant Subsidiaries
*23 Consents of Experts and Counsel
Consent of KPMG LLP
*24 Powers of Attorney
*27 Financial Data Schedule
99 Anadarko Petroleum Corporation Proxy Filed on March 11, 1999
Statement, dated March 22, 1999
</TABLE>
- ---------------
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 ten
percent 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) REPORTS ON FORM 8-K
A report on Form 8-K dated November 10, 1998 was filed in which the
earliest event reported was October 29, 1998. This event was reported under Item
5, "Other Events", and Item 7, "Financial Statements and Exhibits".
74
<PAGE> 75
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
March 12, 1999 By: /s/ MICHAEL E. ROSE
----------------------------------
(Michael E. Rose, 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 MARCH 12, 1999.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
------------------ -----
<S> <C> <C>
(i) Principal executive officer:*
ROBERT J. ALLISON, JR. Chairman of the Board, President and Chief
----------------------------------------------------- Executive Officer
(Robert J. Allison, Jr.)
(ii) Principal financial officer:*
MICHAEL E. ROSE Senior Vice President, Finance and Chief
----------------------------------------------------- Financial Officer
(Michael E. Rose)
(iii) Principal accounting officer:*
JAMES R. LARSON Vice President and Controller
-----------------------------------------------------
(James R. Larson)
(iv) Directors:*
ROBERT J. ALLISON, JR.
CONRAD P. ALBERT
LARRY BARCUS
RONALD BROWN
JAMES L. BRYAN
JOHN R. BUTLER, JR.
JOHN R. GORDON
JOHN N. SEITZ
- -----
* Signed on behalf of each of these persons and on his own behalf:
/s/ By MICHAEL E. ROSE
-------------------------------------------------------
(Michael E. Rose, Attorney-in-Fact)
</TABLE>
75
<PAGE> 76
STOCKHOLDERS' INFORMATION
The common stock of Anadarko Petroleum Corporation is traded on the New
York Stock Exchange. Average daily trading volume was 627,000 shares in 1998,
531,000 shares in 1997 and 453,000 shares in 1996.
The ticker symbol for Anadarko is APC and daily stock reports published in
local newspapers carry trading summaries for the Company under the headings
ANADRK or ANADRKPETE.
The following shows information regarding the closing market price of and
dividends paid on the Company's common stock by quarter for 1998 and 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998*
MARKET PRICE
High $34.63 $37.91 $43.19 $ 40.94
Low $26.44 $30.31 $28.75 $ 25.69
Dividends $0.0375 $0.050 $0.050 $ 0.050
1997*
MARKET PRICE
High $36.13 $32.81 $37.84 $ 38.13
Low $27.31 $25.44 $30.75 $ 28.59
Dividends $0.0375 $0.0375 $0.0375 $0.0375
</TABLE>
- ---------------
* In April 1998, the Board of Directors approved a two-for-one stock split. The
stock split was effected by way of a stock dividend. The distribution date was
July 1, 1998 to stockholders of record on June 15, 1998. All amounts shown
above have been restated to reflect the stock split.
STOCKHOLDER SERVICES
The transfer agent and registrar for Anadarko common stock is ChaseMellon
Shareholder Services, L.L.C. Stockholders who need assistance with their
accounts or wish to eliminate duplicate mailings should call (800) 851-9677
within the continental U.S. or write:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Rd.
Ridgefield Park, NJ 07660
Website: www.chasemellon.com
Anadarko offers a Dividend Reinvestment and Stock Purchase Plan (DRIP) to
its stockholders. The DRIP provides an opportunity to reinvest dividends and
offers an alternative to traditional methods of buying, holding and selling
Anadarko common stock. For more information about Anadarko's DRIP, please
contact ChaseMellon Shareholder Services at 1-888-470-5786.
ANADARKO WILL MAKE AVAILABLE TO ANY STOCKHOLDER, WITHOUT CHARGE, ADDITIONAL
COPIES OF ITS 1998 REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. FOR ADDITIONAL COPIES OF THIS OR ANY ANADARKO PUBLICATION, PLEASE
CONTACT:
Anadarko Petroleum Corporation
Corporate Communications Department
P.O. Box 1330
Houston, Texas 77251-1330
Telephone: (281) 874-3498
As a service to our stockholders, copies of the Company's news releases can
be transmitted at no charge via fax by calling 1-800-758-5804 ext. 038950 or
through our website at www.anadarko.com.
76
<PAGE> 77
ANNUAL STOCKHOLDERS' MEETING
All stockholders are cordially invited to attend Anadarko's annual
stockholders' meeting which will be held at 9:30 a.m. on Thursday, April 29,
1999 at The Wyndham Hotel-Greenspoint at 12400 Greenspoint Drive in Houston.
FOR MORE INFORMATION
If you have questions or need additional information concerning Anadarko's
operations or financial results, please contact Paul Taylor, Vice President,
Corporate Communications, at (281) 874-3471.
77
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
3(a) Restated Certificate of Incorporation of 19(a)(i) to Form 10-Q 1-8968
Anadarko Petroleum Corporation, dated for quarter ended September 30,
August 28, 1986 1986
(b) By-laws of Anadarko Petroleum 3(b) to Form 10-Q 1-8968
Corporation, as amended for quarter ended
June 30, 1996
4(a) Rights Agreement, dated as of October 29, 4.1 to Form 8-A dated October 1-8968
1998, between Anadarko Petroleum 30, 1998
Corporation and The Chase Manhattan Bank,
Rights Agent
(b) Indenture, dated as of May 10, 1988, 4(a) to Form S-3 Registration 33-21094
between Anadarko Petroleum Corporation Statement
and Continental Illinois National Bank
and Trust Company of Chicago, Trustee
(c) First Supplemental Indenture, dated as of 4(d) to Form 10-K 1-8968
November 15, 1991, between Anadarko for year ended
Petroleum Corporation and Continental December 31, 1991
Bank, National Association, Trustee
(d) Amendment to Credit Agreement, dated as 4(a) to Form 10-Q 1-8968
of April 17, 1998 for quarter ended
March 31, 1998
(e) Indenture, dated as of March 1, 1995, 4(a) to Form 10-Q 1-8968
between Anadarko Petroleum Corporation for quarter ended
and the Chase Manhattan Bank, N.A., June 30, 1995
Trustee
(f) Distribution Agreement, dated as of March 4(b) to Form 10-Q 1-8968
9, 1995, for $300,000,000 Medium-Term for quarter ended
Notes, Series A June 30, 1995
(g) Indenture, dated as of September 1, 1997, 4(j) to Form 10-K 1-8968
between Anadarko Petroleum Corporation for year ended
and Harris Trust and Savings Bank, December 31, 1997
Trustee
10(a) (i) Tax Sharing Agreement, dated September 19(c)(i) to Form 10-Q 1-8968
30, 1986, among Panhandle Eastern for quarter ended
Corporation, Centana Energy Corporation September 30, 1986
and Anadarko Petroleum Corporation
(ii) Spin-Off Agreement, dated September 30, 10(a)(iii) to Form 10-K for 1-8968
1986, between Panhandle Eastern year ended December 31, 1988
Corporation and Anadarko Petroleum
Corporation
(iii) Global Settlement Agreement between 28(a) to Form 10-Q 1-8968
Panhandle Eastern Corporation and for quarter ended
Anadarko Petroleum Corporation, dated March 31, 1989
March 31, 1989
10(a) (iv) Agreement for Exploration and 10 to Form 10-Q 1-8968
Exploitation of Liquid Hydrocarbons for quarter ended
between Anadarko Algeria Corporation and March 31, 1997
SONATRACH, dated October 23, 1989
(Confidential treatment requested for
certain provisions pursuant to Rule 24b-2
under the Securities Exchange Act of
1934)
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
(v) Agreement Concerning the Method of 10(a)(i) to Form 10-Q for 1-8968
Application of the Contract signed on quarter ended September 30,
October 23, 1989 between SONATRACH and 1998
Anadarko Algeria Corporation
(vi) Amendment No. 1 to the Agreement for the 10(a)(ii) to Form 10-Q for 1-8968
Exploration and Exploitation of Liquid quarter ended September 30,
Hydrocarbons between SONATRACH and 1998
Anadarko Algeria Corporation signed
October 23, 1989
DIRECTOR AND EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10(b) (i) Director Deferred Compensation Plan of 10(b)(viii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation, effective year ended December 31, 1986
January 1, 1987
(ii) Amendment to Anadarko Petroleum 10(b)(ii) to Form 10-K for year 1-8968
Corporation Director Deferred ended December 31, 1997
Compensation Plan
(iii) Director Deferred Compensation Agreement 19(a)(i) to Form 10-Q for 1-8968
between Anadarko Petroleum Corporation quarter ended March 31, 1987
and each Director Electing to Participate
(iv) First Amendment to Director Deferred 10(b)(iv) to Form 10-K for year 1-8968
Compensation Agreement 1987, 1988, 1989 ended December 31, 1997
and 1990 Plan Years
(v) Anadarko Petroleum Corporation 1988 Stock 19(b) to Form 10-Q for quarter 1-8968
Option Plan for Non-Employee Directors ended September 30, 1988
(vi) Anadarko Petroleum Corporation Amended 99 - Attachment A to Form 10-K 1-8968
and Restated 1988 Stock Option Plan for for year ended December 31,
Non-Employee Directors 1993
(vii) Amendment to Anadarko Petroleum 10(b)(vii) to Form 10-K for 1-8968
Corporation 1988 Stock Option Plan for year ended December 31, 1997
Non-Employee Directors
(viii) Second Amendment to Anadarko Petroleum 10(b)(viii) to Form 10-K for 1-8968
Corporation 1988 Stock Option Plan for year ended December 31, 1997
Non-Employee Directors
(ix) 1998 Director Stock Plan of Anadarko 99 - Attachment A to Form 10-K 1-8968
Petroleum Corporation, effective January for year ended December 31,
30, 1998 1997
(x) Anadarko Petroleum Corporation and 19(c)(ix) to Form 10-Q for 1-8968
Participating Affiliates and Subsidiaries quarter ended September 30,
Annual Override Pool Bonus Plan, as 1986
amended October 6, 1986
(xi) Second Amendment to Anadarko Petroleum 10(b)(ii) to Form 10-K for year 1-8968
Corporation and Participating Affiliates ended December 31, 1987
and Subsidiaries Annual Override Pool
Bonus Plan
10(b) (xii) Restatement of the Anadarko Petroleum Post Effective Amendment No. 1 33-22134
Corporation 1987 Stock Option Plan (and to Forms S-8 and S-3, Anadarko
Related Agreement) Petroleum Corporation 1987
Stock Option Plan
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
(xiii) First Amendment to Restatement of the 10(b)(xii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation 1987 Stock year ended December 31, 1997
Option Plan
(xiv) 1993 Stock Incentive Plan 10(b)(xii) to Form 10-K for 1-8968
year ended December 31, 1993
(xv) First Amendment to Anadarko Petroleum 99 - Attachment A to Form 10-K 1-8968
Corporation 1993 Stock Incentive Plans for year ended December 31,
1996
(xvi) Second Amendment to Anadarko Petroleum 10(b)(xv) to Form 10-K for year 1-8968
Corporation 1993 Stock Incentive Plan ended December 31, 1997
(xvii) Anadarko Petroleum Corporation 1993 Stock 10(a) to Form 10-Q for quarter 1-8968
Incentive Plan Stock Option Agreement ended March 31, 1996
(xviii) Form of Anadarko Petroleum Corporation 10(b)(xvii) to Form 10-K for 1-8968
1993 Stock Incentive Plan Stock Option year ended December 31, 1997
Agreement
(xix) Form of Anadarko Petroleum Corporation 10(b)(xviii) to Form 10-K for 1-8968
1993 Stock Incentive Plan Restricted year ended December 31, 1997
Stock Agreement
(xx) Anadarko Petroleum Corporation 1993 Stock 10(b) to Form 10-Q for quarter 1-8968
Incentive Plan Performance Share ended March 31, 1996
Agreement
(xxi) Form of Anadarko Petroleum Corporation 10(b)(xx) to Form 10-K for year 1-8968
1993 Stock Incentive Plan Performance ended December 31, 1997
Share Agreement
(xxii) Annual Incentive Bonus Plan 10(b)(xiii) to Form 10-K for 1-8968
year ended December 31, 1993
(xxiii) Key Employee Change of Control Contract 10(b)(xxii) to Form 10-K for 1-8968
year ended December 31, 1997
(xxiv) Executive Deferred Compensation Plan of 10(b)(xii) to Form 10-K for 1-8968
Anadarko Petroleum Corporation and year ended December 31, 1987
Participating Subsidiaries and
Affiliates, effective October 1, 1986
(xxv) Executive Deferred Compensation Plan of 10(b)(vi) to Form 10-K for year 1-8968
Anadarko Petroleum Corporation, effective ended December 31, 1986
January 1, 1987
(xxvi) Amendment to Anadarko Petroleum 10(b)(xxv) to Form 10-K for 1-8968
Corporation Executive Deferred year ended December 31, 1997
Compensation Plan
(xxvii) Executive Deferred Compensation Agreement 19(a)(ii) to Form 10-Q for 1-8968
between Anadarko Petroleum Corporation quarter ended March 31, 1987
and each Executive Electing to
Participate
10(b) (xxviii) First Amendment to Executive Deferred 10(b)(xxvii) to Form 10-K for 1-8968
Compensation Agreement 1987, 1988, 1989 year ended December 31, 1997
and 1990 Plan Years
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT ORIGINALLY FILED FILE
NUMBER DESCRIPTION AS EXHIBIT NUMBER
------- ----------------------------------------- ------------------------------- --------
<C> <S> <C> <C> <C>
(xxix) Amendments to Executive Deferred 10(b)(xv) to Form 10-K for year 1-8968
Compensation Agreement between Anadarko ended December 31, 1987
Petroleum Corporation and each Executive
Electing to Participate
(xxx) Anadarko Retirement Restoration Plan, 10(b)(xix) to Form 10-K for 1-8968
effective January 1, 1995 year ended December 31, 1995
(xxxi) Anadarko Savings Restoration Plan, 10(b)(xx) to Form 10-K for year 1-8968
effective January 1, 1995 ended December 31, 1995
(xxxii) Amendment to Amended and Restated 10(b)(xxxi) to Form 10-K for 1-8968
Anadarko Savings Restoration Plan year ended December 31, 1997
(xxxiii) Plan Agreement for the Management Life 10(b)(xxi) to Form 10-K for 1-8968
Insurance Plan between Anadarko Petroleum year ended December 31, 1995
Corporation and each Eligible Employee,
effective July 1, 1995
* (xxxiv) Anadarko Petroleum Corporation Estate
Enhancement Program
* (xxxv) Estate Enhancement Program Agreement
between Anadarko Petroleum Corporation
and Eligible Executives
*12 Computation of Ratios of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
*13 Portions of the Anadarko Petroleum
Corporation 1998 Annual Report to
Stockholders
*21 List of Significant Subsidiaries
*23 Consents of Experts and Counsel
Consent of KPMG LLP
*24 Powers of Attorney
*27 Financial Data Schedule
99 Anadarko Petroleum Corporation Proxy Filed on March 11, 1999
Statement, dated March 22, 1999
</TABLE>
- ---------------
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 ten
percent 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.
<PAGE> 1
EXHIBIT 10(b)(XXXIV)
ANADARKO PETROLEUM CORPORATION
ESTATE ENHANCEMENT PROGRAM
1. PURPOSE
The purpose of the Anadarko Petroleum Corporation Estate Enhancement
Program (the "Plan") is to provide Executives of Anadarko Petroleum
Corporation (the "Company") the ability to elect life insurance
coverage pursuant to a split-dollar life insurance arrangement.
2. DEFINITIONS
For purposes of this Plan, the following terms have the meanings set
forth below:
2.01 ADJUSTED COMPANY DEATH BENEFIT means the portion of the Policy
death benefit payable to the Company solely as a result of an
Alternative Death Benefit Election being in effect for the
Policy, and shall be determined by subtracting from the amount
of Policy death benefit paid to the Company an amount equal to
the portion of the Policy death benefit that would have been
paid to the Company if an Alternative Death Benefit Election
was not in effect for the Policy.
2.02 AGREEMENT means the Agreement executed by the Participant (or
other Policy Owner) and the Company implementing the terms of
this Plan.
2.03 ALTERNATIVE DEATH BENEFIT means a Company-paid death benefit
paid by the Company to the Former Policy Owner's
beneficiary(ies) pursuant to an Alternative Death Benefit
Election under Section 8 of the Plan.
2.04 ALTERNATIVE DEATH BENEFIT AMOUNT means, with respect to a
Participant, an amount that is equal to the Adjusted Company
Death Benefit, reduced by the income taxes (if any) payable by
the Company as a result of receiving the Adjusted Company
Death Benefit, grossed up to reflect the benefit of any
Company federal, state, and local income tax savings resulting
from the deductibility for corporate income tax purposes of
the payment of the Alternative Death Benefit. The Alternative
Death Benefit Amount shall be determined at the time the
payment is to be made, based on the Company's federal, state
and local income tax rate (calculated at the marginal tax rate
then applicable to the Company, but net of any
- 1 -
<PAGE> 2
federal deduction for state and local taxes) at the time of
the payment, and shall be determined by the Committee or its
designee.
2.05 ALTERNATIVE DEATH BENEFIT ELECTION means an election made by
the Elector or Policy Owner pursuant to Section 8 of the Plan.
2.06 BOARD OF DIRECTORS means the Board of Directors of the
Company.
2.07 CHANGE OF CONTROL means: (a) the acquisition by any
individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a),
the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii)
any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company or (iv) any acquisition pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection
(c) of this Section 2.07; or (b) individuals who, as of the
date hereof, constitute the Board of Directors (the "Incumbent
Board") cease for any reason to constitute at least a majority
of the Board of Directors; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board of Directors; or
(c) consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the
acquisition of assets of another entity (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately
- 2 -
<PAGE> 3
prior to such Business Combination beneficially own, directly
or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation
which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case may be,
(ii) no Person (excluding any employee benefit plan (or
related trust) of the Company or such corporation resulting
from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business
Combination and (iii) at least a majority of the members of
the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the
action of the Board of Directors, providing for such Business
Combination; or (d) approval by the shareholders of the
Company of a complete liquidation or dissolution of the
Company.
2.08 COLLATERAL ASSIGNMENT means the Collateral Assignment executed
by the Policy Owner pursuant to Section 6.02 of the Plan.
2.09 COMMITTEE means the Compensation and Benefits Committee of the
Board of Directors of the Company.
2.10 COMPANY means Anadarko Petroleum Corporation.
2.11 COMPANY DEATH BENEFIT means the portion of the Policy's death
benefit payable to Company as provided in Section 8.
2.12 COMPENSATION means amounts a Participant agrees to forego to
participate in the Plan pursuant to Section 3.02, and shall
include amounts the Committee deems Compensation for purposes
of this Plan.
2.13 EFFECTIVE DATE means December 8, 1998.
2.14 ELECTOR means the person or persons who are entitled to make
or revoke an Alternative Death Benefit Election pursuant to
Section 8.01.
- 3 -
<PAGE> 4
2.15 ENROLLMENT AND ELECTION TO FOREGO COMPENSATION FORM means the
form used by a Participant to make an election to forego
Compensation pursuant to Section 3.02 of the Plan.
2.16 EXECUTIVE means an employee of the Company whom the Committee
deems eligible to participate in the Plan in accordance with
Section 3.01.
2.17 FORMER POLICY OWNER means the person(s) or entity that is the
Policy Owner immediately prior to when an Alternative Death
Benefit Election is first made with respect to a Policy.
2.18 INSURER means, with respect to a Participant's Policy, the
insurance company issuing the Policy on the Participant's life
(or on the lives of the Participant and the Participant's
spouse, in the case of a Survivorship Policy) pursuant to the
provisions of the Plan.
2.19 PARTICIPANT means an Executive who elects to participate in
the Plan.
2.20 PARTICIPANT'S COVERAGE AMOUNT means the portion of the
Policy's death benefit payable to the beneficiary(ies) of the
Policy Owner as provided in Section 7.
2.21 PLAN ADMINISTRATOR means the Committee, or its designee.
2.22 POLICY means the life insurance coverage acquired on the life
of the Participant (or on the lives of the Participant and the
Participant's spouse, in the case of a Survivorship Policy) by
the Company.
2.23 POLICY OWNER means the person or entity designated as owner on
the application for the Policy, or the person or entity to
which a Policy Owner assigns his or her interest in the
Policy.
2.24 PREMIUM means, with respect to a Policy on the life of a
Participant (or the lives of a Participant and a Participant's
spouse, if the Policy is a Survivorship Policy), the amount
the Company is obligated, pursuant to the terms of the Plan,
to pay to the Insurer with respect to such Policy.
2.25 SURVIVORSHIP POLICY means a Policy insuring the lives of the
Participant and a Participant's spouse, with the death benefit
payable at the death of the last survivor of the Participant
and his or her spouse.
3. PARTICIPATION
3.01 ELIGIBILITY. Any Executive designated by the Committee shall
be eligible to participate in the Plan. An Executive shall
become a Participant by
- 4 -
<PAGE> 5
completing such forms, documents and procedures as specified
by the Committee. The Participant (and, in the case of a
Survivorship Policy, the Participant's spouse) shall cooperate
with the Insurer by furnishing any and all information
requested by the Insurer in order to facilitate the issuance
of the Policy, including furnishing such medical information
and taking such physical examinations as the Insurer may deem
necessary. In the absence of such cooperation, the Company
shall have no further obligation to the Participant to allow
him or her to participate in the Plan.
3.02 ELECTION TO FOREGO COMPENSATION. As a condition of
participating in the Plan, each Participant shall be required
to make an election in which the Participant shall commit to
forego the receipt of a specified type and amount of
Compensation. The Participant shall make an election to forego
Compensation by execution of an Enrollment and Election to
Forego Compensation Form prior to the Policy effective date.
4. AMOUNT AND TYPE OF COVERAGE
The amount and type of coverage provided under the Policy shall be that
amount and type specified in the Agreement.
5. PAYMENT OF PREMIUMS
5.01 COMPANY PAYMENTS. The Company shall pay a Premium equal to the
Compensation foregone by a Participant within thirty (30) days
after the Policy is issued.
5.02 PARTICIPANT PAYMENTS. Unless otherwise provided in an
Agreement, a Participant, Policy Owner (other than the
Company, if the Company becomes the Policy Owner pursuant to
Section 8), or Former Policy Owner shall not be required to
pay any portion of the Premium due on the Policy. However, the
Participant, Policy Owner or Former Policy Owner may elect to
pay a premium to the Insurer with respect to the Policy.
6. POLICY OWNERSHIP
6.01 OWNERSHIP. Except as otherwise provided in this Plan and
related Agreement, the Policy Owner shall be the sole and
exclusive owner of a Participant's Policy.
6.02 COMPANY'S RIGHTS. The Company shall not have any ownership
rights in the Policy (except as provided in Section 8). The
Company's rights shall be limited to: (1) the right to receive
a portion of the Policy death benefit in the event of the
payment of the Policy death benefit while the Collateral
Assignment is in effect with respect to the Policy; and, (2)
the right to
- 5 -
<PAGE> 6
receive all of the proceeds of any surrender, withdrawal or
loan processed while the Collateral Assignment is in effect,
as specified in the Agreement. In exchange for the Company's
agreement to pay the Premiums described in Section 5.01 of the
Plan and the Participant's Agreement, the Policy Owner shall
execute a Collateral Assignment to the Company of the rights
provided to the Company under this Plan and related Agreement.
The Company shall have the right to direct the Policy Owner in
writing to take any required action consistent with these
rights, and upon the receipt of such written direction from
the Company, the Policy Owner promptly shall take such action
as is necessary to comply therewith. The Company shall have
the right to assign any part or all of its interest in the
Policy, subject to the Policy Owner's rights, and the terms
and conditions of this Plan and related Agreement, to any
person, entity or trust by the execution of a written
instrument delivered to the Policy Owner.
6.03 PROHIBITED POLICY TRANSACTIONS. The Policy Owner shall not
borrow from, hypothecate, withdraw cash value from, surrender
in whole or in part, cancel, or in any other manner encumber a
Policy without the prior written consent of the Company (or
without the prior written consent of the Former Policy Owner,
if the Company is the Policy Owner).
6.04 INVESTMENT OF POLICY CASH VALUES. If the Policy provides the
Policy Owner with a choice of investment funds for the Policy
cash values, and if the Company becomes the Policy Owner
pursuant to Section 8, the Company shall thereafter invest the
cash values in the funds selected by and in the proportions
specified by the Former Policy Owner, unless otherwise
specified in the Participant's Agreement. The Company agrees
to submit an investment election to the Insurer within thirty
(30) days after a written investment request by the Former
Policy Owner or other person or entity designated in the
Participant's Agreement.
6.05 POSSESSION OF POLICY. The Policy Owner shall maintain
possession of the Policy.
7. DEATH BENEFIT
Upon the death of the Participant (or the death of the survivor of the
Participant and the Participant's spouse, if the Policy is a
Survivorship Policy), the death benefit under the Policy shall be
divided as follows:
a. The Company shall be entitled to receive as the Company Death
Benefit an amount equal to the greater of: (i) the Policy cash
accumulation value immediately prior to the death of the
Participant (or the death of the
- 6 -
<PAGE> 7
survivor of the Participant and the Participant's spouse, if
the Policy is a Survivorship Policy) and before any surrender
charges; or (ii) the cumulative Premiums paid by the Company
under the Policy. If the Policy provides for a death benefit
equal to the sum of the face amount of the Policy and any cash
account or accumulation value, any Company Death Benefit
should first be paid from the cash account or accumulation
value portion of the death benefit.
b. The beneficiary(ies) of the Policy Owner shall be entitled to
receive the Participant's Coverage Amount, which shall consist
of the excess, if any, of the Policy's death benefit over the
Company Death Benefit.
8. ALTERNATIVE DEATH BENEFIT ELECTION.
8.01 ALTERNATIVE DEATH BENEFIT ELECTION. The Alternative Death
Benefit Election provided for in this Section may be made or
revoked by the person or persons designated as the Elector in
the Participant's Agreement. If no such person is designated
in the Agreement, or if no designated person is living and
able to make the election, the election may be made or revoked
by the Policy Owner (except that an election cannot be made or
revoked by the Company, if the Company becomes the Policy
Owner). Any such election shall be filed with the Committee in
such form as may be prescribed by the Committee. When an
Alternative Death Benefit Election is made, the Policy Owner
shall immediately transfer the ownership of the Policy to the
Company, and the Company shall be designated as beneficiary to
receive the entire Policy death benefit. In addition, using a
form provided by the Committee, the Former Policy Owner shall
designate a beneficiary to receive the Alternative Death
Benefit.
The Elector may revoke the Alternative Death Benefit Election.
In the event of such a revocation, the Company shall continue
to be the Policy Owner and shall, by endorsement filed with
the Insurer, provide the Former Policy Owner the right to
designate a beneficiary of an amount of Policy death benefit
equal to the Participant's Coverage Amount. The revocation of
an Alternative Death Benefit Election shall not preclude an
Elector from making a later Alternative Death Benefit Election
(or from revoking such later election).
An Alternative Death Benefit Election (or an election to
revoke such an election) shall be effective when any necessary
documentation is submitted to and accepted by the Insurer. The
Policy Owner (or Former Policy Owner, if applicable) and the
Company will promptly submit any
- 7 -
<PAGE> 8
required forms or documents to the Insurer when an Alternative
Death Benefit Election is made or revoked.
8.02 PAYMENT OF BENEFIT. The Alternative Death Benefit shall be
paid by the Company from the general funds of the Company, and
shall not constitute an insurance benefit. It shall be paid by
the Company to the Former Policy Owner's beneficiary(ies) at
the time the Participant's insurance death benefit would have
been paid (at the Participant's death for single life
coverage, or at the death of the survivor of the Participant
and the Participant's spouse if the Policy is a Survivorship
Policy). The amount of the payment shall be equal to the
Alternative Death Benefit Amount. As long as an Alternative
Death Benefit Election is in effect, the beneficiary(ies) of
the Former Policy Owner shall receive only the Alternative
Death Benefit, and shall not be entitled to receive any
portion of any death benefits that would become payable under
the Participant's Policy.
9. ELECTION TO REDUCE POLICY FACE AMOUNT.
The Policy Owner (except the Company, if the Company becomes a Policy
Owner) or, if applicable, the Former Policy Owner, may elect to reduce
the Policy face amount, except that the Policy face amount shall not be
reduced to an amount less than the Company Death Benefit. If the
Company is the Policy Owner, then, within sixty (60) days of receipt of
a written request from the Former Policy Owner, the Company shall
complete and submit the necessary forms to the Insurer to reduce the
Policy Face Amount in accordance with the Former Policy Owner's
request.
10. CHANGE OF CONTROL
If there is a Change of Control:
a. the Plan shall become irrevocable for all Participants in the
Plan at the time of the Change of Control;
b. the Company immediately shall transfer the ownership of all
Participants' Policies owned by the Company to an irrevocable
trust created by the Company to: (i) hold the Policies in
accordance with the terms of the Plan and (ii) pay any
Alternative Death Benefit that becomes payable under Section 8
of this Plan; and
c. except as otherwise provided in this Section, the provisions
of the Plan shall continue to apply as if there had been no
Change of Control.
- 8 -
<PAGE> 9
The occurrence of a Change of Control shall not preclude a Policy Owner
from thereafter making (or revoking) an Alternative Death Benefit
Election pursuant to Section 8. However, if a Policy Owner makes an
Alternative Death Benefit Election after a Change of Control, the
ownership of the Policy shall be transferred to the trust created
pursuant to this Section, and not directly to the Company as provided
in Section 8.
Notwithstanding the creation and funding of an irrevocable trust in
accordance with the provisions of this Section, the Company or its
successor shall continue to be responsible for the Premium costs
associated with the Participants' Policies and any Alternative Death
Benefits payable under Section 8 if such amounts are not paid by the
trust for any reason, or if the trust's assets become insufficient to
pay any required amounts.
11. COMPANY DEFAULT
11.01 COMPANY DEFAULT. A Company Default shall be deemed to have
occurred with respect to a Policy if the Company fails to pay
a Premium on the Policy as required under the terms of the
Agreement within sixty (60) days after the due date for such
Premium, or if the Company processes or attempts to process a
policy loan, or a complete or partial surrender, or a cash
value withdrawal without prior written approval from the
Policy Owner (or Former Policy Owner, if applicable).
11.02 RIGHTS UPON COMPANY DEFAULT. In the event of a Company Default
as described in Section 11.01, the Policy Owner (or Former
Policy Owner, if applicable) shall have the right to require
the Company to cure the Company Default by notifying the
Company in writing within sixty (60) days after the Company
Default occurs, or if later, within thirty (30) days after the
Policy Owner (or Former Policy Owner) becomes aware of the
Company Default. If the Company fails to cure the Company
Default within sixty (60) days after being notified by the
Policy Owner (or Former Policy Owner) of the Company Default,
the Policy Owner (or Former Policy Owner) shall have the right
to require the Company to transfer its interest in the
Participant's Policy to the Policy Owner (or Former Policy
Owner). The Policy Owner (or Former Policy Owner) may exercise
this right by notifying the Company, in writing, within sixty
(60) days after the Company Default occurs. Upon receipt of
such notice, the Company shall immediately transfer its rights
in the Policy to the Policy Owner (or Former Policy Owner),
either by a release of the Collateral Assignment, or by a
transfer of ownership if the Company is the Policy Owner, and
the Company shall thereafter have no rights with respect to
such Policy. A Policy Owner's (or Former Policy Owner's)
failure to exercise its rights under this Section shall not be
deemed to release the Company from any
- 9 -
<PAGE> 10
of its obligations under the Plan, and shall not preclude the
Policy Owner (or Former Policy Owner) from seeking other
remedies with respect to the Company Default. Also, a Policy
Owner's (or Former Policy Owner's) failure to exercise its
rights under this Section will not preclude the Policy Owner
(or Former Policy Owner) from exercising such rights upon a
later Company Default.
12. GOVERNING LAWS AND NOTICES
12.01 GOVERNING LAW. This Plan shall be governed by and construed in
accordance with the substantive law of Texas without giving
effect to the choice of law rules of Texas.
12.02 NOTICES. All notices hereunder shall be in writing and sent by
first class mail with postage prepaid. Any notice to the
Company shall be addressed to the attention of Senior Vice
President of Administration at the principal office of the
Company at 17001 Northchase Drive, Houston, TX 77060. Any
notice to the Participant (or other Policy Owner or Former
Policy Owner) shall be addressed to the Participant (or other
Policy Owner or Former Policy Owner) at the address following
such party's signature on his or her Agreement. Any party may
change its address by giving written notice of such change to
the other party pursuant to this Section.
13. MISCELLANEOUS PROVISIONS
13.01 NO CONTRACT OF EMPLOYMENT. This Plan and any Agreement
executed hereunder shall not be deemed to constitute a
contract of employment between an Executive and the Company,
or a Participant and the Company, nor shall any provision
restrict the right of the Company to discharge an Executive or
Participant, or to restrict the right of an Executive or
Participant to terminate employment with the Company.
13.02 GENDER. The masculine pronoun includes the feminine and the
singular includes the plural where appropriate for valid
construction.
13.03 COOPERATION WITH INSURER. In order to be eligible to
participate in this Plan, the Participant (and, in the case of
a Survivorship Policy, the Participant's spouse) shall
cooperate with the Insurer by furnishing any and all
information requested by the Insurer in order to facilitate
the issuance of the policy, including furnishing such medical
information and taking such physical examinations as the
Insurer may deem necessary. In the absence of such
cooperation, the Company shall have no further obligation to
the Participant to allow him or her to participate in the
Plan.
- 10 -
<PAGE> 11
13.04 CANCELLATION OF POLICY. If the Insurer cancels the
Participant's Policy pursuant to Policy provisions related to
the suicide of the Participant (or the Participant's spouse,
if the Policy is a Survivorship Policy), a material
misstatement of information, nondisclosure of medical
information, or any other Policy provision, then no benefits
shall be payable to the beneficiary(ies) of such Participant
(or other Policy Owner, or Former Policy Owner, where
applicable). In such case, the Participant's election to
participate in the Plan shall be null and void, and the
Company shall restore to the Participant any Compensation
foregone by the Participant to participate in the Plan.
13.05 INCONSISTENT TERMS. In the event of any inconsistency between
the terms of this Plan as described herein and the terms of
any Policy purchased hereunder or any related Agreement, the
terms of such Policy or Agreement shall be controlling as to
that Participant, or his or her Policy Owner or Former Policy
Owner, if other than the Participant, his
successor-in-interest (if any) and his or her beneficiary or
beneficiaries.
14. AMENDMENT, TERMINATION, ADMINISTRATION, AND SUCCESSORS
14.01 AMENDMENT/TERMINATION. The Board of Directors of the Company
may amend, modify or terminate the Plan at any time, but any
such amendment, modification or termination will not affect
the rights of any Participant, Policy Owner or Former Policy
Owner under any Agreement entered into with the Company prior
to the date of such amendment, modification or termination
without the Participant's, Policy Owner's or Former Policy
Owner's written consent.
14.02 ADMINISTRATION. This Plan shall be administered by the Plan
Administrator. The Plan Administrator shall have the authority
to make, amend, interpret, and enforce all rules and
regulations for the administration of the Plan and decide or
resolve any and all questions, including interpretations of
the Plan, as may arise in connection with the Plan in the Plan
Administrator's sole discretion. In the administration of this
Plan, the Plan Administrator from time to time may employ
agents and delegate to them or to others (including
Executives) such administrative duties as it sees fit. The
Plan Administrator from time to time may consult with counsel,
who may be counsel to the Company. The decision or action of
the Plan Administrator (or its designee) with respect to any
question arising out of or in connection with the
administration, interpretation and application of this Plan
shall be final and conclusive and binding upon all persons
having any interest in the Plan. The Company shall indemnify
and hold harmless the Plan Administrator and any Executives to
whom administrative duties under this Plan are delegated,
- 11 -
<PAGE> 12
against any and all claims, loss, damage, expense or liability
arising from any action or failure to act with respect to this
Plan, except in the case of gross negligence or willful
misconduct by the Plan Administrator.
14.03 SUCCESSORS. The terms and conditions of this Plan shall inure
to the benefit of and bind the Company and the Participant and
their successors, assignees (including any Assignee), and
representatives. The Company shall have the right to
absolutely and irrevocably assign its rights, title and
interest in a Policy without the consent of the Participant
(or Assignee).
15. CLAIMS PROCEDURE
Any controversy or claim arising out of or relating to this Plan shall
be filed with the Plan Administrator or its designee which shall make
all determinations concerning such claim. Any decision by the Plan
Administrator denying such claim shall be in writing and shall be
delivered to all parties in interest in accordance with the notice
provisions of Section 12.02 herein. Such decision shall set forth the
reasons for denial in plain language. Pertinent provisions of the Plan
shall be cited and, where appropriate, an explanation as to how the
claimant can perfect the claim will be provided. This notice of denial
of benefits will be provided within ninety (90) days of the Plan
Administrator's receipt of the claim for benefits. If the Plan
Administrator fails to notify the claimant of its decision regarding
the claim, the claim shall be considered denied, and the claimant then
shall be permitted to proceed with an appeal as provided for in this
Section.
A claimant who has been completely or partially denied a benefit shall
be entitled to appeal this denial of his or her claim by filing a
written statement of his or her position with the Plan Administrator no
later than sixty (60) days after receipt of the written notification of
such denial. The Plan Administrator shall schedule an opportunity for a
full and fair review of the issue within thirty (30) days of receipt of
the appeal. The decision on review shall set forth specific reasons for
the decision, and shall cite specific references to the pertinent Plan
provisions on which the decision is based.
Following the review of any additional information submitted by the
claimant, either through the hearing process or otherwise, the Plan
Administrator shall render a decision on the review of the denied claim
in the following manner:
a. The Plan Administrator shall make its decision regarding the
merits of the denied claim within sixty (60) days following
receipt of the request for review (or within 120 days after
such receipt, in a case where there are special circumstances
requiring extension of time for reviewing the appealed claim).
The Plan Administrator shall deliver the decision to the
- 12 -
<PAGE> 13
claimant in writing. If an extension of time for reviewing the
appealed claim is required because of special circumstances,
written notice of the extension shall be furnished to the
claimant prior to the commencement of the extension. If the
decision on review is not furnished within the prescribed
time, the claim shall be deemed denied on review.
b. The decision on review shall set forth specific reasons for
the decision, and shall cite specific references to the
pertinent Plan provisions on which the decision is based.
- 13 -
<PAGE> 1
EXHIBIT 10(b)(xxxv)
ANADARKO PETROLEUM CORPORATION
ESTATE ENHANCEMENT PROGRAM
AGREEMENT
An Agreement is hereby entered into between Anadarko Petroleum Corporation (the
"Company"), and [Participant's Name] (the "Participant"), by and through
[designated owner] (the "Policy Owner"), to be effective [Date]. The Agreement
is incident to Participant's election for coverage under the Anadarko Petroleum
Corporation Estate Enhancement Program (the "Plan"). The Policy Owner and the
Company hereby certify, acknowledge and agree as follows:
1. The Participant has agreed to forego Compensation as specified in Section
3.02 of the Plan.
2. The Company, Participant, and Policy Owner shall cause to be issued by the
Insurer a life insurance Policy (the "Policy") insuring the lives of the
Participant and the Participant's spouse pursuant to the provisions of the
Plan.
3. The Policy shall be owned by the Policy Owner as provided in the Plan.
4. The Policy shall be issued by [Carrier Name] with an initial face amount of
[$Amount].
5. The Policy number of the Policy subject to this Agreement is [Policy #].
6. Subject to the terms of the Plan, the Company agrees to pay premiums equal
to the Participant's foregone Compensation. The entire amount shall be paid
by the Company within thirty (30) days after the Policy is issued.
7. The Company Death Benefit shall be the portion of the Policy death benefit
payable to the Company upon the death of the last survivor of the
Participant and the Participant's spouse, and shall be an amount equal to
the greater of: (i) the Policy cash accumulation value immediately prior to
the death of the last survivor of the Participant and the Participant's
spouse and before any surrender charges; or, (ii) the cumulative Policy
Premiums paid by the Company.
- 1 -
<PAGE> 2
8. The Participant's Coverage Amount shall be the portion of the Policy death
benefit payable to the Policy Owner's beneficiary(ies), and shall be equal
to the amount by which the Policy death benefit exceeds the Company Death
Benefit.
9. Unless and until changed by the Policy Owner, the Policy Owner's
beneficiary shall be the Policy Owner.
10. In accordance with the terms of Section 8.01 of the Plan, the Participant
hereby designates __________________________________ as the Elector
entitled to make the Alternative Death Benefit Election under the Plan. If
such person is unable or unwilling to serve as the Elector, the Elector
shall be ____________. Pursuant to the provisions of Section 8.01 of the
Plan, the Policy Owner hereby agrees to transfer the ownership of the
Policy to the Company if an Alternative Death Benefit Election is made.
11. In the event of a complete or partial surrender or cancellation of the
Policy, or a cash withdrawal or loan from the Policy, all proceeds payable
as a result of the surrender, cancellation, withdrawal or loan shall be
paid to the Company. Policy Owner agrees that it will not cancel, surrender
in whole or in part, withdraw cash value from, borrow from or otherwise
encumber the Policy without the prior written consent of the Company.
12. As security to the Company for the payment to it of amounts due it under
this Agreement and the Plan, the Policy Owner shall execute a Collateral
Assignment of the Policy to the Company, which Collateral Assignment will
specifically limit the rights of the Company in the Policy to payment of
amounts due it under Sections 7 and 11 of this Agreement which have not
otherwise been paid. The Collateral Assignment shall not be terminated,
altered or amended by the Policy Owner without the express written consent
of the Company.
13. The Policy Owner agrees that all terms and conditions specified in the Plan
are hereby incorporated by reference as though fully set forth herein and
form a part of this Agreement.
- ----------------------------------- -----------------------------------------
Name of Policy Owner Signature of Policy Owner
-----------------------------------------
Date
- 2 -
<PAGE> 3
Address of Policy Owner:
-----------------------------------------
-----------------------------------------
-----------------------------------------
- ----------------------------------- -----------------------------------------
Name of Company Representative Signature of Company Representative
-----------------------------------------
Date
Consent and Acknowledgment of Participant:
The undersigned Participant has read and understands the terms of the Plan and
this Agreement, consents to the terms of this Agreement and the Plan, and agrees
to be bound by and subject to the terms of this Agreement to the same extent as
if Participant had been a party to this Agreement.
- ----------------------------------- -----------------------------------------
Date Participant
-----------------------------------------
Participant's Spouse
- 3 -
<PAGE> 1
EXHIBIT 12
ANADARKO PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF COMPUTATION OF RATIOS
OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
FIVE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------
thousands 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross Income $ (7,388) $ 205,318 $ 196,763 $ 65,624 $ 90,794
Rentals 12,477 8,266 4,234 2,457 2,814
--------- --------- --------- --------- ---------
Earnings 5,089 213,584 200,997 68,081 93,608
========= ========= ========= ========= =========
Gross Interest Expense 82,415 62,095 55,986 52,557 41,635
Rentals 12,477 8,266 4,234 2,457 2,814
Preferred Stock Dividends 10,951 -- -- -- --
--------- --------- --------- --------- ---------
Fixed Charges $ 105,843 $ 70,361 $ 60,220 $ 55,014 $ 44,449
========= ========= ========= ========= =========
Ratio of Earnings
to Fixed Charges 0.05 3.04 3.34 1.24 2.11
========= ========= ========= ========= =========
</TABLE>
The ratios of earnings to combined fixed charges and preferred stock dividends
were computed by dividing earnings by fixed charges. As a result of the
Company's net loss in 1998, the Company's earnings did not cover combined
fixed charges and preferred stock dividends. The earnings deficiency was
$100,754 in 1998. For this purpose, earnings include income before income
taxes and fixed charges. Fixed charges include interest and amortization of
debt expenses, the estimated interest component of rentals and preferred
stock dividends.
<PAGE> 1
EXHIBIT 13
SUMMARY FINANCIAL DATA*
<TABLE>
<CAPTION>
% Change
MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 98-97 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 560.3 (17) $675.1 $570.1 $435.2 $484.6
Operating Income (Loss) (7.4) n/a 205.3 196.8 65.6 90.8
Net Income (Loss) (42.2) n/a 107.3 100.7 21.0 41.1
Net Income (Loss) Available to Common
Stockholders (49.3) n/a 107.3 100.7 21.0 41.1
Net Cash provided by Operating Activities $ 239.6 (34) $362.0 $314.5 $248.3 $239.7
Per Common Share:
Net Income (Loss) - Basic $ (0.41) n/a $ 0.90 $ 0.85 $ 0.18 $ 0.35
Net Income (Loss) - Diluted $ (0.41) n/a $ 0.89 $ 0.85 $ 0.18 $ 0.35
Dividends $0.1875 25 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Average Shares Outstanding 120.1 1 119.4 118.5 117.9 117.6
Capital Expenditures $ 917 34 $ 686 $ 427 $ 331 $ 423
- --------------------------------------------------------------------------------------------------------
Long-term Debt $ 1,425 49 $ 956 $ 731 $ 674 $ 629
Stockholders' Equity 1,259 13 1,117 1,014 910 900
Total Assets $ 3,633 21 $2,992 $2,584 $2,267 $2,142
- --------------------------------------------------------------------------------------------------------
Annual Production:
Gas (Bcf) 176.7 (1) 178.7 164.9 171.7 175.8
Oil and Condensate (MBbls) 11,126 22 9,083 6,702 7,435 8,303
NGLs (MBbls) 6,640 21 5,467 3,514 3,580 3,512
Total Energy Equivalent Barrels (MMEEBs) 47.2 7 44.3 37.7 39.6 41.1
- --------------------------------------------------------------------------------------------------------
Average Daily Production:
Gas (MMcf/day) 484 (1) 490 450 471 482
Oil and Condensate (MBbls/day) 30 22 25 18 20 23
NGLs (MBbls/day) 18 21 15 10 10 10
Total Energy Equivalent Barrels (MEEBs/day) 129 7 121 103 108 112
- --------------------------------------------------------------------------------------------------------
Oil Reserves (MMBbls) 494.0 18 419.7 297.8 219.2 157.4
Gas Reserves (Tcf) 2.65 53 1.73 1.82 1.84 1.91
Total Reserves (MMEEBs) 935.1 32 708.0 601.3 526.3 476.4
- --------------------------------------------------------------------------------------------------------
Worldwide Finding Cost ($/EEB)** $ 3.13 (27) $ 4.28 $ 2.76 $ 2.74 $ 2.76
Worldwide Reserve Replacement (% of Production) 581% 70 341% 299% 226% 308%
- --------------------------------------------------------------------------------------------------------
Number of Employees 1,476 6 1,386 1,229 1,076 1,085
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Consolidated for Anadarko Petroleum Corporation (referred to herein as
Anadarko) and its principal subsidiaries, including Anadarko Algeria
Corporation, Anadarko Energy Services Company and Anadarko Gathering Company.
See Management's Discussion and Analysis.
** Worldwide finding costs are calculated by dividing worldwide costs incurred
by the worldwide reserve additions, excluding reserve sales in place.
<PAGE> 2
Q&A YOUR QUESTIONS. OUR ANSWERS.
Low oil and gas prices...capital spending...debt levels...cash
flows...consolidations These are just a few of the major issues that Anadarko
and the oil and gas industry are dealing with in 1999. We invited energy
analysts to submit their questions about key challenges facing the Company and
the industry. Bob Allison, Chairman, President and CEO, responds to their
questions.
QUESTION. WHAT IS THE PROPER SPENDING MIX BETWEEN DEVELOPMENT CAPITAL (TO BRING
KNOWN RESERVES ONSTREAM) AND EXPLORATION SPENDING (TRYING TO FIND NEW RESERVES
FOR THE FUTURE)? (KEN BEER, JOHNSON RICE & COMPANY)
ANSWER. If you look back at the past five years, our capital spending "mix" has
generally averaged about 40% for development and 30% for exploration, with the
remainder for gas gathering, capitalized interest and overhead. This year, about
50% of our capital budget is earmarked for development projects with
approximately 25% allocated for exploration, with the rest for gas gathering,
capitalized interest and overhead. We would like to spend more on exploration in
1999, but with today's low prices, we believe our mix is right.
Here's our rationale. Each year when we develop our capital spending
plans, we have several major goals: (1) to more than replace our annual
production with new reserves at low costs; (2) to develop our recent
discoveries, which should increase production and boost cash flow; and (3) to
keep on exploring -- that's what we do best! It's always difficult to strike a
balance between these goals, and it's especially hard in
1
<PAGE> 3
these tough times when we're pressed for cash. But if we quit exploring during
this difficult period, we would limit our future growth. All of our drilling
success has come from a continuous and long-term commitment to our people and
our programs. We've chosen to not shut down exploration. We're spending less
money in 1999 on exploration, but we're spending enough to provide for future
growth opportunities and to continue identifying and developing prospects and
programs. I think our 1999 capital program has the right balance to increase
production as well as add reserves.
QUESTION. WHAT ARE YOUR PLANS TO FOLLOW UP ON YOUR 1998 EXPLORATION SUCCESSES IN
THE GULF OF MEXICO'S SUB-SALT TREND? (DENIS WALSH, STATE STREET RESEARCH &
MANAGEMENT CO.)
ANSWER. Our geologists and geophysicists are completing multiple seismic imaging
projects that will help us choose our next sub-salt drilling prospects. So far
we've identified about 20 sub-salt prospects across our holdings in the Gulf of
Mexico. At this point, we expect to drill up to four wildcats in 1999. Anadarko
clearly has a lead in data and drilling success in the sub-salt. We don't intend
to relinquish this lead anytime soon.
QUESTION. WHAT IS ANADARKO DOING TO TRANSFER ITS SUB-SALT KNOWLEDGE AND
EXPERTISE TO OTHER HYDROCARBON BASINS? (DENIS WALSH, STATE STREET RESEARCH &
MANAGEMENT CO.)
ANSWER. Across the Company, we share information and technology -- and that's
been a key to our continued success. Over the past several years, our people
have gained vast experience in depth imaging and drilling through salt. We're
using these skills and
2
<PAGE> 4
knowledge to evaluate prospective basins around the world. For example, we've
been able to transfer our employees' experience in salt drilling in Algeria to
our operations in the Gulf of Mexico. Although the specific targets are
proprietary for now, let me point out that there are many places throughout the
world where we can put our knowledge and experience to work. But we haven't
fully explored all of our sub-salt opportunities in the Gulf of Mexico yet.
QUESTION. PLEASE DISCUSS YOUR VARIOUS INTERESTS IN ALASKA. (PHILLIP PACE, CREDIT
SUISSE FIRST BOSTON)
ANSWER. We're very excited about our exploration and development interests in
Alaska. We consider Alaska to be one of the two best remaining exploration
frontiers in the U.S. where there is the potential to discover giant fields. The
other one is the Gulf of Mexico's sub-salt play--one of our other core areas.
Our largest project in Alaska is the development of the Alpine Field on the
North Slope--the largest oil field discovered in Alaska since 1988 and the
fifth-largest discovery ever made on the Slope. Development of Alpine is now
about 40% complete--the project is on schedule to begin producing at an initial
rate of 40,000 BOPD (gross) in mid-2000 and then increase to 70,000 BOPD (gross)
in mid-2001. We have a 22% working interest in Alpine, which is operated by ARCO
Alaska, Inc.
We also have additional interests in other acreage on the North
Slope as a result of our successful bids in State Lease Sale 87 in 1998, where
we acquired 108,000 net acres in the Central Arctic area. We're also
participating in an exploration partnership with the Arctic Slope Regional
Corporation that provides us with exploration rights to
3
<PAGE> 5
more than 2.2 million acres in the Foothills area. And in south central Alaska,
we completed our first Company-operated well in Alaska in 1998 with the Lone
Creek gas discovery in the Cook Inlet area. We're working with our partner, ARCO
Alaska, to develop this discovery. Looking ahead, Alaska is going to be an
important part of our production profile, giving us a strong domestic balance to
our portfolio and excellent opportunities to add significant reserves.
QUESTION. AS ANADARKO GROWS, HOW CAN YOU MAINTAIN YOUR RESERVE AND PRODUCTION
GROWTH RATES WITHOUT HAVING TO MAKE LARGER BETS ON RISKIER WELLS? (MICHAEL CHA,
J. P. MORGAN)
ANSWER. We'll do it by managing a balanced portfolio of projects. We've been
successful because we're focused and disciplined. We believe it's easy to find
oil and gas, but it's a lot harder to make money in this business. Anadarko has
been successful because we're very careful in selecting the right places to
explore in terms of petroleum systems, fiscal regimes, finding, development and
operating costs, and risk-management. So our budget is a careful mix of projects
all across the spectrum of potential risk and reward. We will drill some high
potential/high risk wells, but we won't place "sole bets" on individual
geographic areas or geologic basins.
4
<PAGE> 6
QUESTION. IN OCTOBER 1998, ANADARKO RELEASED A NEW PRODUCTION FORECAST THROUGH
THE YEAR 2002. IN LIGHT OF LOW OIL AND GAS PRICES, HAVE YOU REVISED THIS
PRODUCTION FORECAST? (ALAN GUTMANN, OPPENHEIMER CAPITAL)
ANSWER. Our production forecast was developed in the fall of 1998 and was based
on oil prices in the range of $15 to $17 per barrel and anticipated capital
spending programs of $700 million a year in the future. But by the end of 1998,
we recognized that the abrupt slump in oil and gas prices would likely persist
through 1999. As we developed our capital plans for this year, we've had to
defer projects that could add production -- such as infill drilling programs and
secondary recovery projects in West Texas' Permian Basin, the Bossier Play in
East Texas, Oklahoma's Golden Trend and offshore U.S., just to name a few. When
prices recover, we intend to resume these projects. We're deferring these
projects for now, but it's important to note that these are not lost
opportunities. Our major development projects in Algeria, Alaska and the Gulf of
Mexico represent the cornerstone of Anadarko's future growth and all of these
projects are moving forward.
QUESTION. WHAT IS THE EXPECTED TIMING FOR HIGHER PRODUCTION VOLUMES FROM YOUR
OPERATIONS IN ALGERIA? (DENIS WALSH, STATE STREET RESEARCH MANAGEMENT)
ANSWER. By the end of 1999's first quarter, we expect to award an Engineering,
Procurement and Construction contract for the Stage II production facilities at
the Hassi Berkine South (HBNS) Field. This project should expand production
volumes at the HBNS Field from current levels of about 60,000 BOPD (gross) to
135,000 BOPD (gross) beginning in mid-2001. Under the Stage II contract, we
expect to have an option to build
5
<PAGE> 7
one additional 75,000 BOPD (gross) production train for the El Biar Field and
another option to construct a production train for various satellite fields on
Block 404.
In addition, the Algerian Government recently approved the development
plan for the giant Qoubba Field, which should lead to the formal Exploitation
License soon. We expect to let bids for an Engineering, Procurement and
Construction contract for Qoubba later this year. First production from Qoubba
is slated to begin in mid-2002, ramping up to about 230,000 BOPD (gross). By
late 2002, gross production attributed to Anadarko's contract area in Algeria is
expected to reach 330,000 BOPD. Remember that portions of the El Biar and Qoubba
Fields extend onto other companies' blocks. Our production volumes will further
increase as fields on Block 208 are developed and placed onstream during 2003 -
2005.
QUESTION. HOW CAN INVESTORS BE ASSURED THAT DELAYS IN ALGERIA WILL NOT OCCUR IN
THE FUTURE? (RAYMOND DEACON, SOUTHCOAST CAPITAL)
ANSWER. The hardest thing for us to predict in Algeria has always been timing.
The delays that we've experienced have been related to getting a project started
rather than completing a project. Once we've received firm approvals and
decisions from the Algerian authorities, we've been able to carry out the actual
work on schedule and on budget. We expect to continue to do so in the future.
I think investors need to put the "time issue" in perspective. It took
nearly 12 years from our initial discussions with SONATRACH in 1986 to first
production from the HBNS Field in May 1998. But more importantly, it took only
THREE years from the
6
<PAGE> 8
time we discovered the HBNS Field to first production--that's fast track
development by any standard!
QUESTION. WHAT IS YOUR COMPETITIVE ADVANTAGE RELATIVE TO COMPANIES IN YOUR PEER
GROUP? (RAYMOND DEACON, SOUTHCOAST CAPITAL)
ANSWER. I see four key advantages that Anadarko has over other companies. The
first is our assets: The high quality of our core producing properties and the
recent large discoveries that will come onstream over the next few years give
Anadarko an asset-based advantage over our competitors. If you look at our core
assets in southwest Kansas, the Gulf of Mexico, Algeria, Alaska, Oklahoma and
Texas, these are some of the best hydrocarbon basins in the world. Generally
speaking, these basins offer better-than-average project economics--in terms of
reserves, production, development and operating costs and exploitation
opportunities.
The second advantage is our people. We've assembled a management and
technical team that has consistently made the right investment choices. Our
people are adept at quickly capturing new opportunities in our core areas while
maintaining a competitive ability to move into new play areas. For example, we
moved some of our technical personnel and capital spending from our traditional
U.S. onshore effort in 1998 to focus on the Gulf of Mexico's sub-salt play where
we've enjoyed success at Tanzanite, Hickory, Mahogany and Agate.
The third advantage for us is technology. We place a high value on
using advanced technologies properly throughout our organization. We know how to
use technology and our track record proves that.
7
<PAGE> 9
And the fourth advantage is our streamlined organization. We can make
decisions quickly and take advantage of opportunities in the marketplace. These
four factors set us apart from our peers.
QUESTION. ANADARKO'S BALANCE SHEET IS MORE FINANCIALLY LEVERAGED THAN ANYTIME IN
ITS HISTORY. WHAT DO YOU CONSIDER TO BE A PRUDENT DEBT LEVEL? WHAT ARE YOUR 1999
FINANCING NEEDS AND LONG-TERM TARGETS? (JOHN HERRLIN, MERRILL LYNCH; PHILLIP
PACE, CREDIT SUISSE FIRST BOSTON; AND ALAN GUTMANN, OPPENHEIMER CAPITAL)
ANSWER. For several years, Anadarko has used external funding to finance capital
expenditures in excess of our operating cash flow. The rationale for this
financing plan is simple: debt levels increase for several years until expected
earnings from the new producing fields begin to dramatically improve Anadarko's
debt-to-capital ratios. We are comfortable with this approach.
Our short-term strategy -- during this period of low commodity prices
- -- includes a number of options to supplement our capital needs. For example, we
expect to complete a financing arrangement soon to fund development of the
Tanzanite and Hickory Fields. We currently have a $300 million shelf
registration filed with the SEC that gives us access to public sources of
additional funds. We're also looking at other strategies -- ranging from
property sales to asset trades to creative and innovative business relationships
- -- that could let us leverage our technical skills with potential partners'
funds. These types of strategies should allow us to continue investing in
attractive growth projects without hampering our balance sheet or giving up all
the upside in our higher potential assets.
8
<PAGE> 10
Our long-term strategy is to maintain access to capital markets with a
conservative capital structure and a strong balance sheet. The value of the
assets we've created, plus our demonstrated ability to sustain growth, puts
Anadarko in the position to secure supplemental financing until cash flows
increase significantly over the next few years.
QUESTION. TO WHAT EXTENT DO YOU BELIEVE THAT THE RECENT COLLAPSE IN NATURAL GAS
DRILLING IN NORTH AMERICA WILL AFFECT DELIVERABILITY AND GAS PRICES IN THE
FUTURE? (PHILLIP PACE, CREDIT SUISSE FIRST BOSTON)
ANSWER. I believe the decline in drilling will have a substantial impact on
future deliverability and prices. One report I read recently said "... There's a
bull market under construction in the gas industry."
In simple terms, gas demand continues to grow. Industry trade groups
predict potential U.S. demand of 30 Tcf per year -or 50% above current levels!
The growth would come from industrial customers and new electric power
generators. The problem is gas supply. U.S. gas production peaked in 1996 and
was flat in 1997-1998 despite a furious level of drilling and completion
activity. Drilling began to fall sharply in the second half of 1998 and those
cutbacks have already begun to impact production.
Production levels will continue to fall during 1999.
Gas wells -- like oil wells -- can't produce at flat rates forever.
Production declines for various reasons and at various rates. We look at
nationwide data and see many U.S. gas wells experience annual production
declines of 25% to 41% per year. We look at individual producing basins -- like
the Rocky Mountains, the Gulf of Mexico, and
9
<PAGE> 11
the U.S. mid-continent -- and see a strong positive correlation between drilling
activity and production -- it takes more, not less drilling just to stay even.
Higher gas prices are inevitable -- even though the exact timing of a
market turnaround is impossible to predict. But when it happens, we expect
Anadarko will be producing substantially more gas than we are today.
QUESTION. ANADARKO'S PRODUCTION OVER THE NEXT FOUR TO FIVE YEARS WILL SURGE TO
THE POINT THAT VOLUMES WILL RIVAL THOSE OF MANY SMALL MAJORS. WHAT IS THE
COMPANY DOING TO ENSURE THAT IT WILL CONTINUE TO ACT AND OPERATE LIKE AN
INDEPENDENT? (MIKE HENZI, STEPHENS, INC.)
ANSWER. You're right--by 2002 our production volumes and reserves are projected
to grow substantially. But, we want to make certain that Anadarko retains the
qualities that have made us successful. We've intentionally organized the
Company with few layers of management so that we make decisions quickly to take
advantage of new opportunities. We're open to new ideas from our employees and
we act on their suggestions. I think that's what makes it exciting for our
employees to work here--they get to see their recommendations put into action.
We've created a unique environment here that places great emphasis on sharing
knowledge--we value learning. We're strong advocates of advanced technology,
because it helps to reduce risk. Because of all these factors, we've nurtured a
special approach to exploration and development. This culture helps us to
attract and retain highly skilled and experienced people. As Anadarko continues
to grow, we intend to keep our culture tightly focused on these very special
qualities.
10
<PAGE> 12
QUESTION. THE E&P COMPANIES I FOLLOW TEND TO TRADE FOR FIVE TO SIX TIMES THEIR
CASH FLOW. ANADARKO HAS CONSISTENTLY TRADED MUCH HIGHER. WHY DOES ANADARKO
DESERVE SUCH A HIGH VALUATION PREMIUM? (SHAWN REYNOLDS, LEHMAN BROTHERS)
ANSWER. That's true -- investors have recognized Anadarko's success and will pay
higher premiums -- to cash flow, for example -- than our peer companies. The
reason is simple: we outperform other oil and gas companies. Look at our
results:
o Finding costs that are 20% to 30% lower than industry averages
o 17 straight years of reserve replacement -- no other company in the
industry can make that claim
o A five-year average reserve replacement of 359% versus the most recent
five-year industry average of 99%
o A reserve life of nearly 20 years compared to the most recent U.S.
industry average of 9.4 years
o Substantial growth in projected production over the next five years from
the development of recent major discoveries in the Gulf of Mexico, \
Algeria and Alaska.
We have created value for our stockholders in the past -- and we believe we can
continue to add value in the future.
QUESTION. WALL STREET CURRENTLY PERCEIVES THE UPSTREAM BUSINESS AS HAVING NO
GROWTH. HOW CAN ANADARKO DIFFERENTIATE ITSELF WHEN WALL STREET FIXATES ON
PROJECTED CASH FLOW MULTIPLES AND NOT POTENTIAL VALUE? (JOHN HERRLIN, MERRILL
LYNCH)
ANSWER. I believe Anadarko trades at a high multiple to current cash
flow--but a low multiple to the cash flow that we expect in two to three years
as new production comes
11
<PAGE> 13
on line. Many companies are looking at flat to lower production over the next
five years. Anadarko, on the other hand, expects to increase its production. And
moreover, we're creating growth that provides real economic value for
stockholders-- not just higher production for the sake of growth. We'll continue
to emphasize Anadarko's long-term approach to exploration and development. We
have a great record, but we're looking to the future--beyond the current
multiples. I see a great future ahead for Anadarko.
QUESTION. HAS ANADARKO IDENTIFIED ANY NEW INTERNATIONAL AREAS THAT COULD PROVIDE
WORLD-CLASS EXPLORATION OPPORTUNITIES? (PAUL FERRETTI, WASSERSTEIN PERELLA
SECURITIES AND BILL FEATHERSTON, SCHRODER & CO.)
ANSWER. Yes, we're looking at a number of new exploration areas overseas, but at
this point we're not ready to discuss the specific regions that we're targeting.
With this slump in prices and lower capital spending, we are very selective as
we evaluate new international plays. When we study new areas, we're looking for
ventures that offer attractive fiscal and contract terms; multiple geological
play types and opportunities; areas where we can take advantage of our technical
strengths and expertise--in seismic acquisition, imaging, geological modeling
and integrating with sub-surface imaging; world-class source rock, reservoir
quality and field size potential; and discoveries that can be developed
economically in a volatile price environment.
QUESTION. WOULD YOU CONSIDER SELLING THE COMPANY? WHAT ROLE WILL ANADARKO PLAY
IN THE CURRENT CONSOLIDATION TREND WITHIN THE INDUSTRY? (MICHAEL CHA, J. P.
MORGAN; PAUL FERRETTI, WASSERSTEIN PERELLA SECURITIES; AND ROBERT MORRIS,
PAINEWEBBER)
13
<PAGE> 14
ANSWER. When we asked analysts for their questions, we were afraid someone would
ask about mergers and acquisitions! But that's a fair question. If another
company made an offer to purchase Anadarko, we have the responsibility to our
stockholders to consider any reasonable proposal. But Anadarko is not for sale!
In my opinion, we've demonstrated that we can create tremendous value for our
stockholders with our growth strategies.
We believe that we can add more value for our stockholders through the
drill bit in 1999 rather than the general acquisition market. The fact is, we've
been finding reserves at about $3 per barrel and most acquisitions I see cost $6
to $8 per barrel. But we will continue to look-as we always have--for negotiated
transactions where we can add value for stockholders.
QUESTION. IS THE VIOLENCE IN ALGERIA AFFECTING YOUR OPERATIONS? (ALAN GUTMANN,
OPPENHEIMER CAPITAL)
ANSWER. No, our operations are located in the Sahara Desert, more than 400 miles
south of the areas where most of the violence has taken place. We've worked
closely with SONATRACH and the Government to take reasonable and prudent steps
to protect our employees and contractors in Algeria and to ensure the efficient
operations of our business there. We can't predict with certainty the effect
that the current situation may have on our activity planned for this year and
beyond. However, to date, the situation has not had any material effect on our
operations.
13
<PAGE> 15
Let me add that the criminal terrorism that Algeria has experienced
over recent years has truly been tragic for the country and its citizens. We
have many talented and hardworking Algerian employees, some of whose families
and friends have been touched by this terrible violence and we share their hopes
for an end to this terrorism. The situation in Algeria, however, is complex, and
the roots of the problems are deep. So, it's unrealistic to expect a quick
resolution of this situation.
QUESTION. WILL YOU CONSIDER LOCKING IN LONG-TERM OIL SERVICE CONTRACTS TO AVOID
A REPEAT OF THE 1996-1997 COST INFLATION? ARE OIL SERVICE COMPANIES OPEN TO SUCH
LONG-TERM CONTRACTS NOW? (BILL FEATHERSTON, SCHRODER & CO.)
ANSWER. We have used long-term agreements with service companies when the work
program called for it. But, generally we prefer to work with service companies
every day to secure the best services at competitive prices. Our top priority is
to get the very best service and technical skills from our vendors--we're not
necessarily focused on the absolute rock-bottom price. For example, a cheap
drilling contract is not the best deal for us if that contractor takes twice as
long to drill a well. It also can be difficult to react quickly to changes in
the marketplace when long-term contracts are involved.
QUESTION. SHOULD ANADARKO CONSIDER EXITING THE LOWER 48 OIL BUSINESS? WILL THESE
ASSETS BE VIABLE IN THE LONGER TERM? (MARK FISCHER, NATIONSBANC MONTGOMERY
SECURITIES)
ANSWER. Production from our core assets in the Mid-Continent area has generated
much of the cash flow that's allowed us to grow in other areas of the world as
well as a significant portion of the higher production volumes that we've
achieved recently. And, our operations in the Lower 48 will continue to make
significant contributions to the Company.
14
<PAGE> 16
STOCKHOLDERS' INFORMATION
The common stock of Anadarko Petroleum Corporation is traded on the New
York Stock Exchange. Average daily trading volume was 627,000 shares in 1998,
531,000 shares in 1997 and 453,000 shares in 1996.
The ticker symbol for Anadarko is APC and daily stock reports published in
local newspapers carry trading summaries for the Company under the headings
ANADRK or ANADRKPETE.
The following shows information regarding the closing market price of and
dividends paid on the Company's common stock by quarter for 1998 and 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998*
MARKET PRICE
High $ 34.63 $ 37.91 $ 43.19 $ 40.94
Low $ 26.44 $ 30.31 $ 28.75 $ 25.69
Dividends $0.0375 $ 0.050 $ 0.050 $ 0.050
1997*
MARKET PRICE
High $ 36.13 $ 32.81 $ 37.84 $ 38.13
Low $ 27.31 $ 25.44 $ 30.75 $ 28.59
Dividends $0.0375 $0.0375 $0.0375 $0.0375
</TABLE>
- ---------------
* In April 1998, the Board of Directors approved a two-for-one stock split. The
stock split was effected by way of a stock dividend. The distribution date was
July 1, 1998 to stockholders of record on June 15, 1998. All amounts shown
above have been restated to reflect the stock split.
<PAGE> 1
EXHIBIT 21
LIST OF SIGNIFICANT SUBSIDIARIES
Anadarko Algeria Corporation
a Delaware corporation,
Anadarko Energy Services Company,
a Delaware corporation,
Anadarko Gathering Company,
a Delaware corporation,
Anadarko Eritrea Corporation,
a Delaware corporation,
Anadarko Jordan Corporation,
a Delaware corporation,
Anadarko Peru Corporation,
a Delaware corporation.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Anadarko Petroleum Corporation:
We consent to the incorporation by reference in the following registration
statements of Anadarko Petroleum Corporation of our report dated January 28,
1999, relating to the consolidated balance sheets of Anadarko Petroleum
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders? equity, and cash flows for
each of the years in the three-year period ended December 31, 1998, which
report appears in the December 31, 1998 annual report on Form 10-K of Anadarko
Petroleum Corporation.
(a) Forms S-8 and S-3, Anadarko Petroleum Corporation 1986 Stock Option Plan
(No. 33-8496).
(b) Forms S-8 and S-3, Anadarko Employee Savings Plan (No. 33-8643).
(c) Forms S-8 and S-3, Anadarko Petroleum Corporation 1987 Stock Option Plan
(No. 33-22134).
(d) Forms S-8 and S-3, Anadarko Petroleum Corporation 1988 Stock Option Plan
for Non-Employee Directors (No. 33-30384).
(e) Form S-3, Anadarko Petroleum Corporation Shelf Registration Statement for
$300 million of Equity or Debt Securities (No. 33-50717).
(f) Form S-8, Anadarko Petroleum Corporation 1993 Stock Incentive Plan
(No. 33-54485).
(g) Form S-3, Anadarko Petroleum Corporation Registration Statement for $300
million of Debt Securities, Preferred Stock and Common Stock
(No. 333-30927).
(h) Form S-3, Anadarko Petroleum Corporation Registration Statement for $500
million of Debt Securities, Preferred Stock and Common Stock
(No. 333-48157).
(i) Form S-3, Anadarko Petroleum Corporation Dividend Reinvestment and Stock
Purchase Plan (No. 333-65915).
[KPMG LLP]
Houston, Texas
March , 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Officer and/or
Director of ANADARKO PETROLEUM CORPORATION (the "Company"), a Delaware
corporation, does hereby constitute and appoint SUZANNE SUTER and MICHAEL E.
ROSE, and each of them, his true and lawful attorney and agent to do any and
all acts and things and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange commission
in connection with the filing under said Act of the Form 10-K Annual Report,
including specifically, but without limitation thereof, to sign his name as an
Officer and/or Director of the Company to the Form 10-K Annual Report filed
with the Securities and Exchange Commission, and to any instrument or document
filed as a part of, or in connection with, said Form 10-K Annual Report or
amendment thereto; and the undersigned does hereby ratify and confirm all that
said attorney and agent shall do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents this
28th day of January, 1999.
/s/ ROBERT J. ALLISON, JR. /s/ JAMES L. BRYAN
- ---------------------------- ----------------------------
Robert J. Allison, Jr. James L. Bryan
/s/ CONRAD P. ALBERT /s/ JOHN R. BUTLER, JR
- ---------------------------- ----------------------------
Conrad P. Albert John R. Butler, Jr.
/s/ LARRY BARCUS /s/ JOHN R.GORDON
- ---------------------------- ----------------------------
Larry Barcus John R. Gordon
/s/ RONALD BROWN /s/ JOHN N. SEITZ
- ---------------------------- ----------------------------
Ronald Brown John N. Seitz
/s/ MICHAEL E. ROSE /s/ J. R. LARSON
- ---------------------------- ----------------------------
Michael E. Rose J. R. Larson
/s/ SUZANNE SUTER
- ----------------------------
Suzanne Suter
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,008
<SECURITIES> 0
<RECEIVABLES> 181,491
<ALLOWANCES> 0
<INVENTORY> 25,860
<CURRENT-ASSETS> 229,928
<PP&E> 5,488,721
<DEPRECIATION> 2,107,183
<TOTAL-ASSETS> 3,632,990
<CURRENT-LIABILITIES> 288,726
<BONDS> 1,425,392
0
200,000
<COMMON> 12,244
<OTHER-SE> 1,047,212
<TOTAL-LIABILITY-AND-EQUITY> 3,632,990
<SALES> 560,254
<TOTAL-REVENUES> 560,254
<CGS> 402,728
<TOTAL-COSTS> 402,728
<OTHER-EXPENSES> 70,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,699
<INCOME-PRETAX> (65,087)
<INCOME-TAX> (22,899)
<INCOME-CONTINUING> (42,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (42,188)
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</TABLE>
<PAGE> 1
March 12, 1999
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza - Room 1004
Washington, D.C. 20549
Attention: Division of Corporate Finance
Re: Annual Report on Form 10-K
For the Year Ended December 31, 1998
Commission File No. 1-8968
Gentlemen:
Pursuant to Rule 13a of the Rules and Regulations under the Securities Exchange
Act of 1934, following is the Annual Report on Form 10-K of Anadarko Petroleum
Corporation for the year ended December 31, 1998.
If you have any questions or need additional information with respect to this
matter, please do not hesitate to call me at 281/874-3305.
Very truly yours,
/s/ DIANE DICKEY
Diane Dickey
Assistant Controller
DD:am
