Anadarko Petroleum Keeps Getting Better in This Oil Patch

Though Anadarko Petroleum  (NYSE: APC  ) has operations all over the world, it's spending about three-fifths of its 2014 capital budget on developing its onshore U.S. assets, including south Texas' Eagle Ford shale, Colorado's Wattenberg field, and West Texas' Delaware Basin.

While all three of these plays are contributing strongly to the company's liquids production growth, Anadarko's exceptional performance in the Eagle Ford, where it has slashed well costs by a quarter and halved the number of days it takes to drill a well over the past two years, deserves special mention.

Photo credit: Flickr/Paul Lowry.

Anadarko in the Eagle Ford
Anadarko is one of the larger and more active drillers in the Eagle Ford shale, with roughly 185,000 net acres under its belt. To date, the company has drilled more than 1,000 Eagle Ford wells and continues to drill at a rapid pace, bringing one new well online every day on average. This year, the company plans to drill 400 wells in the play using a 10-rig drilling program.

Over the past five years, Anadarko's net Eagle Ford production has skyrocketed from around 1,000 boe/d in 2009 to 48,000 boe/d in 2013. This year, output is expected to average 68,000-71,000 boe/d, which would represent a 100% compound annual growth rate. Beyond this massive production growth potential, Anadarko's Eagle Ford operations are also extremely profitable.

The company's Eagle Ford drilling program benefits tremendously from high average EURs of 550,000 and 600,000 boe per well, a high percentage of liquids (60%-70% of output consists of liquids), and relatively low development costs of around $13 per boe. These advantages allow Anadarko to earn before-tax rates of return in excess of 70% in some parts of its acreage, representing some of the strongest economics across its global portfolio.

By comparison, Sanchez Energy (NYSE: SN  ) expects to earn an internal rate of return (IRR) of between 35% and 50% from acreage it will acquire from Royal Dutch Shell plc (NYSE: RDS-A  ) . Even though Shell's IRR from these properties, located in in Dimmit, LaSalle, and Webb Counties, Texas, was only around 20%, Sanchez believes that its shale drilling expertise, deep knowledge base of the Eagle Ford, and implementation of an artificial lift program will help the company succeed where Shell failed.

Meanwhile, leading drillers like EOG Resources (NYSE: EOG  ) and Marathon Oil (NYSE: MRO  ) can earn significantly higher rates of return comparable to Anadarko's thanks to size and scale advantages and a rapid transition toward pad drilling that has greatly reduced costs. Both companies are currently seeing IRRs of around 70% and view the Eagle Ford as a key driver of their growth in the years ahead.

Sharply improving returns
Like EOG and Marathon, one of the key reasons why Anadarko's returns in the play are so high is the company's consistent focus on cutting costs and improving efficiencies. Average well costs have plunged from around $2 million per well in 2011 to under $1.5 million per well last year, while drilling days from spud to rig release have fallen from nearly 20 to less than 10 over the same period, thanks largely to an aggressive shift toward multiwell pad drilling.

In fact, according to Anadarko's executive vice president of U.S. onshore exploration and production, Chuck Meloy, the company is now drilling some wells in under five days. Not only is that an exponential improvement from 30 days when it first began drilling in the play, but it's all the more impressive considering that many of those sub-five day wells are longer laterals in the 14,000 to 15,000-foot range.

This year, Anadarko expects to spend roughly 60% of its $8.1 billion-$8.5 billion capital budget on US onshore opportunities, mainly in the Eagle Ford, the Wattenberg, and the Delaware Basin's Wolfcamp shale. This spending program is expected to fuel year-over-year sales volume growth of 6%-7%, driven by an expected increase in oil production of roughly 40,000 barrels per day.

Investor takeaway
Anadarko's continuous and rapid improvements at its Eagle Ford operations are an encouraging sign as the company targets 15%-18% North American liquids production growth this year. Besides its highly profitable drilling programs in the Eagle Ford and Wattenberg, the company's massive position in the Wolfcamp shale -- where the existence of stacked-pay intervals could meaningfully boost its resource potential -- and various exploratory prospects in the Gulf of Mexico and offshore Africa offer potentially huge long-term upside.

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