DBRS Confirms Anadarko Petroleum and Kerr-McGee at BBB (low), Stable Trends

DBRS has today confirmed the Senior Unsecured Notes and Debentures (the Unsecured Notes) of Anadarko Petroleum Corporation (Anadarko or the Company) and of Kerr-McGee Corporation (Kerr-McGee) at BBB (low), with Stable trends, and has removed the ratings from Under Review with Negative Implications, where they were initiated on June 9, 2010 and maintained on August 10, 2010 (see separate press releases).

The Stable trends are based on DBRS’s expectations that in the event that the Company was required to fund the significant expenditures described below, the Company will maintain credit metrics at 2007 levels, with restoration to current levels within 12 to 18 months. The 2007 credit metrics included net debt-to-capital of 45% and net debt-to-cash flow at 2.65 times versus 30% and 2.04 times for the last 12 months ended September 30, 2010 (LTM). The 2007 metrics would allow for the potential upfront out-of-pocket expenses associated with the Gulf of Mexico Macondo well oil spill (the Gulf Spill) of approximately $4 billion (Anadarko’s 25% share of estimated costs spent by BP plc (BP) to October 31, 2010), initially fully funded by debt. The Company currently has cash balances of approximately $4 billion and about $4.5 billion of available secured credit line (the Secured Facility). Alternative financing options include asset sales, monetizations and joint-venture arrangements. On August 10, 2010, DBRS downgraded both the ratings by one notch to the current BBB (low) levels, primarily due to the set up of the Secured Facility, which ranks ahead of the Unsecured Notes, and considerable uncertainties surrounding the Gulf Spill. The potential lifting of the security arrangements on the credit facility in the future may not have positive rating implications, should long-term uncertainties associated with the Gulf Spill remain.

Apart from the expectations outlined above, today’s rating actions also reflect the following:
(1) Reduced uncertainties associated with the Gulf Spill, which was permanently capped on September 19, 2010. The Company expects shoreline cleanup activities should mostly be complete by year-end. BP is a 65% owner and operator and Anadarko is a 25% non-operated participant. BP has fully funded approximately $12 billion response and other costs incurred to September 30, 2010, plus $3 billion spending estimated since then to October 31, 2010. The Company has refused invoiced payments for $2.6 billion in view of investigations surrounding the Gulf Spill, particularly the issue of the operator’s gross negligence, the outcome of which would affect the obligations of the other parties, including Anadarko, under the joint operating agreement (JOA). Certain BP payments and the creation of a $20 billion claims funds are reportedly done on a unilateral basis outside the parameters of the JOA.

However, potential substantial liabilities associated with the Gulf Spill remain. The Company has made no provisions for contingent liability to September 30, 2010, based on applying accounting guidelines and the facts known to date. Based on a scenario of a potential upfront payout of $4 billion (about 25% of the estimated $15 billion costs incurred to October 30, 2010), initially fully funded by debt, DBRS estimates pro forma net debt-to-capital of 38% (total debt-to-capital of 45%) and net debt-to-cash flow of 2.8 times, given the LTM operating results. While the latter ratio is aggressive for the current rating, based on the current favourable crude oil pricing, this should improve to below 2.0 times with the start-up of the first of the three crude oil megaprojects in early December 2010, and the other two around mid 2011 and year-end 2011. The 2010 capex of $5.3 billion to $5.5 billion should be covered by cash flows.

(2) The Company has shored up its liquidity through a five-year undrawn five-year $5 billion Secured Facility, which replaced its previous $1.3 billion unsecured facility, and has significantly termed out debt maturities for 2011 and 2012, extending the average debt term to more than 14 years. DBRS expects the Company to have sufficient liquidity to cover its contingent liabilities in the near- to medium-term. The Secured Facility also reduces cash collateral requirements for certain derivative counterparties included in the bank syndicate. The 2012 debt maturities could rise from $170 million to $850 million, should the put option on the Company’s zero coupon bonds be exercised (the 2010 put option was not exercised and no put option exists in 2011).

At the time of the rating downgrades on August 10, 2010, DBRS was cognizant of the Company’s strong liquidity position and its satisfactory operating results. The Secured Facility is secured by certain of the Company’s exploration and production assets located in the United States and 65% of the capital stock of certain of its foreign subsidiaries. The security arrangements still leave a significant portion of the Company’s assets unencumbered.

(3) The Company continues to perform satisfactorily (except in 2009 from a credit standpoint similar to some of its peers) through its significantly high-graded portfolio since its major purchases in 2006, with a rising production and reserve additions profile and a reduced cost base. Its balance sheet and cash flow ratios, weakened by the 100% debt-funded major acquisitions in 2006, have returned to acceptable levels for the current credit ratings on a net debt basis as mentioned above, through significant de-leveraging helped by disposal proceeds and an equity issuance in 2009. Substantial hedges in place through three-way collars, covering about 80% and 65% of the Company’s remaining projected 2010 gas and crude oil volumes and about 25% and 30% in 2011, respectively, at above market prices, should provide a measure of stability to cash flow in the near term.

(4) The United States should remain Anadarko’s predominant operating region, reducing the political and other risks associated with international activities, particularly in countries outside the Organisation for Economic Cooperation and Development (OECD). The Company’s strategic refocus in the United States (89% of production and reserves for the first nine months of 2010 versus 74% and 67%, respectively, in 2005) in the lower-risk onshore regions, primarily in the Rockies, the South and the Appalachia regions, should generate cash flow to augment major developments in the higher-risk (higher-reward) operations in the deepwater Gulf of Mexico and offshore international areas. However, the Company’s reserve replacement cost performance, albeit improved, remains high compared with some of its U.S. peers. DBRS expects further improvements over the next couple of years.

The Company projects compound annual production growth rates of 7% to 9% to 2014, underpinned by the more predictable onshore shale gas developments and the start-up of the three crude oil mega projects mentioned above, one of which started recently and the other two are expected to be on time and on budget. These projects should add approximately 60,000 barrels per day (b/d) of production (9% of 9M 2010 volumes), providing a more balanced product mix. Reserve replacement (112% in 2009) should continue to improve, with finding and development costs (F&D) trending below the 2009 three-year average level of $17.38 per barrel of oil equivalent (boe). The projected $15/boe is in line with peer performance. While fairly aggressive, the Company’s plans are reflective of its substantially improved capital efficiency and growth prospects achieved in the past three years. The Company has substantial acreage in the Marcellus, Eagle Ford and Haynesville shale plays. Some of these resources benefit from the liquids-rich content, enhancing netbacks despite the current and potentially near-term low gas-pricing environment. Marcellus developments are to be accelerated through a joint-venture arrangement with Mitsui E&P USA LLC, which will provide for approximately $1.4 billion of Anadarko’s share of development costs estimated to 2013. Anadarko has also had significant exploratory finds in the past couple of years, providing growth and asset-monetization opportunities.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on the DBRS website under Methodologies.