Anadarko Petroleum's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Seeking Alpha

Anadarko Petroleum Corporation (APC)

Q1 2013 Earnings Call

May 01, 2013, 10:00 am ET

Executives

John Colglazier - Vice President, Investor Relations and Communications

R. A. Walker - Chairman of the Board, President, Chief Executive Officer

Robert Lawler - Senior Vice President, International and Deepwater Operations

Charles Meloy - Senior Vice President, U.S. Onshore Exploration and Production

Robert Gwin - Senior Vice President, Finance and Chief Financial Officer

Robert Reeves - Senior Vice President, General Counsel, Chief Administrative Officer and Chief Compliance Officer

Bob Daniels - Senior Vice President, International and Deepwater Exploration

Analysts

Brian Singer - Goldman Sachs

Scott Hanold - RBC Capital Markets

Charles Meade - Johnson Rice

Doug Leggate - Bank of America

Dave Kistler - Simmons & Co.

Arun Jayaram - Credit Suisse

Joe Magner - Macquarie Capital

Ross Payne - Wells Fargo

David Cameron - Wells Fargo

Eliot Javanmardi - Capital One Southcoast

Alex Heidbreder - Millennium

Amir Arif - Stifel

Presentation

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Anadarko Petroleum Corporation earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the conference over to your host for today, John Colglazier. Please go ahead, sir.

John Colglazier

Thanks, Steve. Good morning, everyone. We are glad you could join us today for Anadarko's first quarter 2013 conference call. Today's presentation includes forward-looking statements and certain non-GAAP financial measures. A number of factors could cause actual results to differ materially from what we discuss today. We encourage you to read our full disclosure on forward-looking statements and GAAP reconciliations located on our website and attached to last night's earnings release. Also on our website, we have provided a comprehensive summary of our global activities in our quarterly operations report.

In a moment, we will turn the call over to Al Walker who will discuss the company's first quarter results. Al will be joined by certain members of our executive team who will be available to answer questions later in the call. With that, go ahead, Al?

R. A. Walker

Thanks, John. We appreciate everyone taking the time to be with us today. We felt we had an outstanding first quarter in 2013 is shaking up to be breakout year for Anadarko that we have talked about. To highlight this, we achieved record sales volumes in Q1. This was lead by 16% year-over-year increase in oil sales per day. We announced few monetizations which exceeded $1.2 billion during the quarter, but most significant was the $860 million deal for Heidelberg.

This further enhanced our use of capital in a very tax efficient manner. We announced the new GoM exploration success including one of the biggest deepwater oil discoveries in our company's history and we achieved first oil at the EL Merk development in Algeria. Importantly, we generated very strong cash flow and further strengthened the balance sheet.

Our U.S. onshore plays are major contributors to the company's strong first quarter performance, achieving record sales of 555,000 BOE per day, representing a 16% growth versus Q1 '12 and this was against the headwind of ethane rejection which took away more than 10,000 barrels a day of production. Before we highlight the strong operating performance we achieved in the Wattenberg and Eagleford, it is worth taking a moment to know the attractive pricing and value we received again this quarter for our crude oil volumes.

Our domestic crude oil continues to enjoy premium pricing relative to WTI due to the fact that most of our production is waterborne benchmarked and a majority of the U.S. onshore production is light to medium quality. And as you can see in the graphic, it's limited in terms of the gas condensate production we actually realize. The value uplift this clear as our overall average price is almost $103 per barrel, or $808.60 an average premium to WTI over the period.

The Wattenberg field continues to be a top performer. Our sales volumes were enhanced by liquids increase of 45% year-over-year. To accelerate value, we tripled the number of horizontal wells drilled in the first quarter 2013, and we expect to increase this over the course of next year and this year. This asset enjoys the strongest return on capital characteristics on our portfolio with an expected rate of return exceeding 100%.

The Eagleford Shale is also delivering exceptional results. Total liquids for the quarter increased approximately 60% over the same period in 2012, and we are expanding our takeaway capacity with the 200 million a day gas processing plant, which will increase our throughput and yields from the liquids and should come online in the second quarter.

U.S. onshore is complemented by advancing development of our global projects. During the quarter, Anadarko and Sonatrack initiated oil production at EL Merk complex in Algeria, where we expect oil volumes throughout the year to build the next rate around 30,000 barrels per day net to Anadarko. As two facilities and three additional fields are brought on line.

In Ghana, gross daily production has averaged 104,000 barrels of oil per day, year-to-date and an expansion of the gas handling capacity at the FPO to enable higher oil volumes is being planned, and we are working with the government to sanction the TEN project.

The Gulf of Mexico developments includes the Lucius spar which recently set sail on schedule from fabrication yard in Finland for the Gulf of Mexico and then 80,000 barrel a day the Heidelberg spar, which is now at the firm of the queue in the construction.

In Mozambique, we've continued to make good progress on all fronts. Of particular note, we achieved our reserve certification for area one, supporting initial liquefaction train associates with Anadarko operated, Prosperidade complex and this development remains on track towards achieving first cargoes in 2018.

Exploration continues its industry-leading results. In Mozambique, we had an additional exploration successfully Orca-1 well in Area-1, which encountered approximately hundred 90 feet of natural gas pay and a separate accumulation fully contained within our block. We have two appraisal wells now planned to delineate this discovery. And, the Orca enhances our development options and flexibility in Mozambique.

In the Gulf of Mexico, we have been very busy and we have delivered incredible success so far this year. Accelerating the value of the newly discovered Shenandoah basin is critical. This is one of the company's largest discoveries ever the Gulf of Mexico, a short-distance away in the same basin, we participated in the Coronado discovery which encountered more than 400 net feet of oil pay and sidetrack operations are already underway.

Additionally, drilling is ongoing at the nearby Yucatán prospect which is our third exploration well in his new basin. We recently announced the Phobos discovery, which encountered approximately 250 feet of net oil pay in the lower tertiary. Further appraisal activity is now being evaluated and we will incorporate data from the well into our geologic models.

Phobos is located about 11 miles South of our Lucius development, which could enhance its economics as future infrastructure is installed. As busy as the first quarter was, we are having more wells' drilling planned during the balance of the year in the Gulf of Mexico. Operationally, we had another very strong quarter as detailed in our operations report on our website.

If you've had time to review this, you saw us reduce unit cost, improve wellhead margins and deliver operating efficiency across our active plays. Our deep and balanced portfolio now enables Anadarko to grow production and reserves with value.

Capital allocation and our development portfolio continues to be driven by rate of return, which favors oil and liquid-rich gas opportunities. And in spite the current strengthening in the natural gas prices, Anadarko will need to see a sustained prices, well above the current spot for dry gas opportunities to compete for capital in our portfolio.

Recapping our financial results for the quarter, we generated discretionary cash flow more than $2 billion, reported net income of $0.91 per fully diluted share, or $1.08 per share, excluding certain items affecting comparability. Our strong cash flow generation and value accelerating monetizations enabled us to strengthen the balance sheet and improve our leverage ratio to 32%.

The first quarter's results are a great foundation for another outstanding year for our company. As I said earlier this year, we believe 2013 could be a breakout year for Anadarko. We have a number of exciting things ahead of us throughout the balance of the year, to deliver better than 5% year-over-year sales growth, to receive the court's ruling in the Tronox case, we remain confident in the merits of our case, continue to be active worldwide in exploration and delivery portfolio of success similar to prior years and to continue to realize the value via active portfolio management whereas (inaudible) monetizations are going to allow us to reinvest this awarded or realized capital in other parts of our business to achieve growth through value.

With that, we are happy to take questions and operator, we will turn it back to you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Singer with Goldman Sachs. Your line is open.

Brian Singer - Goldman Sachs

Can you expand a little on the comment with regards to Jubilee production that you expect the gas handling capacity to increase in oil volumes until late 2013. Can you just give us an update there on well performance at Jubilee? Then when you think about where oil volumes can go? Does it get to the 120,000 barrel a day capacity and stay there or should we expect something above or below?

R. A. Walker

Sure, you bet. Doug Lawler and I will tag team you on this one. I think some of what we are talking about there, you will hear more from the operator, Tullow but we are very encouraged for the things that we have talked about today that we can point to with respect how well that deal is progressing. Doug, you might take just a few minutes and talk specifically about some of the things we are seeing.

Robert Lawler

Sure, Brian, as you know, the facility is rated at 120,000 barrels a day. We are currently producing about 110,000 on average. The work that you are describing is to do some top side facility work that will result in giving us some additional gas injection capability. We see that being able to get us up to around 120,000 barrels a day from the 110,000 at present.

The current drilling activity, the phase 1 program as well as the acid jobs that we have conducted have performed really well. At present, the flow potential from the field is greater than what we can produce through the FPSO right now. So we have some additional asset simulation work as well as a few other Phase 1A wells that will be drilled later this year and into 2014.

But we are hopeful that this additional injection capability will get us up to 120,000 and in our forecast for the year we expect it to be in the 110,000 to 120,000 range as that gets implemented. The target time for that is targeting in the third quarter.

Brian Singer - Goldman Sachs

Great, thank you. Then as a follow-up, your natural gas production has been, perhaps surprisingly resilient, certainly relative to your guidance and then potentially in the price environment. Obviously this question varies by area. So can you talk to what extent this is being driven by the backlog reduction in area such as the Marcellus and where that stand versus greater gas in the production mix in some of your associated gas areas or just better well performance overall?

R. A. Walker

You bet. Since most of this is an onshore issue for us. I am going to ask Chuck Meloy if he would, to address the question.

Charles Meloy

Brian, as you have seen, our gas production has been steady to slightly up. There is two or three good reasons for that. The first off is just the Marcellus performance. To if you look year-over-year, the growth has been phenomenal. Our sales are up about 71%, from prior year and that’s a combination of completing the wells we are drilling and unloading the backlog that was in our non-op position and getting the infrastructure completed in that area.

As all that has come together you have seeing some very cost efficient, low OpEx costs, really good margin for gas come online as some of the lowest cost gas in America. So it has been an exceptional performing asset for us. We have also seen just really strong performance from the IHUB area where when we originally came in we would have exceeded the TCF of production from that field and the wells have outperformed our expectations and continued to deliver gas that quite frankly we didn't see in our [curve], so those two and smaller other bits and pieces added up to a really good story for us.

Brian Singer - Goldman Sachs

And is here Marcellus backlog now at a normal level or is it still an abnormal backlog where do you see that going?

R. A. Walker

Well, I am not sure what normally be then, but I think we are in a position where we've got it worked down in the Chesapeake in particular work there has been quite considerably and the addition of infrastructure out there I think that is a big of impact on is just completion, so we are starting to open up the pipes and give us some room to grow that's been a big production.

Operator

You next question comes from the line of Scott Hanold with RBC Capital Markets. Your line is now open.

Scott Hanold - RBC Capital Markets

Thanks. When you look at your success in the Gulf of Mexico, can you talk about how are you looking at your shipping around activity. I mean you are looking to do praise the Shenandoah, for what's in the near-term or by the end of the year and what potential impact does have (Inaudible) kind of what comes next.

R. A. Walker

Let me take that in part and have Bob Daniels take the other part. I think what you've seen is, we continue to have extraordinarily good success, both with exploration and development drilling in the Gulf of Mexico. It's you've got the Lucius and Heidelberg coming along at the next mega projects from the Gulf of Mexico with oil production starting next year for Lucius.

As we look at our inventory, I think you can continue to expect that we will management that pretty actively just like we have been. And frankly, additional exploration success there is not critical.

We are always happy when we have it obviously, because it gives us more optionality, but I am going to let Bob address the question exactly what he sees from an exploration standpoint through this year next, because we do have a lot of things still to drill. You made reference to one well that is drilling, but we have a lot of other things still planned to drill through the course of this year.

Bob Daniels

Yes, Scott. Bob here. We have had really, really good success there and that's a great problem to have with our we're going to appraise these things. Shenandoah obviously needs an additional drilling. We plan to get rig out there before the end of the year to drill the next well on it. We still are awaiting on the Yucatán results just south of us, three to four miles. That's going to be really key for the overall Shenandoah Yucatán area and then we are drilling an appraisal well over at Coronado, where we've been non-operator.

Regarding rafter, we are not down on that well yet, so we'll have to see what we find, but we are very hopeful we'll need appraisal work there. Again, a good problem to have and we'll just have to roll it into our overall rig planning based on the results that we see, but we do have Shenandoah scheduled for right at the end of the year to get a rig back on and do another appraisal well there.

Scott Hanold - RBC Capital Markets

Is there any change to you guys have plans in terms of what you've done in the past gave you the fair amount of success potentially monetize some of these successes prior to development has that continued to be something you look at in the Gulf?

Bob Daniels

Absolutely, you've seen what we did at Lucius and what we did at Heidelberg and the value that we are able to realized for those opportunities, so that's a great model. It carries our forward capital and put some marker as to what the value of these discoveries are.

Scott Hanold - RBC Capital Markets

Okay. And one final question if I could. Permian volumes were down a bit in the quarter sequentially. It looks like you guys still feel like active there yet, but was there a specific reason for that?

Bob Daniels

The Permian has been a great performer for us. The reason put it down is essentially the transformation of the operator ship on our non-operated position and those guys are just getting up the high screen, doing a good job and they are starting to build up their program and I look for that to reverse pretty quickly.

Scott Hanold - RBC Capital Markets

Okay. Is that sort of the Chesapeake sales to [Chevron] or..

Bob Daniels

Yes.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice. Your line is open.

Charles Meade - Johnson Rice

Good morning. Thanks for taking my question. On Mozambique, I saw that you had in your operations support that you would receive the reserve certification on third-party for the Prosperidade complex, but I was curious if you could maybe offer some detail on where that same process is for the Golfinho/Atum complex?

Robert Lawler

Sure, John, this is Doug Lawler. Where we sit at present, we have some additional testing working and working with a third-party consultant there. Its in progress. We still are very confident in achieving that in the timeline we have provided for that is also in 2013. So along with the success there and this phenomenal exploration discovery we continue to see you progress on the reserve certification necessary for us to move forward.

Unidentified Analyst

Okay, thank you. Then returning to the Shenandoah mini basin, this might be borderline on fantastic but I think when we got the press release from operator on the Coronado well, I think they just logged that they hadn’t taken pressures or anything and I think I believe I read that they are sidetracking down a bit there but I know that’s, what is it, three blocks, two blocks to the east and one block to the south and so it’s a long away from Shenandoah presumably you have a pressure testing reservoir now and can you offer any view on whether you are in the same pressure regime as the Shenandoah discovery and whether there is any outside chance that this all could have a common oil water contact?

Charles Meloy

Yes, Charles. The Coronado and Shenandoah accumulations don’t line they are be connected. The data doesn’t really sport pad. It’s a long ways away and we go through massive (inaudible) to get over to the Coronado prospect. So we are in the process of appraising that down dip and see what kind of oil leg we have the lowest. So we are looking forward to that. I will say that on the Shenandoah Yucatán complex, which is about 3 miles separation, that one very well could be one common accumulation but of course we have to get the Yucatán well results and see what it tells us. But structurally and stratographically that will make a lot more sense than the over to Coronado which is much further away.

Operator

Your next question comes from the line of Doug Leggate from Bank of America. Your line is now open.

Doug Leggate - Bank of America

I wonder if you could share any updates on the monetization process in Mozambique and specifically address how you think that any potential target tissues might be tackled as part of the process?

R. A. Walker

Sure, happy to do that, Doug. Actually, I can't. I will have Bob Gwin do that and I will probably have a comment to wrap up with on that.

Robert Gwin

Doug, this is Bob. We are really pleased with the indications of interest that we received a few weeks ago. Obviously we are in discussion and working on the transaction. I think it is fair to say we expect it would be a 2013 transaction after government approval would need to received we reach an agreement with a potential buyer.

As far as taxes go, we will see. Obviously the tax situation around Co. was fairly obvious if we were to sell an asset versus a corporate structure here, that tax would be a little bit higher. So we are looking at our economics on the bids that we received on an after-tax basis rather pre-tax basis but we will be working with the government to determine what the ultimate tax on it will be.

R. A. Walker

Doug, I would just add. We feel like as we got into this, it will take us a while to come to a conclusion with one of the potential buyers here and progress so far has been really good. The indications of interest that Bob made reference to were all quite strong and we are looking forward to bringing it to a point where we can talk about it.

Doug Leggate - Bank of America

Forgive me. Have you got any exclusivity on this?

R. A. Walker

No.

Doug Leggate - Bank of America

Oaky, thank you. My follow-up, I don’t know who wants to take (inaudible) but back to Shenandoah, if I may. I think in prior presentations, you have shown Shenandoah on a timeline around 2017. I was just wondering, is it too early to really think about development options here and if not, could you give us some framework as to what you should be thinking about in terms of when you might bring that one to production? I will leave it there. Thanks.

Robert Lawler

Hi, Doug, this is Doug Lawler. Your comment is exactly right. It is very early and we are looking forward to the appraisal program. Obviously it’s a very big discovery. We will be bringing more information forward as we learn more and study those options to bring it to development.

Doug Leggate - Bank of America

Are you thinking about unitized development, Doug? Or it would just be still too early to talk about that?

Robert Lawler

It will be very early, Doug. I appreciate the question but at this point it is very early.

Operator

Your next question comes from the line of Dave Kistler from Simmons & Co. Your line is open.

Dave Kistler - Simmons & Co.

Good morning, guys. Real quickly looking at 2Q production guidance, 1Q had a nice jump up from 4Q. Can you guys kind of define what is delineating sort of the drop-off in production?

R. A. Walker

Yes. I think there's a couple of reasons around it, I think Chuck will walk you through some of that. I think, Dave, the word [Carlson] Island have is best you guys can try to look at as a year-to-year rather than quarter-to-quarter. I know there is some need to do the quarter-to-quarter. But I think we have continued to address these question, it seems like almost every quarter, we certainly guide something we think hit, we see issues out there that we think we are trying to manage around. And, I think, as you can fully appreciate as we think about our business, we do not think about it quite as much quarter-to-quarter as maybe others do.

Charles Meloy

This is Chuck. If you go to the announcements that we made, the big issue that we try to orders back, we had installed rail lifting in the first quarter and that's pretty straight now. The other we have that we are dealing with currently is, we are in the middle of doing the tie-ins down in the Brasada plant area, and so we will have quite a bit of downtime associated in our Eagleford production area as we tie in the Brasada plant and the associated facilities in the field.

That's just going to be an up and down deal and we are going to do it safely and carefully, and we are taking a very conservative approach to how we put all that together. It's just it's part of the drilling plans we talked about a couple of quarters ago as we start this infrastructure build out, you get into these spots from time-to-time that you throw a lot of downtime in, and this quarter is going to be one of those as we significantly enhance our infrastructure position in not just Eagleford, but in Wattenberg and Permian as well, but to a lesser extent from product impact.

Dave Kistler - Simmons & Co.

Okay. I appreciate that and then maybe kind of get back to annual levels. If I look at 1Q CapEx, obviously, it comes in at a run rate well below what your targeted full year CapEx is. Can you kind of walk us through the progression of that throughout the year, or should we be kind of traversing that to the lower end of CapEx?

R. A. Walker

No, Dave. I think you should expect that were to be to the midpoint or the upper end of that range. I would extrapolate from the first quarter that we are going to under spend for the year. It's just the timing of when we expect those capital plans to actually work their way through into reality.

And, we still anticipate a fairly strong year of capital spending, but not outside of the guidance that we have given you and everybody else. First quarter is just sort of like some of the things. It's just the timing issue and a lot more than that.

Dave Kistler - Simmons & Co.

Perfect. One last one if I might just on the Wattenberg. Can you guys give us an update on kind of latest leading edge, lateral lengths, costs, production associated with those longer rail spacing. I mean, obviously that was a homerun this quarter, so I'd love to hear any kind of incremental update you have there.

Charles Meloy

Yes, Dave. I'd probably view it as a grand slam. It's been a wonderful quarter for us. year-over-year, our production has gone up substantially from somewhere in the mid-20s, 26,000 barrels a day to 44,000 barrels a day on the oil side, which is a huge uplift and that's because we are in the middle of doing a lot of optimization work, not just with lateral length, but with spacing, completion design, facility design, putting the big diameter pipes in ground that allow us to move these incredible quantities of hydrocarbons that are coming out of these wells. And, all the infrastructures associated with the Lancaster plant, so we are in the middle of all of this. It's a big optimization effort.

What we have seen is very similar to what the Noble has announced with regard to their pilot test. Longer is better to a degree and we see more and more recovery. There is a pretty straight correlation between lateral length in EUR, and I think that you will continue to see that. There is a natural risk element that we have to take into account with regard to so much completion jewelry in these Wells, but if you get too long but with what we are trying to do is optimize all of those brands. There's not just we, but this was between wells. This is in the number of oils we put in each section reaching and we are in the middle of all that. We feel like it's a little early to come to any conclusions on specifics of that optimization. But we are on the job. We are accelerating the value add of that thing. We are up to 12 rigs now. We started out thinking we will drill around 300 wells this year. We end up drilling around 340. Most of them will be longer laterals than what we originally intended. So we know the value of this thing. It's immense. We are on the job to accelerate that value.

Operator

Your next question comes from the line of Arun Jayaram from Credit Suisse. Your line is open.

Arun Jayaram - Credit Suisse

I just wanted to maybe follow-up on the Wattenberg. Really strong growth. AI think you achieved a 113,000 BOE a day. I was wondering if you can comment, your guidance for the year is 121,000. Do you see any upside to that number just based on the pace of what we have seen far this year?

R. A. Walker

Well, I will answer this in part and Chuck will answer it in part. We don’t guide to the mid-point of our expectations. We guide to what we think we can achieve. So, sure, if we were able to achieve better than average results, we should actually achieve better than we have projected. But we also keep in mind that there are things that we have no control over whether being one of those mechanical issues being another. So if you can appreciate, we don’t try to pull the string to tight when we are looking at guidance and we like to be able to continue to have the types of results year-over-year that give us good momentum, good confidence around being able to achieve what we say we are going to achieve. So I always expect that things go well or in that we can actually always be in the position of overachieving but I am always mindful as well that there are things we can't control.

Arun Jayaram - Credit Suisse

I guess, just a quick follow-up to that. Just saying, as you are ahead of plan at least regarding that guidance. So are there any other infrastructure things that we need to think about in the balance of the year that may even constrain the growth until you get Lancaster online?

Charles Meloy

This is Chuck. The Lancaster tie-ins will come in during the fourth quarter. So we placed in our guidance a reasonable downtime expectation in the fourth quarter. We are hopeful that during the course of the year that we can make those tie-ins optimistically such that we don’t incur all that downtime. That would enhance our volumes for the year.

The other thing that’s really cool out there is, as we would now manage to get our total water feed is on, our total water feed is on, we have got water on demand. So our completion machines just working fantastically. The guys are doing just a fantastic job of lowering the cost. We saw over $350,000 per well savings in the last quarter with regard to lower water cost, lower water delivery cost and then crude completion costs.

So all that is working in our favor and the drilling folks are doing a fantastic job in improving our drilling efficiency and spud to spud time. So the machines are working faster. That gives an opportunity to enhance our results. All that has got to be (inaudible) with what else is going on in the fields enable that to be evacuated in to the markets and between the Lancaster plant. the expansion of White Cliffs, the tie-ins with Texas Express.

We have got a lot of things going on in the field that’s going to interrupt our production at some point and that’s what we are trying to take into account.

Arun Jayaram - Credit Suisse

That’s helpful. Just one quick question or clarification on the full year guidance. Al you did bump the upper end of the guidance by a couple million barrel. You left the bottom end flat. Can you just put that into context? If that is conservatism or any other thing that you are thinking about regarding the bottom end?

R. A. Walker

I think it just goes back to what we have taken through the course of the year. Fairly conservative view on ethane rejection. That’s the reason that we have guided the way we have at this point.

Operator

Your next question comes from the line of Joe Magner with Macquarie. Your line is now open.

Joe Magner - Macquarie Capital

Thanks, good morning. I was just curios if you could provide an update on the monetizations that are potentially forthcoming. Couple have been talked about as possibilities but anything that we should be on lookout for?

R. A. Walker

Well, if I can I will let Bob Gwin give you more color but I think of all the things we are working on, the one that has got the most immediately associated with what you talked about earlier in Mozambique but as you can imagine, I made the comment earlier. We are very active managers of our portfolio. So that’s hardly the only thing we are looking at that at point in time, so with that let me turn it over to Bob.

Robert Gwin

Sure. The only thing I would add really beyond Mozambique of notice something I mentioned on the investor call back in February and that is Brazil. Obviously, we continue to work that. It's a bit of a challenge, because there is the unitization process, or unitization's study underway that BP as the operator of the BM-C-32 block is negotiating, but nonetheless we decided it was appropriate to move forward, the potential monetization there, that process is in a really early stages and the timing of completion is going to be the unknown, because it is little bit complex due to the unitization and subsequent need for ANP approval, and so we would be hopeful to get that done later in 2013, but it is hard for us to drive the timeline it is really just a matter of us proceeding kind of diligently to get that done. We will continue to keep the market apprised as it gains little more shape.

Otherwise, there's lots of things that don't rise to the level of mentioning at this point, but as you've seen things we've done like our OCI deal we did the first quarter various and sundry smaller things are EOR deal that we did with [Lin] last year. There is a variety of these types of things. We continue work on. We will continue to try to fine-tune the portfolio things that do not work quite well for us attractive assets, but it might fit better in somebody else's portfolio and then we'll continue to focus our capital intention on the things that are highest points opportunity.

Joe Magner - Macquarie Capital

Okay. Thanks for that. With respect to the Mozambique situation, you touched on reserve certification process. Can you update us on where the discussions lie, perhaps not on the detailed level obviously, but just regarding the pricing dynamics of off take agreements and what we might expect to see and how we might expect that to play out?

R. A. Walker

Sure. We've got Scott Moore here with us who runs marketing globally through Anadarko. And, if I could, Scott, why don't you address that?

A. Scott Moore

I think we are excited by the interest in the market that we've seen in our Mozambique product. It's a premium product that should deliver a premium price. We do look primarily at oil indexation and the pricing, which is well established with the high quality Asian buyers that we target for green field projects like this. We look forward to working on those structures and we hope to be able to talk to you more about it later this year.

R. A. Walker

Joe, as you might imagine given the advantages of geography and a lot of other things, the buyer community for LNG coming out of Mozambique is pretty deep.

Joe Magner - Macquarie Capital

Okay. There have been some I assume mention in the media that perhaps there is some linkage to natural gas prices or Henry Hub prices, how is that going to influence the calculation or the pricing schemes?

R. A. Walker

Yeah. I think, there are certain utility buyers in Easter Asia that are looking to try to move away from a completely oil-indexed contract. We are looking at it in terms of what the effective price per Mcf or MMBtu is for us and how that gives us project economics, we certainly today have not entered into any contracts that would incorporate that, but we've listened to the buyers that they've talked about it. And, Scott, please add anything you'd like.

A. Scott Moore

I think key for us as we look at things that delivery comparable value and there are a number of ways that can be accomplished and we do try and reflect our buyers' concerns, but.

Operator

Your next question comes from the line of Ross Payne with Wells Fargo. Your line is open.

Ross Payne - Wells Fargo

Thank you. I was just wondering if you could give us any more color on the timing of the Tronox potential settlement when you think that may occur, and if there is any kind of change in what kind of financial impact that may have? Thanks.

R. A. Walker

Ross, I wish I had a crystal ball and could give you an accurate prediction. The reality is, I don't have one of those or haven't found it in my closet yet. We really don't know when this judge is going to come back. In our most recent Q filing this week, we reiterated our range of zero to $1.4 billion. That's our best estimate. We still think the case that we have is very strong and we think more likely than not that we will win, and so therefore, that's the construction of the range, but the timing of when this judge will make a ruling is very difficult for us to give you any directional, but I'm going to let Bobby Reeves try.

Robert Reeves

I think that's right. Look back at our 10-Q, we've not changed. We believe it's more likely than not that we will prevail. There is a potential loss range of zero to 1.4 billion based on our best estimates. We still believe that evidence of the trial was that Kerr-McGee properly capitalized turnoffs when that was IPO'd and that Kerr-McGee wasn’t responsible in any way for the financial struggles or bankruptcy of Tronox.

We believe that that was pointed out clearly in the trial. We believe that a ruling from the Judge should prevail for us and give us the clarity that’s right now an uncertainty on our company. So we were looking forward to the ruling.

Operator

Your next question comes from the line of David Cameron with Wells Fargo. Your line is open.

David Cameron - Wells Fargo

The big cash flow generation in the quarter in the balance sheet, obviously there is some place there for Trunox or whatever but can you talk about what your plans are for that free cash flow that continues? Obviously you have some big projects but thinking dividend and any other thing you what to throw out there?

Robert Gwin

Hi, David, it is Bob Gwin. Obviously we are working to preserve the current strength of the balance sheet. All we have is this uncertainty related to Tronox, as we just discussed. As we move forward and we are going to continue to reduce leverage to a degree, we are obviously are focused on a stronger credit quality and on an appropriate credit quality for the structure of our global business, our exploration business. But as we mentioned a little bit previously, we are going to revisit dividend policy as we go forward.

It doesn’t take a lot of work to look at our future cash flow generating capability and the way that we have focused on monetizing assets and leveraging the use of other people's money in our development dollars. That leads to some relatively strong cash generation over time which is the goal of our business model. When we do that, we will revisit the credit quality, do some liability management and make sure the capital structure is optimized for our business models. So it’s a work in progress but I think we stay essentially where we are until we get to the other side of the current uncertainty.

R. A. Walker

Dave, this is Al. I think given the way we have been able to use our cash flow pretty effectively and staying within that with CapEx, as we have continued, as Bob made reference to the fact of using third-party capital on a lot of our bigger mega project development. Our ability in the future to continue to be even more cash efficient and capital efficient should lead us to a good place when we were able to make an announcement on the dividend payout policy.

David Cameron - Wells Fargo

All right, that’s helpful. Then as I think about you have a bid portfolio in the U.S. I imagine there are a lot of plays but you guys are chasing the one that popped up in the last month or so, is the Northeast Colorado play. Could you talk a little bit about what have out there and then anything else you want to give us as far what you are working on in the U.S.?

Charles Meloy

David, this is Chuck. As we work our U.S. onshore exploration program, you may notice we are investing about $300 million a year in the oil plays. That is roughly half a dozen of those located around the U.S. and we are exploring and appraising in each one of those and we haven’t released any results. We typically don’t until we have a pretty good idea of what we could expect from the plays.

But I would say we have some very encouraging early results in several of those and we look forward them playing a bigger and more prominent role in our portfolio going forward. Each offers the opportunity to substantially enhance our EBITDA per barrel and value proposition for you guys.

R. A. Walker

I think in Colorado as well, as you probably understand, David, we have a very large mineral interest position right in the middle of what looks like to be a new play. I might ask if I could just see if Chuck would want a comment just a little bit about our acreage position there.

Charles Meloy

Well, we did have some press about the plays going on in Southeast Colorado on the arch in Mississippian play. It is right in the middle of our land grant where we have mineral interest in every other section. Our total acreage position there is approaching 800,000 acres net. So it’s a very substantial position and we are well positioned to take advantage of the any successful industry we have on the arch.

David Cameron - Wells Fargo

All right, and at this point in time, are you waiting for us to prove it up or are you guys active out there around the arch.

R. A. Walker

Well, the advantage of having perpetual mineral positions is, you can let others prove up the play and we've been actively monitoring and gauging in some small farmhouse to encourage activity and what we have seen so far is very promising.

We have permitted wells in the area, but we haven't yet drilled one, and there is a lot of inbound interest on that play, and so I feel fairly confident we'll see some good value realization in the future.

Operator

Your next question comes from the line of Eliot Javanmardi from Capital One Southcoast. Your line is open.

Eliot Javanmardi - Capital One Southcoast

Good morning, guys. I believe this question is probably for Chuck. I noticed there was significant decline in the CapEx spend onshore while you maintained your growth and I think it was to the tune of maybe $300 million or so.

Just curious, how much of that would you kind of say was associated with coming off of infrastructure spend on maybe projects you finished as opposed to just the efficiency improvements that you have across the board?

Charles Meloy

Eliot, great question. It's sum of both. We've actually had some really nice savings in our drilling program. I mentioned earlier like in Wattenberg, where we are saving money on the drilling, because we are doing it a little quicker and we are also saving $350,000 on each completion, but changing up our completion design and using slick-water type activities.

We also have completed a fair share of our midstream spend in the first quarter. And, although we still have some big projects yet to come online like Brasada and Lancaster and others, in combination with our west position, our midstream spend going forward is tailing off to some degree off the high spend of these big plants. And, once we get that in the rearview mirror, we are back to sort of a normal run rate.

The combination of that and the timing of the continuation of the JVs that we have down in the Maverick is just subdued our capital in the first quarter, but we are running 47 rigs in the U.S., we are building 900 million of cryo, and we are drilling a bunch of wells and successfully drilling a bunch of wells, most of them horizontal. The vast majority of them horizontal with large completions and that will keep our capital spend rate up through the rest of the year.

R. A. Walker

Eliot, I know you are absolutely aware of this, but just to make a further comment about it. As you've seen us in the past with our midstream infrastructure, we ultimately will find ourselves selling that to Western Gas and reinvesting that capital either in upstream or in other infrastructure, so even though we've made some big capital commitments in the midstream, we do sort of have our own way of looking at that and using Western Gas in that capacity and I think that's worked out very well for us.

R. A. Walker

To that end, we sold an asset gathering in the Marcellus to Western Gas earlier this year through almost $500 million which brought cash back into Anadarko to reinvest in the E&P operations, so it's continuing and working well.

Eliot Javanmardi - Capital One Southcoast

Great. I appreciate that. I didn't see in supported and pretty clearly, so thank you for that. Just a quick follow-up. You touched upon this a little bit already with some of the onshore plays and just curious, do you have any comments on maybe the prospective Powder River and what you got there and that's it for me.

R. A. Walker

Yes, Eliot. The Powder River, we have a very large land position as you know over 350,000 net mineral acres up there and we've been active. We've drilled probably in the order of 20 wells into the deeper section looking for oil plays. That basin has proven to be very oil-prone particularly in the southern end of the basin and it's a deciding place to play, because there is multiple horizons that have paid off.

We've been involved in Frontier, Saskatchewan, and in Niobrara exploration to-date and each one of those has some promise, so we are actively moving those forward. We're in appraisal mode in those areas, so it's an exciting area for us and we are hoping we could put some size and mass around them, so we can put our machine to work.

Eliot Javanmardi - Capital One Southcoast

Excellent. Thank you so much.

Operator

Your next question comes from the line of Alex Heidbreder from Millennium. Your line is now open.

Alex Heidbreder - Millennium

Hi. Thank you for the color. Two questions. First, can you comment on the cost structure in the Eagleford, like you did in the Wattenberg and any kind of trends in the all-in cost of bringing wells on line?

The second question is the size of the Phobos structure. I think John told some of the analysts that was about 8,000 acre structure, but (inaudible), on his call, there was 10,000 to 15,000 acre structure. So I was just hoping you could clear that thing?

Charles Meloy

I will take the first one. This is Chuck. the Eagleford is doing quite well. We continue to drop for our drilling times down and we drilled a whole number of less than 10 day wells now. So if you put everything in play and look at the completion cost, we are now filling, completing and equipping those wells in the order of $5.5 million to $6 million.

The EURs are north of 4.50. So we have had some really strong economics. On the OpEx side, I think that’s a great story where our cost structures continue to fall and we are operating the Eagleford in the order of $2 a barrel now. That has been a great story for us. We get tremendous margins with the oil production that we have and the gas plant liquids that we recover with very rich gas.

So the story is good out there. The cost structure is good. We are making a really nice return on those wells and I anticipate that will continue and maybe even improve once we get (inaudible) online where we can really stabilize the production and not have so many ups and downs as we are putting the infrastructure in place. Once we get that deal stabilized, I guess it would be really, really nice gains in our production profile.

R. A. Walker

Regarding Phobos. The structure is very, very large. It is a big four-way closure. What we are talking about is what we think we have in the accumulation. To our lowest known well, we think we have got about 8,000 to 9,000 acres in that closure that potentially could be full of hydrocarbons. So I don’t know whether that’s the difference between what they are saying and us.

The other is, of course, difference interpretations. You have got different philosophy transforms that could give you a different structural interpretations. So it’s a very, very broad low release structure. So it couldn’t take much to change that. But what we see is about 8,000 to 9,000 acres of four way closure to our lowest known oil.

Operator

(Operator Instructions) Your next question comes from the line of Amir Arif from Stifel. Your line is open.

Amir Arif - Stifel

Well, my questions have been asked. Thank you.

Operator

There appears to be no further questions.

R. A. Walker

All right. Well, I do want to, one more time, say thank you to everybody that was with us today. Your management here could not be happier with the first quarter and I would one more time, we think 2013 is a breakout year for this company and the balance of the year looks really exciting. John?

John Colglazier

Thank you much and we will talk to you all later.

R. A. Walker

Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.



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