-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtMk6qVtbvpdRI0t+yapTt3HWxmmkKl+aIHzQUFCzNG0TSwoBtVy21sV+yVadHuy CG15OKH2hRGCOkckoRuzhQ== 0000950129-97-001007.txt : 19970313 0000950129-97-001007.hdr.sgml : 19970313 ACCESSION NUMBER: 0000950129-97-001007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970312 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANADARKO PETROLEUM CORP CENTRAL INDEX KEY: 0000773910 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760146568 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08968 FILM NUMBER: 97555434 BUSINESS ADDRESS: STREET 1: 16855 NORTHCHASE DR CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 7138751101 MAIL ADDRESS: STREET 1: P O BOX 1330 STREET 2: P O BOX 1330 CITY: HOUSTON STATE: TX ZIP: 77251-1330 10-K 1 ANADARKO PETROLEUM CORPORATION - 12/31/96 1 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 FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-8968 ANADARKO PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) ------------------ DELAWARE 76-0146568 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 17001 NORTHCHASE DRIVE, HOUSTON, TEXAS 77060-2141 (ADDRESS OF EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (281) 875-1101 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $0.10 par value The New York Stock Exchange, Inc. Preferred Stock Purchase Rights The New York Stock Exchange, Inc.
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 computed using the average of the high and low sales prices at which the stock sold on January 31, 1997 was $3,893,006,000. The number of shares outstanding of each of the registrant's classes of common stock as of January 31, 1997 is shown below:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING Common Stock, $0.10 par value 59,605,829
PART OF FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE Part I Portions of the Anadarko Petroleum Corporation 1996 Annual Report to Stockholders. Part III Portions of the Proxy Statement, dated March 21, 1997, for the Annual Meeting of Stockholders of Anadarko Petroleum Corporation to be held April 24, 1997.
2 TABLE OF CONTENTS
PAGE PART I Item 1. Business 2 General 2 Proved Reserves and Future Net Cash Flows 2 Exploration, Development, Acquisition and Marketing Activities 3 Volumes and Prices 3 Properties and Activities -- International 4 Properties and Activities -- United States 7 Offshore 7 Onshore 9 Gathering and Processing 12 Drilling Programs 12 Drilling Statistics 13 Productive Wells 13 Employees 14 Regulatory and Legislative Developments 14 Additional Factors Affecting Business 14 Title to Properties 14 Capital Spending 14 Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends 14 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Executive Officers of the Registrant 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 64 PART III Item 10. Directors and Executive Officers of the Registrant 64 Item 11. Executive Compensation 64 Item 12. Security Ownership of Certain Beneficial Owners and Management 64 Item 13. Certain Relationships and Related Transactions 64 PART IV Item 14. Exhibits and Reports on Form 8-K 65
1 3 PART I ITEM 1. BUSINESS In Item 1 of this Form 10-K, including the production and reserve disclosures contained therein, the Company has included a number of 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. These forward looking statements are based on the best data available at the time this report was released for printing; however, actual results could differ materially from those expressed or implied by such statements. See Additional Factors Affecting Business in the Management's Discussion and Analysis under Item 7 of this Form 10-K. GENERAL Anadarko Petroleum Corporation is one of the world's largest independent oil and gas exploration and production companies with 601 million energy equivalent barrels (MMEEBs) of proved reserves. The Company's reserve mix has shifted dramatically in recent years, primarily due to major crude oil discoveries both in Algeria and the U.S., which have resulted in a larger and more balanced portfolio of energy reserves. As of year-end 1996, crude oil, condensate and natural gas liquids (NGLs) reserves accounted for 50 percent of the Company's total reserves compared to just six percent at year-end 1986. About 80 percent of the Company's 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. Currently, all of the Company's production is in the U.S. The Company also owns interests in 13 gas gathering systems and four gas processing plants in the U.S. Internationally, Anadarko is exploring for and developing crude oil reserves in Algeria's Sahara Desert. To date, the Company has recorded 124.3 million barrels (MMBbls) of proved crude oil and condensate reserves in Algeria, which accounts for about 20 percent of Anadarko's total proved reserves. Development operations are now underway. The Company is also participating in other exploration projects in Eritrea, Jordan and Peru. The principal subsidiaries of Anadarko include: Anadarko Gathering Company; Anadarko Energy Services Company (formerly Anadarko Trading Company); and, Anadarko Algeria Corporation (Anadarko Algeria). 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. PROVED RESERVES AND FUTURE NET CASH FLOWS 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. As of December 31, 1996, Anadarko had proved reserves of 1.82 trillion cubic feet (Tcf) of natural gas and 297.8 MMBbls of crude oil, condensate and NGLs. Combined, these proved reserves are equivalent to 601.3 MMEEBs of oil or 3.61 Tcf of gas. The Company's reserves have grown significantly over the past three years. Reserve growth is due mainly to the dramatic increase in crude oil reserves discovered in Algeria, the Gulf of Mexico and Alaska. Crude oil, condensate and NGLs comprised 50 percent of Anadarko's total reserves at year-end 1996. The volumes of the Company's natural gas reserves have remained relatively stable over the last three years. 2 4 Proved developed reserves comprise 63 percent of the total proved reserves on an energy equivalent barrel (EEB) basis. As of December 31, 1996, Anadarko had proved developed reserves of 1.65 Tcf of natural gas and 100.6 MMBbls of crude oil, condensate and NGLs. The Company's estimates of proved reserves and proved developed reserves owned at December 31, 1996, 1995 and 1994 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 1996 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 five percent 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. 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. EXPLORATION, DEVELOPMENT, ACQUISITION AND MARKETING ACTIVITIES See narrative description on pages 9 through 23 of the Anadarko Petroleum Corporation 1996 Annual Report to Stockholders (Annual Report), which is incorporated herein by reference, and see Marketing Strategies, Operating Results and Acquisitions and Divestitures under Item 7 of this Form 10-K. 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).
1996 1995 1994 ----- ----- ----- UNITED STATES Natural gas 164.9 171.7 173.0 Oil and condensate 6,702 7,435 7,958 Natural gas liquids 3,514 3,580 3,493 CANADA* Natural gas -- -- 2.8 Oil and condensate -- -- 345 Natural gas liquids -- -- 19 TOTAL Natural gas 164.9 171.7 175.8 Oil and condensate 6,702 7,435 8,303 Natural gas liquids 3,514 3,580 3,512
- --------------- * In December 1994, the Company sold its Canadian subsidiary. 3 5 The following table shows the Company's annual average sales prices and average production costs. Production costs are per EEB. For this computation, one barrel is the energy equivalent of six thousand cubic feet (Mcf).
1996 1995 1994 ------ ------ ------ UNITED STATES Sales price Natural gas (per Mcf) $ 2.13 $ 1.42 $ 1.72 Oil and condensate (per barrel) 20.21 16.52 15.06 Natural gas liquids (per barrel) 16.86 12.81 11.77 Production cost (per EEB) 3.17 3.19 3.01 CANADA* Sales price Natural gas (per Mcf) -- -- $ 1.70 Oil and condensate (per barrel) -- -- 12.04 Natural gas liquids (per barrel) -- -- 9.47 Production cost (per EEB) -- -- 4.91 TOTAL Sales price Natural gas (per Mcf) $ 2.13 $ 1.42 $ 1.72 Oil and condensate (per barrel) 20.21 16.52 14.93 Natural gas liquids (per barrel) 16.86 12.81 11.75 Production cost (per EEB) 3.17 3.19 3.05
- --------------- * In December 1994, the Company sold its Canadian subsidiary. Additional information on volumes and prices is contained in Analysis of Volumes and Prices under Item 7 of this Form 10-K. Additional 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 -- INTERNATIONAL OVERVIEW In recent years, Anadarko has devoted a portion of its exploration budget to selected international exploration projects. The Company's objective is to add high-potential prospects to its balanced portfolio of domestic plays. Management believes this strategy will help ensure long-term growth for the Company. Exploration and development work is underway in Algeria and exploration work is being conducted in Eritrea, Jordan and Peru. Studies are also being conducted in other prospective areas around the world. See Additional Factors Affecting Business -- Foreign Operations Risk under Item 7 of this Form 10-K. ALGERIA Anadarko's largest international venture involves exploration for and development of liquid hydrocarbons in Algeria's Sahara Desert. Since 1989, Anadarko has drilled 14 successful wells (seven exploration and seven delineation) and discovered five major fields in Algeria. The Company has booked proved reserves of 124.3 MMBbls (net) of crude oil and condensate as of year-end 1996. As of December 31, 1996, the Company's total net investment in Algeria was $232 million of which about $85 million was spent in 1996. Due to the success of the project thus far, these expenditures are currently being capitalized and no provision for loss or impairment has been made. Anadarko plans to invest $191 million in Algeria in 1997. To date, the Company has elected not to insure its investment in Algeria. At the end of 1996, the Company had 5.3 million gross (2.3 million net) acres in Algeria. The accompanying map illustrates the Company's undeveloped acreage, number of productive wells and other data relevant to its properties in Algeria. 4 6 ALGERIA MAP (GRAPHIC MATERIAL OMITTED) ALGERIA Undeveloped Acreage -- 5.3 million acres (2.3 million net) Productive Wells -- 14 (7 net) Fields discovered to date shown graphically HBN Field HBNS Field* BKE Field* EME/EMK Field* Company operated blocks shown graphically 404(*) 208(*) 211 245 Outside operated blocks shown graphically 401 402 - --------------- (*) Drilling activities were conducted in these areas in 1996. 7 Anadarko's interest in the production sharing agreement (PSA) relating to the four Company-operated blocks is 50 percent 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-percent 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 percent 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 also the beneficial owner of 10.1 percent of Anadarko's outstanding common stock. During 1996, SONATRACH received a Provisional Exploitation Authorization (PEA) for wells in the Hassi Berkine (HBN) and the Hassi Berkine South (HBNS) Fields located on Block 404. Anadarko and its partners signed a $177 million Engineering, Procurement and Construction (EPC) contract in 1996 with Brown & Root Condor for Stage I production facilities at the HBNS Field. Four wells have been drilled in the HBNS Field to date and partners expect to drill additional development wells in the Field in 1997. Initial gross production is estimated at about 60,000 barrels of oil per day (BOPD) and is expected to begin in early 1998. Anadarko's 1997 work program in Algeria will focus on development of known discoveries with continued exploration. In 1997, Anadarko plans a two-rig drilling program to drill up to 10 exploration wells. Four exploration wells were drilled in 1996 and three were discoveries. The Company also has a 27.5-percent interest in a PSA covering two additional blocks -- Blocks 401 and 402 -- in the same region, which are operated by BHP Petroleum (Algerie) Inc. An exploration program is underway on these two blocks. In 1996, BHP and Anadarko shot 1,900 kilometers of high-quality seismic and plans call for drilling two exploratory wells during 1997. Political unrest exists in Algeria. Anadarko is closely monitoring the situation and has taken reasonable and prudent steps to ensure the safety of employees working 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 1997 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 and plans to invest about $30 million over the next several years. Anadarko invested about $8 million on its Eritrea work program in 1996 and plans to spend about $8 million in 1997. In 1996, Anadarko completed a high-density aerial gravity and magnetic survey over the exploration area, known as the Zula Block, and acquired 4,500 kilometers of data across the block. During 1997, the data will be analyzed and combined with existing data from other operators. The Company plans to drill its first exploratory well in Eritrea in late 1997 or early 1998. The Company has a 100-percent interest in the project, but may take partners. JORDAN In March 1996, Anadarko and the Natural Resources Authority of the Hashemite Kingdom of Jordan signed a PSA covering 4.2 million acres, known as the Safawi Block. The Company invested about $2 million on its Jordan efforts in 1996 and has budgeted about $4 million for 1997. In 1996, Anadarko conducted a magnetotelluric survey of the area and reprocessed more than 1,000 kilometers of existing seismic data. The information will be used to determine locations for two stratigraphic test wells planned for 1997. These wells will analyze source rock and look for signs of a working petroleum system. Anadarko operates the venture with a 50-percent interest. In February 1997, a subsidiary of Union Texas Petroleum joined Anadarko as a partner in Jordan with a 50-percent interest. PERU In September 1996, Anadarko signed an exploration license agreement with PERUPETRO S.A., the state oil company in Peru. Anadarko has the right to explore a 2.56-million acre area, known as Block 84. Anadarko invested about $2 million in Peru in 1996 and has budgeted about $2 million for 1997. 6 8 In late 1996, Anadarko flew a 7,300 kilometer aerial magnetic survey of the area to help determine specific locations for a 700 kilometer seismic shoot scheduled for 1997. The Company also plans an additional aerial magnetic survey in 1997. Anadarko owns a 100-percent interest in the venture, but may take partners. INDONESIA In September 1996, Anadarko sold its wholly-owned subsidiary, Anadarko Indonesia Company, Jabung, for $36.8 million. Anadarko's net income in 1996 benefited from a gain on the sale of $19.4 million ($12.3 million after income taxes). The sale was a part of the Company's ongoing strategy to divest "non-core" assets and reinvest proceeds in core operating areas. Anadarko and its partners had discovered two fields in Indonesia with estimated proved reserves of 17.7 MMEEBs. CHINA The Company has decided not to pursue exploration efforts in China's Sichuan Province at this time and is in discussions to farm-out the Company's interests. As a result, Anadarko recognized an impairment of $4.6 million in the third quarter of 1996. The Company has a 100-percent interest in the project. PROPERTIES AND ACTIVITIES -- UNITED STATES OFFSHORE OVERVIEW At year-end 1996, the Company's reserves offshore in the Gulf of Mexico were approximately 13 percent of total proved reserves. In 1996, production from these properties was about 119 million cubic feet per day (MMcf/d) of gas and 2,000 BOPD, or 21 percent of the Company's total production volumes. At year-end 1996, Anadarko owned an average 49 percent working interest in 116 lease blocks representing 178,000 gross (56,000 net) acres in developed properties and 435,000 gross (232,000 net) acres in undeveloped properties offshore. The accompanying map illustrates the Company's undeveloped and developed net acreage, number of net producing wells and other data relevant to its offshore properties. EXPLORATION Anadarko is active in exploration projects in both the conventional and sub-salt plays offshore in the Gulf of Mexico. In 1996, Anadarko concentrated its offshore exploration efforts in the sub-salt play. The Company drilled five sub-salt exploratory wells, announcing two discoveries -- Agate, located at Ship Shoal 361, and Monazite, located at Vermilion South Addition 375. Anadarko and Phillips Petroleum Company (operator) each own a 50-percent working interest in the Agate well. Anadarko (operator), Broken Hill Proprietary (BHP) and Phillips each hold a 33.33-percent working interest in the Monazite well. The first sub-salt discovery -- Mahogany -- came on-line in late 1996 (See Development). Anadarko and partners are considering the possibility of tying Agate production to the Mahogany platform. The Company will continue to evaluate its portfolio of 17 prospects in the play and has five ready-to-drill sub-salt prospects in 1997. The Company also drilled three conventional exploration wells offshore in the Gulf of Mexico in 1996 -- all dry holes. Two additional exploration wells began drilling in late 1996. Three conventional exploration wells are planned in 1997. Until 1996, the Company's principal acreage position offshore was in the shallow water (less than 400 feet). However, in 1996, Anadarko made its entrance into the deepwater play (more than 1,000 feet). In Offshore Lease Sale No. 161 in September 1996, Anadarko and partners acquired 12 lease blocks in the Gulf of Mexico's deepwater play with water depths ranging from 2,700-5,700 feet. Anadarko operates 10 of the 12 blocks and plans to acquire 3-D seismic data on seven of the blocks in 1997. One exploratory well may be drilled in the deepwater play in late 1997. In April 1996, Anadarko acquired seven shallow lease blocks in Offshore Lease Sale No. 157. The leases are located in the central Gulf of Mexico. 7 9 OFFSHORE MAP (GRAPHIC MATERIAL OMITTED)
NET NET NET DEVELOPED UNDEVELOPED PRODUCING ACRES ACRES WELLS --------- ----------- --------- OFFSHORE: United States Florida -- 39,827 -- Louisiana* 24,382 146,018 26 Texas 31,559 45,637 23
*Drilling activities were conducted in these areas in 1996. 10 DEVELOPMENT During 1996, the production platform for Mahogany, the industry's first commercial sub-salt development, was installed on Ship Shoal 349, located about 80 miles offshore Louisiana. Production from the 20-slot platform began in December 1996 and should increase as additional development wells are drilled and completed. Phillips (operator) and Anadarko each own a 37.5-percent working interest in the project. Amoco Production Company holds a 25-percent working interest. Conventional operations focused on development drilling and recompletions. The Company participated in the completion of three new wells and 10 additional wells were recompleted. Eight development wells are planned for 1997 offshore in the Gulf of Mexico. Anadarko and partner, Amerada Hess (operator) installed a production platform at South Marsh Island 192, located about 110 miles offshore Louisiana in July 1996. Production began in November 1996. The partners may drill additional wells in the field to increase production volumes. In 1996, Anadarko purchased additional interests in the Brazos A-47 production platform, located about 35 miles offshore Texas. The Company originally owned a 33-percent working interest and obtained the remaining interests in the field in 1996 by assuming responsibility for disposition of the existing wells and platform. At the time of the purchase, the platform's three wells were shut-in. Anadarko plans to drill one development well in the field in 1997. If successful, the Company plans to recomplete one of the existing wells in late 1997. ONSHORE OVERVIEW The Company's onshore reserves are approximately 67 percent of total proved reserves. These reserves are located principally in Kansas, Oklahoma, Texas and Alaska. In 1996, average production from the Company's onshore properties was 332 MMcf/d of gas and 16.3 thousand barrels per day (MBOD), or 77 percent of the Company's total production volumes. Anadarko has 1,289,000 gross (545,000 net) undeveloped lease acres and 1,082,000 gross (795,000 net) developed acres onshore in the United States. 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 Anadarko's single largest asset is its reserves in the Hugoton Embayment, located in southwest Kansas and the Oklahoma Panhandle. Currently, Anadarko owns 566,000 gross (507,000 net) lease acres in the area and operates about 2,000 wells. Anadarko's net production from the Hugoton Embayment in 1996 was 85.8 Bcf of gas and 1.6 MMBbls of oil, or about 42 percent of the Company's total production volumes. In 1996, Anadarko drilled 72 development wells and recompleted 27 wells in the area. Anadarko's activities in the area are concentrated on two areas: the shallow Hugoton gas fields and the deeper oil and gas zones below the shallow Hugoton production. In 1996, Anadarko drilled 17 wells in the Hugoton gas area and 55 wells in the deeper zones. In 1997, Anadarko plans to drill 30 wells in the shallow Hugoton area and 100 wells in the deeper zones. Management believes the increased drilling activity in this area should lead to an increase in the Company's 1997 production volumes. In addition to development drilling, Anadarko's operations in this area have benefited from acquisitions of producing properties, gas gathering systems and waterflood operations. PERMIAN BASIN Drilling activity reached record levels for Anadarko in late 1996 in the Permian Basin of west Texas and eastern New Mexico. In 1996, net oil production from the area was 9,500 BOPD, or about half of the Company's total oil production. In the Permian Basin, Anadarko holds leasehold interests in 237,000 gross (136,000 net) acres and operates about 2,300 active wells. During 1996, Anadarko drilled 182 wells in the area and 10 Company-operated rigs were running at year-end. The Company plans to drill more than 200 wells in 1997. Management believes the increased drilling activity should increase the Company's production volumes from the area in 1997. ALASKA In October 1996, Anadarko and partners announced commerciality of the Alpine Field, located on the North Slope about 50 miles west of Prudhoe Bay. Development work is underway with first production of 30,000 BOPD (gross) expected in 2000 with peak production of 60,000 BOPD (gross) expected in 2001. Anadarko owns a 22-percent working interest in this ARCO Alaska-operated field. In 1996, the partners acquired 5,900 acres near the Alpine Field in State Lease Sale 86A. In addition to the Alpine Field, Anadarko 9 11 and ARCO Alaska acquired six offshore lease blocks in the Beaufort Sea, west of the Alpine Field. A seismic acquisition program is planned for the area in 1997. Anadarko and ARCO Alaska announced formation of a strategic alliance in 1996 to explore the Cook Inlet of southern Alaska. With Anadarko as operator, the team will review ARCO's existing 127,000 lease acres for exploratory prospects. In December 1996, the partners acquired an additional 10 lease blocks (39,000 acres) on the west side of the Cook Inlet and on the Kenai Peninsula. A seismic acquisition program is underway onshore and the partners hope to have a list of exploratory prospects ready to drill in 1998. GOLDEN TREND Activity levels also increased in central Oklahoma's Golden Trend area. In 1996, the Company drilled 15 successful wells in the area, of which 14 were development wells. Based on the successful results of a 1996 infill program, Anadarko has picked up a second drilling rig and plans to add a third rig to accelerate the Company's 31 well program in 1997. GULF COAST Anadarko is active in the onshore Gulf Coast regions of Mississippi, Texas and Louisiana. In 1996, Anadarko participated in a large 3-D seismic acquisition program in the Smackover Play in Wayne County, Mississippi. The data were analyzed in late 1996 and Anadarko is planning to drill up to four exploratory wells in the Smackover Play in 1997. In 1996, Anadarko drilled one successful exploratory well in the Yegua Play and, in 1997, the Company is planning to drill at least one delineation well to offset a 1996 discovery in the Nome Field near Beaumont, Texas. In the Wilcox Play, located in south Texas, Anadarko is evaluating exploratory prospects in Jim Hogg County. During 1996, Anadarko conducted a 3-D seismic survey on a portion of the Company's acreage. The Company plans to drill an exploratory well in the Wilcox Play in mid-1997. Anadarko has a 33.33-percent working interest in the exploratory venture. COAL-BED METHANE Anadarko is exploring coal-bed methane acreage in the Helper Field, located in Carbon County, Utah. Anadarko is planning to drill three exploratory wells on state and private acreage in early 1997. 10 12 ONSHORE MAP (GRAPHIC MATERIAL OMITTED)
NET NET NET DEVELOPED UNDEVELOPED PRODUCING ACRES ACRES WELLS --------- ----------- --------- ONSHORE: United States Alaska* -- 89,701 -- Colorado 3,627 20,581 -- Kansas* 348,968 69,557 1,481 Mississippi* 117 65,191 -- Montana 1,872 250 -- Nebraska 96 319 -- Nevada -- 76,838 -- New Mexico 17,108 1,956 22 North Dakota 40 80 -- Oklahoma* 217,432 62,111 798 Texas* 186,095 46,418 1,787 Utah* 16,836 70,334 35 Wyoming 3,038 41,895 -- OFFICE LOCATIONS: United States Anchorage, Alaska Houston, Texas Liberal, Kansas Midland, Texas
- --------------- * Drilling activities were conducted in these areas in 1996. 13 GATHERING AND PROCESSING GAS GATHERING SYSTEMS Anadarko owns and operates four 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; and the Hugoton Gathering System in southwest Kansas (which includes the Hugoton Gathering Facility (HUGS), the Cimarron River System (CRS) and a portion of the Panhandle Eastern Pipe Line West End gathering assets acquired in 1996). The Company's gathering systems have approximately 2,100 miles of pipeline connecting nearly 2,000 wells and have nearly 500 MMcf/d of gas gathering capacity. In addition, Anadarko owns interests in nine other smaller gas gathering systems. GAS PROCESSING PLANTS Anadarko owns and operates one gas processing plant, the Sneed Gas Processing Plant located in the West Panhandle Field of Texas, and has interests in three other plants. These plants are located within the Company's major areas of gas production. In 1996, the Company closed its Panther Creek Gas Processing Plant located in the Southwest Antioch Field of Oklahoma because the Company arranged to have the gas processed more efficiently in third-party processing facilities. The following table sets forth the average daily gas throughput and NGLs production for the three years ended December 31, 1996. The NGLs production shown in the table below includes production from Company processing as well as third-party processing.
For the Years Ended December 31 ------------------------- 1996 1995 1994 ----- ----- ----- Gas throughput (MMcf/d) 59 64 80 NGLs production (Barrels per day) 9,650 9,530 6,900
DRILLING PROGRAMS The Company's 1996 drilling program again focused on known oil and gas provinces onshore in North America, as well as offshore in the Gulf of Mexico. Onshore activity was concentrated in Kansas, Oklahoma, the Texas Panhandle, the Permian Basin of west Texas and Alaska. Exploration activity consisted of 11 wells onshore in the United States, six wells offshore United States, six wells in Algeria and three wells in Indonesia. Development activity included 254 wells onshore United States and three wells offshore United States. 12 14 DRILLING STATISTICS The following table shows the results of the oil and gas wells drilled and tested:
NET EXPLORATORY NET DEVELOPMENT ------------------------------ ------------------------------ PRODUCTIVE DRY HOLES TOTAL PRODUCTIVE DRY HOLES TOTAL TOTAL ---------- --------- ----- ---------- --------- ----- ----- 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 --- ---- ---- ----- ---- ----- ----- 1995 United States 2.3 2.9 5.2 159.9 40.1 200.0 205.2 Algeria 2.0 0.5 2.5 -- -- -- 2.5 Indonesia 1.0 -- 1.0 -- -- -- 1.0 --- ---- ---- ----- ---- ----- ----- Total 5.3 3.4 8.7 159.9 40.1 200.0 208.7 --- ---- ---- ----- ---- ----- ----- 1994 United States 6.9 8.1 15.0 162.5 16.8 179.3 194.3 Algeria 2.0 0.8 2.8 -- -- -- 2.8 Canada 1.0 1.2 2.2 2.5 0.5 3.0 5.2 --- ---- ---- ----- ---- ----- ----- Total 9.9 10.1 20.0 165.0 17.3 182.3 202.3 --- ---- ---- ----- ---- ----- -----
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, 1996:
UNITED STATES ALGERIA TOTAL -------------- ------------- -------------- GROSS NET GROSS NET GROSS NET ----- ---- ----- --- ----- ---- WELLS IN THE PROCESS OF DRILLING OR ACTIVE COMPLETION Exploration 3 1.9 1 0.5 4 2.4 Development 10 7.8 -- -- 10 7.8 WELLS SUSPENDED OR WAITING ON COMPLETION Exploration 6 2.6 -- -- 6 2.6 Development 47 41.7 -- -- 47 41.7
PRODUCTIVE WELLS As of December 31, 1996, the Company owned productive wells as follows:
UNITED STATES ALGERIA TOTAL -------------- ------------ -------------- GROSS NET GROSS NET GROSS NET ----- ----- ----- --- ----- ----- Oil wells* 4,312 2,279 14 7 4,326 2,286 Gas wells* 2,737 1,892 -- -- 2,737 1,892 ----- ----- -- -- ----- ----- Total 7,049 4,171 14 7 7,063 4,178 ----- ----- -- -- ----- ----- - --------------- * Includes wells containing multiple completions Oil wells 74 25.8 -- -- 74 25.8 Gas wells 182 87.0 -- -- 182 87.0
13 15 EMPLOYEES On December 31, 1996, the Company employed 1,229 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 and Liquidity and Long-term Debt under Item 7 of this Form 10-K. RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The Company's ratios of earnings to fixed charges for the years ended December 31, 1996, 1995 and 1994 were 3.34, 1.24 and 2.11, respectively. 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 and the estimated interest component of rentals. During the three years ended December 31, 1996, there were no shares of preferred stock outstanding. Accordingly, the ratio of earnings to combined fixed charges and preferred stock dividends for each of the three years is the same as the ratio of earnings to fixed charges. 14 16 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 (NGPA) allows 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 in addition to the otherwise maximum lawful price. FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia (D.C. Circuit), which held in June 1988 that FERC failed to provide a reasoned basis for its findings and remanded the case to FERC for further consideration. On December 1, 1993, FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. FERC clarified the effective date of its decision by an order dated May 19, 1994. The clarification provided that the June 28, 1988 effective date applies to tax bills rendered after that date, not sales made on or after that date. Based on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) was charged against income in 1994, in addition to $130,000 (pre-tax) charged against income in 1993. Numerous parties filed appeals of FERC's action in the D.C. Circuit. Anadarko, together with other natural gas producers, challenged FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) FERC's ruling should, in any event, have been applied prospectively. Other parties separately challenged FERC's orders on the grounds that FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996 which holds that producers must make refunds of all Kansas ad valorem taxes collected with respect to production since October 1983. Petitions for rehearing were denied on November 6, 1996. The Company, along with other producing companies, subsequently filed a petition for writ of certiorari with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by FERC). The petition has not been acted on. Williams Natural Gas Company has filed a cross-petition for certiorari seeking to impose refund liability back to December 1, 1978. The Company and other interested parties will oppose this cross-petition. If Supreme Court review of the decision is unsuccessful, the pursuit of other judicial and regulatory relief from the application of this decision to the Company will be considered. The Company is unable at this time to predict the final outcome of this matter. If, however, the August 2, 1996, decision is not reversed or modified by judicial review and if Anadarko is unable to limit application of the decision to the Company, Anadarko estimates the maximum amount of principal and interest at issue (assuming that the October 1983 effective date remains in effect) is about $37 million (pre-tax) as of December 31, 1996. 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. 15 17 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 1996. EXECUTIVE OFFICERS OF THE REGISTRANT
AGE AT END NAME OF 1997 POSITION ---- ---------- -------- Robert J. Allison, Jr. 58 Chairman of the Board, President and Chief Executive Officer Charles G. Manley 53 Senior Vice President, Administration Michael E. Rose 50 Senior Vice President, Finance and Chief Financial Officer John N. Seitz 46 Senior Vice President, Exploration Charles K. Abernathy 54 Vice President, Operations, Offshore Rex Alman III 46 Vice President, Operations, U.S. Onshore James R. Larson 47 Vice President and Controller Richard A. Lewis 53 Vice President, Human Resources J. Stephen Martin 41 Vice President and General Counsel Gregory M. Pensabene 47 Vice President, Government Relations Albert L. Richey 48 Vice President and Treasurer Richard J. Sharples 50 Vice President, Marketing Bruce H. Stover 48 Vice President, Acquisitions William D. Sullivan 41 Vice President, Algeria A. Paul Taylor, Jr. 48 Vice President, Corporate Communications
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. Manley was named Senior Vice President, Administration in 1993. From 1985 to 1993, he served as Anadarko's Vice President of Administration and Employee Relations. He has worked for the Company since 1976. Mr. Rose was named Senior Vice President, Finance and Chief Financial Officer in 1993. He was named Vice President of Finance in 1986. He has worked for the Company since 1978. Mr. Seitz was named Senior Vice President, Exploration in 1995. He was named Vice President, Exploration in January 1993 and Vice President, Exploration, International/Gulf of Mexico, in January 1992. He has worked for the Company since 1977. Mr. Abernathy was named Vice President, Operations, Offshore in 1995. He was named Vice President Operations, International/Offshore, in 1992. He has worked for the Company since 1975. Mr. Alman was named Vice President, Operations, U.S. Onshore, in 1995. In 1993, he was named Vice President, Engineering. He has worked for the Company since 1976. 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. Pensabene joined Anadarko in 1997 as Vice President, Government Relations. Prior to 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 Anadarko, he served as Vice President of Marketing with Maxus Energy Corporation. Mr. Stover was named Vice President, Acquisitions, in 1993. Prior to that position, he served as President and General Manager, Anadarko Algeria Corporation. He has worked for the Company since 1980. Mr. Sullivan was named Vice President, Algeria in 1995. Prior to this position, he served as Vice President Operations, U. S. Onshore. He has worked for the Company since 1981. 16 18 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. 17 19 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, 1996, there were approximately 6,345 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, 1996.
First Second Third Fourth Quarter Quarter Quarter Quarter thousands ------- ------- ------- ------- 1996 $ 4,431 $4,440 $4,448 $ 4,461 1995 $ 4,417 $4,496 $4,501 $ 4,278
The amount of future 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 6 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 1 of the Annual Report, which is incorporated herein by reference. 18 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In Item 7 of this Form 10-K, including the production and reserve disclosures contained therein, the Company has included a number of 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. These forward looking statements are based on the best data available at the time this report was released for printing; however, actual results could differ materially from those expressed or implied by such statements due to a number of factors including those discussed below: commodity pricing and demand, exploration and operating risks, development risks, domestic governmental risks, foreign operations risks and competition. FINANCIAL RESULTS NET INCOME AND REVENUES Anadarko's net income for 1996 increased 379 percent to $100.7 million ($1.70 per share) compared to 1995 net income of $21.0 million (36 cents per share). Revenues for 1996 were $569.0 million, up 31 percent compared to 1995 revenues of $434.0 million. The increase in revenues and net income reflects significantly higher prices for natural gas, crude oil and natural gas liquids (NGLs). Net income in 1996 included a gain of $19.4 million ($12.3 million after income taxes) on the sale of the Company's Indonesia interests, which was partially offset by provisions for impairments of other international properties of $5.4 million ($3.4 million after income taxes). Anadarko's 1994 net income was $41.1 million (70 cents per share). The 1994 results included a non-cash charge of $6.6 million (after income taxes) related to the sale of the Company's Canadian subsidiary. Stated without giving effect to the sale, 1994 net income was $47.7 million (81 cents per share). Revenues for 1994 were $482.5 million. The decreases in revenues and net income in 1995 compared to 1994 reflect lower prices for natural gas in 1995 and lower production volumes of crude oil in 1995 primarily due to property sales in 1994. SELECTED FINANCIAL DATA
1996 1995 1994 millions except per share amounts ------ ------ ------ Revenues $569.0 $434.0 $482.5 Costs and expenses 373.4 369.5 393.8 Interest expense 39.0 36.4 26.1 Net income 100.7 21.0 41.1 Earnings per share $ 1.70 $ 0.36 $ 0.70
COSTS AND EXPENSES Over the past three years, Anadarko's expense levels have remained relatively constant due to attention and focus on cost controls, cost savings plans and application of new technology to field production operations. In 1996, excluding the effect of the sale of the Company's Indonesia interests, Anadarko's costs and expenses increased six percent compared to 1995. Costs and expenses in 1996 were primarily impacted by the following factors: (1) Operating expenses increased $9.5 million (nine percent) due primarily to costs associated with gas gathering operations. (2) Administrative and general expenses were up $8.2 million (14 percent) due to higher costs associated with the Company's growing workforce. (3) The Company recorded provisions for impairments of international properties of $5.4 million in 1996. (These impairments were offset by the gain on a sale of the Company's Indonesia assets of $19.4 million.) The 1996 impairments reflect costs associated with the review and study of potential exploration projects in China and several other foreign countries that the Company has elected not to pursue. This compares to $2.6 million of provisions for impairments of international and geothermal properties in 1995. 19 21 The Company's 1995 costs and expenses decreased five percent compared to 1994, excluding the sale of the Company's Canadian subsidiary in 1994. There were several reasons: (1) Operating expenses decreased $4.4 million (four percent) due primarily to lower oil and gas operating expenses. (2) Depreciation, depletion and amortization (DD&A) expense decreased $8.1 million (five percent) due to a two percent decrease in gas production volumes and a 10 percent decrease in crude oil production partly due to property sales in late 1994. In addition, the DD&A rate decreased four percent due to additional reserves booked during the year. (3) Administrative and general expenses were down $1.7 million (three percent) due to increases in overhead capitalized and amounts charged to other working interest partners. (4) Other taxes decreased $4.1 million (10 percent) due primarily to lower natural gas prices and lower production volumes, which resulted in lower production and severance taxes. (5) Provisions for impairments of international and geothermal properties decreased $0.5 million (16 percent). These impairments in 1995 primarily reflect costs associated with geothermal exploration projects and the review and study of potential exploration projects in several foreign countries, which the Company elected not to pursue. COSTS AND EXPENSES
1996 1995 1994 millions ------ ------ ------ Operating expenses $115.3 $105.8 $110.2 Administrative and general 67.7 59.5 61.1 DD&A 167.2 164.7 172.8 Other taxes 37.2 36.9 41.0 (Gains) losses and impairments related to international and geothermal properties (14.0) 2.6 8.7 ------ ------ ------ Total $373.4 $369.5 $393.8 ------ ------ ------
INTEREST EXPENSE Anadarko's gross interest expense has increased 27 percent over the past three years due primarily to higher levels of borrowings for capital expenditures, including producing property acquisitions. Gross interest expense in 1996 was up six percent compared to 1995 primarily due to higher average borrowings in 1996. Gross interest expense in 1995 increased 19 percent compared to 1994 primarily due to higher average borrowings and interest rates in 1995. Net interest expense benefited in 1994 from an option sold for an interest rate swap agreement that was not exercised by the purchaser, which reduced interest expense in 1994 by $2.6 million. See Liquidity and Long-term Debt. INTEREST EXPENSE
1996 1995 1994 millions ------ ------ ------ Gross interest expense $ 56.0 $ 52.6 $ 44.2 Interest rate swap agreement -- -- (2.6) Capitalized interest (17.0) (16.2) (15.5) ------ ------ ------ Net interest expense $ 39.0 $ 36.4 $ 26.1 ------ ------ ------
ANALYSIS OF VOLUMES AND PRICES NATURAL GAS Anadarko's natural gas production volumes in 1996 decreased four percent compared to 1995 production primarily due to sales of producing properties in 1995 and natural decline. Gas production volumes in 1994 were at record levels. The Company's average U.S. wellhead gas price in 1996 was up 50 percent from 1995. Anadarko's average U.S. wellhead gas price in 1995 had declined 17 percent from 1994. Management 20 22 expects the Company's natural gas production volumes in 1997 will increase due to increased levels of drilling activity in the Company's core operating areas. During 1996, Anadarko marketed more third-party gas volumes than Company gas production volumes. The Company marketed 200 Bcf of third-party gas in 1996 compared to 109 Bcf in 1995 and 84 Bcf in 1994. The significant increase in third-party sales is a key marketing strategy for the Company. The gas price weakness that began in late 1994 continued until mid-December 1995, when a surge in heating demand caused by extreme winter conditions sent gas prices significantly higher. Natural gas markets were extremely volatile in 1996, with the Company's average price fluctuating from a low of $1.66 per Mcf in September 1996 to a high of $3.49 per Mcf in December 1996. The increase in 1996 prices can be attributed to several factors: temperatures in the winter of 1995-96 were colder than normal in the northeast and midwest heating markets; the nation's storage volumes were lower at the beginning of the 1996 heating season compared to 1995 due to heavy storage withdrawals and higher prices for natural gas in the typical injection season (May-October) that prohibited storage volumes from reaching traditional levels; and the 1996 heating season opened with colder than normal temperatures. This experience shows no one can predict the precise movement of U.S. natural gas prices. In view of this, Anadarko has developed 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 U.S. AVERAGE PRICES
1996 1995 1994 ----- ----- ----- FIRST QUARTER Bcf 43.7 41.3 48.2 MMcf/d 480 459 536 Price per Mcf $1.96 $1.30 $2.03 SECOND QUARTER Bcf 40.4 43.5 43.0 MMcf/d 444 479 472 Price per Mcf $2.04 $1.46 $1.74 THIRD QUARTER Bcf 39.8 42.3 40.9 MMcf/d 433 460 445 Price per Mcf $1.95 $1.27 $1.59 FOURTH QUARTER Bcf 41.0 44.5 43.7 MMcf/d 446 484 475 Price per Mcf $2.56 $1.64 $1.47
- --------------- Mcf -- thousand cubic feet MMcf/d -- million cubic feet per day Bcf -- billion cubic feet CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS Anadarko's crude oil and condensate production in 1996 was down 10 percent from 1995. The 1995 oil and condensate production volumes declined 10 percent compared to 1994. The decreases in oil production over the last three years are due primarily to property sales in 1994 and 1995 and normal production declines associated with mature oil fields. Anadarko's average U.S. crude oil price for 1996 increased 22 percent compared to 1995. Crude oil prices in 1995 were up 10 percent compared to 1994. Crude oil prices have continued to be strong in the first quarter of 1997 in response to seasonal demand for heating oils. Prices for January 1997 averaged about $23.00 per barrel. 21 23 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 1996 decreased two percent compared to 1995 volumes. The 1995 NGLs sales volumes were two percent higher than 1994 NGLs sales. The 1996 average price was up 32 percent compared to 1995. The 1995 NGLs average price was nine percent higher than the 1994 average price. ANNUAL VOLUMES AND U.S. AVERAGE PRICES
1996 1995 1994 ------ ------ ------ NATURAL GAS (BCF) 164.9 171.7 175.8 MMcf/d 450 471 482 Price per Mcf $ 2.13 $ 1.42 $ 1.72 CRUDE OIL AND CONDENSATE (MBBLS) 6,702 7,435 8,303 MBbls/d 18 20 23 Price per barrel $20.21 $16.52 $15.06 NATURAL GAS LIQUIDS (MBBLS) 3,514 3,580 3,512 MBbls/d 10 10 10 Price per barrel $16.86 $12.81 $11.77
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. 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) (formerly Anadarko Trading Company) -- is a full-service marketing company offering supply assurance, competitive pricing and tailored services to its customers. Most of the Company's gas production is sold through AES. Additionally, AES purchases and sells third party gas. In 1996, sales of third-party gas exceeded sales of the Company's gas production volumes. 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 expanded 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 Currently, all of Anadarko's revenues are derived from domestic production. Presently, the Company'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, estimated at about 60,000 barrels of oil per day (BOPD) (gross) is expected in early 1998. Anadarko's marketing department is currently exploring international markets for the Saharan Blend crude oil. 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 more than $85 million to build or acquire gas gathering systems over the last five years. Anadarko owned and operated four major gas gathering systems and one gas processing plant at the end of 1996. In addition, the Company owned interests in nine other gathering systems and three other processing plants at year-end 1996. In March 1996, Anadarko closed on the second of two recent acquisitions from PanEnergy Corp, formerly Panhandle Eastern Corporation. The purchase price of the two systems was about $35 million. These two gathering systems tripled the Company's overall gas gathering capacity to over 480 MMcf/d and serve approximately 1,900 wells. Approximately 75 percent of the gas flowing through these systems is from Anadarko-operated wells. During 1996, Anadarko invested an additional $15 million to lower line pressure and 22 24 increase deliverability from systems in southwest Kansas. Anadarko plans to invest an additional $45 million on enhancing its gathering systems over the next several years and improve access to multiple pipeline market hubs. Anadarko remains active in the NGLs business, primarily as a result of its gas gathering and processing operations. The Company generally sells NGLs on a monthly basis as they are produced. However, some NGLs are held in inventory for sale at a later date. Anadarko generally markets NGLs under short-term contracts. Anadarko had 4,600 barrels of NGLs in inventory at the end of 1996 compared to 66,600 barrels at the end of 1995. USE OF DERIVATIVES 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. See Note 6 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. OPERATING RESULTS DRILLING ACTIVITY During 1996, Anadarko participated in a total of 283 gross wells, including 166 oil wells, 65 gas wells and 52 dry holes. This compares to 258 wells (114 oil wells, 98 gas wells and 46 dry holes) in 1995 and 281 wells (147 oil wells, 95 gas wells and 39 dry holes) in 1994. During 1996, the Company made several significant well completions in its exploration and development drilling program which are discussed in the narrative descriptions on pages 9 through 23 of the 1996 Annual Report to Stockholders, incorporated herein by reference, and Properties and Activities under Item 1 of this Form 10-K. DRILLING PROGRAM ACTIVITY
GAS OIL DRY TOTAL ---- ----- ---- ----- 1996 EXPLORATORY Gross 7 8 11 26 Net 4.9 3.4 6.3 14.6 1996 DEVELOPMENT Gross 58 158 41 257 Net 38.3 125.2 37.9 201.4 1995 EXPLORATORY Gross 3 9 5 17 Net 1.7 3.6 3.4 8.7 1995 DEVELOPMENT Gross 95 105 41 241 Net 72.6 87.3 40.1 200.0
- --------------- 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 23 25 profitability depends on the cost of finding oil and gas reserves. The Company believes its performance in both areas is excellent. For the 15th 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 1996, Anadarko's worldwide reserve replacement was 299 percent of total production, which was 37.7 million energy equivalent barrels (MMEEBs). The Company's worldwide reserve replacement in 1995 was 226 percent of total production and in 1994 was 308 percent of total production. Over the last five years, the Company's annual reserve replacement has averaged 241 percent of annual production volumes. In 1996, the Company replaced 215 percent of its production volumes with U.S. reserves. The Company's U.S. reserve replacement for the five-year period 1992-96 was 183 percent of Anadarko's U.S. production. By comparison, the most recent published U.S. industry average (1991-95) was 84 percent. (Source: Department of Energy.) Anadarko's U.S. reserve replacement performance for the same period 1991-95 was 175 percent of production. Industry data for 1996 are not yet available. COST OF FINDING For 1996, Anadarko's worldwide finding cost for proved reserves was $2.76 per EEB compared to $2.74 per EEB in 1995 and to $2.76 per EEB in 1994. The Company's low worldwide finding costs are due to the success of the Company's exploration programs. Anadarko's U.S. finding cost for 1996 was $3.23 per EEB compared to $4.26 per EEB in 1995 and $3.57 per EEB in 1994. 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 1992-96, Anadarko's U.S. cost of finding was $3.78 per EEB. Anadarko's worldwide finding cost for the same five-year period was $3.25 per EEB. Industry data for 1996 are not yet available. For comparison purposes, the most recent published five-year average (1991-95) for the industry shows U.S. average cost of finding was $4.77 per EEB and worldwide cost of finding was $5.19 per EEB. (Source: Arthur Andersen, SC) For the same period, Anadarko's U.S. finding cost was $3.74 per EEB and worldwide finding cost was $3.39 per EEB. PROVED RESERVES At the end of 1996, Anadarko's proved reserves were 601.3 MMEEBs compared to 526.3 MMEEBs at year-end 1995 and 476.4 MMEEBs at year-end 1994. Reserves increased by 14 percent in 1996 compared to 1995, primarily due to exploration and development drilling and improved recovery. Anadarko's proved reserves have grown by 54 percent 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. The Company's proved natural gas reserves at year-end 1996 were 1.82 trillion cubic feet (Tcf) compared to 1.84 Tcf at year-end 1995 and 1.91 Tcf at year-end 1994. Anadarko's crude oil, condensate and NGLs reserves at year-end 1996 increased 36 percent to 297.8 MMBbls compared to 219.2 MMBbls at year-end 1995. This compares to reserves of 157.4 MMBbls at year-end 1994. Crude oil reserves have increased 279 percent over the last three years due to large discoveries in Algeria, the Gulf of Mexico and Alaska. Crude oil, condensate and NGLs reserves now comprise 50 percent of the Company's proved reserves compared to about 42 percent at year-end 1995 and about 33 percent at year-end 1994. Creating balance between crude oil reserves and natural gas reserves was a key strategy for the Company. 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, 1996, the present value (discounted at 10 percent) of future net revenues from Anadarko's proved reserves was $5.27 billion, before income taxes, and was $3.40 billion, after income taxes, (stated in accordance with the regulations of the Securities and Exchange Commission and Financial Accounting Standards Board). The 1996 estimated present value of future net revenues, after income taxes, increased 96 percent compared to 1995 primarily due to increases in commodity prices for oil and gas at year-end 1996 and the additions of proved reserves related to successful drilling worldwide. See Supplemental Information on Oil and Gas Exploration and Production Activities in the Consolidated Financial Statements under Item 8 of this Form 10-K. 24 26 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. ACQUISITIONS AND DIVESTITURES Several years ago, the Company embarked on an asset management program to sell "non-core" properties and invest the proceeds into core operating areas around the world in order to focus financial resources and personnel on the Company's core areas of operation. Over the past three years, the Company has sold properties, either as a strategic exit or by asset rationalization in existing core areas, with proceeds totaling $216 million. Reserves associated with these sales and trades are 47.7 MMEEBs, resulting in unit proceeds of $4.53 per EEB. During the same time period, Anadarko has acquired through purchases and trades 25.5 MMEEBs of proved reserves at a cash cost of $48 million, or $1.88 per EEB. 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 or $2.19 per EEB. In 1996, acquisitions of producing properties totaled $5.3 million and 1.1 MMEEBs, at a cost of $4.72 per EEB. The largest acquisition was a package of properties in the Oklahoma Panhandle portion of the Hugoton Embayment. This package includes significant undeveloped acreage on which Anadarko plans to conduct a 3-D seismic survey and drill wells in 1997. Total 1995 proceeds from divestitures were $66.6 million, which included assets in north Texas and the Permian Basin of southeast New Mexico and west Texas. Reserves sold equaled 11.9 MMEEBs, resulting in unit proceeds of $5.60 per EEB. The largest sale in 1995 was the Company's interest in 25 "non-strategic" fields to other operators for $56.8 million. In 1995, Anadarko acquired 9.8 MMEEBs of reserves at a cost of $26 million, or $2.66 per EEB. The largest acquisition was a package of properties in west Texas purchased from Shell Western E&P. The Company also purchased for $9.5 million a water supply system in west Texas which reduced operating costs and enabled expansions of several important waterflood projects. During 1994, Anadarko sold assets in the Arkoma Basin, the Rocky Mountains and all of the Company's Canadian holdings. Reserves associated with the 1994 sales and trades were 17.1 MMEEBs, with proceeds of about $109 million, or $6.40 per EEB. PRODUCING PROPERTIES AND LEASES The Company owns 2,286 net producing oil wells and 1,892 net producing gas wells worldwide. The following schedule shows the number of developed and undeveloped acres in which Anadarko held interests at December 31, 1996. ACREAGE
Developed Undeveloped Total --------------- --------------- --------------- Gross Net Gross Net Gross Net thousands ----- ----- ----- ----- ----- ----- United States Onshore 1,082 795 1,289 545 2,371 1,340 Offshore 178 56 435 232 613 288 ----- ----- ----- ----- ----- ----- Total 1,260 851 1,724 777 2,984 1,628 ----- ----- ----- ----- ----- ----- Algeria -- -- 5,292 2,324 5,292 2,324 Eritrea -- -- 6,700 6,700 6,700 6,700 Jordan -- -- 4,200 4,200 4,200 4,200 Peru -- -- 2,557 2,557 2,557 2,557 China -- -- 2,100 2,100 2,100 2,100
25 27 REGULATORY MATTERS ENVIRONMENTAL The Company's oil and gas operations and properties are subject to numerous federal, state and local laws and regulations relating to environmental protection. 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 drilling and production activities, the discharge and disposition of waste materials, offshore oil and gas operations, the reclamation and abandonment of wells 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 rules and regulations. Compliance with environmental laws and regulations has not had a material adverse 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 adverse 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 have authority to issue permits for the drilling of wells, regulate the spacing of wells, 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 of the Department of Interior and, with regard to certain federal leases, with prior approval of drill site locations by the Environmental Protection Agency. In addition to the standard permit process, federal leases may require a complete environmental impact assessment prior to authorizing an exploration or development plan. ADDITIONAL FACTORS AFFECTING BUSINESS COMMODITY PRICING AND DEMAND Crude oil prices continue to be affected by political developments worldwide, pricing decisions of the Organization of Petroleum Exporting Countries (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 capital spending projects and 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 United States 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 workmen'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 in the Gulf of Mexico, Alaska and internationally. 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 arrange- 26 28 ments 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 United States 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 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, as well as, 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. Competition for drilling rigs is keen in certain areas of the Gulf of Mexico. During 1996 and 1995, the Company experienced increases in drilling rig rental rates due to the tight rig market in the Gulf of Mexico. CAPITAL EXPENDITURES, LIQUIDITY AND LONG-TERM DEBT CAPITAL EXPENDITURES Anadarko's total capital spending in 1996 was $427 million, an increase of 29 percent over a 1995 capital spending level of $331 million and about equal to 1994 spending of $423 million. Capital spending in 1996 did not reach the budget initially set at $485 million, largely due to construction delays in Algeria. The 1995 spending level was lower than originally anticipated due to lower gas prices and deferred drilling opportunities in the Gulf of Mexico's sub-salt play. The 1994 spending included $72 million to acquire 26 offshore lease blocks in the Gulf of Mexico at the Minerals Management Service Offshore Lease Sale No. 147 in March 1994. The largest categories of capital spending in 1996, 1995 and 1994 were for exploration and development activities in the U.S. and overseas. The Company funded its capital investment program in 1996, 1995 and 1994 primarily through cash flow, plus proceeds from property sales and increases in long-term debt. CAPITAL EXPENDITURES
1996 1995 1994 millions ------ ------ ------ Exploration $141.8 $ 97.9 $196.0 Development 148.9 96.8 128.8 Acquisitions of producing properties 5.3 26.0 18.1 Gathering and other 64.0 52.4 25.1 Interest and overhead 67.2 58.1 54.7 ------ ------ ------ Total $427.2 $331.2 $422.7 ------ ------ ------
Capital spending for 1997 has been set at about $560 million, an increase of 31 percent over 1996 and the highest anticipated spending level in Company history. The higher capital budget is driven by increased 27 29 opportunities in both U.S. and international exploration and development drilling programs. The 1997 budget includes $159 million for exploration, $300 million for development, $27 million for gathering and other, and $74 million for capitalized interest and overhead. Although no dollars are budgeted for acquisitions in 1997, the Company will look at opportunities and, depending on conditions of the market, may elect to purchase properties. Historically, the Company has based capital spending on anticipated cash flows including proceeds from divestitures, but certain portions of the capital spending budget -- such as acquisitions -- have been financed from time to time. In addition, the Company's budget is adjusted periodically to reflect changes in market prices for oil and natural gas. The Company believes cash flows, including proceeds from divestitures, and existing credit facilities will be sufficient to meet capital and operating requirements, including any contingencies, during 1997. LIQUIDITY AND LONG-TERM DEBT At year-end 1996, Anadarko's total debt was $731 million. This compares to year-end 1995 total debt of $674 million. In January 1997, the Company entered into a sale/lease back agreement for $88.4 million involving 145 natural gas compressors in Anadarko's major mid-continent gathering systems. The transaction monetized Company assets and took advantage of current low interest rates. Proceeds from the transaction were used for general corporate purposes. During 1996, Anadarko offered two "Century Bonds". In September 1996, the Company issued $100 million principal amount of 7.73% Debentures due 2096. Each Debenture holder has the one-time right to have the Company purchase on September 15, 2026, all or a portion of, the Debentures, at a purchase price equal to par plus accrued and unpaid interest. In November 1996, the Company issued $100 million principal amount of 7 1/4% Debentures due November 15, 2096. During the fourth quarter of 1996, Anadarko entered into a 10-year swap agreement with a notional value of $100 million 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 financed in 1996. In March 1995, Anadarko issued $100 million principal amount of 7 1/4% Debentures due 2025. Each Debenture holder has the one-time right to have the Company purchase on March 15, 2000, all or a portion of, the Debenture at a purchase price equal to par plus accrued and unpaid interest. In May 1994, Anadarko entered into a $250 million Revolving Credit Agreement and a $150 million 364-Day Credit Agreement with a group of commercial banks. As of December 31, 1996 and 1995, there were no outstanding borrowings under these agreements. In May 1995, the Company issued one million shares of common stock to the Anadarko Petroleum Corporation Executives and Directors Benefits Trust (Trust) to secure present and future unfunded benefit obligations of the Company. The shares issued to the Trust are not considered outstanding for quorum or voting calculations, but the Trust will receive dividends. The shares are included in the calculation of earnings per share under the treasury stock method and have no dilutive effect. Anadarko's net cash from operating activities in 1996 was up 27 percent to $315 million compared to $248 million in 1995. Net cash from operating activities in 1994 was $240 million. CHANGES IN ACCOUNTING PRINCIPLES STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based Compensation" defines a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS No. 123 allows an entity to continue to measure compensation costs for these plans using the current method of accounting. Anadarko has elected to continue to use the current method of accounting for employee stock compensation plans and discloses in Note 7 of the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K, the fair value as defined in SFAS No. 123. 28 30 DIVIDENDS In 1996, Anadarko paid $17.8 million in dividends to its common stockholders (7.5 cents per share per quarter). The dividend amount was $17.7 million in 1995 (7.5 cents per share per quarter) and $17.6 million (7.5 cents per share per quarter) in 1994. Anadarko has paid a dividend continuously since becoming an independent company in 1986. The Revolving Credit Agreement and the 364-Day Credit Agreement require a minimum balance of $650 million to be maintained in retained earnings. As a result, the amount of retained earnings available for dividends as of December 31, 1996 was $364.1 million. The amount of future 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. 29 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANADARKO PETROLEUM CORPORATION INDEX CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Management 31 Independent Auditors' Report 32 Statement of Income, Three Years Ended December 31, 1996 33 Balance Sheet, December 31, 1996 and 1995 34 Statement of Stockholders' Equity, Three Years Ended December 31, 1996 35 Statement of Cash Flows, Three Years Ended December 31, 1996 36 Notes to Consolidated Financial Statements 37 Supplemental Quarterly Information 54 Supplemental Information on Oil and Gas Exploration and Production Activities 55
30 32 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 judgements 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. [ROBERT J. ALLISON, JR.] Robert J. Allison, Jr. Chairman, President and Chief Executive Officer [MICHAEL E. ROSE] Michael E. Rose Senior Vice President and Chief Financial Officer 31 33 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, 1996 and 1995, 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, 1996, as contained in the 1996 Form 10-K Annual Report. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. [KPMG PEAT MARWICK LLP] Houston, Texas January 30, 1997 32 34 ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1996 1995 1994 ----------------------- ---- ---- ---- thousands REVENUES Gas sales $362,599 $259,849 $313,470 Oil and condensate sales 139,936 125,980 125,640 Natural gas liquids and other 66,493 48,185 43,366 -------- -------- -------- Total 569,028 434,014 482,476 -------- -------- -------- COSTS AND EXPENSES Operating expenses Note 11 115,308 105,829 110,202 Administrative and general 67,673 59,477 61,138 Depreciation, depletion and amortization 167,183 164,742 172,825 Other taxes Note 12 37,205 36,892 40,973 (Gains) losses and impairments related to international and geothermal properties Notes 2 and 5 (13,986) 2,600 8,667 -------- -------- -------- Total 373,383 369,540 393,805 -------- -------- -------- Operating Income 195,645 64,474 88,671 OTHER INCOME AND (EXPENSES) Other income 1,118 1,150 2,123 Interest expense Notes 5 and 6 (38,973) (36,358) (26,128) -------- -------- -------- Income before Income Taxes 157,790 29,266 64,666 INCOME TAXES Note 13 57,070 8,231 23,567 -------- -------- -------- NET INCOME $100,720 $ 21,035 $ 41,099 -------- -------- -------- PER COMMON SHARE Net income $ 1.70 $ 0.36 $ 0.70 Dividends Note 7 $ 0.30 $ 0.30 $ 0.30 -------- -------- -------- AVERAGE NUMBER OF SHARES OUTSTANDING Note 7 59,247 58,935 58,776 -------- -------- --------
See accompanying notes to consolidated financial statements. 33 35 ANADARKO PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEET
December 31 1996 1995 ----------- ---- ---- thousands ASSETS CURRENT ASSETS Cash and cash equivalents Note 3 $ 14,601 $ 17,090 Accounts receivable 226,824 127,943 Inventories Note 4 24,540 14,859 Prepaid expenses 3,843 3,306 ---------- ---------- Total 269,808 163,198 ---------- ---------- PROPERTIES AND EQUIPMENT Original cost 4,036,165 3,717,672 Less accumulated depreciation, depletion and amortization 1,738,709 1,628,922 ---------- ---------- Net properties and equipment -- based on the full cost method of accounting for oil and gas properties Note 5 2,297,456 2,088,750 ---------- ---------- DEFERRED CHARGES 16,766 15,099 ---------- ---------- $2,584,030 $2,267,047 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable Trade and other $ 244,219 $ 153,502 Bank 17,995 12,849 Accrued expenses Interest 12,812 10,729 Taxes and other 10,227 13,393 ---------- ---------- Total 285,253 190,473 ---------- ---------- LONG-TERM DEBT Note 6 731,049 674,008 ---------- ---------- DEFERRED CREDITS Deferred income taxes Note 13 498,973 449,798 Other 54,675 43,074 ---------- ---------- Total 553,648 492,872 ---------- ---------- STOCKHOLDERS' EQUITY Common stock, par value $0.10 (200,000,000 shares authorized, 60,525,699 and 60,016,045 shares issued as of December 31, 1996 and 1995, respectively) 6,098 6,047 Preferred stock, par value $1.00 (2,000,000 shares authorized, no shares issued as of December 31, 1996 and 1995) -- -- Paid-in capital 335,848 304,125 Retained earnings (as of December 31, 1996, $364,080,000 was not restricted as to the payment of dividends) 739,395 656,455 Deferred compensation (3,444) (2,808) Executives and directors benefit trust, at market value (1,000,000 shares as of December 31, 1996 and 1995) (63,813) (54,125) Treasury stock (70 shares as of December 31, 1996) (4) -- ---------- ---------- Total 1,014,080 909,694 ---------- ---------- COMMITMENTS AND CONTINGENCIES Notes 10, 14, 15 and 16 -- -- ---------- ---------- $2,584,030 $2,267,047 ---------- ----------
See accompanying notes to consolidated financial statements. 34 36 ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31 1996 1995 1994 ----------------------- ---- ---- ---- thousands COMMON STOCK Balance at beginning of year $ 6,047 $ 5,931 $ 5,912 Common stock issued 51 116 19 ---------- -------- -------- Balance at end of year 6,098 6,047 5,931 ---------- -------- -------- PAID-IN CAPITAL Balance at beginning of year 304,125 243,976 236,001 Common stock issued 22,035 6,124 7,975 Issuance of stock and revaluation to market for executives and directors benefit trust 9,688 54,025 -- ---------- -------- -------- Balance at end of year 335,848 304,125 243,976 ---------- -------- -------- RETAINED EARNINGS Balance at beginning of year 656,455 653,112 625,308 Net income 100,720 21,035 41,099 Foreign translation losses -- -- (1,686) Cumulative translation losses transferred to the income statement upon disposition of foreign subsidiary -- -- 6,065 ---------- -------- -------- 757,175 674,147 670,786 Dividends paid (17,780) (17,692) (17,635) Issuance of treasury stock -- -- (39) ---------- -------- -------- Balance at end of year 739,395 656,455 653,112 ---------- -------- -------- DEFERRED COMPENSATION Balance at beginning of year (2,808) (3,420) (3,055) Issuance of restricted stock (2,463) (1,106) (1,668) Amortization of restricted stock 1,827 1,718 1,303 ---------- -------- -------- Balance at end of year (3,444) (2,808) (3,420) ---------- -------- -------- EXECUTIVES AND DIRECTORS BENEFIT TRUST Balance at beginning of year (54,125) -- -- Issuance of stock -- (42,375) -- Revaluation to market (9,688) (11,750) -- ---------- -------- -------- Balance at end of year (63,813) (54,125) -- ---------- -------- -------- TREASURY STOCK Balance at beginning of year -- -- -- Purchase of treasury stock (693) (427) (405) Issuance of treasury stock 689 427 405 ---------- -------- -------- Balance at end of year (4) -- -- ---------- -------- -------- STOCKHOLDERS' EQUITY Notes 7 and 8 $1,014,080 $909,694 $899,599 ---------- -------- --------
See accompanying notes to consolidated financial statements. 35 37 ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1996 1995 1994 ----------------------- ---- ---- ---- thousands CASH FLOW FROM OPERATING ACTIVITIES Net income $ 100,720 $ 21,035 $ 41,099 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 167,183 164,742 172,825 Amortization of restricted stock 1,827 1,718 1,303 Deferred income taxes 54,231 11,544 15,912 Provisions for impairments of international and geothermal properties 5,400 2,600 3,100 Cumulative translation losses transferred to the income statement upon disposition of foreign subsidiary -- -- 6,065 --------- -------- --------- 329,361 201,639 240,304 Increase in accounts receivable (98,881) (12,762) (4,695) Increase in inventories (9,681) (1,439) (3,869) Increase in accounts payable -- trade and other and accrued expenses 89,634 63,760 1,175 Other items -- net 4,108 (2,902) 6,772 --------- -------- --------- Net cash provided by operating activities 314,541 248,296 239,687 --------- -------- --------- CASH FLOW FROM INVESTING ACTIVITIES Additions to properties and equipment (427,234) (331,214) (422,718) Sales and retirements of properties and equipment 46,178 62,847 95,370 --------- -------- --------- Net cash used in investing activities (381,056) (268,367) (327,348) --------- -------- --------- CASH FLOW FROM FINANCING ACTIVITIES Additions to debt 200,000 205,100 180,281 Retirements of debt (142,959) (160,373) (93,500) Increase (decrease) in accounts payable, banks 5,146 (1,438) 959 Dividends paid (17,780) (17,692) (17,635) Issuance of common stock 19,623 5,034 6,326 Issuance of treasury stock 689 427 366 Purchase of treasury stock (693) (427) (405) --------- -------- --------- Net cash provided by financing activities 64,026 30,631 76,392 --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,489) 10,560 (11,269) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,090 6,530 17,799 --------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,601 $ 17,090 $ 6,530 --------- -------- ---------
See accompanying notes to consolidated financial statements 36 38 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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 Gathering Company; Anadarko Energy Services Company (formerly Anadarko Trading Company); and, Anadarko Algeria Corporation (Anadarko Algeria). In December 1994, the Company sold its wholly-owned subsidiary, Anadarko Petroleum of Canada Ltd. (Anadarko Canada). See Note 2. 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 judgements 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 revenues generally are recorded using the sales method, whereby the Company recognizes natural gas revenues based on the amount of gas sold to purchasers on its behalf. All other revenues also are recorded using the sales method. PRICE RISK MANAGEMENT Anadarko's financial instruments currently are comprised of futures, swaps and options. Anadarko uses commodity derivative financial instruments to minimize the impact of price fluctuations for the Company and its customers. To qualify as a hedge, these instruments must correlate to anticipated future sales such that the Company's exposure to the effects of commodity price changes is reduced. The gains and losses on these instruments are included in the valuation of the transactions being hedged upon completion of the transactions. Gains and losses on derivatives not classified as hedges are accounted for on a current basis. Unrealized gains and losses are recorded as assets and liabilities on the balance sheet. See Note 6. 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 acquisition, 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. Unsuccessful geothermal exploration costs are charged to expense. 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. 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. 37 39 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) 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, excluding Anadarko Canada, files a U.S. consolidated federal income tax return. Deferred federal and state 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. FOREIGN CURRENCY TRANSLATION ADJUSTMENTS The financial statements of Anadarko Canada were translated to U.S. dollars. All balance sheet accounts were translated at the current exchange rate and income statement items were translated at the average exchange rate for the year; resulting translation adjustments were made directly to a separate component of stockholders' equity. Transaction adjustments were reported in net income. In prior years, deferred federal income taxes were not provided on translation adjustments because the earnings of Anadarko Canada were considered to be permanently invested. Due to the sale of Anadarko Canada in 1994, the cumulative foreign currency translation losses were transferred from stockholders' equity and included in disposition of foreign subsidiary on the income statement. See Note 2. 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 Effective January 1, 1996, Anadarko adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based Compensation". SFAS No. 123 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 measure compensation costs for these plans using the current method of accounting. Anadarko has elected to continue to use the current method of accounting for employee stock compensation plans and disclose the fair values as defined in SFAS No. 123. See Note 7. 2. DISPOSITION OF FOREIGN SUBSIDIARIES In September 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. In December 1994, Anadarko sold Anadarko Canada for $57,937,000. In connection with the sale, Anadarko recorded a charge of $5,567,000 before income taxes ($6,635,000 after income taxes) primarily due to a non-cash charge of $6,065,000 for cumulative foreign currency translation losses previously recorded as a reduction in stockholders' equity. The Company recorded U.S. income tax expense of $17,454,000 on the sale. The Company also reversed previously provided deferred Canadian taxes in the amount of $16,386,000 for a net income tax expense associated with the sale of $1,068,000. 3. CASH AND CASH EQUIVALENTS As of December 31, 1996 and 1995, cash and cash equivalents included $321,000 and $222,000, respectively, held by the Executives and Directors Benefits Trust. In addition, as of December 31, 1995, cash and cash equivalents included $4,127,000 invested in U.S. Treasury securities, which the Company had dedicated for a "like-kind" property exchange. 38 40 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. INVENTORIES Inventories are stated at the lower of average cost or market. Natural gas and NGLs, when sold from inventory, are charged to expense using the average-cost method. The major classes of inventories are as follows:
1996 1995 thousands ---- ---- Materials and supplies $23,495 $13,969 Natural gas, stored in inventory 1,017 478 Natural gas liquids, stored in inventory 28 412 ------- ------- $24,540 $14,859 ------- -------
5. PROPERTIES AND EQUIPMENT A summary of the original cost of properties and equipment by classification follows:
1996 1995 thousands ---- ---- Oil and gas properties $3,750,797 $3,501,162 Gathering facilities 132,631 76,492 Plant facilities 17,726 17,600 General properties 135,011 122,418 ---------- ---------- $4,036,165 $3,717,672 ---------- ----------
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 $254,811,000 and $245,577,000 at December 31, 1996 and 1995, 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. Properties and equipment include costs of $231,858,000 and $146,706,000 at December 31, 1996 and 1995, respectively, for the Company's exploration and development activities in Algeria. Depreciation of these assets will begin when production commences. During 1996, 1995 and 1994, the Company made provisions for impairments of international properties of $5,400,000, $600,000 and $3,100,000, respectively, which were related to oil and gas properties. These impairments related to projects that the Company has decided not to pursue in China and various other international locations. During 1995, the Company made a provision for impairments of geothermal properties of $2,000,000. Total interest costs incurred during 1996, 1995 and 1994 were $55,985,000, $52,557,000 and $41,635,000, respectively. Of these amounts, the Company capitalized $17,012,000, $16,199,000 and $15,507,000 during 1996, 1995 and 1994, 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 $50,213,000, $40,617,000 and $37,898,000 during 1996, 1995 and 1994, respectively. These internal costs were directly related to acquisition, exploration and development activities and are included as part of the cost of oil and gas properties. 39 41 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
Principal --------- 1996 1995 thousands ---- ---- Commercial Paper* $ 31,049 $ 19,908 Notes Payable, Banks* -- 154,100 8 3/4% Notes due 1998 100,000 100,000 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 7.73% Debentures due 2096 100,000 -- 7 1/4% Debentures due 2096 100,000 -- -------- -------- $731,049 $674,008 -------- --------
- --------------- *The average rates in effect at December 31, 1996 and 1995 were 6.30% and 5.96%, respectively for the Commercial Paper. The average rate in effect at December 31, 1995 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 in 1996 and 1995 have been classified as long-term debt in accordance with SFAS No. 6, "Classification of Short-term Obligations Expected to be Refinanced," under the terms of Anadarko's Bank Credit Agreements. In November 1996, Anadarko issued $100,000,000 principal amount of 7 1/4% Debentures due 2096. The Company has a conditional right to shorten the maturity of the Debentures if tax law changes impact the tax deduction for interest on the Debentures. Net proceeds from the offering were used to repay floating interest rate debt. In September 1996, Anadarko issued $100,000,000 principal amount of 7.73% Debentures due 2096. Each Debenture holder has the one-time right to have the Company purchase on September 15, 2026, all or a portion of, the Debentures at a purchase price equal to par plus accrued and unpaid interest. Net proceeds from the offering were used to repay floating interest rate debt. In March 1995, Anadarko issued $100,000,000 principal amount of 7 1/4% Debentures due 2025. Each Debenture holder has the one-time right to have the Company purchase on March 15, 2000, all or a portion of, the Debentures at a purchase price equal to par plus accrued and unpaid interest. Net proceeds from the offering were used to repay floating interest rate debt. In May 1994, the Company entered into a $250,000,000 Revolving Credit Agreement and a $150,000,000 364-Day Credit Agreement with a group of 11 commercial banks. In May 1996, the Agreements were amended to reduce the commitment fees and extend the expiration date of the Agreements for one year. Interest rates are based on either the reference rate, the 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 of 12.5/100 of one percent and 10.0/100 of one percent for the Revolving Credit Agreement and 364-Day Credit Agreement, respectively. The Revolving Credit Agreement will expire in 2001. During 1996 and 1995, there were no outstanding borrowings under these Agreements. 40 42 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED) During 1996 and 1995, 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 1996 and 1995, 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, 2001 are shown below. The payments related to the redemption of the commercial paper are included in the amounts shown in a manner consistent with the terms for repayment of the Revolving Credit Agreement.
thousands 1997 $ -- 1998 100,000 1999 -- 2000* 100,000 2001 131,049
- --------------- * The 7 1/4% Debentures due 2025 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:
Carrying Amount Fair Value thousands --------------- ---------- 1996 Cash and cash equivalents $ 14,601 $ 14,601 Long-term debt 731,049 735,799 Commodity derivative financial instruments Asset 5,121 5,121 Liability (7,515) (7,515) 1995 Cash and cash equivalents $ 17,090 $ 17,090 Long-term debt 674,008 702,008 Commodity derivative financial instruments Asset 4,447 4,447 Liability (7,898) (7,898)
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, 1996 and 1995 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 & 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 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. Gains and losses generally are recorded when the related gas or oil production has been 41 43 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED) produced or delivered. As a result, gains and losses are generally offset by similar changes in the price of natural gas and crude oil. Unrealized gains and losses are recorded as assets and 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 exclude January hedges not open and written options recognized. While financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and crude oil, the financial instruments may limit Anadarko's gain from increases in the market price of natural gas and crude oil. 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 1996, Anadarko had open natural gas futures contracts totaling 76 billion British thermal units per day (BBtu/d) related to sales for February through March 1997. The Company had open natural gas futures contracts related to gas owed to pipelines of 15 BBtu/d for April through May 1997. Anadarko had open crude oil futures contracts related to sales of 6 thousand barrels per day (MBbls/d) for February 1997. At year-end 1995, Anadarko had open natural gas futures contracts totaling 66 BBtu/d related to sales for February through March 1996. The Company had open natural gas futures contracts related to sales of 14 BBtu/d for April through November 1996. The Company had open natural gas futures contracts related to customer and supplier pricing requirements of 1.3 BBtu/d for February through March 1996. Anadarko had open crude oil futures contracts related to sales of 3.4 MBbls/d for February 1996. 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 1996, Anadarko had open basis swap agreements for the Company's gas sales averaging 30 BBtu/d for 1997, 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. The Company had open gas basis swap agreements related to sales averaging 270 BBtu/d for February through March 1997 and 70 BBtu/d for April through July 1997. In addition, the Company had basis swaps related to customer and supplier gas pricing requirements of 8 BBtu/d for February through March 1997 and related to gas owed to pipelines of 15 BBtu/d for April through May 1997. At year-end 1995, Anadarko had open basis swap agreements for the Company's gas sales averaging 64 BBtu/d for January through December 1996 and 30 BBtu/d for 1997, 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 these two positions. The Company also had open gas swap agreements related to sales averaging 7 BBtu/d for February through December 1996 and related to customer and supplier gas pricing requirements of 9 BBtu/d for February through December 1996. 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. Over-the-counter (OTC) options with third-parties have credit risks similar to swaps. 42 44 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS -- (CONTINUED) At year-end 1996, Anadarko had open NYMEX options for the Company's gas sales of 10 BBtu/d for puts and 16 BBtu/d for calls during February and March 1997 and 30 BBtu/d for both puts and calls during April through July 1997. Anadarko also had open NYMEX gas options for its customers of 30 BBtu/d for puts and 6 BBtu/d for calls for February through March 1997. In addition, the Company had open crude oil options on 5.1 MBbls/d for both puts and calls during February through April 1997. At year-end 1995, Anadarko had open NYMEX options for the Company's gas sales of 183 BBtu/d for puts and 61 BBtu/d for calls during February through March 1996 and 30 BBtu/d for puts and 20 BBtu/d for calls for April through November 1996 in order to fix a price range on gas sales. In addition, the Company had open crude oil options on 1.7 MBbls/d for puts and 4.5 MBbls/d for calls during February through March 1996. INTEREST RATE SWAPS During the fourth quarter of 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 financed in 1996. In October 1993, Anadarko accepted a payment of $2,600,000 granting the purchaser the option to enter into a nine-year interest rate swap agreement with the Company. The option was exercisable in October 1994. This agreement, if exercised, would have effectively fixed the rate the Company would have paid on a notional $100,000,000 of its floating interest rate debt at six percent for nine years. The $2,600,000 payment and the related agreement hedged the Company's floating interest rate debt. The option was not exercised and, as a result, the Company recorded a reduction to interest expense of $2,600,000 during the fourth quarter of 1994. 7. STOCK AND STOCK OPTIONS Following is a schedule of the changes in the Company's shares of common stock:
1996 1995 1994 thousands ---- ---- ---- SHARES OF COMMON STOCK ISSUED Beginning of year 60,016 58,857 58,668 Exercise of stock options 413 58 92 Issuance of restricted stock 39 27 32 Issuance of shares for employee savings plan 58 74 65 Issuance of shares for executives and directors benefit trust -- 1,000 -- ------ ------ ------ End of year 60,526 60,016 58,857 ------ ------ ------ SHARES OF COMMON STOCK HELD IN TREASURY Beginning of year -- -- -- Issuance of shares for employee savings plan (12) (9) (7) Purchase of treasury stock 12 10 7 Sale of treasury stock -- (1) -- ------ ------ ------ End of year -- -- -- ------ ------ ------ SHARES OF COMMON STOCK HELD FOR EXECUTIVES AND DIRECTORS BENEFITS TRUST Beginning of year 1,000 -- -- Purchase of shares -- 1,000 -- ------ ------ ------ End of year 1,000 1,000 -- ------ ------ ------ SHARES OF COMMON STOCK OUTSTANDING AT END OF YEAR 59,526 59,016 58,857 ------ ------ ------
In each quarter of 1996, 1995 and 1994, dividends of 7.5 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 43 45 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. STOCK AND STOCK OPTIONS -- (CONTINUED) dividends by the Company, retained earnings of $364,080,000, $259,694,000 and $249,599,000 were not restricted as to the payment of dividends at December 31, 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, 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. In May 1995, the Company issued 1,000,000 shares of common stock to the Anadarko Petroleum Corporation Executives and Directors Benefits Trust (Trust) to secure present and future unfunded benefit obligations of the Company. The shares issued to the Trust are not considered outstanding for quorum or voting calculations, but the Trust will receive dividends. The shares are included in the calculation of earnings per share under the treasury stock method and have no dilutive effect. The fair market value of these shares is included in common stock and paid-in capital and as a reduction to stockholders' equity. As of December 31, 1996 and 1995, there were 1,000,000 shares in the Trust. Anadarko has four stock option plans -- the 1993 Stock Incentive Plan, the 1988 Stock Option Plan for Non-employee Directors, the 1987 Stock Option Plan and the 1986 Stock Option Plan -- under which key employees and directors of the Company may be granted options to purchase shares of Anadarko common stock. Incentive stock options and non-qualified stock options have a maximum term of eleven years from the date of grant and are issued at the market value of Anadarko stock on the date of grant. The options vest over time and may be exercised no earlier than one year from the date of grant. In addition, the 1993 Stock Incentive Plan and the 1987 Stock Option Plan provide that up to 800,000 and 400,000 shares of common stock, respectively, which may be granted under the Plans, 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 1996, 1995 and 1994, the Company issued 39,450, 26,950 and 31,950 shares, respectively, of restricted stock with a weighted-average grant date fair value of $63.42, $41.04 and $52.21, respectively. In 1996, Anadarko and a key officer of the Company entered into a Performance Share Agreement under the 1993 Stock Incentive Plan. The Agreement provides for issuance of up to 150,000 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 the year ended December 31, 1996, 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. 44 46 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. STOCK AND STOCK OPTIONS -- (CONTINUED) Unexercised stock options do not have a dilutive effect on earnings per common share. Information regarding the Company's stock option plans is summarized below:
1996 1995 1994 --------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price options in thousands ------ --------- ------ --------- ------ --------- SHARES UNDER OPTION AT BEGINNING OF YEAR 2,403 $38.13 2,010 $37.13 1,729 $33.76 Granted 933 $58.84 491 $41.41 400 $49.86 Exercised (456) $30.36 (84) $31.69 (117) $30.96 Surrendered or expired (8) $44.62 (14) $47.36 (2) $29.81 --------- --------- --------- SHARES UNDER OPTION AT END OF YEAR 2,872 $46.08 2,403 $38.13 2,010 $37.13 --------- --------- --------- Options exercisable at December 31 1,772 $40.18 1,731 $36.12 1,433 $32.93 --------- --------- --------- Shares available for future grant at end of year 2,222 3,186 3,691 --------- --------- --------- Weighted-average fair value of options granted during the year $23.92 $15.36 N/A
The following table summarizes information about the Company's stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable -------------------------------------- ----------------------- Weighted- Options Average Weighted- Options Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise at Year Contractual Exercise at Year Exercise Prices End Life (Years) Price End Price -------- ----------- ------------ --------- ----------- --------- options in thousands $19.68 - $37.00 750 4.0 $31.74 750 $31.74 $40.88 - $47.00 809 8.0 $43.62 581 $44.48 $47.69 - $54.38 861 9.1 $51.55 441 $48.86 $63.63 - $63.88 452 9.8 $63.64 -- $ -- ------ --- ------ ------ ------ $19.68 - $63.88 2,872 7.5 $44.61 1,772 $40.18 ------ --- ------ ------ ------
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:
1996 1995 ----- ----- Expected option life - years 6.35 5.65 Risk-free interest rate 6.13% 5.94% Dividend yield 0.70% 0.82% Volatility 31.47% 30.59%
45 47 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. STOCK AND STOCK OPTIONS -- (CONTINUED) 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 measure compensation costs for these plans using the current method of accounting. Anadarko has elected to continue the current method of accounting for employee stock compensation plans. Anadarko applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock option 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 earnings per share would have been as shown in the pro forma amounts below:
1996 1995 thousands except per share amounts ------- ------- Net Income As reported $100,720 $21,035 Pro forma $ 96,099 $20,577 Earnings Per Share As reported $ 1.70 $ 0.36 Pro forma $ 1.62 $ 0.35
8. FOREIGN CURRENCY TRANSLATION ADJUSTMENTS The Company's currency translation adjustments are related to Anadarko Canada, which was sold in 1994. See Note 2. The following is an analysis of currency translation adjustments reflected in stockholders' equity:
1994 thousands ------- Balance at beginning of year $(4,379) Current translation losses (1,686) Cumulative translation losses transferred to the income statement upon disposition of foreign subsidiary 6,065 ------- Balance at end of year $ -- -------
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:
1996 1995 1994 thousands ------- ------- ------- Interest $36,197 $32,801 $25,675 Income taxes paid (received) $ 8,484 $(3,803) $ 516
10. TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS During 1989, Anadarko Algeria entered into a Production Sharing Agreement (PSA) with SONATRACH, the national oil and gas enterprise of Algeria. SONATRACH is the beneficial owner of 10.1 percent 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. During 1994, the Company acquired 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 already underway. Approximately $60,000, $432,000 and $30,000 was paid to SONATRACH in 1996, 1995 and 1994, respectively, for charges related to reservoir studies, laboratory services, well testing services and equipment usage. The Company believes anticipated operating cash flows 46 48 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10. TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS -- (CONTINUED) and existing credit facilities will be sufficient to meet its share of the exploration and development costs. As of December 31, 1996, Anadarko Algeria's total net investment in Algeria for exploration, development and related activities was $231,858,000, of which approximately $85,152,000 was incurred in 1996. In September 1996, Anadarko and its partners signed a $177 million Engineering, Procurement and Construction (EPC) contract with Brown & Root Condor, a company jointly owned by Brown & Root and affiliates of SONATRACH. For the year ended December 31, 1996, approximately $21,933,000 was paid to Brown & Root Condor under the EPC contract. Political unrest exists in Algeria. Anadarko is closely monitoring the situation and has taken reasonable and prudent steps to ensure the safety of employees working 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 1997 and beyond. However, the situation has not had any material effect on the Company's operations. The Company's activities in Algeria also are subject to the general risks associated with all foreign operations. In 1996, the Company paid $878,000 to Petroleum Information Corporation and its subsidiaries for production, drilling and seismic data. Also in 1996, the Company paid Houston Advanced Research Center (HARC) $50,000 for a seismic imaging project. John R. Butler, Jr., a director of the Company, serves as Senior Chairman for Petroleum Information Corporation and Chairman for 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 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 1996, sales to Texaco Trading & Transportation Company were $64,444,000, which accounted for more than ten percent of the Company's total revenues. In 1995, sales to Indiana Gas Company Incorporated were $53,130,000 and sales to Texaco Trading & Transportation Company were $53,092,000, each of which accounted for more than ten percent of the Company's total revenues. In 1994, sales to Indiana Gas Company Incorporated were $67,348,000, which was more than ten percent of the Company's total revenues. 11. OPERATING EXPENSES Operating expenses by category are as follows:
1996 1995 1994 thousands ---- ---- ---- Oil and gas $ 65,896 $ 68,506 $ 70,164 Plant and gathering 34,231 26,119 24,905 Gas purchases 13,073 10,123 14,292 Other 2,108 1,081 841 -------- -------- -------- Total $115,308 $105,829 $110,202 -------- -------- --------
47 49 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 12. OTHER TAXES Significant taxes other than income taxes are as follows:
1996 1995 1994 thousands ---- ---- ---- Production and severance $19,457 $16,898 $22,228 Ad valorem 14,137 16,624 16,786 Payroll and other 3,611 3,370 1,959 ------- ------- ------- Total $37,205 $36,892 $40,973 ------- ------- -------
13. INCOME TAXES Income tax expense, including deferred amounts, is summarized as follows:
1996 1995 1994 thousands ---- ---- ---- CURRENT Federal $ 2,849 $(3,385) $ 5,798 Foreign -- -- 1,422 State (10) 72 435 ------- ------- ------- Total 2,839 (3,313) 7,655 ------- ------- ------- DEFERRED Federal 51,075 11,056 29,838 Foreign -- -- (16,224) State 3,156 488 2,298 ------- ------- ------- Total 54,231 11,544 15,912 ------- ------- ------- Total income taxes $57,070 $ 8,231 $23,567 ------- ------- -------
Total income taxes were different than the amounts computed by applying the statutory income tax rate to Income before Income Taxes. The sources of these differences are as follows:
1996 1995 1994 thousands ---- ---- ---- Income before Income Taxes Domestic $172,483 $36,663 $63,963 Foreign (14,693) (7,397) 703 -------- ------- ------- Total $157,790 $29,266 $64,666 -------- ------- ------- Statutory tax rate 35% 35% 35% Tax computed at statutory rate $ 55,227 $10,243 $22,633 Adjustments resulting from: State income taxes (net of federal income tax benefit) 2,045 364 1,777 Oil and gas credits (367) (1,865) (3,072) Disposition of foreign subsidiary -- -- 3,017 Life insurance policies (238) (566) (759) Other -- net 403 55 (29) -------- ------- ------- Total income taxes $ 57,070 $ 8,231 $23,567 -------- ------- ------- Effective tax rate 36% 28% 36% -------- ------- -------
48 50 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 13. INCOME TAXES -- (CONTINUED) 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 1996, 1995 and 1994 the tax benefit amounted to $5,055,000, $458,000 and $968,000, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities (assets) at December 31, 1996 and 1995 are as follows:
1996 1995 thousands ---- ---- Oil and gas exploration and development costs $538,367 $495,757 Other 21,567 18,675 -------- -------- Gross deferred tax liabilities 559,934 514,432 -------- -------- Alternative minimum tax credit carryforward (29,403) (25,170) Other (31,558) (39,464) -------- -------- Gross deferred tax assets (60,961) (64,634) -------- -------- Net deferred tax liabilities $498,973 $449,798 -------- --------
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. In December 1994, the Company sold Anadarko Canada. Under current accounting rules, Anadarko had not previously provided deferred U.S. income taxes on the amount by which its investment in Anadarko Canada exceeded the tax basis or on the cumulative foreign currency translation losses because these temporary differences were previously considered permanent in duration. See Note 2. Net operating loss and alternative minimum tax credit carryforwards at December 31, 1996, which are available for future utilization on federal income tax returns, are as follows:
Alternative Regular Minimum Tax Tax Expiration thousands ------- ----------- ---------- Net operating loss $10,300 $ -- 2010 Alternative minimum tax credit $29,400 $ -- Unlimited
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, 1996, future minimum rental payments due under operating leases are as follows:
thousands 1997 $ 15,904 1998 15,443 1999 13,869 2000 13,583 2001 13,645 Later years 54,166 -------- Total minimum lease payments $126,610 --------
Total rental expense amounted to $12,702,000, $9,858,000 and $8,441,000 in 1996, 1995 and 1994, respectively. 49 51 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 15. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS PENSION PLANS The Company has a non-contributory defined benefit pension plan covering all permanent employees, except certain employees in foreign countries. The benefits for this plan are based primarily on years of service and pay near retirement. Plan assets consist principally of fixed income investments and equity securities. The Company funds the plan with annual contributions as determined in accordance with the Employee Retirement Income Security Act of 1974 and Internal Revenue Code of 1986, as amended, limitations. The Company has an equalization plan to ensure payments to certain employees of amounts to which they are already entitled under the provisions of the pension plan, but which are subject to limitations imposed by federal tax laws. This plan is unfunded and payable solely from the general assets of the Company. In addition, the Company has a pension plan for non-employee directors, which is unfunded. The 1996, 1995 and 1994 pension cost related to these plans includes the following components:
1996 1995 1994 thousands ---- ---- ---- Service costs-benefits earned in the period $ 4,484 $ 3,415 $ 3,502 Interest cost on projected benefit obligation 3,945 2,991 2,895 Actual (return) loss on plan assets (5,603) (9,227) 1,208 Amortization values and deferrals 2,481 6,165 (4,560) Termination benefits -- -- 346 ------- ------- ------- Pension cost $ 5,307 $ 3,344 $ 3,391 ------- ------- -------
The special termination benefits incurred in 1994 relate to the closing of several plant locations. The Company had an additional minimum liability of $2,359,000 and $1,301,000 at December 31, 1996 and 1995, respectively, which represents the difference between the unfunded accumulated benefit obligation and the accrued pension cost related to the equalization plan. This liability was offset by an intangible asset of an equal amount. 50 52 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 15. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The funded status of the plans at December 31, 1996 and 1995 is as follows:
Assets Exceed Accumulated Accumulated Benefits Exceed Benefits Assets (Funded) (Unfunded) thousands ------------- --------------- 1996 Actuarial present value of: Vested benefit obligation $32,901 $ 5,900 Accumulated benefit obligation 39,471 6,565 Projected benefit obligation $52,318 $ 9,144 ------- ------- Plan assets at market value $50,844 $ -- ------- ------- Projected benefit obligation in excess of plan assets $(1,474) $(9,144) Unrecognized initial asset (4,670) -- Unrecognized (gain) loss (778) 3,721 Unrecognized prior service cost 1,150 1,043 Adjustment required to recognize additional minimum liability -- (2,359) ------- ------- Accrued pension cost $(5,772) $(6,739) ------- ------- 1995 Actuarial present value of: Vested benefit obligation $29,549 $ 3,913 Accumulated benefit obligation 35,899 4,213 Projected benefit obligation $48,437 $ 6,210 ------- ------- Plan assets at market value $46,505 $ -- ------- ------- Projected benefit obligation in excess of plan assets $(1,932) $(6,210) Unrecognized initial asset (5,197) -- Unrecognized loss 3,861 1,905 Unrecognized prior service cost 1,467 1,261 Adjustment required to recognize additional minimum liability -- (1,301) ------- ------- Accrued pension cost $(1,801) $(4,345) ------- -------
The Company's assumptions used as of December 31 in determining the pension liability were as follows:
1996 1995 1994 percent ---- ---- ---- Discount rate 7.5 7.25 8.0 Rates of increase in compensation levels 5.0 5.0 5.0 Long-term rate of return on plan assets 8.0 8.0 8.0
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 $4,076,000, $3,731,000, and $3,579,000 during 1996, 1995 and 1994, respectively. OTHER POSTRETIREMENT BENEFITS In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees, 51 53 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 15. PENSION PLANS, EMPLOYEE SAVINGS PLAN AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) including employees in foreign countries, may become eligible for these benefits if they reach retirement age while working for the Company. These benefits and similar benefits for active employees are provided through contributory and noncontributory benefit plans. Health care benefits are funded by contributions from the Company and its employees, with retiree contributions adjusted per the provisions of the Company's health care plans. The Company's current policy is to fund the cost of postretirement health care benefits on a pay-as-you-go basis. The Company's retiree life insurance plan is noncontributory and is currently fully funded through insurance premiums paid by the Company. The following table sets forth the Company's postretirement benefits other than pension combined liability as of December 31, 1996 and 1995:
1996 1995 thousands ---- ---- Accumulated postretirement benefit obligation Retirees $ (6,888) $ (7,610) Fully eligible active plan participants (4,043) (3,337) Other active plan participants (12,081) (12,472) -------- -------- Total (23,012) (23,419) Plan assets at fair value -- -- -------- -------- Accumulated postretirement benefit obligation in excess of plan assets (23,012) (23,419) Unrecognized net gain (7,430) (4,343) -------- -------- Accrued postretirement benefit cost $(30,442) $(27,762) -------- --------
The Company charges postretirement benefits other than pensions as accrued, based on actuarial calculations for each plan. The net annual costs for postretirement benefits other than pensions for 1996 and 1995 included the following components:
1996 1995 thousands ------ ------ Service cost -- benefits attributed to service during the period $1,664 $1,556 Interest cost on accumulated obligation 1,680 1,674 Recognized benefit gain (134) (119) ------ ------ Net postretirement benefit cost $3,210 $3,111 ------ ------
The Company's assumptions used as of December 31 in determining the accumulated postretirement benefit obligation shown above were as follows:
1996 1995 percent --------- --------- Discount rate 7.50 7.25 Rates of increase in compensation levels 5.0 5.0 Health care trend rate 13.0-5.0 13.0-5.0
The health care trend rate for the health care plans starts at the maximum rate for the current year and is gradually reduced to an ultimate rate for 2001 and later years. A change in the health care trend rate of one percent would change the annual cost in 1996 by approximately $674,000 and would change the accumulated postretirement benefit obligation in 1996 by approximately $5,472,000. 52 54 ANADARKO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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. KANSAS AD VALOREM TAX The Natural Gas Policy Act of 1978 (NGPA) allows 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 in addition to the otherwise maximum lawful price. FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia (D.C. Circuit), which held in June 1988 that FERC failed to provide a reasoned basis for its findings and remanded the case to FERC for further consideration. On December 1, 1993, FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. FERC clarified the effective date of its decision by an order dated May 19, 1994. The clarification provided that the June 28, 1988 effective date applies to tax bills rendered after that date, not sales made on or after that date. Based on Anadarko's interpretation of FERC's orders, $700,000 (pre-tax) was charged against income in 1994, in addition to $130,000 (pre-tax) charged against income in 1993. Numerous parties filed appeals of FERC's action in the D.C. Circuit. Anadarko, together with other natural gas producers, challenged FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) FERC's ruling should, in any event, have been applied prospectively. Other parties separately challenged FERC's orders on the grounds that FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996 which holds that producers must make refunds of all Kansas ad valorem taxes collected with respect to production since October 1983. Petitions for rehearing were denied November 6, 1996. The Company, along with other gas producing companies, subsequently filed a petition for writ of certiorari with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by FERC). The petition has not been acted on. Williams Natural Gas Company has filed a cross-petition for certiorari seeking to impose refund liability back to December 1, 1978. The Company and other interested parties will oppose this cross-petition. If Supreme Court review of the decision is unsuccessful, the pursuit of other judicial and regulatory relief from the application of this decision to the Company will be considered. The Company is unable at this time to predict the final outcome of this matter. If, however, the August 2, 1996 decision is not reversed or modified by judicial review and if Anadarko is unable to limit application of the decision to the Company, Anadarko estimates the maximum amount of principal and interest at issue (assuming that the October 1983 effective date remains in effect) is approximately $37 million (pre-tax) as of December 31, 1996. 53 55 ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED) QUARTERLY FINANCIAL DATA The following table shows summary quarterly financial data for 1996 and 1995. See Management's Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Form 10-K.
First Second Third Fourth Quarter Quarter Quarter Quarter thousands except per share amounts ------- ------- -------- ------- 1996 Operating revenues $135,707 $135,088 $128,551 $169,682 Operating income, pretax 40,897 37,127 49,401 68,220 Net income $ 20,516 $ 17,628 $ 24,949 $ 37,627 Earnings per common share $ 0.35 $ 0.30 $ 0.42 $ 0.63 1995 Operating revenues $102,827 $113,890 $ 99,283 $118,014 Operating income, pretax 14,363 22,246 8,535 19,330 Net income $ 4,080 $ 9,053 $ 1,107 $ 6,795 Earnings per common share $ 0.07 $ 0.15 $ 0.02 $ 0.12
54 56 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, 1996 and 1995 are $254,811,000 and $245,577,000, 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
Excluded Year Costs Incurred Costs at Prior ------------------- Dec. 31, Years 1994 1995 1996 1996 thousands ----- ---- ---- ---- -------- Property acquisition $ 6,494 $66,371 $ 6,600 $14,092 $ 93,557 Exploration 31,674 10,064 21,525 67,210 130,473 Capitalized interest 3,164 5,587 9,519 12,511 30,781 ------- ------- ------- ------- -------- Total $41,332 $82,022 $37,644 $93,813 $254,811 ------- ------- ------- ------- --------
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
1996 1995 thousands ---- ---- UNITED STATES Capitalized Unproved properties $ 157,296 $ 160,186 Proved properties 3,353,650 3,178,437 Plant facilities 17,726 17,600 ---------- ---------- 3,528,672 3,356,223 Accumulated depreciation, depletion and amortization 1,649,344 1,584,998 ---------- ---------- Net capitalized costs 1,879,328 1,771,225 ---------- ---------- ALGERIA AND OVERSEAS Capitalized Unproved properties 164,798 100,128 Proved properties 75,053 62,411 ---------- ---------- Net capitalized costs 239,851 162,539 ---------- ---------- TOTAL Capitalized Unproved properties 322,094 260,314 Proved properties 3,428,703 3,240,848 Plant facilities 17,726 17,600 ---------- ---------- 3,768,523 3,518,762 Accumulated depreciation, depletion and amortization 1,649,344 1,584,998 ---------- ---------- Net capitalized costs $2,119,179 $1,933,764 ---------- ----------
55 57 ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
1996 1995 1994 thousands ---- ---- ---- UNITED STATES -- Capitalized Property acquisition Exploration $ 20,920 $ 9,723 $ 87,747 Development 5,335 26,022 16,005 Exploration 106,602 76,056 115,486 Development 132,139 113,401 132,846 -------- -------- -------- 264,996 225,202 352,084 -------- -------- -------- CANADA -- Capitalized Property acquisition Exploration -- -- 987 Development -- -- 2,122 Exploration -- -- 770 Development -- -- 2,866 -------- -------- -------- -- -- 6,745 -------- -------- -------- ALGERIA AND OVERSEAS -- Capitalized Property acquisition Exploration -- 18 -- Development -- 6,848 -- Exploration 68,002 44,675 37,713 Development 29,929 901 88 -------- -------- -------- 97,931 52,442 37,801 -------- -------- -------- TOTAL -- Capitalized Property acquisition Exploration 20,920 9,741 88,734 Development 5,335 32,870 18,127 Exploration 174,604 120,731 153,969 Development 162,068 114,302 135,800 -------- -------- -------- $362,927 $277,644 $396,630 -------- -------- --------
56 58 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. RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
1996 1995 1994 thousands -------- -------- -------- UNITED STATES Net revenues from production Gas sold to consolidated affiliates $316,127 $221,341 $253,667 Other sales of gas, oil, condensate and NGLs 202,111 191,902 204,698 -------- -------- -------- 518,238 413,243 458,365 Production (lifting) costs 119,701 126,189 121,023 Depreciation, depletion and amortization* 149,488 153,648 161,308 -------- -------- -------- 249,049 133,406 176,034 Income tax expense 89,178 46,041 61,983 -------- -------- -------- Results of operations 159,871 87,365 114,051 -------- -------- -------- *DD&A rate per net equivalent barrel $ 3.96 $ 3.88 $ 4.01 -------- -------- -------- CANADA Other sales of gas, oil, condensate and NGLs -- -- 9,046 Production (lifting) costs -- -- 4,052 Depreciation, depletion and amortization* -- -- 2,763 -------- -------- -------- -- -- 2,231 Income tax expense -- -- 556 -------- -------- -------- Results of operations -- -- 1,675 -------- -------- -------- *DD&A rate per net equivalent barrel $ -- $ -- $ 3.35 -------- -------- -------- TOTAL Net revenues from production Gas sold to consolidated affiliates 316,127 221,341 253,667 Other sales of gas, oil, condensate and NGLs 202,111 191,902 213,744 -------- -------- -------- 518,238 413,243 467,411 Production (lifting) costs 119,701 126,189 125,075 Depreciation, depletion and amortization 149,488 153,648 164,071 -------- -------- -------- 249,049 133,406 178,265 Income tax expense 89,178 46,041 62,539 -------- -------- -------- Results of operations $159,871 $ 87,365 $115,726 -------- -------- --------
57 59 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. NGLs are included with oil and condensate reserves and the associated shrinkage has been deducted from the gas reserves. Other international reserve activity shown in the following table includes 1994 activity for Canada and 1996 activity for Indonesia. 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 1996 primarily from exploration and development drilling and improved recovery. At year-end 1996, the Company had 124.3 MMBbls of proved reserves in Algeria, including 31.8 MMBbls which were added during 1996. Anadarko's reserves also increased in 1996 due to higher natural gas and crude oil prices at year-end 1996 compared to year-end 1995. The Company's reserves increased in 1995 primarily due to exploration and development drilling and improved recovery. At year-end 1995, Anadarko had 92.5 MMBbls of oil reserves in Algeria, including 48.5 MMBbls which were added during 1995. Anadarko's reserves also increased in 1995 due to higher natural gas and crude oil prices at year-end 1995 compared to year-end 1994. The Company's reserves increased in 1994 primarily due to exploration and development drilling and improved recovery. During 1994, Anadarko added 44 MMBbls of oil reserves in Algeria, based on successful exploration drilling, preliminary development studies and the contractual rights granted under the PSA. 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. 58 60 ANADARKO PETROLEUM CORPORATION SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) OIL AND GAS RESERVES --(CONTINUED)
NATURAL GAS OIL, CONDENSATE AND NGLS TOTAL (BCF) (MMBBLS) (MMEEBS) ------------------------- ------------------------------------- ------------------------------------ U.S. OTHER INTL. TOTAL U.S. ALGERIA OTHER INTL. TOTAL U.S. ALGERIA OTHER INTL. TOTAL ---- ----------- ----- ---- ------- ----------- ----- ---- ------- ----------- ----- PROVED RESERVES DECEMBER 31, 1993 1,836 39 1,875 75.1 -- 3.4 78.5 381.1 -- 10.0 391.1 Revisions of prior estimates 134 -- 134 2.5 -- -- 2.5 24.9 -- -- 24.9 Extensions, discoveries and other additions 76 2 78 30.9 44.0 -- 74.9 43.5 44.0 0.4 87.9 Improved recovery 8 -- 8 14.8 -- -- 14.8 16.1 -- -- 16.1 Purchases in place 59 -- 59 4.4 -- 0.4 4.8 14.2 -- 0.4 14.6 Sales in place (26) (38) (64) (3.0) -- (3.4) (6.4) (7.2) -- (9.9) (17.1) Production (173) (3) (176) (11.3) -- (0.4) (11.7) (40.2) -- (0.9) (41.1) ----- --- ----- ----- ----- ---- ----- ----- ----- ----- ----- DECEMBER 31, 1994 1,914 -- 1,914 113.4 44.0 -- 157.4 432.4 44.0 -- 476.4 Revisions of prior estimates 29 -- 29 2.6 -- -- 2.6 7.5 -- -- 7.5 Extensions, discoveries and other additions 70 -- 70 7.6 48.5 -- 56.1 19.3 48.5 -- 67.8 Improved recovery 14 -- 14 14.0 -- -- 14.0 16.3 -- -- 16.3 Purchases in place 18 -- 18 6.9 -- -- 6.9 9.8 -- -- 9.8 Sales in place (30) -- (30) (6.8) -- -- (6.8) (11.9) -- -- (11.9) Production (172) -- (172) (11.0) -- -- (11.0) (39.6) -- -- (39.6) ----- --- ----- ----- ----- ---- ----- ----- ----- ----- ----- 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 ----- --- ----- ----- ----- ---- ----- ----- ----- ----- ----- PROVED DEVELOPED RESERVES December 31, 1993 1,674 40 1,714 60.8 -- 3.4 64.2 339.8 -- 10.0 349.8 December 31, 1994 1,787 -- 1,787 74.2 -- -- 74.2 372.0 -- -- 372.0 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
59 61 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. Natural gas prices have decreased by about 25 percent as of February 1997. Oil prices have remained relatively stable through February 1997. 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, 1996, the present value (discounted at ten percent) of future net revenues from Anadarko's proved reserves was $5.27 billion, before income taxes, and $3.4 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 96 percent in 1996 compared to 1995 is primarily due to the significantly higher natural gas and crude oil prices at year-end 1996 as well as additions of proved reserves related to successful drilling in Algeria and Alaska. 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. 60 62 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
1996 1995 1994 millions ---- ---- ---- UNITED STATES Future cash inflows $11,076 $5,621 $4,672 Future production and development costs 2,908 1,847 1,534 ------- ------ ------ Future net cash flows before income taxes 8,168 3,774 3,138 10% annual discount for estimated timing of cash flows 3,907 1,712 1,386 ------- ------ ------ Discounted future net cash flows before income taxes 4,261 2,062 1,752 Future income taxes, net of 10% annual discount 1,450 613 518 ------- ------ ------ Standardized measure of discounted future net cash flows relating to oil and gas reserves 2,811 1,449 1,234 ------- ------ ------ ALGERIA Future cash inflows 3,263 1,907 835 Future production and development costs 813 572 323 ------- ------ ------ Future net cash flows before income taxes 2,450 1,335 512 10% annual discount for estimated timing of cash flows 1,441 836 252 ------- ------ ------ Discounted future net cash flows before income taxes 1,009 499 260 Future income taxes, net of 10% annual discount 417 214 102 ------- ------ ------ Standardized measure of discounted future net cash flows relating to oil and gas reserves 592 285 158 ------- ------ ------ TOTAL Future cash inflows 14,339 7,528 5,507 Future production and development costs 3,721 2,419 1,857 ------- ------ ------ Future net cash flows before income taxes 10,618 5,109 3,650 10% annual discount for estimated timing of cash flows 5,348 2,548 1,638 ------- ------ ------ Discounted future net cash flows before income taxes 5,270 2,561 2,012 Future income taxes, net of 10% annual discount 1,867 827 620 ------- ------ ------ Standardized measure of discounted future net cash flows relating to oil and gas reserves $ 3,403 $1,734 $1,392 ------- ------ ------
61 63 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
1996 1995 1994 millions ---- ---- ---- UNITED STATES Beginning of year $1,449 $1,234 $1,224 Sales and transfers of oil and gas produced, net of production costs (399) (287) (337) Net changes in prices and development and production costs 1,730 293 (361) Extensions, discoveries, additions and improved recovery, less related costs 452 191 226 Development costs incurred during the period 53 23 9 Revisions of previous quantity estimates 161 20 137 Purchases of minerals in place 14 42 25 Sales of minerals in place (11) (60) (39) Accretion of discount 206 175 177 Net change in income taxes (836) (95) 26 Other (8) (87) 147 ------ ------ ------ End of year 2,811 1,449 1,234 ------ ------ ------ CANADA Beginning of year -- -- 30 Sales and transfers of oil and gas produced, net of production costs -- -- (5) Extensions, discoveries, additions and improved recovery, less related costs -- -- 1 Purchases of minerals in place -- -- 4 Sales of minerals in place -- -- (48) Accretion of discount -- -- 4 Net change in income taxes -- -- 14 ------ ------ ------ End of year $ -- $ -- $ -- ------ ------ ------
62 64 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 -- (CONTINUED)
1996 1995 1994 millions ---- ---- ---- ALGERIA Beginning of year $ 285 $ 158 $ -- Net changes in prices and development and production costs 260 98 -- Extensions, discoveries, additions and improved recovery, less related costs 166 108 260 Development costs incurred during the period 29 5 -- Accretion of discount 50 26 -- Net change in income taxes (203) (112) (102) Other 5 2 -- ------- ------ ------ End of year 592 285 158 ------- ------ ------ TOTAL* Beginning of year 1,734 1,392 1,254 Sales and transfers of oil and gas produced, net of production costs (399) (287) (342) Net changes in prices and development and production costs 1,990 391 (361) Extensions, discoveries, additions and improved recovery, less related costs 618 299 487 Development costs incurred during the period 82 28 9 Revisions of previous quantity estimates 161 20 137 Purchases of minerals in place 14 42 29 Sales of minerals in place (11) (60) (87) Accretion of discount 256 201 181 Net change in income taxes (1,039) (207) (62) Other (3) (85) 147 ------- ------ ------ End of year $ 3,403 $1,734 $1,392 ------- ------ ------
- --------------- * Excludes changes in the standardized measure of discounted future net cash flows for Indonesia reserves which were both added and sold during 1996. 63 65 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 Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in the Anadarko Petroleum Corporation Proxy Statement, dated March 21, 1997 ("Proxy Statement"), which are 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 Compensation of Directors and Compensation and Benefits Committee Report on Executive Compensation in the Proxy Statement, which are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Voting Securities and Principle Holders -- Security Ownership of Management and Security Ownership of Certain Beneficial Owners in the Proxy Statement, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Voting Securities and Principle Holders -- Transactions with Management and Others in the Proxy Statement, which is incorporated herein by reference. 64 66 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 30. (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.
EXHIBIT ORIGINALLY FILED FILE NUMBER DESCRIPTION AS EXHIBIT NUMBER ------- ----------- ---------------- -------- 3(a) Restated Certificate of Incorporation of 19(a)(i) to Form 10-Q 1-8968 Anadarko Petroleum Corporation, dated for quarter ended August 28, 1986 September 30, 1986 (b) By-laws of Anadarko Petroleum Corporation, 3(b) to Form 10-Q 1-8968 as amended for quarter ended June 30, 1996 4(a) Rights Agreement, dated as of October 4, 4 to Form 8-K dated October 5, 1-8968 1988, between Anadarko Petroleum 1988 Corporation and Manufacturers Hanover Trust Company, Rights Agent (b) Indenture, dated as of May 10, 1988, 4(a) to Form S-3 Registration 33-21094 between Anadarko Petroleum Corporation and Statement 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) Revolving Credit Agreement dated as of May 4.1 to Form S-8 dated July 8, 1-8968 24, 1994 1994 (e) Amendment to Revolving Credit Agreement, 4(e) to Form 10-K for year 1-8968 dated as of May 23, 1995 ended December 31, 1995 *(f) Amendment to Revolving Credit Agreement, dated as of May 21, 1996 (g) Indenture, dated as of March 1, 1995, 4(a) to Form 10-Q 1-8968 between Anadarko Petroleum Corporation and for the quarter ended the Chase Manhattan Bank, N.A., Trustee June 30, 1995 (h) Distribution Agreement, dated as of March 4(b) to Form 10-Q 1-8968 9, 1995, for $300,000,000 Medium-Term for the quarter ended Notes, Series A June 30, 1995 10(a) (i) Tax Sharing Agreement, dated September 30, 19(c)(i) to Form 10-Q 1-8968 1986, among Panhandle Eastern Corporation, for quarter ended Centana Energy Corporation and Anadarko September 30, 1986 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
65 67
EXHIBIT ORIGINALLY FILED FILE NUMBER DESCRIPTION AS EXHIBIT NUMBER ------- ----------- ---------------- -------- 10(a) (iii) Global Settlement Agreement between 28(a) to Form 10-Q 1-8968 Panhandle Eastern Corporation and Anadarko for quarter ended Petroleum Corporation, dated March 31, March 31, 1989 1989 10(b) (i) Director Deferred Compensation Plan of 10(b)(viii) to Form 10-K 1-8968 Anadarko Petroleum Corporation, effective for year ended January 1, 1987 December 31, 1986 (ii) Director Deferred Compensation Agreement 19(a)(i) to Form 10-Q 1-8968 between Anadarko Petroleum Corporation and for quarter ended each Director electing to participate March 31, 1987 (iii) Anadarko Petroleum Corporation Director 10(b)(ix) to Form 10-K 1-8968 Retirement Income Plan, effective October for year ended 1, 1986 December 31, 1986 (iv) Anadarko Petroleum Corporation 1988 Stock 19(b) to Form 10-Q 1-8968 Option Plan for Non-Employee Directors for quarter ended September 30, 1988 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (v) Anadarko Petroleum Corporation and 19(c)(ix) to Form 10-Q 1-8968 Participating Affiliates and Subsidiaries for quarter ended Annual Override Pool Bonus Plan, as September 30, 1986 amended October 6, 1986 (vi) Second Amendment to Anadarko Petroleum 10(b)(ii) to Form 10-K 1-8968 Corporation and Participating Affiliates for year ended and Subsidiaries Annual Override Pool December 31, 1987 Bonus Plan (vii) Anadarko Petroleum Corporation 1986 Stock 10(b)(vi) to Form 10-K 1-8968 Option Plan, as amended October 28, 1987 for year ended (and Related Agreement) December 31, 1987 (viii) Restatement of the Anadarko Petroleum Post Effective Amendment No. 1 33-22134 Corporation 1987 Stock Option Plan to Forms S-8 and S-3, Anadarko (and Related Agreement) Petroleum Corporation 1987 Stock Option Plan (ix) 1993 Stock Incentive Plan 10(b)(xii) to Form 10-K for 1-8968 year ended December 31, 1993 (x) Anadarko Petroleum Corporation 1993 Stock 10(a) to Form 10-Q 1-8968 Incentive Plan Stock Option Agreement for quarter ended March 31, 1996 (xi) Annual Incentive Bonus Plan 10(b)(xiii) to Form 10-K 1-8968 for year ended December 31, 1993 (xii) Anadarko Petroleum Corporation 1993 Stock 10(b) to Form 10-Q 1-8968 Incentive Plan Performance Share Agreement for quarter ended March 31, 1996 (xiii) Agreement between Employee and Anadarko 28(c) to Form 10-Q 1-8968 Petroleum Corporation related to Change in for quarter ended Control, Death or Disability, or September 30, 1987 Termination Without Cause
66 68 10(b) (xiv) Anadarko Petroleum Corporation Key 19(c)(v) to Form 10-Q 1-8968 Employee Contract of Employment for quarter ended September 30, 1986 (xv) Restatement of Key Employee Contract of Employment 19(a) to Form 10-Q 1-8968 for quarter ended June 30, 1988 (xvi) Restatement of Key Employee Contract of Employment 19(a) to Form 10-Q 1-8968 Amended October 27, 1988 for quarter ended September 30, 1988 (xvii) Executive Deferred Compensation Plan of Anadarko 10(b)(xii) to Form 10-K 1-8968 Petroleum Corporation and Participating Subsidiaries for year ended and Affiliates, December 31, 1987 effective October 1, 1986 (xviii) Executive Deferred Compensation Plan of Anadarko 10(b)(vi) to Form 10-K 1-8968 Petroleum Corporation, effective January 1, 1987 for year ended December 31, 1986 (xix) Executive Deferred Compensation Agreement between 19(a)(ii) to Form 10-Q 1-8968 Anadarko Petroleum Corporation and each Executive for quarter ended electing to participate March 31, 1987 (xx) Amendments to Executive Deferred Compensation 10(b)(xv) to Form 10-K 1-8968 Agreement between Anadarko Petroleum Corporation and for year ended each Executive electing to participate December 31, 1987 (xxi) Anadarko Retirement Restoration Plan, 10(b)(xix) to Form 10-K 1-8968 effective January 1, 1995 for year ended December 31, 1995 (xxii) Anadarko Savings Restoration Plan, effective January 10(b)(xx) to Form 10-K 1-8968 1, 1995 for year ended December 31, 1995 (xxiii) Plan Agreement for the Management Life Insurance Plan 10(b)(xxi) to Form 10-K 1-8968 between Anadarko Petroleum Corporation and each for year ended Eligible Employee, effective July 1, 1995 December 31, 1995 10(c) (i) Purchase and Sale Agreement by and between Atlantic 10(c)(i) to Form 8-K 1-8968 Richfield Company, a Delaware corporation, as Seller dated January 13, 1993 and Anadarko Petroleum Corporation, a Delaware corporation, as Purchaser, dated December 8, 1992 *12 Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends *13 Portions of the Anadarko Petroleum Corporation 1996 Annual Report to Stockholders
67 69
EXHIBIT ORIGINALLY FILED FILE NUMBER DESCRIPTION AS EXHIBIT NUMBER ------- ----------- ---------------- -------- *21 List of Significant Subsidiaries: Anadarko Gathering Company, a Delaware corporation, Anadarko Energy Services Company (formerly Anadarko Trading Company), a Delaware corporation, Anadarko Algeria Corporation, a Delaware corporation *23 Consents of Experts and Counsel Consent of KPMG Peat Marwick LLP *24 Powers of Attorney *27 Financial Data Schedule *99 Anadarko Petroleum Corporation Proxy Statement, dated March 21, 1997
- --------------- 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 There were no reports filed on Form 8-K during the three months ended December 31, 1996. 68 70 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 11, 1997 By: 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 11, 1997.
NAME AND SIGNATURE TITLE ------------------ ----- (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 CHARLES M. SIMMONS
- --------------- * Signed on behalf of each of these persons and on his own behalf: By MICHAEL E. ROSE ---------------------------------------------------- (Michael E. Rose, Attorney-in-Fact)
69 71 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 4(f) Amendment to Revolving Credit Agreement, dated as of May 21, 1996 12 Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends 13 Portions of the Anadarko Petroleum Corporation 1996 Annual Report to Stockholders 23 Consents of Experts and Counsel Consent of KPMG Peat Marwick LLP 24 Powers of Attorney 27 Financial Data Schedule 99 Anadarko Petroleum Corporation Proxy Statement, dated March 21, 1997 EX-4.F 2 AMENDMENT TO REVOLVING CREDIT AGREEMENT 1 EXHIBIT 4(f) SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT Amendment, dated as of May 21, 1996, among ANADARKO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), the Banks named on the signature pages hereof (individually a "Bank" and collectively the "Banks") and CHEMICAL BANK, as Agent for the Banks (the "Agent"). WHEREAS, the Company, the Banks and the Agent have entered into a Revolving Credit Agreement, dated as of May 24, 1994 (as amended by the First Amendment to Revolving Credit Agreement, dated as of May 23, 1995, the "Agreement"), and desire further to amend the Agreement in the manner and to the extent herein provided. NOW THEREFORE, the Company, each Bank and the Agent agree as follows: 1. As used herein, the term "Amendment Date" shall mean May 21, 1996 or such other date as the parties hereafter shall agree upon. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned such term in the Agreement. Each reference to "hereof," "hereunder," "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. 2. The Company, the Banks and the Agent agree that, subject to the conditions set forth in Section 3 hereof, as of the date hereof the Agreement shall be amended as follows: (a) Section 1.01 of the Agreement shall be amended as follows: (i) The following definition shall be added after the definition of "Business Day": " 'CD Margin' means a rate per annum determined in accordance with the Pricing Schedule." (ii) The definition of "Commitment" shall be replaced in its entirety by the following: " 'Commitment' -- As to each Bank, its obligation to make Loans to the Company pursuant to Section 2.01 in the amount set forth opposite its name below, as such obligation may be reduced pursuant to this Agreement:
AMOUNT OF PERCENTAGE OF BANK COMMITMENT COMMITMENT ---- ------------ ------------- Chemical Bank.............................. $ 30,000,000 12.0% Morgan Guaranty Trust Company of New York.. 25,000,000 10.0 NationsBank of Texas, N.A.................. 25,000,000 10.0 ABN AMRO Bank N.V.......................... 21,250,000 8.5 Bank of America, Illinois.................. 21,250,000 8.5 Bank of Montreal........................... 21,250,000 8.5 The Bank of New York....................... 21,250,000 8.5 Credit Lyonnais Cayman Island Branch....... 21,250,000 8.5 Credit Suisse.............................. 21,250,000 8.5 The First National Bank of Chicago......... 21,250,000 8.5 Mellon Bank, N.A........................... 21,250,000 8.5 ------------ ----- Total............................ $250,000,000 100.0%"
(v) The following definition shall be added after the definition of "Commitment": " 'Commitment Fee Rate' means a rate per annum determined in accordance with the Pricing Schedule." 2 (vi) The definition of "Determining Bank" shall be amended by replacing "The Chase Manhattan Bank, National Association" with "NationsBank of Texas, N.A.". (vii) The following definition shall be added after the definition of "Eurodollar Loans": " 'Eurodollar Margin' means a rate per annum determined in accordance with the Pricing Schedule." (viii) The following definition shall be added after the definition of "Person": " 'Pricing Schedule' means the Schedule attached hereto and identified as such." (ix) The definition of "Termination Date" shall be amended by replacing the date "June 30, 2000" with the date "June 30, 2001". (b) Subsection (a) of Section 2.04 shall be replaced in its entirety by the following: "(a) Subject to subsection (b) of this Section, the Company agrees to pay to the Agent for the account of each Bank a commitment fee from the Effective Date to, but not including, the Termination Date or such earlier date upon which the Commitments shall terminate or be reduced to zero pursuant to Section 2.05 or 6.01, computed at the Commitment Fee Rate (determined daily in accordance with the Pricing Schedule) on the daily unused portion of the Commitments." (c) Section 2.09 shall be amended as follows: (i) subsection (a) shall be amended be replacing "37.50/100 of 1%" with the words "the Eurodollar Margin for such day." (ii) subsection (c) shall be amended by replacing "50/100 of 1%" with the words "the CD Margin for such day." (iii) subsections (f) and (g) shall be deleted in their entirety. (d) A Pricing Schedule in the form of Exhibit A hereto shall be added to the Agreement immediately following the signature pages thereof. 3. The amendments specified in Section 2 hereof shall be effective as of the date hereof upon the receipt by the Agent, on or prior to the Amendment Date, of: (a) A certificate signed by a responsible officer of the Company, dated the Amendment Date, to the effect that: (i) the representations and warranties contained in Section 3.01 of the Agreement are true and accurate on and as of the Amendment Date as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (ii) no event has occurred and is continuing, or would result from the execution, delivery and performance of this Amendment, which constitutes an Event of Default or would constitute an Event of Default with the giving of notice or the lapse of time, or both; and (iii) the Company is in compliance with all the terms, covenants and conditions of the Agreement which are binding upon it; (b) An opinion of the General Counsel of the Company, dated the Amendment Date, to the effect that: (i) the Company is duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business as a foreign corporation and is in good standing in the States of Colorado, Kansas, Louisiana, Montana, Nevada, New Mexico, Oklahoma, Texas and Wyoming; (ii) this Amendment has been duly authorized, executed and delivered by the Company; 2 3 (iii) this Amendment, assuming due authorization, execution and delivery hereof by the Banks and the Agent, constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (iv) the execution, delivery and performance by the Company of this Amendment will not (x) conflict with the restated certificate of incorporation or by-laws of the Company, each as in effect on the date of such opinion, (y) contravene any applicable provision of any applicable law or applicable order or (z) conflict with any provision of any indenture, loan agreement or other similar agreement or instrument known to such counsel (having made due inquiry with respect thereto) binding on the Company or affecting its property; (v) no authorization, consent or approval of any governmental body or agency of the State of Texas or the United States of America which has not been obtained is required in connection with the execution, delivery and performance by the Company of this Amendment; and (vi) to the knowledge of such counsel (having made due inquiry with respect thereto), there is no proceeding pending or threatened before any court or administrative agency which, in the opinion of such counsel, will result in a final determination which would have the effect of preventing the Company from carrying on its business or from meeting its current and anticipated obligations on a timely basis. In rendering such opinion, the General Counsel of the Company shall opine only as to matters governed by the Federal laws of the United States of America, the laws of the State of Texas and the General Corporation Law of the State of Delaware and such counsel may state that he has relied on certificates of state officials as to qualification to do business and good standing certificates of officers of the Company and other sources believed by him to be responsible; and (c) Duly executed counterparts hereof signed by the Company, the Agent and each of the Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). 4. Except as amended hereby, the Agreement shall continue in full force and effect. 5. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. 6. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. ANADARKO PETROLEUM CORPORATION By ---------------------------------- Title: Vice President and Treasurer CHEMICAL BANK By ---------------------------------- Title ------------------------------- 3 4 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ---------------------------------- Title ------------------------------- NATIONSBANK OF TEXAS, N.A. By ---------------------------------- Title ------------------------------- ABN AMRO BANK N.V. By ---------------------------------- Title ------------------------------- THE BANK OF AMERICA, ILLINOIS By ---------------------------------- Title ------------------------------- BANK OF MONTREAL By ---------------------------------- Title ------------------------------- THE BANK OF NEW YORK By ---------------------------------- Title ------------------------------- CREDIT LYONNAIS CAYMAN ISLAND BRANCH By ---------------------------------- Title ------------------------------- CREDIT SUISSE By ---------------------------------- Title ------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By ---------------------------------- Title ------------------------------- MELLON BANK, N.A. By ---------------------------------- Title ------------------------------- CHEMICAL BANK, as Agent By ---------------------------------- Title ------------------------------- 4 5 EXHIBIT A PRICING SCHEDULE The "Eurodollar Margin", "CD Margin" and "Commitment Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Level that exists on such day:
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V --------------- --------------- --------------- --------------- --------------- Eurodollar Margin 30/100 of 1% 32.5/100 of 1% 37.5/100 of 1% 45/100 of 1% 75/100 of 1% CD Margin 42.5/100 of 1% 45/100 of 1% 50/100 of 1% 57.5/100 of 1% 87.5/100 of 1% Commitment Fee Rate 12.5/100 of 1% 12.5/100 of 1% 15/100 of 1% 17.5/100 of 1% 25/100 of 1%
For purposes of this Schedule, the following terms have the following meanings: "Level" refers to the determination of which of Level I, Level II, Level III, Level IV or Level V exists at any date. The higher rating of S&P or Moodys will determine the Level to be used. "Level I" exists at any date if, at such date, the Company's long-term debt is rated A- or higher by S&P or A3 or higher by Moodys. "Level II" exists at any date if, at such date, the Company's long-term debt is rated BBB+ by S&P or Baa1 by Moodys. "Level III" exists at any date if, at such date, the Company's long-term debt is rated BBB by S&P or Baa2 by Moodys. "Level IV" exists at any date if, at such date, the Company's long-term debt is rated BBB- by S&P or Baa3 by Moodys. "Level V" exists at any date if, at such date, the Company's long-term debt is rated below BBB- by S&P or below Baa3 by Moodys. In the event a rating is not available from either Moodys or S&P, such rating agency will be deemed to have assigned its lowest rating. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement, and any rating assigned to any other debt securities of the Company shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 5 6 SECOND AMENDMENT TO 364-DAY CREDIT AGREEMENT Second Amendment, dated as of May 21, 1996, among ANADARKO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), the Banks named on the signature pages hereof (individually a "Bank" and collectively the "Banks") and CHEMICAL BANK, as Agent for the Banks (the "Agent"). WHEREAS, the Company, the Banks and the Agent have entered into a 364-Day Credit Agreement, dated as of May 24, 1994 (as amended by the First Amendment to 364-Day Credit Agreement, dated as of May 23, 1995, the "Agreement"), and desire further to amend the Agreement in the manner and to the extent herein provided. NOW THEREFORE, the Company, each Bank and the Agent agree as follows: 1. As used herein, the term "Amendment Date" shall mean May 21, 1996 or such other date as the parties hereafter shall agree upon. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned such term in the Agreement. Each reference to "hereof," "hereunder," "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. 2. The Company, the Banks and the Agent agree that, subject to the conditions set forth in Section 3 hereof, as of the date hereof the Agreement shall be amended as follows: (a) Section 1.01 of the Agreement shall be amended as follows: (i) The following definition shall be added after the definition of "Business Day": " 'CD Margin' means a rate per annum determined in accordance with the Pricing Schedule." (ii) The definition of "Commitment" shall be replaced in its entirety by the following: " 'Commitment' -- As to each Bank, its obligation to make Loans to the Company pursuant to Section 2.01 in the amount set forth opposite its name below, as such obligation may be reduced pursuant to this Agreement:
AMOUNT OF PERCENTAGE OF BANK COMMITMENT COMMITMENT ---- ------------ ------------- Chemical Bank $ 18,000,000 12.0% Morgan Guaranty Trust Company of New York 15,000,000 10.0 NationsBank of Texas, N.A. 15,000,000 10.0 ABN AMRO Bank N.V. 12,750,000 8.5 Bank of America, Illinois 12,750,000 8.5 Bank of Montreal 12,750,000 8.5 The Bank of New York 12,750,000 8.5 Credit Lyonnais Cayman Island Branch 12,750,000 8.5 Credit Suisse 12,750,000 8.5 The First National Bank of Chicago 12,750,000 8.5 Mellon Bank, N.A. 12,750,000 8.5 ------------ ------ Total $150,000,000 100.0%
(v) The following definition shall be added after the definition of "Commitment": " 'Commitment Fee Rate' means a rate per annum determined in accordance with the Pricing Schedule." (vi) The definition of "Determining Bank" shall be amended by replacing "The Chase Manhattan Bank, National Association" with "NationsBank of Texas, N.A.". 7 (vii) The following definition shall be added after the definition of "Eurodollar Loans": " 'Eurodollar Margin' means a rate per annum determined in accordance with the Pricing Schedule." (viii) The following definition shall be added after the definition of "Person": " 'Pricing Schedule' means the Schedule attached hereto and identified as such." (ix) The definition of "Termination Date" shall be amended by replacing the date "May 21, 1996" with the date "May 20, 1997" and the date "June 30, 2000" with the date "June 30, 2001". (b) Subsection (a) of Section 2.04 shall be replaced in its entirety by the following: "(a) Subject to subsection (b) of this Section, the Company agrees to pay to the Agent for the account of each Bank a commitment fee from the Effective Date to, but not including , the Termination Date or such earlier date upon which the Commitments shall terminate or be reduced to zero pursuant to Section 2.05 or 6.01, computed at the Commitment Fee Rate (determined daily in accordance with the Pricing Schedule) on the daily unused portion of the Commitments." (c) Section 2.09 shall be amended as follows: (i) subsection (a) shall be amended be replacing "37.50/100 of 1%" with the words "the Eurodollar Margin for such day." (ii) subsection (c) shall be amended by replacing "50/100 of 1%" with the words "the CD Margin for such day." (iii) subsections (f) and (g) shall be deleted in their entirety. (d) A Pricing Schedule in the form of Exhibit A hereto shall be added to the Agreement immediately following the signature pages thereof. 3. The amendments specified in Section 2 hereof shall be effective as of the date hereof upon the receipt by the Agent, on or prior to the Amendment Date, of: (a) A certificate signed by a responsible officer of the Company, dated the Amendment Date, to the effect that: (i) the representations and warranties contained in Section 3.01 of the Agreement are true and accurate on and as of the Amendment Date as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (ii) no event has occurred and is continuing, or would result from the execution, delivery and performance of this Amendment, which constitutes an Event of Default or would constitute an Event of Default with the giving of notice or the lapse of time, or both; and (iii) the Company is in compliance with all the terms, covenants and conditions of the Agreement which are binding upon it; (b) An opinion of the General Counsel of the Company, dated the Amendment Date, to the effect that: (i) the Company is duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business as a foreign corporation and is in good standing in the States of Colorado, Kansas, Louisiana, Montana, Nevada, New Mexico, Oklahoma, Texas and Wyoming; 2 8 (ii) this Amendment has been duly authorized, executed and delivered by the Company; (iii) this Amendment, assuming due authorization, execution and delivery hereof by the Banks and the Agent, constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except as (x) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (y) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (iv) the execution, delivery and performance by the Company of this Amendment will not (x) conflict with the restated certificate of incorporation or by-laws of the Company, each as in effect on the date of such opinion, (y) contravene any applicable provision of any applicable law or applicable order or (z) conflict with any provision of any indenture, loan agreement or other similar agreement or instrument known to such counsel (having made due inquiry with respect thereto) binding on the Company or affecting its property; (v) no authorization, consent or approval of any governmental body or agency of the State of Texas or the United States of America which has not been obtained is required in connection with the execution, delivery and performance by the Company of this Amendment; and (vi) to the knowledge of such counsel (having made due inquiry with respect thereto), there is no proceeding pending or threatened before any court or administrative agency which, in the opinion of such counsel, will result in a final determination which would have the effect of preventing the Company from carrying on its business or from meeting its current and anticipated obligations on a timely basis. In rendering such opinion, the General Counsel of the Company shall opine only as to matters governed by the Federal laws of the United States of America, the laws of the State of Texas and the General Corporation Law of the State of Delaware and such counsel may state that he has relied on certificates of state officials as to qualification to do business and good standing certificates of officers of the Company and other sources believed by him to be responsible; and (c) Duly executed counterparts hereof signed by the Company, the Agent and each of the Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). 4. Except as amended hereby, the Agreement shall continue in full force and effect. 5. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. 6. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 3 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. ANADARKO PETROLEUM CORPORATION By ---------------------------------- Title ------------------------------- CHEMICAL BANK By ---------------------------------- Title ------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ---------------------------------- Title ------------------------------- NATIONSBANK OF TEXAS, N.A. By ---------------------------------- Title ------------------------------- ABN AMRO BANK N.V. By ---------------------------------- Title ------------------------------- THE BANK OF AMERICA, ILLINOIS By ---------------------------------- Title ------------------------------- BANK OF MONTREAL By ---------------------------------- Title ------------------------------- THE BANK OF NEW YORK By ---------------------------------- Title ------------------------------- CREDIT LYONNAIS CAYMAN ISLAND BRANCH By ---------------------------------- Title ------------------------------- 4 10 CREDIT SUISSE By ---------------------------------- Title ------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By ---------------------------------- Title ------------------------------- MELLON BANK, N.A. By ---------------------------------- Title ------------------------------- CHEMICAL BANK, as Agent By ---------------------------------- Title ------------------------------- 5 11 EXHIBIT A PRICING SCHEDULE The "Eurodollar Margin", "CD Margin" and "Commitment Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Level that exists on such day:
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V -------------- -------------- -------------- -------------- -------------- Eurodollar Margin 30/100 of 1% 32.5/100 of 1% 37.5/100 of 1% 45/100 of 1% 75/100 of 1% CD Margin 42.5/100 of 1% 45/100 of 1% 50/100 of 1% 57.5/100 of 1% 87.5/100 of 1% Commitment Fee Rate 10/100 of 1% 10/100 of 1% 10/100 of 1% 10/100 of 1% 10/100 of 1%
For purposes of this Schedule, the following terms have the following meanings: "Level" refers to the determination of which of Level I, Level II, Level III, Level IV or Level V exists at any date. The higher rating of S&P or Moodys will determine the Level to be used. "Level I" exists at any date if, at such date, the Company's long-term debt is rated A- or higher by S&P or A3 or higher by Moodys. "Level II" exists at any date if, at such date, the Company's long-term debt is rated BBB+ S&P or Baa1 by Moodys. "Level III" exists at any date if, at such date, the Company's long-term debt is rated BBB by S&P or Baa2 by Moodys. "Level IV" exists at any date if, at such date, the Company's long-term debt is rated BBB- by S&P or Baa3 by Moodys. "Level V" exists at any date if, at such date, the Company's long-term debt is rated below BBB- by S&P or below Baa3 by Moodys. In the event a rating is not available from either Moodys or S&P, such rating agency will be deemed to have assigned its lowest rating. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement, and any rating assigned to any other debt securities of the Company shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 6 EX-12 3 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 ANADARKO PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FIVE YEARS ENDED DECEMBER 31, 1996
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1996 1995 1994 1993 1992 -------- ------- ------- -------- ------- THOUSANDS Gross Income $196,763 $65,624 $90,794 $106,824 $68,311 Rentals 4,234 2,457 2,814 3,069 2,737 -------- ------- ------- -------- ------- Earnings 200,997 68,081 93,608 109,893 71,048 ======== ======= ======= ======== ======= Gross Interest Expense 55,986 52,557 41,635 38,000 36,620 Rentals 4,234 2,457 2,814 3,069 2,737 -------- ------- ------- -------- ------- Fixed Charges $ 60,220 $55,014 $44,449 $ 41,069 $39,357 ======== ======= ======= ======== ======= Ratio of Earnings to Fixed Charges 3.34 1.24 2.11 2.68 1.81 ======== ======= ======= ======== =======
The ratios of earnings to fixed charges 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, and the estimated interest component of rentals. Certain amounts for prior years have been restated to conform to the current presentation. During the five years ended December 31, 1996, there were no shares of preferred stock outstanding. Accordingly, the ratio of earnings to combined fixed charges and preferred stock dividends for each of the five years is the same as the ratio of earnings to fixed charges. EX-13 4 1996 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 SUMMARY FINANCIAL DATA*
% CHANGE Millions except per share amounts 1996 95-96 1995 1994 1993 1992 ----------------------------------------------------------------------- Revenues $ 569.0 31 $ 434.0 $ 482.5 $ 482.0 $ 379.7 Operating Income 195.6 203 64.5 88.7 104.1 67.6 Net Income before Cumulative Effect of Changes in Accounting Principles 100.7 380 21.0 41.1 40.0 27.3 Net Income 100.7 380 21.0 41.1 117.4 27.3 Net Cash provided by Operating Activities 314.5 27 248.3 239.7 274.3 171.6 Per Common Share Net Income before Cumulative Effect of Changes in Accounting Principles 1.70 372 0.36 0.70 0.70 0.49 Net Income 1.70 372 0.36 0.70 2.05 0.49 Dividends 0.30 - 0.30 0.30 0.30 0.30 Average Shares Outstanding 59.2 1 58.9 58.8 57.2 55.3 Capital Expenditures 427 29 331 423 264 360 ------- --- ------- ------- ------- ------- Long-term Debt 731 8 674 629 543 647 Stockholders' Equity 1,014 11 910 900 864 657 ------- --- ------- ------- ------- ------- Total Assets $ 2,584 14 $ 2,267 $ 2,142 $ 2,023 $ 1,905 ------- --- ------ ------- ------- ------- Oil Reserves (MMBbls) 297.8 36 219.2 157.4 78.5 80.3 Gas Reserves (Tcf) 1.82 (1) 1.84 1.91 1.88 1.73 Total Reserves (MMEEBs) 601.3 14 526.3 476.4 391.1 368.0 ------- --- ------- ------- ------- ------- Worldwide Finding Cost ($/EEB) $ 2.76 1 $ 2.74 $ 2.76 $ 4.07 $ 5.43 Worldwide Reserve Replacement (% of Production) 299 32 226 308 162 200
* Consolidated for Anadarko Petroleum Corporation (referred to herein as Anadarko) and its principal subsidiaries, including Anadarko Energy Services Company, Anadarko Gathering Company, and Anadarko Algeria Corporation. See Management's Discussion and Analysis. 2 1996 1996 was a record year for Anadarko. The Company benefited from strong commodity prices for gas, oil and natural gas liquids (NGLs), posting record revenues, cash flow and net income. However, our successes were much more than monetary. Record levels of activity were achieved in nearly all of the Company's core operating areas. Significant capital investments were made in the areas of southwest Kansas, the Permian Basin of west Texas, the Gulf of Mexico and Alaska. Using the drill bit, Anadarko again replaced its annual production volumes with proven reserves of oil and gas. These reserves were found at costs well below the most recent available industry averages. Overseas, our development work in Algeria moved us closer to first production. With highly-prospective acreage remaining in Algeria, Anadarko continued to explore, drilling three discoveries. The Company signed two new international ventures in 1996 to generate future opportunity and continued growth and also divested its interests in Indonesia. With the strongest portfolio of exploitation and development drilling projects in Company history, Anadarko announced that by 2000 production should double from current levels. This section details the Company's 1996 work program. ALGERIA Anadarko's 1996 work program in Algeria's Sahara Desert balanced delineation of known fields with continued exploration. The Company successfully drilled four delineation wells and three wildcat discovery wells. With results from the Algeria drilling program, the Company's estimates of net, proved reserves were raised to 124.3 million barrels (MMBbls) of crude oil and condensate, an increase of 34 percent over 1995. Algeria represents about 20 percent of the Company's total proved reserves. The Algerian work program accounted for the largest portion of the Company's international budget. Capital spending for 1996 totaled $85 million and Anadarko plans to invest $191 million in Algeria in 1997. Developing Known Discoveries In 1996, SONATRACH received a Provisional Exploitation Authorization (PEA) from the Algerian government for wells in the Hassi Berkine (HBN) and Hassi Berkine South (HBNS) Fields. This gave Anadarko approval to begin development operations toward first production. In September 1996, Anadarko and partners signed a $177-million Engineering, Procurement and Construction (EPC) contract with Brown & Root Condor for Stage I production facilities at the HBNS Field. Anadarko and its partners are working toward first production of 60,000 barrels of oil per day (BOPD) (gross) in early 1998. Construction is underway which includes oil and gas processing facilities and separators, compression equipment to reinject natural gas, oil storage tanks with a capacity of 3 180,000 barrels, and office, accommodation and maintenance facilities. The Company plans to spend approximately $120 million on development activities in Algeria in 1997. HBNS Field ~ The HBNS Field was discovered in 1995 and three delineation wells have been drilled in the Field to date. Three of the wells tested at unstimulated flow rates ranging from 14,500 - 17,000 BOPD. A comprehensive development plan is being prepared that calls for drilling about 53 wells in the 30,000-acre HBNS Field. Development drilling will begin in 1997. Additional production facilities at the HBNS Field are planned to increase production volumes in subsequent stages of development. Initial production from the HBNS Field will move through a new 30-inch pipeline being constructed by SONATRACH. The pipeline, expected to be completed in late 1997, runs just south of the HBNS Field west to the Nezla area and north past the giant Hassi Messaoud Field. Production will then be transported to multiple export terminals on the Mediterranean Coast. Markets for this Saharan Blend crude oil are now being identified by Anadarko's marketing department. HBN Field ~ Development planning is underway at the HBN Field, located on Block 404 just north of the HBNS Field. Since the HBN Field was discovered in 1994 (the HBN-1 well tested 4,900 BOPD), the partners have drilled one successful delineation well - the HBN-2 well which tested 13,750 BOPD. A third delineation well - the HBN-4 - was drilled three miles southwest of the HBN-1 discovery well. Although it was a dry hole, the well encountered thick, reservoir quality sands and established the oil/water contact. The well was cased and will be used as a future injection well. In March 1996, the Italian company, Agip, announced a discovery called the Hassi Berkine North No. 1 (HBNN-1), located just north of Block 404, which demonstrated the extension of the HBN Field onto Agip's Block 403. The HBNN-1 well tested 14,818 BOPD. In December 1996, results from the HBNN-2 well were announced, flowing 12,000 BOPD. Anadarko and partners are working with Agip on the Commerciality Report and a joint development plan for the Field. The companies plan to file the Commerciality Report for the HBN Field in 1997. An Exploitation License could be granted in late 1997 with first production projected for late 1999. BKE Field ~ Anadarko's largest Algerian Field discovered to date is the Berkine East (BKE) Field, located on Block 404. Discovered in 1994, the BKE Field stretches about 25 kilometers from north to south and is located on both Anadarko and Cepsa (a Spanish oil company operating on Block 406) acreage. Since 1994, Anadarko and partners have drilled two successful delineation wells in the BKE Field; two of the wells tested at unstimulated rates above 15,000 BOPD. Cepsa has drilled three delineation wells in the Field. During 1996, Anadarko and partners drilled the BKE-4 well, the second delineation well in the Field. The well was drilled about five kilometers from the BKE-1 discovery well and logged 70 feet of net pay, confirming the significant westward extension of the Field on Anadarko's acreage. The well was not tested and was cased and suspended for future production. Anadarko and partners are currently preparing a joint development plan and a Commerciality Report for the BKE Field with Cepsa. The Commerciality Report should be submitted to SONATRACH in 1997. Following receipt of an Exploitation License, initial production is expected in late 1999. 4 EME Field ~ Delineation drilling at the El Merk East (EME) Field, located on Block 208, was conducted in 1996. The EME Field is the fourth oil field discovered by the partners since 1993. The EME-2 delineation well, located about 2.4 kilometers east of the EME-1 discovery well, tested three zones with combined flow rates in excess of 18,000 barrels of oil and condensate per day and 66 MMcf/d of gas. The EME Field area is structurally complex and has multiple productive zones of oil, gas and condensate. The commercial potential of this field is under evaluation. Continued Exploration Significant exploration potential remains on the partners' acreage. In 1997, Anadarko plans a two-rig drilling program to drill up to 10 exploration targets. The Company plans to invest about $50 million on exploration in Algeria in 1997. Four exploration wells were drilled in 1996, of which three were discoveries. BKNE-1 ~ The Berkine North East No. 1 discovery well was drilled 18 kilometers west of the BKE Field and logged 14 feet of net oil pay. The well was not tested and was cased and suspended. Additional evaluation is underway to determine the potential of this discovery. The new SONATRACH 30-inch pipeline will come very close to the BKNE-1 discovery. EKT-1 ~ The El Kheit Et Tessekha No. 1 (EKT-1) discovery well is located in the north- west corner of Block 208. The well found 144 feet of net hydrocarbon pay sands and flowed at an unstimulated rate of 13,568 BOPD and 8.8 MMcf/d of gas. Partners will evaluate the results of the EKT-1 well and expect further delineation drilling to better evaluate this significant discovery. EMC-1 ~ The El Merk Central No. 1 (EMC-1) well, located on Block 208, was completed in late 1996. The well flowed 1,278 barrels of condensate per day (BCPD) and 10.2 MMcf/d of gas. The EMC-1 well successfully tested a new fault block adjacent to the EME Field and is the fourth exploration success on Block 208 since 1993. EMC-1 is located 1.5 kilometers west of the EME Field and six kilometers southwest of EMK-1. TAKS-1 ~ The Takouazet South No. 1 (TAKS-1) was drilled on the partners' southernmost acreage - Block 245, a previously undrilled area. The well discovered no commercial hydrocarbons and was plugged and abandoned. Anadarko's interest in the Algerian PSA for Blocks 208, 211, 245 and 404 is 50 percent before participation at the exploitation stage by SONATRACH. The Company has two other partners, LASMO and Maersk. In addition to Anadarko's original exploration area, the Company acquired a minority interest in a PSA for two additional blocks covering about 1.2 million acres in 1994. The Blocks, 401 and 402, are located east of Block 404 and are operated by BHP Petroleum (Algerie) Inc. In 1996, BHP and Anadarko shot 1,900 kilometers of high-quality seismic data and are currently evaluating exploration drilling plans for 1997. In December 1996, Agip announced a discovery - the BRSE No. 1 - located less than one mile from the partners' lease boundary. The BRSE No. 1 well tested about 13,000 BOPD. Anadarko owns a 27.5-percent interest in the two blocks. 5 For additional information, see Properties and Activities - International under Item 1 and Marketing Strategies and Additional Factors Affecting Business under Item 7 of the Form 10-K. ALASKA Anadarko has been exploring on Alaska's North Slope with partner ARCO Alaska, Inc. since 1992. Today, Anadarko is active in two regions in Alaska: the Colville area on the North Slope and the Cook Inlet. Anadarko invested about $14 million in its Alaska operations in 1996 and plans to spend about $17 million in 1997. The budgeted dollars are equally split between development of the new Alpine Field and continued geological and geophysical studies in the Cook Inlet. The Alpine Field In October 1996, Anadarko and partners announced plans to develop the Alpine Field, a major oil field on Alaska's North Slope. Located about 50 miles west of Prudhoe Bay, the Alpine Field holds proven and potential oil reserves of 250-300 million barrels (gross). This Field is the largest domestic onshore discovery announced in the last decade and the fifth largest field in Alaska. Development work is underway in the Field with first production of 30,000 BOPD (gross) expected in 2000. Production should double to 60,000 BOPD (gross) in 2001. The partners are planning a 100-150 well program with an estimated development cost of $700-$800 million (gross). In 1997, partners plan to complete interpretation of a 150 square-mile 3-D seismic survey conducted in early 1996. Technological advancements and an appreciation for the environment allow oil and gas operations and wildlife to co-exist in pristine areas like Alaska. Minimizing environmental impact is a key factor in development of the Alpine Field. Directional drilling will be conducted from two well pads, totaling 85 acres. Construction of the drilling pads is expected to commence in 1997 with development drilling estimated to begin in early 1999. A 16-20 inch, 34 mile pipeline will be constructed to connect the production facility to the Trans Alaska Pipeline System terminus in the Kuparuk River Field. A one-mile section of the pipeline will be tunneled 110 feet below the surface of the Colville River, eliminating the need for costly roads and bridges. Pipeline construction is scheduled to begin in late 1997. Equipment and personnel will be moved by small aircraft, helicopters and, during the winter months, surface vehicles over an ice road. Through innovative solutions like these, the partners plan to reduce development costs for the Alpine Field by about 30 percent compared to other North Slope Fields. To secure additional acreage, Anadarko and partners invested about $2 million for five tracts totaling 5,900 acres near the Alpine Field in State Lease Sale 86A held in October 1996. A complete geological and geophysical evaluation of this acreage was conducted in 1996. 6 Partners in the Alpine Field include ARCO Alaska, Inc. (operator), 56-percent working interest; Anadarko, 22-percent working interest; and, Union Texas Petroleum Alaska Corp., 22-percent working interest. The Cook Inlet Anadarko's long-term interest in Alaska was further demonstrated when the Company signed a strategic alliance with ARCO Alaska in 1996 to explore the Upper Cook Inlet on the state's southern coast. Anadarko will combine its experience and proven track record in exploration with ARCO's experience in Alaska. The two-year agreement gives Anadarko access to ARCO Alaska's 127,000 lease acres in the area. Anadarko will serve as operator and will supervise an Anchorage-based team of geoscientists. In December 1996, Anadarko and ARCO Alaska purchased 10 lease blocks for $832,000 covering 39,000 acres on the west side of the Cook Inlet and on the Kenai Peninsula. During 1996, Anadarko reviewed existing seismic data in the Cook Inlet region to identify areas for a new seismic acquisition program. Anadarko completed a 73-mile seismic shoot in early 1997 and is planning to complete another 74-mile seismic shoot in the first half of 1997. The Company expects to develop a list of exploratory prospects by 1998. Anadarko plans to invest about $7 million (net) on its Cook Inlet technical evaluations in 1997. Anadarko (operator) and ARCO Alaska each have a 50-percent working interest in the Cook Inlet alliance. The Beaufort Sea In September 1996, Anadarko and partner ARCO Alaska acquired six lease blocks totaling about 34,000 acres in the Beaufort Sea, off the North Slope of Alaska. The companies are reviewing existing seismic data and plan to acquire new seismic information in late 1997. ARCO Alaska (operator) owns a 78-percent working interest in the blocks. Anadarko owns a 22-percent working interest. Alaska is one of the country's last domestic frontiers for oil and gas exploration. Anadarko plans to look at other opportunities within the state and will continue to allocate future exploration and development efforts to this new core area. GULF OF MEXICO Anadarko's Gulf of Mexico activities in 1996 were highlighted by installation of and first production from the Mahogany platform and by two additional sub-salt discoveries. Anadarko invested about $103 million on its Gulf of Mexico operations in 1996. At year-end 1996, about 13 percent of Anadarko's proved energy reserves were located in the Gulf of Mexico. Anadarko's Gulf of Mexico production in 1996 averaged 119 MMcf/d of gas and 2,000 barrels of oil and condensate per day. 7 The Company plans to maintain a balanced program of exploration and development in both conventional and sub-salt plays. Anadarko plans to spend about $87 million in 1997 for Gulf of Mexico exploration and development. The Mahogany Field The industry's focus on the Gulf of Mexico's sub-salt play began in September 1993 when Anadarko and its partners made the Mahogany discovery, located at Ship Shoal South Addition 349/359 about 80 miles offshore Louisiana. After drilling three successful delineation wells, the Mahogany Field was declared commercial by the partners in April 1995. The platform was installed in August 1996 and first production began in late December 1996. At the time this report was released for printing, production tests from two wells at the Mahogany platform totaled approximately 14,000 BOPD and 14 MMcf/d of gas (gross). The partners are in the process of completing the remaining two wells drilled to date and expect to bring them on-line in 1997. Production from these four wells is estimated to peak in 1997 at about 22,000 BOPD and 30 MMcf/d of gas. Additional wells drilled from the platform could increase production. This platform can also be used to produce discoveries from the partners' neighboring blocks. Phillips Petroleum Company (operator) and Anadarko each own a 37.5-percent working interest in the Mahogany Field. Amoco Production Company owns a 25- percent working interest. Sub-Salt Success Anadarko continued its sub-salt play success in 1996 by announcing two discoveries: Agate and Monazite. The Company also drilled three dry holes in 1996. Anadarko has one of the industry's most extensive portfolios of sub-salt prospects with 17 prospects on 32 lease blocks. Agate ~ Anadarko and partners' third sub-salt discovery to date was Agate, located at Ship Shoal 361, about 72 miles offshore Louisiana. Two separate zones in a single sand formation were tested at Agate, with the well flowing 4,126 BOPD and 24.1 MMcf/d of gas. The well was drilled to a total depth of 16,163 feet and encountered a gross hydrocarbon interval of 105 feet. The discovery is located in about 400 feet of water. Agate is located about six miles west of the Mahogany Field. The partners are analyzing the possibility of installing sub-sea completion facilities at Agate, tying production to the Mahogany platform. Anadarko and Phillips (operator) each own a 50-percent working interest in the Agate Field. Monazite ~ In November 1996, Anadarko announced the Monazite discovery, located at Vermilion South Addition 375. Well logs, core analyses and production tests confirmed multiple hydrocarbon bearing sands. Production tests were attempted over a one-month period on separate pay intervals. Although all intervals flowed oil, the information was inconclusive. Poor wellbore conditions resulted in the well being plugged and abandoned. Anadarko and 8 partners are reviewing existing seismic data and future appraisal drilling is needed to confirm commerciality of the Monazite discovery. The Company is planning a delineation well at Monazite during 1997. Anadarko (operator), Broken Hill Proprietary (BHP) and Phillips each hold a 33.33-percent working interest in the Monazite discovery. Sub-Salt in 1997 Anadarko and partners have drilled a total of eight exploratory sub-salt wells with four discoveries (Mahogany, Teak, Agate, Monazite). The Company is very encouraged by the results in this play to date and has five prospects in the final stages of exploration preparation. Anadarko has budgeted about $40 million (net) for sub-salt exploration in 1997. In January 1997, Anadarko and partners spudded the Lion No. 1 prospect, located at South Timbalier 299, about 60 miles offshore Louisiana. BHP (operator), Anadarko and Phillips each own a 33.33-percent working interest in the prospect. During 1997, Anadarko will continue to evaluate its prospect inventory and make determinations on drilling order. In 1996, more than $9 million was spent on new seismic acquisition and processing to help "firm-up" drilling locations. Including other operators, nine sub-salt wells were drilled in the Gulf of Mexico in 1996 and seven wells were drilling at the time of publication. Technological advancements in seismic acquisition, processing and structural modeling have yielded better solutions to sub-salt challenges. While the industry is still learning, the success of Anadarko and others proves the potential of the sub-salt play. Conventional Operations Conventional operations in the Gulf of Mexico in 1996 focused on drilling and recompletions, or enhancing the production capabilities of existing wells. The Company participated in the completion of three new wells in 1996 and 10 additional wells were recompleted. Production from these wells added 52 MMcf/d of gas and 2,760 BOPD. In 1996, Anadarko drilled three conventional exploration wells - all dry holes. Two additional exploration wells began drilling in late 1996. In 1997, Anadarko plans to drill three conventional exploration wells in the Gulf of Mexico. Eight development wells are also planned in 1997. Anadarko's recompletion program will continue in 1997. Going Deep Encouraged by the industry's success in the deepwater of the Gulf of Mexico, Anadarko and partners in September 1996 acquired 12 lease blocks in Offshore Lease Sale No. 161. The blocks have water depths ranging from 2,700-5,700 feet. The Company operates 10 of the blocks. Anadarko selected its deepwater blocks by interpreting available 2-D and 3-D seismic data. The Company plans to acquire 3-D data on seven of the blocks in 1997. One exploratory prospect could be drilled in late 1997. 9 THE HUGOTON EMBAYMENT In the Hugoton Embayment, located in southwest Kansas and the Oklahoma Panhandle, the Company operates about 2,000 wells on about 500,000 lease acres. During 1996, Anadarko drilled 72 development wells and recompleted 27 wells. Activities are concentrated on two major work programs - the shallow, low pressure gas formations and the deep oil and gas zones found beneath the shallow production. The Company's 1996 capital spending in the Hugoton Embayment was $30 million, excluding acquisitions. Record activity is expected in 1997, with 130 development wells and 40 recompletions budgeted. Capital spending for 1997 is estimated at about $50 million, an increase of 66 percent over 1996. Over the last four years, Anadarko has invested about $77 million in its Hugoton Embayment operations, drilling nearly 300 development wells and recompleting about 70 wells. Through this program, the Company has added 31.2 MMEEBs of proved reserves. Net production in 1996 from the Hugoton Embayment was 85.8 billion cubic feet (Bcf) of gas and 1.6 MMBbls of oil. This area accounted for 42 percent of the Company's total production volumes in 1996. Gas production is predicted to rise in 1997-98. Developing the Shallow Formations The shallow gas formations (2,000-3,500 feet) are contained in four fields: the Hugoton, Panoma Council Grove and Greenwood Fields, located in southwest Kansas, and the Guymon-Hugoton Field, located in the Oklahoma Panhandle. The Company is still developing reserves in the shallow Hugoton Field even though it was discovered in 1922. During 1996, Anadarko invested about $5 million in shallow gas drilling in the area. The Company drilled and completed 17 wells (10 infill wells and seven replacement wells), adding production of 4.5 MMcf/d of gas. At year-end 1996, an additional 11 wells were drilled and are in various stages of completion. In 1997, the Company has budgeted $7 million to drill 30 wells. Another major component of the Company's program is workovers - or improving production from existing wells. At year-end 1996, 17 workover rigs were operating in the Hugoton Embayment. Anadarko worked over about 100 wells in 1996 and plans to workover about 150 wells in 1997. Better completions, utilizing improved fracture-stimulation technology, should help increase production volumes in 1997. Exploiting Deep Horizons Anadarko is exploring and developing the deeper productive horizons (5,000-6,000 feet) below the shallow gas fields with success. During 1996 in the deeper formations, the Company drilled 55 wells and recompleted 27 wells, representing a capital expenditure of about $17 million. Net production in 1996 from the deeper horizons in the area averaged 53 MMcf/d of gas and 10 4,600 BOPD. This represents about 13 percent of the Company's total production volumes. Anadarko is now the largest oil producer in southwest Kansas. In 1997, 100 development wells and 40 recompletions are planned in deeper zones with an estimated expenditure of about $29 million. This drilling program is largely based on 3-D seismic. In 1996, the Company spent $8 million to acquire 339 square-miles of 3-D seismic data in the area. The results of these surveys were used to identify drilling locations in the Chester and Morrow producing trends. In 1997, the Company plans to acquire an additional 200 square-miles of 3-D seismic over other prospective areas. Property acquisitions have helped solidify the Company's acreage positions in the area. The largest acquisition by the Company in this area was from Mesa Operating Limited Partnership in 1993. Anadarko acquired the "deep" rights to oil and gas properties encompassing 21,000 net acres. Anadarko has drilled 45 development wells on this acreage since the 1993 acquisition, with production increasing from 500 BOPD and 400 thousand cubic feet per day (Mcf/d) of gas in 1993 to a peak of 2,000 BOPD and 5,000 Mcf/d of gas in 1996. The Company also acquired a 6.5-percent override interest in an additional 188,000 acres which are under a pre-existing farm-out arrangement with another company until 1999 when the undeveloped portion of the acreage will revert to Anadarko. In March 1996, Anadarko acquired about 24,000 net acres in the Oklahoma panhandle (Cimarron and Texas Counties) from another operator for $2.9 million. The Company also farmed-in an additional 31,000 net acres. A 3-D survey of the area is planned and the Company anticipates drilling 11 development wells on the acreage in 1997. Gathering Operations In March 1996, Anadarko closed the acquisition of Panhandle Eastern Pipe Line Company's (PEPL) West End gas gathering assets in the Hugoton Field area. This was the second of two recent acquisitions from PanEnergy Corp. When combined, the two acquisitions triple Anadarko's gathering capacity to 480 MMcf/d of gas. The PEPL acquisition includes 1,150 miles of pipeline, 16 compressor stations and serves nearly 1,000 Anadarko-operated wells and 200 third-party wells. Anadarko took over operation of the Cimarron River System (CRS) in late 1994. The purchase price for the two systems was about $35 million. During 1996, Anadarko invested $15 million for upgrades to the Company's gas gathering system in southwest Kansas. Control of gathering assets helps the Company maximize production and meet changing market demands. Over the last three years, Anadarko has invested about $10 million installing computerized well automation systems in southwest Kansas. The system electronically tracks the producing status of about 1,500 Company- operated wells in southwest Kansas and the Oklahoma and Texas panhandles. Anadarko spent $3 million in 1996 to install the automation system on wells connected to the PEPL and CRS systems. 11 PERMIAN BASIN An aggressive work program in the Permian Basin of west Texas during 1996 focused on development drilling, increased density drilling and waterflood implementation. Drilling activity in 1996 reached record levels in the Permian Basin. At year-end 1996, Permian Basin net production was about 9,500 BOPD, or about half of the Company's total daily oil production. In 1996, Anadarko invested about $36 million in the area. The Company drilled 182 wells (163 development wells and 19 injection wells) in the Permian Basin in 1996 compared to 96 wells (73 development wells and 23 injection wells) the previous year. Anadarko plans to drill more than 200 wells in the Permian Basin in 1997, with planned capital expenditures of $46 million. At the time this report was released for printing, 10 Company-operated rigs were drilling in the Permian Basin. The most active area in 1996 was the TXL South Unit of Ector County, Texas. Anadarko drilled and completed 55 infill wells in the Unit in 1996. As a result of this infill drilling program, gross production has increased from 1,070 BOPD and 1.2 MMcf/d of gas in 1995 to a current rate of 3,200 BOPD and 5.9 MMcf/d of gas. The Company's working interest in the TXL South Unit has increased from less than one percent to 65 percent through a series of acquisitions and trades over the past four years. Anadarko plans to spend about $17 million in the TXL South Unit in 1997 to drill 50 development wells and add pay in 20 existing wells. An additional 40 wells will be deepened to expose more pay interval. Plans call for expanding waterflood operations over the next few years. Anadarko currently operates about 200 producing wells in the TXL South Field on about 10,000 lease acres (gross). In the Sharon Ridge/Diamond M Fields in Scurry County, Texas, the Company initiated secondary recovery operations in 1996 on approximately 1,500 acres. A $13 million program is underway to drill 32 producing wells, 46 injection wells and construct waterflood facilities. At year-end 1996, the program was about 30 percent complete. Anadarko currently operates 300 producing wells in these fields with average 1996 production of 1,500 BOPD. GULF COAST In the Gulf Coast regions of Mississippi, Texas and Louisiana, Anadarko is active in several high-potential exploratory plays. Many of these areas remain relatively under-explored with modern technology and the Company is introducing new strategies in the search for hydrocarbons. Smackover Play In 1996, Anadarko participated in the largest 3-D seismic survey ever conducted in Mississippi - a 202 square-mile area in the Smackover Play in Wayne County. The survey provided data on several exploratory leads that the Company identified from existing 2-D data that was reprocessed in 1995. Potential reservoirs in the Smackover Play are located on the flanks of large, steeply-dipping salt structures. 12 In 1997, Anadarko plans to drill up to four exploratory wells. The first prospect spudded in February 1997. Anadarko will continue to evaluate the 3-D seismic results for the remainder of the 1997 drilling program. Anadarko spent $2 million on its Smackover exploratory program in 1996 and plans to invest about $11 million in 1997. Anadarko owns 20,000 (gross) lease acres in Wayne and Jones Counties. The Company has a 50-percent working interest in this venture. Wilcox Play Anadarko is also evaluating exploration prospects in the Wilcox Play, located primarily in Jim Hogg County, Texas. The Company is currently working on a leasing program in the area. During 1996, Anadarko conducted a 120 square-mile 3-D seismic survey. The seismic data was processed in late 1996 - early 1997 and the Company plans to drill an exploratory well in mid-1997. Anadarko has a 33.33-percent working interest in the exploratory venture. Yegua Trend Development of the Yegua Trend along the Texas Gulf Coast has been ongoing since 1991. In February 1996, Anadarko successfully completed the Doornbos No. 1 well, located in Jefferson County, Texas. The Doornbos No. 1 is currently producing 6 MMcf/d of gas and 1,000 BCPD (gross). Anadarko owns a 50-percent working interest in the well. In 1997, Anadarko plans to drill at least one well offsetting a 1996 discovery in the Nome Field area, near Beaumont, Texas. Prospects are being evaluated and the Company plans to shoot a 3-D seismic survey in the Yegua Trend in 1997. Anadarko has an average 50-percent working interest in approximately 18,400 (gross) lease acres. GOLDEN TREND Stronger gas prices brought renewed activity to the Company's acreage in the Golden Trend of central Oklahoma. In 1996, Anadarko drilled 15 successful wells in Garvin and Grady Counties, Oklahoma. Production from the Golden Trend averaged 18.3 MMcf/d of gas and 433 BOPD in 1996. Anadarko's 1997 budget includes about $15 million for Golden Trend development drilling compared to an expenditure of $8 million in 1996. In 1997, the Company plans to drill 31 wells on existing acreage. Anadarko owns interests in more than 250 wells in the area, of which 176 are Company-operated. The Company has about 20,600 undeveloped lease acres (gross) in Garvin, Grady and McClain Counties. 13 1997 & BEYOND The next millennium is fast approaching. As we enter this new era, our continued success will derive from a foundation built over the last 38 years. Our basic goals will not change and our unyielding attention to stockholder value will go unaltered. But there will be few constants in the 21st century. Technology will continue to evolve, changing the way our industry faces challenges and develops solutions. Hydrocarbon exploration will move to remote areas of the world - areas that were unimaginable 20 years ago. Anadarko is positioning itself to be a leader in this new world. Our future is bright. Anadarko's proven domestic base - areas like southwest Kansas, the Permian Basin and the Gulf of Mexico - will produce for years at low operating costs and strong profitability. The Alpine Field on Alaska's North Slope will come on-line in 2000 and new opportunities should open within the state. Internationally, Algeria will lead Anadarko's growth in both reserves and production volumes. Exploration continues and Anadarko has recently signed three multi-phased international ventures - Eritrea, Jordan and Peru - and continues to investigate dozens of other leads around the globe. Using proven strategies, the best of technologies and experience, Anadarko will continue to prosper. ERITREA The Red Sea off the coast of Eritrea, Africa's newest nation, was essentially off limits for exploration for more than 30 years while Eritrea fought for its independence from Ethiopia. Anadarko was the first energy company to sign a PSA with the new government following liberation. Signed in 1995, the agreement gives Anadarko rights to explore a 6.7 million-acre area known as the Zula Block. Anadarko invested about $8 million on its Eritrea work program in 1996 and plans to spend about $8 million in 1997. The Company is prepared to invest about $30 million over the next several years to prove exploration prospects. In early 1996, Anadarko completed a high-density aerial gravity and magnetics survey to identify locations for the 4,500 kilometer seismic program that began in November 1996. During 1997, the seismic data will be interpreted and combined with 15,000 kilometers of existing seismic data. The Company hopes to drill its first exploration well in Eritrea in late 1997 or early 1998. Anadarko is very encouraged by its early technical evaluations in Eritrea. Much of the geology is similar to that of neighboring regions with substantial oil and gas production. The Red Sea has salt structures and Anadarko will apply its Gulf of Mexico experience to this exploratory effort. Anadarko owns a 100-percent interest in the Eritrea venture but may take partners. The Company opened an office in Asmara, Eritrea, the capital city, in early 1996. 14 JORDAN Jordan was added to the Company's growing list of international ventures in March 1996. Anadarko Jordan Company, a wholly-owned subsidiary, signed a PSA with the Natural Resources Authority of the Hashemite Kingdom of Jordan. Anadarko has the right to explore a 4.2 million acre area known as the Safawi Block, located in northeast Jordan. Anadarko invested about $2 million on its Jordan efforts in 1996 and has budgeted about $4 million for 1997. Anadarko has committed to spend at least $5 million in the first two-and-one-half years of the exploration period. In 1996, the Company conducted a magnetotelluric survey of the area and reprocessed more than 1,000 kilometers of existing seismic data. The information will be used to determine specific locations for two stratigraphic test wells planned for 1997. The test wells will analyze source rock and look for signs of a working petroleum system. Anadarko is operator of the Safawi Block. In 1997, a subsidiary of Union Texas Petroleum Corporation joined Anadarko as a partner in Jordan with a 50-percent interest. Anadarko opened an office in Amman, Jordan, the capital city, in early 1997. PERU In September 1996, Anadarko signed an exploration license agreement with PERUPETRO S.A., the state company established in Peru. Anadarko Peru Company, a wholly-owned subsidiary of Anadarko, has the right to explore a 2.56-million acre area, known as Block 84, in the Ucayali region near the Brazilian border. Anadarko is now operating under Phase I of a five-phase agreement. During the two-and-one-half year initial phase, the Company is committed to spend about $5 million to acquire a minimum of 600 kilometers of seismic. The Company invested about $2 million in Peru in 1996 and has budgeted about $2 million for exploration efforts in 1997. In the fourth quarter of 1996, Anadarko flew a 7,300 kilometer aerial magnetic survey of Block 84 to help determine specific locations for a 700 kilometer seismic program that should begin in the second quarter of 1997. A second 20,000 kilometer aerial magnetic survey is planned for late 1997. Anadarko will also continue a geological and geophysical program in 1997 to analyze surface gravity and chemistry. The seismic data will be analyzed in 1997 and used to develop possible exploration prospects in 1998. Block 84, located east of the Andes Mountains and about 450 miles northeast of the capital city of Lima, is sparsely populated. Anadarko conducted an Environmental Assessment of the Block in late 1996 and will use the findings to identify environmental issues prior to the seismic exploration program in 1997. The data will also be used to develop a comprehensive environmental management plan. These documents should be submitted to the Peruvian government in early 1997. Anadarko owns a 100-percent interest in Block 84 but may take partners. The Company opened an office in Lima, Peru, the capital city, in early 1997. 15 This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E and the Securities Exchange Act of 1934. Anadarko believes that its expectations are based on reasonable assumptions. No assurances, however, can be given that its goals will be achieved. See Additional Factors Affecting Business in the Management's Discussion and Analysis (MD&A) included in the Company's 1996 Annual Report on Form 10-K. STOCKHOLDERS' INFORMATION The common stock of Anadarko Petroleum Corporation is traded on the New York Stock Exchange. Average daily trading volume was 226,000 shares in 1996, 288,000 shares in 1995 and 326,000 shares in 1994. 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 1996 and 1995.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 Market Price High $57.50 $60.38 $60.50 $68.75 Low $46.75 $52.00 $51.13 $55.63 Dividends $0.075 $0.075 $0.075 $0.075 1995 Market Price High $45.38 $46.50 $50.25 $54.13 Low $35.88 $40.13 $41.25 $40.75 Dividends $0.075 $0.075 $0.075 $0.075
EX-23 5 CONSENTS OF EXPERTS & COUNSEL 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 30, 1997, relating to the consolidated balance sheets of Anadarko Petroleum Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Anadarko Petroleum Corporation. (a) Post-Effective Amendment No. 1 to Forms S-8 and S-3, Anadarko Petroleum Corporation 1986 Stock Option Plan (No. 33-8496). (b) Post-Effective Amendment No. 2 to Forms S-8 and S-3, Anadarko Employee Savings Plan (No. 33-8643). (c) Post-Effective Amendment No. 1 to 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) Amendment No. 1 to 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). [KPMG PEAT MARWICK LLP] Houston, Texas March 11, 1997 EX-24 6 POWERS OF ATTORNEY 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 18th day of February, 1997. [ROBERT J. ALLISON, JR.] [JAMES L. BRYAN] - ----------------------------------------------------- ----------------------------------------------------- Robert J. Allison, Jr. James L. Bryan [CONRAD P. ALBERT] [JOHN R. BUTLER, JR] - ----------------------------------------------------- ----------------------------------------------------- Conrad P. Albert John R. Butler, Jr. [LARRY BARCUS] [JOHN R. GORDON] - ----------------------------------------------------- ----------------------------------------------------- Larry Barcus John R. Gordon [RONALD BROWN] [CHARLES M. SIMMONS] - ----------------------------------------------------- ----------------------------------------------------- Ronald Brown Charles M. Simmons [MICHAEL E. ROSE] [J. R. LARSON] - ----------------------------------------------------- ----------------------------------------------------- Michael E. Rose J. R. Larson [SUZANNE SUTER] - ----------------------------------------------------- Suzanne Suter
EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 14,601 0 226,824 0 24,540 269,808 4,036,165 1,738,709 2,584,030 285,253 731,049 0 0 6,098 1,007,982 2,584,030 569,028 569,028 319,696 319,696 (13,986) 0 38,973 157,790 57,070 100,720 0 0 0 100,720 1.70 0
EX-99 8 PROXY STATEMENT DATED - 3/21/97 1 ANADARKO PETROLEUM CORPORATION LOGO P. O. BOX 1330 HOUSTON, TEXAS 77251-1330 March 21, 1997 TO THE STOCKHOLDERS: You are cordially invited to attend the Annual Meeting of Stockholders of the Company which will be held in The Wyndham Hotel, Greenspoint, 12400 Greenspoint Drive, Houston, Texas, on Thursday, April 24, 1997, at 9:30 a.m. The Notice of the Annual Meeting and Proxy Statement, which are attached, provide information concerning the matters to be considered at the meeting. In addition, the general operations of the Company will be discussed and stockholders will be afforded the opportunity to ask questions. We would appreciate your signing and returning your proxy in the enclosed envelope as soon as possible, whether or not you plan to attend the meeting. Please sign, date and return the enclosed proxy in the self-addressed, postage-paid return envelope. If you do not return the signed proxy, your proxy cannot be counted. We value your opinions and encourage you to participate in this year's Annual Meeting by voting your proxy. Very truly yours, /s/ ROBERT J. ALLISON, JR. ROBERT J. ALLISON, JR. Chairman, President and Chief Executive Officer 2 [ANADARKO PETROLEUM CORPORATION LOGO] P. O. BOX 1330 HOUSTON, TEXAS 77251-1330 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997 Notice is hereby given that the Annual Meeting of Stockholders of Anadarko Petroleum Corporation, a Delaware corporation (the "Company"), will be held in The Wyndham Hotel, Greenspoint, 12400 Greenspoint Drive, Houston, Texas, on Thursday, April 24, 1997, at 9:30 a.m., for the purpose of: (1) Electing two Class II directors for terms of three years, each to hold office until the expiration of his term and until his successor shall have been elected and shall have qualified; (2) Approving an amendment to the 1993 Stock Incentive Plan; and (3) Transacting such other business as may properly come before the meeting or any adjournment or adjournments thereof. A record date of March 3, 1997, has been fixed for determining stockholders entitled to notice of, and to vote at, the Annual Meeting of Stockholders, and only holders of Common Stock of record at the close of business on the record date will be entitled to receive notice of, and to vote at, such meeting or any adjournment or adjournments thereof. Whether or not you expect to be present at the meeting, please sign, date and return the enclosed proxy in the enclosed addressed envelope, which requires no postage if mailed in the United States. BY ORDER OF THE BOARD OF DIRECTORS /s/ SUZANNE SUTER SUZANNE SUTER Corporate Secretary Dated: March 21, 1997 Houston, Texas 3 [ANADARKO PETROLEUM CORPORATION LOGO] P. O. BOX 1330 HOUSTON, TEXAS 77251-1330 PROXY STATEMENT --------------------- ANNUAL MEETING OF STOCKHOLDERS APRIL 24, 1997 --------------------- GENERAL INFORMATION This statement is furnished in connection with the solicitation by the Board of Directors (the "Board") of Anadarko Petroleum Corporation, a Delaware corporation (the "Company" or "Anadarko"), of proxies for use at its Annual Meeting of Stockholders to be held in The Wyndham Hotel, Greenspoint, 12400 Greenspoint Drive, Houston, Texas, on Thursday, April 24, 1997, at 9:30 a.m., for the purposes set forth in the accompanying notice of the meeting. Proxy material is being mailed to holders of the Company's common stock, par value $0.10 per share ("Common Stock"), on or about March 21, 1997. A stockholder may, at any time prior to the meeting, revoke a proxy by giving written notice of such revocation addressed to the Corporate Secretary of the Company at P.O. Box 1330, Houston, Texas 77251-1330. Unless revoked prior to its exercise, any proxy given pursuant to this solicitation will be voted at the meeting. Also, a stockholder may attend the meeting and vote in person whether or not the stockholder has previously given a proxy. RECORD DATE AND VOTING AT THE MEETING On March 3, 1997, the record date for the determination of stockholders entitled to vote at the meeting, the Company had 59,617,823 shares of Common Stock outstanding, each of which will be entitled to one vote at the meeting. Votes cast by proxy, or in person, at the meeting will be tabulated by the election inspectors appointed for the meeting. The holders of a majority of the shares entitled to vote at the meeting, whether present in person or represented by proxy, will constitute a quorum for the transaction of business at the meeting. Proxy cards that are not signed or that are not returned are treated as not voted for any purpose. All elections for directors shall be decided by a plurality of the votes cast in respect thereof. If no voting direction is indicated on the proxy card, the shares will be considered votes for the nominees. In accordance with Delaware law, a stockholder entitled to vote for the election of directors can withhold authority to vote for all nominees for directors or can withhold authority to vote for certain nominees for director. Abstentions from voting with respect to proposals are treated as votes against the particular proposal. If a broker indicates on a proxy that it does not have discretionary authority as to certain shares to vote on a particular proposal, those shares will not be considered as present and entitled to vote with respect to that proposal. 4 ELECTION OF DIRECTORS (ITEM NO. 1 ON PROXY CARD) The Board is divided into three classes of directors serving staggered three-year terms. Class II and Class III each have two directors and Class I has three directors. At the meeting, Messrs. Conrad P. Albert and Robert J. Allison, Jr., Class II directors, are to be elected for terms of three years, each to hold office until the expiration of his term in 2000 and until his successor shall have been elected and shall have qualified. It is the intention of the persons named in the accompanying form of proxy to vote such proxy, unless otherwise instructed, for the election of Messrs. Conrad P. Albert and Robert J. Allison, Jr. for terms of three years. If either of these nominees should be unable to serve, the proxies will be voted for the election of such other persons as shall be determined by the persons named in the proxy, in accordance with their judgment. Messrs. Larry Barcus and James L. Bryan, Class III directors, were elected by the stockholders in 1995 for terms of three years. Messrs. Ronald Brown and John R. Gordon, Class I directors, were elected by the stockholders in 1996 to each serve a three-year term. Mr. John R. Butler, Jr. was elected by the directors in 1996 as a Class I director to serve a term which expires in 1999. INFORMATION ABOUT DIRECTORS Certain information concerning the nominees for election as directors, and those persons whose terms of office as directors will continue after the meeting, is set forth below. NOMINEES FOR ELECTION CONRAD P. ALBERT -- Mr. Albert resides in New York and is engaged in personal investments. He was Executive Vice President of Manufacturers Hanover Trust Company, a banking corporation, New York, New York, from September 1983 through 1991. Mr. Albert is also a director of Deep Tech International.
AGE AT END BECAME A PROPOSED OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 51 1986 2000
ROBERT J. ALLISON, JR. -- Mr. Allison has been Chairman of the Board and Chief Executive Officer of the Company since October 1, 1986. Mr. Allison was elected President of the Company in January 1993.
AGE AT END BECAME A PROPOSED OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 58 1985 2000
DIRECTORS CONTINUING IN OFFICE LARRY BARCUS -- Mr. Barcus is Chairman of L. G. Barcus and Sons, Inc., Kansas City, Kansas, a general contractor with operations nationwide.
AGE AT END BECAME A PRESENT OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 60 1986 1998
RONALD BROWN -- Mr. Brown resides in Rancho Santa Fe, California, and is engaged in personal investments. He retired as Executive Vice President of Compass Bank, Houston, Texas in 1992.
AGE AT END BECAME A PRESENT OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 64 1986 1999
2 5 JAMES L. BRYAN -- Mr. Bryan has been Senior Vice President of Dresser Industries, Inc. ("Dresser"), an oilfield services company with executive offices in Dallas, Texas, since February 1994. In May 1990, Mr. Bryan was elected Vice President - Operations of Dresser.
AGE AT END BECAME A PRESENT OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 61 1986 1998
JOHN R. BUTLER, JR. -- Mr. Butler has been Chairman of the Board and Chief Executive Officer of GeoQuest International Holdings, Inc. since 1973. GeoQuest is a supplier of drilling, production and seismic data, with executive offices in Houston, Texas.
AGE AT END BECAME A PRESENT OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 58 1996 1999
JOHN R. GORDON -- Mr. Gordon has been President of Deltec Asset Management Corporation, a New York investment management company, since January 1988. Deltec Asset Management Corporation's executive office is in New York, New York.
AGE AT END BECAME A PRESENT OF 1997 DIRECTOR TERM EXPIRES - ---------- -------- ------------ 49 1988 1999
COMMITTEES OF THE BOARD The Board has a standing Executive Committee, Audit Committee and Compensation and Benefits Committee (the "Compensation Committee"). The Board does not currently have a Nominating Committee. Mr. Allison is Chairman and Messrs. Brown and Bryan are members of the Executive Committee. Mr. Barcus is Chairman and Messrs. Albert, Bryan and Butler are members of the Audit Committee. Mr. Brown is Chairman and Messrs. Gordon and Simmons are members of the Compensation Committee. During 1996, the Audit Committee met three times and the Compensation Committee met five times. The Executive Committee reviews and, where appropriate, approves corporate action with respect to the conduct of the business of the Company between Board meetings. Actions taken by the Executive Committee are regularly submitted to the Board at its next meeting for review by the full Board. The Audit Committee recommends to the Board each year the appointment of independent auditors for the following year. The Audit Committee considers the independence of such auditors; reviews the fees for audit and nonaudit services; reviews the plan, scope and results of the independent audit; reviews the recommendations resulting from such audit and the responses of management to such recommendations; reviews the plan, scope and results of the Company's internal audit group's activities; reviews the recommendations resulting from internal audits; and reviews the accounting controls of the Company that the Audit Committee or the Board may deem necessary or desirable. This Committee also reviews the annual financial statements issued by the Company to its security holders and makes recommendations as to accounting and auditing policies which, in its judgment, should receive the attention of the Board. The Compensation Committee considers and approves certain remuneration arrangements between the Company and its officers, including executive officers' salaries; adopts or makes recommendations to the Board regarding the adoption of compensation and employee benefit plans in which officers and certain key employees of the Company and certain subsidiaries are eligible to participate; and grants bonuses, stock options, restricted stock and other benefits pursuant to Company plans. This Committee also reviews and makes recommendations with respect to the election of officers of the Company, and when appropriate, recommends the election to the Board of a Chief Executive Officer. 3 6 MEETINGS During 1996, the Board met five times. Each incumbent director of the Company, during his term as a director in 1996, attended at least 75% of the aggregate number of meetings of the Company's Board and Committees of which he was a member. VOTING SECURITIES AND PRINCIPAL HOLDERS SECURITY OWNERSHIP OF MANAGEMENT The following table shows the number of shares of Common Stock beneficially owned, or as to which there is a right to acquire beneficial ownership within 60 days of February 28, 1997, by each continuing director, each nominee for director, and all directors and executive officers of the Company as a group as of February 28, 1997. Except for Mr. Allison, no director, nominee for director or officer of the Company owns and has the right to acquire more than 1% of the outstanding Common Stock. All directors and officers of the Company as a group own beneficially, or have the right to acquire, within 60 days of February 28, 1997, approximately 3.0% of the outstanding Common Stock.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ----------------------------------------- NUMBER OF SHARES SHARES EXERCISABLE TOTAL TITLE NAME OF BENEFICIALLY WITHIN BENEFICIAL PERCENT OF OF CLASS BENEFICIAL OWNER OWNED(1) 60 DAYS OWNERSHIP CLASS -------- ---------------- ------------ ----------- ---------- ---------- Common Stock............ Robert J. Allison, Jr. 216,959 410,000 626,959 1.1 Common Stock............ Charles G. Manley 38,284 87,000 125,284 * Common Stock............ Michael E. Rose 23,303 36,667 59,970 * Common Stock............ John N. Seitz 19,077 111,267 130,344 * Common Stock............ Charles K. Abernathy 34,639 60,000 94,639 * Common Stock............ Conrad P. Albert 14,000(2) 22,000 36,000(2) * Common Stock............ Larry Barcus 1,000 45,000 46,000 * Common Stock............ Ronald Brown 3,222(3) 42,000 45,222(3) * Common Stock............ James L. Bryan 1,000 45,000 46,000 * Common Stock............ John R. Butler, Jr. 0 0 0 * Common Stock............ John R. Gordon 12,198 45,000 57,198 * Common Stock............ All directors and executive 483,972 1,272,934 1,756,906 3.0 officers as a group, including the above-named (21 persons)
- --------------- * Less than one percent. (1) The directors and officers have sole voting and dispositive power of all shares beneficially owned. Included are beneficially owned and undistributed shares of Common Stock held in the Anadarko Employee Savings Plan. The number does not include shares of Common Stock which the directors or officers of the Company have the right to acquire within 60 days of February 28, 1997. (2) Mr. Albert disclaims beneficial ownership of the 1,000 shares held in his wife's name and the 1,000 shares held in his children's names. (3) Mr. Brown disclaims beneficial ownership of the 50 shares held in his wife's name. 4 7 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth information as to persons known to be the beneficial owner of more than 5% of the Company's outstanding Common Stock:
AMOUNT AND NATURE OF BENEFICIAL PERCENT TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS -------------- ------------------------------------ ---------- -------- Common Stock................ FMR Corp. 8,804,335(1) 14.8% 82 Devonshire Street Boston, Massachusetts 02109 Common Stock................ Sonatrach Petroleum 6,000,000(2) 10.1% Investment Corporation (Ireland) Limited 10, rue du Sahara Hydra, Algiers, Algeria Common Stock................ Oppenheimer Group Inc. 4,104,650(3) 6.9% Oppenheimer Tower World Financial Center New York, New York 10281 Common Stock................ J.P. Morgan & Co. Incorporated 3,058,941(4) 5.1% 60 Wall Street New York, New York 10260
- --------------- (1) According to information contained in Schedule 13G filed with the Securities and Exchange Commission (the "Commission") dated February 14, 1997. (2) According to information contained in a Schedule 13D filed with the Commission dated May 11, 1993. (3) According to information contained in Schedule 13G filed with the Commission dated January 21, 1997. (4) According to information contained in Amendment 1 to the Schedule 13G filed with the Commission, dated January 31, 1997. TRANSACTIONS WITH MANAGEMENT AND OTHERS The Company purchases production, drilling and seismic data from wholly-owned subsidiaries of GeoQuest International Holdings, Inc. In 1996, the aggregate amount paid to Petroleum Information Corporation and Petroleum Information (Canada), Ltd., was approximately $878,000. Mr. Butler, a director of the Company, is Chairman of the Board and Chief Executive Officer of GeoQuest International Holdings, Inc. and Senior Chairman of the subsidiaries. In addition, the Company paid approximately $50,000 in 1996 to Houston Advance Research Center for a seismic imaging project. Mr. Butler is Chairman of the Houston Advance Research Center. During 1989, Anadarko Algeria Corporation ("Anadarko Algeria"), a wholly-owned subsidiary of the Company, entered into an agreement with Sonatrach, the national oil and gas enterprise of Algeria ("Sonatrach"), which gives Anadarko Algeria the right to explore for and produce liquid hydrocarbons in Algeria. Sonatrach is wholly-owned by the People's Democratic Republic of Algeria and owns 99.9% of the capital stock of Sonatrach Petroleum Investment Corporation (Ireland) Limited. In 1996, approximately $60,000 was paid to Sonatrach for charges related to reservoir studies, laboratory services and well testing services. As of December 31, 1996, a total of approximately $232 million in exploration and development costs had been incurred by Anadarko Algeria of which approximately $85 million was incurred in 1996. During 1996, Anadarko Algeria and Sonatrach entered into a contract with Brown & Root Condor, SPA ("BRC") for the construction of an oil production facility. Sonatrach owns 51 percent of BRC either directly or indirectly. In 1996, approximately $22 million was paid to BRC pursuant to the agreement. 5 8 COMPENSATION OF DIRECTORS Directors who are not employees of the Company receive an annual retainer of $35,000 for serving on the Board of Directors, plus $1,250 for attendance at each meeting of the Board. In addition, non-employee directors receive an annual retainer of $3,000 for serving on the Audit or the Compensation Committee, plus $1,250 for each committee meeting attended. Non-employee directors who serve as a Chairman of a committee receive an additional annual retainer of $3,000. All directors are reimbursed for expenses incurred in attending Board and committee meetings. Employees of the Company who are also directors do not receive a retainer or fees for Board and committee meetings attended. The 1988 Stock Option Plan for Non-Employee Directors (the "1988 Plan") was amended in 1994 to permit nonemployee directors to receive a portion of their retainer and/or meeting fees in Common Stock. Under the 1988 Plan, each non-employee director receives an initial grant of 10,000 options which vest equally over a two-year period. In addition, on October 27 of each year, each non-employee director is granted an option to purchase 5,000 shares of Common Stock at the fair market value on such date. All outstanding options granted under the 1988 Plan are options which do not constitute incentive stock options ("ISOs") within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") ("NQOs"). All outstanding options under the 1988 Plan are exercisable no earlier than one year from the date of grant and expire 10 years from the date of grant. Options may not be awarded or granted after October 26, 1998, or the earlier termination of the 1988 Plan. The Company has a Director Retirement Income Plan for its non-employee directors. Directors having 10 or more years of service on the Board and having attained age 65 will be eligible to receive retirement income equal to 60% of the Director's annual retainer fee in effect as of the director's retirement date from the Board. Directors having less than 10 years of service will accrue a benefit of 6% per year of service of the Director's annual retainer fee in effect as of such Director's retirement. Such retirement income will become payable on the later of the Director's retirement date or age 65 and will be payable in equal installments on a monthly basis during the life of the Director with 120 months of payments guaranteed. The Company's Director Deferred Compensation Plan (the "Director Deferred Plan") allowed non-employee directors to defer all or part of their Director annual retainer fee and provided unfunded benefit payments in amounts related to the amount of compensation deferred, age of the Director at the time the compensation was deferred and accrued interest at 20% per annum. The Director Deferred Plan provides in-service payments during the time the director is a member of the Board and payments upon retirement, death, disability or the attainment of age 65. There have been no deferrals under the Director Deferred Plan since 1990. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of Forms 3 and 4 furnished to the Company during its most recent fiscal year and Forms 5 furnished to the Company with respect to its most recent fiscal year, the Company believes that all transactions by reporting persons during the most recent fiscal year were reported on a timely basis. Forms 5 reporting the automatic grant of stock options in 1995 under the 1988 Plan for Messrs. Albert, Barcus, Brown, Bryan and Gordon were not filed in 1995. COMPENSATION AND BENEFITS COMMITTEE REPORT ON 1996 EXECUTIVE COMPENSATION The Compensation Committee is comprised entirely of independent outside directors and is responsible for establishing and administering the executive compensation programs of the Company. These programs are designed to promote the Company's strategic objectives, thereby enhancing stockholder value. This report describes the compensation decisions made by the Compensation Committee during 1996 with respect to Anadarko's executive officers. 6 9 COMPENSATION PHILOSOPHY OF THE COMPANY The key elements of Anadarko's executive compensation programs include base salary, performance-based annual bonus and long-term stock incentive plans. These plans have been developed to attract, reward and retain key personnel critical to the long-term success of the Company. Anadarko's compensation programs are designed to provide executive officers total compensation levels above the average of the Company's competitive market with the opportunity to be within the top quartile of a select peer group of comparable public oil and gas companies, to the extent that Company and executive performance on an individual and collective basis so warrants. In 1996, Mr. Allison's total compensation was within the top quartile of the select peer group. Section 162(m) of the Code limits the deductibility by a company of compensation in excess of $1 million paid to the Chief Executive Officer and the next four highest paid officers during any fiscal year, unless such compensation meets certain performance-based requirements. The Compensation Committee's primary consideration in structuring the Company's compensation programs and in determining the appropriateness of awards, is the achievement of the Company's strategic business goals, taking into consideration competitive practice, market economics and other factors. To the extent fulfilling these goals is consistent with favorable tax treatment under section 162(m) of the Code, the Compensation Committee is committed to making awards that qualify for the performance-based deduction. The Company believes that the compensation paid for 1996 pursuant to the Annual Incentive Bonus Plan (the "Incentive Plan") and the compensation in 1996 resulting from the exercise of stock options awarded under the 1993 Stock Incentive Plan (the "1993 Plan") is deductible. Additionally, the Company believes that with approval by stockholders of the proposed amendment to the 1993 Plan (see APPROVAL OF AN AMENDMENT TO THE 1993 STOCK INCENTIVE PLAN on page 15), compensation which may be paid in the future pursuant to the performance shares awarded to Mr. Allison in 1996 will also qualify as deductible compensation under section 162(m). The Performance Graph, contained in this proxy statement, compares Anadarko's stock price performance over a five-year period against the S&P 500 Index and the Dow Jones Oil-Secondary index (a published index for the oil and gas industry). The Dow Jones Oil-Secondary index provides a meaningful comparison of Anadarko's total stockholder return against a consistent representation of oil and gas companies with whom Anadarko competes for investment dollars. The majority of these companies are also included in the select peer group against which the Compensation Committee annually reviews the total compensation and stock ownership of its executive officers. The analysis of this select peer group focuses more specifically on those companies which are similar in business segments and are considered potential competitors for the Company's executive talent. BASE SALARY Anadarko strives to be the best managed company within the oil and gas industry, and structures its compensation programs to match pay with performance. The Company's base salaries are targeted to be above the industry average, taking into account scope of responsibilities and internal relationships. Individual base salaries are determined by the Compensation Committee based on their subjective evaluation of the executive's performance and the length of time the executive has been in the position. Base compensation is reviewed annually by the Compensation Committee and adjusted accordingly to reflect each executive officer's contribution to the performance of the Company. Mr. Allison's annual base salary for 1996 was increased by the Compensation Committee, effective January 1, as a result of his contribution to the Company's outstanding financial and operational performance for 1995, which served to enhance the value of the Company. In determining Mr. Allison's base compensation against his comparable peers, the Compensation Committee considered Mr. Allison's leadership and specific individual contributions to the Company's continued growth during his 18 years as Anadarko's Chief Executive Officer. 7 10 ANNUAL INCENTIVE BONUS For 1996, executive officers were eligible to receive annual bonus incentives under the Company's Incentive Plan. The Incentive Plan puts a significant portion of compensation at risk by linking potential annual compensation to the Company's achievement of specific performance goals. These goals are established by the Compensation Committee at the beginning of each calendar year. Under the Incentive Plan, a total bonus target is established for each individual executive officer and other key employees, which ranges up to 80% of base salary. This target is based upon the individual's position, level of responsibility and ability to impact the Company's success. The individual target is adjusted based on the Company's achievement of pre-established performance goals. Individuals may receive up to 150% of their bonus target if the Company exceeds the specified goals and, conversely, individuals may receive a reduced bonus or no bonus payment if the Company does not attain the specified goals. For 1996, the performance goals established by the Compensation Committee included financial, operational and relative stock price performance criteria. The financial criteria included (1) net income, and (2) cash flow, both of which were measured against internal objectives. The operational criteria included the comparison of (1) Anadarko's average five-year worldwide reserve replacement measured against an internal objective, and (2) Anadarko's average five-year worldwide cost of finding measured against the most recent available industry average five-year worldwide cost of finding. The stock price performance criteria included the comparison of Anadarko's relative stock price performance for 1996 against the relative average stock price performance of a select group of peer companies for the same period. Each performance goal, including the specific criteria for such goal, was assigned a weight by the Compensation Committee based upon the relative importance of each goal in increasing stockholder value. Anadarko's operating performance for 1996 was one of the best in the Company's history. The Company added over 113 million energy equivalent barrels (EEBs) of reserves, increasing total reserves to 601 million EEBs. Reserve replacement for 1996 was 299%, which resulted in the Company replacing annual production volumes for the 15th consecutive year. In addition, Anadarko's worldwide five-year cost of finding continues to be better than the most recently published industry worldwide five-year average. The Company's financial performance for the year yielded record results. Anadarko's overall performance for 1996, as measured against the performance goals established by the Compensation Committee, produced the maximum Corporate Performance Rating under the Incentive Plan. As a result, the Compensation Committee approved a bonus for Mr. Allison which represents 150% of his 80% bonus target. STOCK PLANS The Company believes equity-based programs encourage long-term strategic management and enhancement of stockholder value. To align the interests of executive officers with those of stockholders, the Company may grant certain stock-based awards under the 1993 Plan. The Compensation Committee believes stock ownership is important to place executive officers in the same position as stockholders with a commitment to the long-term success of Anadarko. Anadarko has established stock ownership guidelines for executive officers of two and one-half times base salary for Vice Presidents, three times base salary for Senior Vice Presidents and five times base salary for the Chief Executive Officer. The Compensation Committee periodically reviews competitive market data to determine appropriate stock awards based on the executive's position and the market value of the stock. In addition, the Compensation Committee considers previous stock grants when determining grant size for executive officers. The Compensation Committee awards stock options to ensure that the interests of executives and stockholders are aligned. Stock options only produce value for the executive if there is an increase in stock price which results in a corresponding increase in value to the stockholder. Stock options are granted on an annual basis at the fair market value of the Common Stock on the date of grant. In early 1996, the Compensation Committee determined that the success of the Company's long-term strategic objectives would best be supported by a stock compensation program for Mr. Allison designed to increase stockholder value both in absolute dollars and relative to the Company's peers, as well as encourage 8 11 his retention with the Company until normal retirement age. To accomplish these objectives, the Committee granted Mr. Allison performance shares and 480,000 non-qualified stock options. The stock option grant vests over the next seven years and encourages continued focus on increasing the stock price for the stockholder. The performance share grant will only produce a payout if the Company's total stockholder return relative to the Company's peers at the end of a four-year or eight-year performance period meets the performance criteria established by the Compensation Committee. The maximum potential payout under this grant is 150,000 shares. SUMMARY Anadarko's compensation strategy is to provide total compensation commensurate with the Company's achievement of specific operational, financial and strategic objectives and the long-term appreciation of Anadarko's stock price. The Company believes a significant portion of executive compensation should be directly and materially linked to the creation of value for stockholders. The Compensation Committee believes the design of the Company's total executive compensation program provides executives the incentive to maximize long-term operational performance consistent with sound financial controls and high standards of integrity. It is the Compensation Committee's belief that this focus will ultimately be reflected in Anadarko's stock price and stockholder return. The Compensation and Benefits Committee of the Board of Directors consists of the following: Mr. Ronald Brown Mr. John R. Gordon Mr. Charles M. Simmons 9 12 The following table sets forth information with respect to the Chief Executive Officer and the four most highly compensated executive officers of the Company as to whom the total annual salary and bonus for the fiscal year ended December 31, 1996, exceeded $100,000: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------- ------------------------------------- AWARDS ------------------------ OTHER SECURITIES ANNUAL UNDERLYING COMPENSA- RESTRICTED OPTIONS/ LTIP NAME PRINCIPAL POSITION YEAR SALARY($) BONUS($) TION(1)($) STOCK(2)($) SARS(3)(#) PAYOUTS($) ---- ------------------ ---- --------- --------- ---------- ----------- ---------- ---------- Robert J. Allison, Chairman, President and 1996 925,000 1,110,000 53,172(1) 0 480,000 0 Jr. Chief Executive Officer Chairman, President and 1995 825,000 1,000,000(5) 0 0 60,000 0 Chief Executive Officer Chairman, President and 1994 825,000 743,000 0 0 60,000 0 Chief Executive Officer John N. Seitz Senior Vice President, 1996 300,000 190,000 0 0 24,000 0 Exploration Senior Vice President, 1995 258,333 165,000 0 0 24,000 0 Exploration Vice President, 1994 250,000 130,000 0 113,000 18,000 0 Exploration Michael E. Rose Senior Vice President, 1996 315,000 167,000 0 0 24,000 0 Finance Senior Vice President, 1995 280,000 148,000 0 81,250 24,000 0 Finance Senior Vice President, 1994 280,000 148,000 0 0 24,000 0 Finance Charles G. Manley Senior Vice President, 1996 310,000 164,000 0 0 24,000 0 Administration Senior Vice President, 1995 280,000 148,000 0 0 24,000 0 Administration Senior Vice President, 1994 280,000 148,000 0 0 24,000 0 Administration Charles K. Abernathy Vice President, Offshore 1996 238,000 90,000 0 0 18,000 0 Vice President, Offshore 1995 228,000 80,000 0 0 18,000 0 Vice Pres. Operations- 1994 228,000 90,000 0 0 18,000 0 International/Offshore ALL OTHER COMPENSA- NAME TION(4)($) ---- ---------- Robert J. Allison, 331,687 Jr. 316,741 192,180 John N. Seitz 74,312 70,721 43,485 Michael E. Rose 97,214 101,312 74,078 Charles G. Manley 105,144 108,817 77,626 Charles K. Abernathy 86,925 93,325 67,485
- --------------- (1) Represents certain perquisites, including $31,705 attributable to personal use of the Company airplane. No other executive officer had perquisites in excess of $50,000 or 10% of salary plus bonus. (2) As of December 31, 1996, the number of restricted shares held by each executive officer and corresponding value on December 31, 1996 was for Mr. Seitz, 2,667 shares valued at $172,688; Mr. Rose, 4,334 shares valued at $280,627; Mr. Manley, 3,000 shares valued at $194,250; and Mr. Abernathy, 2,000 shares valued at $129,500. Dividends will be paid on unvested shares. The restricted stock awarded to Mr. Seitz in 1994 will vest 33% per year each April 28 beginning in 1995. The restricted stock awarded to Mr. Rose in 1995 will vest 33% per year each April 27 beginning in 1996. (3) No Stock Appreciation Rights ("SARs") are outstanding. (4) This column includes (a) Company contributions to the Anadarko Employee Savings Plan and Savings Restoration Plan; (b) interest earned above 120% of the applicable federal rate on deferred compensation under the Executive Deferred Compensation Plan; (c) payments under the Annual Override Bonus Plan ("ORRI"); and (d) the value of Company paid split-dollar insurance. The 1996 amounts for items (a), (b), (c) and (d) for each of the individuals named in the table are for Mr. Allison, $100,080, $74,071, $45,247 and $112,289; Mr. Seitz, $27,900, $15,109, $11,461 and $19,842; Mr. Rose, $27,780, $34,778, $9,518 and $25,138; Mr. Manley, $27,480, $39,166, $9,692 and $28,806; and Mr. Abernathy, $19,080, $31,129, $14,852 and $21,864, respectively. No deferrals have been made under the Executive Deferred Compensation Plan since 1990. Grants under the ORRI were discontinued after 1986; however, awards that were previously made will continue to produce payments to the recipients in accordance with the provisions of the plan. (5) Includes $743,000 paid under the Company's Incentive Plan and a special bonus of $257,000, the payment of which is deferred until Mr. Allison's retirement from the Company. 10 13 OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------- NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT ASSUMED SECURITIES OPTIONS/SARS EXERCISE ANNUAL RATES OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(3) OPTIONS/SARS EMPLOYEES IN PRICE(2) EXPIRATION ----------------------------------------- NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($) ---- ------------- ------------ -------- ---------- ----- -------------- -------------- Robert J. Allison, Jr.................. 480,000(4) 53.2% $54.375 02/26/07 $0 $ 18,539,857 $ 48,366,346 Charles G. Manley..... 24,000(5) 2.7% $63.625 10/30/06 $0 $ 960,322 $ 2,433,645 Michael E. Rose....... 24,000(5) 2.7% $63.625 10/30/06 $0 $ 960,322 $ 2,433,645 John N. Seitz......... 24,000(5) 2.7% $63.625 10/30/06 $0 $ 960,322 $ 2,433,645 Charles K. Abernathy........... 18,000(5) 2.0% $63.625 10/30/06 $0 $ 720,242 $ 1,825,234 Above Optionees Gain as % of all Stockholders Gain... N/A N/A N/A N/A N/A 0.2% 0.2% All Stockholders(6)... 59,525,699 $0 $2,381,847,102 $6,035,856,025
- --------------- (1) No SARs were granted in 1996. (2) The exercise price equals the fair market value of the Common Stock on the date of grant. (3) The dollar amounts under these columns are the results of calculation at 0% and at the 5% and 10% rates set by the Commission and are not intended to forecast possible future appreciation, if any, of the Company's stock price. The Company did not use an alternative formula for a grant date valuation, as the Company is not aware of any formula which will determine with reasonable accuracy a present value based on future unknown or volatility factors. (4) The stock option granted on February 26, 1996, was granted under the Company's 1993 Plan. On August 16, 1996 and on February 26, 1997, 60,000 options became exercisable. On each February 26 beginning in 1998 through 2003, 60,000 will become exercisable. In the event of a "Change of Control" (as defined by the Plan) the Compensation Committee can take any one or more of the following actions: (i) provide for the acceleration of vesting; (ii) provide for the purchase of the option by the Company; (iii) make such adjustment as deemed appropriate; or (iv) cause such option to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation. (5) Stock options granted on October 30, 1996 were granted under the Company's 1993 Plan. Fifty percent of the options become fully exercisable on October 30, 1997 and 50 percent become fully exercisable on October 30, 1998. In the event of a "Change of Control" (as defined by the Plan) the Compensation Committee can take any one or more of the following actions: (i) provide for the acceleration of vesting; (ii) provide for the purchase of the option by the Company; (iii) make such adjustment as deemed appropriate; or (iv) cause such option to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation. (6) Shares owned by all stockholders on December 31, 1996. No gain to optionee is possible without an increase in stock appreciation which will benefit all stockholders commensurately. A 0% gain in stock price appreciation will result in no appreciation for the optionee. 11 14 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FISCAL AT FISCAL YEAR-END YEAR-END SHARES (#) ($) ACQUIRED VALUE --------------- --------------------- ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE* ---- ----------- ---------- --------------- --------------------- Robert J. Allison, Jr....... 160,000 $5,939,638 350,000/450,000 $7,586,250/$4,635,000 Charles G. Manley........... 24,000 $ 697,106 87,000/36,000 $ 1,883,250/$273,000 Michael E. Rose............. 36,000 $ 712,716 36,000/36,000 $ 648,000/$273,000 John N. Seitz............... 0 $ 0 110,600/36,000 $ 2,868,362/$273,000 Charles K. Abernathy........ 12,000 $ 444,337 105,000/27,000 $ 2,675,813/$204,750
- --------------- * Computed based upon the difference between aggregate fair market value on December 31, 1996 ($63.8125) and aggregate exercise price. LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
NUMBER OF PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK SHARES OR OTHER PRICE-BASED PLANS UNITS OR PERIOD UNTIL ------------------------------------------- OTHER RIGHTS MATURATION THRESHOLD TARGET MAXIMUM NAME (#) OR PAYOUT ($ OR #) ($ OR #) ($ OR #) ---- ------------ ---------------- --------- -------------- -------------- Robert J. Allison, Jr..... 150,000 4 and/or 8 years 0 100,000 Shares 150,000 Shares
Subject to stockholder approval of the amendment to the 1993 Plan, Mr. Allison was granted 100,000 performance shares with a maximum potential payout of 150,000 shares for the four-year performance period January 1, 1996 through December 31, 1999. Payout of the performance shares will be determined by comparing the Company's average quarterly total shareholder return ("TSR") over the performance period to a select group of peer companies, designated at the time of the grant, average quarterly TSR for the same period. Any company that ceases to be traded during the performance period will be removed from the peer company list and payout will be determined based on the remaining companies. No companies may be added to the peer company list during the performance period. At the end of the performance period, the Company and the peer companies shall be ranked based on their TSR ranking. If the Company is in the top 25% of the ranking, payout will be 150% of the shares granted. If the Company is average or above, payout will be 100% of the shares granted. If the Company is below average, no shares will be paid out. If all shares are not earned in the initial four-year performance period they may be earned based on an eight-year performance period, using the same performance criteria, beginning on January 1, 1996 through December 31, 2003. In the event of an eight-year performance period, any shares paid out based on the four-year performance period will be subtracted from any payout earned at the end of the eight-year performance period. Upon cessation of employment resulting from death or disability during a performance cycle, TSR will be calculated for the Company and the peer companies using the closing stock price on the date employment ceases. Upon cessation of employment resulting from a Change of Control, TSR will be calculated using the closing stock price on the date of the Change of Control. The amount of payout will be pro-rated based on the actual number of quarters completed (including the quarter in which the event occurred). Upon cessation of employment as a result of retirement, any payout will be made at the discretion of the Compensation Committee. Payout under the 1993 Plan will be made in shares of Common Stock of the Company. 12 15 PENSION PLAN TABLE The Company has a defined benefit Retirement Plan (the "Retirement Plan") covering all United States employees of the Company. The following table shows the estimated single life annuity payable annually upon retirement at various levels of compensation based on the Retirement Plan benefit formula in effect on December 31, 1996.
YEARS OF SERVICE -------------------------------------------------------------- REMUNERATION 15 20 25 30 35 ------------ -------- -------- ---------- ---------- ---------- $ 250,000....................... $ 66,000 $ 88,000 $ 110,000 $ 132,000 $ 154,000 300,000...................... 79,000 106,000 132,000 159,000 185,000 400,000...................... 106,000 142,000 177,000 213,000 248,000 500,000...................... 133,000 178,000 222,000 267,000 311,000 600,000...................... 160,000 214,000 267,000 321,000 374,000 700,000...................... 187,000 250,000 312,000 375,000 437,000 800,000...................... 214,000 286,000 357,000 429,000 500,000 900,000...................... 241,000 322,000 402,000 483,000 563,000 1,000,000...................... 268,000 358,000 447,000 537,000 626,000 1,100,000...................... 295,000 394,000 492,000 591,000 689,000 1,200,000...................... 322,000 430,000 537,000 645,000 752,000 1,300,000...................... 349,000 466,000 582,000 699,000 815,000 1,400,000...................... 376,000 502,000 627,000 753,000 878,000 1,500,000...................... 403,000 538,000 672,000 807,000 941,000 1,600,000...................... 430,000 574,000 717,000 861,000 1,004,000 1,700,000...................... 457,000 610,000 762,000 915,000 1,067,000 1,800,000...................... 484,000 646,000 807,000 969,000 1,130,000 1,900,000...................... 511,000 682,000 852,000 1,023,000 1,193,000 2,000,000...................... 538,000 718,000 897,000 1,077,000 1,256,000 2,100,000...................... 565,000 754,000 942,000 1,131,000 1,319,000 2,200,000...................... 592,000 790,000 987,000 1,185,000 1,382,000 2,300,000...................... 619,000 826,000 1,032,000 1,239,000 1,445,000 2,400,000...................... 646,000 862,000 1,077,000 1,293,000 1,508,000 2,500,000...................... 673,000 898,000 1,122,000 1,347,000 1,571,000
The Retirement Plan provides benefits based on a length of service and a final average pay formula including the Salary and Bonus columns of the Summary Compensation Table. Messrs. Allison, Manley, Rose, Seitz and Abernathy, respectively, have 23, 23, 19, 19 and 22 years of accrued service under the Plan. An employee becomes vested in his benefit under the Retirement Plan at completion of five years of vesting service, as defined in the Retirement Plan. The benefits payable under the Retirement Plan are subject to certain limitations under the Code. For certain employees who may be affected by such limits, the Company has a Retirement Restoration Plan (the "Restoration Plan") to maintain total benefits upon retirement at approximately the levels shown in the table above. The supplemental benefits provided under the Restoration Plan will not be accorded certain of the favorable tax treatments that apply to benefits paid under the existing Retirement Plan. Benefits under the Restoration Plan are payable solely from the general assets of the Company. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS The Company has Key Employee Change of Control Contracts (the "Severance Contracts") with all current executive officers. The Severance Contracts provide that in the event of a change in control, as defined in the Severance Contracts, such individuals will receive certain benefits in the event of the termination of their employment within five years of the effective date of such change in control. Such benefits are provided unless such termination of employment is (i) because of the death or retirement, except in certain circumstances, of the executive, (ii) by the Company for cause or disability, or (iii) by the executive other than for good reason (as defined in the Severance Contracts). Generally, benefits payable under the terms of the Severance Contracts include a lump-sum cash payment equal to (i) 2.9 times the highest total annualized compensation paid during the three years ending with the year of such participant's termination from the 13 16 Company (including base salary and the amount or value of any bonuses); (ii) the amount of Company matching contributions which would have been made on the participant's behalf had he continued to participate in the Anadarko Employee Savings Plan and the Savings Restoration Plan for up to an additional three years; (iii) the present value of the additional normal retirement benefit which would have been received by the employee based on continued service through normal retirement date and assuming an annual 6% increase in base salary; (iv) the present value of the amounts of deferred compensation which would have been received by the employee based on continued service through age 65 under each deferred compensation agreement to which the participant was a party; and (v) the value of any investments credited to the employee under the Savings Restoration Plan. In addition, the Severance Contracts provide for a continuation of various health care, disability and life insurance plans and certain other benefits for a period of up to three years; and the payment of all legal fees and expenses incurred by the employee in obtaining or enforcing any right or benefit provided by the Severance Contracts. The Severance Contracts also obligate the Company to pay an employee such cash amount as may be necessary to restore any benefit diminution resulting directly or indirectly from the assessment of any special excise taxes under section 280G of the Code in respect to benefits provided under the Severance Contracts. In consideration of these benefits the employee agrees, in the event a person seeks to effect a change in control, not to leave the employ of the Company and to render services commensurate with his position until such person has abandoned or terminated his efforts or the change in control has occurred. The employee also agrees to retain, in confidence, any and all confidential information known to him concerning the Company and its business so long as such information is not otherwise publicly disclosed. No amounts have been paid under the Severance Contracts. The Employee Severance Pay Plan (the "Severance Plan") covers all of the Company employees who are not covered by the Employment Contracts. The Severance Plan provides that, in the event of a change in control, as defined in the Severance Plan, employees will have certain benefits provided to them in the event of the termination of their employment within three years after the effective date of such change in control. Benefits are provided unless termination of employment is (i) because of the death or retirement, except in certain circumstances, of the employee; (ii) by the Company for cause or disability; or (iii) by the employee other than for good reason, as defined in the Severance Plan. The Severance Plan provides benefits that include a lump sum cash payment based on salary and service ranging from a minimum of three months to a maximum of two years salary; and a continuation of employee's medical and dental insurance for six months. No amounts have been paid under the Severance Plan. In the event of a "Change of Control", under the terms of the Company's existing stock option plans, except for the 1993 Plan, all outstanding options which were granted at least six months prior to the date of the "Change of Control" shall be surrendered to the Company and the optionee shall receive a cash payment in an amount equal to the number of shares of Common Stock subject to the options multiplied by the difference between the fair market value of a share of Common Stock on the date determined to be the date of cancellation and surrender of such options and the option price. Under the 1993 Plan in the event of a "Change of Control" the Compensation Committee can take one or more of the following actions: (i) provide for the acceleration of vesting; (ii) provide for the purchase of the option by the Company; (iii) make such adjustment as deemed appropriate; or (iv) cause such option to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation. 14 17 PERFORMANCE GRAPH The following performance graph compares the performance of the Company's Common Stock to the S&P 500 Index and to the Dow Jones Oil -- Secondary Index for the last five years. The graph assumes that the value of the investment in the Company's Common Stock and each index was $100 at December 31, 1991 and that all dividends were reinvested. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* ANADARKO PETROLEUM CORP, S&P 500 AND DOW JONES OIL -- SECONDARY
ANADARKO DOW JONES MEASUREMENT PERIOD PETROLEUM OIL - SECON- S&P 500 IN- (FISCAL YEAR COVERED) CORPORATION DARY DEX 1991 100 100 100 1992 124 101 108 1993 193 112 118 1994 165 108 120 1995 233 125 165 1996 280 154 203
Assumes $100 Invested on December 31, 1991. * Total Return Assumes Reinvestment of Dividends Total Return Data Provided by S&P's Compustat Services Inc. and Dow Jones & Company Inc. APPROVAL OF AN AMENDMENT TO THE 1993 STOCK INCENTIVE PLAN (ITEM NO. 2 ON PROXY CARD) THE BOARD OF DIRECTORS RECOMMENDS THE APPROVAL OF THE AMENDMENT TO THE 1993 STOCK INCENTIVE PLAN (THE "AMENDMENT") WHICH AUTHORIZES THE GRANT OF PERFORMANCE STOCK AWARDS BASED ON THE PERFORMANCE GOAL SPECIFIED IN THE AMENDMENT. The 1993 Plan was adopted by the Board on October 28, 1993 and approved by stockholders on April 28, 1994. In December 1995, the Internal Revenue Service ("IRS") issued final regulations under section 162(m) of the Code. Section 162(m) of the Code limits to $1 million per year the tax deduction available to public companies for certain compensation paid to certain employees subject to an exemption for compensation which is "performance-based". The Company's intent is to ensure that payouts of performance shares granted under the 1993 Plan qualify for the exemption under section 162(m) of the Code. The 1993 Plan is intended to attract and retain executive personnel and other key employees of the Company and its subsidiaries. In addition, the 1993 Plan is intended to allow the Compensation Committee the ability to use stock and stock-related awards in the Company's overall compensation program. The essential features of the Amendment and the 1993 Plan, as amended, are summarized below. Approval by 15 18 affirmative votes of holders of a majority of shares of Common Stock present, or represented, and entitled to vote is required for any payouts of performance shares granted under the 1993 Plan and for the payouts to qualify for the "performance-based" compensation exemption under section 162(m) of the Code. AMENDMENT The Amendment to the 1993 Plan establishes performance criteria for the granting of performance shares under the Plan. The Committee has the authority to grant Performance Awards based upon the achievement of the specific performance goals. The Committee shall establish at the time a Performance Award is granted the performance period, which shall be equal in length to at least four years, and the performance goals pursuant to which an Employee may earn and be entitled to a payment under such Performance Award. The Committee shall also establish a schedule or schedules setting forth the portion of the Performance Award which will be earned or forfeited based on the degree of achievement, or lack thereof, of the performance goals at the end of the relevant performance period. The performance goals shall be based on the Company's TSR compared to certain peer companies' TSR for the same period. During any performance period, the Committee shall have the authority to adjust the performance goals in such manner as the Committee, in its sole discretion, deems appropriate with respect to such performance period; provided, however, that Performance Awards which are designed to qualify for the performance-based exception of section 162(m) of the Code, and which are held by "covered employees" (as such term is defined in the regulations promulgated under section 162(m) of the Code), may not have any term or condition of such Award changed in a manner that would produce a greater benefit. Stockholders must approve the material terms of the performance goals before any compensation is paid to certain employees' granted Performance Awards. One Performance Award was granted in 1996. For the terms of that grant see LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR on page 12. The maximum aggregate number of Performance Award shares that may be issued to an employee for payment of compensation based on a Performance Award grant shall not exceed 150,000 shares for any performance period. Performance Award compensation payments may be paid in a lump sum or in installments, in cash, shares or in any combination thereof, following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. SUMMARY OF THE 1993 STOCK INCENTIVE PLAN AS AMENDED TYPES OF AWARDS The 1993 Plan permits the granting of any or all of the following types of awards: (1) stock options, including ISOs; (2) SARs in tandem with stock options or freestanding; (3) restricted stock; (4) performance awards; (5) stock compensation awards; and (6) other stock-based awards. ELIGIBILITY FOR PARTICIPATION All key employees, including employee directors and officers of the Company or any affiliate of the Company, are eligible for participation under the 1993 Plan. While the concept of "key employee" eligible to participate in the 1993 Plan is necessarily flexible, approximately 150 employees (including a total of 15 executive officers) are considered to fall within this category. ADMINISTRATION The 1993 Plan is administered by the Compensation Committee composed of disinterested, outside directors appointed by the Board. The Compensation Committee selects key employees who will receive awards, determines the type and terms of awards to be granted, and interprets and administers the Plan. Unless otherwise expressly provided in the 1993 Plan, all decisions under or with respect to the 1993 Plan shall be within the sole discretion of the Compensation Committee and are final. 16 19 AMENDMENT AND TERMINATION The Board may terminate or amend the 1993 Plan without stockholder approval, except that stockholder approval is required for any amendment which would increase the number of shares available for grant, decrease the minimum exercise price or otherwise cause the 1993 Plan to cease to qualify for any tax or regulatory exemption, status or requirement. TERM OF THE PROGRAM The 1993 Plan will terminate on October 28, 2003, after which time no additional awards may be made under the 1993 Plan. SHARES SUBJECT TO PROGRAM Subject to adjustment as described more fully below, 4,000,000 shares of Common Stock may be awarded under the 1993 Plan, provided, however, that no more than 800,000 shares of the shares specified shall be issued as restricted stock. The maximum aggregate number of shares available for options and SARs to any executive officer during the term of the 1993 Plan is 20 percent of the number of shares with respect to which awards may be granted under the 1993 Plan. STOCK OPTIONS Stock options granted under the 1993 Plan are subject to the terms and conditions determined by the Compensation Committee, except that (i) no options may be granted after the termination of the 1993 Plan; (ii) the option exercise price cannot be less than 100 percent of fair market value of a share of Common Stock at the time the option is granted; and (iii) no option may be exercised more than 10 years after it is granted. ISOs may be granted provided they meet the requirements of the Code. The Compensation Committee shall determine the form in which payment of the exercise price may be made, including cash, shares of Common Stock, other securities or other property, or any combination thereof, having a fair market value on the exercise date equal to the relevant exercise price. STOCK APPRECIATION RIGHTS An SAR may be granted in tandem with another award, in addition to another award, or freestanding and unrelated to another award. The grant price of an SAR shall not be less than 100 percent of fair market value of a share of Common Stock at the time the SAR is granted. The Compensation Committee may impose such conditions or restrictions on the exercise of any SAR as it shall deem appropriate. RESTRICTED STOCK The Compensation Committee shall determine the employees to whom Restricted Stock shall be granted, the number of shares of Restricted Stock to be granted to each participant, the duration of the restriction period, the conditions under which the Restricted Stock may be forfeited to the Company and other terms and conditions of awards of Restricted Stock. Restricted Stock may not be disposed of by the participant until the restrictions specified in the award expire. The participant will have, with respect to Restricted Stock, the right to vote the shares and receive any cash dividends. Except as otherwise determined by the Compensation Committee, upon termination of a participant's employment for any reason during the restriction period, all Restricted Stock shall be forfeited by the participant. PERFORMANCE AWARDS See APPROVAL OF AN AMENDMENT TO THE 1993 STOCK INCENTIVE PLAN -- AMENDMENT on page 15. 17 20 STOCK COMPENSATION The Compensation Committee shall have the authority to pay all or a portion of any amounts payable under any compensation program of the Company in shares of Common Stock. The number and type of shares to be distributed in lieu of the cash compensation, as well as the terms and conditions of any such stock compensation, shall be determined by the Compensation Committee. OTHER STOCK-BASED AWARDS The Compensation Committee may grant other forms of awards based on, payable in, or otherwise related in whole or in part to Common Stock under the 1993 Plan. Subject to the terms of the 1993 Plan, the Compensation Committee shall determine the terms and conditions of any such other stock-based awards. CHANGE OF CONTROL In the event of a "Change of Control" as defined in the 1993 Plan, the Compensation Committee may take any one or more of the following actions in connection with any awards made under the 1993 Plan: (i) accelerate the exercise or vesting date; (ii) provide for the purchase, in cash, of such award; (iii) make adjustments to such award; or (iv) cause any outstanding award to be assumed, or a new right substituted therefor, by the acquiring or surviving corporation. ADJUSTMENTS In the event the Compensation Committee determines that any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares of Common Stock or other similar corporate transaction or event affects the Common Stock such that an adjustment is determined by the Compensation Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended under the 1993 Plan, then the Compensation Committee shall adjust any or all of the awards. NEW PLAN BENEFITS 1993 STOCK INCENTIVE PLAN
DOLLAR NUMBER NAME AND POSITION VALUE($) OF UNITS ----------------- -------- ------------ Robert J. Allison, Jr., Chairman, President and Chief Executive Officer......................................... (1) 0 to 150,000
- --------------- (1) The dollar value is not determinable at this time since any payout is contingent on the Company's TSR performance at the end of 2000 and 2004. See LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR on page 12. INDEPENDENT AUDITORS KPMG Peat Marwick LLP served as the Company's independent auditors during 1996 and was appointed by the Board to serve in that capacity for 1997. Representatives of KPMG Peat Marwick LLP will be present at the meeting to respond to appropriate questions from stockholders and to make a statement if they desire to do so. OTHER MATTERS It is not expected that any other matters will come before the meeting. However, if any other matters properly come before the meeting, it is the intention of the persons named in the accompanying form of proxy to vote such proxy in accordance with their judgment on such matters. 18 21 STOCKHOLDER PROPOSALS Any proposal which a stockholder may desire to present to the 1998 Annual Meeting of Stockholders must be received by the Company on, or prior to, November 18, 1997. PROXY SOLICITATION The cost of preparing, assembling and mailing the material in connection with the solicitation of proxies will be borne by the Company. It is expected that the solicitation of proxies will be primarily by mail but solicitations may also be made personally or by telephone or telegraph by officers and other employees of the Company. In addition, the Company has engaged ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, New York, New York 10001 to assist in such solicitation at an estimated fee of $5,000 plus disbursements. It is important that the proxies be returned promptly. All stockholders, whether or not they expect to attend in person, are urged to sign, date and return the accompanying form of proxy in the enclosed addressed envelope, which requires no postage if mailed in the United States. BY ORDER OF THE BOARD OF DIRECTORS /s/ SUZANNE SUTER SUZANNE SUTER Corporate Secretary Dated: March 21, 1997 Houston, Texas 19 22 AMENDMENT TO ANADARKO PETROLEUM CORPORATION 1993 STOCK INCENTIVE PLAN WHEREAS, ANADARKO PETROLEUM CORPORATION (the "Company"), has heretofore adopted the 1993 Stock Incentive Plan (the "Plan"); and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January 1, 1996: 1. Section 2 shall be amended by replacing the definition of "Employee" in its entirety with the following definition: "'Employee' shall mean any executive officer or other key employee of the Company or any Affiliate." 2. Section 6 (d) shall be replaced in its entirety by the following: "(d) Performance Awards. The Committee shall have authority to grant Performance Awards which shall consist of a right, denominated in Shares, and shall confer on the holder thereof compensation rights based upon the achievement of the performance goals. The maximum aggregate number of Performance Award Shares that may be issued to an Employee for payment of compensation based on a Performance Award grant shall not exceed 150,000 Shares for any performance period. (i) Terms and Conditions. Subject to the terms of the Plan, the Committee shall establish at the time a Performance Award is granted the performance period, which shall be equal in length to at least four (4) years, and the performance goals pursuant to which an Employee may earn and be entitled to a payment under such Performance Award. The Committee shall also establish a schedule or schedules setting forth the portion of the Performance Award which will be earned or forfeited based on the degree of achievement, or lack thereof, of the performance goals at the end of the relevant performance period. The performance goals shall be based on the Company's total shareholder return compared to peer companies' total shareholder return for the same period. During any performance period, the Committee shall have the authority to adjust the performance goals in such manner as the Committee, in its sole discretion, deems appropriate with respect to such performance period; provided, however, that Performance Awards which are designed to qualify for the performance-based exception of Section 162(m) of the Code, and which are held by "covered employees" (as such term is defined in the regulations promulgated under Section 162(m) of the Code), may not have any term or condition of such Award changed in a manner that would produce a greater benefit. (ii) Payment of Performance Awards. Performance Award compensation payments may be paid in a lump sum or in installments, in cash, Shares or in any combination thereof, following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis." 3. Section 9 shall be amended by adding the following new subsection: "(l) Shareholder Approval. Shareholders must approve the material terms of the performance goals described in Section 6(d) before any compensation is paid to a "covered employee" (as such term is defined in the regulations promulgated under Section 162(m) of the Code) based upon a Performance Award granted under such section." 4. As amended hereby, the Plan is specifically ratified and reaffirmed. A-1 23 P R O X Y ANADARKO PETROLEUM CORPORATION SOLICITED BY THE BOARD OF DIRECTORS FOR ANNUAL MEETING OF STOCKHOLDERS APRIL 24, 1997 The undersigned stockholder hereby appoints ROBERT J. ALLISON, JR. AND SUZANNE SUTER, and any one of them, with power of substitution and revocation, the attorneys of the undersigned to vote all shares registered in the name of the undersigned for the election of directors, unless such authority is withheld, and on all other matters which may come before the 1997 Annual Meeting of Stockholders of Anadarko Petroleum Corporation to be held on Thursday, April 24, 1997 at 9:30 A.M. or any adjournment thereof. PLEASE MARK THIS PROXY AS INDICATED ON THE REVERSE SIDE TO VOTE. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE STOCKHOLDER. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS, PLEASE SIGN THE REVERSE SIDE; NO BOXES NEED TO BE CHECKED. THIS PROXY MUST BE SIGNED AND RETURNED TO BE COUNTED. (Continued and to be signed on other side) 24 PLEASE MARK YOUR VOTES AS [X] INDICATED IN THIS EXAMPLE THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2. Item 1 -- ELECTION OF CLASS II DIRECTORS Conrad P. Albert and Robert J. Allison, Jr. FOR WITHHELD FOR ALL [ ] [ ] Withheld For: (Write that nominee's name in the space provided below.) - ----------------------------------------------------------------------- Item 2 -- APPROVAL OF THE AMENDMENT TO THE 1993 STOCK INCENTIVE PLAN FOR AGAINST ABSTAIN [ ] [ ] [ ] Signature(s) Date , 1997 --------------------------------------- ------------------- Please mark, date and sign as your name appears above. If shares are held jointly, each stockholder named should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. Return signed proxy in the enclosed envelope. -----END PRIVACY-ENHANCED MESSAGE-----