Trading Losses Depress Anadarko Petroleum's Profits

Last Updated Aug 15, 2008 4:28 AM EDT

  • Anadarko Petroleum Business LogoThe Company: Anadarko Petroleum, an oil and natural gas company with operations in Algeria and the United States.
  • The Filing: Form 10-Q filed with the SEC on August 6, 2008.
  • The Finding: Despite record energy prices in the second-quarter, Anadarko said its net income for the three-months ended June 30 fell 98 percent to $23 million, due to $1.6 billion in derivative losses.
The Upshot: Volatile energy prices coupled with $1.2 billion in capital expenditures in the second-quarter, primarily for drilling and development opportunities, dictated the need for predictable cash flow. Through the use of derivative instruments, such as swaps and options, the company sought "to lock-in" prices for forward delivery, ensuring sufficient cash flow.

The company received prices (excluding derivatives), on average, of $9.88 per thousand cubic feet for natural gas and $117.63 per barrel of crude for delivery in the United States, up almost 61 percent and 64 percent in price, respectively, year-on-year.

Unfortunately, by hedging against falling prices, Anadarko traded away, on average, $0.58 per thousand feet of cubic feet and $85.80 per barrel in potential gains for natural gas and oil, respectively, in the second-quarter of 2008.

Fortunately, the losses were recorded as "unrealized losses," for no monies actually changed hands -- as the contracts were for forward delivery (GAAP accounting rules). This explains why discretionary cash flow from continuing operations in the second quarter was $438 million.

Anadarko was not alone in making the wrong bet in the price direction of oil and gas. Natural gas producer Chesapeake Energy and Noble Energy -- among others -- recently posted losses of $1.6 billion and $716 million, respectively , in (unrealized) hedge trades.

The Question: If oil and gas companies control the prices of fuel commodities -- as their critics allege -- how come they cannot correctly predict price directions?

  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.