UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

[    ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period fromto

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 incorporation or organization)	(I.R.S. Employer Identification No.)

1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046

(Address of principal executive offices)

Registrant’s telephone number, including area code (832) 636-1000

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

The number of shares outstanding of the Company’s common stock at September 30, 2014, is shown below:

Title of Class	Number of Shares Outstanding
Common Stock, par value $0.10 per share	506,450,402

TABLE OF CONTENTS

PART I		Page
Item 1.	Financial Statements
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013	3
	Consolidated Balance Sheets at September 30, 2014, and December 31, 2013	4
	Consolidated Statement of Equity for the Nine Months Ended September 30, 2014	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
PART II
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	52

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
millions except per-share amounts	2014			2013			2014			2013
Revenues and Other
Natural-gas sales	$	830		$	805		$	3,038		$	2,547
Oil and condensate sales	2,637			2,389			7,766			6,761
Natural-gas liquids sales	424			325			1,221			889
Gathering, processing, and marketing sales	339			270			928			750
Gains (losses) on divestitures and other, net	780			64			2,340			296
Total	5,010			3,853			15,293			11,243
Costs and Expenses
Oil and gas operating	275			277			861			769
Oil and gas transportation and other	322			255			869			763
Exploration	199			272			1,000			714
Gathering, processing, and marketing	269			217			771			638
General and administrative	381			255			984			787
Depreciation, depletion, and amortization	1,163			996			3,335			2,958
Other taxes	306			294			981			819
Impairments	394			593			514			632
Algeria exceptional profits tax settlement	—			—			—			33
Deepwater Horizon settlement and related costs	3			5			96			12
Total	3,312			3,164			9,411			8,125
Operating Income (Loss)	1,698			689			5,882			3,118
Other (Income) Expense
Interest expense	204			177			573			513
(Gains) losses on derivatives, net	(323		)	72			453			(393		)
Other (income) expense, net	24			(23		)	12			69
Tronox-related contingent loss	19			—			4,338			—
Total	(76		)	226			5,376			189
Income (Loss) Before Income Taxes	1,774			463			506			2,929
Income tax expense (benefit)	627			240			1,719			1,263
Net Income (Loss)	1,147			223			(1,213		)	1,666
Net income attributable to noncontrolling interests	60			41			142			95
Net Income (Loss) Attributable to Common Stockholders	$	1,087		$	182		$	(1,355	)	$	1,571
Per Common Share
Net income (loss) attributable to common stockholders—basic	$	2.13		$	0.36		$	(2.69	)	$	3.11
Net income (loss) attributable to common stockholders—diluted	$	2.12		$	0.36		$	(2.69	)	$	3.10
Average Number of Common Shares Outstanding—Basic	506			503			505			502
Average Number of Common Shares Outstanding—Diluted	508			505			505			504
Dividends (per common share)	$	0.27		$	0.18		$	0.72		$	0.36

See accompanying Notes to Consolidated Financial Statements.

2

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended   September 30,				Nine Months Ended   September 30,
millions	2014		2013		2014			2013
Net Income (Loss)	$	1,147	$	223	$	(1,213	)	$	1,666
Other Comprehensive Income (Loss), net of taxes
Reclassification of previously deferred derivative losses to    (gains) losses on derivatives, net (1)	1		2		4			5
Adjustments for pension and other postretirement plans
Amortization of net actuarial (gain) loss to general and administrative expense (2)	5		18		14			56
Amortization of net prior service (credit) cost to general and administrative expense	—		1		—			1
Total adjustments for pension and other postretirement plans	5		19		14			57
Total	6		21		18			62
Comprehensive Income (Loss)	1,153		244		(1,195		)	1,728
Comprehensive income attributable to noncontrolling interests	60		41		142			95
Comprehensive Income (Loss) Attributable to    Common Stockholders	$	1,093	$	203	$	(1,337	)	$	1,633

 __________________________________________________________________

⁽¹⁾  Net of income tax benefit (expense) of $(1) million for the three months ended September 30, 2014 and 2013, and $(3) million for the nine months ended September 30, 2014 and 2013.

⁽²⁾  Net of income tax benefit (expense) of $(2) million for the three months ended September 30, 2014, $(11) million for the three months ended September 30, 2013, $(7) million for the nine months ended September 30, 2014, and $(32) million for the nine months ended September 30, 2013.

See accompanying Notes to Consolidated Financial Statements.

3

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

millions	September 30, 2014			December 31, 2013
ASSETS
Current Assets
Cash and cash equivalents	$	8,335		$	3,698
Accounts receivable (net of allowance of $7 million and $5 million)
Customers	1,350			1,481
Others	1,362			1,241
Other current assets	692			688
Total	11,739			7,108
Properties and Equipment
Cost	72,677			71,244
Less accumulated depreciation, depletion, and amortization	31,573			30,315
Net properties and equipment	41,104			40,929
Other Assets	2,321			2,082
Goodwill and Other Intangible Assets	5,501			5,662
Total Assets	$	60,665		$	55,781
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	3,653		$	3,530
Current asset retirement obligations	403			409
Accrued expenses	1,646			1,264
Current portion of long-term debt	—			500
Deepwater Horizon settlement and related costs	93			—
Tronox-related contingent liability	5,188			—
Total	10,983			5,703
Long-term Debt	14,728			13,065
Other Long-term Liabilities
Deferred income taxes	7,512			9,245
Asset retirement obligations	1,464			1,613
Tronox-related contingent liability	—			850
Other	3,415			1,655
Total	12,391			13,363
Equity
Stockholders’ equity
Common stock, par value $0.10 per share (1.0 billion shares authorized, 525.6 million and 522.5 million shares issued)	52			52
Paid-in capital	9,190			8,629
Retained earnings	12,633			14,356
Treasury stock (19.2 million and 18.8 million shares)	(931		)	(895		)
Accumulated other comprehensive income (loss)	(267		)	(285		)
Total Stockholders’ Equity	20,677			21,857
Noncontrolling interests	1,886			1,793
Total Equity	22,563			23,650
Total Liabilities and Equity	$	60,665		$	55,781

See accompanying Notes to Consolidated Financial Statements.

4

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

	Total Stockholders’ Equity
	Common Stock		Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interests			Total Equity
millions
Balance at December 31, 2013	$	52	$	8,629	$	14,356		$	(895	)	$	(285	)	$	1,793		$	23,650
Net income (loss)	—		—		(1,355		)	—			—			142			(1,213		)
Common stock issued	—		240		—			—			—			—			240
Dividends—common stock	—		—		(368		)	—			—			—			(368		)
Repurchase of common stock	—		—		—			(36		)	—			—			(36		)
Subsidiary equity transactions	—		321		—			—			—			108			429
Distributions to noncontrolling    interest owners	—		—		—			—			—			(157		)	(157		)
Reclassification of previously    deferred derivative losses to    (gains) losses on derivatives, net	—		—		—			—			4			—			4
Adjustments for pension and other    postretirement plans	—		—		—			—			14			—			14
Balance at September 30, 2014	$	52	$	9,190	$	12,633		$	(931	)	$	(267	)	$	1,886		$	22,563

See accompanying Notes to Consolidated Financial Statements.

5

ANADARKO PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended   September 30,
millions	2014			2013
Cash Flows from Operating Activities
Net income (loss)	$	(1,213	)	$	1,666
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, depletion, and amortization	3,335			2,958
Deferred income taxes	(210		)	535
Dry hole expense and impairments of unproved properties	743			423
Impairments	514			632
(Gains) losses on divestitures, net	(2,194		)	(165		)
Total (gains) losses on derivatives, net	462			(396		)
Operating portion of net cash received (paid) in settlement of derivative instruments	(138		)	37
Other	195			174
Changes in assets and liabilities
Deepwater Horizon settlement and related costs	93			3
Algeria exceptional profits tax settlement	—			730
Tronox-related contingent loss	4,338			—
(Increase) decrease in accounts receivable	104			246
Increase (decrease) in accounts payable and accrued expenses	710			(37		)
Other items—net	(225		)	(22		)
Net cash provided by (used in) operating activities	6,514			6,784
Cash Flows from Investing Activities
Additions to properties and equipment and dry hole costs	(7,289		)	(5,327		)
Acquisition of businesses	(4		)	(473		)
Divestitures of properties and equipment and other assets	4,770			451
Other—net	(372		)	(552		)
Net cash provided by (used in) investing activities	(2,895		)	(5,901		)
Cash Flows from Financing Activities
Borrowings, net of issuance costs	2,370			843
Repayments of debt	(1,255		)	(495		)
Financing portion of net cash paid in settlement of derivative instruments	(222		)	—
Increase (decrease) in outstanding checks	134			63
Dividends paid	(368		)	(182		)
Repurchase of common stock	(36		)	(30		)
Issuance of common stock, including tax benefit on share-based compensation awards	117			123
Sale of subsidiary units	434			418
Distributions to noncontrolling interest owners	(157		)	(111		)
Contributions from noncontrolling interest owners	—			2
Net cash provided by (used in) financing activities	1,017			631
Effect of Exchange Rate Changes on Cash	1			(46		)
Net Increase (Decrease) in Cash and Cash Equivalents	4,637			1,468
Cash and Cash Equivalents at Beginning of Period	3,698			2,471
Cash and Cash Equivalents at End of Period	$	8,335		$	3,939

See accompanying Notes to Consolidated Financial Statements.

6

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

General  Anadarko Petroleum Corporation is engaged in the exploration, development, production, and marketing of natural gas, crude oil, condensate, natural gas liquids (NGLs), and anticipated production of liquefied natural gas (LNG). In addition, the Company engages in the gathering, processing, treating, and transporting of natural gas, crude oil, and NGLs. The Company also participates in the hard-minerals business through royalty arrangements. Unless the context otherwise requires, the terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries.

Basis of Presentation  The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s Consolidated Balance Sheets at September 30, 2014, and December 31, 2013, the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and the Consolidated Statement of Equity for the nine months ended September 30, 2014. Certain prior-period amounts have been reclassified to conform to the current-period presentation.

Use of Estimates  The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, including those related to proved reserves; the value of properties and equipment; goodwill; intangible assets; asset retirement obligations; litigation liabilities; environmental liabilities; pension assets, liabilities, and costs; income taxes; and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.

Recently Issued Accounting Standards  The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance in Subtopic 932-605, Extractive Activities—Oil and Gas—Revenue Recognition, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This ASU is effective for annual and interim periods beginning in 2017 and is required to be adopted using one of two retrospective application methods, with no early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, changes the criteria for reporting discontinued operations and requires additional disclosures, both for discontinued operations and for individually significant dispositions and assets classified as held for sale not qualifying as discontinued operations. This ASU is effective for annual and interim periods beginning in 2015, with early adoption permitted for disposals or for assets classified as held for sale that have not been reported in previously issued financial statements. Anadarko early adopted this ASU on a prospective basis beginning with the first quarter of 2014. The adoption did not have a material impact on the Company’s consolidated financial statements.

ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, requires that an unrecognized tax benefit or a portion of an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset, except in certain circumstances. This ASU is effective for annual and interim periods beginning in 2014. See Note 12—Income Taxes.

7

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Acquisitions and Divestitures

For the nine months ended September 30, 2014, the Company received $4.8 billion in proceeds from divestitures and recognized net gains of $2.2 billion, primarily related to assets included in the oil and gas exploration and production reporting segment. In the third quarter of 2014, the Company sold its Chinese subsidiary for $1.075 billion, recognizing a gain of $510 million, and sold its interest in certain unproved properties in the Gulf of Mexico for $500 million, recognizing a gain of $216 million. In the first quarter of 2014, the Company sold a 10% working interest in Rovuma Offshore Area 1 in Mozambique for $2.64 billion, recognizing a gain of $1.5 billion, and sold its interest in the Pinedale/Jonah assets in Wyoming for $581 million.

On October 28, 2014, Anadarko’s consolidated subsidiary, Western Gas Partners, LP (WES), entered into an agreement to acquire a privately held company with gathering and processing assets located in the Delaware basin in West Texas for $1.5 billion in cash. The acquisition is expected to close and be funded in the fourth quarter of 2014 and is subject to regulatory approvals and other customary closing conditions.

3. Inventories

The following summarizes the major classes of inventories included in other current assets:

millions	September 30, 2014		December 31, 2013
Crude oil	$	187	$	88
Natural gas	23		43
NGLs	122		79
Total inventories	$	332	$	210

8

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Impairments

The following summarizes impairments by segment:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
millions	2014		2013		2014		2013
Oil and gas exploration and production
Long-lived assets held for use
U.S. onshore properties	$	387	$	—	$	387	$	—
Gulf of Mexico properties	—		593		115		593
Cost-method investment	—		—		2		10
Midstream
Long-lived assets held for use	7		—		10		29
Total impairments	$	394	$	593	$	514	$	632

In the third quarter of 2014, a U.S. onshore oil and gas property was impaired due to lower forecasted natural-gas prices. In the second quarter of 2014, the Company impaired a Gulf of Mexico property due to a reduction in estimated future cash flows. In the third quarter of 2013, certain Gulf of Mexico properties were impaired due to a reduction in estimated future net cash flows and downward revisions of reserves resulting from changes to the Company’s development plans. In the second quarter of 2013, the Company impaired its Venezuelan cost-method investment due to declines in estimated recoverable value. In addition, during the first quarter of 2013, a midstream property was impaired due to a reduction in estimated future cash flows.

The following summarizes the post-impairment fair value of the above-described assets, which was measured using the income approach and Level 3 inputs:

millions	2014		2013
Long-lived assets held for use	$	661	$	266
Cost-method investment (1)	32		32

__________________________________________________________________

⁽¹⁾  This represents the Company’s after-tax net investment.

5. Suspended Exploratory Well Costs

The Company’s suspended exploratory well costs were $1.5 billion at September 30, 2014, and $2.2 billion at December 31, 2013. The decrease in suspended exploratory well costs during 2014 primarily resulted from the Company’s sale of a 10% working interest in Rovuma Offshore Area 1 in Mozambique during the first quarter of 2014. Projects with suspended exploratory well costs are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development and where management is actively pursuing efforts to assess whether reserves can be attributed to these projects. If additional information becomes available that raises substantial doubt as to the economic or operational viability of any of these projects, the associated costs will be expensed at that time. During the nine months ended September 30, 2014, no exploratory well costs previously capitalized as suspended exploratory well costs for greater than one year at December 31, 2013, were charged to dry hole expense.

9

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Noncontrolling Interests

Western Gas Equity Partners, LP (WGP) is a publicly traded consolidated subsidiary formed to own substantially all of the partnership interests in WES previously owned by Anadarko. During the third quarter of 2014, Anadarko sold 5.75 million WGP limited partner units to the public, raising net proceeds of $335 million. At September 30, 2014, Anadarko’s ownership interest in WGP consisted of an 88.3% limited partner interest and the entire non-economic general partner interest. The remaining 11.7% limited partner interest in WGP was owned by the public.

WES, a publicly traded consolidated subsidiary, is a limited partnership formed by Anadarko to own, operate, acquire, and develop midstream assets. During the first quarter of 2014, WES issued 300,000 common units to the public pursuant to the partial exercise of the underwriters’ over-allotment option granted in connection with WES’s December 2013 equity offering, raising additional net proceeds of $18 million. During the nine months ended September 30, 2014, WES also sold 1.1 million common units to the public under its continuous offering program, raising net proceeds of $81 million. At September 30, 2014, WGP’s ownership interest in WES consisted of a 40.6% limited partner interest, the entire 2.0% general partner interest, and all of the WES incentive distribution rights. At September 30, 2014, Anadarko also owned a 0.6% limited partner interest in WES through other subsidiaries. The remaining 56.8% limited partner interest in WES was owned by the public.

7. Derivative Instruments

Objective and Strategy  The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks. Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company’s oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Henry Hub, Louisiana for natural gas and Cushing, Oklahoma or Sullom Voe, Scotland for oil. Basis swaps are periodically used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company’s leased storage facilities (Marketing and Trading Derivative Activities).

Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to interest-rate changes. The fair value of the Company’s current interest-rate swap portfolio increases (decreases) when interest rates increase (decrease).

The Company does not apply hedge accounting to any of its derivative instruments. As a result, gains and losses associated with derivative instruments are recognized currently in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. See Note 10—Accumulated Other Comprehensive Income (Loss).

10

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Derivative Instruments (Continued)

Oil and Natural-Gas Production/Processing Derivative Activities  The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below are a combination of NYMEX West Texas Intermediate and IntercontinentalExchange, Inc. (ICE) Brent Blend prices. The following is a summary of the Company’s derivative instruments related to Oil and Natural-Gas Production/Processing Derivative Activities at September 30, 2014:

	2014 Settlement		2015 Settlement
Natural Gas
Three-Way Collars (thousand MMBtu/d)	600		635
Average price per MMBtu
Ceiling sold price (call)	$	5.01	$	4.76
Floor purchased price (put)	$	3.75	$	3.75
Floor sold price (put)	$	2.75	$	2.75
Fixed-Price Contracts (thousand MMBtu/d)	1,000		—
Average price per MMBtu	$	4.23	$	—
Crude Oil
Three-Way Collars (MBbls/d)	—		25
Average price per barrel
Ceiling sold price (call)	$	—	$	117.55
Floor purchased price (put)	$	—	$	100.00
Floor sold price (put)	$	—	$	85.00
Fixed-Price Contracts (MBbls/d)	140		—
Average price per barrel	$	101.94	$	—

__________________________________________________________________

MMBtu—million British thermal units

MMBtu/d—million British thermal units per day

MBbls/d—thousand barrels per day

A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

Marketing and Trading Derivative Activities  The Company had financial derivative transactions with notional volumes of natural gas totaling 11 billion cubic feet (Bcf) at September 30, 2014, and 16 Bcf at December 31, 2013, that were entered into to mitigate commodity-price risk related to fixed-price purchase and sales contracts and storage activity.

11

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Derivative Instruments (Continued)

Interest-Rate Derivatives  Anadarko has outstanding interest-rate swap contracts as a fixed-rate payer to manage interest-rate risk associated with anticipated debt issuances. The Company has locked in a fixed interest rate in exchange for a floating interest rate indexed to the three-month London Interbank Offered Rate (LIBOR). These swap instruments include a provision that requires both the termination of the swaps and cash settlement in full at the start of the reference period.

During the second quarter of 2014, to align the interest-rate swap portfolio with anticipated debt financing, the Company extended the reference-period start dates from June 2014 to September 2016 and adjusted the related fixed interest rates for interest-rate swaps with an aggregate notional principal amount of $1.1 billion. In addition, in anticipation of the July 2014 issuance of an aggregate $1.25 billion of Senior Notes, interest-rate swap agreements with an aggregate notional principal amount of $750 million were settled in June 2014, resulting in a cash payment of $222 million.

Derivative settlements are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements are classified as cash flows from financing activities. In prior periods, the Company extended the reference-period start dates for derivatives included in the interest-rate swap portfolio without settling the related interest-rate derivative obligations. As a result, these derivatives contain an other-than-insignificant financing element and, therefore settlements related to these extended interest-rate derivatives are classified as cash flows from financing activities.

The Company had the following outstanding interest-rate swaps at September 30, 2014:

millions except percentages		Reference Period		Weighted-Average
Notional Principal Amount		Start	End	Interest Rate
$	50	September 2016	September 2026	5.91%
$	1,850	September 2016	September 2046	6.05%

Effect of Derivative Instruments—Balance Sheet  The following summarizes the fair value of the Company’s derivative instruments:

	Gross Derivative Assets				Gross Derivative Liabilities
millions	September 30,		December 31,		September 30,			December 31,
Balance Sheet Classification	2014		2013		2014			2013
Commodity derivatives
Other current assets	$	255	$	181	$	(49	)	$	(102	)
Other assets	27		89		(11		)	(66		)
Accrued expenses	6		106		(10		)	(149		)
Other liabilities	1		4		(2		)	(15		)
	289		380		(72		)	(332		)
Interest-rate and other derivatives
Accrued expenses	—		—		—			(480		)
Other liabilities	—		—		(925		)	(174		)
	—		—		(925		)	(654		)
Total derivatives	$	289	$	380	$	(997	)	$	(986	)

12

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Derivative Instruments (Continued)

Effect of Derivative Instruments—Statement of Income  The following summarizes gains and losses related to derivative instruments:

millions	Three Months Ended   September 30,						Nine Months Ended   September 30,
Classification of (Gain) Loss Recognized	2014			2013			2014			2013
Commodity derivatives
Gathering, processing, and marketing sales (1)	$	(1	)	$	(8	)	$	9		$	(3	)
(Gains) losses on derivatives, net	(419		)	146			(40		)	35
Interest-rate and other derivatives
(Gains) losses on derivatives, net	96			(74		)	493			(428		)
Total (gains) losses on derivatives, net	$	(324	)	$	64		$	462		$	(396	)

__________________________________________________________________

⁽¹⁾  Represents the effect of Marketing and Trading Derivative Activities.

Credit-Risk Considerations  The financial integrity of exchange-traded contracts, which are subject to nominal credit risk, is assured by NYMEX or ICE through systems of financial safeguards and transaction guarantees. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines, and assesses the impact on fair value of its counterparties’ creditworthiness. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure. The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset gains and losses when settling with derivative counterparties.

In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across derivative types. At September 30, 2014, $156 million of the Company’s $997 million gross derivative liability balance, and at December 31, 2013, $76 million of the Company’s $986 million gross derivative liability balance would have been eligible for setoff against the Company’s gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across derivative types.

Some of the Company’s derivative instruments are subject to provisions that can require full or partial collateralization or immediate settlement of the Company’s obligations if certain credit-risk-related provisions are triggered, such as if the Company’s credit rating from major credit rating agencies declined to a level below investment grade. However, most of the Company’s derivative counterparties maintain secured positions with respect to the Company’s derivative liabilities under the Company’s $5.0 billion senior secured revolving credit facility maturing in September 2015 ($5.0 billion Facility). For information on the Company’s revolving credit facilities, see Note 8—Debt and Interest Expense—Anadarko Revolving Credit Facilities. The aggregate fair value of unsecured derivative instruments with credit-risk-related contingent features for which a net liability position existed was $89 million at September 30, 2014, and $42 million at December 31, 2013. The current portion of these amounts was included in accrued expenses and the long-term portion of these amounts was included in other long-term liabilities—other on the Company’s Consolidated Balance Sheets.

13

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Derivative Instruments (Continued)

Fair Value  Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, discount factors and implied market volatility.

The following summarizes the fair value of the Company’s derivative assets and liabilities, by input level within the fair-value hierarchy:

millions
September 30, 2014	Level 1		Level 2			Level 3		Netting (1)			Collateral		Total
Assets
Commodity derivatives
Financial institutions	$	—	$	265		$	—	$	(68	)	$	—	$	197
Other counterparties	—		24			—		—			—		24
Total derivative assets	$	—	$	289		$	—	$	(68	)	$	—	$	221
Liabilities
Commodity derivatives
Financial institutions	$	—	$	(70	)	$	—	$	68		$	1	$	(1	)
Other counterparties	—		(2		)	—		—			—		(2		)
Interest-rate and other derivatives	—		(925		)	—		—			—		(925		)
Total derivative liabilities	$	—	$	(997	)	$	—	$	68		$	1	$	(928	)
December 31, 2013
Assets
Commodity derivatives
Financial institutions	$	—	$	211		$	—	$	(153	)	$	—	$	58
Other counterparties	—		169			—		(126		)	—		43
Total derivative assets	$	—	$	380		$	—	$	(279	)	$	—	$	101
Liabilities
Commodity derivatives
Financial institutions	$	—	$	(200	)	$	—	$	153		$	7	$	(40	)
Other counterparties	—		(132		)	—		126			—		(6		)
Interest-rate and other derivatives	—		(654		)	—		—			—		(654		)
Total derivative liabilities	$	—	$	(986	)	$	—	$	279		$	7	$	(700	)

 __________________________________________________________________

⁽¹⁾  Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

14

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Debt and Interest Expense

Debt  The Company’s outstanding debt is senior unsecured, except for borrowings, if any, under the $5.0 billion Facility. The following summarizes the Company’s outstanding debt:

millions	September 30, 2014			December 31, 2013
Total debt at face value	$	16,347		$	15,202
Net unamortized discounts and premiums (1)	(1,627		)	(1,645		)
Total borrowings	$	14,720		$	13,557
Capital lease obligation	8			8
Less current portion of long-term debt	—			500
Total long-term debt	$	14,728		$	13,065

__________________________________________________________________

⁽¹⁾  Unamortized discounts and premiums are amortized over the term of the related debt.

Anadarko’s Zero-Coupon Senior Notes due 2036 (Zero Coupons) can be put to the Company in October of each year, in whole or in part, for the then-accreted value of the outstanding Zero Coupons. None of the Zero Coupons (accreted value of $756 million) were put to the Company in October 2014.

Fair Value  The Company uses a market approach to determine fair value of its fixed-rate debt using observable market data, which results in a Level 2 fair-value measurement. The carrying amount of floating-rate debt approximates fair value as the interest rates are variable and reflective of market rates. The estimated fair value of the Company’s total borrowings was $17.3 billion at September 30, 2014, and $15.3 billion at December 31, 2013.

Debt Activity  The following summarizes the Company’s debt activity during the nine months ended September 30,2014:

	Carrying
millions	Value			Description
Balance at December 31, 2013	$	13,557
Issuances	101			WES 2.600% Senior Notes due 2018
	394			WES 5.450% Senior Notes due 2044
	624			3.450% Senior Notes due 2024
	621			4.500% Senior Notes due 2044
Borrowings	650			WES revolving credit facility
Repayments	(500		)	7.625% Senior Notes due 2014
	(275		)	5.750% Senior Notes due 2014
	(480		)	WES revolving credit facility
Other, net	28			Amortization of debt discounts and premiums
Balance at September 30, 2014	$	14,720

During the third quarter of 2014, the Company issued $625 million aggregate principal amount of 3.450% Senior Notes due 2024 and $625 million aggregate principal amount of 4.500% Senior Notes due 2044.

15

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Debt and Interest Expense (Continued)

Anadarko Revolving Credit Facilities At September 30, 2014, the Company had no outstanding borrowings under the $5.0 billion Facility, there were no restrictions on its ability to use this borrowing capacity, and the Company was in compliance with all applicable covenants.

In June 2014, Anadarko entered into a $3.0 billionfive-year senior unsecured revolving credit facility (Five-Year Credit Facility), which is expandable to $4.0 billion, and a $2.0 billion364-day senior unsecured revolving credit facility (364-Day Credit Facility). These facilities (collectively, the New Credit Facilities) will replace the existing secured $5.0 billion Facility upon satisfaction of certain conditions including (i) repaying amounts owed under the $5.0 billion Facility in full and all associated commitments and liens being terminated or released; (ii) the U.S. District Court for the Southern District of New York (New York District Court) entering an order approving the settlement agreement related to the Tronox Adversary Proceeding and issuing an injunction barring certain third-party claims; and (iii) Anadarko making payment pursuant to the terms of the settlement agreement related to the Tronox Adversary Proceeding. These conditions must be satisfied or waived by the lenders under each of the New Credit Facilities by December 1, 2014, or the commitments thereunder will terminate unless the Company should elect to seek an extension on terms mutually agreeable to the lenders. For additional information, see Note 11—Contingencies—Tronox Litigation.

Borrowings under the New Credit Facilities generally will bear interest under one of two rate options, at Anadarko’s election, using either LIBOR (or Euro Interbank Offered Rate in the case of borrowings under the Five-Year Credit Facility denominated in Euro) or an alternate base rate, in each case plus an applicable margin ranging from 0.00% to 1.65% for the Five-Year Credit Facility and 0.00% to 1.675% for the 364-Day Credit Facility. The applicable margin will vary depending on Anadarko’s credit ratings.

The New Credit Facilities contain certain customary affirmative and negative covenants, including a financial covenant requiring maintenance of a consolidated indebtedness to total capitalization ratio of no greater than 65%, and limitations on certain secured indebtedness, sale-and-leaseback transactions, and mergers and other fundamental changes.

WES Borrowings  During the first quarter of 2014, WES completed a public offering of $100 million aggregate principal amount of 2.600% Senior Notes due 2018 and $400 million aggregate principal amount of 5.450% Senior Notes due 2044. In February 2014, WES amended and restated its then-existing $800 million senior unsecured revolving credit facility by entering into a five-year $1.2 billion senior unsecured revolving credit facility maturing in February 2019 (RCF), which is expandable to $1.5 billion. Borrowings under the RCF bear interest at LIBOR plus an applicable margin ranging from 0.975% to 1.45% depending on WES’s credit rating, or rates at a margin above the one-month LIBOR, the federal funds rate, or prime rates offered by certain designated banks. At September 30, 2014, WES was in compliance with all covenants contained in its RCF, had outstanding borrowings under its RCF of $170 million at an interest rate of 1.46%, and had available borrowing capacity of approximately $1.0 billion ($1.2 billion maximum capacity, less $170 million of outstanding borrowings and $13 million of outstanding letters of credit).

Interest Expense  The following summarizes interest expense:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
millions	2014			2013			2014			2013
Debt and other	$	250		$	240		$	723		$	710
Capitalized interest	(46		)	(63		)	(150		)	(197		)
Total interest expense	$	204		$	177		$	573		$	513

16

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Stockholders’ Equity

The following provides a reconciliation between basic and diluted earnings per share attributable to common stockholders:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
millions except per-share amounts	2014		2013		2014			2013
Net income (loss)
Net income (loss) attributable to common stockholders	$	1,087	$	182	$	(1,355	)	$	1,571
Less distributions on participating securities	2		—		3			1
Less undistributed income allocated to participating securities	6		1		—			9
Basic	$	1,079	$	181	$	(1,358	)	$	1,561
Diluted	$	1,079	$	181	$	(1,358	)	$	1,561
Shares
Average number of common shares outstanding—basic	506		503		505			502
Dilutive effect of stock options	2		2		—			2
Average number of common shares outstanding—diluted	508		505		505			504
Excluded (1)	3		3		11			4
Net income (loss) per common share
Basic	$	2.13	$	0.36	$	(2.69	)	$	3.11
Diluted	$	2.12	$	0.36	$	(2.69	)	$	3.10
Dividends per common share	$	0.27	$	0.18	$	0.72		$	0.36

 __________________________________________________________________

⁽¹⁾  Inclusion of certain shares would have had an anti-dilutive effect.

10. Accumulated Other Comprehensive Income (Loss)

The following summarizes the after-tax changes in the balances of accumulated other comprehensive income (loss):

millions	Interest-rate Derivatives Previously Subject to Hedge Accounting			Pension and Other Postretirement Plans			Total
Balance at December 31, 2013	$	(54	)	$	(231	)	$	(285	)
Reclassifications to Consolidated Statement of Income	4			14			18
Balance at September 30, 2014	$	(50	)	$	(217	)	$	(267	)

17

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Contingencies

Litigation  The Company is a defendant in a number of lawsuits, is involved in governmental proceedings, and is subject to regulatory controls arising in the ordinary course of business, including, but not limited to, personal injury claims; property damage claims; title disputes; tax disputes; royalty claims; contract claims; contamination claims relating to oil and gas production, transportation, and processing; and environmental claims, including claims involving assets owned by acquired companies and claims involving assets previously sold to third parties and no longer a part of the Company’s current operations. Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, and local laws and regulations. While the ultimate outcome and impact on the Company cannot be predicted with certainty, after consideration of recorded expense and liability accruals, management believes that, with the possible exception of the Tronox Litigation discussed below, the resolution of pending proceedings will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

The following is a discussion of any material developments in previously reported contingencies and any other material matters that have arisen since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Tronox Litigation  On November 28, 2005, Tronox Incorporated (Tronox), at the time a subsidiary of Kerr-McGee Corporation, completed an initial public offering (IPO) and was subsequently spun-off from Kerr-McGee Corporation. In August 2006, Anadarko acquired all of the stock of Kerr-McGee Corporation. In January 2009, Tronox and certain of Tronox’s subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court), which is the court that presided over the Adversary Proceeding (defined below). In May 2009, Tronox and certain of its affiliates filed a lawsuit against Anadarko and Kerr-McGee Corporation and certain of its subsidiaries (collectively, Kerr-McGee) asserting several claims, including claims for actual and constructive fraudulent conveyance (Adversary Proceeding). Tronox alleged, among other things, that it was insolvent or undercapitalized at the date of its IPO and sought, among other things, to recover damages in excess of $18.85 billion from Kerr-McGee and Anadarko, as well as interest and attorneys’ fees and costs. In accordance with Tronox’s Bankruptcy Court-approved Plan of Reorganization (Plan), the Adversary Proceeding is being pursued by a litigation trust (Litigation Trust). Pursuant to the Plan, the Litigation Trust was “deemed substituted” for the Tronox plaintiffs in the Adversary Proceeding.

The U.S. government intervened in the Adversary Proceeding, and in May 2009 asserted separate claims against Anadarko and Kerr-McGee under the Federal Debt Collection Procedures Act (FDCPA Complaint). The Litigation Trust and the U.S. government agreed that the recovery of damages under the Adversary Proceeding, if any, would cover both the Adversary Proceeding and the FDCPA Complaint.

In February 2011, Tronox emerged from bankruptcy pursuant to the Plan. The terms of the Plan, which were confirmed by the Bankruptcy Court in the fourth quarter of 2010, contemplate that the claims of the U.S. government (together with other federal, state, local, and tribal governmental entities having regulatory authority or responsibilities for environmental laws, collectively, the Governmental Entities) related to Tronox’s environmental liabilities and tort claims asserted against Tronox by other creditors will be settled through certain environmental response trusts and the Litigation Trust. The Plan provides for an allocation of any proceeds from the Adversary Proceeding between the Governmental Entities and the other creditors.

Liability Accrual  On April 3, 2014, Anadarko and Kerr-McGee entered into a settlement agreement with the Litigation Trust and the U.S. government (in its capacity as plaintiff-intervenor and acting for and on behalf of certain U.S. government agencies) to resolve all claims asserted in the Adversary Proceeding and FDCPA Complaint for $5.15 billion, which represents principal of approximately $3.98 billion plus 6% interest from the filing of the Adversary Proceeding on May 12, 2009, through April 3, 2014. In addition, interest will be paid on the above amount from April 3, 2014, through the date of payment of the settlement, with interest of 1.5% for the first 180 days and 1.5% plus the one-month LIBOR thereafter. Under the terms of the settlement agreement, the Litigation Trust, Anadarko, and Kerr-McGee agreed to mutually release all claims that were or could have been asserted in the Adversary Proceeding. The U.S. government (representing federal agencies that filed claims in the Tronox bankruptcy) and Anadarko and Kerr-McGee also provided covenants not to sue each other with respect to certain claims and causes of action. The U.S. government will also provide contribution protection from third-party claims seeking reimbursement from Anadarko and certain of its affiliates for the sites identified in the settlement agreement.

18

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Contingencies (Continued)

The Adversary Proceeding has been stayed pending final approval of the settlement agreement. In May 2014, the Bankruptcy Court issued its Findings of Fact and Conclusions of Law recommending approval of the settlement agreement. The settlement agreement is subject to approval by the New York District Court and the issuance of an injunction by the New York District Court barring similar claims from third parties. The settlement payment will be made once both the New York District Court’s approval of the settlement agreement and the issuance of the injunction are final and non-appealable. The Company currently expects this process to be completed in early 2015. Anadarko recognized Tronox-related contingent losses of $850 million in the fourth quarter of 2013 and $4.3 billion in the first quarter of 2014. In addition, Anadarko recognized settlement-related interest expense of $38 million, included in Tronox-related contingent loss in the Company’s Consolidated Statement of Income, during the nine months ended September 30, 2014, for an aggregate $5.19 billion Tronox-related contingent liability on the Company’s Consolidated Balance Sheet at September 30, 2014. For information on the tax effects of the settlement agreement, see Note 12—Income Taxes.

Deepwater Horizon Events  In April 2010, the Macondo well in the Gulf of Mexico blew out and an explosion occurred on the Deepwater Horizon drilling rig, resulting in an oil spill. The well was operated by BP Exploration and Production Inc. (BP) and Anadarko held a 25% nonoperated interest. In October 2011, the Company and BP entered into a settlement agreement relating to the Deepwater Horizon events (Settlement Agreement). Pursuant to the Settlement Agreement, the Company is fully indemnified by BP against all claims and damages arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and assessment costs, and any claims arising under the Operating Agreement with BP. This indemnification is guaranteed by BP Corporation North America Inc. (BPCNA) and, in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. Under the Settlement Agreement, BP does not indemnify the Company against penalties and fines, punitive damages, shareholder derivative or securities laws claims, or certain other claims. The Company has not recorded a liability for any costs that are subject to indemnification by BP. For additional disclosure of the Deepwater Horizon events, the Company’s Settlement Agreement with BP, environmental claims under OPA, NRD claims, potential penalties and fines, and civil litigation, see Note 17—Contingencies—Deepwater Horizon Events in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Penalties and Fines  In December 2010, the U.S. Department of Justice (DOJ), on behalf of the United States, filed a civil lawsuit in the U.S. District Court in New Orleans, Louisiana (Louisiana District Court) against several parties, including the Company, seeking an assessment of civil penalties under the Clean Water Act (CWA) in an amount to be determined by the Louisiana District Court. In February 2012, the Louisiana District Court entered a declaratory judgment that, as a partial owner of the Macondo well, Anadarko is liable for civil penalties under Section 311 of the CWA. The declaratory judgment, which was affirmed in June 2014 by the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit), addresses liability only and does not address the amount of the civil penalty. The assessment of a civil penalty against Anadarko will follow a bench trial scheduled to begin in January 2015.

In July 2014, Anadarko filed a motion for rehearing with the Fifth Circuit requesting that the full court sit to reconsider Anadarko’s appeal concerning that portion of the February 2012 declaratory judgment which found Anadarko liable for civil penalties under the CWA. In September 2014, Anadarko filed a letter notifying the Fifth Circuit that the Louisiana District Court issued Findings of Fact and Conclusions of Law in the first phase of the Deepwater Horizon trial (Phase I Findings and Conclusions), which included facts that contradict certain key facts assumed by the Fifth Circuit panel in its June 2014 decision.

19

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Contingencies (Continued)

Applicable accounting guidance requires the Company to accrue a liability if it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The Louisiana District Court’s declaratory judgment in February 2012 satisfies the requirement that a liability arising from the future assessment of a civil penalty against Anadarko is probable. In an effort to resolve this matter, the Company made a settlement offer to the DOJ in July 2014 of $90 million and recorded a contingent liability for this amount at June 30, 2014. The Company subsequently engaged in further discussions regarding settlement, but the parties have not been able to reach agreement on either the amount of, or the terms and conditions governing, a settlement. The Company’s settlement offer of $90 million remains outstanding and the Company remains open to resolving the matter through settlement discussions. The Company believes that $90 million under a settlement scenario is a better estimate of loss at this time than any other amount. Based on the above accounting guidance, the Company’s contingent liability for CWA penalties and fines remains $90 million at September 30, 2014. However, the Company may ultimately incur a liability related to CWA penalties in excess of the current accrued liability.

The actual amount of a CWA penalty is subject to uncertainty, including whether the Company will be able to reach a settlement with the DOJ or will proceed to trial in January 2015. The CWA sets forth subjective criteria to be considered by the court in assessing the magnitude of any CWA penalty, including the degree of fault of the owner. In the Phase I and II trials (defined below) and again for the penalty phase trial in January 2015, the Louisiana District Court ruled that no evidence of Anadarko’s alleged culpability or fault may be presented. In addition, in its Phase I Findings and Conclusions, the Louisiana District Court did not allocate any fault to Anadarko. Given the subjective nature of the CWA criteria used to determine penalty assessments and the Louisiana District Court’s prior rulings related to culpability and allocation of fault, the Company currently cannot reasonably estimate the amount of any such penalty to be assessed or determine a reasonable range of potential loss if the matter is resolved by the Louisiana District Court following trial. However, given the Company’s lack of direct operational involvement in the event, the Louisiana District Court’s rulings excluding any evidence of Anadarko’s alleged culpability or fault, the Phase I Findings and Conclusions that did not allocate any fault to Anadarko, and the subjective criteria of the CWA, the Company believes that its exposure to CWA penalties will not materially impact the Company’s financial condition, results of operations, or cash flows.

Events or factors that could assist the Company in estimating the amount of settlement or potential civil penalty or a range of potential loss related to such penalty include (i) an assessment by the DOJ, (ii) a ruling by a court of competent jurisdiction, or (iii) substantive settlement negotiations between the Company and the DOJ.

As discussed below, numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company. Certain state and local governments appealed, or provided indication of a likely appeal of, the Louisiana District Court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. For example, eleven Louisiana Parish District Attorneys appealed that decision to the Fifth Circuit. In February 2014, the Fifth Circuit denied the appeal and upheld the Louisiana District Court’s decision. In October 2014, the United States Supreme Court denied the Parish District Attorneys’ petition to review the case. While that denial ends further appeal of that decision by the Parish District Attorneys, any other party subject to the decision who has not yet appealed, including private parties who opted out of the BP settlement, the states, and other local governments, may do so after obtaining a final judgment on their damages claims. If any further appeal is taken and is successful, state and/or local laws and regulations could become sources of penalties or fines against the Company.

Civil Litigation Damage Claims  Numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company. This litigation has been consolidated into a federal Multidistrict Litigation (MDL) action pending before Judge Carl Barbier in the Louisiana District Court. In March 2012, BP and the Plaintiffs’ Steering Committee (PSC) entered into a settlement agreement to resolve a substantial majority of the economic loss and medical claims stemming from the Deepwater Horizon events, which the Louisiana District Court approved in orders issued in December 2012 and January 2013. Only OPA claims seeking economic loss damages against the Company remain. In addition, certain state and local governments have appealed, or have provided indication of a likely appeal of, the Louisiana District Court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. Certain Mexican states also have appealed the dismissal of their claims against BP, the Company, and others. The Company, pursuant to the Settlement Agreement, is fully indemnified by BP against losses arising as a result of claims for damages, irrespective of whether such claims are based on federal (including OPA) or state law.

20

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Contingencies (Continued)

The first phase of the trial in the MDL (Phase I) commenced in February 2013. The PSC, BP, BP America Production Company (BPAP), BP p.l.c., the United States, state and local governments, Halliburton Energy Services, Inc. (Halliburton), and certain subsidiaries of Transocean Ltd. (Transocean) participated in Phase I. Anadarko was excused from participation in Phase I. The issues tried in Phase I included the cause of the blowout and all related events leading up to April 22, 2010, the date the Deepwater Horizon sank, as well as allocation of fault. In September 2014, the Louisiana District Court issued its Phase I Findings and Conclusions. The Louisiana District Court found that BP and BPAP, Transocean, and Halliburton, but not Anadarko, are each liable under general maritime law for the blowout, explosion, and oil spill. The court determined that BP’s and BPAP’s conduct was reckless and that both Transocean’s and Halliburton’s conduct was negligent. The Louisiana District Court apportioned 67% of the fault to BP and BPAP, 30% to Transocean, and 3% to Halliburton. No fault was allocated to Anadarko. BP is challenging certain of the Louisiana District Court’s findings.

The second phase of trial (Phase II) began in September 2013 and in November 2013 the parties rested their Phase II cases. The issues tried in Phase II included spill-source control and quantification of the spill for the period from April 20, 2010, until the well was capped. The Company, the PSC, BP, BPAP, BP p.l.c., the United States, state and local governments, Halliburton, and Transocean participated in Phase II of the trial. The penalty phase of the trial, which is scheduled to begin in January 2015, will include Anadarko, BP, and the United States, and will assess findings and penalties under the CWA. In March 2014, the Louisiana District Court ruled that no evidence of Anadarko’s alleged culpability or fault may be presented during the penalty phase trial.

The State of Alabama previously brought actions against the Company and other parties for claims arising from the Deepwater Horizon event, including claims for penalties and fines under state environmental laws, which were subsequently dismissed by the Louisiana District Court. The Louisiana District Court has selected this case as its test case for valuing the damages sought by states for claims under federal laws arising from the Deepwater Horizon event. Trial is set for November 2015 and the parties are conducting discovery. The Louisiana District Court’s previous rulings apply to Alabama’s claims, including the court’s decision that only federal law, and not state law, applies; its decision allocating fault and liability among BP and BPAP, Transocean, and Halliburton; and its orders precluding evidence of alleged culpability by Anadarko, leaving only damages to be decided. The Company, pursuant to the Settlement Agreement, is fully indemnified by BP against losses arising as a result of claims for damages.

Two separate class-action complaints were filed in June and August 2010, in the New York District Court on behalf of purported purchasers of the Company’s stock between June 12, 2009, and June 9, 2010, against Anadarko and certain of its officers. The consolidated action was subsequently transferred to the U.S. District Court for the Southern District of Texas - Houston Division (Texas District Court). The complaints allege causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, the Company’s liability related to the Deepwater Horizon events. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs. In March 2014, the parties reached a settlement in this matter, which was approved by the Texas District Court in September 2014. The settlement was directly funded by the Company’s insurers.

21

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Contingencies (Continued)

Remaining Liability Outlook  It is possible that the Company may recognize additional Deepwater Horizon event-related liabilities for potential fines and penalties and certain other claims not covered by the indemnification provisions of the Settlement Agreement; however, the Company does not believe that any potential liability attributable to the foregoing items, individually or in the aggregate, will have a material impact on the Company’s financial condition, results of operations, or cash flows. This assessment takes into account certain qualitative factors, including the subjective and fault-based nature of CWA penalties, the Company’s indemnification by BP against certain damage claims as discussed above, and BP’s creditworthiness.

Although the Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and certain other potential liabilities, the Company may be required to recognize a liability for these amounts in advance of, or in connection with, recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c.

The Company will continue to monitor the MDL and other legal proceedings discussed above related to the Deepwater Horizon events. The Company cannot predict the nature of additional evidence that may be discovered during the course of legal proceedings or the timing of completion of any legal proceedings.

Deepwater Horizon and Tronox Derivative Claims  In May 2013, an Anadarko shareholder filed a derivative action in the 215^th District Court of Harris County, Texas (215^th District Court) against Anadarko and certain current and former directors and officers (DWH Derivative Action). The shareholder purported to bring claims on behalf of Anadarko and alleged, among other things, that certain current and former directors and officers breached their fiduciary duty in connection with the Company’s investment in the Macondo lease.

In addition, in April 2014, the Company’s Board of Directors received a letter from a current shareholder demanding that the Board undertake an independent investigation of certain current and former officers and directors for alleged breach of fiduciary duty related to the Company’s April 2014 settlement of the Adversary Proceeding (Tronox Derivative Demand).

In May 2014, the parties reached an agreement to jointly resolve the DWH Derivative Action and the Tronox Derivative Demand in one settlement. In order to achieve the joint settlement, the petition in the DWH Derivative Action was amended to include the allegations asserted in the Tronox Derivative Demand. In August 2014, the 215^th District Court approved the settlement. The settlement did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

Environmental Matters  Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, and local laws and regulations. The Company continually monitors remediation and reclamation processes and adjusts its liability for these obligations as necessary.

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ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12. Income Taxes

The following summarizes income tax expense (benefit) and effective tax rates:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
millions except percentages	2014			2013			2014			2013
Income tax expense (benefit)	$	627		$	240		$	1,719		$	1,263
Effective tax rate	35		%	52		%	340		%	43		%

For the three months ended September 30, 2014, the Company’s effective tax rate was the same as the 35% U.S. federal statutory rate. The effective tax rate increase related to the Algerian exceptional profits taxes was offset by the tax impact from foreign operations. The increase from the 35% U.S. federal statutory rate for the three and nine months ended September 30, 2013, was primarily attributable to the tax impact from foreign operations and Algerian exceptional profits taxes.

The increase from the 35% U.S. federal statutory rate for the nine months ended September 30, 2014, was primarily attributable to net changes in uncertain tax positions related to the settlement agreement associated with the Adversary Proceeding, the tax impact from foreign operations, Algerian exceptional profits taxes, and the non-deductible contingent CWA-penalty accrual.

The Company previously recognized a deferred tax benefit of $274 million related to the $850 million loss recognized in 2013 with respect to the Tronox-related contingent liability. In the first quarter of 2014, the Company recognized an additional tax benefit of $282 million related to the additional $4.3 billion loss with respect to the Tronox-related contingent liability. This benefit is net of a $1.1 billion uncertain tax position due to the uncertainty related to the deductibility of the final settlement payment. This uncertain tax position is presented in other long-term liabilities—other on the Company’s Consolidated Balance Sheet. The Company is a participant in the Internal Revenue Service’s (IRS) Compliance Assurance Process and has regular discussions with the IRS concerning the Company’s tax positions. Depending on the outcome of such discussions, it is reasonably possible that the amount of the uncertain tax position related to the settlement could change, perhaps materially. See Note 11—Contingencies—Tronox Litigation.

During the nine months ended September 30, 2014, the Company identified $155 million of uncertain tax positions. The Company estimates $100 million to $130 million of unrecognized tax positions that relate to adjustments to taxable income and credits recorded will reverse within the next 12 months due to expiration of statutes of limitation and settlements with tax authorities.

At September 30, 2014, accrued expenses on the Company’s Consolidated Balance Sheet included $793 million of accrued income taxes.

13. Supplemental Cash Flow Information

The following summarizes cash paid (received) for interest and income taxes, as well as non-cash investing and financing transactions:

	Nine Months Ended   September 30,
millions	2014		2013
Cash paid (received)
Interest, net of amounts capitalized	$	600	$	569
Income taxes, net of refunds	$	661	$	137
Non-cash investing activities
Fair value of properties and equipment exchanged in non-cash transactions	$	5	$	13
Non-cash investing and financing activities
Floating production, storage, and offloading vessel construction period obligation	$	88	$	—

23

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Segment Information

Anadarko’s business segments are separately managed due to distinct operational differences and unique technology, distribution, and marketing requirements. The Company’s three reporting segments are oil and gas exploration and production, midstream, and marketing. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs, and plans for the development and operation of the Company’s LNG project in Mozambique. The midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production. The midstream reporting segment consists of two operating segments, WES and other midstream, which are aggregated into one reporting segment due to similar financial and operating characteristics. The marketing segment sells much of Anadarko’s production, as well as third-party purchased volumes.

To assess the performance of Anadarko’s operating segments, the chief operating decision maker analyzes Adjusted EBITDAX. The Company defines Adjusted EBITDAX as income (loss) before income taxes; exploration expense; depreciation, depletion, and amortization (DD&A); impairments; interest expense; total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives; and certain items not related to the Company’s normal operations, less net income attributable to noncontrolling interests. During the periods presented, items not related to the Company’s normal operations included Deepwater Horizon settlement and related costs, Algeria exceptional profits tax settlement, Tronox-related contingent loss, and certain other nonoperating items included in other (income) expense, net. The Company’s definition of Adjusted EBITDAX excludes exploration expense, as it is not an indicator of operating efficiency for a given reporting period. However, exploration expense is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Anadarko’s financing methods or capital structure. Total (gains) losses on derivatives, net, less net cash from settlement of commodity derivatives are excluded from Adjusted EBITDAX because these (gains) losses are not considered a measure of asset operating performance. Finally, net income attributable to noncontrolling interests is excluded from the Company’s measure of Adjusted EBITDAX because it represents earnings that are not attributable to the Company’s common stockholders.

Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions to stockholders. Adjusted EBITDAX as defined by Anadarko may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) attributable to common stockholders and other performance measures, such as operating income or cash flows from operating activities. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) before income taxes:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
millions	2014			2013			2014		2013
Income (loss) before income taxes	$	1,774		$	463		$	506	$	2,929
Exploration expense	199			272			1,000		714
DD&A	1,163			996			3,335		2,958
Impairments	394			593			514		632
Interest expense	204			177			573		513
Total (gains) losses on derivatives, net, less net cash from    settlement of commodity derivatives	(276		)	36			324		(359		)
Deepwater Horizon settlement and related costs	3			5			96		12
Algeria exceptional profits tax settlement	—			—			—		33
Tronox-related contingent loss	19			—			4,338		—
Certain other nonoperating items	22			(10		)	22		75
Less net income attributable to noncontrolling interests	60			41			142		95
Consolidated Adjusted EBITDAX	$	3,442		$	2,491		$	10,566	$	7,412

24

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Segment Information (Continued)

Information presented below as “Other and Intersegment Eliminations” includes corporate costs, income from hard-minerals royalties, and net cash from settlement of commodity derivatives. The following summarizes selected financial information for Anadarko’s reporting segments:

millions	Oil and Gas Exploration & Production		Midstream		Marketing			Other and Intersegment Eliminations			Total
Three Months Ended September 30, 2014
Sales revenues	$	2,192	$	119	$	1,919		$	—		$	4,230
Intersegment revenues	1,604		364		(1,774		)	(194		)	—
Gains (losses) on divestitures and other, net	724		1		—			55			780
Total revenues and other	4,520		484		145			(139		)	5,010
Operating costs and expenses (1)	1,090		249		188			26			1,553
Net cash from settlement of commodity derivatives	—		—		—			(48		)	(48		)
Other (income) expense, net (2)	—		—		—			2			2
Net income attributable to noncontrolling interests	—		60		—			—			60
Total expenses and other	1,090		309		188			(20		)	1,567
Total (gains) losses on derivatives, net    included in marketing revenue, less net    cash from settlement	—		—		(1		)	—			(1		)
Adjusted EBITDAX	$	3,430	$	175	$	(44	)	$	(119	)	$	3,442
Three Months Ended September 30, 2013
Sales revenues	$	1,916	$	95	$	1,778		$	—		$	3,789
Intersegment revenues	1,516		287		(1,629		)	(174		)	—
Gains (losses) on divestitures and other, net	7		—		—			57			64
Total revenues and other	3,439		382		149			(117		)	3,853
Operating costs and expenses (1)	930		216		164			(12		)	1,298
Net cash from settlement of commodity    derivatives	—		—		—			26			26
Other (income) expense, net (2)	—		—		—			(13		)	(13		)
Net income attributable to noncontrolling interests	—		41		—			—			41
Total expenses and other	930		257		164			1			1,352
Total (gains) losses on derivatives, net    included in marketing revenue, less net    cash from settlement	—		—		(10		)	—			(10		)
Adjusted EBITDAX	$	2,509	$	125	$	(25	)	$	(118	)	$	2,491

 __________________________________________________________________

⁽¹⁾   Operating costs and expenses excludes exploration expense, DD&A, impairments, Deepwater Horizon settlement and related costs, and Algeria exceptional profits tax settlement since these expenses are excluded from Adjusted EBITDAX.

⁽²⁾   Other (income) expense, net excludes certain other nonoperating items since these items are excluded from Adjusted EBITDAX.

25

ANADARKO PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Segment Information (Continued)

millions	Oil and Gas Exploration & Production		Midstream		Marketing	Other and Intersegment Eliminations	Total
Nine Months Ended September 30, 2014
Sales revenues	$	6,804	$	358