Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

General Anadarko Petroleum Corporation is engaged in the exploration, development, production, and sale of oil, natural gas, and NGLs and is advancing its Mozambique LNG project to the construction phase after announcing FID on June 18, 2019. In addition, the Company engages in gathering, compressing, treating, processing, and transporting of natural gas; gathering, stabilizing, and transporting of oil and NGLs; and gathering and disposing of produced water. The Company also participates in the hard-minerals business through royalty arrangements.

Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed or omitted. The accompanying interim financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s consolidated financial statements. Certain prior-period amounts have been reclassified to conform to the current-period presentation. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as the Form 8-K filed on May 15, 2019 to recast the segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, following a change in reportable segments during the quarter ended March 31, 2019.

Merger On April 11, 2019, the Company entered into the Chevron Merger Agreement. On April 24, 2019, Occidental announced a proposal to acquire Anadarko and further revised its proposal on May 5, 2019. On May 6, 2019, Anadarko announced that the Board had unanimously determined that the Occidental proposal was a “Superior Proposal” as defined in the Chevron Merger Agreement and, on May 9, 2019, provided Chevron a notice terminating the Chevron Merger Agreement. Pursuant to the terms of the Chevron Merger Agreement, the Company paid the Chevron Merger Termination Fee of $1.0 billion. Also, on May 9, 2019, the Company entered into the Occidental Merger Agreement, which provides that, among other things, and subject to the terms and conditions of the Occidental Merger Agreement, a wholly owned subsidiary of Occidental will be merged with and into Anadarko, with Anadarko continuing as the surviving corporation and a wholly owned subsidiary of Occidental. Pursuant to the Occidental Merger Agreement, at the effective time of the Occidental Merger and subject to potential further adjustments as specified in the Occidental Merger Agreement, Anadarko stockholders will receive $59.00 in cash and 0.2934 of a share of Occidental common stock for each share of Anadarko common stock, plus cash in lieu of any fractional Occidental shares that otherwise would have been issued. The transaction was approved by the Boards of Directors of both companies. The Occidental Merger is subject to Anadarko stockholder approval and other customary closing conditions. Anadarko is holding a special meeting of its stockholders on August 8, 2019, for holders of record as of July 11, 2019, to vote on the proposal necessary to complete the Occidental Merger. Assuming all closing conditions are satisfied, including obtaining the requisite approval from Anadarko stockholders, Occidental and Anadarko expect the Occidental Merger to close shortly after the special meeting of Anadarko stockholders.

In addition to the Chevron Merger Termination Fee, Anadarko has incurred merger transaction costs of $42 million as of June 30, 2019.

Midstream Asset Sale and WES Merger On February 28, 2019, Anadarko completed the previously announced contribution and sale of substantially all of its midstream assets, which consisted of oil infrastructure assets in the DJ basin and oil and water infrastructure assets in the Delaware basin, to WES Operating for $4.0 billion, with $2.0 billion of cash proceeds and $2.0 billion in WES Operating common units. As a result, the Company no longer reports an Other Midstream segment and now has two reporting segments: Exploration and Production and WES Midstream. Prior period amounts have been reclassified to conform to the current-period presentation. See Note 19—Segment Information for information on the Company’s reporting segments.

Immediately after the asset contribution and sale, a wholly owned subsidiary of WES merged with and into WES Operating, with WES Operating continuing as the surviving entity and a subsidiary of WES, resulting in a simplified midstream structure. Under the terms of the WES Merger, WES acquired all of the outstanding publicly held common units of WES Operating and substantially all of the WES Operating common units owned by Anadarko and its affiliates. WES Operating survived as a partnership with no publicly traded equity, owned 98% by WES and 2% by Anadarko. WES Operating owns all the operating assets and equity investments of WES, is the borrower for all existing WES debt and is expected to be the borrower for all future debt. Anadarko maintains operating control of WES, with approximately 55.5% ownership of the combined entity.

1. Summary of Significant Accounting Policies (Continued)

The consolidated financial statements include the accounts of Anadarko and subsidiaries in which Anadarko holds, directly or indirectly, more than 50% of the voting rights and VIEs for which Anadarko is the primary beneficiary. The Company has determined that WES is a VIE. Anadarko is considered the primary beneficiary and consolidates WES. WES functions with a capital structure that is separate from Anadarko, consisting of its own debt instruments and publicly traded common units. All intercompany transactions have been eliminated. Undivided interests in oil and natural-gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in noncontrolled entities that Anadarko has the ability to exercise significant influence over operating and financial policies and VIEs for which Anadarko is not the primary beneficiary are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost and subsequently adjusted for the Company’s proportionate share of earnings, losses, and distributions. Investments are included in other assets on the Company’s Consolidated Balance Sheets.

Recently Adopted Accounting Standards

ASU 2016-02, Leases (Topic 842) This ASU requires lessees to recognize a lease liability and an ROU asset on the balance sheet for all leases, including operating leases. This ASU modifies the definition of a lease and outlines the recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. The Company adopted Topic 842 on January 1, 2019, using the modified retrospective method applied to all leases that existed on January 1, 2019, and prior-period financial statements were not adjusted. Anadarko elected not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for existing or expired land easements, and not to recognize ROU assets or lease liabilities for short-term leases. Upon adoption, the Company recognized approximately $600 million of ROU assets and lease liabilities related to leases existing at January 1, 2019. The difference between ROU assets and operating lease liabilities, net of the deferred tax impact, was recognized as a $55 million reduction in the opening balance of retained earnings as a cumulative effect adjustment. See Note 10—Leases for additional information.

Accounting Policy

Leases Anadarko determines if an arrangement is a lease based on rights and obligations conveyed at inception of a contract. At the commencement date, a lease is classified as either operating or finance, and an ROU asset and lease liability is recognized based on the present value of future lease payments over the lease term. As the rate implicit in Anadarko’s leases generally is not readily determinable, the Company discounts lease liabilities using the Company’s incremental borrowing rate at the commencement date. Non-lease components associated with leases that begin in 2019 or later are accounted for as part of the lease component, and prepaid lease payments are included in the ROU asset. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that Anadarko will exercise that option. Leases of 12 months or less are not recognized on the Company’s Consolidated Balance Sheets.

Lease cost is recognized over the lease term, unless the end of the useful life of the underlying asset in a finance lease is before the end of the lease term. Lease cost is recognized on a straight-line basis unless another method better represents the pattern that benefit is expected to be derived from the right to use the underlying asset. For finance leases, interest expense is recognized over the lease term using the effective interest method. Variable lease payments are recognized when the obligation for those payments is incurred.

Generally, a contract in a joint arrangement is evaluated as a lease if Anadarko is the operator. Anadarko recognizes an ROU asset and lease liability for the full amount of each contract determined to be a lease, although a portion of lease payments generally is recovered from partners. Lease payments associated with the drilling of exploratory wells and development wells net of amounts billed to partners initially will be capitalized as a component of oil and gas properties and either depreciated, impaired, or written off as exploration expense in future periods.