P.O. Box 1330

Houston, Texas 77251-1330

 

March 27, 2007

 

 

TO THE STOCKHOLDERS:

 

The 2007 Annual Meeting of Stockholders of Anadarko Petroleum Corporation will be held at The Woodlands Waterway Marriott Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas, 77380 on Wednesday, May 16, 2007, at 8:00 a.m. (CDT).

 

The Notice of the Annual Meeting and Proxy Statement, which are attached, provide information concerning the matters to be considered at the meeting. The meeting will be a business-only meeting. There will be no management presentation.

 

We value your opinions and encourage you to participate in this year’s meeting by voting your proxy. You may vote either by Internet or by telephone using the instructions on the proxy card or by signing and returning your proxy card in the enclosed envelope. You may also attend and vote at the Annual Meeting.

 

Very truly yours,

 

 

JAMES T. HACKETT

Chairman of the Board, President and

Chief Executive Officer

 

P. O. Box 1330

Houston, Texas 77251-1330

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The Annual Meeting of Stockholders of Anadarko Petroleum Corporation will be held at The Woodlands Waterway Marriott Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas, 77380, on Wednesday, May 16, 2007, at 8:00 a.m. (CDT) to:

 

(1) elect four directors;

 

(2) ratify the appointment of KPMG LLP as the Company’s independent auditor for 2007; and

 

(3) transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

 

If you are a record holder of common stock at the close of business on March 21, 2007, the record date, then you are entitled to receive notice of and to vote at the meeting.

 

Please take the time to vote by following the Internet or telephone voting instructions on the enclosed proxy card or by completing and mailing the proxy card. A postage-prepaid envelope has been provided for your convenience if you wish to vote by mail. You may also attend and vote at the meeting. You may revoke your proxy at any time before the vote is taken by following the instructions in this proxy statement.

 

Regardless of the number of Anadarko common stock shares you hold, as a stockholder your vote is very important and the Board strongly encourages you to exercise your right to vote.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

Robert K. Reeves

Senior Vice President, General Counsel,

and Chief Administrative Officer

 

Dated: March 27, 2007

The Woodlands, Texas

 

P. O. Box 1330

Houston, Texas 77251-1330

 

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

May 16, 2007

 

GENERAL INFORMATION

 

We are furnishing you this proxy statement in connection with the solicitation of proxies by our Board of Directors to be voted at the Annual Meeting of Stockholders of Anadarko Petroleum Corporation. The Annual Meeting will be held on Wednesday, May 16, 2007. In this proxy statement, Anadarko Petroleum Corporation is referred to as the “Company” or “Anadarko.” This proxy statement and the enclosed proxy card are first being mailed to stockholders of record on or about March 30, 2007.

 

QUESTIONS AND ANSWERS ABOUT THE MEETING

 

Where and when is the Annual Meeting?

 

The Annual Meeting will be at The Woodlands Waterway Marriott Hotel and Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas, 77380, on Wednesday, May 16, 2007, at 8:00 a.m. (CDT).

 

Who may vote?

 

You may vote if you were the record holder of Anadarko common stock as of the close of business on March 21, 2007, the record date for the meeting. Each share of Anadarko common stock is entitled to one vote at the meeting. On the record date, there were 468,105,218 shares of common stock outstanding and entitled to vote at the meeting.

 

May I attend the Annual Meeting?

 

Yes. Attendance is limited to stockholders of record as of the record date for the meeting. Admission will be on a first-come, first-served basis. You may be asked to present valid picture identification, such as a driver’s license or passport. If your shares are held in the name of a bank, broker, or other holder of record and you plan to attend the meeting, you must present proof of your ownership of Company stock, such as a current bank or brokerage account statement reflecting ownership as of the record date for the meeting, to be admitted. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

 

What am I voting on?

 

You are voting on:

 

 

How does the Board recommend that I vote?

 

The Board recommends that you vote:

 

 

Why should I vote?

 

Your vote is very important. Regardless of the number of shares you hold, the Board strongly encourages you to exercise your right to vote as a stockholder of the Company.

 

How do I vote?

 

You may vote by any of the following methods.

 

 

If I vote by telephone or Internet, do I need to return my proxy card?

 

No.

 

If I vote by mail, telephone or Internet, may I still attend the meeting?

 

Yes.

 

Is my vote confidential?

 

Yes. All voting records which identify stockholders are kept permanently confidential except as necessary to meet legal requirements and in other limited circumstances such as proxy contests. The vote tabulators and the inspectors of election are required to execute confidentiality agreements.

 

Can I change my vote?

 

If you are a stockholder of record, you may revoke your proxy at any time before the vote is taken by:

 

 

 

If you are a street name stockholder and you vote by proxy, you may later revoke your proxy by informing the holder of record in accordance with that entity’s procedures.

 

How many votes must be present to hold the meeting?

 

Your shares are counted as present at the meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail. In order for us to hold our meeting, holders of a majority of our common stock entitled to vote must be present in person or by proxy at the meeting. This is referred to as a quorum. Abstentions and broker non-votes will be counted as present for purposes of determining a quorum.

 

What is a broker non-vote?

 

The New York Stock Exchange permits brokers to vote their customers’ shares held in street name on routine matters when the brokers have not received voting instructions from their customers. Brokers may not vote their customers’ shares held in street name on non-routine matters unless they have received voting instructions from their customers. Non-voted shares on non-routine matters are called broker non-votes. Broker non-votes will have no effect on the vote for any matter properly introduced at the Annual Meeting.

 

What are routine matters?

 

The election of directors and the ratification of the independent auditor are examples of routine matters on which brokers may vote even if they have not received instructions from their customers.

 

What are non-routine matters?

 

Non-routine matters are matters such as stockholder proposals, although there are no stockholder proposals under consideration at the Annual Meeting.

 

How many votes are needed to approve each of the proposals?

 

Directors are elected by plurality vote. This means that the director nominees who receive the most votes will be elected to fill the available seats on the Board. Neither abstentions nor broker non-votes will have an effect on the votes for or against the election of a director.

 

Could other matters be decided at the meeting?

 

We are not aware of any matters that will be considered at the Annual Meeting other than those on the proxy card. However, if any other matters arise at the Annual Meeting, the person named in your proxy will vote in accordance with their best judgment.

 

Where can I find the voting results of the meeting?

 

We will announce voting results at the meeting, and we will publish the final results in our quarterly report for the second quarter of 2007. You can get a copy of this and other reports free of charge on the Company’s website at www.anadarko.com, or by contacting our Investor Relations Department at [email protected].

 

ANADARKO BOARD OF DIRECTORS

 

Item 1 — Election of Directors

 

The Board of Directors of Anadarko is divided into three classes of directors for purposes of election. One class of directors is elected at each annual meeting of stockholders to serve for a three-year term. All of the director nominees listed below are current directors of the Company.

 

At the 2007 meeting, the terms of four directors are expiring. All four of the directors have been nominated and, if elected at this meeting, will hold office until the expiration of each of their terms in 2010. Those directors not up for election this year will continue in office for the remainder of their terms.

 

If a nominee is unavailable for election, then the proxies will be voted for the election of another nominee proposed by the Board or, as an alternative, the Board may reduce the number of directors to be elected at the meeting.

 

The Board recommends that you vote “FOR” each of the nominees listed below.

 

Directors Nominated this Year by the Board of Directors for Terms Expiring in 2010

 

Larry Barcus (69) — Since 1990, Mr. Barcus has served as Chairman of L.G. Barcus and Sons, Inc., a general contractor, located in Kansas City, Kansas with operations nationwide. He has also served as Chairman of First Community Bancshares and Chairman of First Community Bank since 1995. Mr. Barcus has been a director of the Company since 1986.

 

James L. Bryan (70) — Mr. Bryan is a retired business executive. From 1999 until December 2003, Mr. Bryan was Executive Vice President of Newpark Drilling Fluids, Inc., an oilfield services firm headquartered in Houston, Texas. He retired as Senior Vice President of Dresser Industries, Inc. in 1998. He had been a Vice President of Dresser since 1990. Mr. Bryan has been a director of the Company since 1986.

 

H. Paulett Eberhart (53) — Since January 2007, Ms. Eberhart has served as President and Chief Executive Officer of Invensys Process Systems, a process automation company. From 2003 until March 2004, Ms. Eberhart was President — Americas of Electronic Data Systems Corporation (EDS), an information technology and business process outsourcing company. From 2002 to 2003, she was Senior Vice President — EDS and President — Solutions Consulting. She was also a member of the Executive Operations Team and Investment Committee of EDS. Ms. Eberhart was an employee of EDS from 1978 to 2004. Ms. Eberhart is a member of the Financial Executives International and American Institute of Certified Public Accountants. Ms. Eberhart also serves on the Board of Directors of Advanced Micro Devices, Inc. and Solectron Corporation. Ms. Eberhart has been a director of the Company since 2004.

 

James T. Hackett (53) — Mr. Hackett was named President and Chief Executive Officer of the Company in December 2003 and Chairman of the Board of the Company in January 2006. Prior to joining the Company, Mr. Hackett was the Chief Operating Officer of Devon Energy Corporation from April 2003 to December 2003, following Devon’s merger with Ocean Energy, Inc. Mr. Hackett was President and Chief Executive Officer of Ocean Energy, Inc. from March 1999 to April 2003 and was Chairman of the Board from January 2000 to April 2003. He served as Chief Executive Officer and President of Seagull Energy Corporation from September 1998 until March 1999 and as Chairman of the Board from January 1999 to March 1999 prior to its merger with Ocean Energy. He currently serves as a Director of Fluor Corporation and Temple-Inland, Inc. and serves as Chairman of the Federal Reserve Bank of Dallas.

 

Continuing Directors with Terms Expiring in 2008

 

John R. Butler, Jr. (68) — Since 1976, Mr. Butler has been Chairman of J. R. Butler and Company, a reservoir engineering company located in Houston, Texas. He was Chairman and Chief Executive Officer of GeoQuest International Holdings, Inc., Senior Chairman of Petroleum Information Corp. and Vice Chairman of Petroleum Information/Dwights, L.L.C. until 1997. Since October 2006, Mr. Butler has served as a director of BreitBurn Energy Partners LP, a NASDAQ listed company, and also serves as a director of the Houston

chapter of the National Association of Corporate Directors. He is currently a member of the Society of Petroleum Evaluation Engineers, and was also Chairman of the Society of Exploration Geophysicists Foundation until December 2001. Mr. Butler has been a director of the Company since 1996.

 

Luke R. Corbett (59) — Mr. Corbett joined Anadarko’s board in 2006 following Anadarko’s acquisition of Kerr-McGee Corporation, where he had served as Chairman and Chief Executive Officer since 1999. Mr. Corbett had been with Kerr-McGee since 1985 when he joined the company’s Exploration and Production Division as vice president of geophysics. In subsequent years, he held a wide array of senior executive positions with Kerr-McGee. Mr. Corbett also serves on the boards of OGE Energy Corporation and Noble Corporation.

 

John R. Gordon (58) — Mr. Gordon is Senior Managing Director of Deltec Asset Management LLC, an investment firm located in New York, New York. He was President of Deltec Securities Corporation from 1988 until it was converted into Deltec Asset Management LLC. Mr. Gordon has been a director of the Company since 1988.

 

Continuing Directors with Terms Expiring in 2009

 

Robert J. Allison, Jr. (68) — Mr. Allison has been Chairman Emeritus of the Board of the Company since January 2006 and a director since 1985. He was Chairman of the Board from 1986 until December 2005. He also served as Chief Executive Officer of the Company from 1986 until January 2002, and from March 2003 until December 2003. Mr. Allison is also a director of Freeport-McMoRan Copper & Gold Inc.

 

John W. Poduska, Sr. (69) — Mr. Poduska is a retired business executive. He was Chairman of Advanced Visual Systems, Inc., a provider of visualization software, from 1992 until 2002. Mr. Poduska is a director of Novell, Inc. and Safeguard Scientific, Inc. He was a director of Union Pacific Resources Group, Inc. from 1995 until 2000. Mr. Poduska has been a director of the Company since 2000.

 

CORPORATE GOVERNANCE

 

In 2006, the Board continued to focus on excellence in corporate governance through implementing and refining various processes that the Board and its committees adopted in 2002. A majority of the Board has been comprised of independent directors since the Company became an independent company in 1986. The Audit Committee, the Compensation and Benefits Committee (referred to in this document as the Compensation Committee), the Nominating and Corporate Governance Committee and the Enterprise Resource Planning Committee have each been comprised entirely of independent directors since their inception. The written charters for the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee can be found on the Company’s website at www.anadarko.com together with the Code of Business Conduct and Ethics, the Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, and the Corporate Governance Guidelines. Any of these documents will be furnished in print free of charge to any stockholder who requests it.

 

Board of Directors

 

Director Independence

 

In accordance with New York Stock Exchange (NYSE) rules, the Board affirmatively determines the independence of each director and director nominee in accordance with the Company’s director independence standards, which are contained in the Company’s “Corporate Governance Guidelines” found on the Company’s website at http://www.anadarko.com/investor_relations/governance.asp.

 

Based on these standards, at its meeting held on February 13, 2007, the Board’s Nominating and Corporate Governance Committee determined that each of the following non-employee directors is independent and has no relationship with the Company, except as a director and stockholder of the Company:

 

 

In addition, based on such standards, the Board affirmatively determined that: (a) Mr. Hackett is not independent because he is the President and Chief Executive Officer of the Company; (b) Mr. Corbett is not independent because, as part of his change of control agreement with Kerr-McGee Corporation, the Company will continue to provide him office space and secretarial assistance through August 2007; and (c) Mr. Allison is not independent because, as part of his retirement package, the Company will continue to provide him use of the Company’s aircraft, office space, secretarial assistance and a monitored residential security system during his lifetime. With respect to Mr. Butler, the Board specifically considered that Mr. Butler’s son-in-law is a non-executive employee of the Company. The Board determined that this is not a relevant factor in determining Mr. Butler’s independence.

 

The Company is required to report whether any director attended fewer than 75% of the sum of the total number of Board meetings and the total number of Board committee meetings that a director was eligible to attend in 2006. There were 13 Board meetings and 31 Board committee meetings in 2006. All of the Company’s directors exceeded the attendance threshold. All of the directors attended the 2006 Annual Meeting of Stockholders except for Mr. Conrad Albert, whose term of service expired at the end of the Annual Meeting. Under the Company’s Corporate Governance Guidelines, directors are expected to attend regularly scheduled Board meetings and meetings of committees on which they serve, as well as the Annual Meeting of Stockholders.

 

Corporate Governance Guidelines

 

The Corporate Governance Guidelines are posted on the Company’s website at
http://www.anadarko.com/investor_relations/governance.asp.

 

Code of Business Conduct and Ethics

 

The Code of Business Conduct and Ethics is posted on the Company’s website at
http://www.anadarko.com/investor_relations/governance.asp. In February 2007, the Board reviewed the Code of Business Conduct and Ethics and determined that no changes were necessary at that time.

 

Selection of Directors

 

The Company’s Corporate Governance Guidelines state that the Nominating and Corporate Governance Committee shall, for positions on the Board of Directors not currently filled: (a) identify the personal characteristics needed in a director nominee so that the Board as a whole will possess the Qualifications of the Board as a Whole as these qualifications are set forth in the Corporate Governance Guidelines; (b) compile, through such means as the Committee considers appropriate, a list of potential director nominees thought to possess the Individual Qualifications identified in the Corporate Governance Guidelines; (c) if the Committee so determines it to be appropriate, engage an outside consultant to assist in the search for nominees and to conduct background investigations on all nominees regardless of how nominated; (d) review the resume of each nominee; (e) conduct interviews with the nominees meeting the desired set of qualifications; (f) following interviews, compile a short list of nominees (which, at the discretion of the Committee, may consist of a single individual) who may meet, at a minimum, with the Chairman of the Board, the Chief Executive Officer and the Chairman of the Nominating and Corporate Governance Committee and/or the Lead Director; and (g) evaluate the nominee(s) in relationship to the culture of the Company and the Board and its needs.

 

Stockholder Participation in the Selection of Director Nominees

 

The Nominating and Corporate Governance Committee did not receive any names of individuals suggested for nomination to the Company’s Board of Directors by its stockholders during the past year. However, the Board will consider individuals identified by stockholders on the same basis as nominees identified from other sources. Stockholders wishing to submit the name of an individual for consideration must submit the recommendation in writing to the Company’s Corporate Secretary by certified or registered mail to the Company’s mailing address, including:

 

 

For more information on stockholder participation in the selection of director nominees, please refer to that section in the Company’s Corporate Governance Guidelines, which are posted on the Company’s website at http://www.anadarko.com/investor_relations/governance.asp.

 

Directors’ Continuing Education

 

The Company’s Director Education Policy encourages all members of the Board of Directors to attend director education programs appropriate to their individual backgrounds to stay abreast of developments in corporate governance and “best practices” relevant to their contribution to the Board of Directors as well as their responsibilities in their specific committee assignments. The Director Education Policy provides that the Company will reimburse the Board of Directors for all costs associated with attending any director education program.

 

Lead Director at the Non-management Directors’ Executive Sessions

 

The Board of Directors has elected Mr. Gordon as its Lead Director. As Lead Director, Mr. Gordon’s role is to aid and assist the Chairman and the remainder of the Board of Directors in assuring effective corporate governance in managing the affairs of the Board of Directors and the Company.

 

Additionally, Mr. Gordon presides at executive sessions of the non-management directors. The executive sessions are held immediately after each regularly scheduled quarterly meeting of the Board of Directors and at any other board meetings as requested by the directors. Mr. Gordon is also a member of the Executive Committee of the Board, providing additional representation for the independent directors in any actions taken by the Executive Committee between Board meetings.

 

Communication with the Directors of the Company

 

The Board of Directors welcomes questions or comments about the Company and its operations. Interested parties may contact the Board of Directors, including the Lead Director, at
[email protected] or at Anadarko Petroleum Corporation, Attn: Corporate Secretary, 1201 Lake Robbins Drive, The Woodlands, Texas, 77380. Any questions or comments will be kept confidential, if requested. These procedures may change from time to time, and you are encouraged to visit our website for the most current means of contacting our directors.

 

Transactions with Entities Connected to Independent Directors

 

Invensys Process Systems, Inc. and its affiliates provide the Company with process automation services. In 2006, Anadarko paid Invensys approximately $1.5 million in connection with these services. This amount is less than 1% of Invensys’s consolidated gross revenues for its fiscal year ended at March 31, 2006. Ms. Eberhart, a director of the Company, became President and CEO of Invensys in January, 2007.

 

Compensation and Benefits Committee Interlocks and Insider Participation

 

The Compensation Committee is made up of three independent, non-employee directors, Messrs. Bryan, Gordon and Poduska. No interlocking relationship exists between the members of our Compensation Committee and the board of directors or compensation committee of any other company.

 

Director Compensation

 

The Company primarily uses a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill level required by the Company of members of the Board. The Compensation Committee maintains responsibility for determining the compensation programs and levels for non-employee directors. The Compensation Committee’s consultant periodically assists in reviewing director compensation by providing benchmark compensation data and recommendations for program design.

 

In May 2006, the Compensation Committee reviewed benchmark levels of compensation for directors against a peer group of companies that included Apache Corporation, ConocoPhillips Corporation, Devon Energy Corporation, EnCana Corporation, EOG Resources Inc, Hess Corporation, Kerr-McGee Corporation, Marathon Oil Corporation, Noble Energy Inc., Pioneer Natural Resources Company and Occidental Petroleum Corporation. The review determined that the Company’s director compensation program ranked slightly above the 75th percentile of the peer group. Based on the results of the competitive review, the Compensation Committee asked its consultant to provide recommendations for any changes to the program at a later meeting. The Compensation Committee had further deliberation at the October 11, 2006 meeting, and at the November 14, 2006 meeting approved changes to the long-term incentive program as described under Stock Plan for Non-management Directors.

 

In addition to the deferred stock and stock options described below, the non-management directors receive the following compensation, which directors may elect to receive in cash, common stock or a combination of both:

 

(1) an annual retainer of $50,000;

 

(2) an annual committee membership retainer of $6,000 for each director who serves on the Audit Committee;

 

(3) an annual committee membership retainer of $3,000 for each committee on which the director serves (except for members of the Audit Committee and the Enterprise Resource Planning Committee);

 

(4) a retainer of $15,000 for serving as the chairman of the Compensation Committee or the Nominating and Corporate Governance Committee, a retainer of $25,000 for serving as Audit Committee chairman, a retainer of $25,000 for serving as Lead Director;

 

(5) a fee of $2,000 for each Board meeting attended, plus expenses related to attendance; and

 

(6) a fee of $2,000 for each committee meeting attended, plus expenses related to attendance.

 

Stock Plan for Non-management Directors

 

Under the Company’s stock ownership guidelines for non-management directors, each non-management director is required to own Company stock in an amount equal to three times the annual Board retainer for non-management directors. Directors have three years from the date of their initial election to the Board to comply with the guidelines. All non-management directors, except for Mr. Corbett who was elected to the Board on August 10, 2006, have met the Company’s stock ownership guidelines.

 

The Company grants stock based awards to non-management directors under the 1998 Director Stock Plan. In 2006, non-management directors received annual grants of deferred stock and stock options. Each non-management director was automatically issued 500 shares of deferred stock on the first business day of each calendar quarter — January 3, April 3, July 3 and October 2 (2,000 shares annually). The deferred stock will be distributed to the director when he or she resigns or retires from the Board. Directors receive dividends on, and are entitled to vote, the deferred stock. In addition, in 2006, upon approval by the Compensation Committee, each non-management director was granted an annual option to purchase 7,500 shares of common stock. The 2006 grant was made on November 14 with the exercise price equal to the closing stock price on that date. The options will vest 100% one year from the date of grant and expire ten years from the date of grant. The Company had previously defined fair market value as the average high and low price on the day of grant. However, effective with the November 14 award of stock options, the Company modified its definition to be the closing stock price on the date of grant to align its practice with the new Securities and Exchange Commission (SEC) disclosure requirements. Additionally, upon initial election to the Board, non-management directors receive an initial grant of an option to purchase 20,000 shares of common stock of the Company. In accordance with the Board’s option grant policy in place at that time, Mr. Corbett received an initial grant of an option to purchase 10,000 shares of common stock upon his appointment to the Board on August 10, 2006 with the exercise price equal to the average high and low price on the date of grant. The options vest 100% on the date of grant and expire ten years from the date of grant.

 

At the November 14, 2006 meeting, the Compensation Committee approved changes to the non-management director equity awards for 2007. Equity grants to non-management directors will automatically be awarded each year on the date of the Company’s annual shareholder meeting. Each non-management director will receive a grant of $130,000 in deferred stock and $70,000 in stock options. Upon initial election to the Board, non-management directors will receive an initial grant of $150,000 in deferred shares. The material terms and conditions of the awards granted will remain unchanged from those described in the preceding paragraph.

 

Deferred Compensation Program for Non-management Directors

 

Non-management directors are eligible to participate in the Company’s Deferred Compensation Plan. It allows directors to defer receipt of up to 100% of their board and committee retainers and/or board and committee meeting fees. The Deferred Compensation Plan permits participants to allocate the deferred amounts among a group of notional accounts that mirror the gains and/or losses of various investment funds. The interest rate earned on the deferred amounts is not above-market or preferential. In general, deferred amounts are distributed to the participant upon termination or at a specific date as elected by the participant. None of the Company’s directors elected to defer compensation into the Plan in 2006.

 

Other Compensation

 

Non-management directors are covered under the Company’s Accidental Death & Dismemberment Plan and the Company pays the annual premium for such coverage on behalf of each director. The Company provides each director with Personal Excess Liability coverage and pays the annual premium on their behalf. For 2006, the Company made $2,500 cash contributions, in honor of specified board members, to non-profit agencies as selected by the director.

 

Director Compensation Table for the Last Fiscal Year

 

The following table sets forth information concerning total director compensation during the 2006 fiscal year for each non-management director:

 

 

 

The following table contains the Grant Date Fair Value of stock option and deferred share awards made to non-management directors during 2006.

 

 

 

 

Committees of the Board

 

The Board of Directors has five committees: the Audit Committee; the Compensation and Benefits Committee (generally referred to in this document as the Compensation Committee); the Nominating and Corporate Governance Committee; the Executive Committee; and the Enterprise Resource Planning Committee. The Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Enterprise Resource Planning Committee are independent committees, which means that all of the members of these committees have been determined by the Board to be independent in accordance with the Company’s Corporate Governance Guidelines. The term of the Enterprise Resource Planning Committee expired in February 2007. The Executive Committee is not an independent committee as it has both non-management and management directors as members; however, the majority of the members of the Executive Committee are independent directors. Each of the independent committees of the Board and the

entire Board evaluated their performance in 2006. The performance evaluations were supervised by the Nominating and Corporate Governance Committee and discussed by the applicable committee and the Board.

 

The table below shows the current membership of each committee of the Board and the number of meetings each committee held in 2006:

 

 

 

 

Audit Committee

 

The Board re-elected Ms. Eberhart and Messrs. Barcus and Butler as members of the Audit Committee in May 2006. The Audit Committee elected Ms. Eberhart as its chairperson in May 2006. During 2006, the Audit Committee held nine meetings.

 

The purpose of the Audit Committee is to assist the Board in monitoring:

 

 

The Audit Committee Charter (as adopted by the Board of Directors and amended from time to time) has been posted on the Company’s website at http://www.anadarko.com/investor_relations/governance.asp.

 

The Audit Committee is also directly responsible for:

 

 

All of the members of the Audit Committee meet the independence requirements of the NYSE, the Sarbanes-Oxley Act, the Securities Exchange Act and the rules of the SEC adopted thereunder, and the Company’s Corporate Governance Guidelines.

 

In February 2007, the Board of Directors determined that Ms. Eberhart is an Audit Committee financial expert as defined by the SEC.

 

Compensation Committee

 

The Board re-elected Messrs. Bryan, Gordon and Poduska as members of the Compensation Committee in May 2006. Mr. Poduska was re-elected as chairman of the Compensation Committee by the Board in May 2006.

 

The Compensation Committee is responsible for establishing executive compensation policies and programs consistent with corporate objectives and stockholder interests. The Compensation Committee operates under a written charter adopted by the Board of Directors, which is reviewed on an annual basis and revised as appropriate. The Compensation Committee reviewed its charter at the November 14, 2006 meeting and approved changes that reflect their responsibilities under the new SEC disclosure requirements. The changes to the Compensation Committee charter were approved by the Board at the February 2007 meeting. The Board of Directors determines the Compensation Committee’s membership, which is composed entirely of independent directors. The Chairman of the Compensation Committee reports on committee actions and recommendations at scheduled meetings of the Board of Directors.

 

On at least an annual basis, the Compensation Committee reviews the design and effectiveness of the short-term and long-term incentive compensation programs to ensure that they are properly aligned with and support the Company’s business strategy.

 

Although the Compensation Committee is ultimately responsible for determining executive compensation, it receives information and guidance from executive officers, compensation consultants, outside legal advisors and benchmarking reports to help the Company establish and carry out its compensation program. The role of each is discussed in more detail below.

 

Compensation Committee Members and Meetings.  The Compensation Committee is comprised of three independent, non-employee directors, James L. Bryan, John R. Gordon and John W. Poduska, Sr. Mr. Poduska is currently the Chairman of the Compensation Committee and has served in such capacity since 2002. The Compensation Committee is required to meet as often as necessary, but at least once each year, to carry out its responsibilities. In 2006, the Compensation Committee met thirteen times, and in 2007 to date the Compensation Committee has met four times. The Compensation Committee reviews and approves an annual meeting calendar at the beginning of each year which outlines the typical items to be reviewed and acted upon at the regularly scheduled Board of Directors meetings. Special meetings are then called as needed to carry out the Compensation Committee’s duties. The Compensation Committee held nine special meetings in 2006, of which eight meetings included actions related to officer appointments and separations, and the impact of the Kerr-McGee Corporation and Western Gas Resources, Inc. acquisitions on the Company’s compensation and benefit programs. Meetings can be called by any member of the Compensation Committee, but are typically scheduled by the Chairman of the Compensation Committee in consultation with Company management. The Compensation Committee’s Chairman also works with Company personnel to set the agendas for each meeting. The Compensation Committee may form and delegate authority to subcommittees when it determines that such action is appropriate under the circumstances, and also delegates authority, as appropriate, to Company management or personnel to carry out actions approved by the Compensation Committee.

 

Role of the Compensation Committee in Executive Compensation.  The Compensation Committee is responsible for translating our compensation objectives into a compensation strategy that aligns the interests of our executives with that of our shareholders. The Compensation Committee has overall responsibility for approving and evaluating the Company’s director and executive officer compensation plans, policies and programs. The Compensation Committee is also responsible for producing an annual Compensation Committee report, which is on page 21, and reviewing the disclosures made in the proxy statement. Additionally, the Compensation Committee has responsibility for approving and evaluating broad-based incentive programs, qualified equity plans and tax qualified benefit plans to ensure that our compensation philosophy is executed consistently at all levels of the Company.

 

In 2006, the Compensation Committee took several actions relating to executive compensation. Generally, the Compensation Committee made decisions with respect to the following subjects:

 

 

For a more detailed discussion of the composition and responsibilities of the Compensation Committee, please see the Compensation Committee’s Charter at http://www.anadarko.com/investor_relations/governance.asp.

 

Role of Executives in Executive Compensation.  Our executives play a meaningful role in compensation design and decision making. Our Vice President, Human Resources works primarily with our Chief Executive Officer and our Senior Vice President, General Counsel and Chief Administrative Officer, and from time to time our Senior Vice President, Finance and Chief Financial Officer, to assess the design of, and make recommendations with respect to, the Company’s compensation programs, plans and awards for the executives and directors. Each executive officer is also charged with alignment of their respective business or functional unit goals and related strategy to support overall Company objectives. This involves measuring the performance of their organization, personnel and overall team against Company objectives, and providing the resulting input for compensation recommendations for such measured performance. From time to time, and at the invitation of the Compensation Committee, the Chief Executive Officer, Senior Vice President, General Counsel and Chief Administrative Officer, Vice President, Human Resources, Senior Vice President and Chief Financial Officer and other members of the Board attended Compensation Committee meetings in 2006. The individuals may attend executive sessions at the invitation of the Compensation Committee, but executive officers are not present when their compensation is discussed. Company management does not make recommendations on the Chief Executive Officer’s compensation; the Compensation Committee determines Chief Executive Officer compensation on its own with input from its outside compensation consultant. Additional executives and other employees attend at the invitation of the Compensation Committee to present on areas requiring specific knowledge.

 

Role of Compensation Consultants.  As set forth in the Compensation Committee’s charter, the Compensation Committee has sole authority to retain (or terminate) any legal, compensation, or other consultant to assist with the evaluation of director or executive compensation matters. The Compensation Committee utilizes an independent compensation consultant to review executive compensation and benefit programs as well as the individual components and total compensation levels provided to the Chief Executive Officer and other executive officers. In 2006, the Compensation Committee directly retained Hewitt Associates LLC as its outside compensation consultant for matters related to executive compensation.

 

The Compensation Committee’s charge to Hewitt included the following:

 

 

 

The Hewitt consultant attended eight out of the thirteen Compensation Committee meetings in 2006 and assisted the Compensation Committee by (1) providing competitive market data and related assessment of executive compensation levels, annual and long-term incentive plan design, and CEO compensation considerations, (2) reviewing tally sheets for the named executive officers and (3) reviewing current compensation trends and providing information with respect to the new proxy disclosure rules. Hewitt also provided advice regarding the impact of the acquisitions and subsequent divestitures on our compensation program design and objectives as well as the appropriateness of the companies within our industry and supplemental peer groups. When requested to do so by the Compensation Committee, the Hewitt consultant also provides recommendations for pay and program level changes.

 

From time to time, the Company also retains third-party consultants, which may include Hewitt, for various purposes including assistance with more broad-based compensation, benefits and human resources related issues and assignments. The nature and scope of such designated consultant’s assignments depends on the particular needs of the Company at that time. On an annual basis, the Compensation Committee reviews the performance of the Committee-retained executive compensation consultant (Hewitt) and determines whether to retain such consultant’s services for the coming year. As part of that process, the Committee reviews both the volume and scope of additional non-executive related assignments conducted by Hewitt.

 

Nominating and Corporate Governance Committee

 

Ms. Eberhart and Messrs. Barcus, Bryan, Butler, Gordon and Poduska served as members of the Nominating and Corporate Governance Committee throughout 2006. Mr. Albert served on the Committee through May 2006. Mr. Bryan served as chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee held four meetings in 2006.

 

The Nominating and Corporate Governance Committee has overall responsibility for:

 

 

The Nominating and Corporate Governance Committee Charter is posted on the Company’s website at www.anadarko.com.

 

Executive Committee

 

The Board re-elected Messrs. Allison, Bryan, Butler, Gordon and Hackett as members of the Executive Committee in May 2006. Mr. Gordon served on the Executive Committee in his capacity as Lead Director. This Committee is not an independent committee; however, the majority of the members of the Executive Committee are independent directors. Mr. Allison, a retired Company executive, and Mr. Hackett, the Company’s Chairman, President and CEO, are members of this Committee. Mr. Hackett is chairman of the

Executive Committee. In accordance with the Company’s bylaws, the Executive Committee acts with the power and authority of the Board in the management of the business and affairs of the Company while the Board is not in session. The Executive Committee has generally held meetings to approve specific terms of financing or other transactions that have previously been approved by the Board. During 2006, the Executive Committee met four times.

 

Enterprise Resource Planning Committee

 

The Board created the Enterprise Resource Planning Committee in January 2005 for the special purpose of providing input and advice to the Company during its implementation of the Enterprise Resource Planning Project. The Board elected Messrs. Butler and Poduska and Ms. Eberhart as members of the Enterprise Resource Planning Committee, with Ms. Eberhart serving as the chairperson. Enterprise Resource Planning integrates back-office systems across the Company by implementing a modern, integrated software system that automates the tasks necessary to perform various business functions. The Enterprise Resource Planning Committee was created with an initial term of one year. In February 2006, the Board renewed and extended the term of the Enterprise Resource Planning Committee by one year. The members of the Enterprise Resource Planning Committee receive only the standard meeting attendance fee and do not receive a committee membership retainer or a retainer for serving as chairman of the committee. The Enterprise Resource Planning Committee met once in 2006. The Board did not take any action to renew and extend the term of the Enterprise Resource Planning Committee which expired in February 2007.

 

STOCK OWNERSHIP

 

As of March 21, 2007, there were 468,105,218 shares of Anadarko common stock outstanding entitled to vote at the meeting. Each of these shares is entitled to one vote. The information provided below summarizes the beneficial ownership of officers and directors of the Company and owners of more than 5% of outstanding common stock. “Beneficial ownership” generally includes those shares of common stock someone has the power to vote, sell or acquire within 60 days. It includes common stock that is held directly and also shares held indirectly through a relationship, a position as a trustee or under a contract or understanding.

 

Directors and Executive Officers

 

On February 28, 2007, the directors and executive officers of the Company beneficially owned, in the aggregate, 4,317,816 shares of Anadarko common stock (approximately 0.9% of the outstanding shares entitled to vote at that time).

 

 

 

 

Owners of More than Five Percent of Anadarko Stock

 

The following table shows the beneficial owners of more than five percent of the Company’s common stock based on information received as of February 15, 2007.

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC and any exchange or other system on which such securities are traded or quoted, initial reports of ownership and reports of changes in ownership of the Company’s common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by the SEC’s regulations to furnish the Company and any exchange or other system on which such securities are traded or quoted with copies of all Section 16(a) forms they filed with the SEC.

 

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all reporting obligations of the Company’s officers, directors and greater than ten percent stockholders under Section 16(a) were satisfied during the year ended December 31, 2006, except that in June 2006 a late Form 4 was filed for Charlene A. Ripley relating to the exercise in 2004 of an option to purchase 455 shares of the Company’s common stock.

 

AUDIT COMMITTEE REPORT

 

The following report of the Audit Committee of the Company shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall this report be incorporated by reference into any filing made by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

The Audit Committee of the Board is responsible for independent, objective oversight of the Company’s accounting functions and internal controls over financial reporting. The Audit Committee is composed of three directors, each of whom is independent as defined by the NYSE listing standards. The Audit Committee operates under a written charter approved by the Board of Directors.

 

Management is responsible for the Company’s internal controls over financial reporting. The independent auditor is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with generally accepted auditing standards in the United States of America and issuing a report thereon. The independent auditor is also responsible for performing independent audits of the Company’s internal controls over financial reporting and of management’s assessment of the effectiveness of controls over financial reporting. The Audit Committee’s responsibility is to monitor and oversee these processes.

 

KPMG LLP served as the Company’s independent auditor during 2006 and was appointed by the Audit Committee to serve in that capacity for 2007. KPMG LLP has served as the Company’s independent auditor since its initial public offering in 1986.

 

In connection with these responsibilities, the Audit Committee met with management and the independent auditor to review and discuss the December 31, 2006 financial statements and matters related to Section 404 of the Sarbanes-Oxley Act of 2002. The Audit Committee also discussed with the independent auditor the matters required by Statement on Auditing Standards No. 61 (Communication with Audit Committees).

 

The Audit Committee also received written disclosures from the independent auditor required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the Audit Committee discussed with the independent auditor that firm’s independence.

 

Based upon the Audit Committee’s (i) review and discussions with management and the independent auditor and (ii) review of the representations of management and the independent auditor, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC.

 

THE AUDIT COMMITTEE
H. Paulett Eberhart, Chairperson
John R. Butler, Jr.
Larry Barcus

 

EXECUTIVE COMPENSATION

 

Compensation and Benefits Committee Report

on 2006 Executive Compensation

 

The Compensation and Benefits Committee (“Compensation Committee”), listed beginning on page 14, is responsible for establishing and administering the executive compensation programs of the Company. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

THE COMPENSATION AND BENEFITS
COMMITTEE

 

John W. Poduska, Sr., Chairman
James L. Bryan
John R. Gordon

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This Compensation Discussion and Analysis will focus on the following:

 

 

Objectives of Our Executive Compensation Program

 

In August 2006, we acquired Kerr-McGee Corporation and Western Gas Resources, Inc. in separate all-cash transactions totaling $21.1 billion plus the assumption of $2.2 billion in debt. Since the acquisitions, we have been restructuring the Company and divesting selected assets to refocus our asset portfolio and reduce debt. In light of the significant changes in our organization, including our recent significant acquisitions of Kerr-McGee and Western Gas Resources, our Compensation Committee has been reviewing our compensation programs, objectives and structure to reconfirm and ensure their appropriateness. We believe that collectively our current programs support our business strategy and align the interests of our executive officers with those of our shareholders. While the Compensation Committee will continue to evaluate appropriate modifications to our compensation objectives and structure, the following discussion reflects our executive compensation program as applied by the Compensation Committee during 2006 and to date in 2007.

 

The objectives of our executive compensation program are as follows.

 

 

How We Make Compensation Decisions

 

Compensation Design

 

We establish target total compensation levels for each executive officer. These target compensation levels are generally designed to place our executive officer compensation at or near the top quartile as compared to our industry peer group, if Company performance exceeds that of our peers and individual performance targets are achieved. In addition, in setting total compensation levels for each executive officer, we compare target compensation levels among each of our executive officers to ensure they are appropriate when considering each executive’s role, experience level and contribution to the organization.

 

We also develop and review “tally sheets” of named executive officer compensation. These provide management and the Compensation Committee a single source for viewing total compensation and include snapshots of:

 

 

To achieve our objectives, our executive compensation program consists of fixed components, such as base salaries, and variable, or “at risk”, components such as short-term and long-term compensation. Variable compensation components such as annual cash bonuses or equity awards must either be earned based on individual or Company performance or may be subject to a substantial risk of forfeiture if certain conditions are not met. Variable components are not guaranteed to provide compensation. We establish target total compensation so that the majority is variable. Variable compensation comprises approximately 80% of the named executive’s targeted annual total compensation, exclusive of benefits and perquisites.

 

Base Salary.  Base salaries are considered “fixed” compensation because they provide a predetermined level of income not tied to performance or risk of forfeiture. Base salary levels are designed to:

 

 

Short-term Compensation.  Short-term compensation consists primarily of annual cash bonuses. The short-term components are designed to:

 

 

Long-term Compensation.  Long-term compensation is comprised of various forms of equity compensation. The long-term elements are designed to:

 

 

The long-term incentive program uses a combination of performance measures to focus the executive officers on executing the Company’s long-term strategic goals and maximizing shareholder returns. Strong executive performance demonstrated in the top half of the peer sector should deliver pay results in the top quartile.

 

Compensation Process

 

Benchmarking.  Benchmarking is one of several elements the Compensation Committee considers when approving compensation actions. Other factors include individual experience, internal equity, development and/or succession status, and other individual or organizational circumstances. In addition, we believe that our compensation program must also be competitive in the marketplace. Benchmarking can assist the Compensation Committee in assessing how competitive and reasonable our compensation practices and programs are against companies of similar size and purpose. With high commodity prices and a shortage of qualified

executive and commercial talent within the oil and gas industry, benchmarking exercises continue to reflect increasing levels of compensation. This is further supported by the size of compensation packages being offered by competing companies to employees within our industry. We believe that offering competitive compensation arrangements to retain our executives is beneficial to the Company to ensure continuity in our operations and avoid the significant costs and loss of efficiency involved with recruiting and replacement hiring.

 

In May 2006, the Compensation Committee approved the use of two groups as reference points for future assessments of competitive executive compensation practices:

 

 

The Company benchmarks total executive compensation against the primary benchmark group. The supplemental benchmark group illustrates broader trends and provides an additional reference point for executive officer positions that are not exclusive to the oil and gas industry. Our acquisitions of Kerr-McGee Corporation and Western Gas Resources prompted the Compensation Committee to revisit the composition of both primary and supplemental benchmark groups in the latter part of 2006, not only because of the Company’s increase in assets and revenues against the then current peer group list, but also as a result of ongoing consolidation within the E&P industry that reduced the population of comparable peer companies following the acquisitions of Kerr-McGee and Burlington Resources.

 

Based on a review of available industry peers and their relative size and scope based on latest available assets, revenues, number of employees and market capitalization, the Company added Chesapeake Energy Corporation, Chevron Corporation and EnCana Corporation to its current industry peer group. Accordingly, the current industry peer group consists of the following companies:

 

 

There are a very limited number of companies that closely resemble Anadarko in size, scope and nature of business operation. Our oil and gas industry peer group contains companies in our industry that are both larger and smaller in scope and that operate in different business segments in the industry such as refining. However, we compete with these companies for talent and believe the selected companies are currently the most appropriate with respect to benchmarking exercises. The differences and similarities between Anadarko and its peer group are taken into consideration when referencing benchmarks for compensation decisions.

 

Based on recommendations from the Committee’s compensation consultant, the supplemental general industry peer group was also revised to consist of the following companies based on the Company’s estimated new size and scope (capturing companies both above and below our position), and available compensation program information:

 

 

Elements of Compensation

 

The elements of our compensation program include: (1) base salary, (2) cash bonuses, (3) equity compensation, and (4) other benefits, including welfare and retirement benefits, perquisites, severance benefits and change of control benefits. Our Chief Executive Officer, James T. Hackett, provides recommendations to the Compensation Committee for each component of pay for all executive officers while the Compensation Committee, with input from Hewitt, determines on its own the salary for Mr. Hackett. Mr. Hackett does not make recommendations on his own compensation. The following section describes these compensation elements and how we determine the amount of each element.

 

Base Salary

 

Base salary is considered an important component of each executive’s total compensation package as it provides for a basic level of annual income. In determining base salaries, the Compensation Committee considers each executive’s qualifications, past experience, performance and accomplishments, overall scope of responsibilities, future potential and related tax deductibility implications. We also consider the competitive base salary practices at peer companies along with the base salary levels of other executives within the Company. Base salaries for executive officers are generally targeted between the 50th and 75th percentiles of the comparative market data of the industry peer group. The base salaries of the named executive officers are reviewed on an annual basis each November, and may be reviewed at the time of a promotion or other change in responsibilities.

 

During 2006, off-cycle salary increases were provided for Mr. Walker and Mr. Kurz. On May 10, 2006, the Compensation Committee approved a base salary increase for Mr. Walker from $425,000 to $475,000. The new base salary reflected Mr. Walker’s increasing leadership position and development in his role as the

Company’s Chief Financial Officer and is closer to the median competitive market value, consistent with the Company’s stated compensation philosophy. On August 9, 2006, the Compensation Committee approved a base salary increase for Mr. Kurz in recognition of his increased responsibilities in his new role as Senior Vice President, North America Operations, Midstream and Marketing. The increase in base salary from $375,000 to $450,000 was effective August 1, 2006 and positioned Mr. Kurz’s base salary at a level equivalent to the base salaries of other internal operational Senior Vice Presidents.

 

The results of the salary benchmarking study prepared by Hewitt Associates for 2006 determined that Mr. Hackett’s salary was between the 50th and 75th percentiles of the oil and gas industry peers. Salaries of the other named executive officers were positioned at or below the median of the peer benchmark. Merit increases normally take effect on November 1st of each year and the 2006 merit increases for our officers, approved by the Compensation Committee on November 14, 2006 ranged from 4% to 12% with an average increase of 7%. The named executive officers received increases as follows based on the individual executive officer’s performance and a review of the Company’s peers:

 

 

 

 

On February 12, 2007, Mr. Kurz’s base salary was increased to $525,000 in recognition of his increased responsibilities in his new role as Chief Operating Officer.

 

Bonuses

 

Our officers participate in the Annual Incentive Plan, which was last approved by shareholders in 2004. The plan puts a significant portion of an executive’s compensation at risk by linking potential annual compensation to the Company’s achievement of specific performance metrics during the year. The performance metrics are established at the beginning of each year by the Compensation Committee.

 

In February 2006 the Compensation Committee approved internal operational, financial and safety measures including a minimum level of performance above which bonuses begin to accrue, a target level of performance required to earn the target bonus payout and the respective weightings for each measure.

 

The calculations for the bonus payouts for 2006 were weighted:

 

 

During 2006, the Company did not achieve the performance measures adopted for reserve additions or finding and development costs but did achieve 200% of the production volume growth metric, 270% of the EBITDA metric and 192% of the safety metric.

 

For 2006, individual bonus targets for named executive officers ranged from 60% to 130%. Executives may receive up to 200% of their individual bonus target if the Company significantly exceeds the specified performance metrics and, conversely, no bonus is paid if the Company does not achieve a minimum threshold level of performance as detailed above. The bonus targets are intended to provide a designated level of compensation opportunity, as stated in our philosophy, when the executive officers achieve their specified performance metrics as approved by the Compensation Committee.

 

Actual bonus awards are determined by the Compensation Committee according to the Company’s and each named executive officer’s level of achievement against the established performance metrics. Annual incentive awards are determined as a percentage of each named executive officer’s earnings for the plan year. The awards paid to the named executives under the shareholder-approved Annual Incentive Plan are generally deductible for federal income tax purposes because they qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The Annual Incentive Plan awards for 2006 paid to each of the named executive officers are shown in the table below and are reflected in the non-equity incentive plan compensation column of the Summary Compensation Table. The opportunity for awards under the Annual Incentive Plan (from threshold to maximum payment) are included in the Grants of Plan-Based Awards table. Prorated changes in the annual target bonus levels can occur during the year if there are changes in an officer’s job responsibilities that warrant such a target change.

 

Following the Compensation Committee’s formal evaluation of the Company’s performance for 2006, as measured against the prescribed performance metrics, the Compensation Committee confirmed that the formulaic calculation for the 2006 performance goals for purposes of Section 162(m) was equal to 137% of target for the named executives under the Annual Incentive Plan. The Compensation Committee applied downward discretion in determining the actual awards for the named executive officers after taking into consideration each named executive’s contributions and role in the integration efforts and accomplishments that followed the mid-year acquisitions as well as several factors that served to influence the calculated 137% performance rating. The Compensation Committee noted that the Company’s safety results for the year were excellent and greatly exceeded expectations. The Compensation Committee also noted that while production growth results exceeded expectations, it was largely influenced by the increased production attributable to the acquisitions of Kerr-McGee and Western Gas Resources. Additionally, above-target performance for EBITDA/BOE (a cash flow per barrel measure) was primarily due to higher than budgeted revenue realizations for 2006, which were in part externally driven. While the Company’s reserve additions and finding and development costs did not achieve the thresholds adopted for 2006, the Compensation Committee considered the circumstances related to those results.

 

Based on the above considerations for each performance measure, the Compensation Committee approved a 110% performance rating under the Annual Incentive Plan for determining bonus payouts to employees. In selected cases, the Committee approved special awards beyond this level, including for some of the named executives. The approved bonus awards to Messrs. Hackett, Walker, Reeves and Kurz represent 110%, 135%, 135% and 110%, respectively, of each officer’s 2006 bonus target. The higher awards for Messrs. Walker and Reeves were in recognition of their leadership and contributions towards the successful acquisitions, divestitures and related merger integration.

 

Based on the Compensation Committee’s review in November 2006 of the competitive market data provided by the compensation consultant, the Committee approved continuation of the same bonus targets for 2007 (as outlined in the table below) for Messrs. Hackett, Walker, Reeves and Kurz. In February 2007, the Compensation Committee approved an increase in the bonus target for Mr. Kurz from 95% to 100% for 2007 in recognition of his appointment to the role of Chief Operating Officer.

Targets and actual awards for each of the named executive officers are illustrated in the table below.

 

 

 

 

Equity Compensation

 

The Company periodically makes equity-based awards under the 1999 Stock Incentive Plan to align the interests of executive officers with those of shareholders by emphasizing the long-term growth in value of the Company. The 1999 Stock Incentive Plan was last approved by shareholders in May 2005. For 2006, the annual equity awards consisted of a combination of stock options, time-based restricted stock and performance unit awards. Stock options and performance units are intended to qualify as “performance based” under Section 162(m) of the Internal Revenue Code whereas time-based restricted stock is not considered performance based for purposes of this IRS statute and regulations promulgated thereunder. The annual long-term incentive target value of the awards has been allocated so that approximately one-third of the value is provided by each of the three incentive vehicles. The Compensation Committee believes this award structure provides a combination of equity-based vehicles that is performance-based in absolute and relative terms, while also encouraging retention. In addition, the use of performance unit awards and restricted shares enables the Company to better manage its stock dilution.

 

In determining the value of awards provided to each named executive officer, the Compensation Committee reviews competitive market data to determine appropriate stock awards based on the executive’s position and the market value of the stock. The Compensation Committee takes into account the scope of the individual’s position, ability to influence results and create shareholder value, past performance and future expectations. In addition, the Compensation Committee considers the cost of the awards, the impact on dilution, the value in relation to other components of target compensation and the value of previous stock grants when determining the grant sizes for executive officers.

 

Annual long-term incentive awards for named executive officers are typically made at the regularly scheduled meeting of the Compensation Committee each November. In 2006, the annual long-term incentive awards were approved by the Compensation Committee at a special meeting on December 4, 2006. The 2006 awards were delayed slightly in 2006 to allow the Company to complete its restructuring activities associated with the acquisitions of Kerr-McGee Corporation and Western Gas Resources in August and to coincide as closely as possible with the December 1, 2006 equity awards made to non-officer employees. On occasion, the Compensation Committee will approve awards to officers during the course of the year to induce an executive to join the Company or to recognize a significant promotion or performance achievement. The actual hiring equity award is made on the executive’s first day of employment with the Company. Promotional and

achievement awards are approved by the Compensation Committee at a regularly scheduled or special meeting of the Compensation Committee and the grant date is always the date of approval.

 

Stock Options.  We believe stock options align the interests of our executives with those of shareholders since an executive can only benefit if our stock price increases. Consistent with awards under the Annual Incentive Plan, stock options support our pay for performance philosophy. Stock options awarded to our executive officers incorporate the following features:

 

 

In order to simplify reporting under the new SEC requirements and to ease administration of the Company equity compensation plans, we elected to change the definition of grant date fair market value effective with the awards made to directors in November 2006 and to non-officer employees and executives in December 2006 from the average high and low stock prices on the date of grant to the closing stock price on the date of grant.

 

Restricted Stock.  Restricted stock provides executives an opportunity to receive shares of company stock provided they remain employed with the Company for a set period of time. Awards of restricted stock provide a valuable retention element to the overall compensation package for our executives. As with stock options, restricted stock awards provide a stock ownership vehicle and direct link to shareholder value creation since the value of the award can fluctuate up or down with changes in the Company’s stock price. Restricted stock awards typically vest equally over three years from the date of grant. Executives receive dividends on the shares and also have voting rights. Generally, an executive will forfeit any unvested restricted shares if the executive terminates voluntarily or is terminated for cause prior to the vesting date.

 

Performance Units.  Performance unit awards may be earned by the named executive officers if specific goals, focused on the long-term strategic objectives of the Company, are achieved. Each performance award is denominated in shares of our stock and has a three-year “cliff vesting” performance period. Each named executive officer is awarded a target award. Payments can range from 0% to 200% of each individual’s initial award at grant. Executives do not have voting rights and no dividends are paid on these awards until earned.

 

The ultimate payout of these awards, if any, is dependent on two equally-weighted performance measures: Reserve Replacement Efficiency (RRE) and Total Shareholder Return (TSR).

 

 

As part of the Compensation Committee’s November 2006 annual review of competitive total compensation levels for executive officers, the Compensation Committee considered each component of compensation, including base salary and target bonus opportunity, in determining appropriate long-term incentive awards for executive officers. Based on the competitive review, the Compensation Committee made stock option, restricted share and performance unit awards to the executive officers, including the named executive officers as reflected in the table below:

 

 

 

 

The stock options and restricted shares noted above were approved by the Compensation Committee on December 4, 2006. The stock options were granted at a fair market value based on the closing stock price on December 4th, will vest pro-rata over three years beginning one year from the date of grant and are subject to a seven-year term. The restricted shares will vest pro-rata over three years, beginning one year from the date of grant. The Performance Units and related performance measures were approved by the Compensation Committee on December 11, 2006 for the three-year performance period beginning January 1, 2007. On January 10, 2007, the Compensation Committee approved special stock option awards for Messrs. Hackett, Walker, Kurz, Reeves and certain other officers. The grants to named executive officers were made to recognize each executive’s performance and leadership in executing the acquisitions and integration of Kerr-McGee and Western Gas Resources into Anadarko, as well as leadership during the Company’s implementation and integration of accounting and information technology systems. On January 23, 2007, at the request of Messrs. Hackett, Kurz, Reeves and Walker, the Compensation Committee modified the terms of such stock option awards for these officers to raise the strike price of their option awards from $40.51 to $48.90 so that these officers could only realize the value of such awards after the Company’s stock price exceeds the trading price prior to the announcement of the acquisitions. Each of these officers executed an amendment to his respective stock option agreement reflecting this change in strike price.

 

Retirement Benefits

 

We offer various retirement benefits to our employees to match competitive practices in our industry, provide for long-term retention of key personnel, provide comprehensive financial security, and allow our employees to take advantage of the tax and financial security benefits long-term retirement planning can provide.

 

Employee Savings Plan.  The Anadarko Employee Savings Plan (the “Savings Plan”) is a tax-qualified retirement savings plan that allows participating employees the opportunity to contribute up to 30% of eligible compensation on a before-tax basis or on an after-tax basis, into their Savings Plan accounts. Eligible compensation for named executive officers includes salary and payments under the Company’s Annual Incentive Plan. Under the Savings Plan, the Company matches an amount equal to one dollar for each dollar contributed by participating employees up to six percent of their total eligible compensation.

 

Pursuant to IRS rules, effective for 2006, the Savings Plan limits the “additions” that can be made to a participating employee’s account to $44,000 per year. “Additions” include the Company’s matching contributions, employee before-tax contributions and employee after-tax contributions.

 

Of those additions, the current maximum before-tax contribution is $15,000 per year (or $20,000 per year for eligible participants age 50 and over). In addition, no more than $220,000 of 2006 annual compensation may be taken into account in computing benefits under the Savings Plan.

 

Savings Restoration Plan.  The Company has a Savings Restoration Plan that accrues a benefit substantially equal to the amount that, in the absence of the limits set forth above, would have been allocated to an employee’s account as Company matching contributions under the Savings Plan. Amounts in the Savings Restoration Plan receive earnings based on the performance of Company stock. In January 2007, the Company amended this Plan so that the earnings are no longer tied to the performance of Company stock, but permits participants to allocate the deferred amounts among a group of notional accounts that mirror the gains and/or losses of various investment funds provided in the Savings Plan.

 

Amounts deferred, if any, under the Savings Plan and the related Restoration Plan by the named executive officers are included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns of the Summary Compensation Table. Our matching contributions allocated to the named executive officers under the Savings Plan and the related Restoration Plan are shown in the “All Other Compensation” column of the Summary Compensation Table.

 

Retirement Plans.  The Anadarko Retirement Plan (the “Retirement Plan”) is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers all United States employees. Due to limitations imposed by the Internal Revenue Code that restrict the amount of benefits payable under tax-qualified plans, the Company also sponsors a Retirement Restoration Plan (collectively the “Retirement Plans”) that covers all employees. Benefits under the Retirement Plans are based upon the employee’s years of service and the greater of either:

 

 

The Retirement Plans do not require contributions by employees and an employee becomes vested in his or her benefit at the completion of five years of service as defined in the Retirement Plans. Compensation covered by the Retirement Plans for the named executive officers includes salary and payments under the Annual Incentive Plan. The amount of compensation that may be considered in calculating benefits under the Retirement Plan is limited by law. For 2006, the annual limitation is $220,000. Compensation in excess of $220,000 is recognized in the Restoration Plan.

 

Benefits under our Retirement Plan are calculated as an annuity equal to the sum of:

 

 

Covered compensation is the average (without indexing) of the Social Security taxable wage base during the 35-year period ending with the last day of the year in which an individual reaches Social Security retirement age. Benefits are calculated based on a normal retirement age of 65; however, employees may receive a reduced benefit as early as age 55. Employees may choose to receive their benefits under several different forms provided under the Retirement Plan.

 

Detail regarding the accrued benefits for each of the named executive officers is provided under the Pension Benefits Table. Under the terms of his employment agreement, Mr. Hackett is eligible to receive supplemental pension benefits upon meeting certain employment conditions. Details of these arrangements are discussed further in the Employment Agreement section below and in the Pension Benefits Table on page 52.

 

Other Benefits

 

In addition to the benefits discussed above, we also provide other benefits such as medical, dental, vision, flexible spending accounts, life insurance and disability coverage to each named executive officer. These benefits, along with paid time off and holidays, are also provided to all other eligible U.S. based employees.

Further, executive officers are eligible for certain additional benefits such as excess liability, life and disability insurance. The executive disability plan was discontinued effective January 1, 2007.

 

We also maintain a Deferred Compensation Plan for directors and certain employees, including the named executive officers. The Deferred Compensation Plan allows employees to voluntarily defer receipt of up to 75% of their salary and/or up to 100% of their annual incentive bonus payments. The Deferred Compensation Plan permits participants to allocate the deferred amounts among a group of notional accounts that mirror the gains and/or losses of various investment funds provided in the Savings Plan. In general, deferred amounts are distributed to the participant upon termination or at a specific date as elected by the participant. The Company does not subsidize or match these deferred amounts. Detail regarding participation in the plan by the named executive officers can be found in the Non-Qualified Deferred Compensation Table on page 53.

 

Perquisites

 

The Company provides a limited number of perquisites to the named executives to supplement their other compensation. These perquisites are assessed annually as part of the total competitive review and include:

 

 

Under certain circumstances, additional perquisites may be provided to certain officers. In general, these perquisites are provided for business purposes but may be used by the officer for personal use. Mr. Hackett has voluntarily declined to utilize the financial planning, tax preparation and estate planning perquisites offered by the Company. As required by the Board of Directors, the Company provides security services for Mr. Hackett at his home. Pursuant to our security policy, the Company also requires Mr. Hackett to use the Company’s aircraft for personal use as well as business travel. It is clearly understood that even when Mr. Hackett utilizes an aircraft for personal usage, he will engage in business activities while in flight. However, anytime Mr. Hackett employs the Company’s aircraft solely for personal use, compensation is imputed to Mr. Hackett for that use and for any passengers that may be accompanying Mr. Hackett. Personal use includes outside Board service, which indirectly benefits the Company. Compensation will be imputed, as required, to any executive officer who utilizes the Company’s aircraft for personal use.

 

The incremental cost to the Company of each perquisite provided is included in the “All Other Compensation” column of the Summary Compensation Table. Individual perquisite values are disclosed in the “All Other Compensation Table” and supporting footnotes following the Summary Compensation Table on page 44.

 

Severance Benefits

 

Severance Plan.  The Anadarko Severance Plan generally covers all regular full time and part time U.S. non-officer employees. The Severance Plan provides severance benefits to non-officer employees under certain involuntary termination scenarios based on the amount of their compensation and years of service with the Company. Severance is not paid if an employee separates voluntarily, retires, or is terminated as a result of cause or for death or disability. Executive Officers of the Company participate in the Anadarko Petroleum Corporation Officer Severance Plan and do not participate in the broad-based severance plan. Participants in the Officer Severance Plan are designated by the Compensation Committee. Participating Officers will be eligible for severance under the Officer Severance Plan if they are terminated involuntarily from the Company.

 

Under the terms of the Officer Severance Plan, involuntary termination means any termination that does not result from a resignation or retirement and does not include the following:

 

 

Benefits provided under the Officer Severance Plan may vary depending upon the officer’s level within the organization and years of service with the company and are made at the discretion of the Compensation Committee. Officers receiving benefits under the Officer Severance Plan are required to execute an agreement releasing the Company from any and all claims from any and all kinds of actions arising from the officer’s employment with the Company or the termination of such employment. In practice, we have typically provided the following severance benefits to officers terminated involuntarily from the Company:

 

 

Effective August 31, 2006, David R. Larson, the Company’s Vice President, Investor Relations and Financial Planning and Diane L. Dickey, the Company’s Vice President, Chief Accounting Officer, separated from the Company. Mr. Larson and Ms. Dickey received benefits under the Officer Severance Plan that were substantially similar to those described above.

 

Effective December 31, 2006, Mark L. Pease, Senior Vice President of Exploration and Production Technology and Services, separated from the Company and was eligible to receive benefits under the Officer Severance Plan. The benefits provided to Mr. Pease were substantially similar to the benefits described above except Mr. Pease received a payment equal to 2.5 times his annual base salary. This benefit was in recognition of his 27 years of valuable service and leadership with the Company. Complete details of Mr. Pease’s severance package can be found in our Form 8-K filed with the SEC on December 11, 2006. On January 10, 2007, the Compensation Committee approved a six-month extension of the exercise period related to Mr. Pease’s outstanding stock options, to the extent such options do not expire prior to the end of such six-month period.

 

Payments under the plan for Mr. Pease, Mr. Larson and Ms. Dickey are included in the “All Other Compensation” column of the Summary Compensation Table.

 

Change of Control Benefits

 

The Company utilizes various change of control benefits to assure that the Company will have the continued dedication of our regular full and part-time non-officer employees as well as our executive officers through the threat or occurrence of a change of control of the Company. These benefits also help diminish the distractions and risks created by a pending or threatened change of control and encourage each employee’s full attention and dedication to the Company.

 

Key Employee Change of Control Contracts.  We have also entered into key employee change of control contracts with all executive officers of the Company, including the named executive officers, with the exception of Mr. Hackett whose change of control benefits are included in Mr. Hackett’s employment agreement described on page 41. These contracts have an initial three-year term that is automatically extended for one year upon each anniversary, unless a notice not to extend is given by the Company. If a change of control of the Company (as defined below) occurs during the term of the contract, then the contract becomes operative for a fixed three-year period. These contracts generally provide that the executive’s terms of employment (including position, work location, compensation and benefits) will not be adversely changed during the three-year period after a change of control. If the Company terminates the executive’s employment (other than for cause, death or disability), the executive terminates for good reason during such three-year period, or, in certain transactions, the executive terminates employment for any reason during the 30-day period following the first anniversary of the change of control, or upon certain terminations prior to a change of control or in connection with or in anticipation of a change of control, the named executive officer is generally entitled to receive the following payment and benefits:

 

 

In addition, the change of control contracts provide for a continuation of various medical, dental, disability and life insurance benefits and financial counseling for a period of up to three years. The contracts also provide for outplacement services and the payment of all legal fees and expenses incurred by the executive in enforcing any right or benefit provided by the change of control contract. The executive will also

be entitled to receive a payment in an amount sufficient to make the executive whole for any excise tax on excess parachute payments imposed under Section 4999 of the Internal Revenue Code.

 

As a condition to receipt of change of control benefits, the executive must remain employed by the Company and provide services commensurate with his or her position until the executive is terminated pursuant to the provisions of the agreement. The executive must also agree to retain in confidence any and all confidential information known to him or her concerning the Company and its business so long as the information is not otherwise publicly disclosed. In 2006, no amounts were paid under the change of control contracts.

 

Change of Control — Stock Plans.  In addition to the change of control benefits discussed above, the Company’s stock plans provide that upon a change of control of the Company:

 

 

For purposes of the change of control contracts and the Company’s stock plans, a change of control is generally defined as any one of the following occurrences:

 

 

 

 

Change of Control — Employment Agreements.  The employment agreement with James T. Hackett described on page 41 provides benefits in connection with a change of control.

 

Potential Payments Upon Termination or Change of Control

 

The following tables reflect potential payments to our named executive officers under existing contracts, agreements, plans or arrangements, whether written or unwritten, for various scenarios involving a change-of-control or termination of employment of each named executive officer, assuming a December 31, 2006 termination date, and, where applicable, using the closing price of our common stock of $43.52 (as reported on the New York Stock Exchange as of December 29, 2006). The footnotes listed below the following tables apply to all of the tables in this section.

 

James T. Hackett

 

R.A. Walker

 

Karl F. Kurz

 

Robert K. Reeves

 

 

 

 

 

Director and Officer Indemnification Agreements

 

The Company has entered into indemnification agreements with its directors and certain executive officers, in part to enable the Company to attract and retain qualified directors and executive officers. These agreements require the Company, among other things, to indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses for proceedings for which they may be indemnified and to cover such person under any directors’ and officers’ liability insurance policy the Company may maintain from time to time. These agreements are intended to provide indemnification rights to the fullest extent permitted under applicable Delaware law and are in addition to any other rights the Company’s directors and executive officers may have under the Company’s restated certificate of incorporation, bylaws and applicable law.

 

Employment Agreements

 

The only named executive officer with which the Company has entered into an employment agreement is the Company’s Chairman, President and Chief Executive Officer, Mr. James T. Hackett.

 

James T. Hackett — Employment Agreement

 

On December 11, 2006, our Board of Directors approved a new Employment Agreement for James T. Hackett, our Chairman, President and Chief Executive Officer. The agreement replaces Mr. Hackett’s previous Employment Agreement and Change of Control Contract which had been in place since December 2003. The consolidated agreement provides for a clearer and more simplified transition between a pre-change of control relationship and a post-change of control relationship. The consolidated agreement has also been revised to update or delete provisions in the prior employment agreement that were outdated or no longer necessary. Additionally, the consolidated agreement incorporates certain changes that are expected to be necessary in order to comply with Section 409A of the Internal Revenue Code (such as imposing a six-month waiting period on certain payments).

 

Under the terms of the agreement, Mr. Hackett receives a minimum annual base salary of $1,400,000, and is eligible for an annual cash bonus at a target of 130%, not to exceed 260%, of annual base salary. The agreement also outlines certain payments and benefits to be paid to Mr. Hackett under various termination scenarios, including:

 

 

The above scenarios are discussed in more detail on page 36 of this proxy statement. The Company will provide a gross-up payment to Mr. Hackett to the extent any of the above payments become subject to the federal excise tax relating to golden parachute payments, similar to his original employment agreement, when he was hired in December 2003. Pre-Change of Control severance benefits are conditioned upon Mr. Hackett’s and the Company’s execution of a mutual release, which was not a feature of the original contract.

 

Mr. Hackett is also subject to covenants regarding confidentiality, non-competition and non-solicitation. The non-competition obligation applies for one year following Mr. Hackett’s termination of employment with the Company if Mr. Hackett voluntarily terminates his employment with the Company (other than for Good Reason) on or before December 3, 2010. If Mr. Hackett remains employed by the Company until at least December 3, 2008, the agreement also provides Mr. Hackett with a special pension benefit, computed so that his total pension benefits from the Company will equal those to which he would have been entitled if his actual years of employment with the Company were doubled. This provision was a feature of the original employment agreement and offset Mr. Hackett’s foregone retirement benefits at his prior employer.

 

Mr. Hackett voluntarily reduced the Change of Control benefits from his original employment agreement.

 

The above description is not a full summary of all of the terms and conditions of the agreement and is qualified in its entirety by the full text of the agreement.

 

Stock Ownership Guidelines

 

We have maintained stock ownership guidelines for executive officers since 1993 with a goal of promoting equity ownership and aligning management’s interests with our shareholders. The ownership guidelines are currently established at the following minimum levels:

 

 

 

The Compensation Committee reviews officer ownership levels annually. At the May 2006 Compensation Committee meeting, the Compensation Committee determined that all officers exceeded the required ownership thresholds. Shares held directly by the executive, shares held indirectly through the Anadarko Employee Savings Plan, unvested Restricted Stock and the target number of outstanding Performance Units are included in determining an executive’s share ownership. Outstanding unexercised Stock Options are not included. We believe these guidelines have accomplished the desired objective of requiring our executives to acquire and maintain, for the duration of their careers, a significant position in Company stock.

 

Regulatory Requirements

 

The Company and the Compensation Committee carefully review the impact of its compensation program design and award decisions as it relates to tax, accounting and securities regulations. We seek to comply with all required regulations while providing compensation program design and opportunity that is mutually beneficial to its employees, the Company and shareholders and in support of its compensation philosophy.

 

Section 162(m) of the Internal Revenue Code, as amended (the “Code”), limits a company’s ability to deduct compensation paid in excess of $1 million during any fiscal year to each of the named executive officers, unless the compensation is “performance-based” as defined under federal tax laws. Stock options and performance units awarded under the 1999 Stock Incentive Plan and awards under the Annual Incentive Plan generally satisfy the performance-based requirements and as such are fully deductible. Since Mr. Hackett’s salary is above $1 million, the portion in excess of $1 million is not deductible by the Company. Restricted stock awards under the 1999 Stock Incentive Plan are not considered performance based and are generally not deductible. The Compensation Committee is committed to providing compensation that qualifies as deductible. However, when providing compensation that is consistent with the strategic goals of the Company, the Compensation Committee may provide compensation that is non-deductible when it believes it is in the best interest of the Company and its shareholders. In this regard, for fiscal year 2006, the amount of base salary in excess of $1,000,000 for any named executive officer was not deductible for federal income tax purposes.

 

Internal Revenue Code Section 409A provides that all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently included in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. The Internal Revenue Service has issued proposed regulations regarding the application of Section 409A with final regulations expected in 2007. In the meantime, companies are expected to comply in “good faith” with the proposed regulations. Anadarko’s Deferred Compensation Plan was created in 2005 in the same time frame as the passage of Section 409A. As such, the program was designed to comply with Section 409A. Depending on the design characteristics, Section 409A can impact a broad range of compensation programs including voluntary deferral plans, restoration and supplemental retirement plans, severance plans and certain equity vehicles. The Company and the Compensation Committee, with the help of internal and external advisors, designs and amends its programs to either be exempt from 409A or, if properly subject to 409A, in good faith compliance with the regulations.

 

SFAS No. 123 (revised 2004), Share-Based Payment, requires the recognition of expense for the fair value of share-based payments. The statement is effective for the Company beginning January 1, 2006. The Company had previously adopted the fair value method of accounting for share-based payments effective January 1, 2003, using the “modified prospective method” described in SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Awards of Stock Options, Performance Units, and Restricted Shares under the Company’s 1999 Stock Incentive Plan are accounted for under SFAS No. 123(R). The adoption of SFAS No. 123(R) did not have a material impact on the Company’s results of operations or its financial position. The Company did not make any changes to its programs in 2006 as a result of the implementation of SFAS No. 123(R).

 

In September 2006, the SEC adopted amendments to the disclosure requirements for executive compensation. The amendments apply to filings under the Securities Exchange Act of 1934 and the Securities Act of 1933, including disclosure in this proxy statement. In order to simplify reporting under the new requirements and to ease administration of the Company’s equity compensation plans, the Company elected to change its definition of grant date fair market value from the average high and low stock prices on the date of grant to the closing stock price on the date of grant. This change was approved by the Compensation Committee effective November 14, 2006. During 2006 the Compensation Committee approved compensation changes and awards to its officers. Before making these decisions, the Committee considered the impact of these decisions on its disclosure requirements under the new rules, in particular to the determination of the named executive officers.

 

Conclusion

 

We believe the design of the Company’s total executive compensation program provides executives the motivation to maximize long-term operational performance using sound financial controls and high standards of integrity. The programs currently offered have been critical elements in the hiring of numerous executives since 2003 and have been equally effective in retaining executives during a period of extreme demand and shortage of talented executives within the oil and gas exploration and production industry. We believe that this focus will continue to be reflected in our operational, financial and stock price performance. We also believe that total compensation for each executive should be, and is, commensurate with the execution of specified short-term and long-term operational, financial and strategic objectives.

 

SUMMARY COMPENSATION TABLE FOR THE LAST FISCAL YEAR

 

The following table summarizes the compensation of our Chief Executive Officer, Chief Financial Officer and our three highest paid executive officers other than our CEO and CFO for the fiscal year ended December 31, 2006. Also included are two additional executive officers for whom disclosure would have been required but for the fact that they were no longer serving as executive officers at the end of the fiscal year.

 

Summary Compensation Table