Anadarko Stock Price Justified Given Optimistic Cost Control Outlook

-14.52%
Downside
72.77
Market
62.20
Trefis
APC: Anadarko Petroleum logo
APC
Anadarko Petroleum

Anadarko Petroleum Corporation (NYSE:APC) is among the largest independent oil and gas exploration and production companies in the world, with about 3 billion barrels of oil equivalent (BOE) of proved reserves. The company explores and produces natural gas, crude oil, condensate and natural gas liquids (NGLs). Its major operations are located onshore United States and in the deepwater Gulf of Mexico. Anadarko also has operations in Algeria, Brazil, China, Ghana, Indonesia, Mozambique, Sierra Leone and other countries. Its main competitors are ExxonMobil (NYSE:XOM), BP (NYSE:BP), ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX).

We have a price estimate of $69.34 for Anadarko’s stock, roughly 10% below market price.

Oil and Gas Production Costs

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There are three key cost components associated with the production of oil and gas: exploration cost, capital cost and operating cost.

  • Exploration Cost accounts for the cost of finding oil and gas resources and includes the costs of drilling and equipping successful exploration wells, as well as dry hole costs, leasehold impairments, geological and geophysical expenses, and the costs of retaining undeveloped leaseholds.
  • Capital Cost is often the largest portion of the cost base and includes costs related to engineering and design, procurement of equipment, construction of facilities, drilling, rig purchase and engineering & project management costs. These costs are also referred to as development costs and are often capitalized on the balance sheet and depreciated over time in line with production.
  • Operating Costs are essentially expenses and costs related to the day-to-day operations. These include the cost of consumables such as fuels and chemicals, transportation and logistics & maintenance of the rig.

The company’s exploration costs have increased over the three year period from 2007 to 2009 due to exploration of new wells and deposits to increase reserves. Anadarko’s exploration cost was about $830 million in 2007, and climbed to $1.2 billion in 2009. Capital costs have remained almost stable at $2.9 billion between 2007 and 2009 and operating costs have decreased from $1.1 billion in 2007 to $930 million in 2009. The combined effect of these costs is a slight decrease in average production cost per barrel of oil equivalent from $8.36 in 2007 to $8.30 in 2009.

Opportunity for Cost Savings?

Anadarko’s average production cost is comparable to Exxon’s average production cost, which stood at $8.36 per barrel of oil equivalent in 2009. However, when compared to ConocoPhillips’ average production cost of $7.72 per barrel of oil equivalent in 2009, Anadarko’s cost seems to be on the higher side.

We currently forecast that Anadarko’s EBITDA margin for crude oil and condensates production will increase to about 65% by year-end 2011, from 2010 levels of roughly 58%. However, there could be 10% upside to our $69.34 price estimate for Anadarko’s stock if the company manages to reduce average production costs to a level comparable to that of ConocoPhillips. We note that this scenario would bring our price estimate in line with market price.