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Investment Overview for Anadarko (NYSE:APC)
WHAT HAS CHANGED?
- Asset Monetizations To Finance Capital Spending
Due to the sharp decline in commodity prices over the last two years, Anadarko's price realization has dropped drastically making it extremely challenging for the company to sustain high levels of exploration and production activities. Thus, the company has reduced its capital spending budget on drilling activities to $2.6-$2.8 billion for the full year 2016, almost 50% lower compared to 2015.
Further, due to the weak commodity prices, Anadarko's cash flow has also been diminishing. Consequently, the company has resorted to asset monetizations to finance its capital budget for the year. In line with this strategy, the company closed monetizations worth $2.5 billion in the first half of 2016 and is progressing well towards finalizing divestitures worth $1 billion in the remaining half of the year. The proceeds from these asset sales will allow the company to fund its capital expenditure and some portion of its day-to-day operations.
- Reducing Debt To Create A Leaner Balance Sheet
In order to conserve its deteriorating cash flows, Anadarko has reduced its dividend by almost 80% over the last few quarters. Further, the company has been consistently trying to refinance or reduce its long term obligations to bring down the burden on its balance sheet. In this effect, the company has retired $3 billion of its near-term maturities with the proceeds of the long term debt issued in the first quarter. In addition, Anadarko plans to utilize some portion of its asset monetization proceeds to repay $750 million of debt due in 2017. This will push the duration of the company's debt obligations by a few quarters, which will give them room to revive its operations.
- Major Milestones
Anadarko has increased the net resource estimate in the Delaware Basin to more than 2 billion BOE. The company will continue to focus its 2016 onshore capital spending in the Delaware and DJ Basin, since it has achieved record production levels in these basins.
Further, the company achieved the first oil at the Heidelberg development in the deepwater Gulf of Mexico, ahead of its schedule. The oil and gas producer also drilled another appraisal well at Shenandoah, where it has 33% working interest. The Shenandoah-5 well encountered more than 1,000 feet of net oil pay and the company plans to expand the field further to a 6th well soon.
Below are key drivers for Anadarko which present opportunities for upside or downside to the current Trefis price estimate for Anadarko.
- Average Crude Oil Sales Price: Anadarko's stock price is highly sensitive to crude oil prices as the company derives more than 50% of its value, by our estimates, from the sale of these products. We believe that the recent decline in oil prices could sustain over the next few quarters, amid slower demand growth and the diminishing price-controlling power of the OPEC. According to our estimates, annual average crude oil prices (Brent) could average at around $50 per barrel this year and thereafter increase gradually to around $95 per barrel by 2023. However, if oil prices remain depressed for longer than what we currently expect and increase only to around $80 per barrel by the end of our forecast period, there could be a downside of more than 10% to our current price estimate for Anadarko.
- Crude Oil Sales Volume: Anadarko's crude oil sales volume has grown sharply from just around 68 million barrels in 2009 to 116 million barrels in 2015, implying a CAGR of almost 9.3%. Almost all of this growth in the company's crude oil sales volume has come from its operations in the Wattenberg field and other tight oil plays in the U.S. We currently forecast Anadarko's crude oil sales volume to grow at an increasing rate, after the temporary slowdown due to lower crude oil prices, to around 141 million barrels by the end of our forecast period. However, if the company is not able to ramp up its crude oil production at the projected rate and it increases to around 127 million barrels by the end of the Trefis forecast period, there could be a 9% downside to our current price estimate for Anadarko. On the other hand, if the company is able grow its crude oil sales volume to 151 million barrels over the same period, there could be a 7% upside to our current price estimate for Anadarko.
Anadarko Petroleum Corporation is among the largest independent oil and gas exploration and production companies in the world, with 2.05 billion barrels of oil equivalent (BOE) of proved reserves as of December 31, 2015. The company has a small interest in marketing and trading of energy products. Anadarko's production and development operations are located primarily in the United States, Algeria, and Ghana. The company also has exploration acreage in Brazil, Cote d’Ivoire, Liberia, Sierra Leone, Mozambique, Indonesia, and other countries.
The company's most valuable business is the production of crude oil and condensates. Its second most valuable business is the production of natural gas.
Over 200 million barrels of crude oil sales at an average price of $46 per barrel
The company has significant crude oil producing capacity and is looking to increase liquids production in the U.S. to offset lower natural gas prices, as a result of which we estimate that it will be able to sell around 230 million barrels of crude oil and condensates, at an average price of around $46 per barrel, over the next two years.
1.5 trillion cubic feet of natural gas sales at an average price of almost $2.50 per thousand cubic feet
Natural gas production and sales is a major source of value for Anadarko. This is due to the large level of sales and expected growth in output in the U.S. and in international markets. We estimate that the company will be able to sell more than 1.5 trillion cubic feet of natural gas at an average price of around $2.50 per thousand cubic feet over the next two years.
Anadarko derives all of its natural gas production from the U.S., where a supply glut has led to severely depressed domestic natural gas prices by international standards. Therefore, despite lower finding, development and lifting costs per barrel of oil equivalent (BOE) of natural gas, the production of liquids (crude oil and natural gas liquids) has become a far more lucrative source of revenue for upstream oil and gas companies in the U.S.
In 2015, Anadarko sold crude oil at an average price of around $46.80 per barrel, compared to just around $38.17 per BOE of natural gas. Therefore, the company has been increasing its focus on liquids production to drive margin growth. As a result, the proportion of liquids in Anadarko’s total sales volume has increased from 38.6% in 2009 to 53.4% in 2015. Going forward, we expect the company’s sales volume-mix to improve further with liquids making over 55% of its total hydrocarbon production in the next couple of years.
Increasing proportion of Wattenberg sales
The contribution of Anadarko’s Wattenberg operations to its total sales volume has grown from around 9.4% in 2010 to 26.5% in 2015. Going forward, the company expects to grow its hydrocarbon sales volume from the Wattenberg field at around 3-4 times the company’s total sales volume growth target of 5-7% CAGR. Therefore, the weight of Wattenberg production in Anadarko’s total sales portfolio is expected to increase, which would exert downward pressure on its total unit operating costs, and thereby help partially offset the impact of lower crude prices on its margins in the short to medium term.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that oil production will not peak in the near future, although the IEA warns that non-OPEC production may have already hit a peak. Many governments across the world are promoting alternative energy measures to ensure that supply is able to keep pace with demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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