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Investment Overview for Anadarko (NYSE:APC)
Below are key drivers for Anadarko which present opportunities for upside or downside to the current Trefis price estimate for Anadarko.
- Crude Oil Price: Anadarko's stock price is highly sensitive to crude oil prices as the company derives almost two thirds of its value, by our estimates, from the sale of these products. We forecast crude oil prices to trend higher in the long run primarily due to incremental demand from emerging economies such as China and India, where growing populations and rising income levels make a solid case for higher energy requirements. However, we expect international crude prices to increase at a very conservative 2% CAGR in contrast to almost 15% CAGR seen over the last decade. This is because we believe rising oil production in North America, mostly coming form unconventional sources such as shale oil in the U.S. and oil sands in Canada, will increase the supply of oil from non-OPEC countries significantly, thereby reducing the pricing power long held by OPEC countries. However, If oil prices rise by around 5% CAGR in the long run, our price estimate for Anadarko could rise by as much as 10%.
- Natural Gas Price: Natural gas production in the U.S. rose to a 40 year high in 2010, reaching roughly 21.6 trillion cubic feet. Production grew for the sixth consecutive year in 2011. The rise in output is largely due to increased output from shale formations. Rising production and inventory levels have resulted in a strong downward trend on natural gas prices. In 2012, gas prices reached a 10 year low in the U.S. falling below $2/MMBTU. However, natural gas prices improved slightly in the U.S. in 2013 as the demand outlook improved with the first approvals for LNG exports to countries that the U.S. does not have free trade agreements with and supply cut backs by some of the largest operators in an industry wide shift towards liquids.
However, if natural gas prices in the U.S. remain below $3 per thousand cubic feet through the end of our forecast period, it would imply a roughly 10% downside to our price estimate for Anadarko.
Anadarko Petroleum Corporation is among the largest independent oil and gas exploration and production companies in the world, with more than 2.79 billion barrels of oil equivalent (BOE) of proved reserves as of December 31, 2013. The company has a small interest in marketing and trading of energy products. Anadarko's production and development operations are located primarily in United States, Algeria, China and Ghana. The company also has exploration acreage in Brazil, Cote d’Ivoire, Ghana, 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.
2 trillion cubic feet of natural gas sales at an average price of $3.6 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 nearly 2 trillion cubic feet of natural gas at an average price of around $3.6 per thousand cubic feet in the next two years.
200 million barrels of crude oil sales at an average price of $105 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 200 million barrels of crude oil and condensates at an average price of $105 per barrel in the next two years.
Recent oil & gas discoveries will help increase production
Anadarko has made major natural gas discoveries in the Offshore Area 1 of Mozambique's Rovuma Basin at the Lagosta prospect. The discovery is touted as one of the most significant finds over the last decade and could hold about 30 trillion cubic feet of natural gas. In another discovery, Anadarko found oil in off shore Sierra Leone, which could help lift production. The company has also struck oil and gas in the Gulf of Mexico and other offshore prospects.
Increasing costs associated with upstream/downstream activities
According to a recent report by IHS, global upstream capital and operating expenditures are expected to reach a record of $1.23 trillion for 2012 and rise to $1.64 trillion in 2016.
This is primarily due to increasing complexity of upstream projects. Various oil companies have embarked on projects in the unconventional space. It includes oil extracted from deepwater regions, oil sands, oil shale, and oil obtained by conversion of gas to liquids (GTL). Some of these resources are located in geographically and geologically complex locations and require a lot of technological innovation and ingenuity. This has led to longer development timelines which have in turn resulted in higher costs.
Due to various new finds offshore, oil and gas producers are increasingly focusing on offshore projects to boost their reserves. According to IHS findings, onshore projects command the largest share of capital expenditures but offshore projects are expected to outpace the growth in capital expenditures compared to onshore projects going forward. Capital expenditures on offshore projects are expected to increase 58% from 2011 to 2016 compared to 39% for onshore projects.
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.
Improvements in technology
Due to limited underlying growth in product demand, there has been a tendency in recent years to increase the complexity of refineries rather than expand their capacity. In the US, no new refineries have been built since 1980. However, improvements in process design and technology has seen refining capacity increase by around 1% per year.
The refineries that were established earlier were mainly used to process light sweet crude resulting in an increase in demand for the latter. With oil prices climbing to record highs in recent times, heavy crude oil is becoming more economically attractive. There has been an increasing interest in the development of new cost-effective methods which will allow economical extraction and transportation of heavy crude oil for refining into valuable light and middle distillate fuels.
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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