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Investment Overview for Anadarko (NYSE:APC)
WHAT HAS CHANGED?
- Declining Crude Oil Prices
Over the last 20 months, global crude oil prices have plummeted close to 60%, falling from over $110 per barrel in July 2014, to less than $40 per barrel in March 2016. This steep decline was driven by the mismatch in the demand supply of crude oil worldwide, caused by the following factors:
- Weakness in global demand for oil, primarily due to slower growth in the Chinese economy
- Excess oil production because of the rise in the tight oil production in the US
- Organization of Petroleum Exporting Countries (OPEC) maintaining high production rates to defend their market share
Due to the sharp decline in commodity prices over the last one year, the price realization of oil and gas companies has dropped drastically. As a result, it has become extremely challenging for these companies to sustain high levels of exploration and production activities. Thus, these companies have been forced to drastically cut down their capital spending on drilling activities and restrict their production levels. While the outlook for crude oil prices is uncertain, the following developments are likely to delay the recovery of oil prices at least to the next year:
- Iranian nuclear agreement, which is likely to waive all international sanctions on Iran's oil production, is expected to result in an additional supply of oil in early 2016.
- Weakness in the Latin American market is expected to drive down the demand for oil in the near future.
Anadarko’s management continues to focus on creating value from its world class assets rather than contributing to the already oversupplied oil market. Thus, the company plans to allocate its capital to intermediate and long term development activities and maintain a flat production growth for the current fiscal. With a challenging oil price environment ahead, we expect Anadarko's top line to continue to fall at least over the next few quarters.
- Effective Capital Allocation In Future Projects
Anadarko expects its mega-projects, such as Heidelberg and Lucius, to come on stream next year. In order to efficiently allocate its capital, the company has sold a part of its interest in these two fields to third parties, who would incur the development cost of these fields. Even in Mozambique, which is considered to be one of the greatest gas discoveries in the last 30 years, the company has sold 10% of its working interest to an Indian company which will incur the development costs on the field. By doing this the company is financially de-risking its cash flows and shortened the duration of returns that will be generated from these fields.
- Two Major Milestones Achieved
Anadarko successfully completed the installation of top sides at its Heidelberg project in the third quarter. Now, the company plans to fast pace the exploration activity at the field and expects to produce the first oil from the first three subsea wells by mid-2016 next year. This will enable Anadarko to reap the cash flows from this project sooner than expected.
Secondly, the company successfully completed the third appraisal test of the Shenandoah discovery, which is co-owned with ConocoPhillips and other partners. This test showed significant results and is considered to be one of the largest oil discoveries in the Gulf of Mexico. We figure that this play has the potential to play a crucial role in Anadarko’s valuation in the long term.
- Efficiency Gains From Key Fields
Over the last one year, Anadarko has managed to reduce its costs by nearly $70 per foot drilled on each of its wells using enhanced wellbore designs and other innovative technologies. With its consistent efforts, the company has been able to bring down the drilling cost in the Wattenberg field by almost 35% over the past six months. Further, the rig productivity in the field has doubled over the last year, implying that the company can now drill the same number of wells using half as many rigs as it used the previous year. In the third quarter, the company further reduced the cycle times by almost 20%, and cost per foot by almost 15% on these fields. It also saw similar efficiency gains in its Delaware basin. The company experienced a reduction of $4 million in its per well costs, amounting to $7.5 million during the quarter, and anticipates further savings of $1.5-2.0 million per well if it chooses to shift towards pad drilling across the field.
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 $90 per barrel by 2022. 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 7% 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 130 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 122 million barrels by the end of the Trefis forecast period, there could be a 6% downside to our current price estimate for Anadarko. On the other hand, if the company is able grow its crude oil sales volume to 142 million barrels over the same period, there could be a 9% 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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