Independent oil explorer Anadarko Corp (NYSE:APC) is set to come out with its second quarter earnings on July 31. The upstream oil and gas company is expected to see a drop in its sequential operating earnings because of lower oil and gas prices in the last quarter. Natural gas prices in the U.S. dropped to their lowest levels in the past decade in Q2 because of a mild winter and the continuing oversupply situation in the market. Anadarko’s shift toward higher liquids production could also be impacted by the fall in oil prices, following weak economic news from Europe and emerging economies.
We have a $90 price estimate for Anadarko, which is at a 25% premium to the current market price.
Despite announcing a number of new successes in exploration over the past few months, Anadarko has been hit by a fall in global commodity prices. Natural gas prices in the U.S. fell below $2/ Million British thermal units (MBtus) in Q2 as oversupply and weak demand resulted in speculation that the country might run out of storage space later this year. While the prices have recovered since then, companies are cutting back on natural gas production and targeting liquid rich basins. However, oil prices have also seen a drop in Q2 because of higher production from Saudi Arabia and growing uncertainty regarding global macroeconomic growth.
Despite the current drops in commodity prices, the impact on Anadarko’s valuation is minimal. Much of the company’s valuation is based on its recent discoveries in Mozambique, Ghana and the U.S. Gulf of Mexico (GoM). We expect Anadarko to ramp up output over the next several years as it begins production from these discoveries. Anadarko could also look to sell its stake in some of these discoveries to immediately monetize their potential. Recently, it sold part of its stake in the Lucius field in the GoM. Anadarko is also said to be in talks with Shell over the sale of its stake in the massive gas find in Mozambique’s offshore area 1. Possible deals could brighten up the company’s future earnings.