Anadarko’s Future Looks Bright As Earnings Show Solid Growth

Anadarko Corp (NYSE:APC) released its Q3 earnings figures on Monday, October 29. The company posted a profit of $121 million compared to a net loss of $3.05 billion in the comparable period last year. The loss incurred in Q3 2011 was due to the payment of $4 billion to settle claims related to the Deepwater Horizon oil spill case. Profit for this quarter was due to higher sales volume offset to some extent by lower realized prices.

The increase in sales volume was mainly due to higher production from its onshore shale reserves in Colorado and Texas. The figure would have been higher if approximately 1 million BOE (barrels of oil equivalent) of production in the Gulf of Mexico hadn’t been shut due to weather-related disruptions. The company boosted the midpoint of its full-year forecast by 3 million barrels with a new range of 265 million to 267 million barrels. ^[1]

Anadarko operates in three segments: oil & gas exploration and production, midstream, and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the deepwater Gulf of Mexico and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, China, Alaska, and New Zealand.

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Higher Sales Volumes Boost Revenues

Third quarter sales volumes rose 12% year-over-year to 739,000 BOE a day. This exceeded Anadarko’s own estimate of 707,000 to 728,000 BOE per day in Q3 (as of July 30). Total sales volume for the quarter stood at 68 million BOE compared to 61 million BOE in the same period last year. Most of the production increase was attributed to Anadarko’s ramp up of operations  in liquids-rich shale regions. Anadarko has operations in major shale fields such as South Texas Eagle Ford shale, the Marcellus shale in the U.S. Northeast, and the Haynesville shale in Louisiana.

It increased its net resources in the region to more than 600 million BOE. Of these, oil and natural gas liquids constitute 65%. Also, the company claims that its net resources in the Wattenberg region stand between 1-1.5 billion BOE. To put things in perspective, Anadarko’s overall output target for 2012 is 265-267 million BOE after an upward revision following the Q3 results. ((Johnson Rice & Co LLC Energy Conference, Anadarko Investor Relations))

As a result of higher production and sales volume, revenues climbed 4.2% year-over-year to reach $3.33 billion in Q3 2012. ^[2]

Ongoing Projects And Assets

Anadarko has also been successful in discovering huge gas reserves off the coast of Mozambique in the Rovuma basin. Recoverable gas reserves have been estimated anywhere between 30-60 trillion cubic feet. The significance of the region’s reserves was underlined in the battle fought between Royal Dutch Shell and Thailand’s PTT Exploration and Production for the control of Cove Energy. PTT eventually won and snapped up Cove for $1.9 billion. ((RPT-UPDATE 5-Thailand’s PTT gets Cove Energy after Shell drops bid, Reuters))

A huge challenge is to build facilities on land to turn the reserves into liquefied natural gas, which can then be shipped to markets. Anadarko plans to build two LNG plants in Cabo Delgado in the first phase, each capable of processing five million tonnes of gas a year. The first sale of this gas is expected to occur sometime in 2018. ^[3]

Anadarko has oil and natural gas production and development operations located in Algeria, Ghana, and China. The company also has exploration acreage in Ghana, Brazil, Liberia, Sierra Leone, Kenya, Cote d’Ivoire, New Zealand, Indonesia, and other countries. In Brazil, Anadarko has assets in the Campos Basin, where Wahoo and Itaipu are its biggest discoveries. Itaipu is believed to contain up to 300 million barrels of oil. However, it recently sold off its 30% stake in the ES-M-661 offshore block located in the Espirito Santo basin to Petrobras. We analyzed this deal in detail in an earlier article. You can read about it here.

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 the 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. This would also help it pay off its debt. The company had a long-term debt of approximately $14 billion on its balance sheet on September 30, 2012.

Anadarko’s overall asset portfolio looks good and we think that it provides sufficient long-term growth opportunities to the company.

The conference call regarding Q3 results has yet to take place at the time of writing, so we haven’t had the opportunity to listen to detailed comments on Anadarko’s ongoing $25 billion lawsuit with Tronox over environmental liabilities. However, in the 10-Q document filed with the SEC post Q3 results declaration, Anadarko has stated that it remains confident of its position in the case and does not believe that a loss is probable. Accordingly, its balance sheet as of September 30, 2012, does not include a loss-contingency liability related to the case. ^[4]

We have a price estimate for Anadarko of $81, which will be revised shortly in view of the latest earnings results.

Understand on Trefis how a company’s products impact its stock price

1. Anadarko Reports Quarterly Profit as Output Increases, Bloomberg [↩]
2. Anadarko Announces Third-Quarter Results, Anadarko News Release [↩]
3. Mozambique: Anadarko Announces Yet Another Major Gas Discovery, All Africa [↩]
4. Anadarko Q3 2012 10-Q, SEC [↩]