Anadarko’s Earnings: Offshore Projects And U.S. Production In Focus

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Independent oil explorer Anadarko Corp (NYSE:APC) is set to release its fourth quarter earnings on February 5. West Texas Intermediate (WTI) oil prices have been lower this quarter on a sequential basis so they could have a negative impact on revenues. Natural gas prices at the Henry Hub have been higher than the previous quarter so that could have a positive impact on revenues for spot sales of gas. Anadarko sells most of its gas in the U.S. markets. [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.

Click here for our full analysis of Anadarko Corp.

Ongoing Projects

Anadarko has significant reserves in the liquids-rich Eagleford region. It has increased its net resources in the region to more than 600 million barrels of oil equivalent (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. [2]

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 35-65 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))

Anadarko is the operator of Offshore Area 1 where these reserves are located, and holds a 36.5% share of the fields. Its current partners are Mitsui of Japan with a 20% stake, Bharat Petroleum Corporation Limited and Videocon (both of India, with 10% stake each) and PTT (8.5%). The Mozambican government is represented by its national oil company, Empresa Nacional de Hidrocarbonetos, which holds a 15% stake in the fields. According to market speculations, Videocon is looking to sell off its stake and even Anadarko might dilute up to 10% of its stake if the valuation is right and the credentials of the buyer are good. [3]

A potential stake sale would make sense because it is expected that another $20 billion of capital expenditure will be needed for the project. Anadarko already had a long-term debt of approximately $14 billion on its balance sheet on September 30, 2012. This might constrain its ability to commit huge funds on its own. [4]

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. [5]

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.

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.

We will be interested in the production volumes and average realized prices of oil, gas and natural gas liquids. The company’s capital expenditure plans for 2013 will give us a clue about its growth next year. We will also be keen to hear Anadarko’s comments on market speculations surrounding the Mozambique project and the latest status of its ongoing $25 billion lawsuit with Tronox over environmental liabilities.

We have a price estimate for Anadarko of $82, which will be revised after the fourth quarter earnings results.

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Notes:
  1. Henry Hub Natural Gas Prices, YCharts []
  2. Goldman Sachs Energy Conference Presentation, Anadarko Website []
  3. ONGC Videsh in race with Asian rivals for Videocon stake in African gas field, Economic Times []
  4. Q3 2012 10-Q Report, SEC []
  5. Anadarko Announces Advancement of Mozambique LNG Project, Anadarko Press Release []
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