Anadarko’s Future Looks Bright As Major Projects Are On Track

Anadarko Corp (NYSE:APC) released its Q4 earnings figures on Monday, February 4. The notable highlights were Anadarko achieving a record production growth rate of 8% over 2011 levels and adding reserves of 434 million barrels of oil equivalent(BOE), thus replacing 162% of its current production levels.

The company posted a quarterly profit of $190 million compared to a net loss of $339 million in the comparable period last year. The loss in Q4 2011 was primarily due to one time impairment charges of $1.48 billion. For the full year, net income was $2.45 billion, as compared to the previous year’s loss of $2.57 billion. The loss in 2011 was mostly because of settlement charges of nearly $4 billion arising from the Gulf of Mexico oil spill disaster.

While the average realized price for oil was lower in Q4 year-over-year, the difference was negligible for the full year. However, the average realized prices for natural gas and natural gas liquids (NGLs) were much lower in 2012, leading to lower overall revenues than 2011. ^[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 Oil Revenues

Annual quarter sales volumes rose 8% year-over-year to 732,000 BOE a day. Total sales volume for the year stood at 268 million BOE compared to 248 million BOE  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. ((Goldman Sachs Energy Conference Presentation, Anadarko Website))

As a result of increased volumes, revenues from oil sales increased to $8.7 billion from $8.1 billion in 2011. On the other hand, the abundance of gas resulted in lower natural gas prices that impacted revenues. Prices for NGLs dropped drastically in 2012 mainly due to high prior inventories of ethane and propane and a comparatively warmer winter in major consumption centers.

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 35-65 trillion cubic feet.

Anadarko is the operator of Offshore Area 1 where these reserves are located and holds a 36.5% share of the fields. It acknowledged in the earnings conference call that it is open to selling 10% of its stake if the valuation is right. 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 has a huge debt on its balance sheet, which it has managed to reduced to $13.2 billion this year by monetizing assets. ^[2]

A huge challenge in this project 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.

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 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.

Anadarko’s overall asset portfolio looks good and we think that it provides sufficient long-term growth opportunities to the company. The company is expected to shed more light on its capital expenditure program two weeks from now.

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

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1. Anadarko 8-K Filing, SEC [↩]
2. Anadarko Q4 2012 Earnings Conference Call, Seeking Alpha [↩]