Anadarko Corp. (NYSE:APC) plans to grow its net hydrocarbon production by 5-7% in the long run. The company has had a fairly good execution record so far. It has grown its average daily sales volume from around 577 million barrels of oil equivalent per day (MBOED) in 2007 to 781 MBOED in 2013, at a CAGR of ~5.2%. The company also expanded its total proved reserves by around 0.4 billion barrels of oil equivalent over the same period. Last year, Anadarko met the high-end of its initial sales guidance despite severe disruptions due to the massive floods in Colorado, which caused the company to shut down more than 600 wells in September. 
Going forward, we expect the company’s net hydrocarbon production to continue to grow at around 5% CAGR in the long run, with most of the growth coming from the development of its U.S. onshore assets. In 2013, production from the company’s U.S. onshore assets totaled 583 MBOED, which is equivalent to ~75% of its total hydrocarbon production during the year. 
Our $85 price estimate for Anadarko is almost in line with its current market price.
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Anadarko’s net hydrocarbon production from the U.S. onshore assets has grown at more than 13.3% CAGR between 2009 and 2013. Most of the growth has come from increased horizontal drilling in the Wattenberg, Eagle Ford, East Texas/North Louisiana and the Marcellus shale plays. More importantly, the production of liquids (crude oil and natural gas liquids) from these assets has increased at a much faster rate. In 2013, liquids made up ~32% of the company’s total hydrocarbon production from the U.S. onshore assets, compared to just around 23% in 2009. Liquids generally sell at much higher prices compared to the equivalent amount of natural gas. Just to give some perspective, Anadarko realized around $21 per BOE of natural gas sold last year, compared to ~$85 per barrel of liquids sold. Moreover, since development costs have remained relatively flat around $13/BOE since 2009, the company’s upstream margins have improved significantly over the last four years. 
This year, Anadarko plans to grow its U.S. onshore production by around 8% over last year, while increasing the proportion of liquids to more than 37%. The company plans to spend around $5.5 billion, which is ~65% of its total capital budget for the year, in order to achieve this target. Below, we take a closer look at some of the key U.S. onshore assets that are expected to drive Anadarko’s sales volume growth in the short to medium term. 
The Wattenberg field is a liquids-rich area where Anadarko operates over 5,200 wells. Recently, the company’s drilling program in the field has been entirely focused on horizontal development. It drilled 335 horizontal wells last year, which led to a 21% y-o-y jump in sales volume from the field. More importantly, the sales-mix improved as well, with a 32% increase in liquid sales over 2012. 
Anadarko has identified around 4,000 potential drilling locations in the Niobrara and Codell formations of the Wattenberg field that are expected to provide substantial opportunity for continued activity. This year, the company plans to drill over 360 horizontal wells in the field employing as many as 13 horizontal operated rigs on an average. 
Anadarko expects to grow its sales volume from the Wattenberg field at ~20% CAGR in the long run. We believe that the target is achievable due to a combination of favorable factors. These include rising drilling efficiencies, increased number of operated rigs, and improving midstream infrastructure. The company is working on more than doubling its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by 2015. It also plans to expand the gas processing capacity from around 400 million cubic feet per day (mmcfd) to over 1,000 mmcfd by 2016. 
Furthermore, the recent asset swap deal signed by Anadarko in the Wattenberg field will allow it to leverage this midstream infrastructure even better over the coming years as its development efforts in the region will be more concentrated around the supporting infrastructure. In October 2013, Anadarko exchanged certain oil and gas properties in the Wattenberg field with a third party. Under the terms of the transaction, each party exchanged approximately 50,000 net acres. The transaction is expected to drive more than $500 million in cost savings for Anadarko through reduced trucking and water sourcing requirements. 
The Eagle Ford shale formation in South Texas runs from the U.S.-Mexico border north of Laredo in a narrow band extending northeast for several hundred miles to just north of Houston. The EIA estimates proved oil reserves in the play to be around 1.25 billion barrels of oil and 8.4 trillion cubic feet of gas. Anadarko currently holds 388,000 gross acres in this area. Last year, the company operated an average of nine rigs and spud 359 horizontal wells, which drove a 46% y-o-y growth in its sales volume from the play. 
Anadarko also expanded its infield gathering-system capacity from 350 mmcfd to approximately 600 mmcfd last year, with the completion of a new gas compression facility. In addition, three oil stabilization trains were also added with an oil capacity of 75 MBOED. Its gas processing capacity in the region was also enhanced last year by the completion of a new cryogenic gas plant that came online in June. The new 200 mmcfd natural gas processing plant is capable of recovering around 30 MBOED of NGLs. 
This year, Anadarko plans to increase its sales volume from the Eagle Ford play by ~45% over last year. The company expects to achieve this target by drilling around 400 wells in the field employing an average of ten operated rigs during the year. 
The Marcellus shale play, one of the richest gas fields in North America, runs through northern Appalachia, primarily in Pennsylvania, West Virginia, New York, and Ohio. The formation is estimated to hold as much as 500 trillion cubic feet of natural gas, about 10% of which is recoverable using current technology. Anadarko holds approximately 260,000 net acres in the play. Last year, the company spud 61 operated horizontal wells in the play using a fleet average of three rigs. It also participated in drilling an additional 51 non-operated horizontal wells. At 85 MBOED, the company’s sales volume from the play grew over 58% y-o-y last year. 
This year, the company plans to reduce its drilling activity in the Marcellus play because it can earn much better returns on employing capital in the liquid-rich plays such as the Wattenberg, where midstream infrastructure bottlenecks are now reducing. The company plans to employ just one operated rig in the Marcellus play this year. However, its natural gas production from the play is still expected to grow by around 10% y-o-y. Notes: