Anadarko: Navigating the Downturn

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APC: Anadarko Petroleum logo
APC
Anadarko Petroleum

Al Walker, Chief Executive Officer (CEO) and President of Anadarko Petroleum Corporation (NYSE:APC), reiterated at the Barclay’s Energy-Power Conference last week that the company continues to focus on deriving value from its assets rather than enhancing its production growth in the already over supplied oil market. He further commented on the 2 million barrels per day of excess oil supply in the global markets and how politically driven countries, such as Saudi Arabia, are preventing oil prices from being determined through the market forces. While Mr. Walker acknowledged the tough times being experienced by the industry due to the oil price slump, he also emphasized the company’s ability to surpass the current downturn by effective capital allocation and enhancing its operational efficiencies. With the management experience to weather this unfavorable oil price environment, coupled with world class oil reserves, we figure that Anadarko will emerge from this commodity cycle much leaner and meaner than its competitors. Our price estimate for Anadarko stands at $87 per share.

APC-Price

Source: Google Finance

Here are the key takeaways from the presentation:

  1. Focus on value not growth – Anadarko’s management continues to focus on creating value from its world class assets rather than contributing to the already oversupplied oil market. For this, the company aims to effectively allocate its capital to intermediate and long-term development activities and maintain a flat production growth for the current fiscal.
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APC-Capex

  1. Operation Efficiencies – According to Walker, Anadarko can deliver the same amount of cash flows at WTI crude oil price of $75 per barrel and Henry Hub gas price of $3.75 per Mcf (thousand cubic feet) as it produced when the WTI price stood at $90 per barrel and natural gas price was at $4 per Mcf. This is due to the substantial drilling and completion efficiencies that the company has achieved in most of its US onshore plays. While the current oil prices are significantly below the $75 per barrel level, the company is well positioned to outperform its peers when the oil prices recover.
  1. Active Portfolio Management – Anadarko actively manages its portfolio and maintains an appropriate mix of both conventional and unconventional production. Going forward, the company will concentrate its conventional production in the offshore and international markets, while its unconventional production will be restricted to selective onshore fields. The company will be investing the majority of its capital expenditure in the following two assets in the near future:
  • Delaware – The company already has an early mover advantage in the area as it has net resource potential of over a billion barrels of oil equivalents in the region. Further, amidst the plummeting oil prices, the company made a large acquisition through Western Gas Partners, adding midstream capabilities, such as gathering and processing facilities to its Delaware basin in late 2014, to complement its upstream activities in the region. This is similar to the company’s approach in the Wattenberg basin.

APC-Delaware

  • Wattenberg – Anadarko has more than 1.5 billion barrels of oil equivalent of net resources in the Wattenberg region. With its consistent efforts, the company has been able to bring down the drilling cost in the field by almost 35% over the past six months. Further, the rig productivity in the field has doubled over the last year, implying that the company can now drill the same number of wells using half as many rigs as it used last year. Apart from this, Anadarko owns the land as well as the mineral rights in the region, which means that the company is not obligated to pay any royalties. This gives the company an economic uplift and enables it to generate 40-50% before tax returns even in the current oil price market. Going forward, the Wattenberg basin will continue to be one of the most important assets for the company, accounting for almost half of the company’s capital budget.

APC-Wattenberg

  1. Effective Capital Allocation To Future Projects – Anadarko expects its mega-projects such as Heidelberg and Lucius to come on stream next year. To efficiently allocate the capital, the company sold a part of its interest in these two fields to third parties, who would incur the development cost of these fields. The company plans to offload some of its interest in other fields, as well, to efficiently allocate its capital while enhancing its operational performance.

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  1. Mozambique To Be A Long-Term Asset – The company considers Mozambique as one of the greatest gas discoveries in the last 30 years. Even in this field, Anadarko sold 10% of its working interest to an Indian company to incur the development costs on the field. By doing this, the company has financially de-risked its cash flows and shortened the duration of returns that will be generated from the field. The region is expected to drive the company’s long-term growth story.

APC-mega projects

While the company sees hard times ahead, a competent top management, combined with its world class assets, will enable Anadarko to hold up well in this downturn and outperform its peers when the market conditions improve.

See Our Complete Analysis For Anadarko Petroleum Corporation Here

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