Anadarko Sees A Drastic Fall In 3Q Earnings Due To Depressed Commodity Prices

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Anadarko Petroleum

Anadarko Petroleum Corporation (NYSE:APC), the US-based independent exploration and production company, posted a drastic fall in its revenues as well as earnings for the September quarter [1] due to weak price realizations driven by plummeting commodity prices. As opposed to the last quarter, the company reported a net loss for this quarter despite the higher-than-expected results from its key fields – Wattenberg, and Delaware basin. The company’s management acknowledges the challenging road ahead and aims to focus on building and preserving value from its existing assets rather than chasing production growth. The company also hinted at the sale of non-core assets in the near future to remain cash sufficient. Based on the company’s guidance and market conditions, we expect to see a further drop in Anadarko’s revenues as well as profitability, even with its cost reduction efforts. Let’s look at the key trends witnessed in the company’s 3Q earnings release and its outlook going forward.

APC-Oct price

Source: Google Finance

Notable Cash Flows Despite Declining Realizations

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Anadarko reported a net loss of $2.2 billion, or $4.41 per share in the third quarter due to the plunging price realizations and restricted production. However, this loss included an after-tax impairment charge of $1.9 billion which was attributable to the impact of lower commodity prices on its reserves. Thus, on an adjusted basis, the company suffered a loss of $358 million, or $0.72 per share, which is better than the analyst estimate, but is significantly lower on a sequential and a year-on-year basis. Despite this, the oil and gas company managed to generate discretionary cash flows of $979 million. This was primarily driven by greater sales volumes from the high margin US oil fields and lower-than-expected capital expenditures and lease operating expense (LOE) per barrel of oil equivalent (BOE). Anadarko recorded third quarter sales volumes of 73 million BOE, which included an increase of 11,000 barrels in the daily oil sales on a divestiture adjusted basis.

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Source: Anadarko Petroleum Form 10-Q, 27th October 2015

Efficiency Gains From Key Fields

As a result of the enhanced wellbore design, Anadarko has reduced its costs by nearly $70 per foot drilled on each of its wells over the last one year. This translates into savings of almost of $1 million per well. Even after experiencing exceptional efficiency gains from its Wattenberg field in the last quarter, Anadarko continues to make further improvements on the field, which has enabled the company to reduce the cycle times sequentially by almost 20%, and cost per foot by almost 15% during the September quarter. Due to the company’s consistent efforts, it also saw similar efficiency gains in its Delaware basin. The company experienced a reduction of $4 million in its per well costs in the Delaware basin, amounting to $7.5 million during the quarter. The company anticipates further savings of $1.5-2.0 million per well if it chooses to shift towards pad drilling across the field.

See Our Complete Analysis For Anadarko Petroleum Corporation Here

Major Milestones Achieved

Although Anadarko faced a rough third quarter due to plummeting oil prices, the company made significant progress on its newer projects and achieved some major milestones. Firstly, the company successfully completed the installation of top sides at its Heidelberg project. With this milestone achieved, the company now plans to fast pace the exploration activity at the field and expects to produce the first oil from the first three subsea wells by mid-2016 next year. As a result, Anadarko will be able to start reaping cash flows from this project sooner than expected. Secondly, the company successfully completed the third appraisal test of the Shenandoah discovery, which is co-owned with ConocoPhillips (NYSE:COP) and other partners. This test showed outstanding results and is being considered as one of the largest oil discoveries in the Gulf of Mexico. We figure that this field has the potential to play a crucial role in Anadarko’s valuation in the long term.

 

Snapshot of 4Q Guidance

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Source: Anadarko Petroleum Form 8-K, 27th October 2015

Thus, we figure that despite having a pessimistic outlook for the commodity markets, Anadarko continues to work at enhancing its production and reducing its operating costs to sustain through the current downturn.

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Notes:
  1. Anadarko Announces 3Q Results, 27th October 2015 []