2015 Earnings Review: Weak Commodity Prices Create A Dent In Anadarko’s Earnings; New Projects May Help The Company To Remain Afloat

Anadarko Petroleum Corporation (NYSE:APC), the independent exploration and production company, reported a tough set of 2015 numbers last week, as a result of the plummeting commodity prices during the past year ^[1]. While the US-based company tried to offset the impact of the commodity downturn by improving its operational efficiencies in its key fields in Wattenberg, and Delaware basin, it suffered a sharp decline in its top line as well as bottom line due to weaker price realizations. The company believes that the outlook for the commodity markets will remain challenging through 2016, and consequently, has reduced its capital budget for the year to focus on building and preserving value from its existing assets rather than chasing production growth. Thus, we foresee a further decline in Anadarko’s revenue as well as profitability, even as the company expects to commence production from Heidelberg and TEN complex in Ghana during the later half of the year. Here’s a quick summary of the key trends witnessed in the company’s latest earnings release and its outlook going forward.

Source: Google Finance

Lower Price Realizations Coupled With Weak Production Pull Down Revenue  

As the commodity prices continued to plunge in 2015, oil and gas producers, such as Anadarko, experienced a steep decline in their average realized prices. Anadarko’s oil price realizations fell close to 50%, in line with the reduction in crude oil prices during the year, while its natural gas realizations dropped over 40% as natural gas prices slipped roughly by the same percentage. However, the company enhanced the performance of its existing wells by using advanced technology, which resulted in an increase in the overall crude oil production. This increase was more than offset by the decline in natural gas production, causing its overall production to be slightly lower compared to the previous year. Due to all these factors, Anadarko  posted 2015 revenue of $8.7 billion, almost 53% lower on a year-on-year basis.

Earnings Fall Drastically Despite Operational Efficiencies

In order to weather the current downturn, Anadarko allocated its US onshore investments to two of its largest and most valuable assets – the Wattenberg field in northeastern Colorado and the Delaware Basin in West Texas. The company used advanced technology on these fields to enhance the performance of the existing wells, while reducing the operating costs. Consequently, in the Wattenberg field, the company managed to reduce its drilling costs per foot by 50% and completion costs by 32%, while increasing oil sales volumes by nearly 30% in 2015. Further, in the Wolfcamp Shale, the company achieved estimated ultimate recoveries (EURs) of around 1 million BOE per well, and aims to further increase its identified drilling locations and recoverable-resource estimates in the basin. Despite these cost efficiencies, Anadarko posted an operating loss of $8.8 billion for the year ended 2015, as opposed to an operating profit of $5.4 billion in 2014.

Declining Commodity Prices Will Force Anadarko To Keep Its Spending Low

Anadarko pulled back its capital spending by more than $3 billion, or almost 40% during 2015 due to the 50% drop in oil prices over the year. Yet, the company managed to organically replace more than 130% of its production with reserve additions at a cost of about $14 per BOE. Also, it increased the percentage of its proved reserves to 80% at the end of 2015 compared to 69% at the end of 2014. This would imply that the company is well-positioned to leverage its reserves when the market eventually rebounds. However, Anadarko anticipates further market dislocation due to a challenging outlook in 2016, which would result in sustained reduction in the company’s capital spending for the year. The company will restrict its capital spending to about $2.8 billion in 2016, almost half of 2015 spending and 70% lower compared to 2014.

New Projects And Monetizations Will Help Anadarko Survive The Downturn

Anadarko achieved its first oil at its Lucius development in the Gulf of Mexico, on budget and on schedule in January 2015. The company-operated Heidelberg spar also achieved first oil towards the end of the year, three months ahead of schedule and under budget. Further, the company made significant advancements in the Mozambique LNG project. Besides, Anadarko also completed 80% of Offshore Ghana, the third-party operated TEN development, by the end of the year and aims to achieve its first oil in the third quarter of 2016 ^[2]. Apart from the progress on its new projects, the company also closed monetizations of more than $2 billion during the year.

Anadarko plans to leverage these assets during 2016 and generate a high rate of returns even at the current depressed commodity prices. The company already has monetization opportunities of more than $1 billion in the pipeline and aims to explore other opportunities  in the future to fund its capital spending during the year. Key developments, such as early production from its Heidelberg spar, continued outperformance at Lucius, and the TEN complex in Ghana coming online during the third quarter of 2016, will enable the company to actively manage its portfolio and prepare well for the eventual recovery in the commodity markets.

See Our Complete Analysis For Anadarko Petroleum Here

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1. Anadarko Reports 2015 Results, www.anadarko.com [↩]
2. Anadarko’s 2015 Earnings Conference Call Transcript, Seeking Alpha [↩]