Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 2

-14.52%
Downside
72.77
Market
62.20
Trefis
APC: Anadarko Petroleum logo
APC
Anadarko Petroleum

The commodity downturn has negatively impacted the valuation of most oil and gas companies as well as some of the world’s most coveted oil and gas assets. However, this is also a good buying opportunity for companies that have adequate resources to finance their future growth at cheap valuations. The perfect example for this is the Anadarko Petroleum acquisition of Deepwater Gulf of Mexico (GOM) assets from Freeport-McMoRan Inc. (NYSE:FCX). In our previous article, Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 1, we had highlighted the impact of this transaction on Freeport’s financial position. In this article, we discuss the rationale and implication of the deal for Anadarko.

See Our Complete Analysis For Anadarko Here

A Strategic Acquisition That Will Complement Growth Targets

Relevant Articles
  1. How Will Anadarko Perform In 2019?
  2. Andarko 4Q: Andarko To See Improved Earnings But Cash Flow May Face Headwinds
  3. Anadarko Has Been Trading At A 52-Week Low. Where Will It Head Going Into 2019?
  4. Higher Oil Output And Improved Commodity Prices Will Drive Anadarko’s 3Q’18 Results
  5. Ramp Up Of Oil Production Will Drive Anadarko’s Value In The Near Term
  6. Key Takeaways From Anadarko’s Second Quarter Results

Anadarko has agreed to acquire Freeport’s Deepwater assets in the Gulf of Mexico for a price consideration of $2 billion.((Anadarko Announces $2 billion Property Acquisition, 12th Spetember 2016, www. anadarko.com)) The deal is primarily aimed at strengthening the oil and gas company’s already leading position in the Gulf of Mexico at an attractive valuation. The transaction will double Anadarko’s ownership in Lucius, one of the best performing assets in the GOM, to almost 49%. It is likely to add approximately 155,000 barrels of oil equivalents per day (boepd) (85% oil) to Anadarko’s existing production. Consequently, the deal will contribute incremental free cash flows of roughly $3 billion from the GOM region between 2017 and 2021 at the current commodity prices. In case the crude oil prices, and natural gas prices move up to $60 per barrel and $2.75 per mcf respectively, then the incremental free cash flows from the deal are expected to be around $4 billion. Thus, we believe that the newly acquired GOM assets have a huge upside potential for Anadarko in a strong price environment.  

APC-Q&A-11

In addition to this, the deal – which is expected to close before the end of this year – will enhance Anadarko’s ability to increase its US onshore activity in the Delaware and DJ basins, which are considered to be among some of the highest quality assets around the world. The company has a target of doubling its combined production to at least 600,000 BOE per day from these two basins over the next five years. As a result, the oil and gas producer has plans to add two rigs in each of these plays later this year to accelerate its activity in these regions. This increased activity would result in a compounded annual growth of 10%-12% in Anadarko’s oil volumes over the next five years, assuming a $50 to $60 oil-price environment.

APC-Q&A-11-1

Finally, the transaction will expand Anadarko’s infrastructure in the Gulf, by adding an inventory of low-cost, subsea tieback opportunities, and significant optionality with new exploration prospects. Thus, the deal will have multiple benefits for Anadarko and will provide a large upside, when the commodity markets rebound.

Does The Deal Make Economic Sense For Anadarko?

Over the last few years, a majority of the new oil and gas discoveries in the US have been primarily concentrated in the Gulf of Mexico. In 2014, 85% of the nation’s reserves additions from new field discoveries came from the GOM region. [1] Thus, the assets in this region are some of the most sought-after in the oil and gas industry. In line with this popular belief, Freeport had bought deepwater assets in the GOM to diversify its mining operations in 2013. However, due to the weak commodity prices, the company was unable to meet its huge debt obligations, and decided to sell off those assets to Anadarko earlier this week.

Anadarko, which already has a strong footprint in the GOM, acquired these assets for a sum of $2 billion. If the company had decided to raise debt to fund this purchase, it would have weighed heavily on its balance sheet, which is already highly levered. However, the company played it safe and plans to issue equity to the shareholders of Freeport to finance the transaction. This move will not only give Anadarko access to some of the world’s best quality assets, but will also enable it to improve its capital structure in the ongoing downturn.

APC-Q&A-11-4

Further, when we examine the valuation multiples of the deal, we figure that Anadarko has acquired the GOM assets at a significant discount to its current valuation. For instance, the EV/EBITDAX multiple of the acquired assets is approximately 1.5x, while Anadarko’s multiple stands at 9x. This ratio indicates the value of the company or asset, and is a commonly used metric in mergers and acquisitions in the oil and gas industry.

On the contrary, the EBITDAX/BOE multiple for the newly acquired assets is nearly $36 per barrel of oil equivalent (boe) produced, while Anadarko’s multiple is lower at around $19.50 per boe. This ratio shows the operating profits (before interest, taxes, depreciation, amortization and exploration expenses) that a company/asset generates for each boe produced. The data released by Anadarko clearly states that the GOM assets have a much higher EBITDAX/BOE multiple, implying that the transaction will be immediately and significantly accretive for Anadarko’s bottom line.

APC-Q&A-11-3

Thus, looking at the huge growth potential that the GOM assets offer, and the attractive valuations at which these assets have been acquired, we believe that the deal makes strategic as well as economic sense for Anadarko.

To know about the impact of the Deepwater Gulf of Mexico assets on Freeport and its financial position, read the article – Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 1

Have more questions about Anadarko Petroleum (NYSE:APC)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Anadarko Petroleum

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Source: US Crude Oil and Natural Gas Proved Reserves, November 2015, US EIA []