Higher Natural Gas Prices Fuel Earnings Growth At Anadarko

Anadarko Petroleum Corporation (NYSE:APC) reported higher second quarter earnings on better natural gas price realizations and increased oil production from U.S. onshore fields. Reported earnings per share (EPS) stood at $1.83 compared to a loss of $0.18 per share in the prior year quarter. However, EPS adjusted for items impacting comparability of results, such as the unrealized gains on derivatives, was up more than 38% to $1.05. ^[1] While increasing production from U.S. onshore fields boosted Anadarko’s liquid sales volume, lower international sales volume and crude oil prices impacted earnings negatively.

Anadarko operates in three segments: oil & gas exploration and production, midstream, and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the deepwater Gulf of Mexico and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, China, Alaska, and New Zealand.

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Natural Gas Prices Fuel Growth

Anadarko’s natural gas sales revenue received a boost from sharply higher commodity prices. Average Henry Hub Gulf Coast natural gas spot prices during the second quarter have been more than 75% higher than the previous year quarter, fluctuating around $4 per million British thermal units (MBtu). The increase in prices can be partly attributed to strong demand brought about by a prolonged winter, which could reverse during the summer. Moreover, rising hopes of higher natural gas exports have also buoyed the outlook for natural gas prices in the U.S.

The Department of Energy in the U.S. recently approved a liquefied natural gas (LNG) export project. The Freeport LNG Terminal in Texas has been allowed to export natural gas to countries that do not have a free trade agreement with the U.S. The announcement has reduced the uncertainty over the Department of Energy’s stance on natural gas exports. This has led to increased expectations on approval of other applications pertaining to similar projects pending with the government. We therefore expect natural gas prices to boost Anadarko’s earnings during the second half of the year as well.

Anadarko’s natural gas revenues grew ~90% on higher natural gas prices. According to our estimates, natural gas production contributes ~25% to the company’s total value. We expect the company’s full year natural gas price realization to be around $3.5 per 1,000 cubic feet, up more than 30% year-on-year.

U.S. Onshore Projects Drive Liquid Growth

Anadarko continued to ramp up liquid (crude oil and condensates and natural gas liquids) production from its U.S. onshore fields. However, despite strong production growth from the Wattenberg field (up 37%) and Eagleford shale (up 62%), Anadarko’s second quarter liquid sales volume at 309,000 barrels per day (Bbl/day) was down 3% y-o-y. This was primarily due to lower sales volume from the company’s Gulf of Mexico (down 25%) and international (down 17%) operations. Lower price realizations further reduced revenues from the sale of liquids.

However, liquid sales volume growth is expected to pick up during the second half of the year as the key factors that pulled down sales volume, such as the timing effect of cargo lifting in Algeria and planned downtime for maintenance of the Gulf of Mexico operations will reverse for better.

Anadarko’s crude oil and condensates production operations contribute ~65% to the company’s total value according to our estimates. We expect the company’s full year crude oil and condensates production volume to be around 94 million barrels, up more than 9% year-on-year.

Much of the Anadarko’s valuation is based on its recent discoveries in Mozambique, Ghana and the U.S. Gulf of Mexico (GoM). We expect Anadarko to ramp up output over the next several years as it begins production from these discoveries. Overall, the company’s asset portfolio looks good and its on-track development projects are expected to provide sufficient long-term growth impetus to the company.

Based on the second quarter earning results we have revised our price estimate for Anadarko to $100.

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1. Anadarko Announces Second Quarter 2013 Results, anadarko.com [↩]