How Has Anadarko’s Financial Position Changed Due To The Commodity Downturn?

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APC: Anadarko Petroleum logo
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Anadarko Petroleum

The commodity downturn over the last two years has left most of the investors fretting about the financial position of the oil and gas companies globally. Such is the case with Anadarko Petroleum Corporation (NYSE:APC), the US-based independent exploration and production company, whose situation has been a reason of anxiety for some of its investors. Hence, in this article, we discuss how the company’s financial condition has changed since the start of the oil slump in 2014.

We start with the debt-to-capital ratio, which indicates a company’s debt proportion in its total capital structure. Historically, Anadarko has had a debt-to-total capital ratio of 35%, which implied that roughly one-third of its capital structure constituted of long-term debt. However, with the onset of the commodity down cycle, the company’s cash flows began to drop significantly, forcing it to borrow large amount of debt to meet its capital spending needs and other obligations. Also, depressed commodity prices created a pricing pressure on the oil and gas producer, causing its profits to fall drastically. This resulted in the deterioration of its shareholders’ equity. Both these factors combined have led to a sharp rise in Anadarko’s debt-to-capital ratio.

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Secondly, we analyze Anadarko’s Net Debt-to-EBITDAX ratio. This metric shows the number of years that a company would require to repay its long term debt (excluding cash and cash equivalents) at the current rate of profits. EBITDAX is the operating profit of a company before interest, taxes, depreciation, amortization, and exploration expenses. Since Anadarko’s Net Debt-to-EBITDAX ratio has increased steeply since 2014, it implies that the company’s ability to meet its long-term debt obligations has deteriorated over time.

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Finally, we discuss the company’s interest coverage ratio, which shows a company’s ability to fulfill its interest obligations. Since Anadarko’s long-term debt obligations have grown notably over the last two years, its interest obligations have also gone up sizeably. With lower operating profits (EBITDAX) and higher interest expense, the E&P player’s interest coverage has declined, indicating a reduction in its ability to meet its interest requirements.

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Though the company is working hard to restructure its balance sheet by refinancing and/or reducing its long-term obligations, the weak commodity price environment has weighed heavily on its profitability and cash flows, pushing it in the vicious circle of debt obligations.

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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

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