Anadarko’s 3Q’16 Disappoints Investors; Company Increases Capex Guidance For 2016

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Anadarko Petroleum

As opposed to market expectations, Anadarko Petroleum Corporation (NYSE:APC) posted disappointing third quarter 2016 results earlier this week on the back of weaker production during the quarter [1]. While the US-based independent exploration and production (E&P) company witnessed a sharp rise in its price realizations due to the rebound in commodity prices over the last few months, the company missed the consensus estimate for revenue as well as earnings by a huge margin. As a result, the company’s stock dropped close to 3.5% post the announcement of the results on Monday. However, the stock revived about 1% on 1st November, when the management painted an optimistic picture of the company’s future prospects in its third quarter conference call.

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Operational Highlights

Despite a decline in Anadarko’s performance on a sequential basis, the company posted a huge improvement on a year-on-year basis. This can be viewed as a huge positive for the company, since it is one of the few companies in the industry that have shown a recovery on an annual basis. This enhanced performance was largely driven by the bounce back in the commodity prices, particularly natural gas prices. For this reason, despite a drop in the company’s production, it reported a 12% rise in its third quarter revenue compared to the same quarter in 2015.

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In terms of operational costs, Anadarko has made a big dent on its cost structure. The oil and gas company’s September quarter operating costs were 37% lower on a year-on-year basis, causing its pre-tax income to improve drastically. While the company made a pre-tax loss of $1 billion in the quarter, it was significantly lower compared to the pre-tax loss of $3.1 billion booked in the same quarter last year. However, on a sequential basis, the company did not perform well, recording higher losses than the last quarter. Anadarko posted an adjusted loss of 89 cents in the third quarter, as against an adjusted profit of 1 cent in the previous quarter.

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Update on Deepwater Assets

The management seemed extremely excited about its acquisition of Freeport’s Deepwater assets in the Gulf of Mexico. The company believes that the deal will strengthen its existing portfolio in the Gulf of Mexico (GOM) and will serve as the primary source of its future growth. The transaction is expected to double Anadarko’s ownership in Lucius, one of the best performing assets in the GOM, to almost 49%. It is likely to add approximately 160,000 barrels of oil equivalents per day (boepd) (85% oil) to the company’s existing production. (For further details read: Deepwater Gulf Of Mexico: Freeport’s Loss Is Anadarko’s Gain – Part 2)

In addition, the oil and gas producer has accelerated drilling activity in the Delaware Basin and the DJ Basin, by adding two rigs in each of the regions. Since, these two basins are among some of the highest quality assets around the world, the company targets to double the combined production to at least 600,000 BOE per day from these plays over the next five years. This increased activity would result in a compound annual growth of 10%-12% in Anadarko’s oil volumes over the next five years, assuming a $50 to $60 oil-price environment.

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Guidance For 2016

Based on the latest earnings release, Anadarko has revised its production guidance for the full year 2016 by 8 million barrels of oil equivalent (BOE) on a divestiture adjusted basis. However, in absolute terms, it appears that the company has revised down its production expectations, particularly gas production, for 2016. In terms of cost, the company anticipates a further reduction in its direct operating costs, which could be partially offset by higher-than-expected transportation costs.

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However, the most crucial guidance change proposed by the US-based company was the upward revision of its capital expenditure budget. Unlike all its peers, Anadarko has increased its capital budget from the $2.7 billion to $2.9 billion for the current fiscal year. Since the company has managed to close asset monetizations worth $3 billion in the year so far, it could utilize its proceeds to fund its capital requirements. However, increasing the capital budget in the current environment is a big gamble on part of the company. While the company may foresee strong growth prospects, which could generate high returns even in challenging times like these, the decision could be detrimental to the company’s already tight cash flow position, if the company’s investments do not pay back as expected.

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

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Notes:
  1. Anadarko Announces Third Quarter 2016 Earnings Conference Call, 31st October 2016, www.anadarko.com []