Anadarko Shifts Focus To High-Margin Basins By Divesting Non-Core Assets

Having lost more than 65% of its value in 2014 and 2015, Anadarko Petroleum (NYSE:APC) finally made a comeback in 2016, and regained a large portion of its lost valuation. The oil and gas producer’s stock rose more than 40% during the year, on the back of the recovery in commodity prices, coupled with its audacious measures to improve its dwindling market position. Apart from optimizing its cost structure to sustain its margins, the independent exploration and production company has announced a series of asset sales over the last year in the quest to enhance its highly levered balance sheet. The latest, and the most significant, additions to the company’s divestment program are the sale of Eagle Ford shale assets and Marcellus shale natural gas assets, announced by the company over the last one month. With these deals, Anadarko aims to divest its non-core and/or unprofitable assets, and shift its focus to the high-margin basins to improve its profitability and returns. Thus, in this note we discuss, what is the company’s strategy going forward and how it plans to execute it.

Source: Google Finance

At the onset of the year 2016, Anadarko had closed asset sales worth $1.3 billion, which included the forward sale of future royalty income from its natural soda ash interest, the divestiture of its East Chalk asset, and the sale of its interest in the Maverick Basin gathering system. This encouraged the company to set a target of $5 billion for asset monetizations for the 2016-2017 time frame. As the year progressed, the company managed to close a few other asset sales, bringing the total proceeds to $3 billion for the first nine months of the year.

However, towards the end of December, Anadarko made a significant asset sale, which not only put the company on track to meet its asset monetization target of $5 billion much ahead of plan, but also changed its operational strategy altogether. On 21st December 2016, the oil and gas producer announced the sale of its upstream and midstream assets in the Marcellus Shale to Alta Marcellus Development for a sum of $1.24 billion((Anadarko Announces Sale Of Marcellus Shale Natural Gas Assets, 21st December 2016, www.anadarko.com)), excluding the midstream owned by Western Gas Partners, LP (NYSE: WES), Anadarko’s sponsored master limited partnership, from the agreement. The deal included the sale of 195,000 net acres, producing approximately 470 million cubic feet per day, which is roughly 13% of Anadarko’s Q3 production. The sale, which is expected to close in the first quarter of 2017, will allow the company to reduce its exposure in the natural gas market and bring in the requisite cash for funding its future oil growth.

Within a month of the Marcellus sale, Anadarko announced another major asset sale. This time, the company divested its Eagleford Shale assets in South Texas for roughly $2.3 billion to Sanchez Energy Corporation and Blackstone Group LP, while retaining the ownership and operating rights of the midstream assets in South Texas through Western Gas Partners((Anadarko Announces Sale Of Eagle Ford Shale Assets, 12th January 2017, www.anadarko.com)). The sale included 155,000 net acres, representing production of 45,000 barrels of oil and NGL per day and 131 million cubic feet of natural gas per day. The assets are believed to have a reserve potential of more than 1.1 billion barrels of oil equivalents (boe). Yet, the Texas-based company has completely exited the Eagle Ford area by disposing all of its oil and gas producing properties in the region.

The rationale behind these asset sales is two-fold. Firstly, the company has accelerated its divestment program in order to utilize the proceeds to pay down its huge long term debt obligations. Over the last few years, Anadarko’s leverage ratio has increased from 35% in 2013 to almost 50% in the latest quarter of 2016, largely due to declining shareholder equity owing to weak profitability. Consequently, the oil and gas company plans to bring down its leverage to enhance its shareholder returns by utilizing the proceeds of its divestment program.

Secondly, and more importantly, Anadarko targets to focus on only high-margin basins by actively managing its portfolio and deliver a 10%-12% compounded annual oil growth rate over the next five years. Going forward, the company will focus on the three Ds in its portfolio – the Delaware Basin, the DJ Basin, and the Deepwater assets in the Gulf of Mexico (GOM). While the company has been operating in the Delaware and DJ basin for sometime, it acquired notable Deepwater assets in the GOM region from Freeport in the third quarter of 2016. Since the deal was an all-stock deal, it did not burden the company’s balance sheet. Instead, the deal doubled the company’s ownership in Lucius, one of the best performing assets in the GOM, adding approximately 160,000 barrels of oil equivalents per day (boepd) (85% oil) to its existing production, and contributing incremental free cash flows of roughly $3 billion between 2017 and 2021, at current commodity prices. 

In addition to the incremental production from the newly acquired GOM assets, the oil and gas player 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.

Thus, we believe that Anadarko is divesting its non-core and unprofitable assets to improve its capital structure and fund its long term oil growth. The company will focus on only three key basins – the Delaware Basin, the DJ Basin, and the Deepwater GOM assets going forward, and expects to deliver 10%-12% compound annual oil growth rate over the next five years.

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