Anadarko Posts Much Higher Losses Than Anticipated; Colorado Incident Continues To Drag Its Stock Price

Despite the sharp recovery in commodity prices, Anadarko Petroleum (NYSE:APC) posted an adjusted loss of 60 cents per share for its March quarter 2017((Anadarko Announces March Quarter 2017 Results, 3rd May 2017, www.anadarko.com)), which was significantly higher than the loss of 24 cents per share predicted by the analysts. While the independent oil and gas company more than doubled its top line for the quarter, posting a huge surprise, it was unable to convert the impact of higher revenue into profits due to the higher-than-expected operating costs recorded during the quarter. That said, the US-based company delivered a notable improvement in its earnings, both sequentially as well as annually. However, the investors were disappointed with the company’s 1Q’17 performance, causing its stock to plunge by almost 8% post the announcement of the results.

In addition, Anadarko has been in a free fall, and has dropped more than 15% in the last 15 days since the deadly house explosion occurred in Colorado on 17th April 2017. The incident occurred in a house about 200 feet away from one of Anadarko’s vertical wells in Colorado. While the company is cooperating with the authorities to identify the actual cause of the fire, it has been forced to shut almost 3,000 vertical wells, which produce roughly 13,000 barrels of oil per day, as part of the investigation. If the investigation results point towards any safety concerns, it could further erode Anadarko’s market value, causing heavy losses to its investors.

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Key Highlights of 1Q’17

Driven by the surge in commodity prices in the last few months, Anadarko witnessed a sharp rise in its oil and gas price realizations for the first quarter. In fact, both crude oil and natural gas price realizations were 70% higher compared to the same quarter of the previous year, providing a boost to the company’s top line. However, this was marginally offset by the 4% reduction in the oil and gas producer’s production for the quarter. Overall, the company posted 1Q’17 revenue of $3.77 billion, almost $1 billion more than estimated by the market.

However, Anadarko failed to control its operating costs during the quarter. The company’s operating costs rose from $2.5 billion in 1Q’16 to $3.9 billion in the latest quarter, representing a rise of almost 53%. This was primarily because of the steep rise in the company’s exploration expense and impairment charges booked in the quarter. That said, the E&P company managed to post operating loss (GAAP) of only $110 million, as opposed to a loss of $864 million in the year ago quarter.

On the financial front, Anadarko’s position improved during the quarter, both on an annual as well as sequential basis. The company’s net debt, which stood at $15.8 billion in the first quarter of 2016, reduced to $9.5 billion in the first quarter of 2017, indicating a solid recovery in the company’s ability to generate cash and meet its long term obligations. Further, the company continued to pay quarterly dividends of 5 cents per share during the quarter, reinforcing investor faith in the company. Also, the company has increased its capital spending budget from $2.8 billion in 2016 to $4.5-$4.7 billion for 2017, with a focus of developing the three Ds in the company’s portfolio: the Delaware basin, the DJ basin, and the deepwater assets in the Gulf of Mexico (GOM), in the order of priority.

Path Going Forward

Despite the ongoing volatility in the commodity markets, Anadarko has reiterated its expansion plans over the next few years. Just to recap, the company aims to grow its oil production at a compounded annual growth rate of more than 15% over the next five years, assuming that the oil prices remain in the $50-$60 per barrel range. Plus, the company plans to alter its product mix and expand its liquids exposure to over 65% by 2021. To achieve this objective, the company will continue to focus on its three key basins (mentioned earlier).

As an update, the company pointed that it is progressing well to achieve its 70% operatorship target in the Delaware Basin, with 15 rigs  currently operating in the region. Also, the company plans to move to pad development in the region in the second half of the year. In addition, the company has achieved record production levels in the deepwater Gulf of Mexico, driven by the strong performance from its Caesar and new wells at Heidelberg and K2. Also, the company has six rigs operating in the DJ Basin, where it is trying to improving the well efficiency, leveraging its Advanced Analytics and Emerging Technology group, or the AAET.

Thus, we figure that while Anadarko’s 1Q’17 earnings missed the consensus mark, the company is progressing well on achieving its expansion targets for the year. However, higher capital spending in a weak price oil environment is likely to work against the company. Further, the ongoing investigation on the Colorado incident could prove to be detrimental for the company value, if authorities raise any safety concerns on the company’s end and/or the company’s well remain out of production for longer than expected.

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