Anadarko Disappoints Investors; Continues To Focus On US Onshore And Deepwater Markets

Anadarko Petroleum (NYSE:APC), the US-based independent exploration and production (E&P) company, disappointed the investors by posting an adjusted loss of 77 cents for its September quarter, far off from the consensus estimate of a loss of 55 cents. The earnings miss was primarily caused by higher exploration expense and large hedging losses booked during the quarter. Further, the company’s production volumes also suffered because of asset sales and disruption of output caused by Hurricane Harvey. Yet, Anadarko will continue to focus on its key onshore and deepwater operations that will enable it to meet its production targets going forward, and boost its future value. We have a price estimate of $53 per share for the company, which is 8% higher compared to its current market price.

See Our Complete Analysis For Anadarko Petroleum Here

Here are the key takeaway of Anadarko’s 3Q’17 earnings report:

Anadarko’s 3Q’17 revenue dropped about 8% on a sequential basis to $2.49 billion because of the asset sales made by the company during the quarter, coupled with the shut down of Eagle Ford operations due to Hurricane Harvey. In addition, the oil and gas company witnessed a sharp rise in its exploration expenses and hedging losses, which led to a significant decline in its bottom line.

Despite the uncertainty in the commodity markets, Anadarko expects its long term growth to be driven by the three Ds in its portfolio – the Delaware basin, the DJ basin, and the deepwater assets in the Gulf of Mexico (GOM), in that order of priority. Consequently, the company aims to grow its oil production at a 5-year compounded annual growth rate of 12%-14%, assuming an oil price scenario of $50-$60 per barrel. With this, the oil and gas company plans to alter its product mix and expand its liquids exposure from 40% in 2016 to 55% in 2017, and to 65% by 2021. If the company is able to deliver well on its goals, coupled with the recovery in commodity prices, the investors are likely to see an increase in Anadarko’s earnings as well as valuation.

Since Anadarko plans to expand its presence in the US onshore and deepwater markets, the majority of its capital investment is expected to be concentrated in these key basins. However, the company’s cash flow position has deteriorated over the last couple of years due to the commodity downturn. Thus, despite significantly reducing its capital expenditure over the few quarters, it may be difficult for the company to fund its capital investments. Consequently, Anadarko is likely to resort to further asset sales and cost reduction measures to improve its liquidity.

Also, Anadarko has been involved in a series of incidents that have caused the investors to doubt the safety measures adopted by the company. Firstly, in April, a deadly house explosion occurred in Colorado due to a suspected natural gas leak from an abandoned line attached to a 24-year-old well operated by Anadarko less than 200 feet away from the residence. There was another explosion at Anadarko’s oil storage tank near Colorado in the Weld County almost a month later, killing one maintenance worker and injuring three others. The two deadly incidents have not only resulted in the shutting down of Anadarko’s operations in the Colorado region, but have also caused a loss of reputation and investor faith in the company. If the investigation results point towards any safety concerns on the company’s part, it could further erode Anadarko’s market value, causing losses to its investors.

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