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Gurus Take a Stand on Oil & Gas Exploration and Production
Posted by: Vanina Egea (IP Logged)
Date: November 13, 2013 11:04PM
Oil and gas exploration and production companies are experiencing great changes in the industry. Major producers have moved back to the North American and North Sea, while showing a greater interest for the African and Brazilian coast. The changes in preferences have created new and interesting challenges as unconventional oil & gas reserves and deepwater have taken greater relevance. Hence, it is an interesting time to take a look at Anadarko Petroleum (APA) and Apache (APC)’s prospects.
Balance Is the Key to Growth
Apache is one of the world´s largest exploration and production companies, involved in the production of conventional and unconventional, and the exploration of shallow and deepwater developments. Most of its operations are spread throughout North America, but projects have reached Egypt, Australia, Argentina, and the UK. While reserves and production are equally divided between oil and gas, almost 60% of both are located in the U.S. and Canada. Hence, the biggest downside to the firm’s prospects is a substantial drop in oil and gas prices.
Looking forward, Apache is well positioned to absorb new market preferences thanks to a geographically diversified reserve base, a balanced exposure to crude oil and natural gas, and multi-year trends in reserve replacement and production growth. An additional push to performance is expected to be seen in the coming years as new projects in Australia are completed. Also, management has hinted the growth strategy will continue to look for new acquisition opportunities, while rewarding shareholders with the recently announced share buyback program.
Being a pure production and exploration company, the bigger challenge to Apache's performance is commodity prices and acquisitions. In other words, performance continues to depend from market forces, and growth from available accretive transactions. Additional troubles may rise from Australian operations as price escalation clauses are hinged on the Australian consumer price index. Last, operations in the Mexican Gulf and Southern U.S. are exposed to natural phenomena with the power to disrupt production.
Financially, Apache is strong amid rising debt related to recent acquisitions, thanks in great part to wide margins. Currently trading at 13.3 times its trailing earnings, the stock packs a 58% to the industry average. Dodge & Cox has turned into the guru with the largest position during the first quarter of 2013, while Brian Rogers increased his stake during the last quarter to take the second place. I share their optimism due to the balanced exposure to oil and gas, and strong balance sheet.
New Projects and Management
Like Apache, Anadarko Petroleum has spread across the globe from the U.S., and is involved in the exploration and production of conventional and unconventional, deepwater oil and gas projects. The firm is present across North America and has strongly encouraged activities in West and North Africa. Activities are divided between the Oil & Gas Exploration & Production, Midstream, and Marketing segments, being the first the one with the greatest contribution to revenues. Nonetheless, assets and production are well balanced between crude oil and gas.
The Permian and Utica shale, Anadarko Petroleum´s management expects will continue to drive growth in the short term. The exploration potential in Algeria and Ghana are also key growth catalysts for the same period, in addition to the three new discoveries in the Gulf of Mexico and lucrative natural gas options in Mozambique. However, political instability remains a high threat to deepwater activities in the African continent. Unconventional activities, on the opposite, offer growth potential over the medium-to-long term at safer regions.
Long-term growth for Anadarko Petroleum is supported by periodic exploration and expansion activities. A great achievement when looking forward are the investments in Algeria, which are expected to double oil and natural gas reserves in the next seven to 10 years.
Another important decision with a significant impact in future performance is current projects at Ghana and Mozambique, for crude oil and natural gas production correspondingly. But Anadarko Petroleum’s most important asset is management expertise for identifying and executing high-impact projects.
The balance sheet for Anadarko Petroleum is moderate due to high debt and operating margins. The stock currently trades at 24.4 times its trailing earnings, carrying a 24% discount to the industry average. Daniel Loeb and Bruce Kovner, the two gurus holding the largest stake in the firm, have reduced their position since mid-2013. George Soros, the third in the list, has not modified his position throughout 2013 and I share his optimism. Several projects should come online in the coming year, and management has proven to perform above the average.
Balance or Management
I like both companies but prefer Apache because gurus have shown a greater enthusiasm for the company. Additionally, Apache´s portfolio product balance and geographic diversification reduces risks concerned with the industry´s volatility. Additionally, new projects are due to come online in the next year, while management continues to look for new opportunities.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Guru Discussed: Brian Rogers: Current Portfolio, Stock Picks
Bruce Kovner: Current Portfolio, Stock Picks
Stocks Discussed: APA, APC,