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Growing Demand Impacts Exploration and Production
Posted by: Vanina Egea (IP Logged)
Date: April 2, 2014 05:07PM
As many of his predecessors, Obama has received a great quantity of criticism from the international liberal wing for his visit to Saudi Arabia. The charges remain the same: the double standard to which the U.S. government is said to pay lip by sponsoring democracy abroad, except in Saudi Arabia. And the reason for unequal treatment is a vital one: oil. With the recovery of the world economy, and especially that of the U.S., oil is the single most important resource for U.S. economic growth. Hence, oil has always been a stop in the agenda for representatives of both countries. Can the meeting affect the market? What about Anadarko Petroleum (APC)?
Pending and Unusual Issues
On April 4, Anadarko is set to sit at the dock to challenge the decision made by the U.S. Bankruptcy Court, Southern District of New York. The company will presents its case to pay as little as $850 million on a $20.8 billion environmental damage claim sought by creditors of bankrupt Tronox Inc. and the federal government against its Kerr-McGee unit. Funds are to be destined to clean 2,772 polluted sites and compensate about 8,100 people affected by the contamination.
Just before appearing in court, unusual volumes of Anadarko’s stock began to be traded in the market. First, a great volume of the stock was traded during the last minute before market closure after the stock lost 99% of its face value. The NYSE cancelled the transactions arguing a blip on the system. Second, in a similar fashion but at smaller volumes, the stock traded at unusually high rates last Tuesday. Most importantly, stock price continues to rise.
Another trend is being draw by financial institutions. Last March 20th, Goldman Sachs maintained a “Buy” rating while rising target price to $107. Most recently, Deutsche Bank increased the same value to $116, assigning a “Buy” rating also. Morgan Stanley, Mizuho and Argus are the other institutions that granted a similar rating to the stock throughout this year. In other words, a trend can be identified between the major financial institutions about Anadarko’s prospects for growth.
Management at Anadarko has only confirmed analysts’ suspicions. "Anadarko is uniquely positioned to build upon our multi-year track record of success and to deliver sustained growth and unmatched optionality in 2014 and beyond," said Anadarko Chairman, President and CEO Al Walker. To materialize those words, the firms announced plans to drill up to 25 high-potential deepwater exploration wells, as well as pursuing an active portfolio management and monetization.
Other important announcements concern capital investment. Anadarko plans to invest $8.1 to $8.5 billion, of which 60% of the funds will be used for US onshore opportunities focused mostly on oil. The remaining amount is to be distributed among international oil and gas activities. In all, capital spending remains at similar levels than the previous year, a tendency displayed by most independent exploration and production firms.
One of the keys to growth for Anadarko is reserve replacement, a policy that continues to develop through the expansion of its international activities in South America and Africa. Those operations are supported by a will to dispose of those non-core non-performing assets, granting overall performance security and prosperity. Most importantly, the firm continues to improve its cash balance and exhibit efficiency in terms of improving operating cash flow.
Currently Anadarko trades at 54.6 times its trailing earnings, carrying a 98% premium to the industry average. At the same time, the company has entered a debt reduction trend while keeping revenue and net income on the uptrend. Most importantly, gurus did find the stock attractive during 2013 and have increased their positions as well as new ones were started. Although the meetings have had an effect over the domestic market, through the tightening of capital investment and improving prospects for growth in the industry, the stock has stopped being a price wise investment. But, the greatest downside to the stock is its unresolved legal issues.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Stocks Discussed: APC,