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Earnings Miss, Legal Woes: Is Anadarko Still Attractive?
Posted by: Sarfaraz A. Khan (IP Logged)
Date: March 3, 2014 09:45AM

Oil and gas exploration company Anadarko Petroleum Corp. (APC) has been divesting its less productive assets as it refocuses on its lucrative operations in North America. Despite the asset sales, the company could consistently post increases in production on the back of some of its mega projects.

Recently, Western Gas Partners (WES) has revealed in its quarterly results that the company will acquire some of Anadarko’s natural gas assets for $375 million. This comes just a week after Anadarko agreed to sell its Chinese subsidiary for $1.075 billion to the Chinese energy company Brightoil Petroleum.

Increasing Production In Sight

On other hand, despite the asset sales, Anadarko could deliver 5% to 7% growth in production, each year, by 2020. This could come on the back of the startup of its major project called Lucius, its onshore assets in Texas and Colorado as well as the Jubilee oilfield located at Ghana and Algeria’s El Merk project. The company’s Heidelberg field could also boost Anadarko’s production by 80,000 barrels per day from 2016.

Anadarko’s Lucius facility, located in the deep-water Gulf of Mexico, will come online in the next quarter. Anadarko has finished installation of the 80,000-barrels-of-oil-per-day spar, which is a massive 23,000-ton structure. The topsides of the project, which will sit atop the spar, will be towed to the location in the current quarter.

A spar is an alternative to the traditional floating oil platform with large vertical cylinder with a supporting deck. It is used for deepwater oil drilling, production and storage operations.

Anadarko is the operator of Lucius with a 35% stake. Other players in the project are Plains Exploration and Production (PXP) with 23.3%, ExxonMobil (XOM) with 15% Apache Corp. (APA) with 11.7%, Brazil’s Petrobras SA (PBR) with 9.6% and Italy’s Eni (E) with a 9.6% stake.

The ongoing projects could power Anadarko’s production growth for the next several years. In its previous quarterly results announced earlier in February, Anadarko reported record levels of production. The company, however, reported a massive loss and missed analysts’ top and bottom line estimates as it braced itself for payments related to the 2006 acquisition of Kerr-McGee.

A Mixed Quarter

In the fourth quarter of 2013, Anadarko swung to a loss of $770 million, or $1.53 per share, from a profit of $203 million, or $0.40 per share in the same quarter of 2012. Meanwhile, Anadarko’s quarterly revenues dropped 2.1% to $3.33 billion.

The company recorded some significant one-time losses in the current quarter, particularly those related to Tronox (TROX). In all, these losses dragged Anadarko’s income by $1.145 billion. Excluding these items, Anadarko’s adjusted income came in at $375 million, or $0.74 per share.

Although in adjusted terms, Anadarko reported a profit, it failed to meet market’s earnings expectations by $0.18 per share and revenue estimates by $460 million.

The company has also witnessed an increase in its operating and exploration expenses, which further dragged its income.

The legal dispute in which Anadarko is caught relates to a subsidiary of Kerr-McGee, which was later spun-off as Tronox. Anadarko says that it could be liable to pay between $850 million and $5.2 billion. The company set aside $850 million in its quarterly results for the payment.

On a positive note, Anadarko witnessed record volumes. For the three months ending December 2013, Anadarko’s sales stood at 74 million barrels of oil equivalents, showing an increase from 68 million barrels in the comparable quarter last year. This was above analysts’ estimates of 71 million barrels of oil equivalents.

For the full year, Anadarko witnessed a 7% increase in sales volume to a record 285 million barrels.

The volume growth was driven by a strong performance in the U.S. where its annual production (2013) rose 25% from the previous year. A significant portion of this increase can be attributed to Wattenberg field, Eagle Ford Shale and East Taxes/North Louisiana horizontal plays.

However, due to softer pricing, Anadarko could not report any increase in revenues, despite the strong volume numbers.

Bottom Line

Anadarko Petroleum will likely continue growing its production level through the end of the decade. Its ongoing exploration projects in the Gulf of Mexico and Mozambique could drive its production growth.

On the other hand, the ongoing lawsuit can be damaging for its income as well as growth ambitions. The company says that it may have to pay up to $5.2 billion but a federal judge has ruled that Anadarko’s liability could be over $14 billion.

Due to the litigation, the company’s shares have been under pressure, dropping 8% in the last six months.

The company, however, has attractive assets overseas and is the biggest player at Eagle Ford. In the long term, the Tronox case will be history and Anadarko will likely continue to record higher volumes. Therefore, Anadarko can be attractive for long term investors.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.



Stocks Discussed: APC, WES, PXP, XOM, APA, PBR, E,
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