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Energy Is Required for the 'Petro-Future'

October 14, 2013 | About:
Victor Selva

Victor Selva

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The oil and gas industry is highly competitive, and this could adversely affect companies’ profitability, as well as their ability to grow and manage their businesses. Companies have implemented strategies like expanding in international markets, redirecting capex toward rich projects and asset divestitures for growing. So let's take a look at two companies in this sector and see which one is doing better and is the best investment.

Anadarko Petroleum Corporation (APC) is one of the largest independent oil and natural gas exploration and production (E&P) companies of the world. With an attractive productive mix, the company is primarily engaged in the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs). The firm´s asset mix for proved reserves was 54% natural gas, 30% oil and condensate, and 16% NGLs in 2012.

International Operations & Megaprojects

Internationally, operations are located in Algeria, China and Ghana, and it also has exploration acreage in Ghana. It also has E&P facilities in Brazil, Indonesia, Mozambique, Liberia, Côte d Ivoire, Sierra Leone, New Zealand and Kenya. International operations represented 27% of 2012 revenues and 10% of total proved reserves at year-end 2012. The company announced discoveries off the western and eastern coasts of Africa, including natural gas discoveries in Mozambique and oil discoveries in Ghana. In 2013, it expects to drill approximately 40 development and 20 exploration wells, allocating approximately 15% ($1 billion) of 2013 capital expenditure to these areas, given their low-cost structure, attractive gas/liquids mix and continued prospects for growth

Regarding megaprojects, each of the three have good prospects. In the Jubilee field off Ghana, first oil has been brought on line. The company received approval for an oil exploration venture and is expected to bring online 80,000 barrels per day (MBbls/d) of production by 2016. The company's Caesar/Tonga project in the Gulf of Mexico came online in 2012, while its El Merk project in the Sahara Desert of Algeria is expected to contribute 30 MBbls/d of production by 2013.

In terms of valuation, the stock sells at a trailing P/E of x21.4, trading at a premium compared to the industry average of x18.1. Analysts’ expectations imply a forward P/E of 17.65. For the second quarter of fiscal year 2013, earnings performed favorably reflecting strong returns from its domestic and foreign assets. In addition, the strong cash flow makes the company double the dividend level to $0.18 per share which demonstrates its commitment to return cash to investors.

Restructuring the Business

Occidental Petroleum Corporation (OXY) is an integrated oil and gas company, with significant exploration and production exposure. Considering revenues reported in 2012, the three main areas were the U.S. (64% of 2012 net sales), the Middle East/North Africa (32%), and Latin America (4%). The company operates in three segments: Oil and Gas (73% of first quarter 2013 net sales), Chemicals (19%), and Midstream, Marketing and Other (9%).

Future Margins

The company's strategy is to divest in non-core assets and to maintain a low-risk portfolio and long reserve-life properties that provide a steady production-growth. Due to unfavorable commodity pricing, the company also took a few cost-cutting measures like production slash, removal of unproductive work-over rigs and planned shutdowns of plants. In May 2013, the company sold its interest in a Brazilian chemical facility, Carbocloro, for $270 million. This suggests that the company´s strategy is to focus on a few core areas, allowing the firm to leverage assets and experience.

In addition, the company has been expanding its business in the Middle East Region through acquisitions and joint ventures. Capex during the second quarter of 2013 were about $2.2 billion. As the company has strong asset-base in the U.S. and Middle East, I see growth driven by stable production from the Permian Basin and California, and from its international projects in Bahrain, Oman, Libya and Iraq.

Dividend-payment history affirms its commitment to maximize shareholder wealth. In February 2013, the company raised its quarterly dividend by 18.5% to $0.64 per share from its earlier payment of $0.54 per share. Occidental has raised its dividend each year in the last 11 years. The 10-year dividend compound annual growth rate is 16%.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.

Company ROE ComparedtoIndustry Mean (=0.0)
Anadarko Petroleum 11.6 Above
Occidental Petroleum 11.5 Above


It is very important to understand this metric before investing in a high-growth company.

Botton Line

Occidental´s earnings depend highly on crude oil price movements, which means in a declining oil price scenario, the shares will underperform in comparison to the peer group. On the other side, Anadarko has a low-risk and predictable production profile which seems more attractive for long-term investors.

Hedge fund gurus like Ray Dalio, Steven Cohen and Jim Simons added this stock to their portfolios, so I would advise fundamental investors to consider adding Anadarko Petroleum to their portfolios as it seems to be an attractive option for investors.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 4.0/5 (12 votes)

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