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Anadarko Petroleum: Production Growth Will Continue From Rich Assets

July 07, 2014 | About:
Value Investor

Value Investor

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Company Overview

Anadarko Petroleum Corporation (APC) is engaged in exploration, development, production and marketing of oil and gas properties. The company operates in some of the mineral rich areas like the Rocky Mountain region, Gulf of Mexico and Appalachian Basin. The company is also strategically present in other international locations like Brazil, Ghana, Indonesia and Mozambique among others.

The article will discuss how global diversification of the company and expanding projects with clear growth prospects makes Anadarko Petroleum an attractive investment.

Portfolio Of Rich Assets

Wattenberg HZ

Anadarko Petroleum plans to have a robust investment in the Wattenberg fields. It is expected to be the best investment on the U.S onshore suggesting exceptional growth and returns. The company currently operates 13 rigs in the region with more than 360 wells drilling, equivalent to 450 plus Type wells.

This has led to an estimated 1 to 1.5 billion barrels of net resources which would lead to prove reserves for the company. Further, since the region has 5,000 plus vertical wells, there is no geological risk for the company as well.

Source: Company Presentation

With the optimization of Lancaster plant along with putting additional compression resources, the company expects robust growth from Wattenberg region in fiscal 2014. This would also have an impressive impact on the top line growth.

Eagle Ford

Eagle Ford is again one of the rich resources of the company. Location has been the most important growth driver here; this is why the company has completed drilling of more than 1,000 wells and has 2,500+ wells left to be drilled.

For fiscal 2014, Anadarko estimates to drill approximately 400 well with 10 rigs in operation. Also, the company is strategically expanding from the central region to south and east. This has had a considerable impact on the sales volume of the region and is expected to increase the volume in the future as well.

In addition to increasing sales volume cost per well has also considerably reduced with increased drilling efficiency. All in all, Eagle Ford is another marquee of asset for the company with huge potential yet to be explored.

Strategic Capital Allocation

What I like about Anadarko is their well planned capital allocation. If you look at the below graph, it becomes clear that the majority of the company’s investment goes in to short cycle projects.

Approximately 70% of the estimated $8.4 to $8.8 billion capital expenditure in fiscal 2014 has been allocated to U.S onshore projects. This is because projects like Lucius and Heidelberg will start with their first production in fiscal 2014. Also, these allocations are to take advantage of the 8+ BBOE development opportunities present in short projects of Mozambique, Wattenberg etc. These are short cash cycle projects which would provide an upside value to the company’s existing opportunities. In addition to this liquid production from U.S onshore and international projects is estimated to increase at a CAGR of 5-7% from 2013 to 2020 providing huge growth opportunities.

Souce: Company Presentation

Further, approximately 15% of the capital expenditure has been allocated to projects with two to five years durations and 10% to high risk and higher impact projects as evident above. This represents a strategic allocation with an effective replenishment cycle.

Valuations

Based on an important valuation metric for Oil and gas exploration companies Anadarko is trading at attractive valuations. EV/EBITDA for Anadarko is only 6.9 whereas peers EOG Resources (EOG) and Canadian Natural Resources (CNQ) are trading at EV/EBITDA of 8.5 and 7.4 respectively. Also, analysts estimate earnings growth of 36% for fiscal 2014. With a forward PE 2014 of 20, the company is currently trading at a PEG 0.6. Thus, trading at a value below 1 indicates that the company is undervalued and can be a good value investment.

Conclusion

Anadarko has gradually been transferring its growth from mostly gas driven in the past five years to oil driven projects. This is evident with some of the company’s big projects in Gulf of Mexico.

Considering this strategic shift and careful allocation of investments in Gulf of Mexico and international projects, the company would enhance value for shareholders. I thus believe the stock has considerable upside potential and is be a good value investment.

About the author:

Value Investor
A value investor.

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