In this article, let's take a look at Anadarko Petroleum Corporation (APC, Financial), a $56.08 billion market cap company, one of the largest independent exploration and production companies in the world.
International operations
The portfolio of the company includes interests in nearly 60 million net acres in the U.S. and abroad. Talking about domestic assets, it is included established gas and liquids-rich plays in the Rockies and significant positions in the Eagle Ford, Haynesville and Marcellus shales and Permian Basin.
When looking abroad, operations are located in Algeria, China and Ghana, and it also has exploration acreage in Ghana. The firm recently announced discoveries off the western and eastern coasts of Africa, including natural gas discoveries in Mozambique and oil discoveries in Ghana. Further, it has positions in a number of plays in the Rockies, Mid-Continent and Gulf Coast.
Looking forward
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.
Looking forward, the success with its deepwater program should provide opportunities to increase reserves and production. Also, a number of opportunities throughout Africa or the Gulf of Mexico will appear.
Other regions
Anadarko controls more than 1.2 million net acres across the Eagle Ford, Haynesville, Marcellus, Delaware Basin and horizontal Wattenberg areas, and plans to increase capital to these assets. It will not being a surprise that the firm could reach for unconventional U.S. assets a 60% of production.
Good management
Management's decision to maintain minimum debt, as well as its permanent intention to deliver above-average returns on capital, make the balance sheet appear to be strong.
Revenues, margins and profitability
Looking at profitability, revenues grew 27.47% but were not enough to reach a positive growth on earnings per share, which has decreased in the most recent quarter compared to the same quarter a year ago ($0.45 vs $1.83). The gross profit margin is very high (70.76%), and it has decreased from the same quarter the year before. However, the net profit margin of 5.17% is in line with the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| APC | Anadarko | -14.45 |
| COP | Conoco Phillips | 17.62 |
| OXY | Occidental Petroleum Corp. | 14.13 |
| Â | Industry Median | 0.65 |
The company has ratio of negative 14.45% which is lower than the industry median and the one of Occidental Petroleum Corp. (OXY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so ConocoPhillips (COP, Financial) looks attractive. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 2.4x versus the industry average of 1.36x while the price-to-sales ratio of 2.6x is below the industry average of 3.33x.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $13,525; that is a 6.2% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the company´s portfolio includes a mix of oil and gas and near-term and longer-dated assets, which should help mitigate risks, for example, commodity prices.
Several catalysts such as the low-cost domestic assets, oil-rich deepwater, international operations, unconventional assets and growth prospects may offset almost every negative scenario. The main risk is a substantial drop in oil and gas prices. Other risks include delays and costs on long-dated deepwater projects, and some political instability in specific regions.
Although ROE and EPS are not trending well, for all the other reasons we discuss, I feel bullish on the firm’s prospects in both the short and long term, so I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund gurus like Jeff Auxier (Trades, Portfolio), Jim Simons (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Paul Singer (Trades, Portfolio), John Burbank (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Ron Baron (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014, as well as Pioneer Investments (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
