There are several oil and gas stocks that I have discussed in the last two months and the focus of my analysis has been on the company’s liquidity and balance sheet fundamentals. In my view, if the company has enough liquidity and a strong balance sheet to navigate the crisis, the stock is worth considering with a time horizon of three to five years.
Continuing with my discussion on quality oil and gas stocks, this article discusses Anadarko Petroleum (APC, Financial) primarily from a liquidity and balance sheet perspective. The key conclusion is that the company’s financial health is likely to remain robust in the next 12 to 24 months even if oil trends higher gradually. In line with this view, I expect the company’s key credit metrics to remain stable and I don’t expect any rating downgrade action in the coming quarters.
Anadarko Petroleum has $900 million in cash as of December 2015 and the company has monetized assets worth $1.2 billion as of February 2016. This translates into total cash liquidity of $2.1 billion as of March. With planned capital expenditure of $2.7 billion for FY 2016 (mid-range of guidance), Anadarko Petroleum is almost funded for the year just through existing liquidity.
Anadarko Petroleum, however, has embarked on divestment of non-core assets and the company expects divestment of $2 billion to $3 billion in 2016. With $1.3 billion in divestment already done, I expect another $1.2 billion to $1.7 billion of liquidity infusion through asset sales. Further, Anadarko Petroleum also expects cash flow from operations to be in the range of $2.1 billion to $2.2 billion for the year. In other words, Anadarko Petroleum is likely to close 2016 with total liquidity of $2.5 billion, and this also implies that the company is fully funded for the next 24 months.
Along with the cash liquidity buffer, Anadarko Petroleum also has $3 billion in five-year RCF and $2 billion in 364-day facility. While I don’t see the need for utilizing these facilities at this point in time, this can provide additional funding source if oil trends meaningfully higher and the investment program is accelerated. While S&P and Moody’s have a negative outlook on the stock, I don’t expect any downgrade considering the company’s financial health. A potential downgrade is only likely if oil trends below $30 per barrel again.
From a capital expenditure perspective, Anadarko Petroleum has scaled back significantly with U.S. onshore program declining from $3.6 billion in FY15 to $1.2 billion in FY16. However, I don’t see that as a worry with the company’s assets having bright long-term prospects. Just as an example, the Delaware Basin has 4,000 identified drilling locations with an attractive break-even.
The company’s sales volume is likely to be flat or marginally lower in 2016 with 50% reduction in capital expenditure. However, market participants are unlikely to focus on this factor in the coming quarters with the focus being on asset monetization and cost reduction.
Anadarko Petroleum has declined by 9.2% year to date, even when oil has trended higher and I see this as a good buying opportunity. While the stock might remain sideways to marginally lower for some more time, I see these valuations as worth considering. Further, it is also important to note that major oil producers will be meeting on April 17 to discuss production freeze and if there is some consensus in that meeting, I expect oil to trend higher.
Disclosure: No positions in the stock.
