In my last article, I discussed the reasons to believe the positive momentum for oil is likely to sustain through 2017. Anadarko Petroleum (APC, Financial) is another stock in the oil and gas sector that is likely to outperform in the next 12 months and beyond.
It has been a strong year to date with the stock surging by 45%, but the upside is far from over.
I want to start my discussion with the news that Anadarko Petroleum sold operated and nonoperated upstream assets and operated midstream assets in the Marcellus Shale of north-central Pennsylvania to Alta Marcellus Development for a consideration of $1.24 billion. With this transaction, the company has closed monetization in excess of $5 billion this year. The key positive outcomes from this asset sale through 2016 are as follows:
- With the sale of assets in Marcellus Shale, the company has ensured that it minimizes its exposure to natural gas assets and focuses on oil assets, which is likely to yield strong results in fiscal 2017 and beyond.
- As of Sept. 30, Anadarko Petroleum had cash and equivalents of $4.0 billion and with the recent sale, the company’s cash position has swelled to $5.2 billion. This cash buffer will provide strong financial muscles for growth in the coming years. I must add here that Anadarko Petroleum also has $5.0 billion available under the RCF that adds to the liquidity buffer.
- Anadarko will now be focusing on onshore activities on world-class oil-levered assets in the Delaware and DJ basins. With quality assets and clarity on the way forward, the markets are likely to reward the stock in fiscal 2017 as oil also trends higher.
Further, Anadarko Petroleum announced on Dec. 15 that the company has closed the acquisition of Freeport-McMoRan (FCX, Financial) deepwater Gulf of Mexico assets. I see this development as positive and impacting the development of the Delaware and DJ basins in the following ways:
- With oil trending higher, the deepwater acquisition might have been well timed and if oil upside sustains, I see accelerated activity in the asset.
- The acquisition doubles Gulf of Mexico production to more than 160,000boed, and this will enhance cash flow from the asset. I am mentioning this because the cash buffer in the balance sheet along with cash flow from Gulf of Mexico will ensure that the Delaware and DJ basins development is accelerated in 2017 and beyond.
I mentioned the focus on the Delaware Basin above and just to put things into perspective, the asset is a multibillion-barrel oil play and Anadarko Petroleum expects production from the asset to surpass 130,000boed by 2021. Further, with a deep drilling inventory and low break-even, I expect accelerated development to sustain in the coming years if oil price remains supportive.
The outlook for the DJ Basin is equally attractive with the asset having 1.5bboe of net resources and 4,000 identified drilling locations. The asset has also witnessed sustained drilling and completion cost improvements, and the IRR will be attractive in the medium to long-term with the assumption that oil upside sustains.
Considering the company’s financial health, cash buffer and big assets under development, I am bullish on the stock for the next 12 months and also for the long term. I mentioned in my last article that oil has rallied for at least two years in the past instances of production cut by the OPEC. If this holds true, the next 24 months can be exciting for Anadarko Petroleum, and the company is well positioned to benefit from higher oil prices.
Disclosure: No positions in the stocks discussed.
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