Anadarko Petroleum (APC, Financial) announced yesterday the sale of its Eagle Ford Shale asset in South Texas for approximately $2.3 billion to Sanchez Energy Corp. (SN, Financial) and Blackstone Group (BX, Financial).
The sale of this asset, along with the previous sale of its Marcellus Shale asset, will greatly benefit the company. As of Sept. 30, 2016, Anadarko had cash and equivalents of $4 billion. With the sale of its Marcellus Shale and Eagle Ford Shale assets, the company’s cash buffer is likely to swell to $7.5 billion. In addition, Anadarko has $5 billion in undrawn credit facility. Considering a total liquidity buffer of $12.5 billion and that operating cash flows will provide additional liquidity, Anadarko is fully funded for aggressive capital expenditure for the next 24 months.
In the Delaware Basin of West Texas, Anadarko reported sales volumes of 49,000 barrels of oil equivalent per day. This represents a 43% year over year increase and a 19% increase in sales volume as compared to the prior quarter. Further, oil sales volumes increased to 27,000 barrels of oil equivalent per day, an increase of 60% on a year over year basis. Anadarko is targeting a sales volume of 130,000 barrels per day by 2021 from the asset. In the next five years, the company expects oil volumes to increase at a compound annual growth rate of 40%. There is no doubt the asset can deliver these targets. The only hurdle would have been potential constraints in financing. With its current liquidity buffer, I see the company moving smoothly towards its target, which will ensure the stock moves higher.
In the DJ Basin of Colorado, Anadarko reported a sales volume of 248,000 barrels of oil equivalent per day for third-quarter 2016. This represents a year over year volume increase of 28,000 barrels per day. With 1.5 billion barrels of oil equivalent of net resources and 4,000 identified drilling locations, Anadarko is on target to achieve sales volumes of 400,000 barrels of oil equivalent per day by 2021. The asset has been delivering better margins and as sales volumes increase, I believe the margins will continue to improve. Again, the key factor here is the company’s ability to accelerate investments and from that perspective, Anadarko has done exceedingly well in preserving liquidity and keeping credit metrics strong.
Based on these factors, Anadarko has a clear plan for the next five years and the company’s execution of the plan has been excellent in the recent past. The asset sales will ensure efforts are more concentrated, which will help boost production and assist in cost control.
I want to renew by bullish view of Anadarko Petroleum because oil is trending higher and I expect oil to be above $60 per barrel in the second half of 2017. With Anadarko Petroleum moving aggressively towards oil-weighted assets, the benefits are likely to be realized in the coming years.
In conclusion, Anadarko Petroleum is worth considering for the next few years. Even if oil surges higher, I do not expect a meaningful increase in dividends, but I do expect stock upside to be robust. Anadarko Petroleum is likely to be one of the outperformers in the oil and gas industry. The key risk factor remains oil price volatility, but I am of the view that oil is in a bull market after bottoming out below $30 per barrel in January of 2016.
Disclosure: No positions in the stock.
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