In this article, let's take a look at Anadarko Petroleum Corporation (APC, Financial), a $56.08 billion market cap company, which is 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. Internationally, 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. In 2013, it expects to drill approximately 40 development and 20 exploration wells, allocating approximately 15% ($1 billion) of 2013 capital expenditure to these areas, given their low-cost structure, attractive gas/liquids mix, and continued prospects for growth. Further, it also has E&P facilities in Brazil, Indonesia, Mozambique, Liberia, CĂ´te d Ivoire, Sierra Leone, New Zealand and Kenya. It also has operations in the Gulf of Mexico.
Good Prospects
The company received approval for an oil exploration venture and is expected to bring online 80 thousand barrels per day (MBbls/d) of production by 2016. The company's Caesar/Tonga project in the Gulf of Mexico came online in 2012, while its El Merk project in the Sahara Desert of Algeria is expected to contribute 30 MBbls/d of production by 2013.
Other Attractive Elements
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 of maintaining minimum debt, as well as its permanent intention on delivering above-average returns on capital, make the balance sheet appears to be strong.
Major Risks
The main risk is a substantial drop in oil and gas prices. Other risks include delays and cost overruns on Anadarko's long-dated deep-water projects, execution risk, some political instability in specific regions or regulatory issues.
Revenues, Margins and Profitability
Looking at profitability, the revenue growth (16.67%) has outpaced the industry average. The gross profit margin is very high (73.54%) and it has increased from the same quarter the year before. However, the net profit margin of -61.52% is in-line with the industry average. Earnings per share decreased in the most recent quarter compared to the same quarter a year ago.
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 | 3.66 |
| COP | ConocoPhillips | 17.58 |
| OXY | Occidental Petroleum Corp. | 13.69 |
| Industry Median | -1.03 |
The company has ratio of 3.66% which is higher than the industry median, but lower than 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 2.9x versus the industry average of 1.78x while the price-to-sales ratio of 3.4x is below the industry average of 4.62x.
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 $25.412, that is a 20.5% 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 deep-water, international operations, unconventional assets and growth prospects, may offset almost every negative scenario.
Although ROE and EPS are not in good trends, 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 Leon Cooperman (Trades, Portfolio), Kyle Bass (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), David Dreman (Trades, Portfolio), John Keeley (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), David Einhorn (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
