In the recent past, I have discussed few companies in the oil and gas sector as I believe that the industry is bottoming out. Therefore, investors can consider some exposure to quality stocks. In particular, I have focused on stocks that have a solid balance sheet along with a quality asset base. Anadarko Petroleum (APC, Financial) is another quality long-term investment, and this article discusses the key factors to be bullish on the stock with a 3-5 year investment horizon.
I mentioned that the company’s balance sheet is a key consideration, and Anadarko has $16 billion in debt as of June. I will start with the balance sheet analysis before talking about the assets and production. While leverage is important to analyze, I am more interested in the company’s debt servicing power. If debt servicing capability is strong, the company’s balance sheet health is likely to remain strong.
For Anadarko, the company reported $2.4 billion in consolidated adjusted EBITDAX for 1H15, and this implies an annualized EBITDAX of $4.8 billion. In terms of debt servicing, the total interest expense for 1H15 was $417 million; even if the annual debt servicing is assumed at approximately $850 million, Anadarko has EBITDA interest coverage of 5.6. This shows smooth debt servicing capability and the flexibility to leverage further for growth.
The second point related to the company’s balance sheet is the overall liquidity position. As of 2Q15, Anadarko had $2.2 billion in cash and equivalents, and the company is likely to receive proceeds of $440 million from the Bossier divestiture. Therefore, the total liquidity is at $2.6 billion. In addition, the company has $3.0 billion in unsecured credit facility and $2.4 billion available under the commercial paper program. The total liquidity along with potential cash flow for the next 18 months will ensure that Anadarko is fully funded for 2H15 and 2016 capital expenditure.
Coming to the company’s asset base, the Wattenberg asset is estimated to hold 1 billion to 1.5 billion BOE of recoverable resources and is just one of the long-term cash flow assets the company owns. The company’s assets in Eagle Ford and Marcellus also have robust production currently and will continue to deliver long-term cash flows. To put things into perspective from a drilling and long-term production outlook perspective, Wattenberg has 4,000 identified horizontal drilling locations, Eagle Ford has 2,000 identified drilling locations and Delaware Basin has 5,000 identified drilling locations.
In addition, Anadarko has assets in Ghana, Algeria and Mozambique. These assets can deliver robust returns in the long term. However, I must mention here that I see geopolitical risks associated with African assets, and investors need to discount that factor.
I also believe that Anadarko will continue with its strategy of asset divestiture and this will be an additional source of cash flow that will be deployed in accelerating developments in core assets. Overall, the company’s asset base is excellent, and the company is operating in regions that have a proven record of delivering value.
While the company’s capital expenditure for FY15 is estimated at $5.4 billion to $5.7 billion, I expect acceleration in investment plans if oil trends higher in 2016. I must also add here that Anadarko expects 100% reserves replacement for 2015. Therefore, there are several positives, and I believe that these factors will combine to take the stock higher over the next 3-5 years.
Anadarko also has current dividend payout of $1.08 per share, and I see this payout sustaining through 2016 considering the company’s investments that will translate into incremental cash flows. Anadarko has corrected by 16% in YTD15, and I see minimal downside from these levels while the upside potential can be significant. Investors still need to consider gradual exposure to the stock and further positions in the oil and gas industry can be considered once there is clarity on the supply potential from Iran in 2016.
