As oil prices stabilize and trend higher with OPEC agreeing to cut its production in 2017, I believe Anadarko Petroleum (APC, Financial) is a good stock to buy at current levels. Anadarko’s stock has been affected by the sentiments of some analysts who believe the company did not get the best price when it sold its Marcellus Shale natural gas asset. I see this negative sentiment as a good buying opportunity. I will discuss some of the recent strategic acquisitions and divestitures of Anadarko, which I believe is a reflection of a focused vision and plan.
Anadarko Petroleum is involved in the exploration, development, production and marketing of oil and gas properties. Anadarko’s asset portfolio includes U.S. onshore resource plays in the Rocky Mountains, the southern United States, the Appalachian basin and Alaska. The company is also among the largest independent producers in the deepwater Gulf of Mexico and has exploration and production activities worldwide, including activities in Algeria, Ghana, Mozambique, Colombia, Côte d’Ivoire, New Zealand, Kenya and other countries. It is the global presence and total proved reserves of 2.1 billion barrels of oil equivalents as of Dec. 30, 2015, that makes it a rich resource play worth investing in.
Acquisition and divestiture plans
The company made many acquisitions and sales of some of the company’s assets during 2016. This is primarily to meet the company’s goal of focusing on its best assets and enhancing operational efficiencies along with an active monetization program. The oil and gas industry has been under immense pressure since 2014. To cope with the economic conditions and market volatility, some of the steps Anadarko took were to cut down on its capital allocation, focus on higher margin oil sales volume and monetize more than $5 billion of assets in 2016.
The company announced the sale of its Marcellus Shale natural gas asset to Alta Marcellus Development LLC for approximately $1.24 billion in December. This sale was another step that implies the company is stepping out of its natural gas business and focusing on its U.S. onshore activities and oil-levered assets in the Delaware and DJ basins. This was a crucial step as the I believe the current cash flow from Marcellus can be traded for potential cash flows from other assets bought in 2016.
The company successfully closed its deepwater Gulf of Mexico acquisition from Freeport McMoRan (FCX, Financial) for $2 billion on Dec. 15. The acquisition has doubled Anadarko’s ownership in the Lucius development to approximately 49% and will also double the production in the Gulf of Mexico to more than 160,000 barrels of oil equivalent per day.
The asset is estimated to generate substantial free cash flow that would facilitate increased investments in the U.S onshore business to achieve a five-year compounded oil growth rate of 10% to 12% at an oil price of $50 to $60. The deal would not require much of the company’s capital expenditure before delivering full production because Freeport McMoran has already spent significantly in the development of the asset. Therefore, I believe it will provide Anadarko substantial cash visibility with minimal investment.
Delaware and DJ basin outlook
From an asset perspective, Anadarko’s primary aim is to accelerate growth in the Delaware and DJ basins. Delaware Basin is expected to produce more than 130,000 barrels of oil per day by 2021, which is an approximately 40% CAGR for five-year oil production. By bringing well costs to less than $5 million per SLE and optimizing targeting, spacing and completions, the company aims to enhance both margins and returns at Delaware. Since 2014, Anadarko increased over 200 thousand barrels of oil equivalent estimated ultimate recovery per SLE well and approximately 50% decrease in SLE well cost.
Similarly, DJ Basin will also have 400,000 barrels of oil per day by 2021 with approximately 4,000 drilling locations. Anadarko has also been able to improve its margins here by reducing drilling costs by 45% and completion costs by 56% since fiscal 2015.
Improving balance sheet
Anadarko has been managing its debt efficiently and the credit profile should not be a reason of concern for investors. Anadarko has been able to reduce its debt, net of cash, from $14.9 billion at the end of fiscal 2015 to $11.9 billion in the third quarter of 2016. As discussed, monetization of its assets and acquisition of some rich resources in 2016 will further provide sufficient free cash flow to fund its capital expenditure requirements, pay dividends and pay off debt.
Conclusion
Anadarko Petroleum looks attractive at $70. With oil prices trending higher, Anadarko is likely to provide strong returns. Considering the management’s efficiency during the downturn and focus on core areas, I believe Anadarko has sufficient upside and can be considered a good long-term investment.
Disclosure: No position in the stock discussed.
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