Anadarko Petroleum: Boasting Strong Growth Profile

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The Woodlands, Texas-based Anadarko Petroleum (NYSE:APC) held its first investor day in almost two years and discussed both its short-term and long-term goals. The company reiterated its long-term growth of 5 percent to 7 percent assuming minimal dry gas investment and initiated 2014 guidance calling for 6 percent to 7 percent growth from continuing assets with $8.1 billion to $8.4 billion in capital spending before its controlled midstream subsidiary. Both the company’s ongoing operations and potential projects offer significant potential. Moreover, similar to its peers, Anadarko possesses meaningful upside potential in North American shale plays.

Onshore operations driving growth

Anadarko’s onshore production volumes are expected to increase by 9 percent to 10 percent in 2014. The onshore operations contributed nearly 75 percent of the production in 2013. Similarly in 2014, majority of the production is expected to come from the onshore activities. The onshore operations are expected to take the major chunk (60 percent) of the 2014 capex of $8.1 billion to $8.5 billion, representing an increase of 7.8 percent from the $7.7 billion spent last year. Moreover, APC has scheduled at least fifteen new well-planned exploration wells on the prolific U.S. Gulf of Mexico and Mozambique, which should further increase its operational capacity.

Strong asset base

Anadarko represents a very strong asset base. The company has posted strong results over the past year and is unique among its peers in maintaining a high-risk but high-potential exploration program around the globe. APC’s 2013 production from Wattenberg was much better than expected, and combined with the healthy returns from the newly established Eagle Ford, pushed Natural Gas Liquid’s (NGL) production well above the expectations. Going forward, the company expects more than 20 percent growth from Wattenberg by 2018.

Strengthening financial position and asset optimization

APC’s liquidity position and cash flow generation is also likely to strengthen in the future. Cash flow from operations is expected to surpass capex for the year. Moreover, the company recently sold its Chinese subsidiary for $1.1 billion and Mozambique and Pinedale/Jonah assets for $2.6 billion, further strengthening its financial positions. The strengthening position of FCF and liquidity in future should provide APC with an increasing ability to strengthen its underlying NAV once the Tronox litigation is resolved.

The asset swap in Wattenberg is expected to generate cost saving synergies for APC. The company’s aptitude of merging its different operations is also likely to work a great deal in its favor. APC is pulling its strategic levers. The company is buying back shares and accelerating its growth potential largely through its onshore operations. The company is constantly strengthening its asset portfolio through selling its assets (approx. $10 billion in prior five years). APC’s active portfolio management approach continues to add value through asset monetization’s and strategic midstream strategy.

Tronox case remains an overhang

The impact of Tronox proceedings plays a key role in the valuation of Anadarko. The final amount of liability will be known in second-quarter 2014 but as the liability is probable, the company has accrued a loss of $850 million in its fourth-quarter 2013. Even if the final liability is on the higher end of the Judge Grooper’s estimates of $5 billion to$14 billion, investment in APC would still be less risky given the tax shield and discounted settlement of the liability. Moreover, seeing APC’s potential in portfolio management, conservative capital structure, relatively liquid midstream assets and 2014 growth potential, the company would still be boasting a strong profile even after a huge Tronox liability payment.

Conclusion

A notable feature of APC is its ability to exploit the key competitive strengths of E&P giants like major project planning and development and expensive offshore activities, etc., while retaining the entrepreneurial nature of business. The company also a significant potential in North American shale plays. APC is not only boosting promising results in the near-term, it is poised to deliver at least 5 percent to 7 percent long-term production growth that took in a capital efficient manner. Although the Tronox case remains an overhang for APC, the company has significant growth potential. Moreover, any decrease in share value would have already reflected in the price, given the announcement regarding the Tronox liability was made in the last quarter of 2013.

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