Anadarko's Deep Water Prospects

The stock of buy-recommended Anadarko Petroleum (APC) has been trading above its 200-day average in May 2009 for the first time in more than nine months. While stock price is the catalyst for us to restore our buy recommendation, a low McDep Ratio provides the fundamental rationale. By our analysis, APC offers unlevered appreciation potential of 27% to a McDep Ratio of 1.0 and levered appreciation potential of 45% to Net Present Value (NPV) of $70 a share.

During the first quarter, according to results released late last night, the company generated cash from oil and gas production of about $16 a barrel of oil equivalent as the difference between price of about $29 and cash operating costs of about $13. Unlevered cash flow (Ebitda) matched our expectations from three months ago. We project gradual increases in Ebitda in the next few quarters. Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil.

Pointing to expected oil price recovery, futures prices for the next six years averaged near $71 a barrel recently. In addition to an improving industry outlook, Anadarko stock price performance may benefit from future news on oil exploration in deep waters offshore Africa, Brazil and in the Gulf of Mexico.

Originally published on May 7, 2009.