Is Anadarko Petroleum Overvalued Or Should You Buy Now?

Jul. 7.14 | About: Anadarko Petroleum (APC)


Anadarko has seen its stock skyrocket from $80 in April to around $110. The rise was mostly due to the settlement of a US Justice Department case.

The financial metrics look good for Anadarko. Among these metrics are EV/EBITDA, Return on Capital, and Debt to Equity (even with the new bond issue).

Anadarko is a strong player in many major finds throughout the world, including Eagle Ford and Marcellus Shale.

Catalysts for an increase in stock price include; issues in the Middle East, a possible merger/acquisition, and high net asset value per share.

Anadarko Petroleum Company (APC) is a solid company, with great prospects in the Eagle Ford, Gulf of Mexico, and Marcellus Shale areas. After the US Justice Department issues were settled for 5.15 billion back at the start of April, Anadarko has spiked from $80 per share to the $100 range. While many investors were looking for a slight dip to purchase more shares, Anadarko saw an even greater increase through June on rumors that Exxon (XOM) might be a possible purchaser.

Now, this Monday July 7th, Anadarko is going to close on the following bond offering:

Anadarko Petroleum Corporation today announced it has priced its registered public offering of $1.25 billion aggregate principal amount of senior notes comprised of $625 million 3.450-percent senior notes due 2024, and $625 million 4.500-percent senior notes due 2044.

With Anadarko closing on this new bond offering of roughly $1.25 billion, we can expect the market to react positively. It is most likely that as Anadarko builds momentum, a lower price for investors to initiate a position will become increasingly unlikely.

Financial Metrics:

EV/EBITDA - Here is the EV/EBITDA for APC against some comparables:

APC EV to EBITDA (Forward) Chart

APC EV to EBITDA (Forward) data by YCharts

At 5.61 the EV/EBITDA multiple is favorable for Anadarko versus Chesapeake Energy (CHK) at 6.43 and Devon Energy (DVN) at 6.93. Anadarko is therefore the better buy of these three companies, however they are all rather low for general purposes of the EV/EBITDA ratio. It should be noted that on July 5th these metrics were reversed incorrectly by a Motley Fool article which came to a correspondingly different conclusion with respect to APC's value proposition.

Management Effectiveness:

In order to gain a perspective on the ability of management to effectively allocate capital we can take a look at the Return on Capital Employed:

APC Return on Capital Employed (Annual) Chart

APC Return on Capital Employed (Annual) data by YCharts

At 5.66% Anadarko appears to be coming out ahead of both Chesapeake and Devon. It is a good indication that Anadarko's management team can effectively utilize their capital better than their peer group.

Debt to Equity:

As indicated at the beginning of this article, Anadarko is planning on acquiring additional debt. So how does the debt-to-equity situation look?

APC Debt to Equity Ratio (Quarterly) Chart

APC Debt to Equity Ratio (Quarterly) data by YCharts

Once again, with respect to its peer group, Anadarko is looking better at 0.71 versus Chesapeake at 0.79 and Devon at 0.76. With Anadarko's equity currently at roughly 21 billion, we would see an increase in the debt-to-equity of roughly 6% after the additional $1.25 billion series of notes are issued on Monday. An additional 6% would bring Anadarko over Devon but under Chesapeake with respect to this metric. This increase of debt to equity however will not be a bad thing for Anadarko as it should increase the Return on Equity for the company.

Qualitative Factors:

Eagle Ford:

Hands down, it's good to be in oil these days. With Anadarko this is no different. Anadarko has exposure to Eagle Ford in Texas and their revenue from this is ever increasing:

According to Anadarko's Fact Sheets on the subject:

Anadarko holds approximately 400,000 gross acres in Dimmit, LaSalle, Maverick and Webb counties and has a regional office location in Carrizo Springs... The company operates more than 350 miles of oil and natural gas pipeline throughout the region.

After $30 billion in capital was invested into the infrastructure of the area during 2013 to support expansion efforts, the Eagle Ford area is primed for yielding ever increasing revenue for the major players such as Anadarko.

Marcellus Shale:

Another reason to buy Anadarko is its ownership of Marcellus Shale natural gas rights.

The company holds approximately 260,000 net acres in Centre, Clinton and Lycoming counties, with additional non-operated activity in Potter, Sullivan and Tioga counties. In the fourth quarter of 2013, Anadarko produced more than 553 million cubic feet (BCF) of natural gas per day.

And from the fact sheet on Marcellus Shale:

At the end of 2013 Anadarko had 2.79 billion barrels-equivalent of proven reserves.

Here is the map showing the area operated by Anadarko:

Both Marcellus Shale and Eagle Ford are only highlights of the larger portfolio of assets currently owned by Anadarko. However from just Eagle Ford and Marcellus Shale, one can see that Anadarko will continue to see solid growth during the next 10 years.


Here are the Catalysts that will cause the stock price of Anadarko to go up:

1. Continued upward pressure on oil prices provides strong support for a higher stock price for Anadarko. While not all revenue for the company is derived from oil, the price per barrel continues to go up due to instability in Iraq. This will only help to ensure an increase in both revenue and income for Anadarko which will only push the stock price higher in future months.

2. Possible acquisition by a larger company also serves as a catalyst for the stock price to increase. At $54 billion in market capitalization Anadarko has reached a size where there are only a few companies that would consider this a likely move. Exxon Mobile was the company originally thought to possibly be interested in Anadarko around mid-June. This caused the stock price to reach a 52 week high from which it has recently receded. However Chevron (CVX) and BP (BP) are also possible candidates.

Exxon Mobile however is the largest by market cap out of the potential companies that might consider Anadarko. Additionally Exxon Mobile has had most of its activity in Eagle Ford developed through a 2010 acquisition of XTO Energy. In other words, the Exxon Mobile activity does not appear to have been organically generated. As the logic goes, if Exxon Mobile was willing to acquire XTO Energy in 2010 with major stakes in Eagle Ford, then perhaps Anadarko is the next candidate. The XTO Energy acquisition was a $41 billion dollar merger. While a potential Anadarko merger would come with a higher price tag, it is certainly a possibility with market cap of APC at roughly $54 billion currently.

3. Expansion of current Net Asset Value is our third catalyst for this stock. The opposing view with respect to mergers and acquisitions, is that it is unlikely since management would require a premium on the price per share.

As a summary of the JP Morgan note from June 12th in response to the possibility of an Exxon Mobile takeover indicated:

Anadarko takeover by Exxon Mobile, as rumored during the trading day yesterday, is not likely. The firm [JP Morgan] notes that Anadarko listed its net asset value in March at above $140 per share. As such, the firm thinks management could require a premium to the NAV in a corporate takeover.

So perhaps a merger/acquisition is not in the cards for Anadarko, however this is hardly a bad thing. As is clearly stated by JP Morgan, the NAV per share is roughly $140 and this has assuredly increased since that time as oil prices have reached a high year-to-date which ought to have increased the NAV. If this is the case, then perhaps a merger will not happen, but this fact all by itself will serve as a catalyst to push the stock price higher.

In the case of Anadarko therefore, it would seem that almost any scenario will result in a higher stock price within the near future.

Analyst Expectations:

The price target consensus estimate of the analyst community is roughly $115 which shows a short-term upside of roughly 6%.

However after running my own regression analysis (email me if you want the excel file) on 136 different analyst price targets made over the last two years, and plotting these against the subsequent price averaged over a month after the price target announcement, I had the following:

Click to enlarge

As you can probably determine from a quick visual estimation of the chart, the analysts are really all over the place with respect to the subsequent average actual price. There is some correlation, but not much.

While analyst price targets are meant for an entire year, often times a model can be created that shows some correlation between both the price target and the actual price over the short term. In this case there was an R^2 of roughly 25% which would indicate that, all analyst recommendation being equal, that analyst price targets are good about 25% of the time with respect to Anadarko.


With the analysts being correct roughly 25% of the time, Anadarko seems to stand a fair chance of increasing much more then what analyst price targets are currently indicating. Not that the analyst community does not already rate APC as a buy, but perhaps the upside is understated currently with respect to price targets.

Anadarko also has a strong EV/EBITDA against its peer group which shows that Anadarko might provide good value for an investor at current price levels. The management also show a strong ability to yield higher returns on invested capital then the peer group. While additional debt is going to be added to Anadarko, this really only brings it more in line with its peer group with respect to the Debt-to-Equity ratio (shown above).

Anadarko is a strong player in many major finds throughout the world especially, as highlighted within this article, Eagle Ford and Marcellus Shale. With a high NAV Anadarko shows a strong value at current price levels whether it is eventually acquired by a larger company or not.

In almost every possible scenario, Anadarko is a buy. If the company is acquired (or if an attempt is made) that will drive the price up. If it is not, then Anadarko continue to increase the NAV and generate higher yielding assets. In the meantime, with the price of oil continually going up, it is hard to think of a better time to buy Anadarko.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.