Anadarko Petroleum - A Well-Positioned Portfolio

Sep. 3.14 | About: Anadarko Petroleum (APC)

Summary

The Wattenberg Field continues to benefit the company in the long term, as the company seeks to drill over 360 additional wells in the current year.

Additionally, Anadarko has a well-positioned portfolio of U.S. assets, and is determined to increase its liquid contribution to around 45 percent of the total production.

The company expects its 2014 capital budget to be around $8.6-$8.8 billion, and aims to retain the historical reserve replacement ratio of 150 percent.

However, the $15 billion LNG project poses certain risks, such as start-up delays and overrun costs.

During the second quarter of 2014, Anadarko Petroleum (NYSE:APC) was able to deliver record average daily production of 848,000 barrels of oil equivalent. The increase was primarily attributed to the Wattenberg Field. The company's acreage in the Wattenberg Field turned out to be the most productive asset within the U.S. onshore portfolio. The company reported net sales volume from the Wattenberg Field of 121 million barrels of oil equivalent, reflecting an increase of approximately 45 percent from the previous quarter's 83 million barrels of oil equivalent. Currently, the company is operating 5200 wells in the Wattenberg Field, and it plans to drill over 360 horizontal wells in the current year. In addition to the Wattenberg Field, the company's assets portfolio involves a position in U.S. onshore resource plays that include lucrative positions in the Rocky Mountains region, the southern U.S. and also the Appalachian Basin. It also carries out its operations in the Gulf of Mexico. The company has been trying to increase its focus on liquid-based production, and is positioned to deliver margin growth. Currently, Anadarko's liquid production contributes approximately 43.5 percent of the total production. However, the company is determined to increase the liquid contribution to around 45 percent of the total production within the next couple of years.

Going forward, the company expects the overall revenues to increase by 4 percent, primarily due to the increased production of oil and natural gas liquids. The company is confident in its portfolio's ability to deliver stronger results, and expects its full-year sales volume guidance to increase to approximately 5 million barrels of oil equivalent. On the other hand, Anadarko is not putting in any efforts to increase natural gas production. During the second quarter, the natural gas production fell by 1 percent, and is expected to decrease by more than 6 percent by the end of 2014.

Anadarko continues to develop its U.S. onshore plays and expect its 2014 capital expenditure to be around $8.6-$8.8 billion. The capital spending budget is directed towards strengthening the company's operations in the Wattenberg Field, Eagle Ford Shale and Wolfcamp Basin. So with the disciplined investments in both domestic and international ventures, the company is well-positioned to maintain its historical reserve replacement ratio. During the last five years, the company was able to post a reserve replacement ratio of approximately 150 percent.

LNG Project: A Risk that Needs to be Considered

The company is building two LNG trains in Mozambique. Moreover, the company had already signed long-term supply agreements for two-thirds of the capacity of the first train of the LNG project. The company estimates the gross cost of building these trains, along with required infrastructure, to be around $15 billion. However, there are certain risks associated with the successful completion of the project. There are concerns regarding whether or not the region has the suitable political climate to provide a stable investment environment. Moreover, in the past, these large-scale projects were also confronted with start-up delays and overrun costs. This poses a downward risk to the company's overall returns.

Concluding Remarks

Given the booming oil and gas production in the U.S., Anadarko Petroleum is all set to ramp up production across its diverse portfolio. Moreover, the company has been putting efforts into concentrating more on liquid-based production. The company continues to enjoy a lucrative position in the Wattenberg Field, and plans to drill over 360 wells in the current year. In addition, the company believes in sharing its success with shareholders. The investment thesis of the company is based on strong domestic and international production growth, which will be translated into dividend growth. However, investors are advised to keep a closer look on the ongoing LNG project and consider the above mentioned risks before making any investment decisions.

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.