Anadarko Petroleum (NYSE:APC) has scheduled its Q2 earnings release for next Tuesday (7/26). The company is one of the largest independent players in the oil & gas exploration and production sector with around 2.4 billion barrels of oil equivalent in proven reserves with operations spread across the U.S., Western Africa, China and Latin America. We believe that the sales volumes and EBITDA margins in the crude oil and condensate business will be important factors in determining the upside and downside potential to our $75.30 price estimate for the stock which is roughly 5% below the current market price. Anadarko competes with oil majors such as Exxon Mobil (NYSE: XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and independents such as Chesapeake Energy (NYSE:CHK).
High oil prices signal upside
With crude oil prices continuing to hover above $90 on supply disruptions in Algeria and global demand, revenues for Anadarko from sales of oil and condensate are expected to show strong growth this quarter. Sales volumes of liquids should also increase as exploration and production activity in the U.S. has shifted to liquid rich shale plays. The company reported that 76% of its sales volume from the Eagleford shale comprised of oil and natural gas liquids and it planed to drill more than 200 wells in the basin this year. Anadarko expects to ramp up the production of liquids from around 40% of total output in 2010 to around 47% by 2014. It also forecasts that its oil and gas production will increase at a compounded rate between 7-9% over the next few years. 
(Chart created by using Trefis' app)
Another strength of the company is that it has a reserve replacement rate greater than 100% and is actively targeting further exploration in onshore and offshore U.S. as well as in deepwater prospects in Africa, southeast Asia, Brazil and New Zealand.
Natural gas pricing continues to remain an issue
The shale gas boom in the U.S. has helped to suppress natural gas prices. Gas prices will remain at the present levels with the EIA estimating that the natural gas production in the U.S. would expand by 5.8% in 2011 over the previous year.  We estimate that natural gas production contributes to 31% of our target price for Anadarko. Low pricing will result in a stagnating EBITDA margins in the natural gas production business pulling down the valuation of the company. However higher production volumes will support overall revenue growth.
Disclosure: No positions