Tullow Oil (TLW) announced on April 19 that exploratory wells in Sierra Leone and the Cote d'Ivoire encountered water bearing reservoirs that show signs of underlying oil. This is good news for Anadarko Petroleum (APC), as it shares Tullow's interests in both of these fields. At Kosrou-1 in Cote d'Ivoire, Anadarko has a 55% working interest in and is operator of Block SL-07B-11. At Mercury 2 in Sierra Leone, Anadarko has 50% working interest in and is operator of Block CI-105. The discovery will allow all companies working in these fields to update their models of the region and further refine targets for a hub class discovery, which at current oil prices could bring in record earnings.
On April 19, Anadarko also announced an extension of up to 1,500 acres in the Heidelberg field in the Gulf of Mexico, more specifically in Green Canyon block 903. Anadarko originally discovered the deepwater Heidelberg field in February 2009. At the time, estimates targeted 700 million boe in the field. Anadarko's recent discovery extends that estimate by a further 200 million boe.
Anadarko is also doing well onshore. Its operations at the Utica Shale in Ohio are bringing in promising early returns. Its Brookfield A-3H well is a front runner, producing 9,500 boe and 12 mmcf of high-BTU natural gas in its first twenty days. Considering that in the fourth quarter of 2011 Anadarko reported a significant 83% drilling success rate, I think this news indicates that Anadarko is on track to repeat its success in 2012.
On A Positive Earnings Trend
Like its competitors Marathon Oil (MRO) and Apache (APA), Anadarko is pursuing plays of shale for extraction and refinement. Its fourth quarter 2011 report revealed that these plays contributed over 10% of its total sales volume, compared to less than 1% in 2010. In my opinion, that Anadarko managed to do this while keeping its operational margins relatively unchanged is the truly amazing number. Shale plays are difficult to extract and refine at comfortable profit margins, nowhere more so than in the U.S., where regulatory restrictions are numerous and where Anadarko has many shale plays ongoing. In part because of these challenging plays, Anadarko finished 2011 with estimated proved reserves of 2.54 bboe, 71% of which are developed.
According to Anadarko, improvements in efficiency allowed the company to reduce the cost per stage by approximately 10% year over year. In my opinion, part of this efficiency gain can be attributed to Anadarko's growing experience with difficult extractions, so I fully expect Anadarko to be able to continue improving.
Anadarko operations in the Colville River Unit, on the Alaskan North Slope, produced 80,500 bopd during the fourth quarter of 2011 for Anadarko. Anadarko is expecting to expand its nearby Alpine West discovery late in 2012. The North Slope, edging Hudson Bay, represents a potentially profitable endeavor. Estimates are that there could be up to 2 bboe in the North Slope, up to 80 trillion cf of natural gas, and 500 mboe of liquid natural gas.
Current major interests in Colville are split between ConocoPhillips (COP) with 77.39% interest and Anadarko with 21.69% interest. ConocoPhillips and Anadarko also operate in the nearby (non-producing) Bear Tooth Unit in similar percentages. Other units in the North Slope are being operated by BP Exploration (BP), Exxon Mobil (XOM), and Chevron (CVX). All of these companies stand to benefit from increased revenues if the North Slope truly holds current estimated reserves.
Negative Sentiment Affects Some US Drilling Interests
Sentiment against Alaskan drilling in pristine areas is still strong. Recently, the US Senate rejected a bill that would have opened the Arctic National Wildlife Refuge and other areas to oil and gas exploration, though the US House of Representatives passed the measure before it went to the Senate. Drilling on the North Slope is also frequently opposed by environmental groups, so much so that Royal Dutch Shell PLC ADR (RDS) recently sought declaratory (i.e., before-the-fact) relief against any lawsuits by environmental groups challenging its right to drill in the Chukchi Sea.
Incidents like Repsol YPF'S (not traded in the US) months-long cleanup of a blown out well do not inspire confidence in environmentalists or stockholders, especially after the Macando oil spill that followed the Deepwater Horizon disaster. A similar disaster in the North Slope could result in a similar moratorium to that which occurred after the Deepwater Horizon incident. This could negatively impact all oil company's stock. In Anadarko's case, a very slim margin of its production comes from the North Slope, but a North Slope spill and attendant public relations issues from any of the majors could have a negative effect on its stock prices.
Current Outlook
Anadarko is currently trading around $72 per share, with a forward price to earnings of 14.0. I believe that in Anadarko's situation, its price to book, currently at 2.0, is a better measure of relative price, considering that its most recent reported earnings per share were reduced by a $4 billion write-down related to its settlement with BP over the Macando oil spill.
BP is not rebounding from Macando as well as Anadarko, in part because it is still incurring costs related to litigation and clean-up efforts. BP is currently trading around $43 per share, with a forward price to earnings of 5.3 and a price to book of 1.2. By price to book this makes BP cheaper than any of the majors in this industry. ConocoPhillips comes in at a price to book of 1.4 at around $73 per share, and Chevron comes in with a price to book of 1.7 at around $103 per share. Compare this again to Anadarko's price to book of 2.0. While more expensive than its peers, Anadarko is returning better revenue growth and better growth prospects.
Between its increasing operational inefficiencies, successful international explorations, and productive U.S. plays that offer a hedge of political stability against international operations, Anadarko is well positioned for upward stock movements. I believe that analyst median targets are reasonable at $103, and with its competitors overall slower to move on alternative energy extraction, I think it's reasonable to anticipate Anadarko will outperform its peers over the next year. At current levels it's an attractive stock to own. Anadarko will release first quarter 2012 results on May 1.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
