Anadarko Petroleum Benefits from Favorable Production Trend

Buy-recommended Anadarko Petroleum (APC) offers unlevered appreciation potential of 16% to estimated net present value [NPV] of $74 a share concentrated 56% on U.S. natural gas. Third quarter results reported late last night disclosed a favorable production trend to benefit from higher prices ahead.

By a margin that covers tax increases on Algerian oil, NPV is well supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). A recent change in accounting to expensing exploration has no impact on our valuation that relies on underlying cash flow rather than reported earnings.

We are disturbed that a master limited partnership holding natural gas gathering facilities to be sold to the public in the next several weeks may use misleading accounting. That potential ethical negative may be subsumed by APC’s NPV upside with strong industry conditions. A renewed rise in oil price may take six-year futures to another double as was the case from the end of 2004 to mid 2006, subject to short declines from time to time.

Originally published on November 6, 2007.