Anadarko Petroleum (APC) was recently upgraded from market perform to outperform by analysts at Sanford C. Bernstein, the same rating assigned by Raymond James' analysts. Though Anadarko's year to date performance is tracking cratering U.S. natural gas prices and recent declines in crude oil, so are the performances of nearly all of its major competitors. What Anadarko has that most other exploration and production companies do not is a global resource base of risked resources in areas where natural gas brings a premium to U.S. prices, while maintaining an exceptional shale oil portfolio in the Central U.S. in addition to conventional oil resources in the Gulf of Mexico (GOM) and elsewhere.
It is exactly this diversification and the prospect of doubling its production and revenues in the coming years that has me excited about Anadarko. At the present moment, Anadarko has more funded exploration capability and a better cash cushion than nearly any other U.S. independent. Let's look at a few of its plays to see why.
Track Record in African Deepwater
Royal Dutch Shell (RDS.A) and Thai energy company PTT Exploration & Production PCL are battling to take over Cove Energy PLC. Whichever company gains the approval of Cove's shareholders will take over an 8.5% stake in Anadarko's operations in the Rovuma Basin off the shores of Mozambique, one of Cove's largest and most valuable assets.
The Rovuma discovery, also known as Prosperidade, is one of the largest made by Anadarko or any other company in years, with up to 50 tcf in place, up to 30 tcf of which is believed recoverable. This is enough to encourage Anadarko in plans for building liquid natural gas trains for processing and export. First production and sales are expected in 2018. I think that Shell and PTT are eager to access Prosperidade and this is driving most of the companies' interest in small Cove Energy, which could put a higher value on Anadarko's majority stake than Anadarko estimated.
Anadarko is also working in the Jubilee field off the shores of Ghana, where it and partner Tullow Oil PLC are seeing success despite setbacks. Tullow cut its production estimates for the field by 10,000 barrels per day, from 90,000 down to 80,000, just last week, which prompted an immediate decline in shares of Anadarko, Tullow, and a third partner, Kosmos Energy Ltd (KOS). This shows that investors are paying close attention to African developments in the wake of weak prices at home. Still, the companies plan to invest up to $20 billion in these developments over the next decade, meaning that though first production is lower than anticipated there is much more to come.
Smart Moves in the Gulf
Anadarko is making a brilliant financing move for its Lucius oil and natural gas project in the deepwater GOM, as it looks to share the risk of exploration and production by selling 7.2% of its working interest to an undisclosed party. The stake is small to be sure, so Anadarko will have a working interest at 27.8% after the deal completes, with the remainder held by the undisclosed party and Anadarko's existing partners: Plains Exploration & Production (PXP), Exxon Mobil (XOM), a subsidiary of Apache (APA), Petrobras (PBR), and Eni S.P.A. The partners have the right of first refusal on the deal, but either way Anadarko will benefit.
The interest sale, for which Anadarko will receive $556 million, will carry 100% of Anadarko's expected capital obligation until the first stage of production, which is expected to begin in the second half of 2014. While Anadarko still believes that the Lucius holds 300 mboe of potential reserves, I think that its massive finds elsewhere are leading the company to move this one towards the backburner; by financing itself through production, Anadarko is free to use its exploration funds on its considerably more massive developments.
Steady on the Wattenberg
In another smart move, Anadarko secured at least some of its water needs for fracking in Colorado's Wattenberg field through a water lease with the city of Aurora. Anadarko will pay $9.5 million over five years for the rights to about 2.5 billion gallons of water. The Wattenberg is currently producing over 80 mboe per day for Anadarko, and the firm estimates that its 350,000 net acres in the field represent between 500 mmboe and 1.5 bboe of potential reserves.
What's better is that in 2011 Anadarko fully funded its expenditures on Wattenberg development with Wattenberg production, with $400 million in excess cash flow to spare. Sourcing the water from Aurora was an important move for Anadarko, since this entire area is suffering from a long term drought; without water, it can't frack, and without fracking its Wattenberg finds will grind to a halt. By sourcing water leases from cities close to its operations before the water runs out or is claimed by someone else, Anadarko is moving ahead of the competition once again.
Anadarko is currently trading around $65 per share, at a price to book of 1.6 and a forward price to earnings of 13.5. I believe that the key to understanding Anadarko's value lies in recognizing that its potential is scheduled to come online within the next three to five years, at which point Anadarko's production could be blowing its competitors out of the water.
Just looking at its production schedule gives an idea: Its El Merk and Brazilian fields are scheduled for first production in 2013, its Ghanaian Ten project and GOM Lucius project are scheduled for first production in 2015, its Ghanaian MTAB and GOM Heidelberg and Shanandoah projects are scheduled for first production in 2016, and its Mozambique trains should be operational between 2018 and 2020. Altogether these developments represent over 4 bboe of resources, and this is all in addition to its U.S. onshore production, which is steadily increasing.
Anadarko recently promoted Robert D. Lawler, Vice President, Operations, to Senior Vice President, International Deepwater Operations, in which capacity he will join Anadarko's Executive Committee. While this would be a substantial promotion in most oil and gas companies, with Anadarko's focus on deepwater across the globe it's a huge move for Lawler. This will be Lawler's first offshore responsibility, as his previous experience is centered onshore. Under Lawler's leadership, Anadarko greatly expanded its U.S. onshore developments quickly and profitably while pivoting towards oil, so I think that Lawler is a proven leader. If he can continue Anadarko's rise in deepwater dominance, this will turn out to be a beneficial move for Lawler, Anadarko, and shareholders.