Despite posting a second quarter loss, Anadarko Petroleum (APC) did better than many analysts expected. Its exposure to natural gas, particularly with its coal bed methane projects, were a liability for the firm, but its diversification led to record production, which helped to lessen the blow. Still, the decrease in prices on natural gas sales amounted to a 43% fall in realizations for Anadarko.
According to Anadarko CEO, President, and Director Al Walker, Anadarko increased its oil sales volumes in the second quarter by 20,000 barrels per day over the first quarter. However, most of its production increases were in natural gas, and recent Henry Hub spot prices are at $2.79 per mbtu. This is as low as 75% below summer 2008 prices, which trended between $11 and $12 per mbtu. Anadarko can't argue against these numbers with increased production, but what it can do is continue its oil production increases and bide its time.
Operating within Cash Flow Despite Challenges - New Projects on Horizon
By operating within cash flow, Anadarko is avoiding the trap Chesapeake Energy (CHK) is currently attempting to escape. Anadarko paid down its revolving credit facility by $800 million in the second quarter, and still ended the quarter with a cash on hand balance of $2.8 billion. According to Robert G. Gwin, Anadarko CFO and Senior Vice President of Finance, Anadarko is still committed to remaining within cash flow through the end of 2013. That Anadarko can do this while continuing to explore and move towards production on previous discoveries is a major factor in its favor, especially given its track record. In fact, its track record is beginning to give shareholders hints of returns to come.
Anadarko's Wattenberg horizontal program is expected to continue delivering exceptional returns in the near term. With current rates of return in excess of 100% even at current low prices, Anadarko plans to keep an aggressive drilling schedule supported by its midstream assets in the area.
While the results are impressive, Anadarko is far from alone in reporting Wattenberg success. The tiny but appropriately named Bonanza Creek Energy (BCEI), with a market cap of just $836 million and a 2012 capital expenditures budget of $298 million, reported 144% production growth quarter over quarter driven by activities on the Wattenberg. The company, which started with a focus on vertical drilling, is now shifting to unconventional drilling in view of these results, and may become a major player in the years to come.
Internationally, Anadarko expects first production at its Algerian El Merk mega project by the end of this year, a year after its original predictions. The project, in which Anadarko is partnered with ConocoPhillips (COP), Talisman Energy (TLM), Petrofac, and Eni SpA, among others, will have facilities capable of processing 98,000 barrels of oil per day, 29,000 barrels of condensate per day, and 31,000 barrels of liquid natural gas per day as well as a liquid natural gas train capable of holding 600 mcf per day.
The condensate and liquid natural gas capacity will be particularly important for the El Merk project. As a member of OPEC, Algeria maintains strict production and export limits on oil, but currently no such restrictions are in place for these other related commodities. This is leading to a producer pile in on Algerian natural gas, as companies hope to claim part of Algeria's proven reserves of 159 tcf. With the El Merk project, Anadarko will be in a position to turn revenues higher not only from its own production, but from the production of its competitors.
Tronox Litigation Still Building in a Discount
In Anadarko's second quarter earnings call, Anadarko actively addressed the punishment its stock is taking over misunderstandings related to the Environmental Protection Agency and Tronox lawsuit that is currently ongoing. According to Walker, Anadarko is "continuing to pursue what we think is the right answer for the shareholder in court, at the same time balancing that with what we think could be a reasonable settlement, if one could be achieved."
The litigation seeks $25 billion in damages and related costs from Anadarko, putting this lawsuit on par with suits against the majors, such as Ecuador's $19 billion pursuit of Chevron (CVX). By openly addressing concerns about the Tronox case, Anadarko was able to assuage some shareholder worries over the ultimate outcome of the litigation. This is in stark contrast to Chevron's approach to its Ecuador suit on its own second quarter conference call. Chevron allegedly censored shareholders with a history of pressing questions about the Ecuadorian liability. This close lipped approach is unlikely to help Chevron should the Securities and Exchange Commission proceed with an investigation over failure to disclose material information over the Ecuador case and its potential impacts on Chevron's finances.
Anadarko is trading around $70 with a price to book of 1.7 and a forward price to earnings of 16.1. ConocoPhillips is trading around $57 with a price to book of 1.5 and a forward price to earnings of 9.1. Chevron is maintaining its weight, trading around $113 with a price to book of 1.7 and a forward price to earnings of 8.1. Bonanza is trading around $21 with a price to book of 1.5 and a forward price to earnings of 7.5, a stiff value against competitor Chesapeake, which despite its larger size and what should be better metrics is trading at a heavy discount, around $19 with a price to book of 0.9 and a forward price to earnings of 10.1.
Canaccord Genuity increased its price target on Anadarko from $118 to $120 late last week, keeping a previously awarded buy rating on the stock in place. With the most recent trades around $70 this puts Anadarko's return potential above 40%, but I think that Canaccord's target may actually be low. Considering the number of mega projects that Anadarko is currently moving towards production, and the expectation that natural gas prices will rebound within the next two years as these projects come online, I think that a three year horizon for Anadarko could be as high as $130, meaning a buy and hold for this stock would be a good growth play.