According to a recent announcement, Anadarko Petroleum (APC) is ceding its 30% stake in the ES-M-661 block in the Espirito Santo Basin to Petroleo Brasileiro SA (PBR), commonly called Petrobras. Although Anadarko stated it ceded its interest in the block six months ago, the Brazilian National Petroleum Agency only approved the transfer last week. The terms of the deal were not disclosed, but Anadarko previously indicated it wanted to sell its interest to help pay off debt and focus its activities in the Campos Basin.
I think this is a good move, as the Campos Basin is a better play for Anadarko. Recent discoveries in the Espirito Santo are low-quality heavy crude, while the U.S. Energy Information Administration estimates that the majority of potential oil deposits from Brazil's offshore pre- and post-salt depositions are focused further south, in the Campos and Santos basins. Of the three fields, the Campos Basin also has the most developed infrastructure.
Six of the known fields in the Campos Basin alone account for over half of Brazil's total crude production, making this the most active play in Brazil's deepwater. However, there is still massive potential for growth in the field since its discovery was recent, inaugurated by a wildcat strike by Petrobras in 2002. It is currently an area of intense interest, not least because operator Petrobras is desperately attempting to increase production efficiency in the basin, with plans to spend nearly $6 billion on increasing output over the next four years.
This could lead to incredibly profitable concessions for Anadarko, as well as help cut through the red tape for which the National Petroleum Agency is infamous; the aging of the fields in the Campos is leading to steady declines in production, and new investment will center on more advanced technology and enhanced recovery methods, both areas where Anadarko can make contributions.
However, Anadarko ranks the potential of the Campos as lower than a few of its other international operations, notably its positions in West Africa and also East Africa, where it is in talks with deepwater peer Enersis SA ADR (ENI) to build a natural gas processing unit in Mozambique, where both firms recently laid claim to separate major discoveries. Perhaps because of the regulatory framework in Brazil, which makes it difficult and sometimes onerous for foreign producers to make an impact, Anadarko is still leaving the door to monetization of its Brazilian assets open, even as it expects first production from its efforts in 2013.
Continental US is Driving Growth
In the continental US, Anadarko is focusing on the Eagleford Shale and the Wattenberg for growth. Anadarko has net resources totaling above 600 mmboe on the Eagleford Shale, where downspacing on its 400,000 gross acres provides room for over 4,000 drill sites and sales volumes are anticipated to double over 2011 volumes by the end of this year. The only downside to Eagleford is that Anadarko's positions are primarily centered in the gas condensate window, leading to a sales mix of 35% gas, 25% natural gas liquids, and 40% oil.
At a time when competitors like EOG Resources (EOG) are predicting a collapse in natural gas liquids prices, Anadarko is moving ahead with expanding its natural gas liquids midstream capacities, a cost that might be sunk if the decline in natural gas liquids is anything like the decline seen in dry natural gas. Anadarko is particularly exposed to this potential decline since its in service dates for these facilities are primarily anticipated in the second half of 2013 and first half of 2014, a time period during which energy consultants Turner, Mason & Company predicts that natural gas liquid production will spike precipitously, driving volatile price differentials that could hurt Anadarko's margins. Competitor Devon Energy (DVN) is already seeing the impact, as it already reported a 26% fall in natural gas liquids realizations in the second quarter of 2012 compared to the second quarter of 2011.
However, Anadarko's oil heavy Wattenberg position neatly eclipses its position on the Eagleford. Its Wattenberg position is estimated to hold between 1 bboe and 1.5 bboe net resources under 2,000 potential drilling sites, with estimated ultimate recovery from each falling between 300 and 600 mboe. At current prices, Anadarko predicts that will lead to rates of return at or above 100%. The infrastructure in place is allowing sales volumes from the Wattenberg to increase at rates exceeding 10% per year, with a leap of almost 20% anticipated from 2012 to 2013. This is a great place for Anadarko to be, since it owns a premiere acreage position and can move forward with further exploration and development financed by producing fields like the Wattenberg.
Anadarko is currently trading around $71 per share, with a price to book of 1.7 and a forward price to earnings of 17.7. Petrobas is trading around $23 per share, with a price to book of 0.9 and a forward price to earnings of 7.6. Eni is trading around $17 per share, with a price to book of 1.4 and a forward price to earnings of 13.3. EOG is trading around $114 per share, with a price to book of 2.3 and a forward price to earnings of 18.0. Devon is trading around $61 per share, with a price to book of 1.1 and a forward price to earnings of 11.6.
Anadarko has a strong growth track and is relatively unencumbered by debt. Additionally, its well diversified production mix helps insulate it against wide swings in any one market; although its margins would be hurt by a natural gas liquids glut in the U.S. and its capital outlays on improving its natural gas liquids midstream could be a mistake in light of current predictions, it would not be enough to significantly damage Anadarko's long-term prospects, which rely more heavily on international natural gas and U.S. oil production, particularly from the Gulf of Mexico. With this in mind, compared to its competitors, I think Anadarko looks like a decent value.