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Anadarko Petroleum's (NYSE:APC) strong growth prospects are reflected in its superior operating performance, in its discovery of natural gas reserves in Mozambique, it reaching new heights of sales volume and raising full year sales volume guidance by approximately 3,000,000 barrels of oil per day without raising any capital. APC has registered earnings per share, excluding one-time items and impairment charges of $0.85, which beats analyst estimates by $0.08.

Anadarko has been trading at a significant discount to intrinsic value, reflecting the uncertainty attached with the Macondo event and the Tronox litigation. The Tronox litigation has already been incorporated in APC's stock price and now is the time to show an upside. According to Credit Suisse, the stock is trading at a 35% discount to intrinsic value due to the Tronox litigation. We believe the company's shift to the Campos basin and its expectation to win against Tronox would show a significant upside in the coming period. Therefore, we have a bullish stance on the stock.

Company Overview:

The company is involved in the production, exploration, development and marketing of natural gas, natural gas liquids, condensate and crude oil. The company's operations are segregated into three different segments comprising upstream, midstream and marketing of petrochemicals in the downstream business. Its upstream business is engaged in the exploration and development of crude oil, natural gas and NGL's. The company's midstream business focuses on the transportation and supply chain infrastructure of oil products. The downstream business is involved in the marketing of petrochemicals in the United States. In the second quarter of 2012, the company generated around 74% of its revenue from the exploration and development of crude oil and condensate.

Expect to win against Tronox's:

The company expects to win the case put up by Tronox Corporation. APC removed contingency losses of $525 million from its books, based on its strong position in the court. The company's management believes that its position against the Tronox claims, with regards to environmental protection, would be a healthy sign to regain the trust of green investors.

Shift in Focus:

In our opinion, the company's decision to sell its 30% stake in the Espirito Santo Basin to Petroleo Brasileiro SA (NYSE:PBR) would enable it to focus more on the Campos Basin, and to pay off its debt. As Espirito Santo Basin is known for its low quality crude oil, selling of these assets would help the company produce high quality oil from the Campos Basin. The Campos Basin has developed its infrastructure, and six of its fields constitute around half of Brazil's crude oil. Therefore, the company can tap into the high growth opportunity in this field. Petrobras has decided to increase its operating efficiency in the area by spending approximately $6 billion over the next four years.

Financial:

Due to the one-time items expense and impairment charges of $804 million, the company has registered a net loss of $380 million, or $0.76 per share, in the second quarter. Its sales volumes have reached new heights of 742,000 barrels of oil equivalent, with an increase of around 20,000 barrels per day in the second quarter. Moreover, the company's Capex was approximately $1.8 billion, and its guidance for the third quarter is between $1.65 billion to $1.8 billion. It has been able to generate discretionary cash flows of $1.9 billion from its operating activities, and estimation revision of more than 300 million barrels of oil equivalent reserves in its Gulf of Mexico Vito field will further enhance its profitability. It has a low dividend yield of 0.52% compared to the industry average of 2.15%. In our opinion, it would improve, as it is expected to make profits in the coming period. Due to its high operational efficiencies, it has the highest gross margin amongst its competitors of 80%, as shown in the table below.

Direct Competitor Comparison

Anadarko Petroleum

Marathon Oil (NYSE:MRO)

Devon Energy (NYSE:DVN)

Exxon Mobil (NYSE:XOM)

Chevron (NYSE:CVX)

Market Cap

34.22B

229.96B

24.13B

425.36B

229.88B

Qtrly Rev Growth (yoy)

-14%

-10%

-33%

-7%

-10%

Revenue (NYSE:TTM)

13.54B

230.56B

9.70B

434.82B

230.56B

Gross Margin:

80%

30%

64%

29%

30%

EBITDA

7.95B

50.98B

6.63B

65.40B

50.98B

Operating Margin

11%

16%

42%

11%

16%

Net Income

-1.35B

26.63B

2.42B

45.09B

26.63B

Source: Yahoo Finance

Price Appreciation

The stock has shown an upside of ~5% over the last three months. Its 50-day and 200-day moving averages are $70 and $69, respectively. 85.9% of the company's shares are held by institutions. We believe the stock price will show an upside in the coming years, based upon the following two points: 1) the company expects to win the case against Tronox Corporation. 2) Its focus on the Campos Basin would enable it to achieve higher sales volume guidance for the year.

Source: Google finance

Valuation:

The stock is trading at 2.5x to its sales at premium when compared to the price to sales ratios of 1x, 2.5x, 0.98x and 1x of its competitors Marathon Oil, Devon Energy, Exxon Mobil and Chevron, respectively. It is trading at a forward price to earnings of 15.9x, EV/ Revenue of 3.44x and EV/EBITDA of 5.8x.

In our opinion, going forward, the company's strong position in the Tronox case, and its strong future growth prospects will improve its valuations.

Direct Competitor Comparison

Anadarko Petroleum

Marathon Oil

Devon Energy

Exxon Mobil

Chevron

P/S

2.55x

1x

2.5x

0.98x

1x

Forward P/E (Dec 2013)

15.9x

8.84x

12.67x

11.29x

9.31x

EV/Revenue

3.44x

1.71x

2.87x

0.98x

0.95x

EV/EBITDA

5.86x

3.43x

4.2x

6.5x

4.3x

Source: Yahoo Finance

Source: Buy Anadarko: A Natural Gas Stock That Offers Growth