Anadarko Petroleum (APC) posted better than expected third quarter earnings, reporting earnings of $0.84 per share against analyst estimates of $0.76 per share despite a near miss on revenue, which it reported at $3.3 billion against analyst expectations of $3.42 billion. Anadarko's higher earnings were driven by a 12% increase in overall sales volumes compared to the third quarter of 2011. As a consequence, Anadarko raised its full year sales volume guidance by 3 mboe, to between 265 and 267 mboe, without raising its capital expenditures. This is despite a company estimated 1 mboe drop in sales due to weather related shut ins in the Gulf of Mexico.
As production increases, Anadarko's long term debt continues to decrease, now standing at $13.1 billion compared to $15.06 billion at the end of the fourth quarter of 2011, mostly attributable to a reduction in borrowings against its revolving credit facility totaling $1.5 billion. This company is making all of the right moves, and has a leading portfolio to show for it.
Growth in Liquids Driven by the Wattenberg
Anadarko indicated that better than expected performance from its Niobrara and Codell formations led it to increase its estimated resource range in its Wattenberg HZ program by 500 mboe during the quarter, to between 1.0 and 1.5 bboe. Anadarko CEO, President, and Director R.A. Walker indicated that Anadarko is seeing "very positive early result[s] for drilling off of longer laterals in the field," and that the field continues to provide rates of return above 100%. With ten rigs running on the play, Anadarko expects to exit 2012 with the field producing above 100,000 barrels per day, up from just over 90,000 barrels per day in the third quarter.
Anadarko's estimated ultimate recovery, on average, is exceeding 350,000 barrels per well on the Niobrara. With these results, it can come as little surprise that Robert G. Gwin, Anadarko's CFO and Senior Vice President of Finance, recently confirmed that Anadarko is no longer seeking a joint venture partner in its core Wattenberg positions, although it is not opposed to monetizing fringe Wattenberg assets to the south and to a lesser extent to the north of its central focus areas. As a first entrant and a strong spender, Anadarko is just dominating this play, and given the returns, I expect to see Anadarko exceed its own estimates on this field, leading to higher revenues and earnings per share even if oil prices remain stable.
Natural Gas Sales on the Increase
Along with growth in shale oil, Anadarko is also growing its natural gas resource base and production. Its resource base is growing primarily through its assets in Mozambique. It believes that its massive Prosperidade complex can move Mozambique from its current position of exporting no liquefied natural gas to a position as the third largest exporter of liquefied natural gas in the world. Anadarko currently claims a 36.5% stake in Prosperidade, which it is not opposed to selling down if a reasonable offer from potential partners emerges.
There is no shortage of potential partners, either. Noble Energy (NBL) recently expressed interest in bidding on blocks expected to go to auction in the first quarter of 2013, several of which are located in the Rovuma Basin where Anadarko is operating. After losing its bidding war for Cove Energy, which it wanted primarily based on its East African assets, Royal Dutch Shell (RDS.A) confirms that it is still interested in entering Mozambique. Enersis (ENI) COO - Exploration & Production Claudio Descalzi recently remarked that "Shell could be a wonderful partner," interesting in light of speculation that Eni is also looking for partners in this area of the world and Shell's own search for an entry point.
Given the careful wording of Anadarko's willingness to work with a partner in the Rovuma Basin, it seems like Anadarko is simply waiting for another bidding war like that which occurred over Cove to break out, in order for it to secure the best terms for a piece of its world class stake in Mozambique. I think this is shrewd, as the bidding for the blocks the Mozambique government intends to release this winter is sure to be heated and will put a higher value on what Anadarko has to offer.
Anadarko's natural gas production is also growing as a result of its non-operated interests on the Marcellus, and in a nod to at least one thing that its Marcellus partner Chesapeake Energy (CHK) is doing right, Walker noted during the third quarter conference call that Anadarko is "surprised by just how productive Chesapeake is…well outside of what we anticipated as we budgeted for what our non-op volumes would be for the year," with daily production nearing 1.3 bcf per day.
Even so, Anadarko wants to see "sustained $5 natural gas" before it begins to re-allocate its capital to the Marcellus. Supply will eventually tighten to the point where that target becomes a reality, whether that's sooner or later. There are several shifts occurring in the industry indicating a trend to greater long term demand, including moves by electric companies to switch capacity away from coal towards natural gas; state, local, and private fleet conversions to liquefied natural gas; and renewed interest in US based fertilizing and chemical manufacturing. I think that the tipping point might be closer than many expect, and once it approaches, Anadarko is sure to be one of the first movers given its interests in natural gas currently on the backburner.
Investor fears of a dismal energy earnings season pushed Anadarko down ahead of its earnings release. Anadarko is currently trading around $69, giving it a price to book of 1.7 and a forward price to earnings of 17.3. For comparison, Shell is trading around $69 with a price to book of 1.2 and a forward price to earnings of 10.9. Chesapeake is trading around $20 with a price to book of 0.9 and a forward price to earnings of 11.3. Eni is trading around $17 with a price to book of 1.4 and a forward price to earnings of 13.6. Noble is impressing with a strong recovery over this summer's lows, now trading around $95 with a price to book of 2.2 and a forward price to earnings of 15.7.
Even though it is gaining ground, Anadarko is being held back by investor worries over its ongoing Tronox lawsuit. Anadarko maintains an optimistic position on its chances for success with the suit, but if it emerges on the wrong side of the argument, the company is potentially on the hook for damages nearly equal to its market cap. This is enough to spook investors, leading to a deep discount on Anadarko's real value. I believe that Anadarko's arguments against its liability in the Tronox suit are compelling enough to put stock in Anadarko's chances of success, which in turn leads me to believe it's time to buy Anadarko stock while the discount is steep.