Anadarko Pre-Earnings: Higher Liquids Volume, Natural Gas Prices To Boost Results

| About: Anadarko Petroleum (APC)
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Independent oil explorer Anadarko Corp (NYSE:APC) is set to announce its second quarter earnings after markets close on July 29. Average West Texas Intermediate (WTI) oil prices have been marginally higher year on year during the second quarter and will positively impact crude oil revenues. On the other hand, average natural gas spot prices during the second quarter have been more than 75% higher than the previous year so that will have a positive impact on revenues from spot sales of gas. Anadarko sells most of its crude oil and natural gas in the U.S. markets.

We expect the company to post higher crude oil and natural gas liquids production volume primarily due to rising production from its U.S. onshore fields. We will also be keen to hear Anadarko’s comments on the progress made so far on its plans to dilute its stake in the Mozambique project and the latest status of its ongoing $25 billion lawsuit with Tronox over environmental liabilities.

Anadarko operates in three segments: oil & gas exploration and production, midstream, and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the deepwater Gulf of Mexico and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, China, Alaska, and New Zealand.

Higher Crude Oil Production Volume

Our outlook for Anadarko’s crude oil and condensate division is quite positive primarily due to improving production output from its U.S. onshore assets, especially the Wattenberg field. The company claims that its net resources in the Wattenberg region stand between 1-1.5 billion BOE. To put things in perspective, Anadarko’s overall sales volume for 2012 was 268 million BOE. Increased horizontal drilling in the Wattenberg field improved liquid (including both crude oil & condensates and natural gas liquids) sales volume by 45% y-o-y during the first quarter.

Rising production from the liquids-rich Eagleford shale formation in the Southern and Appalachia region is also expected to help sales volumes. Anadarko has increased its net resources in the region to more than 600 million barrels of oil equivalent (BOE). Of these, oil and natural gas liquids constitute 65%.

We believe production volumes will be boosted in the coming years as the company gains traction on its plan of developing midstream infrastructure such as expanding oil gathering pipelines and completing the oil rail terminal which is expected to be in service this year. The company expects to more than double its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by 2014.

Our estimate of 7% CAGR for crude oil and condensates sales volume also takes into account rising production from Anadarko’s Caesar/Tonga and Lucius fields in the Gulf of Mexico as well as its El Merk project in Algeria. Anadarko holds 35% stake in the Lucius oil field, which is estimated to contain reserves of more than 300 million barrels of oil equivalent. Other projects such as the Heidelberg field in the Gulf of Mexico, which is currently under appraisal process, are also expected to drive higher production volumes in the long run. Anadarko’s liquid sales volume at 345,000 barrels per day increased 14% y-o-y during the first quarter.

Higher Natural Gas Prices

Anadarko’s natural gas sales revenue is expected to receive a boost from sharply higher commodity prices. Average Henry Hub Gulf Coast natural gas spot prices during the second quarter have been more than 75% higher than the previous year quarter, fluctuating around $4 per million British thermal units (MBtu). The increase in prices can be partly attributed to strong demand brought about by a prolonged winter, which could reverse during the summer. Moreover, rising hopes of higher natural gas exports have also buoyed the outlook for natural gas prices in the U.S.

The Department of Energy in the U.S. recently approved a liquified natural gas (LNG) export project. The Freeport LNG Terminal in Texas has been allowed to export natural gas to countries that do not have a free trade agreement with the U.S. The announcement has reduced the uncertainty over the Department of Energy’s stance on natural gas exports. This has led to increased expectations on approval of other applications pertaining to similar projects pending with the government. It was also reflected in a 4% jump seen in June 2015 natural gas future contracts following the announcement.

Higher exports will lead to higher domestic prices in the U.S. as increased international trade will narrow the price differential across geographies. However, it should be noted that the feasibility of exports is directly proportional to the size of price differential between domestic and international prices. So, the amount of exports allowed by the U.S. government will largely determine the cap on domestic prices.

We have a price estimate for Anadarko of $95, which will be revised based on the second quarter earnings results.

Disclosure: No positions