Anadarko Petroleum: Looking Beyond The Short-Term Weakness

| About: Anadarko Petroleum (APC)
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Summary

Anadarko Petroleum has suffered as oil pricing has taken a hit and OPEC might not cut production.

Anadarko, however, is improving production profile and this will help it profit from an improvement in oil market dynamics in the long run.

Anadarko's impressive cash flow figures and expected long-term earnings improvements indicate that there is hope for the company after the current weakness is over.

Anadarko Petroleum (NYSE:APC) fell a massive 10% last Friday after it emerged that OPEC might not cut production in order to arrest the slide in fuel prices. As a result, conditions in the oil industry remain tense as crude has fallen massively this year. The EIA has weighed in on the weakness in oil pricing by reducing its crude oil price forecast to "$95 a barrel this year and $77.75 a barrel next year, below its previous forecasts of $97.72 a barrel this year and $94.58 a barrel next year."

As a result of this weak forecast and no signs of a production cut by OPEC, there is a probability that Anadarko will be under pressure in the short-term as oil prices fall further. But, in my opinion, investors need to focus on the long-term view. Oil prices are expected to increase to $101.30 a barrel by 2030, which will be marked improvement over the current pricing of $70 a barrel. Now, as the conditions in the oil industry improve in the long run, Anadarko's prospects will improve as well.

Maintaining a strong production profile will help in the long run

As such, investors need to sit tight and focus on Anadarko's production profile, which will enable the company to benefit from improved oil pricing in the long run. Currently, Anadarko is focused on improving its key assets in order to survive the current downturn in the oil industry.

One of its key assets is the Wattenberg field, which is expected to be a key value driver for the company by delivering growth in the U.S. on-shore business. The performance of its horizontal drilling program, coupled with key investments made in the DJ Basin for expanding its midstream assets in that region, has helped the company increase and accelerate liquid volumes by 20,000 barrels per day.

More importantly, the Wattenberg field is forecasted to deliver over $500 million of free cash flow in the year, a trend that is expected to continue in the long run. Also, at the Wolfcamp Shale, Anadarko has enhanced the result-oriented delineation program. Additionally, Anadarko's Western Gas midstream MLP has acquired a key infrastructure that's tactically located at the center of the Delaware Basin. With this move in the DJ, Anadarko will be able to enhance its midstream capacity to ease production growth and manage product delivery efficiently.

Moreover, in the deepwater Gulf of Mexico, Anadarko expects to see first oil production at Lucius in the next few weeks. Further, it expects Lucius to produce 80,000 barrels of oil per day, and this will help the company further improve production. On the other hand, in Mozambique, Anadarko is continuously working to enhance its operated LNG project.

Oil industry dynamics

Now, some investors might be thinking why Anadarko is focused on improving production even when oil prices are falling. Well, as mentioned earlier, the company will benefit from an increase in oil pricing going forward. In addition, as oil demand is expected to increase in the future, better production will allow Anadarko cater to demand improvements.

According to a report, it is expected that oil demand across the globe will increase at a rate of 1% a year till 2030. As such, even though oil demand might remain weak in the short run, the long-term prospects are still intact.

Looking beyond the short-term pain

Taking a closer look at Anadarko's financial metrics, not everything is positive. The company is currently incurring losses, which is why it doesn't have a trailing P/E ratio. The short-term prospects are bleak as well, since analysts expect Anadarko's bottom line to drop another 15.8% next year. However, investors need to take a look at its cash flow generation. In the past year, Anadarko has generated $8.6 billion in operating cash flow and $4.47 billion in levered free cash flow.

This indicates that even in difficult times, Anadarko's focus on its key assets is helping it generate robust cash flow. In addition, over the next five years, it is estimated that the company's bottom line will grow at an annual rate of 12.4%. Hence, beyond the short-term pain, Anadarko's performance is expected to improve, and this will be driven by better oil demand and pricing, along with strong production.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.