Anadarko Petroleum: The Marcellus Divestiture Disappoints, Reflects Challenging Marcellus North Price Environment

| About: Anadarko Petroleum (APC)
This article is now exclusive for PRO subscribers.


Anadarko receives $1.24 billion for nearly a 0.5 Bcf/d of existing gas production and nearly 200,000 net held by production acres.

While no cash flow data was provided, the low valuation likely reflects weak margins.

The non-operated nature of an important part of the assets contributes to the unexpectedly weak outcome.

(Source: Anadarko Petroleum, February 2016)

Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions - investors should conduct their own comprehensive research. Please read the disclaimer at the end of this article.

The relatively low price received by Anadarko Petroleum (NYSE:APC) in its divestiture of the Marcellus Shale assets puts the spotlight on the challenging margin environment in the Marcellus North and may indicate the company's and strategic buyers' pessimistic view with regard to regional differentials in the Northeast, the Marcellus North in particular.

The Transaction

In the December 21 press release, Anadarko announced it has agreed to sell its "operated and non-operated upstream assets and operated midstream assets" in the Marcellus Shale for ~$1.24 billion. The midstream assets owned by Western Gas Partners (NYSE:WES), APC's sponsored master limited partnership, which represent the larger part of Anadarko-controlled midstream assets in the Marcellus, are not part of the sale.

The divestiture includes ~195,000 net acres and associated dry gas production of approximately 470 million cubic feet per day, as of the end of the third quarter of 2016. Given the significant, moderate-decline existing production, Anadarko appears to be receiving little value for the remaining development potential that the properties offer.

As one can see from a slide from Anadarko's older (November 2014) presentation, the company's most prolific acreage in Bradford and Sullivan Counties, Pennsylvania, is mostly non-operated. Still, the core portion of the acreage is meaningful in size and appears to offer significant development backlog in the event regional differentials in the Marcellus North area improve meaningfully.

(Source: Anadarko Petroleum, November 2014)

The buyer in the transaction is private equity-backed Alta Resources Development, LLC, an operating entity with a strong track record of shale property acquisitions and subsequent exits via sales.

What Is Driving The Unexpectedly Low Sale Price?

The non-operated nature of a large portion of the acreage is an important consideration in understanding the outcome of this transaction. It likely explains why the winning bid comes from a private equity-backed entity and not from another Marcellus operator.

It is worth noting that a large portion of the non-operated acreage - which also happens to be the most prolific portion of the package - falls within areas dominated by Chesapeake Energy (NYSE:CHK). Arguably, Chesapeake would be the most logical acquirer for the assets. However, the company's financial constraints and significant existing exposure to the Marcellus North likely handicapped its ability (and, possibly willingness) to participate. The map of Chesapeake's acreage is shown below:

(Source: Chesapeake Energy, October 2016)

Another major factor impacting the valuation is the outlook for Marcellus North price differentials. The slide from Anadarko's presentation at the top of this note suggests that a realized price in the $2.50/Mcf range would be required for new drilling to generate competitive returns on investment. Using current futures pricing, the average Henry Hub price for the five-year period beginning January 2018 is $2.91/Mcf. Even if one were to assume that basis differentials for volumes sold locally in the Marcellus North would contract to $0.50 per Mcf for the same period, only select, mostly non-operated areas within Anadarko's acreage would likely be able to compete for capital.

Finally, CHK's high-price midstream contracts, if they also apply to Anadarko's volumes operated by Chesapeake, could be a significant factor impacting the valuation. High midstream fees under long-term dedications could depress cash flows from both existing and future production.

Implications For Anadarko

The sale of the Marcellus assets by Anadarko is not unexpected. The Marcellus has received very little capital allocation in the company's budget over the last two years. In 2015, the company drilled just one operated well and participated in 18 non-operated wells in the Marcellus. No operated drilling activity occurred in 2016.

Anadarko has been tightening its U.S. onshore portfolio to concentrate resources on the core Delaware Basin and D-J Basin operations. The Marcellus was one of several assets that were expected to go on the auction block. In my expectation, additional asset sales are likely to follow in 2017, of which the likely sale of the company's massive Eagle Ford position is the most notable.

The divestiture of the Marcellus is a logical strategic step, given the mostly non-operated nature of the core portion of the acreage. However, I view the sale price as a disappointment.

While the proceeds from the Marcellus divestiture will help Anadarko to fund its drilling program acceleration in the U.S. onshore planned for 2017, the $1.24 billion in sale proceeds are unlikely to make a big difference in the context of the company's overall financial scale. On the other hand, the long-term optionality associated with this significant asset and large existing production stream is now gone, with no adequate compensation received, in my opinion. Raising equity might have been a more attractive alternative from a value preservation perspective.

That said, investors are likely to view the divestiture as a neutral development, as the resulting tightening of the company's operational focus will likely offset the effect of the uninspiring sale valuation.


The announcement is a negative data point with regard to asset valuations in the Marcellus North, particularly for acreage outside the "core of the core" area located mostly in Susquehanna and Bradford Counties. The most direct "read-across" is to Chesapeake's Marcellus North assets that in significant part overlap with Anadarko's assets being sold.

For in-depth analysis of energy industry and oil and natural gas fundamentals and market trends, please consider subscribing to Zeits OIL ANALYTICS.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.