Anadarko Petroleum Reshapes Itself, While Sanchez Energy Buys Low And Sells High

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

Summary

Sanchez Energy sold high and bought low as Anadarko disposed of Eagle Ford assets for less than implied by comparable deals.

In under two months, Anadarko concluded three sizable asset divestitures adding up to almost a quarter of oil-equivalent production at Q3 2016 - but how good are the selling prices?

Anadarko's statements made in connection with the just-concluded sale of Eagle Ford assets shed light on the company's Permian strategy and support my November 2016 thesis of its abrupt change.

Three recent divestitures by Anadarko Petroleum (NYSE:APC) have netted the company over $4.5 billion at the cost of losing almost 25% of its Q3 2016 oil-equivalent production. Intriguingly, Sanchez Energy (NYSE:SN), the same company Anadarko has just announced to be a buyer in the Eagle Ford transaction, divested properties in the Eagle Ford in October 2016. In this article, I will analyze Anadarko's recent divestitures. I will also consider Anadarko's recent statements to evaluate the shift in the firm's Permian strategy noticed in November 2016 upon the announcement of Q3 results.

Anadarko's just-reported Eagle Ford sale to Sanchez Energy and Blackstone

As disclosed on January 12, Sanchez and Blackstone (NYSE:BX) will pay Anadarko $1.24 billion for "155K net acres with current production of 67K boe/day (70% liquids) [ and ] 300M boe in proved reserves". This works out to $34,000 per flowing Boe, $7.67 per Boe of proved reserves and $14,800 per acre.

One way to assess the attractiveness of Anadarko's sale is to look for comparable transactions and compare the values of the three metrics, the prices paid for existing production, for proved reserves and for the acreage. The following exhibit presents two such deals. One took place less than two weeks ago. The other, dating back to October 2016, is noteworthy for the appearance of a party, Sanchez Energy, involved in the latest Anadarko divestiture. A buyer this time, it was the seller in October.
Key figures and pricing metrics for Anadarko Petroleum
Source: companies' news releases and author's analysis

A comparison to SM Energy's Eagle Ford sale on January 3

In a similarly-sized deal, SM Energy (NYSE:SM) is selling "some of its non-operated assets in the Eagle Ford shale" for $800 million. The trade concerns 37.5K net acres, assets recently producing 27.26 MBoe/d and 65 MMBoe of proved reserves. Aside from the "12.5% interest in the Springfield gathering system", the wells and acreage being sold by SM are comparable to those in Anadarko's latest divestiture. For example, the fraction of liquids in the current output of wells sold by SM is very close at 71%.

The key parameters for SM's sale are $29,300 per flowing Boe, $12.31 per Boe of proved reserves and $21,300 per acre. Among these, the only one where Anadarko has done better is the price per flowing Boe, at $34,000. This is, however, unsurprising because the entire WTI futures curve has both risen and steepened compared to January 3 when the SM transaction was announced, with the front month up $0.50 and the medium part of the curve, represented by the 12-month future, up even more by $1.07. The higher prices support the value of ongoing production quantitatively. At the same time, the market's growing confidence in OPEC ability to manage the production cut corroborates it qualitatively.

In contrast, Anadarko has done far worse than SM on two other metrics. The price per Boe of proved reserves of $7.67 compares poorly to SM's $12.31 and so does the $14,800 price per acre as compared to SM's $21,300.

Carrizo Oil & Gas' Eagle Ford purchase in October 2016: Sanchez Energy sold high

Another example of a comparable transaction is provided by the sale of Eagle Ford acreage by Sanchez to Carrizo Oil & Gas (NASDAQ:CRZO) reported October 24. Sanchez was paid $58,400 per flowing Boe, $12.48 per Boe of proved reserves and $12,000 per acre.

Comparing these metrics to the latest Anadarko sale, only the acreage at $14,800 per acre compares favorably. The other two measures of the deal value indicate that Anadarko is being paid far less, $34,000 per flowing Boe and only $7.67 per Boe of proved reserves.

Recent oil prices have been notably higher than in October, with front month WTI up by almost $5 and the 12-month contract up by more than $2.50. In view of this, I find it most surprising that the current production of Anadarko's assets did not fetch a much higher price.

Anadarko's Eagle Ford sale scores poorly on key metrics, while Sanchez Energy managed to sell high and buy low

As the above analysis of the three key metrics made abundantly clear, the latest Eagle Ford divestiture fetched Anadarko significantly less than one might expect based on comparable recent transactions. Anadarko is being paid much less, $7.67 per Boe of proved reserves than approximately $12.40 received by sellers in the comparable deals. The company is also being paid significantly below average, when price per Boe of existing production and the price per acre are considered.

Although the size of the sale in October was small compared to one-half of the purchase amount Sanchez Energy has committed to paying Anadarko, Sanchez can be commended for paying less - over one third less - than it received in proceeds of its October sale according to two metrics that reflect best the deal economics, the price per flowing Boe and per Boe of proved reserves.

Anadarko's sales of natural gas assets in Q4 2016 were also very substantial

The latest Eagle Ford sale, discussed above, disposed of 8.6% of Anadarko's Q3 2016 oil-equivalent production of 780 MBoe/d. Alas, this was already the third large divestiture announced in the span of less than two months. While one deal of this magnitude is large enough, the sum total of all three is going to reshape the company. When Anadarko presents its FY 2016 results in February, it will be a very different company from the one it was a quarter earlier. To illuminate the bigger picture, I will briefly review the two other transactions.

The first of the three deals was the sale of Haynesville basin assets on November 18. Despite the proceeds of "over $1 billion", there is a dearth of information about this transaction as Anadarko itself did not issue a press release.

Nonetheless, the firm disclosed the divested production volumes in its January 2017 "Investor Book Appendix". The sale, known as the Carthage divestiture, involved 1 MBbl/d of oil, 10 MBbl/d of natural gas liquids (NYSE:NGL) and 171 MMcf/d of natural gas, with total oil-equivalent production being 40 MBoe/d as of Q3 2016. In other words, Anadarko sold mostly natural gas assets at $25,000 per flowing Boe. In big picture terms, this sale divested 8.5% of the company's Q3 2016 natural gas production of 2,003 MMcf/d and 5.1% of its oil-equivalent production.

Given that the amount of daily oil production in Haynesville was a tiny part of oil-equivalent production, this sale can be compared to Anadarko's sale of "remaining Marcellus Shale natural gas assets" in December. Marcellus sale was the middle one, time-wise, of the three sales in the preceding two months.

Anadarko's Marcellus sale: a poor result compared to the Carthage divestiture

A sale of Marcellus assets, producing 470 MMcf/d netted the company $1.24 billion, or $15,800 per flowing Boe of nearly 100% natural gas. Compared to the earlier Carthage transaction in Haynesville, the Marcellus sale appears to have been done at a far lower price. The back-of-the envelope analysis here supports the criticisms leveled by The Value Investor and Richard Zeits.

Looking at the Marcellus divestiture from another angle, the sale disposed of 23.5% of the company's Q3 2016 production of natural gas and of 10% of its oil-equivalent production.

What to expect in the Permian?

In an earlier article, I pointed out a strategy change Anadarko announced when discussing its Q3 2016 earnings. The rapid jump into the Permian was inconsistent with the views expressed by the company just one quarter earlier during Q2 2016 earnings conference call.

Anadarko's current thinking appears to support my thesis of an abrupt change in the firm's risk aversion and market posture. One stated reason for the Eagle Ford divestiture was to

further accelerate capital investments in our higher-return oil opportunities in the Delaware Basin, the DJ Basin, and the deepwater Gulf of Mexico, which drive our ability to deliver a 12- to 14-percent five-year compounded annual oil growth rate

The 5-year CAGR target, stated to be 10-12% in September 2016 presentation, remained unchanged even in January 2017 Investor Book. The apparent increase to the 12-14% range might not actually be an improvement. The three divestitures discussed in this article resulted in a sale of 23.7% of Anadarko's Q3 2016 oil-equivalent production. Hence, the newly raised growth target might be a simple consequence of growing production from the lowered base, likely to be seen in Q4 2016 and even more so in Q1 2017.

Among the locales where growth is planned, Delaware, DJ and the Gulf of Mexico, it is the Delaware basin that has seen a small but meaningful change in the firm's presentations. The break-even oil price on "BTAX PV-10" basis was $35 as recently as September. It is now at $30.

Conclusion

The sale of Eagle Ford assets continues a major transformation of Anadarko Petroleum. Based on the analysis of comparable transactions, I believe the price received by the firm was too low. While there is value in simplicity stemming from a reduction in the number of basins the company operates in, the Eagle Ford divestiture should be seen as but one of three large asset sales announced in the span of two months, two of which have been criticized for poor pricing and which in the aggregate disposed of nearly one quarter of the company's Q3 2016 production.

Anadarko's large rig deployment in the Delaware basin has been in place for at least two months in Q4. Looking ahead, it is possible that the first results of the company's acceleration into the Permian will be seen when FY 2016 results are announced in a few weeks.

Note from the author: Thank you for reading. If you like this article, please follow me by clicking the "Follow" link at the top of this page and choosing "Real-time alerts on this author" to be informed of my latest ideas.

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 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.