Anadarko Could Double By 2014

by Laura McPherson

Anadarko (NYSE:APC) recently announced that its operations in the Niobrara made another possible discovery below a former bombing range in Arapahoe County, Colorado. First production was reported at 200 boe per day, though this trailed to 127 boe per day after the first 90 days of production. Anadarko Director of External Communications John Christiansen indicated the company will be drilling more test wells to obtain an estimate of the potential oil and gas reserves in the area.

Some are crediting EOG Resources (EOG) with inaugurating the Niobrara, in late 2009, and now Anadarko and competitor Noble Energy (NBL) are both bullish on the play. Total reserves in the area are unknown, but Anadarko is indicating it will spend $1 billion a year developing and extracting from the area. Already the company is producing an average of 80,100 boe per day from its Niobrara and Codell acreage, and has seven horizontal rigs operating with plans for three more to be added this year. For its part, Noble expects to invest $1.2 billion this year on its Niobrara exploration and production. Ted Brown, Senior Vice President, Northern Region for Noble, recently indicated the company will continue to spend between $1 and $1.5 billion a year on the Wattenberg specifically.

Earlier this month Anadarko divested its working interests in the deepwater Gulf of Mexico Pompano field to Stone Energy (SGY) in a deal valued around $67 million. Net production transferred is estimated at 1,000 boe and 3 mcf per day. Stone already owns working interest in the Pompano field, so this deal adds to its existing footprint in the area. This is not a major deal for Anadarko, but I believe that the decision to divest was made to free further resources for the Niobrara and other on-shore plays. This shores up Anadarko for a major run on shale this year.

Pro-E&P Moves by the BLM Good for Anadarko

Anadarko recently received approval from the U.S. Bureau of Land Management (BLM) to drill up to 3,675 gas wells in eastern Utah on federal lands in the Uinta Basin in the Greater Natural Buttes. U.S. Interior Secretary Ken Salazar indicated that the project is expected to produce over 6 tcf over its lifetime. Utah Senator Orrin Hatch also praised the deal, though he noted that "much more has to be done to open up more of our state's land to development."

The BLM does not always make it easy for the energy industry. It recently proposed a rule that would require companies to disclose the chemicals used in fracking operations if those operations took place on federal or Indian land, and also proposed strict standards for drill construction and water management. At the same time, the BLM is promising to "implement new automated tracking systems that could reduce the review period for drilling permits by two-thirds and expedite the sale and processing of federal oil and gas leases." The new system is expected to be online by May 2013, and will greatly expedite the current permitting process, which is almost completely paper based. The BLM is also taking steps to improve the leasing process by standardizing the workflow among its many offices.

These steps are all crucial to Anadarko's business, as Anadarko drills on federal lands on multiple plays. Besides the deepwater Gulf of Mexico and the project in Utah noted above, Anadarko has operations on federal property in the Bakken and the Niobrara, among others. Anadarko is able to do this mostly through improved technology. According to a recent report from the American Exploration and Production Council, fracking technology advanced over the past few decades to the point where the average well site footprint is now 70% smaller than it was in 1970, and a single well is now capable of reaching over "60 times more below-ground area than possible previously."

Another mark in Anadarko's favor are its positive public relations efforts. I think Anadarko's public relations regarding its fracking activities are among the best in the industry. An information sheet Anadarko prepared, Questions and Answers Regarding Fracture Stimulation, is widely distributed and explains all of the steps that Anadarko undertakes to ensure the safety of its wells, with a specific focus on water protection and conservation. Anadarko also points out that less water is used in deep shale natural gas fracking operations per mmbtu than many other energy resources, including nuclear. Anadarko also voluntarily joined the Frac Focus Chemical Disclosure Registry, where it discloses the materials used on each of its individual wells. Others on the registry include Apache (APA), Devon (DVN), and Occidental Petroleum (OXY).

Outlook

Late last month Standard & Poor's Ratings Services raised its outlook on Anadarko from stable to positive and affirmed Anadarko's "BBB-" credit rating. In the note, Standard & Poor's indicated "the positive outlook reflects our expectation that credit protection measures will improve over the next 12 months," which I believe indicates Standard & Poor's is strongly inclined to award Anadarko a credit rating upgrade. It appears the major item is, once again, the Environmental Protection Agency/Tronox/Kerr-McGee litigation, which casts a shadow of uncertainty over Anadarko. Standard & Poor's is predicting the conclusion to the trial may come as early as August, but I think it is more likely that the trial will stretch into the fall.

Anadarko just recently dipped to a new 52-week low, and trading volumes almost doubled the norm for Anadarko. Currently around $59, Anadarko has a price to book of 1.5 and a forward price to earnings of 11.5. Compared to two of its strongest peers, this price to book is extremely attractive. At around $81 per share Oxy has a price to book of 1.7, and at around $92 EOG has a price to book of 1.9. Apache and Devon are trading at price to book levels similar to Anadarko's, not surprising given these three stocks tend to track one another.

As it is, I agree with the Standard & Poors' outlook for Anadarko, and I think that once the current litigation is settled Anadarko does not have any predictable barriers to a strong upswing heading through the second half of the year. I am setting a price target for Anadarko at $120 by 2014, given its string of successes and strong balance sheet, as it leads the industry in shale gas booms across the country.

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