Anadarko Petroleum: Don't Sell This Stock

| About: Anadarko Petroleum (APC)
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The second half of the year is an opportune time for investors to consider Anadarko Petroleum (NYSE:APC) as an investment in the E&P industry. The company's most recent earnings reports showed a decline in revenue across the board, but this was largely due to declines in commodity prices through 2012. Anadarko achieved record productivity in the second quarter and had a promising first half of 2012. Anadarko maintains an aggressive approach to its exploration activities abroad, focusing much if its efforts on developments in the Gulf of Mexico and Africa. Anadarko feels confident in its defense against litigation claims brought on by Tronox and U.S attorneys on behalf of the EPA. Below, I will explain why current shareholders should hold onto Anadarko for the long term, as Anadarko experiences organic growth and increases in revenue throughout 2013 from gradually increasing oil prices alongside the anticipated rebound in natural gas prices.

Anadarko is most comparable to other independent U.S.-based E&P firms with market caps ranging around $15 billion to $35 billion such as Apache Corporation (NYSE:APA), EOG Resources (NYSE:EOG), Noble Energy (NYSE:NBL) and Devon Energy Corporation (NYSE:DVN). Behind EOG Resources, Anadarko has the second highest price-to-earnings ratio among these E&Ps. Behind Noble Energy and EOG Resources, Anadarko has the third highest price-to-sales and price-to-book ratios among the aforementioned U.S based E&Ps. At around 0.51%, Anadarko currently has the lowest dividend yield among these E&Ps. However, at around 1.51, Anadarko does have the highest beta among these E&Ps.

At around 6.44%, Anadarko has the third highest sales growth over the past five years, trailing behind EOG Resources at 20.85% and Apache Corp at 15.24%. At around 1.33, Anadarko has the second highest current ratio, only trailing Devon Energy. At around 85%, Anadarko has the second highest gross margin behind EOG Resources. But Anadarko is the only one of these E&P with its return on equity, operating margin and net margin running at a deficit, while it has the highest debt-to-equity ratio of around 0.74. Anadarko stock has been the worst performer among all the E&Ps YTD through mid-August. Its stock price has declined by around 1.9% since its last earnings release.

According to the recent quarterly report, Anadarko total revenues in the second quarter decreased to $3.22 billion from $3.77 billion year-over-year (YOY). Total revenues in the first half of 2012 decreased to $6.67 billion from $6.93 billion YOY. Net loss in the second quarter attributable to stockholders decreased to $89 million from $544 million YOY. For half of 2012, this net income increased to $2.07 billion from $706 million YOY. Total sales revenues decreased 14% YOY to $3 billion in the second quarter and decreased 5% to $6.16 billion for the first half of 2012. In the second quarter, overall revenue from natural gas decreased 43% YOY to $496 million, oil and condensate decreased 1% YOY to $2.22 billion and LNG decreased 24% YOY to $282 million. In the first half, overall revenue from natural gas decreased 38% YOY to $1.07 billion, oil and condensate increased 10% YOY to $4.47 billion and LNG decreased 11% YOY to $624 million.

The decreases in quarterly revenue came from declining prices, partially offset by higher sales volumes across the board. Revenue decreases in the first half of 2012 were partially offset by higher sales volumes, as well as higher prices for oil. Quarterly revenue decreased due to a $455 million decline in natural gas prices YOY, oil prices decreased $170 million and LNG declined $110 YOY; this total decline of $735 million from prices was offset by an additional $259 from combined sales volume YOY. In the first half of 2012, lower natural gas prices declined revenues by $746 million, while lower priced LNG declined revenue by $123 million. This was partially offset by a $165 million from increased oil prices, equating to an overall $704 million deficit to total revenue YOY; this was also offset by $393 million from a combined increase in sales volume YOY.

Sales volume in the second quarter for oil in the U.S increased by 11% YOY, while it decreased 7% internationally, U.S sales volume increased 6% YOY for the first half of 2012. In the second quarter, natural gas sales volume increased 9% YOY, while the price per Mcf decreased 48% YOY. In the first half, natural gas sales volume increased 5% YOY, while price per Mcf decreased 41% YOY. Increases in sales volume were due to drilling success in the Marcellus and Eagleford shales, as well as higher volumes in the Rocky Mountain territories. This accompanying press release from Anadarko covered the highlights YTD in 2012. Sales volume increased by a record 68 MMBOE in the second quarter, an 8% increase YOY.

Growth was partially due to success from horizontal drilling in the Wattenberg territory; Anadarko will add three more rigs here during 2012. Anadarko will also add another well to the three already producing 40,000 BOPD in its Tonga play. The SEC filing also notes that no settlement is in the future for the Tronox trial, Anadarko is confident in its defense and doesn't expect to pay more than $1.4 billion in the end. Anadarko has recently entered into three year farm-in agreement in South Africa with PetroSA for 80% stake as it tries to build upon the success it's had off the coast of Mozambique. Aside from Mozambique, Anadarko had recent success in its joint venture in the Tano Block within Ghana.

Anadarko spent almost $390 million in the first quarter on its exploration activities in Africa. Anadarko is considering divesting one of its natural gas assets in Wyoming in order to mitigate the losses from the natural gas division thus far in 2012, while it continues to explore several international opportunities. The low prices in natural gas is primarily a domestic issue due to oversupply. Anadarko's focus on international territories will put it in a prime position to benefit, as worldwide demand for natural gas as an alternative fuel increases alongside domestic prices and higher oil prices across the globe in 2013.

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