Anadarko Petroleum (NYSE:APC) is one of the largest independent exploration and production companies with a production mix of 57% gas/43% oil. The group owns an attractive array of North American unconventional natural gas assets which generate attractive cash flows as well as a diversified exploration program with exposure to several of the world's most attractive exploration areas. In an era of restricted resources oil and gas resources, exploration represents a good way to materially add to asset value.
Strong Q1 2013 results
Anadarko's valuation premium vs. peers is fully justified, due to the strong growth profile owing to attractive shale assets in North America and an active global exploration program with exposure to frontier regions. Additionally it seems that the potential liability of the Tronox litigation is already reflected in the stock price. With strong Q1 2013 results a BUY recommendation is maintained.
Outstanding quarter driven by strong production growth and higher prices
Anadarko Petroleum reported outstanding Q1 2013 results, highlighting significant production growth which exceeded the company's guidance and better-than-expected price realizations. Accordingly, adjusted net income of $1.08 per share topped consensus expectations of $0.93. Production volumes advanced 7% QOQ to 793,000 barrels of oil and gas equivalent per day, exceeding the high-end of company guidance, primarily driven by strong growth in US onshore production and a one-time accelerated lifting in West Africa (Ghana). As a result, the group slightly raised its fiscal year 2013 volume guidance. Operating performance was strong as well; as total costs declined 9% QOQ to $1.5 billion driven by 5% lower operating expenses ($3.46 per barrel), lower exploration expenses and lower gathering processing and marketing costs. As a result, net cash flow from operations rose 13% QOQ to $2.5 billion which allowed to comfortably meet capex of $1.7 billion.
Extensive project portfolio and unconventional assets to drive production growth
Anadarko's portfolio of high-quality projects are exposed to several attractive low-cost North American unconventional shales and large-sized expansions should allow meeting the ambitious long-term production growth target of 7%-9% per year. Aided by fundamentally supported oil prices, this should translate into strong cash flow generation. Combined with a strong balance sheet (~$5.5 billion of cash and undrawn credit facilities at hand), this should allow to easily fund the group's capex needs.
Bottom Line: Several exploration catalysts in 2013
Anadarko's extensive and highly active drilling campaign which is focused on several exploration areas around the world (e.g. Gulf of Mexico, China, Ghana, Liberia, Sierra Leone, Cote D'Ivoire, Mozambique, Brazil) is likely to provide for attractive stock catalysts in coming months. This should allow the group to continue to expand its reserve base. The expected sale of the Brazil assets represents additional upside potential and would further improve the group's financial strength.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in APC over 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.