Anadarko Petroleum Is Attractive At Current Levels

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Mar 23, 2015

Anadarko Petroleum (APC, Financial) has corrected from a high of $112.7 on August 28, 2014 to a low of $72 by December 15, 2014. The 36% correction in the stock was triggered by lower oil prices. However, the stock has subsequently shown strong resilience and currently trades at $81.95. If the stock performance for YTD15 is observed, Anadarko Petroleum has remained flat for the first three months of the year. In my view, the company is in a phase of consolidation and the stock is likely to move higher over the next 6-12 months. This article discusses the reasons to like Anadarko Petroleum from a near-term as well as a long-term perspective.

Coming first to the near-term perspective, Anadarko Petroleum has a planned capital expenditure of $5.4 to $5.8 billion for 2015. The important point here is that nearly 55% of the company’s capital expenditure is allocated to short cash cycle projects and 30% of the capital expenditure is allocated to medium cash cycle projects. A strong investment in short cash cycle ensures that Anadarko’s cash flow for 2015 will be robust.

Further, for the near-term, it is important to mention that Anadarko Petroleum has $3 billion of cash in hand and a borrowing capacity of $8 billion in the form of revolving credit facility, commercial paper and a 364-day facility. The company’s current financial position, therefore, allows for easy investments in 2015 without considering the internal cash flows.

The company’s financial strength and financial flexibility is also continuously enhanced by the ability to sell assets or farm-down on assets at attractive prices. In 2013 and 2014, Anadarko Petroleum generated net proceeds of $4.8 billion and $2.6 billion respectively through asset sales. With $700 million in divestiture already in 2015, the company’s financial flexibility is likely to remain robust through the year.

Another positive point that I want to add here related to 2015 is the company’s expectation for production and reserves replacement. Even with a likely production of 295-301mmboe, the company expects 100% reserve replacement at a finding and development cost of $20 per barrel. I believe that this is a big positive considering the fact that Anadarko has been continuously divesting assets. The reserve replacement still remains robust and it comes at a low cost. This will help Anadarko Petroleum command robust EBITDA margin when oil prices trend higher.

Another factor that is positive for Anadarko Petroleum and for shareholder value creation is the company’s ability to generate continued free cash flows. For FY13 and FY14, Anadarko Petroleum generated free cash flow of $1 billion and $0.8 billion respectively. Once oil prices recover, I expect this to translate into higher dividends coupled with potential share buybacks.

Therefore, with all these positives, it is not surprising to see Anadarko Petroleum stock showing strong resilience at current levels. In my view, the consolidation at current levels is likely to continue and the upside will come once oil prices start trending higher. I therefore recommend gradual accumulation of this stock with quality assets that will have an excellent IRR once oil prices tradce at $75-$100 per barrel.