Anadarko Petroleum Corp Offers More than Just a Buyout Opportunity

One of the largest independent oil producers in America, Anadarko Petroleum (NYSE: APC  )  recently reached a massive $5 billion legal settlement over its Kerr-McGee unit. This sent shares soaring upwards, from $86 on April 3 to over $100 as of April 4. The settlement prompted some analysts to speculate that Anadarko Petroleum could be swallowed up by an integrated oil major or merge with another independent oil producer. Investors interested in this company should look past the speculation, regardless of how much truth there is to it, and see just how Anadarko plans on growing shareholder value on its own over the next few years. 

Onshore America
From 2009 to 2013, Anadarko was able to grow its output from onshore American plays from 353,000 boe/d to 583,000 boe/d. As production shot up, so did liquids output. Liquids production rose from 81,000 boe/d to 185,000 boe/d during that same time period. Anadarko Petroleum has had plenty of success developing U.S. shale plays over the past five years, and the next five years could be even better. 

This year will see Anadarko spend most of its $8.3 billion capex budget on American shale plays. With this budget, Anadarko is forecasting that overall production levels will rise by 7.2% to 625,000 boe/d as liquids output increases by 27% to 235,000 boe/d. This seems great in theory, but Anadarko needs a plan to back up its guidance.

Three favorite plays
The Wattenberg, Eagle Ford, and Delaware Basin are the three shale plays Anadarko has the highest hopes for. While Anadarko does have extensive assets in the Marcellus region, output growth will remain somewhat subdued until natural gas prices rise.

Investors should first take note of Anadarko's plan for the Wattenberg. With 1 billion to 1.5 billion barrels of oil equivalent laying underneath its 350,000 net acres in the area, Anadarko Petroleum hopes to increase that further with downspacing projects. On top of using downspacing, Anadarko is ramping up its horizontal drilling program in the Wattenberg to truly gauge what its acreage holds.

Back in 2011, Anadarko Petroleum's production in the Wattenberg was entirely attributed to vertical drilling. Then, in 2012, Anadarko started using horizontal drilling in the Wattenberg; this sent output flying upwards. This is just the very beginning, as Anadarko is forecasting 20%+ compounded growth through 2018. To fuel this growth, Anadarko plans on using 13 rigs to complete 360 wells this year. As more wells come online, Anadarko can use the additional cash flow to fund future growth in Colorado. 

Texas
Down to the south, Anadarko has been investing heavily in the Eagle Ford play. With wells in the Dimmit and Webb counties pumping out a production mix that is 60% to 70% weighted toward liquids, Anadarko sees plenty of cash flow growth coming in future years. This will be aided by its 2,500 future drilling locations.

With ten rigs up and running in the area, Anadarko is guiding to complete 400 wells this year. This should boost output from 48,000 boe/d in 2013 to 70,000 boe/d. Shareholders should also take note that Anadarko Petroleum's drilling time has been cut in half since 2011 as well costs continue to trend lower. If this trend continues, Anadarko doesn't have to rely on spending increases to grow output.

Next to the Eagle Ford lays the Delaware Basin, which houses the stacked Bone Spring and Wolfcamp shale play. By running eight to ten rigs in the area this year, Anadarko hopes to complete 80 wells.

While this may seem like a tiny number compared to its Wattenberg or Eagle Ford ambitions, investors should keep in mind that the production mix is 85% liquids and the average estimated ultimate recovery (EUR) per well is between 500,000 and 600,000 boe. Eagle Ford wells have similar EURs of 550,000 boe to 600,000 boe but a lower liquids content, and Wattenberg wells have much lower EURs of 350,000 boe-450,000 boe with a 60% to 65% liquids content.

Foolish conclusion
Not all shale wells are created equal, but all three of these plays will create strong liquids production growth with high rates of return for Anadarko Petroleum. American shale plays give Anadarko Petroleum the opportunity to grow production substantially over the next four years, but beyond 2018 Anadarko's offshore assets will provide a second wind to its growth prospects. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 15, 2014, at 10:18 AM, sgraham005 wrote:

    Hard to know which integrated oil major has the cash flow make an acquisition, most of their cash has been consumed by major capital project cost overruns. Merger with another independent sounds more likely

  • Report this Comment On April 15, 2014, at 12:04 PM, callumturcan wrote:

    I'm more interested in what Anadarko plans to do with its shale plays now that it's free of a major liability and nearing/at output levels that generate free cash flow.

  • Report this Comment On May 12, 2014, at 3:12 PM, Hansen wrote:

    Anadarko updated its sales volume guidance for FY14 by 3.5 million barrels of oil equivalent http://bit.ly/1gffLhZ

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