Anadarko Petroleum (NYSE: APC ) , the Woodlands, Texas-based oil and gas exploration and production company, reported a sharply lower first-quarter profit on Monday as a one-time charge offset better-than-expected production growth.
Excluding one-time items, however, the company posted earnings of $1.26 per share, handily beating analysts' expectations. Let's take a closer look at some of the key highlights from Anadarko's first quarter and why the company is in a much better position going forward.
Key highlights from the first quarter
Anadarko reported a first-quarter net loss of $2.67 billion, or $5.30 per share, compared to a year-earlier profit of $460 million, or $0.91 a share, due largely to a contingent loss of $4.3 billion associated with the Tronox Adversary Proceeding settlement agreement.
Excluding this and other one-time items, Anadarko's adjusted earnings came in at $1.26 per share, up from $1.08 per share in the year-earlier period and ahead of analysts' expectations of $1.15 per share, as the company delivered better-than-expected production growth.
First-quarter sales volumes surged to a record 819,000 barrels of oil equivalent (BOE) per day, up 3.3% year over year and above the high end of the company's guidance, led by an approximately 69,000 BOE per day, or 12%, year-over-year increase in onshore U.S. sales volumes.
Production growth from the company's onshore U.S. assets in Texas' Eagle Ford shale and Colorado's Wattenberg field was especially impressive. Wattenberg liquids volumes jumped 30% year over year, while Eagle Ford liquids sales volumes increased 46% year over year. This is important because Anadarko's onshore US assets are among its most profitable, with its Wattenberg asset generating returns in excess of 100% at current commodity prices.
With major cloud lifted, Anadarko free to soar
One of the biggest uncertainties that was weighing on Anadarko's share price was also lifted during the quarter, as the company was ordered to pay a settlement of $5.15 billion associated with the Tronox case, significantly less than the $14.2 billion penalty that could have been imposed. The day the settlement was announced, Anadarko's shares popped by 15%.
Encouraged by better-than-expected production growth during the quarter, Anadarko raised its full-year production guidance to 803-816 MBOE/d, which would represent 8% same-store sales growth over 2013 production levels. To achieve this goal, the company raised its 2014 capital investment guidance by $300 million to a range of $8.4-$8.8 billion to further accelerate drilling activity in the Wattenberg field and the Wolfcamp shale.
Last but not least, Anadarko will also continue its active portfolio management strategy that has seen the monetization of some $10 billion of assets since 2009. The company expects to monetize a portion of its stake in Western Gas Partners, LP (NYSE: WES ) , a limited partnership formed by Anadarko in 2008 to own, operate, acquire and develop midstream energy assets, which is estimated to have a current market value of more than $9.7 billion.
Even without additional asset monetizations, Anadarko remains solid from a balance sheet and liquidity perspective. It generated more than $2.5 billion of discretionary cash flow in the first quarter and ended the quarter with $5.9 billion of cash on hand. It also has access to a $5 billion undrawn revolving credit facility. Even after the Tronox settlement, Anadarko should easily be able to return more cash to shareholders through a dividend increase or through a share buyback program.
Anadarko's future looks bright
As evidenced by its first-quarter performance, Anadarko remains a truly world-class operator with a phenomenal collection of highly economical assets both domestically and abroad. In addition to its two major Gulf of Mexico projects and its core domestic assets in the Wattenberg and Eagle Ford, Anadarko's large acreage position in the Wolfcamp shale represents a truly massive opportunity that may not be fully appreciated by investors.
Though the favorable resolution of the Tronox case has lifted the company's valuation considerably, Anadarko may still have reasonable upside left. Following the company's strong quarterly performance, analysts at Citigroup raised their price target from $112 per share to $115 per share, which represents nearly 15% upside from the company's current share price of $102 per share.
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