Anadarko Petroleum Has Further Upside Potential

Anadarko Petroleum's (NYSE: APC  ) shares are up more than 25% year to date and have outperformed shares of competitors Continental Resources (NYSE: CLR  )  and Noble Energy (NYSE: NBL  ) , largely due to the settlement with Tronox announced in April. 

Anadarko Petroleum offers investors a better than average portfolio with an attractive deep-water program and solid onshore assets. The company, in particular, has a dominant position in the Niobrara and a very attractive position in the emerging Delaware Basin. Anadarko has a very successful track record of deep-water exploration. Moreover, the large discovery in Mozambique and the company's willingness to monetize assets (Anadarko has generated more than $10 billion in asset monetization since 2009), all make Anadarko a very compelling investment opportunity.  

Despite its recent outperformance, the company continues to trade at a discount compared to its peers. Anadarko has a price/book ratio of 2.6 compared to Continental Resources' 6.0 and Noble Energy's 2.7. Similarly, Anadarko has a price/sales ratio of 3.0 compared to 6.7 and 4.8 for Continental Resources and Noble Energy respectively. Anadarko's relatively cheap valuation and better than average portfolio present a good entry point.

Free at last
Anadarko recently announced that it has entered into a settlement agreement with the Tronox plaintiffs to resolve all claims against the company's subsidiary, Kerr-McGee. As part of the settlement, the company agreed to pay $5.15 billion including interest. The settlement payment will likely be made prior to the end of 3Q14 after some legal issues are finalized. Anadarko's significant cash position and an available $5 billion credit facility provide flexibility in funding the payment. 

The settlement will free the company from all future claims and provides a significant net asset value unlock. Anadarko's management has been constrained given the necessity to maintain an under-levered balance sheet. Due to the Tronox uncertainty, neither could the company accelerate its high rate of return projects in Wattenberg or Delaware Basin nor could it pursue investor-friendly actions such as meaningful dividend increases or buybacks. However, post-settlement the company has increased clarity to further accelerate its high rate of return assets, and the focus should now return to the company's deep portfolio, superior execution, and growth potential.

Underappreciated onshore assets
The company reported first quarter operating EPS of $1.26, beating consensus estimates of $1.15 by 10%. The production of 72.2 million barrels of oil (mmboe) came in above the high end of the company's guidance range of 69-71 mmboe. 

Anadarko increased its capex for the year by $300 million, or 3% to $8.4 billion-8.8 billion. The additional capital will be directed toward the Wattenberg, Delaware Basin and Powder River Basin. The company also raised the mid-point of its full-year production guidance by 3.5 mmboe, or about 1% to 293-298 mmboe (from 293-306 mmboe).

Anadarko's operational update highlights the quality of the company's U.S. onshore assets, which I think are underappreciated compared to the company's international/deepwater portfolio. Despite weather issues, the company was able to grow production at Wattenberg by 19,000 barrels per day. After disappointing growth in recent quarters, Eagle Ford oil production also increased by 4,000 barrels of oil per day or 20% sequentially. 

Going forward, the capacity expansion at the Lancaster cryogenic plant and start-up of a NGL pipeline should result in further production/pricing uplift. The point is Anadarko has a portfolio of quality but underappreciated U.S. onshore assets with the potential to surprise positively.

Another dividend hike
Anadarko's Board recently approved an impressive 50% increase in its dividend, taking the quarterly dividend to $0.27 per share from $0.18 . The hike comes after the company reported solid first quarter results. The dividend increase not only shows the strength of the company's robust balance sheet but also shows the confidence Anadarko Petroleum has in its future prospects. This is a second dividend increase by Anadarko in less than a year. The company increased its dividend by 100% in August last year to $0.18 per share. 

Anadarko has a dividend yield of 1.1% compared to 1% of Noble Energy. Continental Resources, on the other hand, does not pay dividend.

Bottom line
Despite Anadarko's peer-leading exploration, execution, and management, the risks associated with the Tronox settlement compressed the valuation of the company and created a wide discount to NAV. However, now that the Tronox uncertainty is behind the company, the focus should now shift back to Anadarko's superior portfolio, growth potential, and successful track record of deepwater exploration. The company should be able to reclaim its premium valuation via execution of its production plans and market recognition of its assets value.

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10/24/2014 4:00 PM
APC $90.98 Down -1.19 -1.29%
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Continental Resour… CAPS Rating: ****
NBL $57.43 Down -1.05 -1.80%
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