Among the mid-major independent exploration and production companies, I have long been interested in Anadarko Petroleum (NYSE: APC ) and Apache (NYSE: APA ) , which struck me as exceptionally well managed world-class operators that own assets in some of the world's fastest-growing and most promising resource basins.
While Anadarko may be more attractive for investors seeking an energy company with higher global diversification, Apache is a better bet for those seeking greater leverage to U.S. crude oil production. And while I think both companies are good long-term investments, Apache's severely depressed valuation makes it the better buy today.
Assets and strategies
Both companies are large energy producers with market caps north of $30 billion, though Apache's market cap of $35 billion is much smaller than Anadarko's $51 billion. The two also have comparable oil/gas production mixes and are both focused on growing liquids output.
Anadarko has a more diversified portfolio featuring sizable stakes in multiple foreign locations, while Apache's asset base is much more heavily concentrated in onshore U.S. resource plays -- the result of a significant divestment program over the past year that saw monetization of some $8 billion worth of noncore international assets.
With a much more streamlined portfolio, Apache views its assets in West Texas' Permian Basin and Oklahoma's Anadarko Basin, which feature stronger and more predictable rates of growth, as the centerpiece of its growth strategy. Meanwhile, foreign assets in Egypt and the U.K. North Sea are seen as stable cash generators that will fund Apache's domestic growth.
Anadarko also views its onshore U.S. assets, namely Texas' Eagle Ford shale and northeastern Colorado's Wattenberg field, as two of its largest drivers of oil production growth. However, the company has significant growth-augmenting operations in the Gulf of Mexico, cash-generative megaprojects in Ghana and Algeria, and promising exploratory prospects off the eastern and western coasts of Africa.
Production growth outlook
Both companies expect to deliver 5%-8% annual production growth over the next few years, but Apache's production growth relative to 2013 will remain constrained for at least another couple years due to its recent asset sales.
Apache and Anadarko also have strong domestic liquids production growth prospects. Apache delivered 21% year-over-year growth in onshore North American liquids production during the first quarter and is guiding for 15%-18% growth for the full year. Meanwhile, Anadarko delivered 12% growth in onshore U.S. volumes during the first quarter and is guiding for more than 10% growth this year.
At the end of the day, investors probably don't care about where a company makes its money; they're likely more concerned with future expected returns, which are largely a function of valuation. In this respect, I think both are attractively valued, though Apache has the edge.
The company trades at just 12 times forward earnings and commands an extremely depressed EV/EBITDA multiple of under 4, representing a significant discount to other similarly sized energy producers focused on liquids-rich U.S. resource basins. Furthermore, Apache barely trades above its book value -- a key indicator of undervaluation frequently used by disciples of renowned value investor Benjamin Graham.
Over time, I think the market will recognize just how much progress Apache has made in streamlining its portfolio to focus on higher-margin, liquids-rich U.S. plays and adjust the company's valuation accordingly. RBC Capital recently raised its price target on Apache's stock from $99 to $102 per share, which would represent about 15% upside from its current price of roughly $89 a share.
Anadarko's valuation also looks reasonably attractive, despite the 15% surge in its share price since the announcement that its liability in the Tronox case was much less than the markets expected and just a fraction of the maximum $14.2 billion penalty that could have been imposed. Though the company now trades at a little over 18 times forward earnings, only a slight discount to the industry average, some of its assets may not be fully appreciated by the market.
According to Credit Suisse analyst Arun Jayaram, the markets aren't giving enough credit to Anadarko's undeveloped assets in the Permian Basin's Wolfcamp shale, where it commands roughly 600,000 acres; he reckons the company's net asset value could be worth more than $120 a share. Barclays recently raised its price target on the company from $109 to $111 per share, which represents more than 10% upside from its current price of about $99 per share.
The final verdict
While both Apache and Anadarko are top-notch operators poised to deliver strong growth in production, earnings, and cash flow in the years ahead, I think Apache's greater leverage to onshore U.S. resource basins and more attractive valuation make it the more compelling buy. As such, I am strongly considering initiating a position in the company in the weeks ahead.
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