What Could Hold Back Shares of Anadarko Petroleum?

Shares of Anadarko Petroleum (NYSE: APC  ) were recently given a sector outperform rating by several analysts. The company's second-quarter earnings report will be released by the end of this month. If the company doesn't meet market expectations, this earnings report could slow down its recent rally. Let's examine the main issues related to this earnings report. 

Reaching production goals
The company's upcoming second-quarter earnings report could curb its progress if it doesn't meet the quarterly guidance. The table below shows guidance for the average sales volume of oil, natural gas, and natural gas liquids during the second quarter of 2014 and a comparison to last year's.  

Source of data: Anadarko Petroleum

As the table above shows, the company's total sales rose by nearly 6% year over year. Most of this sales growth came from its oil and NGL operations. Conversely, Anadarko Petroleum's natural gas production fell by 3.7%. Even the rise in the price of natural gas didn't change the company's plan to reduce its annual natural gas production by 5% compared to 2013.

These numbers are based on the company's quarterly guidance. If it doesn't present similar figures in the second-quarter earnings report, this could prevent Anadarko Petroleum's stock from rising further.

In the first quarter, capital expenditures jumped by 47% year over year to reach about $2.6 billion. Most of this growth was from developing U.S onshore drilling in the Wattenberg field, Delaware basin, and Eagle Ford shale.

It also increased its exploration drilling in its Gulf of Mexico assets. This year, its total capex is expected to be between $9 billion and $9.5 billion. This means the company's capex should reach roughly $2.25 billion per quarter. If the company doesn't meet this estimate, it could suggest a potential impediment in its developing progress. In order to finance this high level of capex, the company will look to its close to $6 billion cash on hand, a $5 billion facility loan, and divesting non-core assets including its Chinese subsidiary for $1.075 billion. Therefore, any delays in progress aren't likely to come from financial problems but rather environmental issues, such as harsh weather conditions. 

Energy prices remain high
Besides the progress in Anadarko Petroleum's production, the changes in energy prices also affected its profit margin and revenue growth during the past quarter. The average price of oil (West Texas Intermediate) reached $103 per barrel -- more than 9% higher than the same quarter of last year. Although natural gas prices fell by 2.5% quarter over quarter, the price remained 14% higher than the second quarter of 2013. These numbers, however, could be lower due to the company's hedging strategy, which could reduce the realized prices from the market prices. 

Nonetheless, the high oil and natural gas prices will benefit other oil and gas producers such as Devon Energy (NYSE: DVN  ) and Chesapeake Energy (NYSE: CHK  ) , as indicated in the chart below. All of the above mentioned companies improved their profit margins in the past quarter.  

Source of data: Google Finance

The chart also shows that Anadarko Petroleum continues to lead the way in terms of profitability, which is partly due to higher realized prices and the energy production mix. As the company's profitability continues to improve, this could also translate to higher dividend payments. 

Bottom line
Anadarko Petroleum could see a slowdown, in the short term, if the upcoming earnings results don't meet market expectations. But based on its past performance, which should be taken with a grain of salt, the company is likely to reach its quarterly goals.

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