Image source: Apache Corp.
Apache (APA 7.67%) and Anadarko Petroleum (APC +0.00%) share many similarities. Both are large, diversified independent oil and gas producers that operate in several geographies. Those parallels are one reason why Anadarko made an offer to buy Apache late last year. However, it is their subtle differences that make one company a better buy over the other at the moment.
Battle of the balance sheets
If there is one lesson investors learned during the downturn, it is the importance of having a strong balance sheet. Here's how these two oil giants compare.
|
Company |
Credit Rating |
Total Debt |
Debt/Enterprise Value |
Cash on Hand |
|---|---|---|---|---|
|
Apache |
BBB/Baa3 |
$8.7 billion |
28% |
$1.2 billion |
|
Anadarko Petroleum |
BBB/Ba1 |
$15.7 billion |
34% |
$1.4 billion |
Data sources: Company investor presentations and press releases.
For the most part, both companies have relatively comparable balance sheets, though Apache's is a bit better. Not only does it have less proportional debt, but it has a slightly better credit rating. That is after Moody's downgraded Anadarko's credit rating below investment grade earlier this year citing its "high debt levels relative to cash flow." While the rating agency also downgraded Apache, it maintained an investment grade rating because of its "sizable cash balance, aggressive reductions in capital spending which has limited anticipated negative free cash flow in 2016 and 2017, and only modest debt maturities through 2020."
That slight edge gives Apache the win in this battle.
Battle of the asset base
Next, let's drill down into the portfolios of the two oil giants, first taking a look at where both currently get the bulk of their production:
Data source: Company press releases. Chart by author. Note: In thousands of barrels of oil equivalent per day.
As that chart shows, both companies currently get the bulk of their production from U.S. onshore oil and gas plays. For Anadarko, its biggest production driver is DJ Basin in Colorado, where it produced an average of 234,000 barrels of oil equivalent per day (BOE/d) last quarter, primarily from the gas-rich Wattenberg Field. Because of that, the bulk of the company's U.S. onshore production is natural gas, with oil only accounting for 26% of its domestic onshore output. Meanwhile, the company's positions in the deepwater Gulf of Mexico, onshore in Algeria, and offshore in Ghana supply more oil, resulting in oil accounting for 38% of the company's total production.
Contrast this with Apache, which gets a much larger portion of its output from its international operations. Furthermore, higher-margin oil accounts for 53% of its overall production, mainly because the bulk of its U.S. onshore production comes from the oil-rich Permian Basin. Meanwhile, both its position in Egypt and the North Sea are primarily oil producers.
When we compare these two head-to-head, the greater geographic diversification and oil-weighted production give Apache the close win in this category.
A look at the upside
Anadarko is working hard to bolster both its geographic diversity as well as its oil production. Internationally, the company is moving forward with the Mozambique LNG project, which will add significant production when it comes online. Meanwhile, it has several other exploration projects in Africa that could drive international production growth in the coming years.
Furthermore, Anadarko recently spent $2 billion to bolster its position in the Gulf of Mexico. It not only doubled its current production but added 20 near-term growth opportunities and 15 exploration projects. In addition to that, the company has two compelling oil-rich growth drivers in its U.S. onshore business: the Delaware Basin and the DJ Basin. The company believes it can double its sales volumes from these two resource plays over the next five years at current oil prices due to their compelling economics. As a result, Anadarko estimates that it can grow its production by a 10% to 12% compound annual rate through 2020 as long as oil is over $50 a barrel.
Apache, on the other hand, sees most of its growth coming from North American onshore plays going forward. Like Anadarko, it has a compelling position in the Delaware Basin, including the recently discovered Alpine High play. In addition to that, it has upside from its positions in the Midland Basin and STACK/SCOOP plays in the U.S. as well as the Duvernay and Montney shale plays in Canada. That said, Apache has yet to put out a production growth target, so while it has an abundance of captured resources, its development path is unclear.
Anadarko's international growth, increasing oil content, and visible upside gives it the win over Apache in this category.
Investor takeaway
For some investors, Apache's slightly better balance sheet and stronger current portfolio make it a better buy. However, for investors who are looking for upside, Anadarko is the better option. It has visible double-digit production growth on the horizon, the bulk of which is weighted to oil. That makes it stand out from Apache, which not only doesn't have a clearly discernable path forward at the moment, but doesn't have Anadarko's margin upside.
