U.S. oil giant Anadarko Petroleum (APC) has shifted its strategy in recent years from growing production to enhancing shareholder value. One result of that pivot is that the company has been focusing its investments on its best opportunities, which is not only improving its returns, but is also freeing up money that it can return to investors through dividends and buybacks. The company expects this trend to continue in 2019, and that's evident in its recently released spending plans.
Drilling down into Anadarko's budget
Anadarko Petroleum plans to invest between $4.3 billion and $4.7 billion into capital projects in 2019. That range is slightly lower 2018's $4.5 billion to $4.8 billion spending plan, mainly due to the company's not-yet-closed sale of its remaining midstream assets to Western Gas Partners (WES 4.48%). Because of that, Anadarko's midstream spending will decline from around $650 million last year to just $130 million in 2019, with that amount due entirely to when the transaction with Western Gas Partners gets finalized. In addition, Anadarko is also cutting its deepwater Gulf of Mexico budget by $300 million, which will give it enough capital to keep its production in the region roughly flat.
Meanwhile, it plans to ramp up spending on its U.S. resource plays: 70% of its capital earmarked is to those assets. The bulk of the investment will go into the Delaware Basin and the Denver-Julesburg Basin, though the company also plans to continue appraising its position in Wyoming's Powder River Basin. Those investments will enable the company to grow its oil production by 10% this year, a slight deceleration from the 13% growth it expects to deliver in 2018.
Another noteworthy budget inclusion is the $200 million it has earmarked toward its Mozambique liquified natural gas (LNG) project. Anadarko noted that it's on track to make a final investment decision in the first half of next year. If it does approve the project, it will likely adjust its capital budget to reflect the increased spending needed to build that facility.
Plenty of cash to go around
Anadarko noted that it could fully fund its 2019 capital budget as long as oil averages $50 a barrel, which is about $8 a barrel below the current price. Meanwhile, if crude averages $60 a barrel over the next year, the company estimates that it can produce $1.6 billion in free cash flow. Add that excess cash to the $2 billion the company will receive from selling its midstream assets to Western Gas Partners, and the $1.9 billion in cash on its balance sheet at the end of the third quarter, and the company has plenty of money to return to shareholders.
It plans to do that in three ways. First, the company has boosted its share-buyback authorization by $1 billion to a total of $5 billion. It has already spent $3.5 billion of that over the past year, reducing shares outstanding by 10%. It expects to complete the remaining $1.5 billion in buybacks by the middle of 2020.
In addition to that, the company will increase its dividend another 20% to $0.30 per share on a quarterly basis. That brings its year-to-date payout increase to an impressive 500%. Of note, with the latest raise, Anadarko Petroleum's dividend is now above the level it was in 2015 before the company slashed it by 82% to conserve cash during the oil market downturn. Further, it will boost the company's dividend yield to 2.2%, which is higher than the 1.9% average of dividend-paying stocks in the S&P 500.
Finally, the company plans to retire another $500 million in debt in the next year, bringing its total debt repayment to $2 billion. While that might not seem to offer an obvious benefit to investors (since the company is sending the cash to creditors), the move will reduce its interest payments, which will increase cash flow and shareholder value.
One other thing worth pointing out about these moves is that they'll all increase Anadarko Petroleum's growth rate on a per-share basis. The company noted that production should expand by 15% per debt-adjusted share, which takes into account the lower share count from the buyback as well as its falling debt level.
Set up to thrive even if oil continues to dive
Anadarko Petroleum continues to put a priority on returning cash to shareholders. That's why the company is remaining disciplined in its capital spending, with a goal of keeping it to the cash flow it can produce on $50 a barrel oil. With this strategy, the company has positioned itself to generate significant excess cash when oil prices are higher. In combination with its cash-rich balance sheet, that should give it ample funds with which to reward its shareholders in the next year.