Crashing Crude Prices and Higher Costs Cut Anadarko Petroleum’s Q4 Profits

Crude prices crashed 40% during the fourth quarter, which had a noticeable impact on the financial results of oil producers. Anadarko Petroleum (APC) wasn't immune -- its earnings declined sharply from the third quarter and came in well below analysts' expectations. While those weaker crude prices did crimp the company's profitability, that hasn't altered its plans for 2019.

Drilling down into the report

Data source: Anadarko Petroleum. BOE/D=barrels of oil equivalent per day.

On a positive note, Anadarko Petroleum's production was in the middle of its guidance range. Overall, the company grew output 9%, with oil sales expanding at an even faster 14% from 2017's level after adjusting for asset sales. The main driver was the company's U.S. onshore business, where production rose 17% thanks to continued growth in the DJ and Delaware Basins. The oil producer also benefited from higher international production, mainly due to the timing and size of tanker fillings, which help offset flat results in the Gulf of Mexico.

Anadarko's adjusted earnings, however, came in well below expectations due to lower oil prices during the quarter as well as higher costs. Expenses jumped 19% as the company ramped up investments in its two core U.S. onshore plays.

Despite weaker oil prices and higher expenses during the fourth quarter, Anadarko Petroleum generated a gusher of cash flow by producing $1.6 billion in cash during the quarter, boosting its full-year total to $5.9 billion. The company reinvested about $5 billion of that into drilling more wells and expanding its infrastructure. It used the excess -- as well as cash from its balance sheet -- to buy back stock, repay debt, and boost its dividend a jaw-dropping 500%. The company has now repurchased $3.75 billion in stock since it started the program in late 2017, retiring 12% of its outstanding shares, and has paid off $600 million in debt. Meanwhile, it ended the year with $1.3 billion in cash and should receive another $2 billion when it closes its midstream transaction.

Image source: Getty Images.

A look at what's ahead

Despite the recent turbulence in the oil market, Anadarko Petroleum reaffirmed its capital plans for 2019. The company still expects to spend between $4.3 billion and $4.7 billion on expanding its oil and gas business, which should enable it to grow its oil production by 10% this year. The company noted that it could fund that spending plan with the cash flow produced on $50 oil, which is below the recent price of nearly $54. That has the company on track to generate excess cash.

Anadarko plans to use whatever free cash flow it produces, along with some from its balance sheet, to continue rewarding investors. Overall, the company expects to repurchase another $1.25 billion in stock and pay off an additional $1.4 billion in debt by mid-2020, as well as continue paying its much higher dividend.

Anadarko also made significant progress in recent months on its liquified natural gas (LNG) project in Mozambique. The company recently signed several LNG sale and purchase agreements with key buyers, including LNG leader Royal Dutch Shell (RDS.A) (RDS.B), which will be a foundational customer for the project. Shell agreed to buy 2 million metric tons of LNG per year for 13 years, which brought the total for the project up to 7.5 million metric tons. That's a significant portion of the proposed facility's 12.88 million metric tons of annual capacity. This progress in securing customers leads Anadarko to believe it will be able to sanction the project in the first half of this year, which would enhance the company's long-term growth prospects.

A solid end to an excellent year

While higher costs and lower oil prices ate into Anadarko's fourth-quarter profits, it was still a strong year for the company. Oil production rose double digits, which -- when combined with higher crude prices through much of the year -- enabled Anadarko to generate gobs of cash flow. The company sent a large chunk of that money back to investors via a much higher dividend and a share repurchase program, while also investing to drive continued growth in 2019 and beyond.

This ability to grow at a healthy pace while still returning boatloads of cash to investors at lower oil prices makes Anadarko an ideal oil stock to consider owning in this turbulent market.

Check out the latest Anadarko Petroleum earnings call transcript.