Over the past few years, Anadarko Petroleum Corporation (NYSE:APC) has gradually reduced its international footprint in favor of accelerating activity in onshore U.S. resource plays, which feature stronger and more reliable returns. The company's recently released 2014 capital expectations and guidance suggests this focus on domestic opportunities will continue. Let's take a closer look.
Where Anadarko will spend its money
On Tuesday, Anadarko said that it would boost its 2014 capital budget to between $8.1 billion and $8.5 billion, up from $7.7 billion in 2013, not including investments associated with Western Gas Partners, LP (NYSE:WES), a separate publicly traded entity that Anadarko controls and includes in its consolidated financial statements.
Roughly 60% of Anadarko's budget will be allocated toward onshore U.S. resource plays, while 30% will be directed toward international and deepwater operations and exploration. The remaining 10% has been earmarked for midstream and other projects. Of the approximately $4.9-$5.1 billion directed toward onshore U.S. operations, more than 80% will go toward oil- and liquids-rich opportunities.
Onshore U.S. opportunities
The single largest driver of Anadarko's growth this year should once again be its Wattenberg Horizontal program in Colorado. The play is already generating returns in excess of 100% -- the highest in the company's onshore U.S. portfolio -- that should only get stronger thanks to regional infrastructure improvements and efficiency gains from a recent acreage swap with Noble Energy (NYSE:NBL).
In October, Noble and Anadarko exchanged roughly 50,000 net acres in different parts of the Wattenberg, giving Anadarko a much more consolidated core acreage position that is better complemented by its existing infrastructure in the play. As a result, the company should see further cost reductions and improvements in operating efficiency.
Similarly, the expansions of the 300-million-cubic-feet-per-day Lancaster cryogenic plant and the 150,000-barrels-per-day Front Range NGL Pipeline should significantly boost takeaway capacity from the play, allowing Anadarko to drill more than 360 Wattenberg wells this year with a 13-rig drilling program. Along with its operations in South Texas' Eagle Ford Shale and other liquids-rich plays, the Wattenberg should help drive 10% year-over-year adjusted growth in onshore U.S. liquids production this year.
The Wolfcamp and international opportunities
In addition to its huge opportunity in the relatively low-risk, established Wattenberg play, Anadarko also sees massive opportunity in the emerging Wolfcamp play of West Texas. The company has already derisked roughly 20% of its approximately 600,000 gross acreage position in the play and plans to continue evaluating and derisking the rest of its acreage this year.
It expects to drill more than 80 Wolfcamp wells this year using an 8- to 10-rig drilling program. Having already identified more than 1,000 drilling locations across its derisked acreage, Anadarko expects significant additional upside from its remaining acreage, especially given the abundance of stacked-pay potential across the play.
Another major area of opportunity for Anadarko is exploration and development activities at its international and deepwater projects. In the Gulf of Mexico, the company's 80,000 barrels-of-oil-per-day Lucius development is on track to achieve first oil in the second half of the year, while its El Merk megaproject in Algeria recently achieved net production of more than 30,000 barrels per day.
The company will also continue to focus on exploration and appraisal efforts in the Coronado, Yucatan and Shenandoah discoveries in the Gulf's Shenandoah Basin, where one of its wells last year hit more than 1,000 net feet of oil pay in multiple reservoirs, as well as appraisal and exploration projects in Mozambique.
The bottom line
All told, Anadarko has a great mix of projects that consist of low-risk development opportunities in the Wattenberg and Eagle Ford, emerging opportunities in the Wolfcamp, and international and deepwater projects in the Gulf of Mexico and offshore West Africa that offer substantial upside. With uncertainty regarding the company's potential liabilities from the Tronox case continuing to weigh heavily on its share price, now may be a good time to invest.