Anadarko Petroleum Corporation (NYSE:APC) has been one of the best-performing large energy stocks this year, with shares up nearly 30% year to date. The company's outperformance is due largely to a favorable settlement of the Tronox case, in which Anadarko was required to pay a much lower-than-expected penalty for environmental liabilities.
But despite the significant uplift in Anadarko's valuation, I think the company may still be reasonably undervalued. Given its exceptional track record of deepwater success and massive opportunity in the Delaware Basin's Wolfcamp shale -- one of the most promising new oil discoveries in America -- I think Anadarko shares deserve to command a premium valuation.
Barclays recently downgraded Anadarko to Equal Weight from Overweight, citing valuation concerns, though the bank maintains a $111 price target on the stock. Barclays' analyst Thomas Driscoll explained that, despite Anadarko's strong asset portfolio and impressive track record, there is better value elsewhere in the energy sphere.
He mentioned Continental Resources (NYSE:CLR), EOG Resources (NYSE:EOG), and Noble Energy (NYSE:NBL) as three similarly sized companies that look more attractive from a valuation standpoint. All three are likely to grow twice as fast as Anadarko, yet trade at comparable valuations in terms of debt-adjusted cash-flow multiples using 2015 cash flow estimates (7.6x, 6.1x and 7.2x for Continental, EOG, and Noble, respectively, as compared to 7.3x for Anadarko Petroleum).
While I do agree with his argument that there is better value elsewhere among the large independent E&Ps, I think Anadarko still presents reasonable value at its current price of around $100 a share. This is mainly because I think the company deserves a premium multiple over most of its peers given its exceptional track record of deepwater success and its massive opportunity in the Delaware Basin.
Why Anadarko deserves a premium valuation
Along with Statoil (NYSE:EQNR), which was last year's leading oil and gas explorer in terms of total volume of conventional oil and gas discovered, Anadarko is one of the best deepwater oil and gas drillers in the world. Last year, it achieved an industry-leading 67% success rate on its deepwater exploration and appraisal wells.
In the Gulf of Mexico, encouraging appraisal results from the Shenandoah Basin, as well as the Coronado and Yucatan discoveries, suggest the company could be sitting on some of the most prolific deepwater blocks in the entire Gulf of Mexico -- suggesting major long-term upside from their development.
In addition to its robust portfolio of deepwater opportunities, Anadarko maintains sizable stakes in south Texas' Eagle Ford shale, Colorado's Wattenberg field, and west Texas' Delaware Basin. While the Eagle Ford and Wattenberg are already key drivers of the company's oil production growth, its massive opportunity in the Delaware Basin's emerging Wolfcamp shale -- hailed as potentially one of the largest oil and gas discoveries in America -- may not be reflected in its share price.
Anadarko, which boasts roughly 600,000 gross acres in the Wolfcamp, has been aggressively ramping up activity in the play with highly encouraging results so far. Six wells drilled in the third quarter of 2013 yielded gross processed IP rates in the range of 1,000 to 1,600 BOE per day, while first-quarter Wolfcamp sales volumes grew almost threefold over the fourth quarter of 2013. This year, Anadarko plans to drill more than 80 Wolfcamp wells using an 8-10 rig drilling program.
Crucially, the company has already identified more than 1,000 drilling locations across the acreage it has evaluated so far, which represents just a fifth of its total acreage. As the company de-risks its remaining acreage, significant upside could result from the existence of numerous stacked-pay intervals, which could meaningfully boost the company's resource base and its net asset value (NAV) -- an almost certain catalyst to boost its share price.
Anadarko may not be as compelling an investment opportunity as it was earlier this year, when uncertainty surrounding the Tronox case severely depressed its valuation, but I think it still presents decent near-term upside and compelling long-term value given its high-quality and diversified global portfolio, exceptional track record of deepwater success, and massive opportunity in the Delaware Basin.