Oil and gas exploration and production major Anadarko Petroleum (NYSE:APC) is having a great run. This should be no surprise, of course, since energy production in the United States is soaring, and hitting levels not seen in decades. Anadarko is taking full advantage, because it holds significant positions in several of the premier areas of production in the U.S., including in the deepwater Gulf of Mexico, and onshore in the Wattenberg portion of the Denver Basin.
Because of this, the company's average daily volumes hit a record last quarter. But even though things are going in the company's favor, it's worthwhile to remember there's no such thing as a risk-free investment.
With that in mind, here are three reasons Anadarko Petroleum stock could fall.
Risk of overseas supply disruptions
Several exploration and production companies are getting rid of international assets as quickly as they can. This is because overseas operations in places like Africa are increasingly seen as too risky to continue operating. This was the reason why ConocoPhillips (NYSE:COP) has been divesting overseas businesses. For example, ConocoPhillips recently closed on the sale of its Nigerian unit for $1.5 billion. In 2013, ConocoPhillips received $10.2 billion in proceeds from asset divestments, including a $1.75 billion divestment of its Algerian unit.
The rationale for these moves was that, because production is ramping up in the United States, there's little reason to take outsized risks on costly overseas projects. As a result, it's reasonable to question Anadarko's strategy.
Anadarko maintains a large business in Algeria. In fact, Algeria accounts for approximately one-quarter of the company's total crude oil and condensate production. If there are further civil uprisings and supply disruptions, which prompted some exploration and production majors to leave these areas, Anadarko is at risk.
Rising capital expenditures
As previously mentioned, Anadarko is growing production significantly this year. The other side of this, however, is that its exploration and drilling expenses are rising in tandem. For example, the company's exploration expenses alone nearly tripled last quarter, to more than $500 million. A big contributor to this was $109 million in impairments taken last quarter for unproved properties.
Capital expenditures totaled $2.4 billion last quarter, representing a 28% increase year over year. This resulted in Anadarko barely generating any free cash flow. Free cash flow stood at just $60 million last quarter, down from $636 million in the same quarter last year.
While capital expenditures are necessary for oil and gas exploration companies to secure assets for future production, it's important for management to keep control of costs as well. If not, earnings could suffer.
Lots of debt on the books
In addition to rising exploration and discovery expenses, Anadarko has a fairly bloated balance sheet. The company has $13.4 billion in long-term debt, an increase of approximately $400 million just since the beginning of this year. By comparison, Anadarko has just $19.3 billion in shareholder's equity. This represents a long-term debt-to-equity ratio of 69%, which could become difficult over time.
If interest rates begin to rise in the future, and the company needs to refinance this debt, it will likely see higher interest expenses going forward. This would weigh on earnings per share.
The bottom line
Anadarko Petroleum is ramping up production of oil and natural gas. It's putting up strong results right now; but that doesn't mean it's a risk-free stock. Anadarko could face significant headwinds if certain things go awry.
Anadarko is still heavily involved in overseas operations that are more risky than domestic projects. In addition, the company is spending a lot more money exploring for new resources. And, finally, Anadarko carries a fairly high level of long-term debt on the books. All of these could weigh on earnings if they go wrong. If that happens, Anadarko's stock could take a hit.
Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.