With the price of oil dropping another 20% during the fourth quarter, Anadarko Petroleum (NYSE:APC) is facing pretty significant headwind. However, it's doing its best to face that headwind head on by cutting its costs, focusing on the long-term, and dropping its capex alongside the oil price. That was on display in the company's fourth-quarter report, which was released after the market closed on Monday.
1. Cost-cutting is paying big dividends
For the fourth quarter, Anadarko reported a loss of $1.25 billion or $2.45 per share. However, the bulk of that loss was due to a number of special items, including more than $1.3 billion in asset impairment charges. If these special items are adjusted it significantly narrows Anadarko's loss to $296 million, or $0.57 per share, which was actually $0.52 per share better than analysts were expected.
The company was able to outperform expectations by reducing its controllable spending by $500 million while at the same time delivering an incremental 25,000 barrels per day of higher-margin oil sales volumes over the prior year. One of the areas where the company saw the strongest cost reductions was in its Wattenberg field in Colorado where drilling costs per foot were down 50% year over year, while completion costs have fallen 32%.
2. Growth is focused on the long-term
For the full year, Anadarko's production rose 4% after adjusting for asset sales, however, fourth-quarter production averaged 779,000 barrels of oil equivalent per day, or BOE/d/, which was below its full year average of 836,000 BOE/d. This is mainly a function of the company's focus on investing in lumpier longer cash cycle opportunities such as deepwater projects and exploration instead of pursuing the short-cycle shale growth that rivals such as ConocoPhillips (NYSE:COP) are focused on.
The two have really taken a vastly different approach with ConocoPhillips recently deciding to completely abandon deepwater exploration because the costs are so much higher than other sources of oil, especially unconventional shale plays. That said, Anadarko has not only historically created a lot of value from deepwater development, but it believes that it's better off saving its shorter cycle opportunities for when commodity prices recover.
3. Capex spending continues fall with the oil price
While Anadarko's growth is clearly focused on long-term opportunities, that company is managing its spending for the current market environment. Because of this the company plans to cut its 2016 capex spending by 50% compared to last year's level, which would bring it 70% lower than spending in 2014. That's expected to enable the company to protect its balance sheet during a time that it expects the market to continue to be very volatile. However, the company hasn't yet said how that spending will impact production, leaving the potential for a meaningful year over year production decline, especially given how much production in the fourth-quarter was below its full-year average.
To put Anadarko's spending reduction into context, ConocoPhillips is only reducing its 2016 spending by 25% over last year's level and 55% below what it spent in 2014, which will still drive adjusted production growth of 1% to 3%. However, the key difference is the fact the ConocoPhillips is funding its spending with a combination of cash flow, asset sales and debt. Anadarko, on the other hand, plans to stay within cash flow, which it wasn't able to do last year after it spent $5.9 billion on capex, but only generated $4.7 billion in cash flow. While it covered its shortfall via $2 billion asset sales last year, it's not planning to use asset sales to bridge its gap this year.
The drop in the oil price is having a noticeable impact on Anadarko's operations. While the company is mitigating some of that impact by reducing its costs and cutting investments, it does appear that Anadarko's production growth will be put on hold in 2016. That's not necessarily a bad thing because it will help the industry work off its supply glut. Further, because of its longer-term investment focus the company has a number of growth projects expected to come online over the next few years when oil prices will hopefully be much higher.