Behind The Ratings: The Second Biggest U.S. Independent Oil & Gas Producer

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anadarko Petroleum (NYSE: APC), the second biggest U.S. independent oil and natural gas producer by market value, reported fourth quarter profits that exceeded analysts’ estimates, and output that exceeded its own forecast.

Excluding one-time items, per-share profit was 20 cents more than the 71-cent per share average of 28 analyst estimates compiled by Bloomberg. “They’ve been surprising to the upside regularly now,” commented James Sullivan, an analyst at Alembic Global Advisors in New York who has a buy rating on Anadarko shares. "It’s a good quarter, it’s kind of an on pace quarter." The company was able to generate higher sales volume to compensate for the lower realized price. In this article, I will examine Andarko's fourth quarter results to give readers a clear understanding of why the company is so highly rated, and how this impacts the company as an investment candidate.

Fourth Quarter Highlights

Anadarko Petroleum announced 2012 fourth-quarter results with net income attributable to common stockholders of $203 million, or $0.40 per share (diluted).  This included certain items that are typically excluded by the investment community and, in total, these items decreased net income by around $254 million, or $0.51 per share (diluted) on an after-tax basis.

Cash flow generated from operations in the fourth quarter of 2012 was $2.22 billion, while discretionary cash flow for the quarter was $1.612 billion. For the year 2012, the company reported net income attributable to common stockholders of $2.391 billion, or $4.74 per share (diluted), and 2012 cash flow generated from operations was $8.339 billion, while discretionary cash flow for the year was $7.157 billion.

Anadarko achieved record sales volumes representing an 8% increase year over year and gross processed production milestones of 100,000 barrels of oil equivalent (BOE) per day in four onshore plays in the United States. 434 million BOE of proved reserves were added, replacing 162% of production, and two of the world's largest discoveries of 2012 in offshore Mozambique were made.

Anadarko’s full-year sales volumes of natural gas, crude oil, and natural gas liquids (NGLs) were a record 268 million BOE, or roughly 732,000 BOE per day, representing a growth of 8% over full-year 2011 sales volumes of approximately 248 million BOE. Fourth-quarter sales volumes of natural gas, crude oil and NGLs were 68 million BOE, or 741,000 BOE per day.  According to company estimates, proved reserves at year-end 2012 were 2.56 billion BOE, with 74% falling in the proved developed category and 26 percent in the proved undeveloped category. At year-end 2012, proved reserves consisted of 46% liquids and 54% natural gas.

Internationally, the company continued with a robust worldwide exploration and appraisal program and participated in more than 25 deepwater wells.  The company made two new significant natural gas discoveries at the Golfinho and Atum prospects in Mozambique, which more than doubled previously estimated recoverable resources in the operated Offshore Area 1. 

Anadarko continued to progress its Mozambique liquefied natural gas (LNG) development toward the target of first sales in 2018. In West Africa, the company discovered and identified oil opportunities in offshore Ghana and Côte d'Ivoire. The company and its partners also increased production at Jubilee to more than 110,000 barrels of oil per day.

Anadarko achieved first oil in March at its Caesar/Tonga mega project in the deepwater Gulf of Mexico and, during the fourth quarter, drilled another successful development well in the field. In 2013, Anadarko is continuing its active international and deepwater drilling program in the Gulf of Mexico and expects to achieve initial oil production during the first quarter of 2013 from the first of three facilities in the El Merk complex in Algeria.

Cash and cash equivalents of the company as of Dec. 31, 2012 were $2.47 billion compared to $2.69 billion as of Dec. 31, 2011.  The collection of $1 billion in connection with the Algeria exceptional tax resolution boosted the cash balance. As of Dec. 31, 2012, Anadarko had total outstanding debt of $13.26 billion compared to $15.23 billion at the end of the previous year, and the debt-to-capitalization ratio of 39% at year end was less than the 2011 year-end level of 46%. During the year, Anadarko also repaid its $2.5 billion revolving credit facility.

The Competition In Africa

Africa has been in the news mainly for the wrong reasons, such as the attack in Algeria and the trouble in Mali.  However, it is evident that Africa's importance is growing when it comes to supplying the world's energy needs.

The recent attack on a BP (NYSE: BP) operated natural gas production facility in Algeria will definitely make some companies rethink future involvement in the region. BP has said that it is committed to remaining in Algeria but is reviewing its commitment to restart operations in Libya.

One of BP's venture partners in the Algerian facility is Statoil (NYSE: STO), which also has operations in a number of locations throughout Africa, including an important gas discovery off the coast of Tanzania. Statoil, with partner ExxonMobil (NYSE: XOM), has made the significant Zafarani and Lavani discoveries in the Block 2 area, which could contain up to 9 trillion cubic feet of gas in place. Africa is clearly important to the future growth of Statoil.

ExxonMobil is also continuing to grow its African business. The largest producer of natural gas in America recently acquired a 75% operating interest in the Tugela South Exploration Right concession off the coast of South Africa, and also has rights to acquire 75% interests in three future blocks off of the country's coast. The company also has the exclusive rights to study 12.4 million acres in the Deepwater Durban basin for one year.

Smaller companies like Hess (NYSE: HES) also have key operations in Africa, including Algeria and Libya. The company has additional operations off the continent's coasts with its operations in Ghana, Equatorial Guinea, and Egypt. Hess recently found oil at its Pecan-1 well in the Deepwater Tano/Cape Three Points license off the coast of Ghana. 

Conclusion

Wall Street recommendations tracked by S&P Capital IQ show that the average analyst rating on Anadarko Petroleum is outperform, with an average price target of $98.02 compared to the current price of around $83.70. With its track record of exceptional production growth, I recommend the stock if you are looking for energy exposure.


jordobivona has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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