Anadarko Ready To Break $80 By 2013
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Anadarko Petroleum (NYSE: APC) reported a net loss in the second quarter, driven by a $978 non-cash charge related to an impairment from low natural gas prices on its coalbed methane properties, as well as a loss on derivatives equivalent to $0.29 per share. However, setting aside one time items, Anadarko actually beat analyst expectations by $0.08 cents per share.
Anadarko reached record daily sales of 742,000 boe during the quarter, helped along by a 20,000 barrel per day increase in oil sales volumes, to 241,000 barrels per day. Its daily sales mix was completed by an average 77,000 barrels of natural gas liquids per day and an average 2.54 bcf of natural gas per day. Anadarko attributed its increase in daily oil sales volumes largely to its activities on the Wattenberg in northeast Colorado, along with the first full quarter of production from its Caesar/Tonga project in deepwater Gulf of Mexico and a push from its Algerian tax resolution, reached earlier this year.
Wattenberg a Major Growth Driver
Anadarko has huge growth prospects with the Wattenberg; it indicates that the 75 wells drilled here to date are “delivering excellent results” with rates of return in excess of 100% in the current price environment. These results are strong enough that Anadarko plans to increase its rig count on the play to ten from the current seven “over the next few months.” It is currently netting just under 5 mboe per day from the Wattenberg, and expects production to soar to 20 mboe per day by the end of the year, a great profit potential given its rates of return.
Competitor Noble Energy (NYSE: NBL) is also doing well on the Wattenberg, which represents the majority of its U.S. onshore production. It is testing 40 acre downspacing in a pilot program which it plans to expand, and is also testing extended reach wells to over 9,800 feet; the first extended reach well Noble drilled one year ago is still producing at about 400 boe per day, contributing to Noble’s total daily production from the DJ Basin of 73 mboe. With these numbers, Noble has a head start over Anadarko, but Anadarko is showing a willingness to invest in Wattenberg assets that could make Noble’s lead short lived.
Encana (NYSE: ECA) also has a huge presence in the DJ Basin, with over 1,100 producing wells and four rigs operating. Its most recently completed wells are showing thirty day flow rates between 539 boe per day and 907 boe per day, a good start towards the liquid diversification Encana needs to overcome its current dependence on natural gas. Compared to powerhouses Noble and Anadarko though, Encana will need to put in a lot of work and count on a little luck to become a major force in this area.
In a situation similar to Encana’s, Chesapeake Energy (NYSE: CHK) is using the Niobrara to leverage itself out of its hole. It is holding out 193,000 net acres in the Wattenberg for sale, hoping that the sale will result in a deal of up to $1 billion to help pay down its staggering debt. Since purchasing the assets Chesapeake drilled a paltry 29 wells on the acreage, making this a less appealing acquisition for companies like Anadarko that already have considerable acreage in reserve. Bids closed at the end of June, but so far no announcements on a purchaser are forthcoming.
Following a hopeful announcement that the parties agreed on settlements for certain claims, Anadarko’s attempt to settle its suit with the Environmental Protection Agency and Tronox is stalling, though Anadarko still indicates that the total cost of the suit will be much less than the $25 billion sought in original filings; its current “reasonable range” for potential loss of the suit is between $0 and $1.4 billion. However, as Anadarko believes it is likely to prevail against the claims brought against it in court, the suit’s return to litigation would not necessarily be a bad outcome for the firm.
After taking the above mentioned impairment in the second quarter on its coalbed methane properties following a fourth quarter 2011 impairment on the same properties of almost $1 billion, Anadarko is seeking to divest its Wyoming coalbeds as well as some of its gathering, compression, and pipeline holdings. These beds are located in the Powder River Basin and Atlantic Rim. On the Atlantic Rim properties, Anadarko holds a 50% interest on most of the assets, with the other half interest held by Warren Resources (NASDAQ: WRES).
Warren may choose to exercise its option to purchase Anadarko’s interests on these properties after the bid window closes and Anadarko shares bidding results with its partner. I think that Warren’s likelihood of exercising preference is almost entirely contingent on price; while Warren may find benefit from a 100% interest in additional producing properties, just 20% of its net acreage of coalbed methane is developed, enabling it to pursue increased production growth without acquisition.
Anadarko is currently trading around $70 per share, giving it a price to book of 1.7 and a forward price to earnings of 15.1. For comparison, Noble is trading around $90 with a price to book of 2.0 and a forward price to earnings of 12.6.
Encana is trading around $23 with a price to book of 2.5 and a forward price to earnings of 78.2. The high price to earnings for Encana reflects the firm’s troubles in the current natural gas price environment. Chesapeake is facing a similar uphill battle but is diversified enough into oil that its multiples are not as high. Currently trading around $20, Chesapeake has a price to book of 1.0 and a forward price to earnings of 10.1. Small value Warren rounds out the bottom, trading around $3 with a price to book of 1.1 and a forward price to earnings of 5.3.
Despite the tough quarter for Anadarko, analysts acted quickly to reiterate previous ratings on its stock. Zacks reaffirmed its neutral rating on Anadarko, while Citigroup reiterated its buy rating. I think that once the suit with the U.S. and Tronox is finally put to bed, Anadarko will be better able to focus on its core operations and shareholder optimism will return to the stock in a big way, pushing it past $80 by the end of this year.
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