Anadarko Corp. (NYSE:APC) primarily operates in three segments: oil & gas exploration and production, midstream and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the deepwater Gulf of Mexico and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, China, Alaska and New Zealand. At the end of 2012, Anadarko had proven reserves of more than 2.4 billion barrels of oil equivalent.
We believe that a robust portfolio of onshore and offshore assets in the U.S. as well as internationally, relatively stable commodity prices due to growing supplies from non-OPEC countries and improving profitability due to lower development and processing costs will be the key factors driving future growth for Anadarko. However, higher capital investments required for funding the ongoing development of the U.S. onshore assets as well as the long-term growth projects are expected to weigh on the company's valuation.
Based on these factors, we recently updated our valuation estimate for Anadarko to $95 a share.
Key Business
According to our estimates, Anadarko's crude oil and condensates business, which contributes more than 70% to its annual revenues, makes up almost 65% of the company's total value. The division sells oil produced from its production and development activities to refineries and other chemical companies that use crude oil and condensates as raw materials for the production of gasoline, diesel, jet fuel and other petrochemical products. According to the company's latest annual report, the U.S.-based oil fields contributed almost 65% to the total sales volume last year. Anadarko's onshore fields in the U.S. are located in Colorado, Utah, Wyoming, Texas, Pennsylvania, Louisiana, Kansas and Ohio. It also owns an average 64% working interest in 479 blocks in the Gulf of Mexico (SEC Filings).
Anadarko's international oil production and development projects are primarily located in Algeria, Ghana and China. The company started production from the El Merk project in Algeria during the first quarter this year. It also holds 18% non-operating interest in the Jubilee offshore oil field located in Ghana, which recorded gross production output of 110,000 barrels per day in 2012. In China, the company restarted production from an offshore site in Bohai Bay last year, which was shut down after an oil leak in 2011 (SEC Filings).
Proven Reserves
Since crude oil is a depleting source of energy, proven reserves is a closely watched metric for all oil and gas companies. It is a term given to the amount of technically and economically recoverable oil reserves owned by a company. As of December 31, 2012, Anadarko's total proven reserves of crude oil and condensates stood at 767 million barrels. Almost 70% of these proven reserves are located in the U.S., while the percentage of undeveloped reserves is 30%. Proven reserves are classified as developed or undeveloped, depending upon whether additional capital investment is required or not in order to bring the underlying oil to the surface (SEC Filings).
Growing Sales Volume
Our outlook for Anadarko's crude oil production is quite positive primarily due to improving production output from its U.S. onshore assets, especially the Wattenberg field. Increased horizontal drilling in the Wattenberg field during the first nine months of the year helped the company shore up its crude oil sales volume by 9,000 barrels per day over last year. Sales volumes were also helped by increased horizontal drilling and infrastructure expansions in the Eagleford shale formation in the Southern and Appalachia region (SEC Filings).
We believe production volumes will grow further in the coming years as the company gains traction on its plan for expanding the existing midstream infrastructure such as oil gathering pipelines and gas processing capacity. The company expects to more than double its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by 2014. Furthermore, the recent asset swap deal signed by the company in the Wattenberg field will allow it to leverage this midstream infrastructure even better over the coming years as its development efforts in the region will be more concentrated around the supporting infrastructure. This is expected to result in lower development and processing costs for Anadarko.
Our forecast of ~7% CAGR for crude oil sales volume in the long run also takes into account rising production from Anadarko's Caesar/Tonga and Lucius fields in the Gulf of Mexico as well as its El Merk project in Algeria. Anadarko holds 35% stake in the Lucius oil field, which is estimated to contain reserves of more than 300 million barrels of oil equivalent. Other projects such as the Heidelberg in the Gulf of Mexico are also expected to drive higher production volumes in the long run. Total crude oil and condensates sales volume at 86 million barrels of oil equivalent (MMBOE) grew by almost 9% y-o-y in 2012.
Higher Price Realizations
We forecast crude oil prices to trend higher in the long run primarily due to incremental demand from emerging economies such as China and India, where growing populations and rising income levels make a solid case for higher energy requirements. However, we expect international crude prices to increase at a very conservative 2% CAGR in contrast to almost 15% CAGR seen over the last decade. This is because we believe rising oil production in North America, mostly coming form unconventional sources such as shale oil in the U.S. and oil sands in Canada, will increase the supply of oil from non-OPEC countries significantly, thereby reducing the pricing power long held by OPEC countries (source).
Although short-term volatility in crude oil prices will still remain, long-term fundamentals appear to have swung positively for a much smoother demand-supply equation than seen in the past. According to an IEA report, U.S. oil production is likely to grow by almost 4 million barrels per day by 2018, which would be almost one-third of the total new oil supplies over the next five years.
Higher Capital Expenditure
Anadarko's annual capital expenditure has increased from just over $5 billion in 2010 to $7.2 billion in 2012 on increased investments in development and exploration activities. As the company continues to develop the U.S. onshore plays and supporting midstream infrastructure, we expect 2013 capital expenditure to be north of $7.5 billion as well.
Proceeds from the recent 10% stake sale in the Mozambique gas project will partly offset capital expenditures next year. (See: Anadarko Rakes In $2.6 billion from African Asset Sale) However, upcoming new projects in the Gulf of Mexico and Mozambique are expected to drive higher capital expenditures in the long run. Anadarko estimates the gross cost of building the first two LNG (liquefied natural gas) trains in Mozambique along with the wells and supporting subsea infrastructure to be around $15 billion. However, it has been observed in the past that large-scale LNG projects are generally marred with start-up delays and cost escalations. This poses a downward risk to the company's rate of return on invested capital in the long run.
Disclosure: No positions
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