Last week’s rumor about Occidental Petroleum perhaps purchasing Apache (for ~$25 billion!) reminded me that Anadarko had made an offer for Apache late last year. Curious about their current status, I spent a little time looking into Anadarko and decided they would be an excellent operator to look at, especially as a proxy for larger US E&Ps.
Anadarko is very much a major independent, with a $25 billion market cap, global operations, and significant current US onshore activity – according to our own DI Index of New Production Capacity, they added 5 Mbbl/Day in NPC in the month of April! They were founded in 1959 as a subsidiary of a pipeline company to focus E&P in the Anadarko Basin in Oklahoma and Texas, and are headquartered in the Woodlands, TX.
If we take a look at cumulative new production for the past 5 years at 20:1 MBOE as an economic basis, we see that Anadarko is showing strong growth in actual production, and not just capacity.
As luck would have it, earlier today Anadarko presented at the 2016 UBS Global Oil and Gas Conference in Austin, TX. Though I would have very much enjoyed attending the conference (hint hint whoever runs these), I was able to listen along, and I’ll start with a couple of thoughts regarding what they seem to be highlighting the most about the future of their core business at this time.
Anadarko In The Room
Today’s presentation at the UBS conference was led by Bob Gwin, EVP and CFO of Anadarko Petroleum Corporation. As you would expect from a CFO led presentation there was a fair amount of focus on the current and future financial position. His lead-off slide does a very good job of setting the context for his discussion.
This slide being a few months old, it accounts for a slightly more gloomy outlook than today’s market, but it does show that they have a strategy that accounts for middle and long term cash-flow programs. Anadarko is, like most E&P companies, focusing on reducing the amount of leverage against the company, monetizing assets as appropriate, seeking additional cost savings and efficiencies, and maintaining adequate cash to support projected operations. One of the lenses they use to illuminate their financial health is to split their operations into short (~1 year), medium(1-3 years), and long-term (3+ years) cash cycles. They then further identify major operations by which of those buckets are most appropriate. Mr. Gwin then took a few minutes to go through a number of the efforts they have taken to achieve those goals while spending well within their discretionary cash flow.
The second half of the presentation illuminated their Gulf of Mexico “Value-Creation Model” which, through tie-backs, seems to bring large amounts of resources online at costs that are closer to onshore operations (though with much more encouraging decline curves than unconventional operations).
Figure Source: Anadarko Company Presentation
Anadarko In The Press
Anadarko’s Q1 results reported a Q116 adjusted loss of $1.12 per share, more than the year –ago figure of $0.72, but less than analysts’ expectations. In the past month or so we have seen some wiggling on ratings for the company. Early in the month Nomura and Goldman maintained “Buy” ratings for Anadarko (UBS “reiterated” “Buy”), while by mid-month Scotia Howard Weil and Credit Suisse had “Downgraded” the company. On May 17, Investor Blackrock Advisors increased their stake in the company sizably with 1.73M share purchase.
A few weeks ago, Anadarko was reported to have plans to sell some assets in Wyoming, Texas, and Louisiana, but we have yet to see confirmation of those plans.
Building Cash and Building Value
Since 3 years is a long time from now, let’s look at some of their short and mid-cash cycle US Onshore programs.
Drilled and Uncompleted (DUC) wells are very much a topic of consideration in the current market, and in most cases tend to obscure the nature of many operators operations. Anadarko, however has actually managed to put DUCs into a fairly clear fiscal and operational context (in fact they using the acronym IDUC – for Intentionally Deferred Uncompleted wells). To start with they have around current 230 DUCs and expect another 160 from 2016 operations. But as we look into the operations they have identified as short term vs. medium term cash cycles, the IDUCs involved help clear up the distinction.
- Short Cash Cycle – in Colorado’s DJ Basin they project operating 1 Rig and 2 frac crews, which indicates that they will be bringing that current IDUC inventory to market in shorter term.
- Medium Cash Cycle – in the West Texas Delaware Basin they plan to run 4 rigs and 1 frac crew, indicating a desire to stack up some IDUC inventory as they delineate their acreage, strengthen their pad pad structure, and wait bring resources on line as we see more favorable market conditions.
An often overlooked aspect to DUC operations is that completion technology is still improving, so a well drilled today but completed next year will likely show much better results than one completed today. The Delaware Basin, with its relatively newer horizontal operations and stacked pay potential is a good option for these deferred completions.
Let’s take a closer look at Anadarko in the DJ Basin
Weld County Activity
On the left is Anadarko’s last year of rig activity in the heart of the oil-rich portion of the DJ Basin, contrasted with Noble Energy. Anadarko is squarely focused on the southwestern corner of the county, while Noble trends along towards the northeast. On the right we see DUCs vs. a few other operators in the county, and can see that Anadarko is indeed executing on their previously mentioned completions in the county.
Anadarko appears to have developed and executed a good strategy to outlast the downturn in oil price, and are communicating a straightforward plan for the future that allows for a focus on value creation or even potential growth depending on market conditions.
What do you think? Leave a comment below.
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