Anadarko Petroleum's Recent Share Price Rise Is Misleading; It's a Stock to Avoid
Investors this year have been bidding up shares of independent oil and gas producer Anadarko Petroleum (APC) - Get Report , but this company is a dog with lots of fleas.
The Woodlands, Tex.-based company has a huge amount of debt and its uncertain if oil prices will hold their levels. The company announces earnings tomorrow, and the results are not expected to be good. Shares of the company are up about 80% since January and rose slightly in Friday trading. Still, investors should stay away.
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Texas-based Anadarko faces significant threats to its well being. Despite the rally in oil prices this year, exploration and production companies face considerable pressure. Anadarko is saddled with an especially heavy debt load that far exceeds that of its direct competitors.
Anadarko operates through three segments: oil and gas exploration and production, midstream, and marketing. The company's assets include U.S. onshore resource plays in the Rocky Mountains area, the southern U.S., the Appalachian basin and Alaska; the deepwater Gulf of Mexico; and in several other countries, including Algeria, Ghana, New Zealand and Kenya.
The average analyst estimate for its second quarter is that earnings per share (EPS) will come in at -8 cents, compared to a gain of one cent in the same period a year ago. For the full year, estimated EPS is -$3.10, compared to -$2 in 2015.
Before they started to plunge in mid-2014, oil prices enjoyed a long upswing that brought them to a high of about $110 a barrel. High prices and low interest rates prompted several ambitious energy companies to fund reckless expansion with inexpensive debt. Now rates are rising and oil prices are below $50 a barrel, which is considered the breakeven mark for energy companies.
After several frenetic divestitures, Anadarko is becoming a pure play on U.S. shale production through its holdings in Wattenberg, Eagle Ford and the Delaware Basin. But this strategic pivot is too late and insufficient.
Anadarko's total debt-to-equity ratio rose from 2013 to 2014 and from 2014 to 2015, and it remains at unsustainable levels. Anadarko's total debt now sits at $20.39 billion, for a whopping total debt-to-equity ratio of 138.71. APC's ratio compares unfavorably to those of its direct competitors, which are struggling with weak balance sheets: Chevron (27.95); ConocoPhillips (74.75); EOG Resources (56.31); Exxon Mobil (24.15); Occidental Petroleum (31.98); and Phillips 66 (37.37).
The surge in Anadarko's stock is misleading. The company has had a lot of ground to recover.
Over the past two years, the share price plunged 50.97%. Investors hoping that oil prices had hit bottom have been prematurely optimistic about the sector, pushing up the share prices of even fundamentally weak players. Don't expect the rally in Anadarko shares to last.
After an orgy of debt-fueled expansion when oil prices were high, Anadarko can't cut costs or negotiate new contracts fast enough to service its crushing debt. What's more, the oil price rebound is fragile and susceptible to unexpected shocks. Looking for growth? Stick to inherently strong companies or get burned.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.