Energy Winners: 4 Things Anadarko Did Right
NEW YORK (
) --
Anadarko Petroleum
(APC) - Get Report
did a few things right in its earnings report Tuesday and the stock hit a new 52-week high.
The exploration and production company provided four reasons for investors with a longer-term investing horizon to be bullish on the company.
A Clean Beat
Anadarko provided a clean beat of Wall Street expectations (excluding one-time charges), reporting earnings of 85 cents in the fourth quarter versus a consensus estimate of 61 cents. Production came in at the high-end of Anadarko's guidance and costs associated with production were 5% lower.
Increased Hedging of Natural Gas as Peers are Left Open to Spot Prices
Anadarko doubled its natural gas hedges as a percentage of production from 20% to 40%. The reduced hedging activity among peers into 2012 -- as natural gas prices have tanked -- has been one of the primary concerns for investors in the independent exploration and production space. Anadarko also increased its crude oil hedging from 1% to 25% of production.
As Stifel noted in a review of Anadarko's earnings, the big increase in hedging removes one of its primary concerns about Anadarko.
"Investors are concerned about owning E&P stocks with the gas exposure, and Anadarko is within this group of companies," RBC Capital analyst Scott Hanold said.
Reserves Feel Minimal Impact From Reduced Gas Drilling, at Least so Far
Anadarko estimated year-end reserves increased by 5% to 2.54 billion of barrels of oil equivalent (BBoe), up from 2.42 BBoe. A key measure within the production guidance is the PUD ratio, or proven undeveloped reserves. A big component of the proven undeveloped reserves has been the natural gas basins of North America, however, with the recent slide in natural gas pricing, Wall Street analysts are concerned that the existing PUD ratios may decline as exploration and production companies scale back gas drilling.
Accounting rules dictate that E&P companies can place undeveloped reserves in the PUD ratio as long as these projects are within a five-year drilling plan. However, with the 2007 to 2012 five-year period coming to an end, just as natural gas prices weaken to a historic low, there is fear that a drop in gas drilling will lead to assets being removed from new five-year plans across many E&P companies. This in turn could lead to a significant reduction in PUD ratios. Even if the reduction in gas drilling projects and the removal of gas assets from the PUD ratio would be the right move economically for these companies, investors are quick to turn negative on E&P shares when reserves data trends in the wrong direction.
Anadarko's PUD ratio fell slightly at year-end 2011, from 31% to 29%, and the gas ratio only declined from 56% to 55%.
Anadarko won't release 2012 guidance until its annual investor day in March, and given the steep decline in natural gas pricing so far this year, this remains an issue to monitor. But at least so far, Anadarko hasn't made any moves that have changed the PUD ratio to a significant degree.
Getting Back to Work in the Gulf
Anadarko said it will have its first production from a post-Gulf of Mexico drilling moratorium project -- its Cheyenne East prospect -- online this quarter,
"Action in the Gulf of Mexico is one of the things people want to see," said Hanold.
Anadarko already has other catalysts built into shares, including the monetization of its Niobrara shale assets through joint ventures, as well as a planned sale of deepwater assets in Brazil.
Even with these positive trends, Stifel comes down on the sidelines with Anadarko shares due to valuation concerns.
"We believe APC remains an attractive name to play the deepwater trend for investors with a longer-term (2+ years) horizon; however, current valuation of 5.6x EV/EBITDA and more importantly, 7.1x EV/DACF, keeps us on the sidelines," Stifel analysts said in an Anadarko earnings review.
-- Written by Eric Rosenbaum from New York.
RELATED STORIES:
>>No. 1 Reason Natural Gas Prices Can't Rise: Exxon Mobil
>>2 Big Questions Raised by Another Blah Exxon Earnings Report
>>Exxon Still Biggest Oil Stock, but No Longer the Best
>To contact the writer of this article, click here:
Eric Rosenbaum
.
>To follow the writer on Twitter, go to
.
Follow
TheStreet
on
and become a fan on
