NEW YORK (TheStreet) -- Investors who follow Anadarko Petroleum (APC) may be wondering if the pullback in the oil and gas producer's shares since it reported its quarterly results in late July presents a good buying opportunity.
The shares have fallen about 5% since Anadarko reported that its second-quarter profit fell 76% from a year earlier. The stock's decline, in large part, reflects the drop in the price of crude oil. The shares were trading late Friday morning at $106.63, up 74 cents.
The stock is up 34% year to date, compared with a 5.8% gain for the Standard & Poor's 500 Index. It has risen partly on takeover rumors and largely on a $5.15 billion settlement Anadarko reached with the U.S. Justice Department in an environmental case stemming from the company's acquisition of Kerr-McGee in 2006. Investors were relieved that Anadarko put the issue behind it and didn't have to pay more.
When considering whether to buy on a dip, investors have a lot to weigh with Anadarko. For one, the company may be facing billions of dollars in fines from its role in the BP (BP) oil spill in the Gulf of Mexico in 2010.
Another issue is Anadarko's huge investment in a natural-gas project off the coast of Mozambique. The project has reportedly cost Anardarko up to $1 billion so far.
On the other hand, the company exceeded its production and sales volume goals for the second quarter for each of its three products: oil, natural gas and natural gas liquids. Revenue during the quarter rose 28%, although hedging losses caused the profit to drop.
Another positive development is that oil production from Anadarko's Lucius project in the Gulf of Mexico is expected to start during the fourth quarter.
Anadarko estimates it will increase its overall output this year by almost 4%. Most of the growth is coming from higher production of oil and natural gas liquids. Natural-gas output fell by 1% during the second quarter and is projected to fall 6% in 2014. The switch toward oil and away from natural gas bodes well for Anadarko because natural-gas prices are projected to drop 6% this year.
Also, by one measure Anadarko's stock, which trades at about 20 times this year's estimated earnings, isn't expensive. The stock's enterprise value (market capitalization plus debt minus cash)-to-EBITDA (earnings before interest, taxes, depreciation and amortization ) ratio is 6.7. In comparison, the ratio for Devon Energy (DEV), another oil and gas company, is seven.
So, all told, there are many reasons to consider buying Anadarko shares on a dip.
At the time of publication, the author held no positions in any of the stocks mentioned.TheStreet Ratings team rates ANADARKO PETROLEUM CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ANADARKO PETROLEUM CORP (APC) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 2.1%. Since the same quarter one year prior, revenues rose by 27.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
- The gross profit margin for ANADARKO PETROLEUM CORP is currently very high, coming in at 70.76%. Regardless of APC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.17% trails the industry average.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 75.6% when compared to the same quarter one year ago, falling from $929.00 million to $227.00 million.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ANADARKO PETROLEUM CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: APC Ratings Report