Anadarko Drills into High-Quality Assets

09/25/2017 5:00 am EST

Focus: ENERGY

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Anadarko Petroleum (APC) made headlines after reducing its 2017 capital expenditures by $300 million, with the bulk of this cut involving offshore exploration, explains Elliott Gue, editor of Energy and Income Advisor.


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The company’s spending plans in the Denver-Julesburg (DJ) Basin and Delaware Basin remain intact. Management reiterated its commitment to living within cash flow for upstream expenditures, but Anadarko Petroleum will dip into the $6 billion cash on its balance sheet to fund midstream projects in Delaware Basin.


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Not only can Anadarko Petroleum recover these investments by dropping this infrastructure down to Western Gas Partners LP (WES), but the exploration and production.

The company’s 75 percent ownership interest in Western Gas Equity Parnters LP (WGP) provides a steady stream of cash flow. Anadarko Petroleum continues to run 16 rigs in Delaware Basin as part of its push to capture operatorship.

Management indicated that appraisal activity in this area will continue for a few more quarters before the company transitions to development mode, at which point longer laterals, pad drilling and a solid midstream backbone should improve economics significantly.

In the DJ basin, Anadarko Petroleum continues to enjoy break-evens around $30 per barrel, thanks to its mineral rights and retained cash flow from its midstream assets. Recent well results in region suggest that an upward revision to the company’s type curve could be in the future.

The stock has underperformed since a tragic home explosion in Colorado earlier this year. That said, we continue to like Anadarko Petroleum's balanced portfolio of high-quality assets.

These assets include franchise positions in DJ Basin and Delaware Basin as well as cash-generating assets in Gulf of Mexico and midstream infrastructure. Anadarko Petroleum rates a buy up to $48 per share. Our dream price for the stock would be to buy shares on a decline to $38.

The stock recently jumped after it announced a $2.5 billion share repurchase program through the end of 2018. Our position is unchanged. There was some speculation Anadarko would make an acquisition in the Permian and the buyback means that's less likely. However, it makes sense that they'd want to take advantage of what we see as an undervalued stock to buy back shares.

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