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Actionable news in APC: ANADARKO PETROLEUM Corp,

Anadarko Petroleum: Solid Asset Mix Provides Accretive De-Levering Potential

Summary

Energy commodity price downturns affected Anadarko significantly in 2015, slashing O&G revenues by nearly 50%.

2016 is shaping up to be a better year and Anadarko has a compelling mix of operating and developmental assets to benefit shareholders down the line from an NAV standpoint.

APC is likely trading on the lower end of its valuation range at the moment.

Nonetheless, the energy commodity supply glut is not over and may require investors' patience to realize appreciable value.

Anadarko Petroleum (NYSE:APC) provides a solid portfolio of offshore and shale assets that could help bring about a continuing turnaround for the company, which has struggled badly in light of last year's fallout in energy commodity prices. The company reached highs of $112 per share in August 2014 before bottoming out in January 2016 at $32 and moving up to today's ~$54 levels.

APC data by YCharts

It could be argued that Anadarko could benefit from a de-leverage as the industry experiences turbulence, but the extent to which a de-leverage would be accretive to share prices is uncertain. If one assumes that the company will remain at an operating loss for several more years, the obvious accretive effect on share prices would be exponential. If this is merely a temporary blip with a combination of commodity price normalization and a favorable asset portfolio working in its favor, as I believe, it would be less so. Accordingly, it's almost impossible to plot out some sort of reliable, representative capital structure curve for the company, sensitive to leverage inputs yielding valuation estimate outputs.

Anadarko generated an adjusted consolidated EBITDAX of $1.58 billion in the first half of 2016 for an EBITDAX margin of 44%, and stood at 46% for Q2 2016. Adjusted consolidated EBITDAX reached 56.7% in 2015, 58.6% in 2014, and 67.7% in 2013. If the company can maintain a 46% EBITDAX margin on an estimated $10 billion in 2016 revenue, that would put Anadarko's EV/EBITDAX ratio at about 9.5. This would be neither necessarily cheap nor expensive on a relative basis, but I believe upstream oil and gas companies are better valued from more traditional cash flow approaches. DCF often isn't optimal for upstream O&G given the high capital expenditure requirements typically whittle down the free cash flow to the point where the valuation is heavily dependent on the terminal value output. Generally, the best approach is a net asset value ("NAV") model, by directly considering the company's asset portfolio, and this is where Anadarko may have an advantage over many of its peers. (Valuation will be provided before the conclusion.)

Domestic Assets

Most of the company's assets (and corresponding production) are located in the mid-continental U.S., Gulf of Mexico, and Alaska. The company's upstream revenues are roughly comprised of two-thirds oil and condensate sales, and one-third natural gas.

Wattenberg Field (Colorado) - Anadarko's prized asset consists of the Wattenberg Field, a natural gas and condensate producing area of Colorado's Denver-Julesburg (DJ) Basin. The field was discovered in 1970 and has been in operation since 1981. The company owns 350,000 net acres containing up to 1.5 billion barrels of oil equivalent ("BOE") and also maintains royalty-interest and mineral-interest ownership on these acres. Nonetheless, realization of the full resource potential of the asset has come into question based on the recent news of anti-fracking initiatives being added to a November election ballot. The initiatives allow a public vote over government regulatory control over new oil and gas developments and with respect to state setback rules (i.e., allowable distance between oil and gas developments and occupied structures or recreational areas).

Thus...


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