Anadarko: BP Agreement Drags on Earnings, Revised $88 Estimate

Independent oil exploration player Anadarko Petroleum (NYSE:APC) announced a Q3 net loss of about $3 billion last week as a result of the $4 billion settlement it reached with oil major BP (NYSE:BP). Anadarko agreed to pay $4 billion to BP to meet costs arising from the Gulf of Mexico oil spill incident after extended negotiations. Anadarko’s operational results continued to remain on track and the company managed to increase its year on year sales by 5% and boosted liquids output by 10% while major oil and gas players saw their output fall over the same period. ^[1]

We have revised our price estimate  for Anadarko from $84 to $88 based on increased liquids output and multiple new discoveries as well as taking into account the $4 billion liability arising from the Gulf of Mexico spill into its debt. Our estimate implies a moderate premium over the stock’s current market price.

Click here for our full analysis of Anadarko.

Spill costs dwarf earnings

Anadarko generated $1.46 billion of cash from operations in the last quarter on the back of growth in sales volumes and higher fuel prices. Revenues from sale of oil and condensates increased by almost 50% over the same period last year as production rose by10%. Earnings from gas exploration stayed flat while natural gas liquids sales increased. However, the aforementioned $4 billion settlement with BP pulled down company’s results. Anadarko owned a 25% stake in the Macondo well that blew out. (See: BP & Anadarko Make up in $4 Billion Settlement Benefitting Both Parties)

Anadarko’s production output for the quarter stood at 660,000 barrels of oil equivalent / day (BOE/d). The company continued to expand its presence in shale exploration with the assembly of a 300,000 acre gross position in its Utica play. Its expanded horizontal drilling program resulted in a 36% growth in liquids volume over last year in the Wattenberg fields. The company boosted its output in the Eagleford shale and the Permian basin, where its improved its oil output by 150%y-0-y.

Deepwater exploration

Anadarko’s Caeser/Tonga deepwater project in the Gulf of Mexico is expected to begin production in mid 2012. Its exploration efforts off Mozambique and Ghana reported a success rate of 75% in the quarter. The company now estimates that its Camarao fields hold more than 10 trillion cubic feet of natural gas, which will boost its LNG output from the region. The company also announced another discovery in offshore Ghana in the quarter.

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1. Anadarko Announces Third-Quarter Results, Anadarko [↩]