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Dream Prices from a Nightmare Situation

By Elliott H. Gue on Sep. 25, 2015

Anadarko Petroleum Corp stands out among North American independent oil and gas producers for its strong balance sheet, high-quality management team and extensive upstream portfolio that includes several world-class assets and a good mix of short-, intermediate- and longer-cycle development opportunities.

These competitive advantages add up to superior optionality that enables management to bide its time and focus on unlocking long-term value for shareholders at a time when many of exploration and production companies find themselves in survival mode and focused exclusively on the near term.

Let’s start with Anadarko Petroleum’s balance sheet and financial flexibility.

The company boasts a cash position of more than $2 billion and remains one of the few US independent oil and gas companies that has proved its ability to live within its cash flow in a challenging environment for commodity prices.

In the first half of 2015, Anadarko Petroleum balanced its capital expenditures with its cash flow and, thanks to gains in drilling efficiency and price breaks from service providers, expects to exceed its guidance for full-year production by 20,000 barrels per day.

Management also has a long history of effective portfolio management, divesting noncore assets to fund better opportunities and reducing risk and improving economics by selling equity interests in promising projects.

Thus far in 2015, the company has raised about $2 billion in proceeds from asset sales.

Completed transactions include the sale of mature, oil-producing acreage in Wyoming to KKR & Co LP (NYSE: KKR) and Fleur de Lis Energy for $700 million and the divestment of its assets in the Bossier Shale for $440 million. Without providing details, management indicated that the company continues to market other producing assets that would struggle to compete for capital in its own portfolio.

Anadarko Petroleum has also developed a collection of midstream assets that supports its operations in the US onshore market. The company recently moved to monetize some of its 87 percent equity interest in Western Gas Equity Partners LP (NYSE: WGP), which owns the general-partner interest in Western Gas Partners LP (NYSE: WES). Management indicated that similar transactions could take place in coming years, as market conditions warrant.

A balanced asset base that includes low-cost positions in some of the leading US shale plays and a significant presence in promising offshore fields gives Anadarko Petroleum additional flexibility.

The company’s extensive acreage in the heart of the Niobrara Shale also boasts some of the best economics in the US onshore market, thanks to the quality of the rocks and the firm’s retention of the underlying mineral interests. Management estimates that the firm still earns a 35 percent rate of return on its wells in the play—an impressive feat in the current environment.

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