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  • Roger S. Conrad

Quarterly Check-Up

By Elliott H. Gue on Nov. 2, 2016

Anadarko Petroleum Corp (NYSE: APC) posted solid third-quarter results, headlined by almost $100 million in organic free cash flow and oil output from ongoing operations that exceeded the midpoint of the company’s guidance by 13,000 barrels per day.

Management also increased the midpoint of its full-year production target by 8 million barrels of oil equivalent to reflect accelerating drilling and completion activity in the Delaware Basin and the Niobrara Shale. The company reiterated its capacity to grow its oil production at a compounded annual rate of 10 to 12 percent.

Over the summer, Anadarko Petroleum operated six rigs on its 580,000 gross acres in the Permian Basin, focusing primarily on the Wolfcamp formation. The exploration and production company added a seventh rig in the third quarter and activated an eighth in October.

Like many of its peers in the Permian Basin, Anadarko Petroleum continues to block up its acreage through asset swaps to grow its inventory of drilling locations that can support longer horizontal wells. So far this year, more than 60 percent of the wells that the company has drilled in West Texas have lateral segments that exceed 7,500 feet.

Anadarko Petroleum continues to hone its drilling and completion techniques in the region as it works toward a development plan that will maximize value for shareholders.

The company also boasts a leading position and some of the best economics in the Niobrara Shale and has added two rigs to the one drilling team operating in the play. Management expects to drill 90 more wells than initially expected in this area and complete an additional 50 wells that had accumulated in its inventory.

Despite pushback from Freeport McMoran’s (NYSE: FCX) bondholders, management still expects Anadarko Petroleum’s $2 billion acquisition of the mining giant’s assets in the deepwater Gulf of Mexico to close later this year.

The acquisition is expected to boost the company’s production in the Gulf of Mexico to about 150,000 barrels of oil equivalent per day, with crude accounting for more than 80 percent of this output. Management expects this transaction to generate $3 billion worth of free cash flow over the next five years, based on prevailing futures prices for West Texas Intermediate.

Management plans to plow a sizable chunk of this free cash flow into developing its assets in the Permian Basin and the Niobrara Shale, though the company will also leverage its 10 platforms in the Gulf of Mexico to pursue low-risk tieback opportunities.

Although some investors may prefer pure-play names that offer exposure to a single basin, Anadarko Petroleum’s diversified portfolio provides opportunities to fund development or additional acquisitions by monetizing noncore assets.

With the announced sale of Anadarko Petroleum’s Carthage assets in East Texas, management expects the company to generate $4 billion in proceeds from divestments this year. Expect this trend to continue.

Reports suggest that the firm has placed its assets in the Eagle Ford Shale on the market, while the recent recovery in natural-gas prices could create an opportunity for the company to monetize its position in the Marcellus Shale.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor