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Anadarko's consistent growth makes it ripe for takeover

The US independent continues to get it right with a mix of reliable onshore assets and a foothold in potentially prolific offshore plays

There's nothing like setting high expectations – and Anadarko Petroleum certainly did that in February when chief executive Al Walker said he expects 2013 to be one of the best years in the company’s history. Anadarko had a successful 2012 – though analysts say that has to be put in perspective, given that 2010 and 2011 were difficult, as Anadarko, a co-owner with BP of the Macondo well, struggled with the fall-out from the blow-out and spill at the Gulf of Mexico well.

In 2012, Anadarko posted a record production growth rate of 8% over 2011 levels while adding reserves of 434 million barrels of oil equivalent (boe), replacing 162% of its current production. Proved reserves at year-end were 2.56 billion boe, up from 2.54bn boe in 2011. It’s targeting 3bn boe by the end of 2014.

It also returned to profit, booking a fourth-quarter profit of $190m compared with a loss of $339m in the same period in 2011. For the full year, net income was $2.39bn, a turnaround from 2011’s loss of $2.57bn mostly because of settlement charges of nearly $4bn arising from the Macondo spill.

Output from Anadarko’s US onshore assets rose 37% from the previous year, driven by production from the Eagle Ford, Permian and Wattenberg plays.  Anadarko plans to plough more funds into its US onshore and Gulf of Mexico projects this year as it increases its capital expenditure to between $7.2bn and $7.6bn, up from a projected $6.6bn to $6.9bn for 2012. While planned 2013 production of 279m to 285m boe, up about 5% from last year, is at the low end of analysts’ expectations, chief executive Al Walker said the company’s longer term projection of production growth of 5-7% remained on track.

Of the $7.2bn to $7.6bn to be spent this year, 60% will be devoted to onshore US projects as Anadarko looks to raise onshore sales volumes by about 10% from 2012, focusing on increasing sales of higher-margin oil volumes by about 30,000 barrels a day. Of particular note is the liquids-rich Wattenberg field, where it is generating rates of return exceeding 100% at today’s prices. Net resources in the Wattenberg region stand at 1bn-1.5bn boe.

One hedge fund manager says that the net present value per well in the Wattenberg field is around $7m. “A major reason why returns are off the charts is Anadarko’s land grant status for all of its acreage… Basically, Anadarko is paying itself royalties on its Wattenberg acreage,” he says.  

Anadarko report card

Anadarko plans to invest in its major growth plays that generate the highest returns and margins, such as the Eagle Ford Shale and the Permian basin. “With over 200,000 net acres in the Eagle Ford, Anadarko has over 2,500 drill sites identified with potential net resources of 600m boe,” the hedge fund manager says. Of these, oil and natural gas liquids constitute 65%.

In a 20 February conference call, Walker told investors: “We plan to be among the most active deep-water explorers in the world in 2013. We expect to drill 25 deep-water wells this year, including high-potential prospects in the Gulf of Mexico and three potentially play-opening international opportunities.”

The deep-water Gulf of Mexico is in the early stages of an extended growth cycle, and “is poised to be the strongest offshore market in the world through 2015”, according to Jud Bailey, who heads International Strategy and Investment’s oil services research team. Anadarko plans to participate in six to eight wells during the year, which includes “ongoing activity in the Shenandoah mini-basin, where the company encountered encouraging results from its Shenandoah appraisal well and the nearby Coronado prospect, with results from the Yucatan prospect expected later this quarter”. Elsewhere in the Gulf, Lucius is on schedule for first oil in 2014, while Heidelberg is expected on stream in 2016.

Anadarko plans to push on with large-scale developments in Algeria, Ghana and Mozambique, as well as a 20-well exploration/appraisal programme. It has discovered gas reserves estimated at 35 trillion to 65 trillion cubic feet in Tanzania’s offshore Rovuma basin.

All this has investors interested. Since January shares have gained 10%; currently there are 21 analysts that rate Anadarko a buy, none rate it a sell, and three rate it a hold. “While I don’t have a ‘buy’ rating on it, I do think about it a lot because it’s had a lot of exploration success and a good pool of assets,” says Phil Weiss, senior analyst covering the energy sector at Argus Research.  However, the success in Mozambique also highlights one of Anadarko’s big challenges. The project needs onshore facilities built to liquefy the gas so it can be shipped to market. That takes money, lots of it, but Anadarko already has a huge debt on its balance sheet worth about $13.2bn.

To fix this, Anadarko’s management has set about by monetising its assets, with a great deal of success. In March, Anadarko and Indian billionaire Venugopal Dhoot  launched an auction of a 20% stake in the gasfield in Mozambique’s Offshore Area 1, which could fetch as much as $4.5. “At this stage, with a final investment decision regarding the project planned for 2013/2014, the need to find a partner from a major exploration company with greenfield LNG experience is becoming more pressing,” says IHS Global Insight.

The month before, Anadarko indicated it was considering monetising a stake in Heidelberg, which is also at an early stage of development. “Looking what we did at Lucius is probably a good indication of how we’d think about Heidelberg,” Bob Daniels, Anadarko’s senior vice president for international and deep-water exploration, said. He was referring to a deal in July 2012 when Anadarko formed a venture with an undisclosed company, which paid $556m in exchange for 7.2% of the company’s 35% stake. The idea behind such deals is to cover future costs Walker said, adding the company’s stake in Lucius is now worth $2.8bn. “You should expect we’ll do more of that,” he said.

Given Anadarko’s consistent growth, and its mix of reliable onshore assets along with huge potential offshore plays, it’s hardly surprising the company has been pegged as a takeover target. But it wouldn’t come cheap. An analysis by Bloomberg said the takeover price for Anadarko would be around $102 per share, which would translate into a market cap of about $52bn.

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