By Martin Vlcek –
July 29, 2013
| 0 Comments
Martin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Anadarko Petroleum (NYSE: APC) is one of the largest independent oil and gas exploration and production companies in the world, and the second-largest U.S. oil and gas explorer and producer. It has bright prospects for an expected 13% average annual growth rate in the next five years.
Great production, sales and EBITDA growth prospects
Anadarko’s sales were growing at a 10% annual CAGR rate since 2008, and the 2013 through 2014 sales estimates promise similar annual growth. Anadarko has excellent EBITDA growth prospects of 13% annually for the next five years. Of that, approximately 5% to 9% is expected to be achieved through higher production volume. The rest will have to be accomplished by a combination of improving profit margins and higher oil and gas prices. The company’s growth estimates are based on the price of West Texas Intermediate (WTI) crude oil of $90/barrel and natural gas of $3.50/Mcf (million cubic feet).
If the company really grows at such high annual rates, Anadarko will become the largest independent oil and gas company and its market cap will very probably overtake that of smaller major integrated oil and gas companies, such as ConocoPhillips and Statoil (ADR) (NYSE: STO).
Statoil is unique in that is partly owned by the Norwegian government and has the majority of its reserves located in the Norwegian continental shelf. Statoil is quite the opposite of Anadarko. It has an average of negative 1.3% EPS growth estimates for the upcoming five years. Its 7.0 trailing P/E is correspondingly low and Statoil also pays a hefty dividend yielding 3.9%. The company tried to diversify its current North Sea production and exploration activities in the Gulf of Mexico and elsewhere, often through partnering with other large oil and gas players, such as Chevron and ExxonMobil.
In the independent oil and gas arena, EOG Resources (NYSE: EOG) is comparable to Anadarko in many ways. It has an even more impressive annual earnings growth prospects for the next five years and also trades at a fair price. Together with ConocoPhillips, EOG is one of the two-largest producers in one of the fastest growing and most economical shale plays in the US, the Eagle Ford. All in all, approximately 94% of EOG’s proved reserves and 86% of production are located in the United States and Canada. This regional dependency is also one of the EOG’s main weaknesses.
However, while the growth in U.S. oil and gas production continues, the company will profit handsomely. EOG pays a dividend, however the yield is less than 1%; so EOG is definitely not a true dividend stock. Nor should it be, given its strong growth prospects and thus better options to utilize extra cash.
Anadarko is becoming increasingly balanced and diversified
Many investors view Anadarko as a U.S. company. While still largely true, Anadarko is rapidly becoming more diversified regionally as well as in terms of the contribution of various business streams to its bottom line. The majority of Anadarko’s current revenue and profits are still derived from its U.S. operations.
However, all projects in its rich pipeline of new endeavors are located in countries outside of the U.S., mainly off the coast of Mozambique in East Africa, China, West Africa and in North Africa. Anadarko still generates most of its profits from its upstream operations. However, it is becoming increasingly balanced between continental and offshore sources. Moreover, a small midstream unit further diversifies income streams.
Rapid growth of proved reserves and a rich project pipeline
Anadarko made the world’s two largest 2012 oil and gas discoveries off the coast of Mozambique. In total, the company added 434 million BOE of proved reserves, replacing 162% of its annual production, while having a strong pipeline of future projects that are expected to deliver addition sales of almost 200 million BOE per day by 2020.
Source: Company materials
The company currently trades at a 16 forward P/E, which corresponds with its growth nature. However, most of the future growth seems to already be priced in. Let’s estimate the intrinsic value of the company and determine what future growth rate the markets now expect from Anadarko based on its current market price.
Intrinsic value estimate using the discounted cash flows (DCF) method
The company and analysts estimate a 13% annual earnings growth for the next five years. Taking this figure, the company’s current price of $90 and a 10% discount rate, the DCF formula reveals that at the current price, investors are expecting a 1.5% annual growth rate after the initial five-year period of rapid 13% annual growth.
This estimate of future growth is inline with my expectations, and I therefore conclude that Anadarko’s stock price is fair, based on the above growth estimates. I’m expecting a stable price in oil and gas at $90/barrel and $3.50/Mfc.
The major risk facing Anadarko investors at the current price is the potential fall in oil and natural-gas prices.
Anadarko’s profit is approximately equally dependent on oil and natural gas. Therefore, it doesn’t really matter which of the two commodities rises in price, as long as the total price of these two resources keeps at least on current levels, or ideally, increases.
Prices of crude oil are expected to remain flat at best, in nominal U.S. dollar terms, if not fall gradually by 2% to 3% each year. However, the estimates widely differ and demonstrate the risks and uncertainty associated with basing the future earnings growth estimates on the future prices of oil and natural gas. On the other hand, prices of natural gas are forecast to rise moderately over the longer horizon.
Anadarko is an excellent company with compelling growth prospects. However, most of this growth is already priced into the stock. Anadarko itself doesn’t offer me any major incentive to buy now, at this price level. It is fairly priced and there is a substantial downside risk should the price of oil and gas fall or should the overall stock market stumble. I will keep an eye on Anadarko and start buying at $75 per share on a major pullback, which would provide me with an adequate margin of safety.