Argus Reaffirms Anadarko On Focus List, Highlights 'Accelerating Cost Cuts'

Argus has reaffirmed its Buy rating on Anadarko Petroleum Corporation (NYSE: APC) on recent recovery in crude oil prices and accelerating cost cuts.

Analyst Justification

Anadarko, which is on Argus' "Focus List," gets major share of earnings from its U.S. onshore business — Wattenberg and Eagle Ford shales and the Permian basin. To navigate the low commodity price environment, Anadarko is focusing on higher-margin liquids, cutting costs, selling non-core assets and improving well productivity.

In addition, Anadarko has a series of "megaprojects" under development or in production in the Gulf of Mexico, Ghana and Mozambique, and has an onshore project in Algeria.

"These projects are expected to generate high returns on capital and strong free cash flow, with stable long-term production growth and low incremental operating and maintenance expenses," analyst Bill Selesky wrote in a note.

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Meanwhile, the company cut its 2016 capex and plans to monetize up to $3 billion of assets this year. Anadarko is set to save about $700 million from its cost cutting initiatives including workforce reduction and quarterly dividend cut to $0.05 a share from $0.27. The analyst's revised dividend estimates are $0.20 for both 2016 and 2017.

"[W]e believe that the company's solid balance sheet and access to liquidity will be positive differentiating factors during the current industry downturn," Selesky highlighted.

Earlier this month, Anadarko reported an adjusted first-quarter net loss of $1.12 per share, which was wider than Argus' loss estimate of $0.98 per share but narrower than the consensus loss estimate of $1.16.

Selesky widened his 2016 loss estimate to $3.56 per share from $2.82 and 2017 loss estimate to $1.04 per share from $0.23 based on expectations for continued low realized commodity prices. The consensus loss estimates are $3.64 per share for 2016 and $1.07 per share for 2017. The analyst expects slightly higher crude oil prices but relatively flat natural gas prices in 2017.

"Our long-term rating remains BUY, based on the company's industry-leading exploration programs and prospects for above-industry-average reserve replacement growth through 2020," the analyst noted.

Looking Forward

Looking ahead, Selesky estimate that the company's visible project backlog would deliver 5–7 percent annual production growth through 2020.

Apart from a successful exploration program and active portfolio management, the company has a strong balance sheet and adequate liquidity.

"We believe that the company's current asset portfolio and deepwater and exploration expertise may make it an attractive acquisition target for larger integrated firms," Selesky added.

Shares of Anadarko closed Monday's regular trading session at $49.20. The analyst has a price target of $56 on the stock.