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Financial Analysis of Anadarko Petroleum Corporation

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Financial Analysis of Anadarko Petroleum Corporation
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Netra Shetty
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Financial Analysis of Anadarko Petroleum Corporation - February 9th, 2011

Anadarko Petroleum Corporation (NYSE: APC) is one of the world’s largest independent oil and gas exploration and production companies, with approximately 2.3 billion barrels of oil equivalent (BOE) of proved reserves and production of 206 million BOE as of December 31, 2008. Anadarko employs a worldwide workforce of about 4,000.[3] The company is headquartered in The Woodlands, SPD Montgomery County, Texas.[4]

Apache Corp. (NYSE:APA) is an independent energy company that engages in the exploration, development, and production of natural gas, crude oil, and natural gas liquids.[1] In recent years, Apache’s portfolio of exploration and production interests has grown through strategic acquisitions across the globe.[2] Apaches exploration and production operations are located in the Gulf Coast, Central regions in the U.S., Canada, Egypt, the North Sea, Australia, and Argentina. In total, Apache’s acreage positions are 39 million gross acres across the globe.[3]

For Apache, diversification in terms of geography and energy products has been a key strategy. No single region contributed more than 26% of Apache’s production or reserves in 2009.[4] For the same year, crude oil and liquids provided half of the company’s production and 68% of revenue.[5] In terms of proven reserves, 55% are natural gas and the remaining 45% is crude oil and liquids.[6]

In July 2010, Apache announced the acquisition of BP assets in Permian Basin, Canada, and Egypt for $7 billion.[7] Eager to raise money to pay for damages caused by the Gulf oil spill, BP sold proved reserves of 385 million barrels of oil equivalent and approximately 83,000 BOE per day of production.[8] This deal may ultimately prove beneficial to both sides, as Apache gains increased reserves while BP (BP) is able to build up its cash reserves.

Company Overview

Contents
1 Company Overview
1.1 Business Segments
1.1.1 The United States
1.1.2 Canada
1.1.3 Egypt
1.1.4 Australia
1.1.5 North Sea
1.1.6 Argentina
1.1.7 Chile
2 Trends and Forces
2.1 Apache's aggressive acquisitions strategy in 2010 expands production assets and reserves, but calls into question balance sheet strength
2.1.1 Acquisition of Devon's properties in the Gulf (May 2010)
2.1.2 Acquisition of Mariner Energy (ME) (May 2010)
2.1.3 Acquisition of BP Assets (July 2010)
2.2 Apache's Mature Extraction Strategy Requires High Oil Prices to Be Successful
2.3 Apache's Growth is Rife with Political Risk
3 Competition
4 Notes
The steep decline in oil and gas prices coupled with the global financial crisis that began in 2007 pushed Apache to focus on maintaining cash flow and cutting costs in order to build the company’s financial flexibility.[9] Despite a 9% rise in year-over-year production and a 28% decline in operating costs, Apache recorded a net loss of $292 million compared to net income of $706 million in 2008.[10] Compared to levels in 2008, average realized oil prices declined 32% and natural gas fell 45% in 2009.[11] Net cash provided by operating activities totaled $4.2 billion in 2009, down from $7.1 billion in 2008.[12]

Apache Production, Pricing, and Lease Operating Costs[13]
2007 2008 2009
Production of Oil (Mbbls) 101,735 92,911 90,921
Production of NGLs (Mbbls) 4,185 4,007 4,653
Production of Gas (MMcf) 641,967 592,045 655,667
Average Sale Price of Oil (per barrel) $59.85 $87.70 $68.84
Average Sale Price of NGLs (per barrel) $27.63 $51.38 $42.78
Average Sale Price of Gas (per Mcf) $3.69 $6.70 $5.34
Average Lease Costs per Boe $8.48 $10.56 $8.90
Quarterly Analysis

3Q 2010: Third quarter production for both liquid hydrocarbons and natural gas increased 3% compared the the second quarter of 2010 while realized per barrel declined slightly. Year-over-year, worldwide production increased 10 percent from the third quarter 2009 to 667,460 barrels of oil equivalent (boe) per day.[14] While realizations partially offset the production improvements, net income for the third quarter 2010 was $765 million compared to $441 million in the third quarter of last year.[15] Due to acquisition activity, production is expected to continue to increase for the remainder of 2009.[16] As of November 2010, Apache forecasts production to reach more than 775,000 boe in December 2010, an increase of 35% compared to December 2009.[17]

2Q 2010: A rise in production at Apache's international operations contributed significantly to the 94% rise in second-quarter earnings.[18] Apache reported a profit of $860.2 million for the second quarter of 2010, compared to profit of $443.3 million for the second quarter 2009.[19] Over the second quarter of 2010, average daily production rose 10% amid a surge in Australia. In addition, Apache's financial performance benefited from higher oil and natural gas prices in North American markets.[20] Also, Apache announced that it plans to acquire oil and natural gas assets in North American and Egypt for $7 billion from BP (BP).[21] Apache plans on paying for the assets through a mix of debt and equity. At the end of the quarter, Apache's cash balance was $1.8 billion.[22]


Business Segments
Apache Geographic Overview for 2009[23]
United States Canada Egypt Australia North Sea Argentina
2009 Production (MMboe) 75.3 28.2 55.7 14.7 22.4 16.6
2009 Production Revenue ($ millions) 3,050 877 2,553 363 1,369 362
Estimated Proved Reserves (MMboe) 930.0 531.0 308.8 305.3 172.5 119.0
2009 Gross New Wells Drilled 161 201 164 33 17 32
The United States
Apache’s U.S. interests are divided into a Gulf Coast region and a Central region. The Gulf Coast region covers areas on and offshore of Louisiana and Texas. In 2009, operations in the Gulf Coast produced about 20% of the company’s worldwide production and accounted for 13% of estimated proved reserves.[24] The Central region pertains to interests in Anadarko Basin, The East Texas Basin, and the Permian Basin. The Central region provides 27% of proved reserves and has grown from approximately 3,000 in 2000 wells to over 10,000 by 2010.[25] For drilling, recompletion projects, development projects, equipment upgrades, production enhancement projects, seismic acquisition and abandonment activities, Apache plans to invest $1.4 billion in its Gulf interests and $375 to $400 million in its Central region interests.[26]

Canada
Apache has approximately 4.4 million net acres across provinces of British Columbia, Alberta, and Saskatchewan.[27] In total, interests in Apache’s Canada region provided 22% of proved reserves in 2009.[28] In this region, Apache has expanded its natural gas and liquid natural gas operations through joint ventures with energy companies like Horn River resources, Corridor resources, and Kitimat LNG Incorporated.[29]

Egypt
Apache is the largest producer of liquid hydrocarbons and natural gas in the Western Desert and the third largest producer in all of Egypt.[30] Production in the region contributed 30% of 2009 revenue and 26% of total production. 13% of Apache’s proved reserves in 2009 came from interests located in Egypt.[31] Apache’s capital expenditure budget for 2010 is approximately $1.0 billion to $1.1 billion.[32]

As of January 27, Apache's operations and oil and gas production remain unaffected by current events in Egypt. [33] However, instability caused by protesters and security forces have the potential of disrupting Apache's operations in the region, which represented almost a third of 2009 revenues. Instability caused by government changes also has the potential of affecting operations. [34]

Australia
Apache holds 4.3 million net acres in 31 exploration permits, 14 production licenses and three retention leases located across Australia.[35] Although production from the region accounted for only 7% of total production in 2009, equivalent production rose 40% year-over-year.[36] Apache has well-developed growth strategies for projects in the Carnarvon Basin and other regions in Australia. In 2010, the company began production at two large oil development projects called Van Gogh and Pyrenees. Peak production from the Van Gogh and Pyrenees discoveries is projected to reach a combined 40,000 barrels per day net to Apache.[37] Capex budget is expected to be $1.1 billion to $1.2 billion in 2010.[38]

In September 2010, Apache and BHP Billiton (BHP) announced a $1.5 billion development project for gas fields off the coast of Western Australia.[39] The project is designed to develop four offshore wells to produce for an onshore processing plant with daily processing capacity of 200 million cubic feet.[40] Apache plans to invest about $430 million to take a 28.57% interest in the project.[41]

In October 2010, Apache announced an agreement with a subsidiary of Chevron and Tokyo Electric Power Company regarding the sale of LNGs from a project in Western Australia.[42] Chevron and TEPCO own the project in Western Australia, and agreed in December 2009 to deliver 3.1 million tons of annum of LNG for up to 20 year. Along with Kufpec, the Apache subsidiary plans to provide 25% of the LNG. [43]

In January 2011, Apache reported that shutdowns in the Van Gogh oil field due to cyclone-related downtimes should be completed during the beginning of Feburary.[44] Much of Apache's operations in Western Australia are susceptible to shutdowns and damages resulting from seasonal storms.[45]

North Sea
Apache entered the North Sea after acquiring a 97% working interest in the Forties field in 2003.[46] In 2009, production from the North Seas region totaled 22.4 MMBoe, which was 11% of total worldwide production.[47] Approximately 99% of production was oil.[48] Proved reserves account for 7% of total reserves in 2009. Capital expenditures are budgeted to be between $625 million to $675 million for 2010. [49]

Argentina
Apache has expanded its operations in Argentina through acquisitions. In 2009, the region produced 16.6 MMboe from 29.6 net wells.[50] Through capital projects and development, Apache added an estimated 14.4 MMboe in reserves and brought regional reserves to 119.0 MMboe, which is approximately 5% of Apache’s worldwide total.[51]

Chile
In November 2007, Apache was awarded exploration rights on two blocks comprising approximately one million net acres on the Chilean side of Tierra del Fuego, which is adjacent to a portion of its Argentina operations.[52] From 2007 to 2010, Apache received approval to begin testing, exploring, and producing from its Chilean interests.[53] This segment may serve as a source of significant future revenues, as Apache has just begun exploring and producing oil from this segment.

Trends and Forces

Apache's aggressive acquisitions strategy in 2010 expands production assets and reserves, but calls into question balance sheet strength
During the first half of 2010, Apache struck three major energy deals designed to expand the company's core production assets. From the acquisitions, Apache increased its assets in North America, the Gulf, and Egypt, which were all area that provided a large percentage of Apache's production and reserves numbers in 2009.[54] To pay for these acquisitions, the company plans to principally use debt instruments and equity sales.[55] Many analysts are concerned that Apache's aggressive expansion into these areas has the potential of over-extending the company's debt load and diluting its earnings per share for the remainder of 2010.[56] The acquisitions are described below:

Acquisition of Devon's properties in the Gulf (May 2010)
Apache agreed to pay nearly $1.1 billion for Devon Energy's oil and natural gas assets in the shallow waters of the Gulf of Mexico. Prior to the acquisition Apache was the second-largest producer of oil and gas in waters less than 1,200 feet deep, and this acquisition has the potential of making Apache the largest. From the deal, Apache receives nearly half a million acres off Texas, Louisiana and Alabama that held proven and probable reserves of 83 million barrels of oil equivalent at the end of 2009. [57]

Acquisition of Mariner Energy (ME) (May 2010)
Within a week of announcing the acquisition of properties owned by Devon Energy (DVN), Apache continued to expand its Gulf of Mexico operations through the purchase of Mariner Energy (ME).[58] Under the deal terms, Apache has the potential of paying $2.7 billion for Mariner's assets and assuming $1.2 billion in debt.[59] Mariner Energy (ME) is estimated to produce about 63,000 barrels of oil a day and control proven reserves estimated at 181 million boe.[60] In addition to acquiring properties in West Texas and New Mexico, Apache will also expand its deepwater assets and projects in the Gulf of Mexico.[61]

Acquisition of BP Assets (July 2010)
A $7 billion deal, the acquisition of BP assets in North America and Egypt is the largest in Apache's history.[62] Apache paid a slight premium for BP's assets in West Texas, New Mexico, Western Canada, and Egypt. However, the acquisition has the potential of increasing Apache's overall daily production by 13% and proved reserves by about 20%.[63] the company plans to finance the transaction through a sale of equity and debt.[64] Shortly after announcing the deal, Moody's Investors Service put Apache's credit rating under review for downgrade.[65]

Apache has made a name for itself as an energy company that can create value through accelerating production and reducing cost. While many analysts believe that Apache is capable of handling its debt load to finance these projects, the deals are not expected to increase earnings and production growth until 2011.[66] In addition, these deals increase Apache's risk exposure in the Gulf of Mexico. After BP's massive oil spill beginning in April 2010, deepwater operations have the potential of facing tighter Federal regulation and requiring more expensive safety precautions.[67] The Gulf region is also exposed to tropical storms and hurricanes for a portion of the year. Severe weather conditions have the potential of leading to temporary suspensions in production or possible damage to rigs and production assets.[68]

Apache's Mature Extraction Strategy Requires High Oil Prices to Be Successful
Apache's expansion strategy involves buying up mature properties from larger oil companies and drying them out. This involves the use of complicated, expensive technologies that allow old wells to be more fully depleted and new wells to be drilled where the terrain was too difficult before. In the current high-price environment, Apache can make a killing by extracting from these more difficult wells, especially if it can keep its costs as low as possible (primarily by buying the properties at lower rates because they are mature). If oil and gas prices fall, however, the company's margins would fall significantly.

Apache's Growth is Rife with Political Risk
With 70% of its reserves in the dying North American region, Apache's growth is strongly dependent on its ability to obtain new international reserves. The company's strategy of buying reserves that larger oil companies to not want to continue to drill means that current international markets, many of which are situated in politically unstable regions that are either rife with terrorism or have high risk of asset nationalization, are going to end up as part of Apache's holdings in the future. This makes the company's growth very sensitive to international political currents.

Competition

Apache's main competitors lie in the independent oil and gas sector, since the major oil companies like Exxon Mobil and BP are too large and diverse to fairly be called "competition". Among Apache's independent competitors are Anadarko Petroleum, Cabot Oil & Gas, Comstock Resources, and EnCana. Anadarko Petroleum is by far the largest of these, and about the same size as Apache, producing 25,000 less barrels of oil and three hundred million more cubic feet of gas. Comstock Resources is the smallest of Apache's competitors, and is betting on deepwater exploration to deliver in the future. Cabot Oil & Gas has natural gas in 97% of its reserves[69]), but is focused only on onshore North American development, possibly limiting its growth potential. Of these competitors, EnCana is the largest producer of natural gas, though Canadian regulations and a dependence on the exchange rate for short-run margins health makes it more vulnerable to macroeconomic conditions than.
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