Strong 2Q, though we see better value in other stocks - Goldman Sachs - August 01, 2007
What's changed
Anadarko reported 2Q 2007 adjusted EPS of $1.24, above consensus and our estimate of $0.79. Production from properties Anadarko intends to retain post restructuring was 517 MBOE/d, in the middle of guidance of 505-529 MBOE/d. The company raised the midpoint of its 2007 guidance range and increased capital spending by $200 million. We are revising our 2007-2010 estimates to reflect changes to our assumptions for production, realized commodity prices, unit costs, asset sales and other adjustments.
Implications
Anadarko continues to be in a transition year towards a company more focused on the Rockies and the Gulf of Mexico. Going forward, we believe the key catalysts for performance are the extent of further asset sales to shore up the balance sheet and management's ability to execute on production growth without cost pressures, especially in the Powder River Basin. We believe 2008 will be the peak year of organic growth for Anadarko, and the ability to sustain production in the Gulf of Mexico once Independence Hub reaches peak production rates represents a catalyst for the stock.
Valuation
Anadarko shares trade at 5.4X 2008 EV/debt-adjusted cash flow, versus the peer range between 4.9X-5.6X. We rate Anadarko Sell as we see more attractively valued companies among large cap E&Ps relative to Anadarko that have better combinations of growth, returns and free cash flow. Following an asset review, we are raising our 12-month discounted cash flow based target price for Anadarko shares to $46 from $40, and we see 7% downside versus 5% upside for E&P stocks.
Key risks
Commodity price volatility, drilling results, cost pressures and regulatory pronouncements are key risks. |
