Here's another one.
Anadarko Petroleum Corp. (APC): Beating 2008 growth guidance needed to justify premium valuation - Goldman Sachs - 11/07/07
What's changed
Anadarko shares outperformed on November 6 following above-consensus 3Q EPS, 2008 growth guidance in line with peers and continued swift rampup of Independence Hub production.
Implications
We rate Anadarko Petroleum Sell relative to an Attractive coverage view, as we do not see reason for Anadarko shares to trade at a premium valuation to other US large-cap E&Ps. As the asset sales following the acquisitions of Western Gas Resources and Kerr-McGee wind down, we believe the Street will begin to focus more on the underlying assets in the Rockies, Gulf of Mexico and Africa. Overall, Anadarko guided to 5%-9% production growth in 2008 (below our estimates of double-digit growth), not a dissimilar growth rate relative to other large-cap E&Ps, without indications of its capital budget. With asset sales creating somewhat noisy cash flow results, we believe Anadarko can outperform if it can show a superior free cash profile versus peers, considering that growth is expected to be in line with peers and returns below average. We expect 4Q 2007 Gulf of Mexico exploration to be a near-term catalyst for the stock.
Valuation
Anadarko trades at 5.9x 2008 EV/debt-adjusted cash flow versus 5.6x for Apache, 5.2x for Devon Energy, 5.7x for EOG Resources, 7.3x for XTO Energy and 7.6x for EnCana. We see 7% upside to a $64 12-month discounted cash flow based target price versus 14% upside for E&P stocks, as we believe Anadarko’s premium can continue to narrow. We rate Anadarko Sell relative to an Attractive coverage view.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
