Anadarko Petroleum Corp. (APC): Equity still relatively expensive, assuming above-guidance 2008 - Goldman sachs - February 06, 2008
What's changed
Anadarko reported 4Q 2007 adjusted EPS of $0.90 versus our $0.81 and First Call consensus of $0.78. Operating cash flow was $1.6 billion versus our $1.4 billion estimate. The company announced two unsuccessful wells in the deepwater Gulf of Mexico, which we believe led to relative weakness in the shares prior to and following the announcement. Our 2008-2010 EPS estimates are now $4.11/$6.28/$5.34 from $4.79/$7.19/$5.50.
Implications
Anadarko has executed well in beating its production guidance, a trend we expect to continue in 2008. Heightened management concern regarding commodity price and financial market volatility is leading to a 2008 strategy at least initially more focused on generating free cash flow and preserving the company’s investment grade credit rating, considering Anadarko’s high leverage. As a result, we expect modest growth in US proved reserves in 2008 and a meaningful decline in Anadarko’s organic growth rate in 2009. We see the catalysts driving Anadarko’s share price performance increasingly leveraged to deepwater exploration in the Gulf of Mexico, Ghana and Brazil.
Valuation
Anadarko trades at 5.9x 2008 EV/debt-adjusted cash flow versus 5.1x for Apache, 5.0x for Devon Energy, 5.2x for Chesapeake Energy, 5.5x for EOG Resources, 6.4x for EnCana (adjusted for oil sands) and 6.9x for XTO. Considering below-average production growth per share and returns, we do not believe a premium valuation is justified. We have an Attractive coverage view on E&P stocks and see 20% upside potential to a $68 12-month discounted cash flow based target price for Anadarko. But we see 29% upside potential for E&Ps and as such continue to rate Anadarko Sell.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
