Anadarko Petroleum Corp. (APC): Underperformance seems overdone after positive oil surprise - Goldman Sachs - May 06, 2008
News
Anadarko reported 1Q 2008 adjusted EPS of $1.44 versus our estimate and First Call consensus estimate of $1.22. Total production was 585 MBOE/d versus our 575 MBOE/d estimate. Operating cash flow was $1.95 billion versus our $1.64 billion. Management maintained its full-year production guidance despite the projected 4-6 week outage of the Independence Hub, which at full we estimate represents ~10% of total company production. Management announced positive deepwater drilling results (though with additional drilling needed) in the Gulf of Mexico and Ghana.
Analysis
Anadarko shares have been among the worst performing E&Ps year-to-date, in part because the Street has not embraced a company-making resource opportunity as has been the case for some peers. However, the weakness seems increasingly overdone, and we believe Anadarko shares deserve credit for multiple smaller opportunities, especially oilier ones, that are surprising to the upside. We believe upside potential from Ghana is not in the shares, and with our higher oil and gas price deck we expect meaningful free cash generation in the coming years. Due to asset sales and free cash flow, we expect net debt/tangible capital to fall to 37% at yearend 2008 versus 54% at yearend 2007, although greater capital spending may be needed to meet 5%-9% growth in 2009.
Implications
Anadarko began the year trading at more than half a multiple point premium to Devon Energy and Apache on an enterprise value/debt-adjusted cash flow basis. However, these three stocks now trade at parity (~4.5x 2009 EV/DACF). While we do not believe the extent of the earlier premium valuation is necessarily justified, we are assuming lower production than company guidance for 2009. Greater free cash flow and better-than-expected production and exploration results boost confidence that our estimates, which are under review, may be too low. We rate Anadarko Neutral relative to an Attractive coverage view. |
