Morningstar | Permian Growth Continues for Anadarko in 2Q; We See Share Repurchases as Value-Neutral
We're raising our fair value for no-moat Anadarko Petroleum to $65 per share from $60 following the release of the company's second-quarter results. Our fair value climbs on several minor factors, including higher near-term commodity prices. Our long-term outlook for oil remains unchanged at $55 per barrel for West Texas Intermediate.Volumes declined a bit sequentially to 637 mboe/d but were still above the midpoint of management's guidance. Oil volume in the Delaware Basin exceeded our expectations and continued to grow strongly, up nearly 20% sequentially and almost 90% year over year. The company has secured enough Permian takeaway capacity to ensure further growth in the basin. The wider price differential for Permian oil, caused by congested takeaway capacity, has been a recent headwind for some producers, but Anadarko has been mostly immune with its transportation agreements. The company is currently selling about 50% of its Delaware volumes at Gulf Coast markets, realizing an approximately $4/bbl premium to WTI. Sales in the basin have suffered from a WTI discount of about $8/bbl. Companywide realized oil prices tracked about a dollar lower than WTI in the quarter. With the completion of Plains' Cactus II pipeline to Corpus Christi, Anadarko expects to sell essentially all of its Delaware crude to Gulf Coast markets.
Volumes in the DJ Basin were essentially flat sequentially, but we expect the DJ will remain a large free cash flow contributor to Anadarko, based on well economics that have improved the last few years from longer laterals and shorter cycle times.
As previously announced, the company completed a $3 billion share repurchase plan in the second quarter and added another $1 billion to the plan for further buybacks. With shares now trading closer to our updated fair value estimate, we assume the additional share repurchases will be essentially value-neutral.
Outside of its current portfolio, Anadarko has targeted an LNG project in Mozambique and liquids-heavy production in Wyoming's Powder River Basin. We expect more details on Powder River in the quarters to come (Anadarko just gave initial details on its acreage position on Aug. 1) and a final investment decision on Mozambique in the first half of 2019 per management's guidance. It's important to note that because of the early-stage of development neither of these projects are included in our valuation model and both could provide upside to our current fair value estimate.
We remind investors that oil prices are still more than 15% above our midcycle estimate of $55/bbl WTI, reflecting above-average near-term supply disruptions. But these are temporary barriers. There are about 100 more U.S. tight oil rigs active than necessary to balance the market in the long run, and lower prices are required--sooner or later--to incentivize a slowdown in the shale patch and avoid a painful glut. Anadarko currently trades about 7% above our updated fair value estimate.
For more information on our long-term crude outlook, please see our June report "Oil Prices Are Unsustainably High, Stretching Energy Valuations."
Anadarko Petroleum is an independent exploration and production company. The company also participates in the hard-minerals business through royalty arrangements. The company's reporting segments are as follows: Exploration and Production, which is engaged in the exploration, development, production, and sale of oil, natural gas, and natural-gas liquids (NGLs) and in advancing its Mozambique liquefied natural gas project toward final investment decision; and WES Midstream and Other Midstream, in which these two segments engage in gathering, processing, treating, and transporting the company and third-party oil, natural-gas, and NGL production as well as gathering and disposal of produced water.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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