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Weekly Oil & Gas Notes: Anadarko, Exxon and BP

By: Trefis
Posted: 10/1/2013 10:25:00 AM
Referenced Stocks: APC;BP;COP;KRG;XOM

The past week saw quite a few developments in the oil and gas space. Uncertainties loomed over the potential impact of the recent floods in Colorado on Anadarko's ( APC ) production from the Wattenberg field, as wet weather and infrastructural bottlenecks slowed down the pace of damage inspection and recovery.

On the other hand, the Iraqi central government threatened the Kurdistan regional government ( KRG ) to cut its share of the federal budget amid a growing dispute over the control of Kurdish oil reserves. As the kurds prepare to raise the ante against the central government by installing a separate pipeline to operate their oil exports independently, we analyze and compare the operating strategies taken up by Exxon Mobil ( XOM ) and BP Plc. ( BP ) in Iraq.

Anadarko

Production from Anadarko's Wattenberg field in Colorado is expected to be hit by the recent floods harder than initially expected, as infrastructural issues and persistent wet conditions continue to delay the process of inspection, estimation and recovery of damages caused by the natural disaster. The Colorado Oil and Gas Conservation Commission told Bloomberg last week that the operations of state workers were being "hampered by wet and slow-going conditions". Anadarko reported that it had to shut down more than 600 wells due to the massive floods caused by torrential rains that began on September 9 in the foothills of the Rocky Mountains.

The Wattenberg field is a liquids-rich area where Anadarko operates over 5,500 wells. It is one of the primary growth engines of the company not only because of a significantly higher than average rate of production growth, but also due to a higher than average percentage of liquids (crude oil and natural gas liquids) produced from the field. Because of better yields realized by the energy companies on the sale of liquids compared to natural gas, amid depressed natural gas prices in the U.S., higher proportion of liquids boosts revenues and enhances return on invested capital.

Total production from the Wattenberg field has grown at 22.5% CAGR since 2010 compared to ~7% CAGR observed in company-wide production volumes. Also, liquids make up more than 52% of the hydrocarbons produced from the Wattenberg field compared to 43% of the company's overall hydrocarbon production. During the second quarter, liquids production from the field grew by more than 37% y-o-y to 60,000 barrels per day.

Since production from the Wattenberg field makes up more than 12% of the company's overall sales volume, a significant downtime at the field due to delays in the recovery of damages caused by the recent floods can materially impact the company's valuation. Just to get a ballpark idea, if 10% of the wells operated by Anadarko at the Wattenberg field stay idle for 3 months, it could reduce the field's production volume by ~1.1 million barrels of oil equivalent or ~2% of the company's total quarterly production.

Exxon Mobil

Last week, Iraq's central government asked the KRG to link its new pipeline to the main government pipe at a metering station near the Turkish border, so that they can know the amount of oil being exported out of Iraq. It has also threatened to refuse the region's 17% share in the federal budget if the KRG tries to bypass the central authorities and starts operating an independent oil pipeline. This further widened the rift between the two governments increasing the operating risks of the multinational oil companies invested in Iraq.

Disagreements over the control of Kurdish oil reserves and export revenues is at the heart of a larger dispute between the Iraqi central government and the KRG. The central government believes that the semi-autonomous Kurdistan region has no legal authority to export oil or sign production agreements with oil companies. While the KRG maintains that Iraq's constitution gives them the right to do so, and has already signed contracts with a number of multinational companies, including Chevron, Exxon and Gazprom. Given the current situation where the two governments are nowhere close to a resolution of the growing dispute, we analyze and compare the different strategies taken up by the oil majors BP and Exxon in Iraq with respect to the operating risks inherent to each. (See: BP, Exxon Playing The Growing Dispute In Iraq Differently )

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