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Surge In Commodity Prices To Drive Anadarko's December Quarter Results

Despite a highly levered balance sheet and diminishing cash flows, Anadarko Petroleum 's ( APC ) stock price has risen almost 45% in the last one year. The company's deteriorating performance in the first half of the year was partly offset by the sudden spike in commodity prices in the second half of the year, driven by the Organization of Petroleum Exporting Countries' (OPEC) agreement to reduce its combined oil production by 1.2 million barrels per day (Mbpd). In addition to this, the oil and gas producer has been focused at improving its operational efficiency to sustain its diminishing margins. Thus, keeping these factors in mind, the market expects Anadarko to report a solid improvement in its December quarter results on 1st February 2017(( Anadarko Schedules Fourth Quarter 2016 Results , 18th January 2017, www.anadarko.com)).

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Key Trends Witnessed By Anadarko In 4Q'16

As discussed earlier, the agreement between OPEC and some Non-OPEC members to curtail their cumulative oil output by 1.8 Mbpd, led to a strong bounce back in commodity prices in the fourth quarter of 2016. The WTI crude oil prices rose more than 10% to $49.21 per barrel in the December quarter, while the Henry Hub natural gas prices went up by more than 30% in the same period, ending the quarter at $3.71 per Mcf. With the recovery in commodity prices, Anadarko is likely to witness a steep rise in its price realizations that will lift the company's revenues for the quarter. Accordingly, the street expects the US-based exploration and production (E&P) company to post a notable improvement in its 4Q'16 revenue, both on an annual as well as sequential basis.

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Data Source: US Energy Information Administration ( EIA )

Apart from the revival of the commodity prices, the December quarter was a remarkable one for Anadarko. The company finalized two significant asset sales of more than $3.5 billion, which enabled it to meet its divestment target of $5 billion for 2016-2017, well ahead of schedule. The first deal is the sale of its upstream and midstream assets in the Marcellus Shale to Alta Marcellus Development for a sum of$1.24 billion (( Anadarko Announces Sale Of Marcellus Shale Natural Gas Assets , 21st December 2016, www.anadarko.com)).The deal entails the sale of 195,000 net acres, producing approximately 470 million cubic feet per day (MMcfd), which will wipe away roughly 13% of Anadarko's Q3 production. The sale, which is expected to close in the first quarter of 2017, will allow the company to reduce its exposure in the natural gas market, and utilize the proceeds to fund its future oil growth.

The second, and the more crucial one, is sale of its Eagleford Shale assets inSouth Texas for roughly$2.3 billion to Sanchez Energy Corporation and Blackstone Group LP((Anadarko Announces Sale Of Eagle Ford Shale Assets, 12th January 2017, www.anadarko.com)).The sale includes 155,000 net acres, holding production of 45,000 barrels of oil and NGL per day and 131 MMcfd. The assets are believed to have a reserve potential of more than 1.1 billion barrels of oil equivalents (boe). Yet, the Texas-based company decided to completely exit the area by disposing all of its oil and gas producing properties in the region. Anadarko's rationale behind these asset sales is to focus only on high-margin basins by actively managing its portfolio and deliver a 10%-12% compounded annual oil growth rate over the next five years. Going forward, the company will focus on the three Ds in its portfolio - the Delaware Basin, the DJ Basin, and the Deepwater assets in the Gulf of Mexico (GOM).

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That said, the investors continued to be anxious about the company's rising leverage during the quarter. Anadarko's debt to total capital ratio has increased from 35% in 2013 to almost 50% in the third quarter of 2016, largely due to declining shareholder equity owing to weak profitability. However, the oil and gas company is aware of its highly levered capital structure and has been proactively repaying its debt obligations to improve its balance sheet. In line with this strategy, the E&P player will utilize the proceeds of its extensive divestment plans to bring down its leverage and enhance its shareholder returns in the coming quarters.

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Source: Google Finance; US Energy Information Administration ( EIA )

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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