Will Oil’s Rally Bring Good News for Anadarko Petroleum Investors?

Anadarko Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="APC" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has been hammered over the past year thanks to the tumble oil prices took in the second half of 2018, but with that headwind now out of the way, there’s a good chance of it making a comeback.

Anadarko is going to follow a disciplined capital expenditure program in 2019 so that it can do well even if oil prices remain weak.

Anadarko is going to follow a disciplined capital expenditure program in 2019 so that it can do well even if oil prices remain weak. In such a scenario, investors can expect the company’s cash flow profile to be better than expected in light of the recent rally in oil prices, which is here to stay.

Higher Oil Prices Will Be a Boon for Anadarko

Anadarko’s consolidated average oil price per barrel (which includes its operations in the U.S., Algeria, and other international markets) came in at $59.86 last year. The price of WTI oil and Brent crude is currently well above those levels, with the former trading at more than $63 a barrel and the latter at over $70 a barrel, respectively.

Assuming that these oil price levels are sustained for the remainder of the year on the back of the ongoing supply control actions being undertaken by the major producers, Anadarko could deliver impressive growth in its cash flow. That’s because Anadarko has designed its 2019 capital expenditure assuming an oil price of $50 per barrel.

The company has chalked out a capital budget of $4.3 billion to $4.7 billion for the full year, with the majority of it being spent in U.S. onshore assets. For comparison, Anadarko’s capital expenditure in 2018 came in at $6.18 billion.

Despite this massive reduction in the company’s capital expenditure budget, it anticipates total sales volume of oil, natural gas and natural gas liquids (NGLs) to range between 260-270 million barrels of oil equivalent (BOE). This represents an increase over last year’s production of 243 million barrels of oil equivalent (BOE).

More specifically, oil sales are expected between 410,000 and 435,000 barrels of oil equivalent per day, up from last year’s production of 383,000 BOE/day. In all, Anadarko is well-placed to increase its production and lower its costs at the same time in 2019.

This puts the company in a solid position to boost its financial performance and increase the cash flow.

Further Balance Sheet Improvements in the Cards

As Anadarko has designed its capital budget keeping a $50 oil scenario in mind, it should be able to generate a stronger than expected cash flow because of a lower break-even price. This will allow the company to not only return money to shareholders, but also retire more of its debt.

Last year, Anadarko retired over $600 million of its debt, while increasing the dividend from $0.05 to $0.30 per share. Also, the company repurchased $3.75 billion worth of stock, representing 12% of its outstanding float.

As higher oil prices and improved production will allow Anadarko to generate higher free cash flow in 2019, investors can expect further balance sheet improvements. This is why it would be a great idea to buy the weakness in Anadarko Petroleum stock as it can execute a turnaround this year.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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