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On Nov 26, 2013, we downgraded our recommendation on Anadarko Petroleum Corp. (APC - Analyst Report) to Neutral from Outperform. The oil and gas exploration as well as production operator currently carries a Zacks Rank #3 (Hold).

Why the Downgrade?

The downgrade takes into account the company’s spiraling operating costs and volatility in oil and gas prices. Anadarko’s third quarter 2013 earnings lagged our expectations significantly as profit declined 15.6% from the year-ago quarter.

These negative factors have been reflected in downward estimate revisions. In the last 30 days, the Zacks Consensus Estimate for 2013 decreased by 21 cents to $4.29 per share.

Causes of Concern

The renewed spurt of political conflict in Mozambique could jeopardize the company’s multi-billion dollar exploration initiatives and might deter its future investment opportunities in the region. Moreover, foreign exchange restrictions and fluctuation in international currency relative to the U.S. dollar are factors that might constrain the company’s performance.

Furthermore, Anadarko’s operations are subject to risks related to unexpected natural disasters. The Colorado flood in Sep 2013 affected Anadarko’s activities leading to the shut-down of 675 operated wells in the region. Its deep sea operations are time consuming, resulting in lags in production which could lead to increased costs.

However, the company’s expanding interest in the Gulf of Mexico’s Coronado discovery and service startup of the Texas pipeline asset are expected to lend substantial upside.

Other Stocks to Consider     

Some better-ranked stocks in the same sector include Abraxas Petroleum Corp. (AXAS - Snapshot Report), Bonanza Creek Energy, Inc. (BCEI - Snapshot Report) and Matador Resources Company (MTDR - Snapshot Report). All these stocks presently hold a Zacks Rank #1 (Strong Buy).

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