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Analyst Blog

On Mar 13, we issued an updated research report on Anadarko Petroleum Corporation (APC - Analyst Report). The big player in the Independent Oil & Gas space promises steady growth with its exploration activities in the U.S. Gulf of Mexico and other international locations. However, downside factors like volatility in commodity prices and unplanned outages temper our expectations.

Anadarko failed to post impressive Q4 financial results with its top line and bottom line lagging our expectation and edging down year over year. The drop came from lower revenues and higher expenses. 2013 revenues, however, improved from higher sales pitched in by natural gas, oil and condensate, and natural gas liquids businesses.

Anadarko Petroleum, a Zacks Rank #3 (Hold) stock, is committed to carrying out its worldwide exploration, appraisal, and development programs. For 2014, Anadarko raised its capital expenditure target to $8.1–$8.5 billion, a major portion of which will be utilized to develop the U.S. onshore assets.

We note that reserve replacement is a key for survival for exploration & production companies. Anadarko Petroleum has shown an increase of 21.2% in its proved reserves over the last five years, which is a favorable signal.

Stable cash flow is inevitable for better financial health. Anadarko Petroleum continues to improve its cash balance and exhibit efficiency in terms of improving operating cash flow. The company’s initiative towards reducing its long-term debt level is a positive move towards creating value for its shareholders.

However, volatility in prices of oil, natural gas and natural gas liquids can cloud over the operational results of the company. The uncertainty in the movement of energy prices affects both the top and the bottom line of the company.

Other challenges include political risk from operating in international locations and natural catastrophic events to which all oil and gas companies are vulnerable to.

Key Picks from the Sector

Other better ranked stocks in this industry include Range Resources Corp. (RRC - Analyst Report), Warren Resources Inc. (WRES - Snapshot Report) and Abraxas Petroleum Corp. (AXAS - Snapshot Report). While Range Resources and Warren Resources carry a Zacks Rank #1(Strong Buy), Abraxas Petroleum holds a Zacks Rank #2 (Buy).