Anadarko Beats EPS, Lags Sales

Anadarko Petroleum Corporation ( APC - Analyst Report ) posted net earnings from continuing operations of 85 cents per share for the second quarter of 2012, surpassing the Zacks Consensus Estimate of 77 cents but lagging the prior-year figure of $1.14 per share.

On a GAAP basis, Anadarko reported a loss of 76 cents per share in the second quarter versus earnings of $1.08 per share in the year-ago quarter. The difference between operating and GAAP earnings during the quarter was due to the impact of certain one-time items, charges and gains, during the quarter.

Numbering among the charges were a 2 cent loss from divestiture, $1.26 for impairments, 29 cents loss on derivatives, and 4 cents related to accelerated depreciation of Gulf of Mexico assets.

Revenue

Revenue of $3.22 billion in the quarter missed the Zacks Consensus Estimate of $3.42 billion and the year-ago figure of $3.67 billion.

The year-over-year decline in revenue was mainly due to a 45.3% drop in natural gas sales and 23.8% decline in natural gas liquid sales from the prior-year quarter.

Operational Highlights

Sales volumes in the quarter improved 8% to 68 million barrels of oil equivalent (MMBOE) or 742 thousand barrels of oil equivalent per day (MBOE/d) from 61 MMBOE or 685 MBOE/d in the year-ago quarter. The year-over-year rise was mainly due to higher natural gas and oil and condensate sales volumes.

Liquids sales averaged 241 thousand barrels per day (MBbl/d), up 7% year over year. The increase was driven by the company’s five major U.S. onshore growth plays, namely Wattenberg, Eagleford, Greater Natural Buttes, East Texas HZ and Marcellus Shale. Besides, Caesar/Tonga in the deepwater Gulf of Mexico and increased volumes resulting from the Algeria tax resolution benefited liquid sales volume.

Realized prices for crude oil and condensate, natural gas and NGL averaged $101.22 per barrel (down 7.1%), $2.15 per thousand cubic feet (down 47.7%) and $40.41 per barrel (down 28.1%), respectively, in the reported quarter.

Exploration costs during the quarter were $1.12 billion, rising significantly from the prior-year level of $236 million. The rise in exploration expenses yielded results as the company made significant discoveries during the quarter.

Interest expense during the quarter was $190 million, lower than $216 million in the year-ago quarter.

Financials

The company continues to have a strong cash position. Cash and cash equivalents as of June 30, 2012, were $2.79 billion versus $2.69 billion as of December 31, 2011.

Long-term debt of the company as of June 30, 2012 was $13.09 billion versus $15.06 billion as of December 31, 2011.

Cash flow from operations in the second quarter of 2012 was $1.99 billion versus $1.83 billion in the year-ago quarter. Free cash flow in the reported quarter was $142 million versus $126 million in the year-ago quarter.

Capital expenditure during the quarter was $1.8 billion, increasing from $1.72 billion in the second quarter of 2011.

Guidance

The strong performance in the first half of the year prompted the company to revise its full year sales expectation. Anadarko increased its 2012 sales expectation by 3 million barrels to 261–265 MMBOE from the prior range of 258–262 MMBOE. The third quarter sales volume is expected to be in the range of 65- 67 MMBOE.

Marketing and gathering margin for the third quarter and full year 2012 are expected to be in the band of $20–$40 million and $160–$180 million, respectively.

Minerals and Others for the third quarter and full year 2012 are expected to be in the band of $30–$35 million and $145–$165 million, respectively.

General and administrative expenses for the third quarter and full year 2012 are expected to be in the band of $290–$310 million and $1.1–$1.2 billion, respectively.

Capital expenditure of the company for the third quarter and full year 2012 is expected to be in the range of $1.65–$1.8 billion and $6.6–$6.9 billion, respectively.

Peer Comparison

ConocoPhillips ( COP - Analyst Report ) , which competes with Anadarko Petroleum, announced operating earnings of $1.22 per share for the second quarter 2012, which surpassed the Zacks Consensus Estimate of $1.17 per share. However, earnings were down by almost 25.6% from the year-earlier profit of $1.64, reflecting lower oil price realization, weak production volume and the divestiture of its refining and pipelines business.

ConocoPhillips’s operating revenue of $15.17 billion in the quarter slipped 14.1% from $17.67 billion reported in the year-ago quarter. Revenues surpassed the Zacks Consensus Estimate of $9.89 billion.

Our View

During the quarter the company made significant natural gas and oil discovery in Africa. Anadarko expects the discovery in offshore Mozambique, the Golfinho/Atum complex to contain 10 to 30-plus trillion cubic feet of natural gas. In West Africa, the company made a light oil discovery in offshore Côte d'Ivoire (Ivory Coast) in the CI-103 block. Anadarko has 40% working interest in the CI-103 block.

During the quarter the company monetized a portion of its holding in the Salt Creek field in Wyoming and the Lucius development project in the Gulf of Mexico. For this, it received a total fund of $956 million. The funds generated will be directed toward the development of these projects and will increase production capacity of the company, once these projects come on-line.

Despite the expansion in volumes year over year, the results this quarter were hurt by lower realized prices of the products sold, which took a hit on total revenue.

Based in The Woodlands, Texas, Anadarko Petroleum is primarily engaged in the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and NGLs. The company presently retains a short-term Zacks #3 Rank, which translates into a short-term Hold rating.