Anadarko Reaffirmed at Neutral

We maintain our Neutral recommendation on Texas-based oil and natural gas exploration company, Anadarko Petroleum Corporation ( APC - Analyst Report ) . The company posted mixed results in the second quarter 2012 with earnings surpassing the Zacks Consensus Estimate while sales falling short of it. Reported earnings per share in the second quarter were 85 cents which lagged behind the prior-year figure of $1.14 per share.

Lower realized prices of products sold were chiefly responsible for the lackluster top-line performance in spite of volume expansion. Nonetheless, recent forecasts reflect an uptrend in retail natural gas prices in the US markets, which bode well for top-line benefits going forward.

Anadarko’s major natural gas discoveries at Golfinho and Atum in offshore Mozambique and oil discovery in Côte d'Ivoire will aid in the future growth prospects of the company. In addition, joint ventures of about $1 billion related to the Salt Creek Enhanced Oil Recovery project in Wyoming as well as in the deepwater Lucius development in the Gulf of Mexico will fetch lucrative returns for the company.

Conversely, Anadarko’s operations are exposed to periodic risks such as unexpected natural disasters, unplanned outages and higher oil field service costs. The company’s deep sea operations are time consuming, contributing to lags in production and leading to increased costs.

Operations on foreign soil could also be threatened by political and economic uncertainties like war and civil unrest.

On a positive note, we believe Anadarko’s deep and diversified asset base provides the company with substantial growth potential over the medium-to-long term. It has a proven track record of identifying and executing high-impact projects which could act as major growth driver.

However, a sluggish pace of the US macro-environment and failure to fund its future capital requirements, acquisitions or development activities and debt payments could limit growth opportunities

Anadarko nevertheless revised its full year sales expectation on the basis of its first half 2012 performance. Anadarko increased its 2012 sales expectation by 3 million barrels to 261–265 million barrels of oil equivalent (MMBOE) from the prior range of 258–262 MMBOE.

The Zacks Consensus Estimates for the third quarter and full year 2012 are currently pegged at 70 cents per share and $3.43 per share, respectively. The company’s closest competitor is ConocoPhillips ( COP - Analyst Report ) .

Anadarko presently holds a Zacks #3 Rank implying a short-term Hold rating. The company is primarily engaged in the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs).