Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Maybe it's because oil prices were having an off day, or maybe it's because the magic word "Permian" didn't feature, but investors on Friday just weren't that jazzed about Anadarko Petroleum Corp.'s latest deal.

After dithering a bit early on, Anadarko's stock had eked out a gain of 0.5 percent by mid-morning. This came after Thursday evening's announcement the company was selling a package of land and some oil and gas production in the Eagle Ford shale basin in south Texas to Sanchez Energy Corp. and Blackstone Group LP for $2.3 billion in cash.

That price may explain some of the shrug-off. When this deal was first rumored back at the end of October, the range was put at $3-$3.5 billion.

That unverified number, however, may well have been based on the assumption that regional pipelines owned by Anadarko's master limited partnership, Western Gas Partners LP, would also be thrown in. They aren't.

Plus, valuing deals that mix producing wells and prospective acreage involves a lot of assumptions. Based on valuations of Eagle Ford deals over the past year, Evercore ISI's estimates imply Anadarko's latest deal has come in a bit shy of expectations, but nowhere near what's implied by that figure touted a few months ago.

Moreover, investors ought to be thinking a bit more -- to borrow a phrase -- bigly. Any perceived shortfall on this disposal should be made up in what Anadarko's wider streamlining means for the company's valuation overall.

Cast your mind back to that grim period around the start of 2016. Oil was still yet to hit its low point, and Anadarko had just made an ill-conceived swipe at taking out rival Apache Corp. that ended up taking a big chunk out of Anadarko's own credibility. Net debt had doubled in the course of 2015 as profits collapsed, taking leverage from 0.9 times Ebitda to 3.5 times.

Since then, Anadarko has taken itself in hand. It has sold about $7.5 billion worth of assets, including the latest disposal. Leverage, pro-forma for the deal, should now be below 2.8 times and heading lower.

Anadarko Before The Dawn
After a rough start to 2016, Anadarko has regained some of its mojo
Source: Bloomberg
Note: Performance indexed to 100.

Just as important, especially after the head-scratching tilt at Apache, is Anadarko's clearer strategy. Investment is now focused on just three areas: the deepwater Gulf of Mexico, the Permian basin (there it is!), and the Denver-Julesburg basin in Colorado, known as the "DJ basin" for brevity or maybe just to make shale sound cool.

The $2 billion acquisition of assets in the Gulf of Mexico from Freeport McMoRan Inc., announced in September, looks well-timed. And if Anadarko can redeploy capital tied up in the Eagle Ford shale to its Permian or DJ businesses, then returns will likely be better there.

Leaner after a year of intense workout, Anadarko increased its projected annual growth in oil production to a healthy 12-14 percent over the next five years. That could rise in the course of 2017, especially as Anadarko has more assets it can sell to fund expansion in its core areas. Plus, there's the perennial possibility of a major casting an acquisitive eye on the company.

And yet, despite perking up of late, Anadarko's valuation still looks relatively so-so. Time for a dose of Friday feeling.

Caught In The Middle
Anadarko's valuation sits in the middle of the pack
Source: Bloomberg
Note: Enterprise value to Ebitda multiples.

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net