Regulatory Concerns For Anadarko Have Created Attractive Value

Susquehanna initiated coverage of Anadarko Petroleum Corporation APC with a Positive rating and a $60 price target, suggesting roughly 35 percent upside from current levels. The firm believes regulatory concerns in Colorado, though remaining a near-term headwind, has rendered shares attractive, given its recent weakness and relative valuation.

In April, an explosion and fire at one of the company's wells in northeast Colorado killed two people at a home near the well.

In response, the company announced shuttering of 3,000 vertical wells in a precautionary move. The closed wells represented 2 percent of its production. Apart from lost production, the company may also be constrained by regulatory backlash over the accident.

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Analyst Biju Perincheril sees some degree of elevated headline risk and a modest increase in operating costs in the DJ basin in Colorado. The analyst is of the view that any reduction to the drilling inventory, arising out of regulatory action, would be modest and tolerable, given its Delaware position.

Susquehanna presented the bull and bear cases for the stock.

Bull Cases

• NAV upside from Delaware Basin completion optimizations and cost synergies in development mode
• Ability to churn out superlative oil growth from its core DJ and Delaware Basin positions
• Strong balance sheet and free cash flow from deepwater and international assets
• Potential for consolidation in the Delaware Basin
• Optionality from exploration

Bear Cases

• Weak oil prices
• Minimal hedging and cash flow outspend
• Worries whether recent accidents in Colorado could impact drilling in DJ basin
• Compelling Valuation

Susquehanna indicated its $60 price target is based on a 5.5 times multiple of 2019 EBITDA estimate of $5.7 billion and is in line with its conservative base case NAV estimate.

"From an NAV perspective, we estimate upside case factoring in Delaware improvements and LNG project could be more than $70/share, even after risking the value of DJ inventory by 50%," the analyst clarified.