Anadarko Petroleum's US Onshore Growth Isn't Priced Into The Stock Yet, Says BMO

Anadarko Petroleum Corporation APC announced Thursday detailed 2018 guidance and revised outlook to 2020.

The company expects to make capital investments in the range of $.2 billion to $4.6 billion in 2018, with 80 percent of its allocated toward the Delaware and DJ basins, including Anadarko midstream and the deepwater Gulf of Mexico.

The Analyst

Reviewing the announcement, BMO Capital Markets analyst Phillip Jungwirth upgraded shares from Market Perform to Outperform and increased his price target from $53 to $57.

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The Thesis

Anadarko's U.S. onshore assets are expected grow production at a high-teens CAGR through 2020, in line with large shale-focused exploration and production companies, Jungwirth said. However, the U.S. onshore business is valued at a discount to the comparable group.

If Anadarko's U.S. onshore assets were to trade in-line, the analyst believes it could support a valuation of $57-$63, representing 20-32 percent upside. The analyst sees no reason as to why the segment should trade at a material discount, given the company's core Wattenberg position.

BMO views Andarko's update as positive. Accordingly, the firm increased its oil production and in turn cash flow estimates.

"Anadarko's 10-14% oil CAGR at $50Bbl WTI/Brent (vs. +15% at $55Bbl WTI/Brent) can drive mid-teens debt adjusted cash flow growth at $50Bbl or +20% at BMO's price deck," the firm said.

BMO believes at $55-$60 a barrel WTI pricing, the company can generate a 3.5-6.5 percent free cash flow yield by 2020. At higher oil prices, the firm said free cash flow and debt-adjusted growth could expand materially.

The Price Action

After advancing through 2016, Anadarko shares have been on a downward trajectory for much of 2017. Despite trimming its losses, courtesy a recovery since early September, the stock is down about 31 percent in the year-to-date period.