Replies to post #419 on The Rising Influence of Rising Affluence

[DewDiligence]

APC: Here are summaries of three sell-side reports I found on
the Yahoo MB. I posted them in what I consider a descending
order of bearishness. Comments?

From Stern Agee:

South Grand Lahou Prospect dry. In a surprising announcement this morning, Anadarko provides results on its second major exploration well on its emerging West African program… and it wasn’t good. Hitting its objective well ahead of schedule, APC indicated that no hydrocarbons were found, a huge disappointment as “an important calibration point within the trend” rings hollow… Results from its first exploration well on the trend last month at Venus indicated hydrocarbons in place, yet only 45 ft of net oil pay. At the time, it was deemed a success by APC as it proved there was a working hydrocarbon system in place.

All along management has indicated that South Grand Lahou was a better prospect than Venus, although still [only] a 1-in-3 chance for success. The view was supported by prior shallower water success in the Ivorian Basin, whereas no prior wells had been drilled in the Liberian Basin where Venus is located.

De-risking probability argument takes a hit. Since Venus, a debate has swirled over the commerciality of that “discovery” and what it meant to the rest of the program. It seemed pretty clear that Venus is unlikely to be a commercial discovery, but the justification for a 10% move on the stock that day was that it improved the probability of success on the remaining 30 prospects. Prior to Venus, the company assumed about a 1-in-5 chance for success in the Liberian Basin and a 1-in-3 chance in the Ivorian Basin… probabilities that improved to 1-in-3 overall according to the company. That argument just took a big hit today.

From JPM:

Downgrading to Neutral. The stock appears overvalued relative to its peers, even after giving risked credit for its inventory of exploration projects. We think the stock will react negatively to the news of an unsuccessful well at South Grand Lahou [it did—not exactly a tough call].

• 0-for-2 outside of Ghana. South Grand Lahou (Cote d’Ivoire) and Venus (Sierra Leone) both were commercially unsuccessful (despite the company’s “spin” on Venus). South Grand Lahou was wet, and Venus found “hydrocarbons” in relatively thin sands. Operators typically declare wells as discoveries when they are commercially successful and not just technically successful. Venus appears to have been a technical discovery, but the commerciality seems unlikely. We recognize that Venus might have established a new trend for the industry, but the next few wells outside of Ghana likely dictate how much more activity Anadarko and others actually execute in this trend. APC had indicated that South Grand Lahou was similar in potential to the Jubilee Field.

• Valuation. The stock is trading at 110% of NAV vs. the large-cap group that is trading at 80-85% of NAV and the overall group that is trading at 90% of NAV.

• Jubilee Field gets further confirmation. APC also announced a successful appraisal well with its Mahogany-4 well. This field likely starts production in 2010.

From Sun Trust — note that they raised their target price from $67 to $70 despite “downgrading” the stock:

Downgrade to Neutral on valuation; market value appropriately reflects competitive business model execution.

After more than doubling from its March low, APC has essentially achieved our target price. Year-to-date, APC’s 20+ percentage point outperformance relative to the E&P sector has coincided with the company realizing our expectation of ’09 production outperformance driven by its Rocky Mountain and Gulf of Mexico assets as well as meaningful deepwater GOM/West African exploration success. At this point, we believe the market’s increased confidence in the company’s underlying asset base compounded by material exploration success is fully reflected in the stock price.

Moreover, the market’s view of APC’s value may be amplified by unsubstantiated takeover speculation following a recent discovery offshore Sierra Leone, though we believe management is disinclined to sell at this stage in the commodity price cycle.

Separately, the $3 increase in our target price reflects a $0.50/$5 increase in our long-term natural gas/oil price forecasts.

Investment Theme: Expansive asset portfolio encompassing Rockies tight gas/coal bed methane, the deepwater Gulf of Mexico (GOM) Miocene/Tertiary Trends, East Texas Haynesville/Bossier/Chalk/Cotton Valley Trends, South Texas Eagle Ford Shale, Appalachian Basin Marcellus Shale, Alaskan North Slope, Algerian Berkine Basin, deepwater West Africa Cretaceous Trend, deepwater Brazil and offshore Indonesia/Mozambique. Notably, the company operates 11 deepwater GOM hubs, which provide Anadarko a competitive advantage as to resource development in proximity to these facilities.