ANADARKO PETROLEUM CORP APC
September 02, 2014 - 9:35pm EST by
bruno677
2014 2015
Price: 111.57 EPS $0.00 $0.00
Shares Out. (in M): 506 P/E 0.0x 0.0x
Market Cap (in M): 56,450 P/FCF 0.0x 0.0x
Net Debt (in M): 10,000 EBIT 0 0
TEV: 65,450 TEV/EBIT 0.0x 0.0x

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  • Offshore
  • Oil and Gas
  • E&P
  • Discount to NAV
  • Potential Asset Sales
  • Potential Acquisition Target
  • Transformation
  • Discount to Peers
 

Description

Anadarko Petroleum (APC)

 

APC is an independent oil and gas exploration company that has significant operations onshore in virtually every major resource basin in the US and is the industry leader in offshore deep-water and sub-salt exploration & development. APC’s offshore discoveries in the Gulf of Mexico, Mozambique and West Africa will be a major source of growth as the new fields enter production over the next few years.

 

The company’s EBITDAX, now about $10 billion, will increase 20% to more than $12 billion by 2016, from existing discoveries only – not including the upside from any deep-water prospects currently drilling or planned.   The stock is current trading at $111 and with a NAV of $140. 

 

There are significant corporate capital structure opportunities/drivers to monetize assets.  There is also a very good possibility that APC is acquired by a Major, it has the size and asset base to make it a perfect acquisition target for a Major.

 

The stock should trade closer to its $140 NAV with the management focused on optimizing its asset portfolio.  There is a takeout premium on top of the $140 NAV if a Major decides to acquire APC.    

 

 

APC Business Model & Corporate Strategy

 

APC has established a “best in class” record of developing large-scale projects and of subsequent portfolio management – monetizing offshore projects to accelerate cash flow, and high-grading onshore reserves to focus on the most competitive and profitable basins. The company is widely recognized as having one of the best exploration staffs and unconventional resource capabilities in the E&P industry.

 

 APC was the prime mover in the GOM Lower Tertiary play and was an early entrant into similar deep-water prospects offshore Ghana, Liberia, Mozambique and Brazil.

 

In US onshore, APC was a leader in the Rockies unconventional plays, notably the Wattenberg-Niobrara, Pinedale and Greater Natural Buttes fields of Colorado, Utah and Wyoming. These Rockies fields, most of which were acquired with KMG and Western Gas Resources (WGR), are APC’s single most valuable asset.

 

Newer shale plays include the Eagle Ford, Permian, Haynesville, Utica and Marcellus, in which APC has assembled a position in aggregate of more than two million net acres.

 

The growth for these exploration and resource plays has required APC to reinvest virtually all of its cash flow for the last three years. But that is changing: the transition from exploration of major offshore prospects to development and production will occur between now and 2016.

 

APC will generate more than $4 billion in Free Cash Flow over the next three years. Management’s strategy is to evolve from a growth E&P company (difficult to sustain long-term for a company with a $60 billion market value) to a balanced growth-and-cash-return company.

 

Monetization of its low-cash-flow assets, including offshore projects not yet producing and such things as its 91% ownership of the midstream MLP WGP (general partner of WES) – alone worth $8 billion.  APC management is firmly committed to this cash monetization and corporate transformation.

 

 

APC Asset Base

 

http://media.corporate-ir.net/media_files/IROL/80/80451/2014IRConference_ALL_FINAL.pdf

 

APC corporate presentation for Match 2014 does a very good job of laying out its asset base and how APC managements get a $140 NAV for the stock.

 

I get $150 NAV with a very low assumption for mineral rights.      

 

APC Summary NAV

(millions $)

 

 

Proved Properties

$50,000.00

Unproved Properties

$50,500.00

WGP & Mid-stream

$11,000.00

Mineral Rights

$1,000.00

Debt

-$13,065.00

NPV of G&A

-$8,000.00

Future Cash Taxes

-$12,500.00

Cash

$3,698.00

Tronox Settlement

-$5,150.00

 

$77,483.00

 

 

NAV Per Share

$152.53

 

I have attached an overview of APC asset base as an appendix. 

 

My price target is 90%-95% of the NAV - $140-$145.

 

 

Valuation

 

APC is trading at 5.7X EV/EBITDA multiple for 2014 and 2015.  It’s trading at 80% of NAV while other E&P are trading at close to NAV using NYMEX pricing.   It is cheaper than its comps while having a much better and more diversified asset base and far better exploration and development organization expertize. 

 

Catalysts

 

Valuation discount

 

The Tronox litigation was a valuation overhang on APC.  Its settlement was a big positive for stock and the price action of the stock reflected that.  Given where APC is trading relative to its comps the discount is not justified.  Given APC track record in adding value thru the drill bit and it’s much more conservative and prudent capital management, APC should trade at a premium to its other independent oil and gas competitors. 

 

 

 

Transformation from growth to development

 

The biggest negative for APC is it is a $60 bil. company with a high quality diversified asset base in an industry sector in which the markets mainly looks for production growth.  The independent oil and gas sector is as much a growth sector as technology.  The short term (quarterly)market focus is always been on production growth and not on other more valuation driven metrics like cash flow, return on capital ect.  At $60 bil. market cap, a new shale play or discovery does not transform the APC. 

 

APC management realizes that the company is transitioning from growth/exploration to production.  Its cash flow metrics should improve and free cash generation should increase as its existing portfolio of assets is developed.       

 

Asset Divestiture

 

APC has lower (more stable) cash flow generating MLP assets that it can dispose.  APC continues to own 88% of WGP, with a market value of $11 billion (WGP owns 42% of WES’s LP units and holds IDR’s). The current yield of WGP, reflecting the strong contracted nature of its cash flows, is a low 2.6%.  APC plans to gradually sell down its WGP stake, while continuing to control the entity. I have WGP units valued at current market, $11 billion. In theory, if unlikely in practice, APC could transfer control of WGP to a third party at a premium to current market value (as DVN did with XTEX for its midstream assets).

 

APC mineral Rights

 

APC owns the mineral rights to 7.5 million acres of land in the western US, on which it receives royalties from third party production of soda ash and coal, among other minerals (the rights also increase the value of some of APC’s Niobrara and other Rockies properties, as the company does not pay royalties to land owners, as most E&P companies do).

 

The mineral rights trace back to the Land Grants made to the Union Pacific Railroad in the administration of Abraham Lincoln: a checkerboard pattern of alternating blocks, each ten miles by one-tenth mile, on each side of the UNP right-of-way. In 2000, APC acquired Union Pacific Resources Corporation, which had been spun-out of UNP in 1996 with the Land Grant rights.

 

I don’t give as high a value as some street analysts to the mineral rights.  I have them at $1 bil. as I expect APC to continue to hold them.   I don’t see APC spinning the assets of into a MLP structure. 

 

 

Corporate Sale

 

I am more bullish than street analysts on a sale of APC to a major.  Goldman in its model has a 15% change of sale.  I think it is much higher around 30%-40%.  My timing would be in next 18-36 months. 

 

Why would a Major buy APC?

 

APC has the right size and asset base.  Its $70 bil. company (debt and equity).  It has large quality assets around the world.  Its US asset base is top quality both onshore and offshore.  APC exploration and development personal and organization structure are first class. 

 

Where else are Majors going to invest to offset their declining asset base?  Russia, Iraq, Libya, or Brazil?  The best place for Majors to invest is in the US and Canada.  Known property rights system, great infrastructure and deep domestic markets.    

 

The Majors are not going to roll up fifteen $2 bil. market cap companies to create an expanded asset footprint.  APC (APA/DVN) give the Majors that footprint in one acquisition.   

 

Risks

 

Commodity Risk – APC is too big to hedge its commodity exposure.  Going long APC assumes that investor expects oil and gas to trade around forward NYMEX prices.

 

Conclusion

 

APC is not the typical beaten down value investment.  It’s no longer an orphaned or tainted equity after the Tronox settlement.  APC is a transition play as it now focused on developing its asset base.  APC is transitioning to a cash flow generation story.  It is trading at close to all time highs.  However, it is cheap relative to its competitors, is cheap on a NAV basis, it’s a competent management and organizational structure and has a blue chip asset base.  I see a 25% upside in a year and greater upside on a takeout by a Major.  

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Transition to free cash flow generation 
NAV Asset discount
MLP ownership divestiture
Possible take out by a Major
    sort by   Expand   New

    Description

    Anadarko Petroleum (APC)

     

    APC is an independent oil and gas exploration company that has significant operations onshore in virtually every major resource basin in the US and is the industry leader in offshore deep-water and sub-salt exploration & development. APC’s offshore discoveries in the Gulf of Mexico, Mozambique and West Africa will be a major source of growth as the new fields enter production over the next few years.

     

    The company’s EBITDAX, now about $10 billion, will increase 20% to more than $12 billion by 2016, from existing discoveries only – not including the upside from any deep-water prospects currently drilling or planned.   The stock is current trading at $111 and with a NAV of $140. 

     

    There are significant corporate capital structure opportunities/drivers to monetize assets.  There is also a very good possibility that APC is acquired by a Major, it has the size and asset base to make it a perfect acquisition target for a Major.

     

    The stock should trade closer to its $140 NAV with the management focused on optimizing its asset portfolio.  There is a takeout premium on top of the $140 NAV if a Major decides to acquire APC.    

     

     

    APC Business Model & Corporate Strategy

     

    APC has established a “best in class” record of developing large-scale projects and of subsequent portfolio management – monetizing offshore projects to accelerate cash flow, and high-grading onshore reserves to focus on the most competitive and profitable basins. The company is widely recognized as having one of the best exploration staffs and unconventional resource capabilities in the E&P industry.

     

     APC was the prime mover in the GOM Lower Tertiary play and was an early entrant into similar deep-water prospects offshore Ghana, Liberia, Mozambique and Brazil.

     

    In US onshore, APC was a leader in the Rockies unconventional plays, notably the Wattenberg-Niobrara, Pinedale and Greater Natural Buttes fields of Colorado, Utah and Wyoming. These Rockies fields, most of which were acquired with KMG and Western Gas Resources (WGR), are APC’s single most valuable asset.

     

    Newer shale plays include the Eagle Ford, Permian, Haynesville, Utica and Marcellus, in which APC has assembled a position in aggregate of more than two million net acres.

     

    The growth for these exploration and resource plays has required APC to reinvest virtually all of its cash flow for the last three years. But that is changing: the transition from exploration of major offshore prospects to development and production will occur between now and 2016.

     

    APC will generate more than $4 billion in Free Cash Flow over the next three years. Management’s strategy is to evolve from a growth E&P company (difficult to sustain long-term for a company with a $60 billion market value) to a balanced growth-and-cash-return company.

     

    Monetization of its low-cash-flow assets, including offshore projects not yet producing and such things as its 91% ownership of the midstream MLP WGP (general partner of WES) – alone worth $8 billion.  APC management is firmly committed to this cash monetization and corporate transformation.

     

     

    APC Asset Base

     

    http://media.corporate-ir.net/media_files/IROL/80/80451/2014IRConference_ALL_FINAL.pdf

     

    APC corporate presentation for Match 2014 does a very good job of laying out its asset base and how APC managements get a $140 NAV for the stock.

     

    I get $150 NAV with a very low assumption for mineral rights.      

     

    APC Summary NAV

    (millions $)

     

     

    Proved Properties

    $50,000.00

    Unproved Properties

    $50,500.00

    WGP & Mid-stream

    $11,000.00

    Mineral Rights

    $1,000.00

    Debt

    -$13,065.00

    NPV of G&A

    -$8,000.00

    Future Cash Taxes

    -$12,500.00

    Cash

    $3,698.00

    Tronox Settlement

    -$5,150.00

     

    $77,483.00

     

     

    NAV Per Share

    $152.53

     

    I have attached an overview of APC asset base as an appendix. 

     

    My price target is 90%-95% of the NAV - $140-$145.

     

     

    Valuation

     

    APC is trading at 5.7X EV/EBITDA multiple for 2014 and 2015.  It’s trading at 80% of NAV while other E&P are trading at close to NAV using NYMEX pricing.   It is cheaper than its comps while having a much better and more diversified asset base and far better exploration and development organization expertize. 

     

    Catalysts

     

    Valuation discount

     

    The Tronox litigation was a valuation overhang on APC.  Its settlement was a big positive for stock and the price action of the stock reflected that.  Given where APC is trading relative to its comps the discount is not justified.  Given APC track record in adding value thru the drill bit and it’s much more conservative and prudent capital management, APC should trade at a premium to its other independent oil and gas competitors. 

     

     

     

    Transformation from growth to development

     

    The biggest negative for APC is it is a $60 bil. company with a high quality diversified asset base in an industry sector in which the markets mainly looks for production growth.  The independent oil and gas sector is as much a growth sector as technology.  The short term (quarterly)market focus is always been on production growth and not on other more valuation driven metrics like cash flow, return on capital ect.  At $60 bil. market cap, a new shale play or discovery does not transform the APC. 

     

    APC management realizes that the company is transitioning from growth/exploration to production.  Its cash flow metrics should improve and free cash generation should increase as its existing portfolio of assets is developed.       

     

    Asset Divestiture

     

    APC has lower (more stable) cash flow generating MLP assets that it can dispose.  APC continues to own 88% of WGP, with a market value of $11 billion (WGP owns 42% of WES’s LP units and holds IDR’s). The current yield of WGP, reflecting the strong contracted nature of its cash flows, is a low 2.6%.  APC plans to gradually sell down its WGP stake, while continuing to control the entity. I have WGP units valued at current market, $11 billion. In theory, if unlikely in practice, APC could transfer control of WGP to a third party at a premium to current market value (as DVN did with XTEX for its midstream assets).

     

    APC mineral Rights

     

    APC owns the mineral rights to 7.5 million acres of land in the western US, on which it receives royalties from third party production of soda ash and coal, among other minerals (the rights also increase the value of some of APC’s Niobrara and other Rockies properties, as the company does not pay royalties to land owners, as most E&P companies do).

     

    The mineral rights trace back to the Land Grants made to the Union Pacific Railroad in the administration of Abraham Lincoln: a checkerboard pattern of alternating blocks, each ten miles by one-tenth mile, on each side of the UNP right-of-way. In 2000, APC acquired Union Pacific Resources Corporation, which had been spun-out of UNP in 1996 with the Land Grant rights.

     

    I don’t give as high a value as some street analysts to the mineral rights.  I have them at $1 bil. as I expect APC to continue to hold them.   I don’t see APC spinning the assets of into a MLP structure. 

     

     

    Corporate Sale

     

    I am more bullish than street analysts on a sale of APC to a major.  Goldman in its model has a 15% change of sale.  I think it is much higher around 30%-40%.  My timing would be in next 18-36 months. 

     

    Why would a Major buy APC?

     

    APC has the right size and asset base.  Its $70 bil. company (debt and equity).  It has large quality assets around the world.  Its US asset base is top quality both onshore and offshore.  APC exploration and development personal and organization structure are first class. 

     

    Where else are Majors going to invest to offset their declining asset base?  Russia, Iraq, Libya, or Brazil?  The best place for Majors to invest is in the US and Canada.  Known property rights system, great infrastructure and deep domestic markets.    

     

    The Majors are not going to roll up fifteen $2 bil. market cap companies to create an expanded asset footprint.  APC (APA/DVN) give the Majors that footprint in one acquisition.   

     

    Risks

     

    Commodity Risk – APC is too big to hedge its commodity exposure.  Going long APC assumes that investor expects oil and gas to trade around forward NYMEX prices.

     

    Conclusion

     

    APC is not the typical beaten down value investment.  It’s no longer an orphaned or tainted equity after the Tronox settlement.  APC is a transition play as it now focused on developing its asset base.  APC is transitioning to a cash flow generation story.  It is trading at close to all time highs.  However, it is cheap relative to its competitors, is cheap on a NAV basis, it’s a competent management and organizational structure and has a blue chip asset base.  I see a 25% upside in a year and greater upside on a takeout by a Major.  

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Transition to free cash flow generation 
    NAV Asset discount
    MLP ownership divestiture
    Possible take out by a Major

    Messages


    SubjectAPC Asset Appendix
    Entry09/02/2014 09:39 PM
    Memberbruno677

    Appendix

     

     

    US Onshore:

     

    Wattenberg-Niobrara: APC’s position in the Niobrara, acquired through KMG and WGR, is the company’s most valuable and highest-return property. The Niobrara has benefitted more than other US shales from technical advances in hydrofracking and horizontal drilling: once viewed as purely a dry gas play (APC acquired KMG at the height of US gas prices), it has grown into an oil-rich and liquids-rich area in the western sections, where much of APC’s acreage is. APC is the most active driller in the Niobrara, having drilled 300 wells since 2011; it is currently running 14 rigs in the field and plans to drill 400 wells in 2014. The wells have average Estimated Ultimate Recoveries (EUR’s) of 350,000 BOE’s, 60% liquids, and offer 100% rates of return.  APC holds 350,000 acres in the liquids core area and another 350,000 non-core acres.

     

     

    Eagle Ford: The second-most valuable non-proved asset for APC, the Eagle Ford has in 2013 shown the highest production growth (in percentage terms), up 60% over 2012 levels. In 2014, production is expected to rise another 40% over 2013. The accelerated drilling is partly due to a promoted-JV that APC signed with Korea National Oil Company in 2011, in which KNOC funds $1.55 billion of drilling costs in return for a one-third interest. APC is now running 10 rigs in the Eagle Ford, plans to drill 250 wells in 2014, and estimates that the wells produce an average 70% rate of return.

     

    Permian-Wolfcamp: APC has historically targeted two zones in the Delaware Basin area: most of its 122 wells to date were drilled to the shallower Avalon and Bone Spring formations, and had average IPs of 540 Bpd. More recently it has drilled six horizontal wells to the underlying Wolfcamp shale, with IP rates of 1,000 to 1,600 Bpd. APC is currently drilling to the Wolfcamp A and B zones; there are four primary zones, A through D, between 8,000 and 12,000 feet (the deeper C and D zones, also known as the Cline shale, are prospective but more variable and largely untested). APC had previously tamped down expectations for its Permian operations – apparently thinking that much of its 350,000 net acres were non-prospective – but has recently become much more positive. The company has increased its Wolfcamp type-curve EUR’s from 450,000 to 600,000 BOE’s (other companies with acreage near APC’s core in Ward County are using 720,000 EUR’s ). The whole Wolfcamp formation – still in its early stages of development – may contain in total up to 50 billion barrels of recoverable oil, which would make it the largest oil producing shale in the US: twice the size of the Eagle Ford, three timed the size of the Bakken or Prudhoe Bay. Although APC has to date booked relatively little proved reserves in the Permian (72 MMBoe, or 2.6% of its total proved reserves).  . As the play is derisked over the next few years, I think that this value may double: the Wolfcamp could be a major upside catalyst for APC’s stock.

     

    Haynesville-East Texas: APC seems unique among E&P companies in the Haynesville, as it is able to produce wet gas (little oil but 35% NGLs) from the deep formation. Data from the company actually combines the Haynesville with the shallower Cotton Valley, which has more liquids. In 2014 East Texas production is expected to grow 10%-15% over 2013. APC ran seven rigs in the Haynesville in 2013 and is expected to continue at near that level.

     

    Marcellus: APC’s Marcellus acreage is concentrated in northeastern Pennsylvania (Lycoming and nearby counties) and it has experienced the same takeaway constraints as have ARP and others. In 2010 APC signed a joint venture with Mitsui to fund $1.4 billion of drilling costs, which valued the company’s position at $4.3 billion. That funding was completed in 2013, and while APC is continuing to run two rigs in Pennsylvania, the Marcellus economics are not competitive with the Niobrara or Permian, and APC is de-emphasizing the play. It is still drilling a number of non-operated wells in a JV with CHK.

     

    Other Rockies: Uinta/Greater Natural Buttes/Powder River/Jonah/CBM/EOR: These fields were once a core of APC’s Rockies operations. But other than EOR, they are mostly dry and medium-wet gas. APC is still growing aggregate production but is limiting the capital being reinvested. APC has low-cost Coal Bed Methane wells in the PRB of Wyoming and attractive downspacing opportunities in the Greater Natural Buttes play.

     

    Gulf of Mexico:

     

    APC was a first-mover in the Lower Tertiary and sub-salt GOM exploration, and has had extraordinary exploration success there. The company has been creative in monetizing portions of its discoveries, and will likely continue to accelerate cash flow through sell-downs. APC’s exploration and development activities in the GOM were suspended during the moratorium after the 2010 Macondo accident (in which APC held a non-operated position with BP; it paid $4 billion to settle virtually all liability). But activity has gradually returned to normal, and now several large GOM fields are set to begin production in the next few years, bringing catalysts and growing EBITDA to APC. The deepwater fields that are largest and closest to production are:

     

    Lucius: Discovered in 2009 with 200 feet of net pay, sanctioned in 2011 with 650 feet, Lucius should begin producing 80,000 BPD in mid-2014 from a current estimate of 950 feet of net pay. The field will employ the largest truss spar built by APC. In 2012, APC sold a 7.2% interest to INPEX for $556 million, effectively covering all of its remaining development costs in the project (APC’s interest was reduced from 35% to 27.8%; the company had previously sold 15% of its original 50% interest to XOM). The INPEX sale valued APC’s remaining interest at $2.1 billion. APC drilled a further appraisal well in Lucius in 2013 that we believe will extend the discovery.

     

    Heidelberg: Discovered in 2009 and confirmed by an appraisal well in 2012, Heidelberg (31.5% interest) is scheduled for first production in 2016. In 2013, APC sold a 12.5% interest in the project to Marubeni for $860 million, which valued its remaining interest at $2.1 billion.

     

    Shenandoah: First discovered in 2009 with 300 feet of net pay, the Shenandoah field garnered headlines in May 2013 when the appraisal well encountered 1,000 feet of pay, establishing it as one of the largest finds ever in the deepwater GOM. Estimates of total recoverable oil range from 500 million to 1 billion barrels; a second appraisal well is currently drilling, and preliminary results may be disclosed at APC’s upcoming Analyst Day in March.

     

    Vito: Originally operated by APC with a minority interest, Vito is now operated by RDSA, with 55%. Vito was discovered in 2009 at 250 feet of net pay; an appraisal well in 2010 extended the field 1.5 miles to the north and expanded net pay to 650 feet.

     

    Phobos: Discovered in 2013, Phobos showed 250 feet of “high quality” net pay in the Lower Tertiary and opened up a remote and previously untested structure, the Sigsbee Escarpment. The well lies 11 miles south of Lucius, near the marine border with Mexico; it is the southernmost deepwater discovery in the US GOM. APC’s sold a 20% interest in Phobos to XOM prior to spudding the well, in return for XOM funding all of its drilling and development costs. An appraisal well is pending

     

     

    International:

     

    West Africa: APC’s unproved value in West Africa is dominated by the giant Jubilee field offshore Ghana, in which APC holds a 24% non-operated interest. Jubilee was discovered in 2007 and began small production in 2010. It is now producing about 100,000 barrels per day gross. TLW, the operator, has experienced issues with a proposed onshore gas plant, causing delays in reaching full field production of 120,000 BPD. The total resource of Jubilee is at least 600 million barrels, with considerable upside. In 2012, partner KOS (22%) acquired a 4.05% interest in a transaction that valued the entire field at $12.6 billion; earlier, KOS had reached an agreement to sell its entire stake to XOM, valuing the full field at $17 billion, but the Ghana government objected.

     

    East Africa: In Mozambique, APC operates two blocks, one onshore and one offshore, with a total of six million gross acres. In 2010 it discovered a large gas field in Propseridade offshore, which was confirmed and enlarged by two 2012 discoveries at Golfinho and Atun. The three fields combined are now thought to contain 35 to 65 Tcf of recoverable gas, making it one of the world’s largest gas fields outside of Russia and the Persian Gulf. Two LNG trains have begun construction onshore Mozambique and first production is expected in 2018. In 2013, APC announced a sale of a 10% interest in Mozambique to India’s ONGC for $2.64 billion, which valued the company’s remaining 26.5% interest at $7 billion.

     

    Algeria: APC’s third large Algerian project, El Merk, began operations in 2013 and is currently producing about 30,000 BPD; the capacity of its two trains is 130,000 BPD, with a third train possible. El Merk is in eastern Algeria, in the Sahara Desert, 50 miles south of APC’s Hassi Berkine project and 30 miles south of its Ourhoud project, which together are producing about 400,000 BPD. APC is pursuing satellite exploration in the Sahara, drilling about 40 wells annually; it holds rights to 4 million net acres. APC’s presence in Algeria dates to the 1980’s and has at times been contentious: in 2006, Algeria imposed extraordinary taxes on APC’s profits; the company sought arbitration in an international forum, which dragged on for years. APC and Sonatrach, the Algerian national oil company, settled the tax case in 2012, amending and extending the PSA to provide APC with a higher volume of profit barrels.

     

    Brazil: In an often-delayed process, APC has been attempting for several years to sell its deepwater Brazil assets. The company made four discoveries in Brazil, including the large Wahoo and Itaipu fields, and owns about 750,000 gross (225,000 net) acres in the Campos and Espirito Santo basins. APC had previously sold its Peregrino field to STL for $1.4 billion. However, the Brazilian government is considering unitizing the Campos fields, a process that is not moving quickly. In the meantime, APC is continuing to drill appraisal and development wells at Wahoo.

     

    China: APC holds a 35% interest in producing properties in Bohai Bay, in which it transferred project operations to China’s CNOOC in 2012; the field produces 35,000 BPD gross (12,200 net) and is APC’s smallest international producing operation. APC is currently drilling the highly-anticipated Liwan exploration well in the South China Sea, in which it owns a 50% interest.

     

    New Zealand: APC holds 5 million net acres in the Canterbury (50% interest), Taranaki (50%) and Pegasus (100%) basins offshore New Zealand. Its first wildcat well, the Romney, in the Taranaki Basin was recently declared uncommercial and will be plugged. APC will now spud a second exploration will in the Canterbury basin.

    Other Exploration: APC holds 1.3 million net acres in Colombia, with 50% interest in two offshore blocks, Fuerte Norte and Fuerte Sul; acreage in Guyana, where it will explore the deepwater Roraima block (TLW and others have had nearby discoveries); onshore Morocco and Tunisia, in which it is exploring unconventional shales; and in South Africa, with 80% interest in three offshore blocks (other E&P companies have had very limited success offshore South Africa).

     

    Other Assets

     

     Western Gas Partners and other Midstream. In 2008 APC launched a midstream MLP, Western Gas Partners (WES: market cap $7 billion), to which it transferred most of the midstream assets serving its US producing fields; APC signed long-term, largely fixed-price contracts with WES. (APC sold at auction other midstream assets that were not directly tied to its E&P operations – the winning bidder for these was APL). In December 2012, APC launched an IPO of the General Partner of WES, WGP (market cap $9 billion). APC continues to own 88% of WGP, with a market value of $11 billion (WGP owns 42% of WES’s LP units and holds IDR’s). The current yield of WGP, reflecting the strong contracted nature of its cash flows, is a low 2.6%. APC plans to gradually sell down its WGP stake, while continuing to control the entity. We value the WGP units at current market, $11 billion. In theory, if unlikely in practice, APC could transfer control of WGP to a third party at a premium to current market value (as DVN did with XTEX for its midstream assets).

     

    APC holds midstream assets at the parent company, the value of which we believe is often overlooked by sell-side analysts. These include cryogenic processing plants in the Wattenberg and Greater Natural Buttes; a 33% interest (with EPD and DPM) in the 435-mile Front Range NGL pipeline from Colorado to North Texas (150,000 BPD); a 20% interest in the 580-mile Texas Express NGL pipeline from the Texas panhandle to Mt. Belvieu (280,000 BPD); a 50% interest (with ACMP) in the Avalon Express gas system in the Permian (200 Mmcf/d); and gathering systems in the Eagle Ford and Marcellus shales.

     

    APC owns the mineral rights to 7.5 million acres of land in the western US, on which it receives royalties from third party production of soda ash and coal, among other minerals (the rights also increase the value of some of APC’s Niobrara and other Rockies properties, as the company does not pay royalties to land owners, as most E&P companies do). The mineral rights trace back to the Land Grants made to the Union Pacific Railroad in the administration of Abraham Lincoln: a checkerboard pattern of alternating blocks, each ten miles by one-tenth mile, on each side of the UNP right-of-way. In 2000, APC acquired Union Pacific Resources Corporation, which had been spun-out of UNP in 1996 with the Land Grant rights. 


    SubjectRE:Great writeup. high level q and specific q
    Entry09/05/2014 09:49 AM
    Memberbruno677
    Sugar
     
    The renter versus owner refers to investing in the oil and gas space.  For me I stay as far as possible away from small e&P regardless of value gap.  They tend to be value traps.  They make great investment write ups and stories to tell investors but terrible investments when things don't work out.  
     
    My investing and trading style also tends to favor investments where there are liquid option markets.   I want to be able to sell call premium and buy put protection.  Small caps don't offer that.  
     
    As for looking at exploration expense - there is also a benefit from exploration.  APC activity in GOM and Moz - they are world class finds that have been monetized in part by sell downs.  

    APC is not a major but it is a pefect fit for one.  

    One can look at CHK but the investment thesis on a CHK is clean up off a messy land grab and cap structure.  May be a great investment.  But CHK is not an investment in a company where new drilling - exploration will great increase asset base.  There is no drill bit adding value.  

    APC has added value via the drill bit.  Its exploration is not just an expense but a core part of its business activity.  
     
    Thanks for comments

    SubjectRE: Mineral Rights
    Entry09/06/2014 11:54 PM
    Membersnarfy
    Agreed on the 0 needing to be added to the value of the mineral rights.  And look at VNOM - FANG's new mineral rights IPO in the Midland Basin.  Trading at something like a 3% yield.  

    SubjectRE: RE: Mineral Rights
    Entry09/07/2014 11:53 PM
    Memberbruno677
    Will update the numbers and model for higher moneral value.  APC needs to do something with its asset base and capital structure.  A $10 bil. mineral rights moves the NAV closer to $175.  
     
    I am gone till late September - hunting moose in alaska.  Will follow up after I gwt back.   
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