Current APC Stock Info

Anadarko Deepwater GOM cash flow will fund Delaware, DJ growth
In exchange for production of 80,000 net barrels of oil equivalent per day (BOEPD), Anadarko Petroleum (ticker: APC) will give Freeport McMoRan Oil & Gas Company (ticker: FCX) $2 billon in a deal that Anadarko calculates could deliver $3 billion of incremental free cash flow over the next five years to Anadarko (at current strip prices).

On the other side of the deal, Freeport McMoRan said the deal brings its 2016 asset sales to more than $6 billion, as the mining company se...

Analyst Commentary

From Johnson Rice

We view this acquisition as a contrarian move that captures a large chunk of value. While recent transactions cheered by investors have been centered on entering or bolstering Permian Basin positions, Anadarko is choosing to buy offshore assets that provide near-term cash flow to fund future onshore growth. The company tacitly acknowledged that this move could be unpopular in some quarters by emphasizing this acceleration in the DJ and Delaware alongside this acquisition. Equity investors should be less concerned with where cash flow comes from than where it is going, and on this point Anadarko makes it clear that this US onshore will still be the preferred destination for incremental capex.

Looking at the deal metrics, we believe the deal comes at a compelling valuation for Anadarko, reflecting a motivated seller and relatively few credible potential buyers. The company is purchasing the assets for an 1.5x forward EBITDAX and ~3.5x expected free cash flow after capex.

The funding of the deal also highlights the value capture: Anadarko offered shares at a ~9.0x forward multiple to pull in assets at 1.5x. While the name could see some multiple compression as the company is now more GoM-heavy, any such move should be offset with the increased oil growth guidance, which now stands at 10-12% CAGR for the 2016 - 2020 time frame.

The near-term cash flow associated with the acquisition coupled with the equity offering delevers the company and makes Anadarko an entire turn cheaper on 2017 EV/EBITDA. At 7.5x 2017 EBITDA, APC shares are now the cheapest in our coverage group, and we strongly doubt it will stay that way.  


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