Independent oil and gas exploration firm Anadarko Corp is set to release its Q4 results on February 7th. Upstream operators have accelerated their push towards liquids plays because of low gas prices as the mild winter has dampened demand for natural gas. Liquids prices have remained high as crude prices stayed near the $100 for most of last quarter. We expect Andarko’s earnings to reflect these main trends in energy prices. The oil and gas upsteam industry is dominated by large players like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).
We have a $88 price estimate for Anadarko Corp, which is at a 10% premium to its current stock price.
Supply glut in gas markets
The mild winter in the U.S. resulted in weaker than expected demand for natural gas, which is the dominant fuel used for heating. The quantity of natural gas drawn from underground stockpiles was significantly lower than the draw witnessed last year and average draw over the past 5 years. Weak demand has pushed down prices which are languishing at around $3 /MMBtu falling from $5 /MMBtu in June last year.(See: Mild Winter Hurts Natural Gas Demand As Shale Exploration Continues Unabated)
The problem has been further exacerbated by continuing shale exploration activity in the U.S.. Output from shale formations now accounts for a third for the total gas produced in the country and the U.S. is now the largest producer of natural gas in the world. However depressed gas prices will impact the revenues and the margins of companies operating in shale plays as the required technology is considerably costlier. Shale exploration is also facing growing criticism from environmentalists who are calling for tougher regulations. Strict regulations could further hurt the margins of shale operators.
More than half of the rigs operating in North America are now focused on liquids exploration. Over the last year, companies have turned their attention to liquid rich plays such as the Eagleford basin. Anadarko has focused on increasing its liquids output in 2011 driven by the more attractive economics of liquids production. The company is also developing oil fields in the Gulf of Mexico to raise its crude output. (See: Anadarko is Worth $88 On Rising Liquids Output and Offshore Gas Finds) We expect Anadarko’s revenues and earnings growth to be driven by increasing liquids volumes and high prices.