Anadarko Petroleum Corporation (APC) is an independent exploration, development, production, and marketer of oil and gas. The company is organized into three segments: Exploration and Production, Midstream, and Marketing. The Exploration and Production segment explores for and produces oil, natural gas, and natural gas liquids (NGLs). The Midstream segment gathers, processes, treats and transporting oil, natural gas, and NGLs production, for itself and other companies. The Marketing segment sells oil, natural gas, and NGLs in the United States; oil and NGLs internationally. The company’s oil and natural gas properties are located in the U.S. onshore, deep water Gulf of Mexico, and Alaska. Internationally, the company produces hydrocarbons in Colombia, Côte d’Ivoire, Mozambique, and New Zealand.
We do not have to tell our readers that the Oil & Gas industry is in stress and transition. The price of crude oil peaked at about $125 a barrel in the first half of 2011. It remained in triple digits until the middle of 2014. It then went on a relentless fall from about $115 a barrel to a low, just under $30 and has now settled in the low 50s. The fall in the price of took the price of oil and gas company stocks down with it. But a curious thing happened after the price of oil bottomed. The share price of many exploration and production stocks substantially outperformed the price of the commodity.
Take Anadarko Petroleum for example. The price of oil has about doubled from $30 a barrel at the bottom, to about $55 currently. At the same time, the price of APC rallied from under $30 to over $70 a share. This is rather bizarre when you think of it. APC generated $8.5 billion in cash from operation in 2014, and just $3 billion in 2016 and had to raise $3.3 billion in equity to fund investments and repay debt. From our estimation, the company cannot make money at $55 oil and $3.50 gas. With crude oil stocks at historical levels, we think lower prices are more likely than higher prices, even with the production cuts by OPEC nations.
Valuation is supportive of the bearish case. The company is losing money and we do not expect it to be profitable unless the rice of oil rises into the $70+ dollar range. In addition, EV/EBITDA is a modest 16.5 but every last bit of free cash flow needs to be spent on CapEx, The company continues to pay a $0.05 dividend per quarter to keep the shares eligible for institutional and mutual funds that can only hold stocks that pay dividends.
APC is a good company fight the good fight in a terrible macro economic / sector environment. With the share price rolling over, we think investors should consider selling their shares should they hold any and sell a call spread should they wish to capitalize on weakness in the company’s share price. If you have a strong bearish opinion on the oil & gas sector in general and APC in particular, we suggest selling a slight in the money call spread. With the stock trading at $63.08, we recommend the following structure.
| Action | Quantity | Exp. Date | Strike | Type | Net |
| Buy | 1 | 5/19/17 | $67.50 | Call | $1.55 |
| Sell | 1 | 5/19/17 | $62.50 | Call | $3.65 |
| -$2.10 |
To initiate this trade, the investor will collect $210 up front per call-spread. The breakeven level is $64.60, which is 2% below the current price. The efficient market hypothesis suggests there is a 60% chance of success on this trade, which is consistent with our view. While we expect APC breakdown at any time, this structure allows us to participate in simple weakness in the share price. If the price of oil increases from here, taking the share price of APC higher, the most one can loose is $290 per structure, which would occur should the share price trade above $67.50 at expiration, which is about 7% the current price.
