2 Oil Stocks That Are a Must Buy

Anadarko Petroleum (APC) is covering its capital expenditure through the discretionary cash flow and asset monetization, which is a good move during this low oil and natural gas price environment. For instance, the company generated approximately $4.7 billion of discretionary cash flow and $2.0 billion from asset monetization. This helped the company to cover its capital expenditure of $5.36 billion in 2015, which was nearly 36% below from 2014 levels.

Looking forward, the company plans to further reduce its capital expenditure to the range of $2.6 billion to $2.8 billion, which is about 25% lower as compared to 2015 capital program.
Even at this level of capital expenditure, the company is able to keep its production and sales volumes flat in 2016 to that of 2015 levels.

In the meantime, the company is targeting approximately $3.00 billion of monetization opportunities that would further improve its cash position at the end of 2016. The most important part of this asset monetization is that it expects to realize about $1.3 billion in the first-half of 2016, as shown in the chart below.

Anadarko Petroleum is successfully navigating in a volatile environment through its strategic steps that should allow the company to remain competitive going forward. In fact, its move such as increasing higher margin oil and sales will improve its top line performance while steps like reducing well costs at already economical oil fields such as Delaware and DJ Basin will enable the company to display a better bottom line numbers in 2016. Thus, Anadarko remains a good oil stock in the long-run with the growth in the oil and natural gas prices.

A look at Apache

Apache (APA) under a low oil price environment has significantly improved its balance sheet. For instance, the company during the year reduced its net debt by $3.2 billion to $7.1 billion at the end of 2015. The most important part of this net debt reduction is that it has eliminated the $900 million of 2017 and 2018 maturities, as shown in the chart below. At present, the company has only $700 million of debt maturing through 2020. On the liquidity front, Apache began 2016 with approximately $5 billion of liquidity, including nearly $1.5 billion in cash. This is a good move in the context of lower oil price environment that should strengthen its position for growth in the coming years.

This reduction in net debt can be attributed to its efforts of selling non-core assets and using the proceeds to pay its debt. Apache sold off non-core assets worth $6.2 billion in 2015. In fact, Apache has now completed more than $10 billion of non-core asset sales in the past couple of years. The point to observe here is that Apache despite this level of non-core asset sales and reduced capital spending is expected to remain cash flow neutral in 2016 at $35 oil price.

More importantly, the company is planning to cover its dividend through its operating cash flow, while other companies in the industry such as ConocoPhillips (COP) Anadarko Petroleum (APC), Devon Energy (DVN), Encana (ECA), Marathon Oil (MRO) and Noble Energy (NBL) have all cut their common dividends in recent months. In fact, Anadarko cut its dividend by over 80% and others, including QEP Resources, have eliminated dividends entirely.


Apache, therefore, remains one of the best stocks in oil that has strategically streamlined its operation for an extended low oil price environment with cash flow neutrality. Moreover, its continuous efforts to high-grade its assets through investments in technology are allowing the company to build an inventory of attractive opportunities in Egypt and the North Sea. This should allow the company to deliver a strong return under a low oil price environment while strengthening its financial position and liquidity.
Published on Apr 19, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

Posted in ...