Consumers Vulnerable as Oil Earnings Flourish

August 21st, 2013
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Written by , Profit Confidential

If there is one constant in capital markets it's that the oil business continues to be a good business to be in.

West Texas Intermediate (WTI) oil over $100.00 a barrel is nicely profitable. Natural gas and natural gas liquids (NGLs) could be higher, but according to the numbers, big oil is doing great.

Anadarko Petroleum Corporation (APC) is one of the largest independent oil and natural gas companies in the world with 2.56 billion barrels of oil equivalent (BOE) in proven reserves as of the end of 2012.

Follow up:

Last year, the company delivered record sales volume of 268 million BOE, representing eight-percent growth over 2011. The company's latest earnings were very good.

In the second quarter of 2012, the company increased its U.S. onshore oil volume by almost 20,000 barrels a day over the comparable quarter.

Total second-quarter revenues grew to $3.5 billion, up from $3.2 billion comparatively. Natural gas sales almost doubled to $935 million, while oil and condensate sales fell to $2.0 billion from $2.2 billion. NGL sales came in at $261 million.

Earnings attributable to Anadarko shareholders were a solid $929 million, compared to a loss of $89.0 million in the second quarter of 2012.

The company increased its full-year 2013 sales volume guidance to a range of 281 million to 287 million BOE, up from the previous range of 279 million to 287 million BOE. This should translate to solid bottom-line gains over 2012, with the commodity above $100.00 a barrel. Wall Street estimates have been going up.

Anadarko's share price performance has been choppy over the last 10 years, but the normalized trend is still upward. The company's chart is below:

Chart courtesy of
Click to enlarge

This stock is fully priced with a forward price-to-earnings (P/E) ratio of approximately 17, but it's typically fully priced because investors want to own it.

Oil and natural gas belong in a well-balanced equity market portfolio (unless environmental concerns are too great an issue). Anadarko has a bright outlook and executes well from the investor's perspective.

It certainly doesn't yield like many of the large integrated companies, but Anadarko outperforms Exxon Mobile Corporation (XOM), Chevron Corporation (CVX), and ConocoPhillips (COP) over the long term.

There is a flurry of earnings in this sector right now, and outlooks are going up because of renewed positive action in spot oil.

In terms of portfolio construction, I think an equity market portfolio, especially for income-seeking investors, needs to have holdings in this sector. The yield, whether through integrated producer dividends or through master limited partnerships (MLPs), is attractive and there's certainty there. (See "Why Supply and Demand Doesn't Matter for U.S. Oil")

Oil is both a consumer cost and barometer in capital markets. If geopolitical events are relatively calm and WTI is more than $100.00 a barrel, it's a bet by speculators on strength in the U.S. economy.

Even though higher oil prices hurt industries like the railroads, it's still a vote by financial market participants on the current outlook.

A company like Anadarko is very much a stock that long-term investors can put on their radar. It's proven to be a solid opportunity on many retrenchments.


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