Fitch: US Commodity Co. Approaches Differ on Deepwater Assets
While Fitch believes the transaction is credit positive for both companies, the approaches differ in the path to improved credit fundamentals. Anadarko's deal takes place in the context of balance sheet expansion and cash flow growth, while Freeport-McMoRan will likely use asset sales to pay down debt and shrink the balance sheet. The deepwater assets complement Anadarko's existing GoM positions, and the company is better able to allocate capital to the GoM position, particularly as Freeport-McMoRan seeks to reduce its exposure to oil & gas and focus on its core position in copper.
To fund the purchase, Anadarko announced an offering of 35.2 million shares, aiming to raise $2.0 billion in new equity, making the deal immediately deleveraging as the properties have 80 mboe/d of production (80% oil) associated with them. The purchase will double Anadarko's ownership in the Lucius asset to 49% from 23.8% at year-end 2015 and increase exposure to Heidelberg. The purchase also includes 15 identified exploration projects, 69 primary-term leases, three operated facilities and additional associated GoM infrastructure.
Other recent oil & gas transactions have exhibited a wide valuation range based on 1P or flowing barrel metrics, largely due to early-stage assets with limited proved reserves and production. However, Fitch believes the transaction was executed on favorable terms for Anadarko, particularly given its operational integration, stage of development, free cash flow outlook and oil mix. Anadarko has disclosed an acquisition price of $13.50/boe for proved reserves, which is competitive particularly given the oil-weighted reserve base.
Based on recent strip pricing, Anadarko estimates that its overall GoM position will generate significant free cash flow in 2017-2021. This should provide incremental free cash flow to drive growth in Anadarko's US onshore position, in particular the Delaware and D. J. basins, improving visibility on Anadarko onshore volumes. This flows through as a longer-term positive for Western Gas Partners, Anadarko's midstream Master Limited Partnership.
Western's current contract structure has limited commodity price risk; however, similar to other midstream companies volumetric risk remains as a primary credit concern. An acceleration of onshore growth funded by GoM free cash flow would help to reduce volumetric risks at Western, benefiting both Western and Anadarko and highlighting the value of the structure for both companies.
The transaction is expected to result in net proceeds of $1.4 billion to Freeport-McMoRan in the fourth quarter of 2016. Proceeds to Freeport-McMoRan are net of amounts due to preferred shareholders in Freeport-McMoRan's oil & gas subsidiary, Plains Offshore Operations, who will receive $582 million.
Together with the proceeds from the sale of Tenke Fungarumi ($2.7 billion) and the at-the-market equity offering of $1.5 billion, Freeport-McMoRan will have raised more than sufficient funds to meet $4.2 billion in debt maturities due in 2017 and 2018. For the LTM period ending June 30, 2016, the company had spent $1.6 billion in capex on its GoM properties and was structuring the GoM assets to generate free cash flow at $45/bbl oil beginning in 2017.