Surging Production Yields Surprising Gain for Anadarko Petroleum Corporation

While there's nothing Anadarko Petroleum Corporation can do about the oil price, what it can do is run its operations more efficiently. That's exactly what the company did during the second quarter, as Anadarko delivered much stronger than anticipated production growth. While that didn't completely offset the weaker oil price, it certainly did help mute its sting, as the company's earnings came in well ahead of expectations, as analysts thought the company would lose money during the quarter, but it eked out a gain.

Drilling down into the numbersAnadarko Petroleum produced an average of 846,000 barrels of oil equivalent per day, or BOE/d, during the second quarter. That was 18,000 BOE/d higher than its own guidance as a result of "continued improvement in productivity and ongoing operating efficiencies," according to CEO Al Walker. Driving this better-than-expected result was the company's U.S. onshore assets, which grew production by 30% year over year. As a result, the company expects its full-year production for 2015 to be 13% higher than last year's production, adjusted for divestitures.

Nearly all of that incremental production was higher-margin oil, which enabled the company to deliver adjusted net income of $57 million, or $0.11 per share. While that was well below the $227 million, or $0.45 per share the company earned in the same quarter of last year, it handily beat expectations. In fact, analysts were expecting the company to lose more than $0.50 per share in the quarter. Further, net cash provided by operating activities was much higher than earnings at $1.2 billion during the quarter, though thanks to weaker oil and gas prices that was still down substantially from last quarter's nearly $2.5 billion.

This solid cash flow is important for Anadarko, as it uses nearly all of it to fund oil and gas development. That said, its stronger-than-expected results this year will now enable the company to drill more than 100 additional wells while remaining within its capital guidance. In other words, the company is able to do more with less as a result of its solid operational performance.

A look aheadAs a result of some recent asset sales, Anadarko Petroleum's production in the third-quarter is expected to be lower sequentially. The company is now guiding for production to be in the range of 772,000 to 793,000 BOE/d, while full year production is expected to average 816,000 to 827,000 BOE/d. That being said, when we adjust for these divestitures, the company's production will actually be about 35,000 BOE/d higher than last year, which is 13% growth.

Further down the line, Anadarko has a number of projects that are expected to deliver value in the years ahead. One project worth noting is its Mozambique LNG project, which continues to advance. The company is now moving forward with two 6-MMTPA LNG trains, which represent a 20% increase in capacity from the company's original expectation with no change to estimated costs.

Investor takeawayBy controlling the only things it can control, namely its costs and operational efficiency, Anadarko Petroleum delivered a relatively strong quarter. While earnings and cash flow were down considerably year over year, the company did manage to beat expectations rather handily. Further, it expects its full-year results to come in better than guidance as a result of stronger-than-expected well results that will enable the company to drill 100 more wells than previously planned for the same capex budget.

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