Anadarko Petroleum (NYSE: APC) recently reported less-than-stellar fourth-quarter results. While production was on target, earnings fell short of expectations because of falling commodity prices and higher costs. That earnings shortfall weighed on the stock, which slumped more than 7% on the heels of the report.
Because investors focused on the earnings shortfall, it caused them to miss the metric that's more important to Anadarko: cash flow. That's why CEO Al Walker took some time on the company's fourth-quarter conference call to re-emphasize "our philosophical view of Anadarko's business and how we think it is competitively positioned to support the goal of delivering cash returns to investors." Here are three reasons cash is king at the oil giant.
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1. We remain committed to returning cash to shareholders
Walker started his review of the company's philosophy by stating that "we remain committed to returning cash to investors." He pointed out that "last year, we delivered peer-leading cash return results to investors, and we will continue this commitment going forward." Overall, Anadarko has returned $3.75 billion in cash to shareholders through its share-repurchase plan since launching it in late 2017, which has enabled it to retire 12% of its outstanding shares, while also boosting its dividend 500% last year up to $600 million annually and paying off $600 million in debt.
"There is more to come in 2019," according to Walker, with the company aiming to buy back another $1.25 billion in stock and retire $1.4 billion in debt as it matures through mid-2020.
2. We designed our portfolio to grow cash flow
Supporting Anadarko's ability to return cash to investors is its portfolio of low-cost oil and gas producing assets. Walker noted:
Anadarko spent several years repositioning its portfolio, including selling off several properties that didn't generate the margins and investment returns it's seeking, so that it had the right assets for a low-oil-price environment. As a result, it's been able to focus on expanding its best assets, which has enabled the company to grow its cash flow so that it has more to return to investors.
3. We will remain disciplined in investment spending
Speaking of growth spending, Walker stated:
As the CEO points out, Anadarko set its budget to the cash flows it can produce on $50 oil. That enables it to generate significant free cash when crude is above that level, the bulk of which it will return to shareholders. By remaining disciplined, the company can easily weather steep drops in oil prices, which was the case last quarter, when crude plunged 40%. Instead of having to slam on the brakes as some peers did, Anadarko has been able to stick to its disciplined spending plan.
Cash flow is king at this oil giant
Anadarko Petroleum made a philosophical change a few years ago, shifting its focus from growing production to expanding cash flow. That led it to reposition its portfolio so that it could generate strong cash flow at $50 oil to support a disciplined investment program that can still produce healthy growth, which allows it to send increasing amounts of cash to shareholders. So while the company's fourth-quarter earnings might have missed the mark, Anadarko remains right on target with achieving the aims of its new cash-focused philosophy.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.