Analysis: APC SLB XEC

After you receive this Alert, we will be initiating a position in Anadarko Petroleum Corp (APC) , buying 250 shares at roughly $67.49. Following the trade, APC will represent 0.63% of the portfolio.

We are calling up Anadarko from the Bullpen and into the portfolio because we believe the company can take advantage of higher energy prices, and we want a new name to play in this space in addition to what we have with Schlumberger (SLB) and Cimarex (XEC) . Anadarko's first-quarter earnings presentation can be found here. The company's 2017 annual report can be found here.

Anadarko is a predominantly domestic-based exploration and production company (i.e., upstream, as these companies typically conduct the work to find and extract resources) with key operations in the Delaware Basin in Texas and the DJ Basin in Colorado. What draws us to Anadarko is its much more likeable production mix that keeps it in favor of this market.

With a first-quarter 2018 production mix of 57% oil, Anadarko is considered an "oily" name that can achieve higher cash flows with higher crude prices. The exploration and production names that have been unable to lift during this period of rising crude are the ones tied too much to natural gas because this commodity cannot find any relief. In fact, it is more cost effective for producers right now to flare it off compared to shipping it.

With natural gas as low as it is now, it is more critical than ever to invest in heavily exposed oil names because WTI crude is trading at its highest levels since 2014. This makes the spreads for exploration and production companies much more profitable, and with tensions in the Middle East raised following the U.S. withdrawal from the Iran deal, we believe oil prices can maintain these elevated levels.

We also like management's commitment to retuning value to its shareholders. On the last earnings release, management said that they expect to complete its $3 billion share repurchase program by the middle of the year -- a sign that management firmly believes that its stock price has disconnected to where WTI crude has risen. But we also see room for a new program once the current one completes because the company has the flexibility to do so. With plenty of cash on hand (roughly $3.5 billion at the end of Q1) and management's expectation that free cash flows will continue to go higher, we think they can be opportunistic and buy back even more stock, or even raise its dividend again down the road (management did most recently in February).

We are starting very small in APC to smooth out variability from the recent spike in crude. Furthermore, with Cimarex confirming in its most recent release that its oil production growth will not ramp until later in 2018, APC is our preferred E&P name because it is more "oily" and will benefit more from the current environment. We are initiating the position with a $77 price target.