I added Anadarko as a short-term play in Option Investor this weekend. However, the opportunity is too good to pass up so I am also adding it as a longer-term play in this newsletter.
I am also adding CSX after great earnings, strong guidance and promise of a new initiative in 2H 2017.
APC - Anadarko Petroleum - Company Profile
Anadarko Petroleum Corporation engages in the exploration, development, production, and marketing of oil and gas properties. It operates through three segments: Oil and Gas Exploration and Production, Midstream, and Marketing. The Oil and Gas Exploration and Production segment explores for and produces oil, natural gas, and natural gas liquids (NGLs). The Midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production, as well as the gathering and disposal of produced water. The Marketing segment sells oil, natural gas, and NGLs in the United States; oil and NGLs internationally; and anticipated liquefied natural gas production from Mozambique. The company's oil and natural gas properties are located in the U.S. onshore, deepwater Gulf of Mexico, and Alaska; and in Colombia, Cote d'Ivoire, Mozambique, and other countries As of December 31, 2016, it had approximately 1.7 billion barrels of oil equivalent of proved reserves. Florida. Company description from FinViz.com.
Anadarko shares were hammered over the last several weeks by multiple events. The $10 drop in crude prices was the major cause of the first dip. Prices will rebound as we enter the summer driving season that begins on Memorial Day.
The second problem was a house explosion in Firestone Colorado. When the house was built the contractors cut into an abandoned flow line that used to run through the pasture that became a housing development. The line had been abandoned and the tanks removed long ago. However, when the well was shutdown in early 2016 the valve on the abandoned line was never closed. A new valve, new line to new storage tanks elsewhere was installed after Anadarko acquired the lease and the well was restarted in February. Unknown to Anadarko, the well was actually flowing gas into both lines. The gas from the line that had been cut saturated the ground around the house and entered the basement through a sump pump. The non-odorized gas built up in the basement until the owner tried to install a new water heater and the house blew up. Two men were killed and the wife was badly burned.
Anadarko shutdown more than 3,000 wells in the area to make sure they do not have any other problems. The well was drilled in 1993 and was last inspected in 2014. The well initially belonged to Gerrity Oil. Gerrity became a subsidiary of Patina Oil and Gas. Patina had 3,550 producing wells in the Wattenberg field within a 40 mile radius. Noble Energy bought Patina in 2005. How/when the well ownership moved from Noble to Anadarko is not clear.
I am sure there will be a settlement. However, Anadarko has insurance. If Somebody other than Anadarko was responsible for shutting down the well in early 2016 then they will be liable as well. That could have been any number of oil field service providers like Baker Hughes, Schlumberger or others. There is also the contractor that cut the line while they were building the house. If they did not report it, they could be liable.
Anadarko is a $30 billion company. Any fine, judgment or settlement that comes out of this event will be expensive but on a relative basis it will probably be less than the cost of drilling a single well and will probably be shared by several companies. I do not want to be uncaring but we are talking about a business reality that is important to this investment.
Earnings August 1st.
The double whammy of the oil price drop and the high profile house explosion crushed APC shares. The headlines on the explosion are already fading. Once oil prices begin to rebound ahead of Memorial Day the energy company shares will also begin to rise. Options are cheap because of the disaster. This is a buying opportunity.
Buy Jan $60 call, currently $2.21. No initial stop loss.
CSX - CSX Corp - Company Profile
CSX Corporation, together with its subsidiaries, provides rail-based transportation services in the United States and Canada. The company offers rail services, as well as transports intermodal containers and trailers. It transports agricultural and food products, fertilizers, chemicals, automotive, metals and equipment, minerals, and forest products; and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, and industrial plants. The company also exports coal to deep-water port facilities. In addition, it offers intermodal transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States; drayage services, including the pickup and delivery of intermodal shipments; and trucking dispatch services. Further, the company serves the automotive industry with distribution centers and storage locations, as well as connects non-rail served customers through transferring products from rail to trucks, which includes plastics and ethanol. Additionally, it acquires, develops, sells, leases, and manages real estate properties. The company operates approximately 21,000 route mile rail network, which serves various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, as well as owns and leases approximately 4,400 locomotives. It also serves production and distribution facilities through track connections. CSX Corporation was founded in 1978 and is based in Jacksonville, Florida. Company description from FinViz.com.
Railroads are not a sexy investment like Nvidia or Tesla but the volatility is far less and the risk will allow you to sleep at night.
CSX reported earnings of 51 cents that beat estimates for 43 cents. Revenue of $2.87 billion rose 10% and bear estimates for $2.76 billion.
The company announced a dividend of 20 cents payable June 15th to holders on May 31st. They also approved a $1 billion share buyback program to be completed by Q1-2018. They have repurchased $2 since April 2015 in the prior program.
They guided for 25% earnings growth in 2017 and free cash flow of $1.5 billion.
They are currently in a strong restructuring program that they expect will propel earnings even higher in the months ahead. A new CEO, Hunter Harrison, just took control after a hedge fund forced the old CEO out. Harrison was formerly with Canadian Pacific.
Raymond James sent a note to investors on Friday spelling out their expectations.
Relative to our model the beat came from stronger pricing and positive mix as opex matched our estimates. All-in "same-store" pricing was up 3.9% y/y, accelerating from 2.8% in 4Q16 likely on improving coal yields (particularly exports); however, "intermodal & merchandise" decelerated to 2.5% from 3.2% likely on weak core intermodal pricing. Total carloads rose 3% y/y. While coal volumes advanced only 2%, higher-priced exports drove a 23% y/y gain in RTM/coal carloads and management expects that trend to continue, (though potentially at less magnitude). The volume outlook sounded stable with ~70% of CSXâ€™s book of business expected to "favorable". Given pricing plus cost controls, the OR (ex-$173 million restructuring/severance charge) improved ~400 bp y/y to 69.2%. Importantly, CSX provided 2017 guidance that includes a "mid-60s" OR, 25% EPS growth, and $1.5 billion in FCF, and noted it will unveil a "multi-year strategy" in 2H17.
Earnings July 19th.
CSX closed at a new high on Friday and shares are starting to accelerate higher after the earnings beat on April 20th. The post earnings depression phase never really appeared suggesting investors are already boarding the train.
Buy Jan $55 call, currently $3.10, initial stop loss $48.85.