Being a large oil and gas producer, Anadarko’s (NYSE:APC) revenue is highly correlated to commodity prices. The sharp fall in commodity prices over the last 20 months has resulted in a notable decline in the company’s price realizations for the various commodities. As a result, the US-based E&P company had to pull back its exploration and drilling plans during 2015. This severely impacted the company, resulting in a drop of over 40% in its revenue and over 75% in its earnings last year.
Based on a weak outlook for commodity prices in the near future, we expect crude oil prices to gradually recover to $70 per barrel by 2018. In this case, Anadarko’s production and price realization will remain weak in 2016 and grow gradually over the following two years. These numbers are presented in the table below under the base case calculations. If, however, the commodity markets grow slower-than-expected and crude oil prices average $50 per barrel by 2018, Anadarko’s revenue in 2018 is likely to be 45% lower than our base case.