by Aaron Levitt | April 7, 2014 11:46 am
It’s finally time for large, independent energy producer Anadarko (APC) to get some respect. That is, if it doesn’t get bought out first. A huge legal win is finally making possible what analysts have been predicting for years.
Like BP (BP), APC stock has been bogged down by various environmental legal issues stemming from an ill-timed purchase. However, unlike BP — which continues to get under the EPA’s and activists skins — Anadarko has finally made good on its legal woes.
And with a settlement now in place, APC is set to shine as one of the largest independent explorers of oil & gas. It also has the potential to be one of the largest corporate buyouts in history.
Either way, the coast is clear for investors looking to add APC stock to their portfolios.
Anadarko’s issues can be traced back to 2006 and its purchase of Kerr-McGee’s oil and gas assets. APC paid nearly $17 billion — including an estimated $1.6 billion worth of debt and other liabilities — for the assets. That purchase was an integral part of former CEO Jim Hackett’s plan to expand Anadarko into an independent giant.
The assets were good deal for APC in terms of reserves and production. Unfortunately, they came with a toxic legacy.
Three months before selling itself, Kerr-McGee spun off its chemicals business and a paint pigment facilities into Tronox (TROX) back in 2005. With it, Ker-McGee placed much of its old environmental liabilities with new firm. Those liabilities — which include fouling over 2,770 sites across the country since its founding in the 1920’s — eventually caused TROX to file for bankruptcy protection.
TROX later sued APC and Ker-McGee, alleging that management purposely duped shareholders by placing all the bad into the new chemical firm while pulling just the top “clean” assets of the top. The EPA and Justice Department agreed and later Anadarko found itself staring down the barrel of gun.
As the court case progressed, initial estimates for fines were upwards of $25 billion and some analyst postulated that APC could be headed for a potential breakup or bankruptcy.
So, when Anadarko announced that it would be only on the hook for $5.15 billion due to a settlement with Department of Justice, shares of APC stock surged nearly 15%.
With the taint of Kerr-McGee and TROX now removed from its face, Anadarko is ready to rock and roll as an independent energy firm. It also makes APC stock a very big buy for investors.
As a stand-alone energy firm, APC is top-notch. Anadarko has huge assets in the Gulf of Mexico as well as offshore Africa. Its claims in Mozambique are some of the largest natural gas fields in the world.
Together, Anadarko and partner Italian energy giant ENI (E) have discovered around 150 trillion cubic feet of natural gas in Mozambique’s waters. New LNG export terminals are planned for those assets, and selling some small joint venture stakes in Mozambique has netted APC some hefty dollar amounts.
At the same time, Anadarko has expanded heavily into U.S. shale fields and has seen its fortunes rise in the Eagle Ford and Colorado’s Niobrara shale. Owning nearly 388,000 gross acres in the Eagle Ford, APC has continued to see rising production in the region. In the final quarter of 2013, Anadarko managed to produce around 53,000 barrels per day. That’s nearly a 36% increase over the fourth quarter of 2012.
All in all, APC is looking at growing its total production by 5% to 7% annually over the next ten years or so — with liquids and oil making up more than 60% of that production.
That makes APC stock a pretty juicy buy for investors now that its legal liabilities are finally taking care off. It also makes Anadarko a potential buy for a larger suitor as well.
Those huge fields are just the kind of plays that the large super-majors — Chevron (CVX), Total (TOT) and various state-owned energy firms — are clamoring to add. And with the downside now known — a max of $5.15 billion — APC could finally be buyout bait for one of the giants.
It’s certainly plausible. Former CEO James Hackett was known as a dealmaker, and he had expressed the idea that he was building APC as buyout target. Before APC, Hackett remade Ocean Energy — which was later bought out by Devon (DVN) for around $5 billion. While Hackett is now gone at APC, the buyout potential is still there.
Analysts currently estimate that Anadarko would have an enterprise value of around $61 billion. So a buyout wouldn’t be cheap, and would actually be one of the energy industry’s biggest corporate takeovers. But it could be done — especially by a state-backed energy firm with deep national pockets. The most likely candidates would be Sinopec (SNP) or PetroChina (PTR), who are on the hunt for expanding their deepwater and fracking technology.
A potential merger of equals isn’t out of the question either as APC shareholders would gain by hooking up with another larger-scale, independent energy firm.
Either way, the real winners will be shareholders of APC stock. Anadarko has a great portfolio of producing assets and high growth projects. Buyout or not, that’s what investors should be looking for. And with the TROX ligation now gone, APC stock should finally begin to shine on.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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