For Anadarko Petroleum Corporation (NYSE:APC), the name of the game has always been buyout potential. As one of the largest independent oil and gas firms, APC stock has long been a supposed target for larger integrated rivals like Exxon Mobil Corporation (NYSE:XOM) or Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B).
That buyout has always remained elusive — even during the oil downturn and its resulting share price slump. So apparently, Anadarko has just decided to go from being the hunted to doing the hunting.
Anadarko stock is off slightly on Tuesday after announcing a big buyout of a struggling operator’s assets in its home turf of the Gulf of Mexico. But it could prove to be one of APC’s best decisions yet.
That’s because the deal could transform Anadarko back into the energy superpower it once was. And that makes APC stock a buy right here.
APC Buys Freeport
The truth is Freeport-McMoRan Inc (NYSE:FCX) should have never purchased its energy assets. The idea was that these Gulf of Mexico and onshore assets would counter falling gold and copper prices.
Unfortunately, falling oil prices — and the high debts used to finance the deal — proved to be Freeport’s undoing. For years now, FCX has struggled with what to do with the operations. Freeport even thought about a 100% write-off and spin-off
Well, investors in FCX need not worry anymore.
For pocket change, Anadarko is picking up prime acreage in the Gulf of Mexico. The $2 billion deal will bring APC 91 drilling blocks, includes some hefty deepwater assets and rich reserves. Anadarko will pay for that deal by issuing 35 million common shares of APC stock and using cash on hand.
Investors weren’t happy with the dilution, nor the words “deepwater” and “offshore.” In the current oil-price environment, deepwater drilling is practically verboten. Heck, some operators can’t turn a profit onshore these days.
Anadarko stock dipped nearly 5% on the news, but it’s a huge coup for investors willing to look at the long-term.
What APC Is Really Getting
The thing to remember about Anadaro is that it is already one of the biggest players in the Gulf of Mexico. APC already owns 1.6 million acres across 269 drilling blocks located in the Gulf. It’s already very much tied to offshore drilling, too. The FCX purchase will only strengthen position in leading offshore assets.
The deal really is a $2 billion bolt-on transaction — one that will boost Freeport’s stake in the already producing Lucius development. The Lucius field is one of APC’s most lucrative Gulf assets, and the deal will nearly double its stake there. That should give Anadarko an additional 80,000 barrels per day worth of production.
The beauty about the Lucius is that more than 80% of its production is oil, rather than natural gas or liquids, so it’s more lucrative.
The addition of the Lucius assets will be instantly accretive, and free cash flows generated by the play will be more than enough to fund its drilling programs in Texas and Colorado. Anadarko should see its cash flows in the Gulf rise to more than $3 billion per year at current commodity prices.
Add the rest of smaller stakes included in the deal, and APC will be able to boost its production in the region to about 155,000 barrels of oil equivalent a day.
More importantly, the additional acreage and drilling blocks will provide additional future drilling locations for Anadarko. That includes 20 so-called tieback locations with easy access to APC’s current main projects and 15 new exploration targets. Those assets are all in the area of other big-time oil discoveries.
In the end, Anadarko is getting current production and the ability to generate future production for a low price. Really, $2 billion is a pretty low price considering the quality of the assets.
Luckily for Anadarko, Freeport was a very motivated seller.
Buying the Anadarko Buyout
Some investors may have dumped APC stock on the news, but they’re missing the point. Anadarko is smartly setting itself up for the next oil rally.
APC was able to snag proven, bolt-on assets for a song. Those assets will drive cash flows at current prices, and they’ll really start pumping if and when oil rebounds. Meanwhile, Anadarko can use those cash flows to help fund future drilling programs. That will help cash even further, and the great cycle of success will be in full swing.
Anadarko CEO R. A. Walker said it best in the press release:
“The Gulf acquisition is a catalyst for the company’s oil-growth objectives, with quality assets being acquired at an attractive price to create significant value.”
Walker is right. Anadarko has proved that it can survive the downturn, and now it’s looking toward better days ahead.
This is a coup for anyone holding APC stock. If you’re long, go longer. If you’re not, get acquainted.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.