More Pressure Ahead for This Oil Company

A court ruling stating that Anadarko Petroleum (NYSE: APC  ) may have to pay up to $14.2 billion in damages related to the Tronox (NYSE: TROX  ) spinoff caught investors off guard last week. The company, which was already an underperformer this year, lost more than 6% of its capitalization on the day of the announcement.

Tronox was created as a spinoff of Kerr-McGee Corporation, which was later acquired by Anadarko back in 2005. Kerr-McGee's move allowed the company to get rid of existing environmental liabilities and opened the door to the acquisition by Anadarko. Tronox filed for bankruptcy in 2009 and contributed more than $300 million in cash and assets to environmental and tort trusts as part of its restructuring. Tronox believes that expenditures on environmental matters and compensation to individuals may continue for decades.

This is just the beginning
This court ruling is not the final judgment. The parties will submit further arguments over the next 60 days, and after that the court is expected to issue a final decision, which will be subject to appeal. Such settlements can become a never-ending battle. BP's (NYSE: BP  ) case is a perfect example. BP's stock continues to feel the pressure from the Macondo spill which took place back in 2010. The total compensation that BP will have to pay is still unclear, and this uncertainty does no good for BP's shares.

The same uncertainty is likely to put pressure on Anadarko. The court's calculations show that the damage claims can range from $5.2 billion to as much as $14.2 billion. The big difference between the low end and the high end of the range contributes additional uncertainty to an already complicated issue.

Dangers ahead
The possible $14.2 billion axe that hangs over Anadarko's head endangers its existing projects. This year, the company has sold a 10% interest in Mozambique's Offshore Area 1 for $2.64 billion in cash. Anadarko remained the operator of the Area 1 with a working interest of 26.5%. Taking into account the value of the first transaction, the remaining interest could be valued at $7 billion.

First production from Mozambique is expected in 2018. As the project will need more capital investments, it is the perfect candidate for a sale should the court's decision be unfavorable for Anadarko.

This year, Anadarko has doubled its quarterly dividend from 9 cents per share to 18 cents per share. As of now, the company is spending more than $90 million per quarter on the dividend. The dividend could also be revised in order to preserve cash. It is likely that the 2014 capital expenditures program will be on the safe side too as uncertainty weighs on Anadarko.

Bottom line
Unfortunately for Anadarko's shareholders, this is not a one-time event. The court ruling is just the beginning of a lengthy legal battle. Given the reaction of Anadarko's shares to the news, one can assume that investors do not believe in the worst-case scenario.

However, Anadarko is likely to remain under pressure even if the damage claims come at the low end of the range. The uncertainty over the amount of claims will prevent the company from actively pursuing growth opportunities. As Anadarko's debt level is still relatively high, the company can choose to sell some of its assets.

I think that a BP-like scenario is highly plausible. If Anadarko does not see success in the court room, its shares could be pressured for several years.

A safer play on energy
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2766154, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:43:34 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement