The Future Is Cloudy for This Oil Company

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Deutsche Bank recently said that the worst is over for Anadarko Petroleum (NYSE: APC  ) .

Ever since U.S. Bankruptcy Judge Allan Gropper ruled on Dec. 12  that Anadarko's Kerr-McGee unit needed to pay for environmental cleanup caused by its spinoff of Tronox, there have been clouds growing over the Woodland, TX,company.

Because of the court ruling, Anadarko is now liable for anywhere between $5 billion to $14 billion in environmental cleanup costs. The upper bound of $14 billion was substantially greater than analyst expectations and was the primary reason why Anadarko shed a significant part of its market capitalization.

Parallel to Macondo
The Tronox ruling for Anadarko is a lot like the 2010 Macondo spill for BP (NYSE: BP  ) . Like Anadarko, BP had a resulting large legal liability. BP has so far set aside $42 billion to cover up the fines, clean-up, and other costs for the Macondo oil spill. 

That large legal uncertainty caused BP's stock to significantly underperform peers like ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) and trade in a tight range between $35 and $48 for two years while the company divested many of its non-core assets to shore up its balance sheet. 

I believe the story with Anadarko is going to play out in a similar fashion, but without the stock taking as much of a beating. 

Like BP, the legal liability will likely make Anadarko less aggressive in making capital investments and could spur the company to sell some of its portfolio to fund its potential liabilities.

Unlike BP in 2010, when the British company faced a liquidity crisis and cancelled its dividend, Anadarko has $7 billion in cash and can access liquidity through debt offerings. Because of the appeals process, the liability ruling is not an immediate expense and is unlikely to cause the company to cancel its dividend. This removes the forced pension fund liquidation scenario that BP underwent in 2010. 

The bottom line
The recent legal trouble for Anardarko creates an interesting situation for new long-term investors.

Despite its recent legal troubles, Anardarko is still a quality company. Its net asset value is significantly higher than its current market price. Anardarko has many attractive assets around the globe. The company has deepwater offshore assets in the Gulf of Mexico and Africa, as well as projects in the Wattenberg Field, Eagle Ford, and Brazil. It is still targeting annual production growth of 5% to 7% in the next decade.

New long-term investors benefit from the legal ruling because if Anardarko falls significantly, there will likely be a buyout offer from a larger firm, offering a free out for investors.

According to Oppenheimer's Fadel Gheit, both ExxonMobil and Chevron may be interested in acquiring Anadarko.

Unlike BP, which at its lowest point still traded at a substantial enterprise value, Anadarko, at $50 billion in enterprise value, is small enough for companies like ExxonMobil or Chevron to buy.

It may also be a good deal for the acquirer. The company is currently trading at only 5.4 times 2014 enterprise value/debt-adjusted cash flow. In my opinion, Deutsche Bank is right in that there is limited downside. It may be range-bound in the near future, but the long-term upside is still very attractive.

An energy play with a safer outlook
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 (1)

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.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2793099, ~/Articles/ArticleHandler.aspx, 9/2/2015 6:39:24 AM

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...

Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:06 PM
APC $68.29 Down -3.29 -4.60%
Anadarko Petroleum… CAPS Rating: ***
BP $32.14 Down -1.40 -4.17%
BP p.l.c. (ADR) CAPS Rating: ****
CVX $78.19 Down -2.80 -3.46%
Chevron CAPS Rating: ****
XOM $72.08 Down -3.16 -4.20%
ExxonMobil Corp CAPS Rating: ****