The Future Is Cloudy for This Oil Company

Anadarko has seen tough times. Is the worst over?

Jan 13, 2014 at 1:41PM

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!


Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information