Will Mega-Projects Revive This Oil Stock?

Sometimes you have to hope for the best while expecting the worst.

Renowned hedge fund manager David Einhorn recently purchased a stake in Anadarko Petroleum (NYSE: APC  ) through Greenlight Capital, noting in a letter to investors that he saw Anadarko Petroleum as undervalued and that its legal woes weren't going to hurt the company as much as expected.

With many investors expecting a horrible outcome for Anadarko, the company's legal issues may already be priced into the stock. Anadarko shares have been heavily weighed down by the possibility of a $14 billion legal settlement, which was significantly higher than the $5 billion some were expecting.

You've got the wrong guy
The root of the legal issue lies in Anadarko's purchase of Kerr-McGee in 2006. It turns out that Kerr-McGee had extensive pollution liabilities that Anadarko wasn't fully aware of when it bought the company. At first the U.S. was looking for $25 billion in compensation, but now the range has been lowered to $5 billion-$14 billion.

While legal issues are hard to gauge, some investors are worried this could turn into another BP scenario, where divestitures and continuous lawsuits drag shares down. So far the stock has only risen 5% in the past year versus a near 25% rally in the broader market. The threats outlined above are likely already priced into the stock to some extent, so looking past the legal issues investors should pay attention to what Anadarko Petroleum plans to do in 2014.

Mega-projects
The Gulf of Mexico is home to two of Anadarko's mega-projects. The company is the operator of the Caesar/Tonga project (33.75% working interest), which Chevron (NYSE: CVX  ) , Statoil (NYSE: STO  ) , and Royal Dutch Shell have also invested in.

Production started at the beginning of 2012, and last quarter should have seen the completion of the fourth well at the Caesar/Tonga. When Anadarko Petroleum reports, shareholders of Chevron, Statoil, and Shell should see how the new well is producing and what management is guiding for in regards to recoverable resources. The range is from 200 MMBoe to 400 MMBoe, which the latest well could help define as more data rolls in.

The Lucius project is also expected to start production in the second half of this year.  Lucius will tap into at least 300 MMBoe of recoverable resources, with the possibility of upside as production starts up. With a 28% working interest in the project, Anadarko has been able to spread out the costs with ExxonMobil and several others. 

Why everyone should care
Investors in non-operating oil majors should always be paying attention to what Anadarko has to say. Shell's earnings fell significantly because of a 50% increase in capex, and investors need to know that Shell's stake in these projects will pay off. For ExxonMobil, its output has fallen for three years, and if these Gulf projects take longer than expected to come online, ExxonMobil will have trouble growing upstream operations.

Ghana
Ghana's economy has been booming ever since oil was discovered in 2010, and most of its proven reserves are in the Jubilee field. . With stakes in various oilfields off the coast of Ghana, including the Jubilee field, Anadarko is helping turn Ghana into a major oil exporter.

America
Back at home Anadarko Petroleum is helping the U.S. reduce its need for oil imports. Through investments in the Eagle Ford, East Texas, Marcellus, Wattenberg, the Permian Basin, and the Uinta Basin, Anadarko was able to grow domestic onshore output by 10% last year to ~580,000 boe/d. Liquids production is expected to grow by 10% this year, mostly on the back of U.S. shale plays. 

Foolish conclusion
Language around the mega-projects in the Gulf of Mexico is what shareholders should pay the most attention to this quarter, as the completion of the Lucius project would provide major output growth. Some oil producers have already stated that harsh weather curtailed drilling activity in various shale plays, so look to see how that affected Anadarko's drilling activity and if it will impact its shale ambitions going forward. 2014 is when Anadarko Petroleum's mega-projects start to come online, and investors don't want to get burned by delays on top of legal settlements.

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