Is There Too Much Optimism About Anadarko Petroleum Corporation?

Anadarko Petroleum's shares enjoyed nice run after the announcement of settlement of the Tronox case, but the upside could continue

Apr 8, 2014 at 11:01AM

Anadarko Petroleum (NYSE:APC) shares gained more than 15% after the company announced that it has settled an agreement on the Tronox (NYSE:TROX) case. Anadarko has agreed to pay $5.15 billion in exchange for a complete release of all claims associated with the case. Market participants greeted the news with great enthusiasm, as Anadarko had faced possible payments of up to $14 billion. Surely, the fact that the Tronox case and the related uncertainty are behind Anadarko is a huge positive factor. However, does it justify the rapid rise in the company's valuation?

Anadarko has sufficient resources to fund the settlement
Anadarko finished the fourth quarter with $3.7 billion of cash on the balance sheet. What's more, the company also has $5 billion available under the credit facility. This means that the settlement will not affect the company's capital spending plans, and investors can focus on Anadarko's operating performance.

Investors should expect that Tronox-related loss to be booked soon. Anadarko booked just $850 million associated with the Tronox issue in the fourth quarter, so an additional booking of $4.3 billion loss will be made.

However, the price of uncertainty was higher. Anadarko's shares were under continuing pressure from the Tronox issue. Now, after the case is resolved, it's only the company's performance that matters.

Healthy growth expected
Anadarko expects 6%-7% sales volumes growth this year at times when its bigger peers like ExxonMobil (NYSE:XOM) expect flat production growth. The company believes that its strong position in U.S. onshore plays together with deepwater projects will allow it to show similar growth rates going forward.

So far, the company increased its U.S. onshore oil sales volumes by 25% over 2012. This strong growth was fueled by company's positions in Wattenberg, Eagle Ford and Marcellus. Wattenberg is the biggest growth area, as Anadarko plans to raise its sales to at least 90,000 barrels of oil equivalent per day from 56 boe/d in 2013.

Strong U.S. onshore production growth levels could be a driver of Anadarko's share price growth. Now that the company is free from Tronox-related uncertainty, it can focus on delivering value to shareholders. Deepwater prospects also look good, with major projects like Lucius and Heidelberg on the pipeline. What's more, current rig rates contribute to lower costs for deepwater projects.

Bottom line
Anadarko Petroleum's shares have enjoyed a nice run and are up more than 25% year-to-date, and that upside could continue. Anadarko enjoys healthy sustainable growth rates, which are significant for a company of its size. Anadarko's strong position in U.S. onshore is a major positive factor, as U.S. onshore is a main growth driver for many oil companies.

The company's solid financial position will allow it to pay for Tronox settlement without damaging its growth prospects. Anadarko raised its capital expenditure program to $8.1 billion-$8.5 billion, up from $7.7 billion in 2013. Importantly, this program will be funded from its operational cash flow, unless oil prices experience a severe downturn.

All in all, Anadarko is in a much better position after the resolution of the Tronox issue than it was prior to it. With all the uncertainty behind, its shares are free to rise.

America's energy boom is just getting started
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Vladimir Zernov 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers