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.

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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.

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