Anadarko's Dual Acquisition Doubles Its Size

I can't recall a time when a company has announced two large acquisitions at the same time. Today we hear that Anadarko Petroleum (APC) will buy both Kerr McGee (KMG) and Western Gas Resources (WGR) for more than $21 billion in cash. With Anadarko's market cap around $22 billion before the deals were announced, they are essentially doubling the size of the company overnight, creating the country's largest independent exploration and production company.

Both of these purchases show just how undervalued energy companies are in the public markets these days. Anadarko is paying a 40% premium for Kerr McGee ($16.4B) and a 49% premium for Western Gas ($4.7B). Despite these huge cash premiums, the deals will be accretive to earnings.

Few seem to disagree that our natural gas needs will continue to rise, but for some reason the stocks trade at exceptionally low valuations. This has resulted in a lot of M&A activity, and likely will continue to do so.

Comments

[Chad Brand]

I would agree on some points and disagree on others.

There is no doubt that the energy industry is cyclical, but I do not believe the cycle has peaked yet. The NG stocks have been weaker relative to the oil names since the underlying commodity price has been relatively weaker and the stocks in the short term track the gas price. the question is, does NG present a better value now because of that. We could be one category five hurricane away from $10 NG, but the stocks are pricing in $6. And I do not think we will have warm winters every year. That is a big reason why inventory levels are high right now.

I disagree that LNG will bring down NG prices from here. Both the 12 month and 72 month futures strips are pricing gas at more than $8, and LNG being considered in that pricing. I think the futures markets are right about NG price trends. If we go to $3 then, yes, the stocks have peaked. However, I am taking the other side of that trade. The next $2 move should be up, not down, and could come as soon as a storm hits, or we get a cold winter. All of this gas drilling is proving extremely profitable, and the firms are even hedging production (APC to hedge 75% of production from their mergers) to lock in prices since the futures markets are over $8.