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Summary

  • At $99, I project fair value to reach $110 on the basis of increased production outputs, which should spur long-term earnings per share growth.
  • With close to $4 billion in cash on the books and $9 billion in operating cash flow, Anadarko is well positioned to execute in any direction that it wants.
  • Over the past four years, Anadarko has grown its output from onshore American plays by 65%, from 353,000 BOE/d to 583,000.

Anadarko (NYSE:APC) investors are still cheering the news that the company had finally given Wall Street some peace of mind, regarding what analysts believed was a potential criminal prosecution. Although Anadarko had never lost its standing as a leader in exploration and production of oil and gas, the company has been marred by a lengthy lawsuit with the creditors of Tronox (NYSE:TROX), following Tronox's 2005 spin-off from the energy and chemical company Kerr-McGee.

The uncertainty about the outcome was too much for Wall Street's liking. Christopher Helman of Forbes, described, Tronox was created by Kerr-McGee as "a kind of pit of despair into which loaded up decades of toxic environmental liabilities and toxic tort claims, balanced them out with a handful of assets, then spun it out as a standalone public company."

Then Anadarko acquired Kerr-McGee in 2006, supposedly without the taint of Tronox's messes. Tronox went bankrupt in 2009. Major litigation followed. The case was brought by a trust which represents 11 state governments, Indian tribes, the U.S. government and individuals. All told, the group was seeking restitution and cleanup costs at over 2,000 U.S. sites. This is in addition to claims of more than 8,000 people who said they were exposed to cancer-causing agents in two of Kerr-McGee's wood treatment plants.

But back in April, Anadarko announced that it had reached an agreement to pay more than $5.15 billion to clean up areas across the U.S. polluted by nuclear fuel, wood creosote and rocket fuel waste that caused cancer and other health problems. Since the announcement, the shares have gone up roughly 3%. And with this mess out of the way, Anadarko will look to regain investors' trust as a long-term energy powerhouse. And management can do this by showing strong revenue and earnings when the company reports first quarter results Tuesday.

The Street will be looking for earnings of $1.16 per share on revenue of $3.87 billion. Despite the slight dip in revenue, analysts seem broadly optimistic about the expected results - not only for this quarter, but for what the rest of the year will bring now that the litigation fears are out of the way.

This is because Anadarko management has not been shy about their production guidance. The company has forecasted more than a 7% increase in overall production levels, reaching 625,000 barrels of oil equivalent per day (BOE/d). This is while BOE/d for liquids output is projected to increase by 27% to 235,000. Given Anadarko's extensive budget, I don't see anything standing in the company's way of achieving this goal.

While some may raise their eyebrows and consider this too aggressive, it's not as if management hasn't shown this level of production before. In fact, over the past four years, Anadarko has grown its output from onshore American plays by 65%, from 353,000 BOE/d to 583,000. Likewise, liquid outputs surged even more impressively at 125% from 81,000 BOE/d to 185,000. So I wouldn't bet against a seemingly determined management team.

With close to $4 billion in cash on the books and $9 billion in operating cash flow, Anadarko is well positioned to execute in any direction that it wants, including growing its capabilities U.S. shale plays, where it has had strong success over the past five years. And it has done this with the overhang of the litigation. Imagine what this company can now do with a focused operation. Don't forget, management has more than $8 billion in capex budget at its disposal.

I'm not going to proclaim that these shares, which are trading at 4 times that of both rivals Apache (NYSE:APA) and Total (NYSE:TOT), are cheap. But with the stock trading at $99, I project fair value to reach $110 by the second half of the year on the basis of increased production outputs, which should spur long-term earnings per share growth.

Source: Why Anadarko Is Heading To $110