- Settlement of the Tronox case has diminished appeal in my opinion.
- Growth is impressive, yet valuation is more than fair amidst current leverage position.
- Growth and portfolio management of assets could create value, if executed at the right prices.
Anadarko Petroleum (NYSE:APC) saw its shares breaking out above the $100 mark as the settlement of the Tronox litigation case and strong production growth results in enthusiasm among investors.
While both trends are clearly very positive for the company, the biggest potential trigger which has been the settlement of the Tronox case has already been reflected in the current valuation. Therefore I remain cautious on valuation grounds.
Solid Start To 2014...
Anadarko announced first-quarter revenues of $5.84 billion. This included $1.51 billion in revenues related to gains on divestments. Excluding for this revenues were up by 11.4% to $4.34 billion.
The company posted a net loss of $2.67 billion versus a $460 million profit last year. Obviously earnings were impacted by the $4.3 billion charge related to the Tronox settlement as discussed later while the sale of a 10% stake of the assets in Mozambique boosted earnings by $946 million.
Adjusting for the Tronox case and gains related to divestments earnings came in at $639 million which compares to $545 million last year.
...As Production Keeps Growing
Production rose to 819,000 barrels of oil equivalent per day in the first quarter reflecting a 12% growth on what it calls ¨same-store-sales¨ increase. I must say that I am quite surprised by the choice of wording as it seems more appropriate wording for a retailer to indicate organic growth.
Given the strong production trends Anadarko is raising the full-year sales volume target by 3.5 million barrels of oil-equivalent, which comes down to roughly 10,000 barrels a day. This comes without the expense of many additional capital expenditures. Growth was driven by the Wattenberg field, the Eagle Ford shale and the Delaware Basin.
Getting Past Tronox
On the 3th of April, Anadarko announced the settlement in the Tronox Adversary Proceeding resolving all of the claims against the in 2006 acquired Kerr-McGee corporation.
Anadarko will pay $5.15 billion to plaintiffs being calculated as a principal sum of $3.98 billion and 6% interest on that amount since the filing date of May of 2009.
Back in December of last year I urged investors to take action after a judge ordered Anadarko to pay anything between $5.2 and $14.2 billion to settle the Tronox case. Shares plunged to $78 following the news thereby whipping out $6 billion in market value in the process, thereby pricing in pretty much the most adverse event.
Following the news at the start of April shares rose about $12.50 in a single trading session to levels of $99, essentially recouping the $6 billion loss as the settlement came in at the low end of expectations.
Sufficient Access To Liquidity
Anadarko ended the quarter with $5.92 billion in cash and equivalents. The company stresses that it has access to a line of credit of another $5 billion. Debt levels stood at $13.57 billion on top of which stands a $5.15 billion liability related to the Tronox case.
During the quarter Anadarko announced the $1.075 billion divestiture of China. The previously announced 10% sale in the Mozambique Offshore Area 1 has been closed for $2.64 billion. The $581 million Pinedale/Jonah divestment has been closed as well during the quarter. The closed divestments generated 17,000 barrels of oil equivalent production per day in the first quarter.
Anadarko outlined and reiterated its strategy at the Howard Weil conference earlier in March. The company praises its flexibility citing flexible capital allocation and active portfolio management.
For the long term, Anadarko sticks to its 5-7% production growth and a replacement ratio of at least 150%. Between 2009 and 2013 the company achieved 7% production growth and a 160% replacement ratio.
For 2014 growth is seen between 6 and 7% driven by $8.1-$8.5 billion in capital expenditures ensuring the replacement ratio will exceed 150% once again. The good news is that huge capital expenditures are not locked up in a long time with 70% of investments targeted in short cycle cash investments.
Mega projects in the Gulf of Mexico continue to be on track as the topsides at the Lucius spar have been installed and Anadarko is nearing completion of the Heidelberger spar. The Lucius spar is expected to start producing in the second half of this year, while the Heidelberger project should start production two years later.
Takeaway For Investors
At the current pace Anadarko is on track to earn about $2.5 billion in normalized earnings per year while shares are valued at little above $51 billion, for a rather steep valuation multiple. This is especially the case when taking the net debt position of around $12 billion into account.
Of course the strong growth profile warrants a premium, it is just the question of how much. To illustrate the strong success of mega projects Anadarko points towards the project in Mozambique which is scheduled to ship first cargoes in 2018.
It sold a 10% stake for $2.64 billion, valuing the remainder of its 26.5% stake at about $7 billion assuming similar selling prices could be achieved. Smaller stakes being sold in the Lucius and Heidelberg developments indicate multi-billion dollar valuations for each of those projects as well.
This just illustrates that if Anadarko could sell these currently non-producing assets at similar valuations the company should be able to quite easily pay off debt, creating an unlevered growing oil producer at a fair valuation.
I must say that I have been mostly attracted to Anadarko as a result of the uncertainty of the Tronox case which was a clear overhang in recent times. With that issue being resolved the company has a future again, yet it has removed the upside trigger for me to invest in the shares.
I remain on the sidelines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.