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Summary

  • Anadarko has entered into an agreement with the Tronox Adversary Proceeding's plaintiff to settle all claims by paying a penalty of $5.15 billion.
  • The company has enough cash holdings to pay out this amount, so its financial position won't be too impacted.
  • With settlement issues resolved, Anadarko can now concentrate on improving its operational performance. It has various high-value assets that will help to grow its production in the coming years.

Uncertainty Comes to an End

Anadarko Petroleum Corporation's (NYSE:APC) share price was down over the past few months due to the uncertainty regarding the penalty amount required to resolve the Tronox Adversary Proceeding, which the Litigation Trust filed against Anadarko's Kerr-Mcgee unit. However, on April 3, Anadarko resolved the issue by entering into an agreement with the Litigation Trust, which is the plaintiff in the proceeding. Under the agreement, Anadarko agreed to pay a penalty of $5.15 billion to settle all claims, which is the minimum level of the U.S. bankruptcy court's decided penalty range.

Recently, the U.S. bankruptcy judge Allan L. Gropper approved the settlement, which is the largest distribution of funds for environmental cleanup ever. Under the deal, Anadarko's Kerr-McGee's unit will pay 88% of the money to the U.S. and 12% to people with personal injury claims. Furthermore, the federal court is expected to make a final approval by the end of third quarter of this year, after which the settlement payment will be made.

The federal court decided Anadarko's penalty should be within the range of $5.15 billion to $14.166 billion. Hence, an agreement of $5.15 billion is positive news for investors. In addition, Anadarko has estimated to record a gross tax benefit of about $1.65 billion associated with the settlement.

The table below shows potential liability per share for investors at the payout of $5.15 billion:

Penalty Agreed

$5.15 billion

Estimated gross tax benefit

$1.65 billion

Shares outstanding

505 million

Pre-tax liability per share

$10.198

Pre-tax liability per share

$6.930

The company is in a comfortable position to meet this obligation. At the end of last year, the company's cash on hand was $3.7 billion, and by the end of the first quarter of this year, the company was expecting to add $2.64 billion from selling part of its Mozambique assets and $580 million from divesting its non-operated Pinedale position. In addition, the company also has a $5 billion credit facility, which will also aid in funding the settlement payment.

Now Focus Will Be on Operational Performance

As the Tronox issue is expected to end on a happy note, Anadarko can better focus on its operations. The company is continuously adding high-value assets to its portfolio. From March 2009 to March 2014, its net asset value, or NAV, appreciated by about 75% to $140 per share. The company's stock price rose nearly 30% year-to-date, and it is trading above $99 after the settlement agreement with the Litigation Trust. However, it is still undervalued in comparison to its NAV, and the stock price is expected to rise further in the coming quarters.

Due to high-value assets, in the last five years, Anadarko's oil and gas cumulative production has grown at a CAGR of about 7%. In the coming years, the company is expecting production growth of about 5% to 7%. A few of the company's assets that have good growth prospects are as follows:

1. Growing liquid production in the U.S. onshore: In 2014, Anadarko plans to direct 80% of $5.5 billion, which is the capex it allocated for U.S. liquid-rich assets. The company's Colorado Wattenberg field assets are one of the major assets that are helping it to increase the weightage of liquid in its production portfolio. In Wattenberg last year, Anadarko's average production increased by about 34,000 barrels of oil equivalent per day (boepd) to 56,000 boepd, from its 2012 average production. This year, the company has planned to drill about 360 wells in the region to further increase the production rate. From 2013 to 2018, the company expects to increase production from the region at a CAGR of 20%.

2. Expanding LNG at Mozambique: The liquefied natural gas, or LNG, demand in the Asia-Pacific region is growing year over year. According to a Research and Markets report, the region accounts for more than 60% of the global LNG demand. To capture this opportunity, Anadarko is working on its LNG project in Mozambique offshore, and it is expecting to deliver the first cargo of LNG from the region in 2018. Last year, the company discovered two new wells and successfully appraised six wells. It also expects to drill about seven to eight new wells this year in the offshore area. By 2018, it expects to produce 5 million metric tons per annum of LNG, and it already has a long-term supply contract for two-thirds of the expected volume with buyers in the Asian market. Additionally, the company has also raised its estimates of the amount of recoverable natural gas at its concession in the Rovuma basin, northern Mozambique, to between 50 trillion and 70 trillion cubic feet. The Mozambican government expects that exploration of LNG will reserve 180 trillion cubic feet of recoverable natural gas in the region. With expected growth in LNG demand, I expect the company will improve sales in the coming years.

Conclusion

The Tronox issue, which was one of the major worries of Anadarko Petroleum, is almost resolved. After the settlement agreement, the company's stock price has also shown upward movement. It can further increase in the coming months due to the company's consistent operational performance. Improving production at the assets like Wattenberg and the Mozambique offshore area will help Anadarko to maintain its production rate in the coming years, which will provide potential upside to its top line. Considering the overall growth prospects, investors should keep this stock in their portfolio.

Source: Tronox Settlement Will Unleash The True Potential Of Anadarko