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Summary

  • Anadarko Petroleum's shares hit fresh highs after renewed takeover chatter.
  • Strong growth, interesting assets and a resolvement of the Tronox case increase the probabilities of a deal.
  • Yet shares have already reflected a great deal of good news, it is too late for me to jump on the bandwagon.

Anadarko Petroleum Corporation (NYSE:APC) saw its shares increase to fresh all time highs on Wednesday as renewed takeover chatter was reported on major news wires.

Shares have already seen very strong returns this year on the resolvement of the Tronox case, general momentum in the energy sector and a solid operational performance.

Renewed Takeover Rumors

Shares of Anadarko Petroleum rose to fresh highs of $109 per share after posting gains north of 4% on Wednesday.

Takeover ¨chatter¨ regarding a potential deal for the oil and gas producer was the driver behind the jump after the company finally settled the long-standing ¨Tronox¨ pollution case in April. The company settled the pollution claim with the US Justice Department for $5.15 billion for the pollution caused by its acquired Kerr-McGee unit.

With the overhang of this settlement being a thing of the past, large oil companies might be interested in the company, with Exxon Mobil (NYSE:XOM) being often mentioned in news reports.

Very Interesting Asset Base...

Many large oil companies are dealing with declining production, a course which they try to reverse. Yet disappointments in developments projects, mega projects and cost price inflation in oil equipment have pushed up the capital expenditures budgets. While costs for exploration and development have gone up, these majors don't have the new production to show for it.

As such it might be more attractive for these oil majors to acquire competing firms which grow at solid rates and have assets in to be considered attractive areas. Anadarko has presence in the famous Eagle Ford shale basin in Texas, Colorado and offshore assets in Africa with the LNG project in Mozambique. With Anadarko targeting 5-7% production growth for the coming decade, a potential deal could really move the needle for oil majors.

Besides Exxon Mobil, other majors like BP (NYSE:BP), Total (NYSE:TOT) and Royal Dutch Shell (RDSA) are mentioned as well. The Bloomberg reports also mentions Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) as potential suitors which seems unlikely given the healthy anticipated production growth of these companies in the coming years.

Comes At A price...

Following the latest move, shares of Anadarko have risen 36% year to date which has pushed up the valuation of the equity to $55 billion. The company has roughly $6 billion in cash, yet it still has to pay the more than five billion fine which will eat most of the cash balances.

Total debt of $13.5 billion results in a net debt position of about $12.5 billion after the payment of the fine, valuing the enterprise already at $67-$68 billion.

Note that Anadarko reported revenues of $14.6 billion for 2013 on which it net earned a paltry $801 million. Normalized earnings after backing out items run at a rate of $2.5 billion which still results in a very steep earnings multiple.

Just last month, Anadarko announced a 50% dividend hike, currently paying out $0.27 per share on a quarterly basis. This provides investors with a 1.0% dividend yield.

Very high valuation, however megadeals do occur

Last month, Anadarko presented at the UBS Global oil and gas conference, at which it reiterated its 5-7% production target for the coming years. The 150% or more replacement ratio should add to the backlog of the business.

Of course such growth requires great capital investments which are seen at $8.4 to $8.8 billion this year. Divestitures which were initiated to pay for the Tronox settlement, and improved operational cash flows have limited the increase in debt. Note that the net debt position is quite a bit higher compared to your average major integrated oil company.

Yet the 5-7% growth is attractive as Anadarko can really boost production for an oil major as its production totaled 819,000 barrels of oil-equivalent per day in the first quarter. Given the huge enterprise value and a potential premium required to buy the business, only the real big players could make a potential deal.

Note the merger and acquisition market is very supportive to large deals this year with companies having access to cheap debt, while large equity financing is also possible.

Takeaway For Investors

Back in May of this year, I checked out the company's prospects after the company released its first quarter results. I applauded the settlement and rapid production growth. Yet with normalized earnings of $2.5 billion per annum, the equity valuation then around $50 billion was a bit demanding.

This is as major oil companies trade more in the 10-12 times earnings multiple, placing a huge premium on Anadarko's growth. Note that Anadarko's dividend is suboptimal compared to its competitors, while debt is relatively high.

As such I believe that an offer is the best that can happen to investors which have already seen steep returns this year. I would not dare to jump the bandwagon after yet another rumor, although the resolvement of the Tronox case has pushed up the chances of a deal.

Source: Anadarko Petroleum - Fresh Highs On Deal Hopes, Too Late To Join The Momentum