Companies involved in fossil fuel exploration and production constantly have to face the uncertainties of global macro-economic factors, supply and speculation that impact sale prices. Political uncertainties, refining capacity and concerns over the environmental impact of development and production complete the list of factors working against companies in the oil and gas markets. As a result of some of these concerns, oil prices are high enough to make the production of oil and barrels of oil equivalent (BOE) a port in the storm of low natural gas prices. While the production of BOEs has contributed positively to companies such as Chesapeake Energy (CHK) and Devon Energy (DVN), the specter of fines to regulatory agencies and settlement of liability suits has had a negative impact on some of the largest producers in the country.
Anadarko Petroleum (APC) is among the world's largest independent oil and natural gas exploration and production companies. It produced 2.54 billion BOE in proved reserves at year-end 2011. Assets include properties in U.S. land-based shale and resource properties and oil focused opportunities in deepwater basins worldwide. In 2012 the company expects capital expenditures of approximately $11 billion. It will expend of this amount 50% onshore in the U.S. and 5% on exploration activities in that region, 15% of its expenditures on international operations and 10% of capital expenditures on international exploration, 5% on Gulf of Mexico production and 5% Gulf Of Mexico offshore. Midstream expenditures will amount to 10%.
Anadarko's shares trade around $69. The shares have a 52-week range of $57.11 and $88.70. The earnings per share are negative ($1.44) and the dividend yield is 0.50%. The company has total cash of $2.96 billion and total debt of $15.39 billion. The book value per share is $36.95. The percentage of the float owned by institutions is 87.7%. The percentage of the float sold short is 1.20%. There is not a lot of liquidity for retail investors to take advantage of a short in this stock. The last dividend date was March 27, 2012.
Anadarko's first-quarter 2012 results showed net income of $2.156 billion and $4.28 per share. Cash flow from operations was $1.891 billion in the first quarter 2012. There was record daily sales volume of 704,000 BOE per day including record liquids volume made up of 75% crude oil. The company ramped up production on some of its properties in Africa, announced drilling success in its deep water exploration in Mozambique, Ghana, and the Gulf of Mexico. It had successful exploration testing results in Mozambique, and Ghana.
Operating results were record in addition to all the exploration and ramp up success in Africa and the Gulf of Mexico. A portion of net income was extraordinary items such as the resolution of a taxation dispute in Algeria of $4.4 billion in cash of which Anadarko is expected to receive $1 billion in 2012 and the balance in 2013. The resolution included additional 1.6 million barrels of oil volumes during 2012. The additional BOEs were as a result of increased volumes from North American properties, particularly the Wattenberg field in Colorado, which added 12,000 barrels per day. The Cesar/Tonga project in the Gulf of Mexico provided 45,000 barrels of NGL per day in the quarter, spawning plans to drill a fourth well in the third quarter of 2012.
At the end of the first quarter the company had $3.0 billion in cash and access to $132 million in free cash flow. During the quarter Anadarko retired $131 million in senior notes at 6.12%. Anadarko has a good balance of domestic and international assets. Currently, with the price of natural gas being depressed, its oil output is 75% of its liquids production. Anadarko's first-quarter profit rose to $2.2 million on higher crude oil prices and a tax settlement gain.
Anadarko took a $275 million charge on the Tronox (TROX.PK) litigation in the first quarter. The Tronox litigation represents a potential $25 billion Environmental Protection Agency (EPA) toxic liability. In the early 2000s Creosote leaked in Columbus, Mississippi, from a Kerr-McGee Corp. pigment plant. Anadarko bought Kerr-Magee's oil and gas assets out of a spin-off and bankruptcy. Anadarko and has been employing several legal maneuvers to frustrate the legal action to avoid paying claimants.
Anadarko is charged with being responsible for a fraudulent scheme that transferred $15 billion in assets out of Kerr-McGee. The EPA is seeking an additional $10 billion to cover interest and appreciation since 2005. Anadarko maintains that it is not responsible for Kerr-McGee's old liabilities. Anadarko thinks the suit will result in a liability of only $250 million or 1% of what the EPA is seeking. The $275 million charge brings the total costs related to the lawsuit to $525 million. A total of 5,100 residents of Columbus, Mississippi, claim alleged creosote damage to their health. Kerr-McGee's track record of toxic contamination spreads geographically from Mississippi, to Pennsylvania. Most notably it is the company that was accused of contaminating workers at its nuclear materials plant in Oklahoma, and where whistleblower Karen Silkwood died under suspicious circumstances.
Kerr-McGee transferred most of its environmental liabilities with its pigment making unit to a company called Tronox Inc., in 2003. Kerr-McGee sold its profitable oil and gas business to Anadarko in 2006. Tronox declared bankruptcy in 2009. As part of its declaration Tronox was spending $126 million per year on Kerr-McGee's environmental liabilities. Tronox sued Anadarko, claiming Kerr-McGee burdened shareholders with the liabilities through a public offering of Tronox securities. The EPA claims it is the victim of a fraudulent transfer and owed billions for having to clean up Kerr-McGee's polluted areas that Kerr-McGee refused to clean up, making the EPA Tronox's largest creditor.
The EPA settled with Tronox in 2010 with and cleared Tronox to be discharged from bankruptcy with its pigment unit intact and all previous liabilities disappeared. Tronox paid the EPA $320 million as part of the settlement leaving the EPA and state environmental agencies to receive 88% of whatever could be recovered from Anadarko for toxic waste remediation. Anadarko has upside potential with its continued success in exploration programs, which could all be negated with the EPA winning the Tronox litigation. It still has to be determined if Anadarko will be held liable. It appears that the EPA's action is dependent on the transfer of assets being fraudulent, which may be difficult to prove, especially as Tronox originally acquired the liabilities in the first place and its issues with the EPA have been settled.
Exxon Mobil (XOM) trades around $85.60, has a 52-week range of $67.01 and $87.94. The price-earnings ratio is 10.35. Earnings per share are %8.28 and dividend yield is 2.6%. The company has total cash of $12.66 billion and total debt of $17.03 billion. The book value per share is $32.61 and 51% of the float is in the hands of retail investors.
Exxon Mobil has being involved with cleanup operations in Louisiana, as a result of a pipeline rupture on April 28. We will soon find out the cost of the cleanup operations. As well it has paid fines for water pollution at well sites in West Virginia. Fines were in excess of $100,000 to the EPA. Prior to the 2010 Deepwater Horizon disaster in the Gulf of Mexico, Exxon has had problems of its own, being responsible for the Exxon Valdez disaster in Alaska, which was the largest oil spill of its time and resulted in $287 million in clean-up costs and $5 billion in liability payments.
BP has dealt with a 2010 disaster in the Gulf of Mexico with a $7.8 billion charge in anticipation of unresolved Gulf claims. A sea floor oil gusher resulted in an explosion at the BP operated Macondo Prospect killing 11 men on the platform and injuring 17 others. It spilled over four million barrels. The spill flowed for three months in 2010 and continues to seep. BP blamed partners for making budget-cutting decisions and the lack of adequate safety systems. Assets sales in excess of $3 billion have taken place in order to absorb some of these costs. Production declines for BP of 6% in the first quarter of 2012 are a result of the 2010/2011 drilling moratorium in the Gulf of Mexico. In addition the company has divested of $23 billion in assets related to the Gulf disaster. In 2011 Anadarko Petroleum agreed to pay $4 billion to BP for its 25% stake in the Gulf of Mexico Well. Two other partners Transocean (RIG) and Halliburton (HAL) have not made any restitution.
The EPA's regulatory activities with respect to refinery construction and upgrades will see 50% of East Coast refinery capacity set to shut down in June. Two refineries owned by Sunoco (SUN) have shut down as a result of paying $1.3 billion to comply with stringent EPA regulations. ConocoPhillips (COP) shut down its Philadelphia, facility in September 2011, as a result of the high cost of compliance.
Despite all of the environmental, political and economic factors, BOE and oil remain a high margin business that energy companies rely on to get through the depressed market in natural gas. The possibility of fines from regulators and lawsuits by corporation and individuals does not deter companies from doing business in areas that are politically unstable and environmentally sensitive. Fossil fuel drilling and production has greatly expanded under the Obama administration as a result of a 15% reduction in the importation of foreign energy to the U.S.
T. Boone Pickens forecasts that natural gas will be $4 per thousand cubic feet in the second half of 2012. He is of the opinion that natural gas prices are near bottom but may go lower. A lot of people share this opinion. It is evident that there is no speculation in the natural gas market. What is happening with the price is purely the function of supply and demand. The U.S. has an abundant supply of natural gas and booming production. Investment in the fields is high but the oversupply makes for very thin margins. While there are higher margins in NGL and oil, there is risk that the business of production will be rendered economically unfeasible with any precipitous drop in price of oil. Mr. Pickens site special interests as responsible for keeping the price of natural gas low. He specifically names Koch Industries, a chemical and fertilizers concern that depends on low cost natural gas to deliver high margins it its business as a main culprit in keeping the price low. Mr. Pickens sees Koch Industries as the special interest resulting in a lack of an energy policy in the U.S., which will keep natural gas prices low.
The latest bad news out of Europe did not see the European Central Bank giving any indication that it will shore up the market on the latest bad economic news. A slower global economy, limited growth in some countries and recessions in others continue to impact resource demand and drive commodity prices lower. The U.S. released mixed economic news saying initial jobless claims were below expectations, while other reports suggested non-manufacturing industries, which are nearly 90% of the U.S. economy, declined in April.
Whether or not the European crisis and the domestic economy will counteract any of the effects of refinery closures in the U.S. in terms of serious impact on the price of oil is in question. The lack of facilities for refining may do more to temper demand for oil and the speculation in its price. The past four years have seen speculators exit and enter the market in equal parts, regardless of macro-economic factors. As well, the massive restitution being paid by companies will do more to impact production and prices. There are production and refining factors working in favor of high oil prices and economic factors working against high oil. Producers that have the capacity to work the high margin oil are better positioned than those that are concentrated in the natural gas is abundant in supply and has little demand.
As environmentally unfriendly and at times catastrophic oil production and refining are, the demand for the commodity and investments in oil company stocks are a constant. Energy companies are a large part of any portfolio planning, as in less volatile times - which are now a distant memory - these companies can offer investors capital appreciation and good income from either unit distributions or dividends. In more volatile times, they offer the opportunity to garner impressive gains if the investor is on the right side of the trade. As a result, holdings of energy shares by funds and institutions are a constant in the capital markets.
I am not a fan of stocks that are heavily held by institutions as they more heavily direct the market for the shares as opposed to trade them. They are generally not a good fit for the retail investor who cannot achieve the accuracy in terms of price and volume that institutional shareholders can. There is not enough liquidity in shares of companies that are held over 55% by institutions. Anadarko is approaching almost 90% institutional ownership. Liquidity is essential to the retail investor, it allows agility in making trade decisions to capitalize on share ownership and take advantage of opportunities as they arise in the market. In instances such as the shares of companies that are dependent on the volatile nature of underlying commodities, it is important to have agility to exit in and out when the commodity markets pick a direction.
For the institutional percentage holdings alone, as a retail investor, I would avoid the stock. However, if you have the risk tolerance, Anadarko has impressive producing assets and stellar results from its exploration activities. It remains unfazed by the amount of regulatory fines and damages from ongoing litigation. It also has a good mix of holdings and will be able to take advantage of its natural gas assets when the time comes for the price of natural gas to shine.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
