Several oil and gas companies continue to make the news for legal situations, but some of them are fortunately coming out on top. In this article, I will address some developments in the situations facing Anadarko Petroleum (APC) and Chesapeake Energy (CHK). Despite poor second quarter numbers, Andarko recently had some good legal news and other encouraging signs, and remains a solid portfolio recommendation for me. Chesapeake, on the other hand, continues to fall into new pits of legal troubles. At its current price, Chesapeake is a "hold" for me. It is making positive moves, though, and a sinking share price could make for an attractive buy prospect.
Anadarko is currently trading around $72, and it has been on an upward trend since the late part of May. It announced its 2Q numbers recently - declaring a loss of $0.76 per share, as well as announcing a $0.09 quarterly dividend. The numbers certainly aren't encouraging, and Tronox (which I'll get to) probably scared some more investors, but recent news should help with Andarko's confidence.
Last month, Anadarko entered into settlement talks with Tronox (TROX). Tronox was seeking $15 billion in assets and $10 billion in interest payments. This stemmed from Anadarko's purchase of Kerr-McGee, the former parent company that Tronox spun off from. It claimed that Kerr-McGee set up huge environmental liabilities that led Tronox to file Chapter 11 in 2009. It believed that Anadarko should be responsible for environmental clean-up at over 2,000 polluted sites, leading up to the $25 billion. Latest news has it that Andarko expects to win the case, and expects a minimal $1.4 billion in losses stemming from the legal trouble.
This is great news, obviously, for Andarko - which has managed to keep profit margins up by keeping costs down. Still, last quarter its margins slipped below 0%, with a reported operating income of -$279 million. Paying out $1.4 billion will hurt future numbers, but not in the way that $25 billion would have (or even a settled upon number of half that). The company is quick to note, also, that its "cash position is strong - with $2.8 billion on hand." This should help keep that position locked in.
The company also noted sq`ome confidence in the future, it anticipates:
... a number of notable catalysts that we expect to do the following: increase production in the U.S. onshore liquid-rich plays; continue a very active global deepwater exploration and appraisal program; submit a plan of development for the TEN complex offshore Ghana; and achieve first production at the El Merk project towards the end of this year.
With the looming legal situation moving toward a happier solution, Andarko should have the opening it needs to pursue these projects.
Chesapeake
Chesapeake's legal issues still stem back to April when CEO Aubrey McClendon's personal loan activity became public. Many shareholders have been filing lawsuits, and a federal judge last month combined thirteen of these lawsuits that deal with the breach of fiduciary duties. These lawsuits are against Chesapeake officers and directors, but they are not against Chesapeake. At that point, worried investors could still breathe easy. In fact, the judge wrote:
Each derivative action seeks to ensure that any damages suffered by Chesapeake by reason of these alleged violations and other alleged fiduciary breaches are borne by the individual defendants and not by Chesapeake and its shareholders.
If that had been the end of things, investors could have been content with the lengthy fallout from McClendon's doings. However, just recently the company confirmed that the US Department of Justice has begun an antitrust investigation concerning some oil and gas lands purchased in Michigan. The announcement led to a brief price drop that's come in a rather tumultuous year for Chesapeake. On the one hand, it's up 35% since May (when news of McClendon plagued prices), but it's still nowhere near the $25 mark it hit in February of this year.
The probe is troubling, especially as it comes on the tail end of all the previous drama. Just when it seemed Chesapeake might be have cleared the airs (involving a noticeable changing of its Board of Directors), the Department of Justice has come in to look further into McClendon's dealing in Michigan. The company purchased more than $400 million worth of leases in the state.
Obviously, the probe warrants some watching. However, concerns that drop down Chesapeake's price may open an opportunity for investors. Recently, Chesapeake has increased its production, while looking to sell off some Texas land to pay down its debt. McClendon, still the acting CEO, said "We are taking aggressive and focused actions to increase cash flow and net asset value per share, while also reducing long-term debt." The aggressive strategy is great, it shows some eagerness to get past the troubles it's faced so far in 2012. What's even better is Chesapeake's excellent dividend growth.
Here's Forbes' chart for annualized dividend paid out over the last decade and a half.
(click to enlarge)
As the article points out, Chesapeake continues to rank high among energy stocks and its shares are trading for less than the price of a book. This price is staying down because of doubts, but Chesapeake itself seems confident.
I like both Andarko and Chesapeake to add to a portfolio, as I think both are slowly escaping any legal problems that may have hindered previous success. Andarko is emerging faster, so it's reward will be seen more immediately. Chesapeake may require a bit more patience. Still, if its share price continues to sit below $20, it may be time to dive in. Assuming there's not great fallout in the Michigan probe (which should be kept in view), it's poised for a solid remainder of 2012, with a stellar dividend to boot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
