Anadarko: Deeply Undervalued At $69

Aug.29.12 | About: Anadarko Petroleum (APC)

Anadarko Petroleum (NYSE:APC), the second-largest U.S. independent oil and natural gas producer, is what some investors would call a "kick yourself" stock. I remember Anadarko trading around $74 in the days leading up to the Gulf of Mexico oil spill in April 2010 and it is even easier to recall the breathtaking decline the shares of Anadarko experienced because the company had a 25 percent non-operating interest in the ill-fated Macondo well project.

By the end of July 2010, the stock plunged almost 50 percent. This is the part that is apt to make some investors kick themselves. Amid intense controversy and after credit ratings agencies downgraded Anadarko's debt ratings, the stock started to rise. From the late July 2010 bottom through the end of the year, Anadarko doubled and that was before the company reached a settlement with BP (NYSE:BP) to alleviate the potential burden of spill-related financial liabilities.

I am not saying history is repeating itself, but Anadarko once again finds itself ensconced in legal controversy. The company's Kerr-McGee unit is facing a $25 billion lawsuit brought against it by regulators and creditors of Tronox. Tronox was spun-off by Kerr-McGee in 2005, but Anadarko is on the hook because it acquired Kerr-McGee.

Bottom line: Kerr-McGee is accused of trying to defraud the Environmental Protection Agency. For its part, Anadarko is trying to settle these claims, but earlier this month said those talks reached an "impasse." Skittish investors could be seeing a repeat Anadarko's post-spill litigation burden. That would be enough to keep most folks out of this high-beta name, but I see opportunity.

Yes, Anadarko is a high-beta stock. Its beta of 1.51 exceeds that of comparable rivals such as Apache (NYSE:APA), ConocoPhillips (NYSE:COP), Devon Energy (NYSE:DVN) and EOG Resources (NYSE:EOG). Anadarko is also not a stock for dividend seekers. The shares yield just half a percent compared to 4.7 percent for ConocoPhillips.

In addition, Anadarko's risk profile is arguably higher than at least two of the four aforementioned names. Devon Energy has sold all of its international and offshore assets to focus on North American onshore projects. EOG also actively focuses on U.S. shale plays, not global or offshore production.

Yes, Anadarko does have ample U.S. shale exposure, including footprints in the Eagle Ford, Marcellus, Niobrara and Wattenberg shales, but the allure of the stock and the potential for dramatic upside stem from the company's international and offshore projects.

For starters, Anadarko recently sold a 7.2 percent stake in a Gulf of Mexico field for $556 million, valuing the company's remaining 27.8 percent stake in the field at $2 billion, according to Barron's. That is equivalent to $4 a share in cash just through that one project. EOG has just over $1 per share in cash, though it should be noted that Anadarko's gross margin of 85 percent trails EOG's.

Still, Anadarko's African operations are a compelling reason to consider the stock. The company holds a 36.5 percent interest in a gas project off the coast of Mozambique, which could hold 30 trillion to 60 trillion cubic feet of gas. At $1 per thousand cubic feet, it could be valued at $10 billion, or $20 per Anadarko share, Barron's reported.

Low natural gas prices have suppressed Anadarko's per share earnings this year, giving it negative return on equity, operating margin and net margin numbers. Not surprisingly, Anadarko has been the worst performer in group including itself, Apache, Devon and EOG. The slack performance came primarily by virtue of Wall Street's view of Anadarko as a natural gas play at a time when prices and demand for that commodity in the U.S. remain low.

What that thesis fails to take into account is that natural gas demand is rising in other parts of the world and prices are not nearly depressed as what is seen in the U.S. Anadarko's Mozambique presence gives the company a leg up on rivals that could arrive too late to the international natural gas game.

I believe it is also constructive to note that Anadarko is not Chesapeake Energy (NYSE:CHK). Translation: The former has not overly leveraged its balance sheet or its corporate profile to natural gas. Oil sales volumes jumped by 20,000 barrels per day in the first quarter and Anadarko is approaching $3 billion in cash on hand.

Anadarko has also established itself as a major player at Ghana's Jubilee field, which is estimated to hold more than 1 billion barrels of recoverable reserves. Production there is still in the nascent stages, but is already averaging close to 63,000 barrels per day. In the first half of 2012, Anadarko pulled 2.9 million barrels from Jubilee.

Of course, I cannot fail to mention that Anadarko is operating in Ivory Coast, Kenya, Liberia and Sierra Leone. Exploring for oil in countries like that is not easy, and it is long on risk. That said, I see little evidence to support the notion that any potential rewards from these activities have been built into Anadarko's current share price.


With a forward price-to-earnings ratio of almost 16, Anadarko is more richly valued than Apache or Devon. Anadarko's price/book ratio is also loftier than its rivals. While Anadarko may appear richly valued relative to its nearest rivals, that does not mean the stock is expensive. The shares currently trade below $69 and that price does not reflect the aforementioned $4 a share for the Gulf project and $20 per share for the Mozambique gas operations.

At the very least, a case can be made that Anadarko is undervalued by a third. If a suitor comes calling, a rumor that has previously been mentioned, a takeover price for Anadarko could easily stretch into the triple digits. That means at $69 Anadarko is not pricey at all.

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.