The Tronox litigation, which has been a key overhang on the Anadarko stock (APC), could potentially be resolved near-term given the conclusion of the defense testimony last week. In my view, a potential settlement could unlock significant value as APC trades at a wide discount to intrinsic value by eliminating investor's perceived tail risk associated with the litigation. The embedded USD 2.75 billion litigation risk in the stock leaves management ample running room to settle the litigation above its estimated range of zero to $1.4 billion loss, while still insuring a favorable outcome for the shares. Another incentive for management to settle the litigation relates to taxes benefit in contrast to a judgment, whereby APC could take a tax deduction if it settles the litigation.
Potential Investor Pushback: Investor pushback revolves around the uncertainty over the Tronox settlement price. At current prices, the stock is pricing in a USD 2.75 billion litigation accrual, but the maximum potential judgment could be USD 5 billion or higher. Meanwhile, there are no guarantees on settlement and a decision by the judge could stretch into mid 1Q' 2013.
Investment Thesis: APC has an outstanding upstream portfolio, given long-term growth visibility through its giant gas discoveries in Mozambique, domestic liquids-rich growth opportunities in the DJ Basin, and exploration upside (domestic and international). In particular, the company has seen outstanding success in the Wattenberg as it has successfully transitioned its program from vertical to horizontal wells. In order to narrow the discount relative to intrinsic value, I expect the company to monetize a portion of its stake in Mozambique, helping to crystalize the value of this significant asset. I feel Mozambique asset has to be valued at $11/share on Net Asset Value (NAV) basis. However, based on the valuation for Cove, APC's stake could be worth closer to $15/share.
Valuation: The stock is trading at a 30% discount to consensus NAV estimate of $107/share, compared to an average of 18% for its peers. This valuation gap should narrow if the company begins to bring value forward by monetizing its underappreciated assets such as Mozambique. My NAV estimate could prove conservative as it does not give value for ~$13 per share of incremental upside associated with Mozambique, the Utica Shale, Lucius, and the favorable outcome in its tax dispute with Algeria.
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Anadarko Petroleum, based in The Woodlands, Texas, is one of the largest independent E&P companies in North America. Its asset base includes conventional and unconventional properties in the U.S. and deep-water oil and gas projects in the Gulf of Mexico and Africa. Anadarko holds an interest in 35 million net acres, 8.4 million on which it owns mineral rights. At year-end 2011, proved reserves totaled 2.5 billion boe, with net production of 680 thousand boe/d.