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Anadarko Petroleum Company (APC) reported its third quarter results on Monday. The independent exploration and production company managed to boost production in a solid third quarter.

Third Quarter Results

Anadarko reported third quarter revenues of $3.33 billion, up 4.2% on the year. Revenues fell short of analysts expectations of $3.40 billion

The company reported a net income of $142 million for the quarter. Net income attributable to shareholders came in at $121 million, or $0.24 per diluted share. Last year, the company reported a $3.0 billion loss on the back of settlement costs related to the Deepwater disaster.

Earnings were impacted by a $301 million net charge, related to unrealized losses on derivatives contracts. Charges totaled $0.60 per share, resulting in adjusted earnings per share of $0.84. On average, analysts expected the company to earn $0.76 per share.

Total sales volumes averaged 739,000 barrels of oil-equivalent per day. Oil volumes averaged 234,000 barrels per day and natural gas liquids production came in at 88,000 barrels per day. Natural gas volumes averaged 2.5 billion cubit feet per day.

CEO Al Walker commented on the results, "Anadarko is delivering another year of strong operational results and continued cost reductions, and with this momentum, we are pleased to increase our full-year sales-volumes guidance to a new range of 265 to 267 million BOE with no corresponding increase in capital spending. During the quarter, we delivered record liquids volumes of 322,000 barrels per day and safely reduced controllable costs on a per-unit basis in every category relative to the third quarter of last year."

Valuation

Anadarko ended its third quarter with $2.5 billion in cash and equivalents. The company operates with $14.1 billion in short and long term debt, for a net cash position of $11.6 billion.

For the first nine months of 2012, Anadarko reported revenue of $10.0 billion. The company net earned $2.2 billion, or $4.34 per diluted share.

Full year revenues could come in around $13.5 billion. Full year earnings could come in around $2.6 billion, or $5.75 per diluted share.

The market currently values Anadarko at roughly $33 billion. This values the firm at 2.4 times annual revenues. The firm is valued at 12-13 times annual earnings.

Anadarko currently pays a quarterly dividend of $0.09 per share, for an annual dividend yield of 0.5%.

Investment Thesis

Year to date, shares of Anadarko have fallen some 13%. Shares rose from $75 in January to highs of $88 in February. Shares of the relatively levered company fell to lows of $57 in June on the back of lower energy prices. Shares are currently exchanging hands around $66 per share.

Over the past five years, shares have risen some 10%. Shares hit lows of $27 at the end of 2008 and recovered to $88 in February this year. Shares have given up a quarter of their value, ever since. Between 2008 and 2012, the company has stagnated its revenues from $14.1 billion in 2008 to an estimated $13.5 billion this year. Net earnings fell from $3.2 billion, to an estimated $2.6 billion over the same period of time.

Last year, Anadarko took a $4.0 billion charge related to its 25% stake in BP's run Macondo drill, related to the Deepwater explosion in the Gulf of Mexico back in 2010. Anadarko ramped up production of the Wattenberg HZ program in Colorado and Eagleford Shale in Texas during the quarter. Furthermore, it boosted the estimated resource range by 500 million BOE to 1.0-1.5 billion barrels of oil equivalent for those fields. On top of that, the company announced excellent drilling and testing results from Mozambique.

Anadarko is a medium-sized player which has some interesting energy assets. The firm is boosting production and recoverable reserves, but operates with a sizable debt position. Shares are still struggling amidst the impact of the Deepwater drama and the overhang of a $25 billion lawsuit, in a rather complicated case brought by the US and Tronox. Furthermore, dividend payouts of merely 0.5% per year,are very modest in comparison to the wider energy sector.

On the other hand, large integrated oil companies like the likes of Exxon Mobil (XOM), who fail to grow organically could make a bid for the company. I refrain from an investment on the back of uncertainties regarding the lawsuit, yet I think assets are very cheap given the growth potential if the case gets settled for a reasonable amount.

Source: Anadarko Petroleum - Lawsuit Overhang Holds Shares Down