This Company Is A Buy Through 2013
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Anadarko Petroleum (NYSE: APC) is very well-positioned to see significant growth in the next year and beyond. The company has produced top notch operating performance with a very strong and effective management team. It has set record heights of sales volume and oil production and has discovered a large source of natural gas reserves in Mozambique. The company has done all of this without borrowing any money or raising any capital.
The company is involved in the production, exploration, development, and marketing of natural gas, natural gas liquids, condensate and crude oil. The company's operations are segregated into three different segments comprising upstream, midstream, and marketing of petrochemicals in the downstream business. Its upstream business is engaged in the exploration and development of crude oil, natural gas and NGL's. The company's midstream business focuses on the transportation and supply chain infrastructure of oil products. The downstream business is involved in the marketing of petrochemicals in the United States. In the second quarter of 2012, the company generated around 74% of its revenue from the exploration and development of crude oil and condensate. Relying heavily involved in the oil production business has meant that the company has avoided many of the problems affecting natural gas producers in recent years. Large scale producers such as Exxon Mobil (XOM) have seen some disappointing numbers after having purchased XTO Energy in 2010 - the company was a leading producer of natural gas. Smaller companies invested heavily in gas production have also had struggles. Chesapeake Energy (CHK) has had to sell down many valuable assets in an effort to generate cash flow wile in the poor natural gas market. Anadarko has largely been immune to such disappointments.
The company was involved in the Gulf of Mexico oil spill that has plagued BP (NYSE: BP) for the last two years. The company has agreed to a $4 billion settlement with BP that will cover the $6.1 billion in invoices that BP had billed Anadarko. The company believes that this settlement agreement will end the Anadarko's legal problems surrounding the Deep Horizon oil spill. CEO Jim Hackett has said that the continuing government and civil lawsuits seeking compensation and fines arising out of the aftermath of the spill are not concerns of the company given that investigations have shown Anadarko played no role in the drilling of the wells. This litigation had been a major drain on the company's stock price and its conclusion is good reason to be bullish on Anadarko's stock.
Anadarko has also seen its stock held back by its ongoing litigation with Tronox (NYSE: TROX). This litigation involves environmental cleanup costs Tronox claims it is due Kerr-McGee Corporation, a company Anadarko purchased. The lawsuit is seeking $25 billion in damages but legal experts think in the best case scenario for Tronox, it will receive $2.5 billion. The parties were close to reaching a deal this summer, but negotiations collapsed at the last minute. The litigation is already factored in Anadarko's stock price, so when a settlement is reached the company will see an almost instant uptick in share price. Furthermore, the company expects to win in this litigation battle. It is so confident that it removed $525 million in contingency losses from its books. While planning for a possible $1.5 billion loss, an outright victory would prove to be a windfall for investors. Even assuming a $2.5 billion loss, the company still holds value. Cutting such a loss almost in half or more will be a tremendous boon to investors.
The company recently made the decision to sell its 30% stake in the Espirito Santo Basin to Petrobras (NYSE: PBR). This move is designed to help pay off debt and become more efficient. The efficiency will come in large part due to the company focusing more effort and attention on the Campos Basin. The Espirito Santo Basin is known for its low quality crude oil and selling of these assets would help the company produce high quality oil from the Campos Basin. The Campos Basin has developed its infrastructure, and six of its fields constitute around half of Brazil's crude oil. Therefore, the company can tap into the high growth opportunity in this field. Staying involved in the Brazilian market will prove to pay high dividends going forward, as the country's energy needs are skyrocketing and will continue to do so. Petrobras has decided to increase its operating efficiency in the area by spending approximately $6 billion over the next four years.
Due to the one-time items expense and impairment charges of $804 million, the company had registered a net loss of $380 million, or $0.76 per share, in the second quarter. It bounced back in the third quarter by posting $121 million in profits, and declaring a $0.09 per share dividend for the quarter, representing a healthy 0.50% yield. It's trading at a ratio of under 20 which puts it in the average range of energy companies.
I expect to see Anadarko grow at least another 5% before the end of the current calendar year. Once the Tronox litigation is finished, and it most likely will finish in the first half of 2013, I think the stock will see tremendous growth in price. The stock is selling around $72 per share now. I expect it to approach $80 by the end of the year, reach $90 by spring, and it will easily top $100+ once the Tronox litigation ends. The focus the company is placing on the Campos Basin will also contribute: 1) the company expects to win the case against Tronox. 2) Its focus on the Campos Basin would enable it to achieve higher sales volume guidance for the year to nice gains, although I expect those gains to show up more in the latter half of 2013 and beyond.
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