Look To Anadarko for Short-Term Gains
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Anadarko Petroleum (NYSE: APC) is, as usual, pulling ahead of the competition on a spate of good news. The news includes, yet again, a major Anadarko discovery in deep water, where I think it’s safe to say the firm is now an international leader. This, combined with the potential settlement of a major lawsuit that was anchoring Anadarko’s stock, is pointing the way towards an excellent second quarter earnings report for the firm.
Deepwater Operations Successful in U.S. and Abroad
Royal Dutch Shell (NYSE: RDS-A) appears desperate to claim an interest in the Rovuma-1 basin off the shores of Mozambique. Its bid to take over U.K. based Cove Energy PLC was dropped after a furious bidding war with Thai company PTT Exploration & Production raised Cove’s share price to double its levels prior to the takeover attempt. Cove’s most desirable asset is its 8.5% working interest in Rovuma-1, and Shell’s overtures to Anadarko show that it was this play Shell was really after. Anadarko is the operator with a 36.5% working interest on this play, and based on the Cove price Anadarko’s interest could be worth $8 billion--not bad for a resource that is largely unexplored and unproved.
According to Bloomberg, sources close to the discussions between Anadarko and Shell are indicating that Anadarko is hesitant to sell before it has a better idea of the basin’s potential. One reason Anadarko could be moved to sell part of its stake is the necessity of building liquefied natural gas trains to export production from the basin, an area where Shell has ample experience.
Anadarko’s most recent find is off the shores of the Republic of Ghana in the Deepwater Tano Block. Anadarko’s Wawa-1 exploration well here discovered about 43 net feet of oil pay and 65 net feet of gas condensate pay of high quality, in a level that is distinct from the neighboring complexes. According to Anadarko Senior Vice President, International and Deepwater Exploration Bob Daniels, Anadarko and its partners “plan further exploration of the Deepwater Tano Block with additional wells scheduled at our Okure and Sapele prospects later this year.” Anadarko has an 18% working interest in the block, which is operated by Tullow Oil PLC with a 49.95% working interest. Other partners include Sabre Oil & Gas Holdings and the Ghana National Petroleum.
Anadarko’s competitors and partners are also finding major success elsewhere in African deepwater. Tullow Oil PLC and Africa Oil Corp recently announced 43 meters of potential oil pay in addition to the 100 meters announced in May in the South Lokichar basin off the shores of northern Kenya. The companies are targeting the Lokhone shale, which is an oil sands interval that could be the Lokichar’s primary source and a major resource at shallower depths than expected. Apache (NYSE: APA) is another player entering Kenya with high expectations – analysts believe Apache’s deepwater drilling, set to start next month, could uncover $70 billion in oil.
Anadarko also faces stiff competition at home. Ecopetrol (NYSE: EC) recently placed several bids on deep water blocks with other partners in a Gulf of Mexico auction, hoping to add to its 42 block position in the Gulf. The company is aggressively internationalizing from its base in Columbia, and is treating the Gulf as a focus area even as it expands at home, where it owns a large part of that country’s upstream infrastructure. This could drive block prices up for Anadarko in one of its favorite operating arenas, the more so since Ecopetrol is partnering with companies well known to Anadarko like Apache, Repsol, and Murphy Oil (MUR).
Tronox Suit May Be Headed to a Close
One major drag on Anadarko’s stock may be approaching resolution. Over the past few months, Anadarko was enmeshed in a lawsuit brought by the Environmental Protection Agency and Tronox over Anadarko’s 2006 acquisition of Kerr-McGee Corp and subsequent denial of responsibility for legacy clean up costs from the notoriously non-compliant Kerr-McGee. As the suit headed to trial, Anadarko released a vehement statement indicating that Tronox’s “claims are highly inflated and without merit…all of the information associated with Tronox was provided by Kerr-McGee in a transparent and publicly available fashion” prior to the acquisitions.
Earlier this week, proceedings in the suit were halted as Anadarko and Tronox started discussions for a potential settlement. Tronox is seeking $15 billion in assets and $10 billion in interest from Anadarko, 88% of which Tronox pledged to the Environmental Protection Agency under a separate settlement. It is unlikely Anadarko will agree to payments at these levels; in the first quarter Anadarko recorded just a $525 million loss contingency for the suit. The fact that Tronox is now willing to negotiate shows that Tronox is losing hope that its suit will prevail.
Outlook
Anadarko will receive about $250 million in cash for the second quarter related to its resolution of a disagreement with Sonatrach over Algeria’s exceptional profits tax. Anadarko will also receive additional sales volumes through its production sharing agreement as part of the resolution reportable in the quarter.
Analysts are expecting Anadarko to return between $0.62 and $0.94 earnings per share this quarter, down significantly from $1.14 in the year ago quarter. Since a portion of Anadarko’s liquids revenues are from natural gas liquids, which are sliding this year, Anadarko could well report such lower earnings. I do think that its resolution with Sonatrach will help to offset this, but the offset would be minor compared to the impact of low natural gas prices across the board.
Anadarko is currently trading around $73, with a price to book of 1.8 and a forward price to earnings of 15.7. This shows a higher valuation than competitor Shell, which is trading around $70 with a price to book of 1.3 and a forward price to earnings of 10.3. It’s also a higher premium than is commanded by Total (NYSE: TOT), which is competing in many of the same deepwater plays. Total is trading around $45 with a price to book of 1.2 and a forward price to earnings of 5.8.
A major reason for Anadarko’s premium is that its finds over the past few years are not yet in production, which means that despite major world class discoveries, Anadarko’s earnings are not reflecting its actual resources. Over the next three to five years though, as these plays are brought into production Anadarko will be in high growth mode, which is a great reason to jump in on it now.
Anadarko will announce second quarter earnings on July 31.
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