(By Mani) The valuation of Anadarko Petroleum Corp.
) is being suppressed by the potential liability of Tronox
) that overshadowed Anadarko's two large gas discoveries offshore Mozambique, exploration success and potential in deepwater Gulf of Mexico and west Africa, and the potential impact from its 8 million fee land acres onshore the US.
Shares of Anadarko were down 10 percent year to date versus down 7 percent for peers and up 11 percent for the S&P 500. The shares are trading 23 percent below their 12-month high and 21 percent above their low, compared with 23 percent and 29 percent for peers and 2 percent and 29 percent for the S&P 500.
Recently, the company settled with BP for $4 billion regarding the Gulf of Mexico oil spill and won its tax dispute with Algeria for a $1.7 billion refund.
'We believe the a settlement with Tronox would remove uncertainty, which depressed the stock in the last six months," Oppenheimer analyst Fadel Gheit said in a client note.
Based on 498 million shares outstanding and a 40 percent tax rate, each $1 billion for settlement impacts the company's earnings by $1.20 a share.
The U.S government is seeking more than $10 billion from bankrupt Tronox for environmental cleanup costs. Meanwhile, Tronox's creditors and the U.S. government also sued Anadarko and Kerr-McGee, seeking $25 billion over environmental liabilities. Kerr-McGee spun off its chemicals business to create Tronox, which subsequently filed for bankruptcy in 2009. Later, Anadarko bought Kerr-McGee's profitable oil and natural-gas business.
Anadarko believes that Tronox was adequately capitalized at the time of its IPO and that Kerr-McGee was not responsible for its bankruptcy.
"Although it has a high level of confidence in the merits of its case, it is still seeking a reasonable settlement, which we think could boost APC's valuation," Gheit said.
Anadarko has potential exploration opportunities at Mozambique. Anadarko is the operator, with 36.5 percent interest, in a block offshore Mozambique where it has made two very large discoveries with total estimated recoverable reserve of 30-60 plus trillion cubic feet (Tcf). Both discoveries will be developed as LNG export projects to the growing Asian markets.
Anadarko is the only E&P with projected free cash flow this year, keeping capex and dividend within cash flow. It has $2.8 billion in cash after repaying $800 million in debt, and its asset sale offshore Brazil could double its cash balance.
"APC has successfully monetized its discoveries to operate within cash flow," Gheit added.
In addition, the company has significant net asset value (NAV) upside due to its diversified onshore / offshore asset base, visible long-lead projects and exploration upside. Anadarko can offset weakening natural gas liquid prices, weak crude demand, and slowing emerging market trends through its portfolio diversification.
In terms of valuation, Anadarko is trading at higher P/E, but average P/CF multiples relative to its peers, based on 2013 consensus estimates. Its dividend yield and return on average capital employed are lower, and debt ratio is higher. The company's implied reserve value is in line with peer average, and its upside exploration potential is much higher.
Anadarko is among the largest independent oil and natural gas exploration and production companies in the world, with 2.54 billion barrels of oil equivalent of proved reserves at year-end 2011. The company's portfolio of assets encompasses key positions in U.S. onshore shale and resource plays in the Rocky Mountains region, and the Appalachian Basin.
The company also is a premier deepwater producer in the Gulf of Mexico and has production in Alaska, Algeria, and Ghana with additional exploration opportunities in West Africa, Mozambique, Kenya, South Africa, New Zealand and China.