Anadarko: Like BP, A Gulf Of Mexico Crisis Bargain Investing Play?

10th Jun '10 by djpreston

18 comments 6845 reads

Naturally, most of the media (and investor) attention arising from the disaster with the Macondo well in the Gulf of Mexico is focussed on BP (LON:BP.), rightly or wrongly. However, Anadarko (NYSE:APC) is now, I feel, well worth a second look as a bargain play. Anadarko (see company website) is not well known to many UK based investor but it should be, due to its involvement in some interesting areas where there are overlaps with UK based companies such as Tullow and laterly Cove. Since the Macondo disaster, Anadarko's shares have fallen from $74 to close at $34 last night (9 June), valuing the company at $17bn.The company has some world class assets including large stakes in their projects. Details of their assets can be found again by reference to their website.I highly commend the company for the quality of the information that they have on their website, in terms of fact sheets relating to the different operational areas and of course their presentations. the latest of which was their presentation at the RBC conference on 8 June, which can be accessed here.

Technically speaking APC could be on the hook for up to 25% of the Macondo costs as a 25% interest holder. However, if costs escalate further, to the ludicrous/hysterical figures being mentioned in the press, then I would be willing to bet that APC will use the Joint Operator Agreement to wriggle out of some of these costs (all?) via gross negligence related clauses, perhaps citing the oft mentioned "rows" between the BP "company man" and the contractors in the days and hours leading up to the explosion. Perhaps, in turn, they could file against BP?

The presentation above gives some indication of the strength of APC's finances and they look reasonably solid. The main driver and what I've looked at with APC before is the major expansion of production and cashflow (doubling and tripling respectively) over the next five years, as the mega projects start to be brought onstream - Wahoo, Jubilee, Shales etc. I highly recommend reading the RBS presentation for an excellent overview of their assets, what they've achieved and what's happening. They have a very active exploration campaign and Cove Energy (LON:COV) holders may find the references to Windjammer etc intriguing. It's also a useful refresher for the…

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Isaac

10th Jun '10

I welcome any comments.

OK - Ed described Anardarko as "BLEEDING" yesterday. Why would you want to invest here? I don't think they have the financial capacity that BP has if worse comes to worse.

Record levels of volume traded in London today for BP.

Prime Minister David Cameron offered to help deal with BP Plc's Gulf of Mexico oil spill on Thursday, saying he would take it up with U.S. President Barack Obama, as the beleaguered company's shares rebounded from 14-year lows.

Analysts said the company's improved performance was partly due to speculation that PetroChina, Asia's top oil and gas firm, was considering making a bid for BP.

http://uk.news.yahoo.com/22/20100610/tts-uk-oil-spill-ca02f96.html

What next Barack? You going to go to War with the Chinese if they buyout BP?

djpreston

I should have said comments from all but one person.

Fangorn

Hehe :)

Imagine if the Chinese did get involved though.

I'd personally prefer it if BP maintained its independence though.

Will be topping up (or should I say averaging down tomorrow I suspect)

If you really believe what you have written then why did you buy Bp today?

Also i find it very ironic that Anadarko have said on slide 3 "Our strategy is working" and then states "30 deepwater exploration and appraisal wells in 2010".

Which is a ridiculous statement to make when Obama has banned deep water drilling in the GoM!

On their website they state ..

Anadarko is the largest independent producer in the deepwater Gulf of Mexico. Our deepwater holdings and skill sets position the company to excel with high-impact projects in various stages from exploration prospects and new discoveries, to projects sanctioned for development and producing fields. Anadarko utilizes a hub-and-spoke infrastructure enabling new discoveries to be brought on production safer, faster and at significant cost savings.

pfff.....Excel with high-inpact projects in the GoM!? The current spill is in no way excelling! After what is happening politically I don't think you are appreciating the level of political risk that is now/has been present in the US. Well the majors are starting to wake up.

As Ed said this incident in the GoM has changed the industry forever. I would'nt want to be the largest independent producer in the GoM. You keep thinking this is just a BP problem, but far from it. This is an Oil industry problem. I can see protests in the US when Obama tries to lift the ban on drilling in the GoM after this event is over....

Anadarko has allocated 42% of their Capex in the US + 18% dedicated to the GoM so a total of 60% of their Capex to go to the US. They made 9 discoveries in the GoM last year. Clearly a big player in the GoM and clearly a victim from the upcoming regulation and added costs of future drilling in the US. Why would you want to be a shareholder here? Or as an Oil company why would you want to drill in the US when you can drill in Africa/Asia and deliver to the Chinese, the largest consumers of Oil.

BP also has big operations in the US but they also have big operatsions elsewhere to diversify their portfolio.

They have only got $3.7 Billion in cash and 25-35$ debt to market cap. Say the total costs of the spill is $40b. Anardarkos share of 25% means they incur $10b in costs, with already a maxed out debt ratio to market cap I think this company will struggle to pay its share of costs and fund capex/dividends/service debt etc.

25-35% gearing is actually very high to then face a crisis like the GoM. BP only has 19% gearing with about $6b in cash + massive cash generation everyday from their production. They don't need to use credit facilties that they have access to, They can manage this crisis with their cashflow.

They have some nice assets in other parts of the world. No doubt about it, but as Ed said Anardarko is BLEEDING and Isaac would'nt invest here. I believe BP is a safer bet despite what the Media says,

alano20

11th Jun '10

Isaac,
Also i find it very ironic that Anadarko have said on slide 3 "Our strategy is working" and then states "30 deepwater exploration and appraisal wells in 2010".

You need to read on: it seems to me that only three wells are in GOM, the rest of the 30 are in Brazil, West Africa, Mozambique, and South East Asia, see slide 24.

Also bear in mind they were one of those companies reported earlier to be looking at the force majeure clauses in their drilling contracts, so their rigs in GOM are likely off to Brazil and West Africa etc. very soon, so the inpact will be minimal, or could even be beneficial, if they have more rigs working in say West Africa, see slide 20 "700 mile span".

loglorry

I've not had a lot of time to look in detail at APC but what jumps out at me is the danger of a big fine/costs being presented to them against their modest market cap. If total costs for the cleanup/fines come in around the $50Bn which is possible then APC would have to swallow 12Bn of this which would really hit their 18Bn market cap especially given their current 13Bn of debt.

Perhaps the way to play this one is through a long dated option well out of the money perhaps a year out from here. This will limit losses if things go horribly wrong.

I'll look at APC a bit more but my initial thoughts are it could end up being too small to muscle it out.
In summary I get the feeling that BP will have the resources to survive so equity holders can just sit it out if need be. Whereas there is a real risk if things go very badly wrong for APC that their equity will be worthless.

In hindsight I think buying the BP debt when yeilding 8% was probably the way to play this crisis. I jumped in far too early when flow rates were thought to be 5K and BP were reasonably confident in stopping the flow within 4 weeks.

Cuthbert C

There's a post on TMF which quotes a statement by Anadarko saying their insurance cover provides for a maximum claim of $700 million. Not had time to check, so not guaranteeing accuracy of statement. But if true it seems a completley inadequate level of cover for this situation.

marben100

Hi Alano,

'fraid I haven't had time to study this one in any detail. However...

Also bear in mind they were one of those companies reported earlier to be looking at the force majeure clauses in their drilling contracts, so their rigs in GOM are likely off to Brazil

Brazil and the Santos basin are considered one of the best new finds in decades BUT...

....if the GoM has turned out to be at the "bleeding edge" of technology, the challenges are even more severe in the Brazilian plays. Not only do we have extreme water depths (7,000') and HTHP wells but I am also led to believe that their sub-salt nature poses corrosion problems for materials that are used conventionally. I do know that, as a consequence, whole new standards are being speciified for materials used for construction of facilities to exploit these fields.

One thing that the Deepwater Horizon accident has shown is that the we were already operating at the limits of our technical capability. It seems likely that there will be setbacks and cost-overruns in developing the Brazilian fields.

I do NOT know whether that impacts the investment case for Anadarko but just something to bear in mind.

Cheers,

Mark

Here a couple of points that came out from the RBC conference the other day:

• Has 25% WI in the Macondo well but not likely liable for 25% of BP costs associated with disasters. There is someamount in the $1.25B that BP has paid that would not typically be covered in the operator agreements.

• Operator agreements generally contain clauses that provide for the operator to have a fiduciary responsibility, whichgenerally implies that costs such as punitive damages are not the responsibility of the non-operator.

That second point about punitive damages is very significant when it comes to APC and their total payments (assuming that Transocean etc don't have to pay anything - highly unlikely imo). Plus, as I said in the header, there's every likelihood that, if they choose, they could invoke clauses in the JoA relating to misconduct/negligence or even pursue BP in the courts.

Then there's the timescale. This will drag on for years and APC will have tripled cashflow in five years. Then there's the option of liquidating an asset or two - alaska, Marcellus, Haynesville, West Africa, E Africa. All very attractive assets that would be hotly contested.

SW10Chap

I would be willing to bet that APC will use the Joint Operator Agreement to wriggle out of some of these costs (all?) via gross negligence related clauses, perhaps citing the oft mentioned "rows" between the BP "company man" and the contractors in the days and hours leading up to the explosion. Perhaps, in turn, they could file against BP?

For the time being I really would discount the supposed 'row' between BP and Transocean.

AFAIK only the motorman has testified on this.

At best you have the rig mechanic reporting on a conversation between two people discussing drilling and well operations; at worst there may be a case of misdirection.

Let's not forget that other testimony suggests that the engines within the motorman's area of responsibility not only failed to shut down when gas was present, but also that they likely caused the explosion which resulted in the loss of the rig.

SW10

Mark,

Brazil was just one of several examples of where Anadarko could move rigs from GOM: as a Tullow investor I would be very happy if all displaced rigs went to West Africa rather than any going to Brazil: you make very good points re Brazil.

14th Jun '10

For the record we've just sold out of our position this morning.

Given the tanking BP price, the quick gain in APC was looking too tempting so time to bank the gain and watch for another entry point, as inevitably there will be.

DJP,

I've had a look at a few things over the weekend trying to work out which is the best way to play (if any) the crisis. I still think sticking with BP is the way to go especially at the current level of 350p. BP are indeed on the hook for a lot more at this point but probably almost all except some very very worst case scenarios are in the price. Whereas certainly in the case of Transocean it could get a lot lot worse. If for example they are found to be grossley negligent in operating the rig then they might end up in chapter 11. Obviously, being american is helping them now with Obama but I'm not sure in the long term when Obama has gone and all the court wranglings start that will count for much.

APC also are a bit of a problem for me and it comes down to size again. If they don't start to meet the claims that will head there way very shortly from BP they might find BP starting to get quite tough with them. Again I'm not sure this is all in the price yet. They also could suffer from the fact that their deepwater assets are discounted going forwards.

BP have the might to tough this out and when the well is fixed they might start to shine in a different light. The recent article in seeking alpha for example suggests that BP could just put BP America in chapter 11 and the rest woudl still be worth a lot more than the current price. I'm not suggesting they will do this but it shows that the scale of the selloff here is still very much overdone IMHO.

BP quite frankly have to fix the well as soon as they can and tough it out. They then need to clean the spill as quickly as possible and make all the right noises going forwards. If they can do that and public opinion moves on to something else then they have a chance with escaping by giving up just one years earnings.

I'm still long and in now with an average of 458p.

I'm now going to do an ostrich impression and wait for something to happen !

Log

Buying some more myself Log.

I just feel that there is too muc hfear associated with this and things wont pan out as badly as the herd seem to think. BP is currently at the receiving end of unwarranted political backlash solely because it has the deepest pockets. No attention is being shown to Transocean, who's safety record is poor, and who are both the owners and operator of the rig in question - BP merely leased their services and much of the problems I'm sure will be shown to be Transocean's fault.

Quite why Transocean is receiving no pressure to halt its $1bn dividend whatsoever is ridiculous as they're going to have costs to meet for sure. Yet both senators and US president are blatantly ignoring this and focusing on BP's dividend. Perhaps because Transocean presumably only has American shareholders!!

Well I think the first releif well is at 14,000 feet now with 18,000 to drill in total. So only another 4,000 until target dept. They will no doubt have to faff around and drilling gets much slower the deeper they go but even an RNS that we are at target depth should be decent news.

There is some positive newsflow in the pipeline so to speak but until that oil stops leaking I'm sure the bashing will continue and probably get worse.

Log

It seems Sen Reid is asking for the $20Bn to be put aside - to go along way to meet claims arising from lost revenue from busineses. They make the point it could be a lot more than this but this is a decent start. This is clearly just absurd.

Over 51,000 claims have been submitted since the MC252 oil well blew up in the Gulf of Mexico in April, and more than 26,500 payments have been made, totalling over $62m (£42m).

Clearly BP's response should be that it has made a commitment to meet all ligitimate claims and is doing so already so there is no need for this sort of up front cash call which is clearly designed to put massive financial stress on BP. I also hope they point out that Transocean and the other operators Anadarko and Mitsui should also start to put thier hands in their pockets too. Transocean having just paid out $1Bn in dividends.

They have until Friday to respond and I'm sure they will take that long but I hope they do stand up to this sort of nonsense.

So only another 4,000 until target depth. They will no doubt have to faff around... but even an RNS that we are at target depth should be decent news.

I would be cautious on this: as you suggest there is the inevitability of a dose of SW10's Law, but there is also a reasonable likelihood they won't hit the target, which could result in more naysaying, squealing and doom-and-gloom from the uninitiated and uninformed.

24th Jul '10

Under Hackett, the company had grown from a laggard to a star among medium-sized oil and gas players. His strategy: super-charging Anadarko’s reliable oil and gas production on the U.S. mainland with successful wildcat exploration in the deep waters of the Gulf of Mexico, and off West Africa and Brazil. That appetite for risk turned Anadarko into one of the premier oil exploration companies.

Growth Plans

Now Anadarko’s ambitious growth plans and perhaps its existence are threatened. Unless it can find a way out, its share of cleanup costs, fines, and victims’ claims could easily add up to billions of dollars. Analysts said obligations that large are likely to put a crimp on the investment capital needed to meet Hackett’s 7 percent to 9 percent annual production growth targets.

Anadarko, based in The Woodlands, Texas, has a market value of about $23 billion, down more than $13 billion since April 20, and had $3.7 billion in cash as of March 31. Some estimates put total spill-related costs at as much as $60 billion, meaning Anadarko’s share would be $15 billion, assuming it had to pay 25 percent. That sort of tab “would grind the whole company pretty much to a halt for a while,” says Philip Dodge, an analyst at Tuohy Brothers.

Anadarko’s predicament could turn into a watershed event for the oil and gas business. Exploration companies drilling in U.S. waters and elsewhere have assumed their drilling expertise minimized risks. Instead, it has become clear since the well blowout and subsequent spill that BP and its partners face huge liabilities they never anticipated.

http://noir.bloomberg.com/apps/news?pid=20601109&sid=arxeMsafh2hk&pos=10

Anadarko: Like BP, a Gulf of Mexico Crisis bargain investing play?

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Djpreston

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