Tuesday, August 10, 2010

More on the FBR Downgrade: "Anadarko Petroleum Engulfed by Uncertainty" (APC)

Yesterday we had the blurb: "Anadarko Raising $1.5 Billion; Downgraded At Friedman Billings on Valuation (APC)" when the stock traded up 67 cents. Today however...
With the S&P 500 down 1.18% APC is off $2.39 (4.24%) at $53.94.
Here's Barron's Hot Research:
FBR Capital downgraded the energy firm to Market Perform from Outperform.
Anadarko Petroleum (APC: NYSE)
By FBR Capital Markets ($55.68, Aug. 9, 2010)
WE ARE DOWNGRADING Anadarko Petroleum (ticker: APC) to a Market Perform from Outperform to reflect our comfort with current valuation.

Our viewpoint reflects a conservative take on continued uncertainty around the Horizon event-related ultimate net liability to Anadarko as well as uncertainty around timing and rules of re-engagement with regard to resumption of Gulf of Mexico (GOM) drilling activity.
We believe investors should wait for reasonable clarity before further reducing event-related liability factored into the current stock price. Clarity on the regulatory front is also needed before credit to exploratory and development potential in GOM is ascribed back to the stock price.
We note we are raising our price target to $60 per share from $55 per share to reflect a reduction in the markets' ascription of event-related liability to $6 billion (primarily because of progress made on containment of leakage from the time of our last note in early June) from $8 billion. Our net asset value (NAV)-based price target assumes zero credit for future GOM discoveries and $6 billion for event liability. We will await developments on these fronts as well as results on key international exploratory drilling activity before revisiting our rating and valuation.
We calculate that the market is pricing in gross $55 billion in total liability associated with the Horizon incident for the joint venture partners of the project. We estimate that 85% of this liability or $46.5 billion has been ascribed by the marketplace to BP (BP), 11% or $6 billion to Anadarko and an implied 4% to Mitsui (MITSY). We note though that this is very different than what would be implied by the working interest (W.I.) ownership of 65% ($36 billion) for BP and 25% ($14 billion) for Anadarko.
Without deepwater GOM, Anadarko to us looks like a combination of Apache (APA) and Nabors Industries (NBL); these two companies trade at an average of 6.5 times 2010 and 5.9 times 2011 total enterprise value (TEV) multiples. On a cash flow basis, assuming an average $6 billion liability for the event, 2010 and 2011 TEV multiples for Anadarko calculate to 6.4 times 2010 and 5.8 times 2011. This approach affirms to us the relative stock price performance-driven calculation of $6 billion net Anadarko share of the liability.
Prior to the event, our 3P (proved, probable and possible) NAV of $175 per share for Anadarko by end of 2012 had assumed about $9 per share in value creation from deepwater U.S. GOM exploratory activities by end of 2012. We had also assumed $15 per share of value creation from development (Caesar Tonga Phase II, Lucius, Shenandoah, and Heidelberg) activities by end of 2012.
Assuming instead no credit due to uncertainty still associated with the future of GOM subsalt drilling, our 3P NAV declines to $110 today. Our price target for such an enterprise today would be 65% the 3P NAV, i.e. $72 per share. Deducting market implied $6 billion in liability from this implies current price of $60 per share NAV-based value.

We understand Anadarko's argument for gross negligence on BP's part. Also, it seems to make strategic legal sense for BP to purse an out of court settlement with its joint-venture partners. But, we will admit that we are really not qualified to determine if the above-discussed gross and/or company-specific allocation of liability is appropriate or too high/too low. As such, we are willing to presume that the market is correct in its quantification of total and assignment of individual liabilities and instead focus our efforts on fundamental outlook and gut feel with regards to the appropriateness of liability quantification and assignment of it.
We remain fans of the subsalt GOM potential for the industry in general. To us, Anadarko's Lucius project alone could be a billion-barrel field. As such, we believe that all the associated economic ramifications of domestic oil supply sources render reinitiating of drilling in deepwater GOM as an inevitability. But, indeed, rules of engagement need clarity before we give credit to the companies involved.

Material acreage positions and/or proven successes in frontier areas like Brazil, Ghana, Indonesia, Mozambique and New Zealand; need we say more. What we would note is that we are believers that exploratory renaissance is ongoing where countries that typically would not have come to mind are due to improvements in seismic and drilling technology.During the next couple of quarters, the next catalysts on this front are Iron Clad prospect (Mozambique), Wahoo South and Itauna prospects and Itaipu appraisal (Brazil).
The company reported earnings per share/cash flow per share (EPS/CFPS) 49 cents/$2.56 versus the FBR estimate of 59 cents/$3.12 and consensus of 37 cents/$2.75. The company also revised its full-year 2010 production guidance upward by 232 million barrels of oil equivalent (MMBOE) to 256 MMBOE for 2010. The company's diversified and deep portfolio is enabling the company to deliver results despite the deepwater issues.
-- Rehan Rashid
-- Saurabh Lele

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