I’m never happy when the market hammers a stock I love — especially by exaggerated bad news.
That’s exactly what happened to me last week. On Friday, one of my favorite oil stocks, Anadarko Petroleum (APC), dropped 8% to $77 a share.
Over my four decades as an investor and three as a stock analyst, I’ve learned not to be a lemming in these situations. Jumping out of a stock when it is hit with bad news can cause even more damage. The key is to understand what’s really going on with the company.
Even if you don’t own Anadarko, you ought to watch it and learn from what just happened.
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When Bad News Happens to Good Stocks
Anadarko bought a natural gas company called Kerr-McGee in 2006 for $16.4 billion. Kerr-McGee had a subsidiary chemical company it had spun off prior to the APC takeover. That former subsidiary, Tronox, eventually went bankrupt.
The bankruptcy came because Tronox could be liable for as much as $14 billion in environmental damages, legal fees and punitive damage liability.
Last week a bankruptcy judge said Anadarko "may be liable for between $5 billion and $14 billion." Essentially, the bankruptcy judge said the Tronox spin-off by Kerr-McGee might have been improper. That would mean Anadarko automatically assumed the liability when it bought Kerr McGee.
Anyone following Anadarko these last few years, as I have, already knew the Kerr-McGee acquisition was a big mistake. Along with others, I’ve long known Anadarko likely has some liability in this matter.
How much liability does Anadarko face? I don’t think it is anywhere near $14 billion or even $5 billion. I think $3 billion is a more-realistic number. Other analysts have made similar estimates.
Here’s What That Means for Shareholders
APC shares traded as high as $98 in October, and then dropped to $77 in last Friday’s sell-off. That translates to roughly $10 billion in market value.
But the facts simply don’t justify this panic. This matter is way overblown — and I’ll tell you exactly why …
• Anadarko owns about 2.6 billion proven barrels of oil equivalent (BOE).
Proven oil reserves are currently selling for as much as $50 a barrel. Even if we assume a much-lower price of $40 per BOE, a fire-sale liquidation price would value the company’s reserves at $90 billion.
Deduct $13 billion in debt and add back $3 billion in cash, and you’ll find Anadarko’s net asset value is conservatively at least $80 billion.
At the current $79 share price, investors are saying APC is worth only $39 billion.
Even if you only figure proven reserves, deduct debt and add on-hand cash, the company is very likely worth $154 a share in a takeover. That’s well-below my previous $120 target price as well as my revised $95 12-month target.
• APC also owns billions of dollars in potential oil and natural gas reserves, along with billions in infrastructure, oil leases and subsidiary assets. These are reflected in the $80 billion fire-sale price.
• The Tronox bankruptcy case has been in court four years and will likely drag on for several more years before it is finally settled.
The bankruptcy court has NOT made a final decision. The judge’s comments last week were very preliminary. Even if he finds Anadarko responsible for $1 billion in liability, you can bet the company WILL appeal any negative decision.
In the end, I believe Anadarko has a good chance of paying no more than the $3 billion analysts expected all along.
• APC can always follow the British Petroleum (BP) approach and sell some of its less-desirable assets and use the cash to settle this case once and for all.
Anadarko Petroleum is an amazing company — one of the few oil producers with the expertise to drill in ultra-deep water.
Some Wall Street analysts are revising their APC price targets based on this news. Their opinions may pull APC down a little more in the short term — but I expect the stock to climb steadily higher in 2014.
To be cautious, I’ve also reduced my own APC 2014 target to $95 a share. At the same time, I believe $120 would be a very conservative bid if Anadarko gets a takeover bid.
When news hurts a stock like this, shares tend to oversell and they rarely go straight back up. Right now, the headlines are driving shareholders to sell in a panic.
It will take some time for the real impact of this situation to seep through the panic. Anadarko needs to consolidate. In the long run, it will be healthy for the stock.
Bottom line: Don’t panic. If you own Anadarko shares, I would continue to hold them.
And if you’re looking for an oil sector bargain … watch APC in the coming weeks!
(Disclosure: APC is an active recommendation in both my Global Resource Hunter and Junior Resource Millionaire services. For my up-to-date commentaries, plus actions to take, on APC and other natural-resource values out there, join me at Global Resource Hunter today).
Keep my valuation numbers in mind when it’s clear that the panic-selling is over. At less than half of its long-term value, this stock is a good deal in anyone’s book.
Good luck and best wishes,
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