News Column

Contemplating on takeovers, spinoffs and energy shares

April 28, 2014

Anadarko Petroleum has risen 20 per cent since early March to $100 on its decision to pay $5.15 billion to settle all claims against its Kerr McGee subsidiary in the Tronox lawsuit.

I had recommended Halliburton in successive columns in mid-2012, when it traded near 30, as one of the most significant turnaround stories in North American oil and gas services, a classic beneficiary of the shale revolution and Gulf of Mexico deepwater drilling. Halliburton has doubled since mid-2012 to 64 now. Energy, 10 per cent of the S&P 500 index, is a deep-value cyclical sector that will be a clear beneficiary of higher US capex Chinese monetary stimulus and even Russia/Mideast geopolitical risk. Energy is immune to higher rates, attracts index flows and is a hedge against index softness.

Anadarko Petroleum has risen 20 per cent since early March to $100 on its decision to pay $5.15 billion to settle all claims against its Kerr McGee subsidiary in the Tronox lawsuit. This removes a major legal sword of Damocles overhang on the shares and investors can now focus on its fabulous fundamentals in Eagle Ford shale, deepwater and exploration/production. Anadarko is one of the world's highest-production growth oil and gas companies, making it an obvious acquisition candidate for a reserve replacement ratio challenged a member of the Seven Sisters. Anadarko is one of the world's most-liquid rich reserve-to-ratio production firms, another attractive metric for Big Oil.

I admit Anadarko trades at a valuation premium to its exploration and production companies in the world. Is this justified? Yes. Anadarko is among the biggest independents in the world. Anadarko production growth can well be a stellar 10 per cent per annum in the next three years, given its fabulous franchises in onshore Texas, deepwater Gulf of Mexico, Algeria, Ghana, offshore East Africa, Indonesia, China and New Zealand.

Its reserves are now almost 2.8 million barrels of oil equivalent. Anadarko also produces 800,000 barrels of oil equivalent. Anadarko is ideally positioned in Africa, with its Algerian/Ghanaian oilfields matched with the elephant offshore gas fields off Mozambique. This alone could add 200 million cubic feet of gas production by 2015. If ever there was a more compelling takeover candidate for Big Oil, Anadarko is it, given its scale, assets, reserves and Texans shale/African producing offshore gas fields.

Occidental Petroleum, or Oxy, is a legend in the oil and gas business. Founded by the wildcatter/art dealer Dr Armand Hammer (who dealt with every Kremlin boss from Levin to Gorbachev), Oxy was a pioneer in epic oil strikes in Libya, the North Sea and Alaska. Oxy is now on the eve of a historic restructuring. Management intends to sell a portion of oil/gas assets in the Arab world and non-core midstream businesses to focus on its California and Texas shale energy business. This will lead to a valuation rerating on Wall Street since "pure play" domestic exploration/production companies command of a far higher multiple than global, integrated supermajors.

Oxy's Middle East oil and gas assets span Bahrain, Iraq, Libya, Oman, Qatar, Abu Dhabi and Yemen. With Brent above $100, geopolitical risk galore in multiple oil provinces (e.g. Russia, Libya, Nigeria, Iraq, Sudan, Yemen, etc), improved refined product spreads and a surge in the Texan Permian Basin output (where Oxy is the largest operator). Oxy Chem/midstream businesses is in restructuring and management has confirmed plans to spin off its California exploration assets. Terrorist attacks on an oil pipeline that transports crude from an Oxy operated oilfield in Colombia has hit the shares.

However, I believe Oxy is not expensive at 96 or at 12 times earnings and a three per cent dividend yield. If Oxy's restructuring is embraced by the Street, the shares could well lead to $115-$120 a share sometime this fall. Still, in the oil business the best laid plans of mice and men oft go astray, as Robert Burns rightly observed.

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Source: Khaleej Times (United Arab Emirates)

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