Anadarko (APC) Might Be Most Undervalued Energy Company - Barron's

July 9, 2012 9:10 AM EDT
Anadarko Petroleum (NYSE: APC) shares are indicated for a higher open Monday following a bullish report in Barron's over the weekend.

The magazine argues that Anadarko isn't getting enough credit for finds in West Africa, Brazil, Mozambique, and in the Gulf of Mexico.

At $65.50, the stock is trading 12 percent lower since the start of 2012 and well off its near-term high of $89 reached in February. Energy companies have been hit by a swarm of falling prices from nat gas to crude.

For Anadarko, there's still litigation surrounding Tronox, which went bankrupt in 2009. Anadarko acquired the company's former parent, Mree-McGee, in 2006. The case Anadarko is in is that the 2005 IPO of Tronox by Kerr-McGee and subsequent spinoff amounted to a fraudulent transfer.

Following the $556 million sale of a 7.2 percent interest in its Gulf of Mexico holdings, the rest of Anadarko's presence in the region (27.8 percent stake) is valued at $2 billion. Additionally, Anadarko might draw $3 billion to $4 billion for its Brazilian assets currenty on the auction block.

The company is looking to expand output, which is currently at $6 percent over the past few years. In the first quarter, Anadarko produced 704,000 barrels of oil equivalent per day, up 3 percent from the same period in the prior year.

Anadarko is a little expensive when compared with peers, going for 18 times next years projected EPS and trading at a richer value than cash flow. But, some analysts argue that the full potential of Anadarko's holdings isn't being priced in yet.

Proven reserves are at 2.5 billion barrels of nat gas, NGLs, and oil. The company's target is 3 billion barrels by 2014 and has 13 billion of potential reserves in development. The company might also be open to an acquisition, which CEO Jim Hackett might be open to at the right price.

Investors might be concerned with Anadarko's bias toward nat gas production in the U.S. Last quarter, about 57 percent of production was nat gas, compared with just 31 percent for crude.

But, Anadarko holds a strong 36.5 percent interest in Mozambique, where its projects might hold 30 trillion to 60 trillion cubic feet of nat gas. Production there isn't expected to start until 2018. Total U.S. reserves are at 300 trillion cubic feet.

Barron's estimates that Anadarko's Mozambique stake might be valued at $10 billion, or $20 per share, based on a $1 per thousand cubic feet calculation.

Shares are up about 1.5 percent Monday morning.

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