Anadarko Major Victim of Uncertainty Following Spill

NEW YORK(Dow Jones Newswires), June 2, 2010

Anadarko is particularly vulnerable to the fallout from the Gulf of Mexico oil spill, and its stock has reflected uncertainty related to liabilities and regulations that will result from the disaster.

Anadarko is getting hit on two fronts, observers said. First, because the company is BP partner in the leaking well, holding a 25% non-operating stake, it will likely be facing significant liabilities tied to the cleanup and potential litigation.

Meanwhile, Anadarko is also hurt by the fact that it focuses on exploration in the Gulf of Mexico, a market that has stalled due to a six-month drilling moratorium. If and when the ban lifts, increased regulations are expected to push up the cost of doing business for companies in the Gulf, leaving Anadarko vulnerable.

A lack of clarity on how significantly Anadarko will be affected by those factors has made many analysts cautious on the company for the time being. But others called the selloff overdone, saying the market is overlooking Anadarko's other lucrative assets, including projects off the coasts of West Africa and Brazil, both hot areas for offshore exploration.

A representative from Anadarko couldn't immediately comment for this story.

The offshore drilling group took a massive hit Tuesday on concerns about the drilling ban and after BP's initially promising effort to plug the leak failed over the weekend. Anadarko was one of the weakest performers Tuesday, falling nearly 15%, compared with a 4.3% drop in the energy group of the S&P 500.

The group was getting some relief Wednesday on gains in the price of crude oil futures and the broader markets. However, caution remains strong--in the market for credit-default swaps, the cost of insuring BP and other deep-water drilling companies' debt rose.

Shares of Anadarko were recently up 4% at $43.84, but the stock is still down about 41% since the explosion of the Deepwater Horizon rig caused the spill on April 20.

UBS said in a note Tuesday that Anadarko has lagged the large-cap exploration and production peer group by 31% since the explosion, inferring an $11.2 billion net liability for cleanup and legal costs associated with the spill. The company currently has a market capitalization of about $21.6 billion.

Using a lower-end estimate, the firm said it thinks Anadarko could fund a $5 billion liability with cash on hand and modest asset sales, but under larger liability scenarios, the company "would have to issue a greater percentage of non-producing assets and equity." The firm cut its price target on the company to $68 from $86.

Anadarko said on its first-quarter conference call on May 4 that it could choose in the future to selectively sell assets if necessary to fund its share of the potential cost.

Anadarko is seen as particularly vulnerable to the spill because it is the largest independent deepwater producer in the Gulf of Mexico. Larger diversified companies working the region will be better able to absorb the fallout of new regulation from the spill than Anadarko, analysts said.

In the first quarter, about 26% of Anadarko's production volume came from the Gulf of Mexico, according to data from the company. The company also has positions in nearly a dozen U.S. onshore natural gas resource areas, including the Marcellus, Haynesville and Eagleford shale plays.

The selloff in Anadarko shares is "severely overdone," Weeden & Co. senior energy analyst Ellen Hannan said, adding that the current price doesn't reflect the value of many of the company's assets.

Argus Research analyst Philip Weiss was more cautious. He said putting new money in the stock right now is "just speculating."

But if investors already have a position in the stock, he advises that they wait it out. Longer term, drilling activity will probably resume, oil prices will likely go up and the company has a good pool of resources it will be able to exploit, he said.

Copyright (c) 2010 Dow Jones & Company, Inc.


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