Heard on the Street: Anadarko Seeks Scarce Rigs

, Dec 27, 2006 (Dow Jones Newswires from the Wall Street Journal)

Energy company Anadarko Petroleum Corp. has something harder to find than oil -- the floating rigs that explorers need for drilling.

A boom in drilling deep-water oil and natural-gas wells in the Gulf of Mexico and off the coasts of Brazil and West Africa has driven demand for the specialized rigs needed to work in depths as much as two miles. Deep-water rigs are in short supply, and companies are scrambling to get their hands on them, which could pay off for Anadarko.

A midsize company based in The Woodlands, Texas, it pegged the looming scarcity early on, and moved quickly to secure board approval last year to spend $1 billion locking down rig leases.

Anadarko now has a larger inventory of Gulf-based rigs under contract than any other major oil company, giving it an extraordinary competitive advantage. Fields ripe for exploration can't be drilled without the rigs. Anadarko's leases give it a powerful bargaining chip to barter for stakes in more deep-water oil and gas prospects.

Its moves have gone largely unappreciated on Wall Street, overshadowed by investor concerns about the company's balance sheet. In a continuing effort to reduce debt, Anadarko yesterday agreed to sell two Louisiana natural-gas fields for $1.6 billion to EXCO Resources Inc.

Anadarko's stock is off 10% for the year to date, compared with a 20% gain for the broad Dow Jones Wilshire Oil & Gas Index, and it has underperformed midsize, North America-focused peers like Devon Energy Corp. and XTO Energy Inc., which are both up for the year.

Of the 32 analysts who cover Anadarko, only 17 have "buy" ratings on the stock, with more downgrades than upgrades in the past six months, according to Thomson Financial. Some 25 out of 31 analysts rate XTO Energy a buy. Devon Energy has 16 buys out of 28 analysts.

Anadarko is a relatively cheap stock in the energy sector, which has been riding a multiyear bull market. Anadarko's price-to-earnings ratio is 5.6, compared with peers Devon and XTO Energy, both of which trade at a 9.5 P/E ratio.

Anadarko's lackluster stock performance is due in part to market apprehension over recent acquisitions. In June, it announced two big all-cash deals, acquiring Kerr-McGee Corp. and Western Gas Resources Inc. for a combined $21.1 billion. In the process it assumed $2.2 billion in debt from the two companies and borrowed an additional $24 billion to finance the deals.

Anadarko told investors it would sell assets to pare back debt levels, leaving stockholders biting their nails about what the company would shed -- and at what price. Investors also worried the company would issue additional stock to raise cash, which would dilute shareholdings.

The worries might ease. Anadarko has executed four major asset sales at attractive prices, disposing of a Canadian subsidiary, Louisiana gas fields and holdings in the Gulf of Mexico and yielding $8.1 billion. After the sales, some investors are starting to believe any additional issuance of shares will be small.

An Anadarko spokesman confirmed that if "we successfully execute our planned asset sales, we would not likely need to issue additional equity."

Another hurdle remains. Anadarko has run into unexpected production problems at one of its major Gulf of Mexico oil reservoirs, which caused its average spending on finding and producing oil to rise in 2006. Earlier this month, the company said it was reclassifying some of its "proved" reserves in the field -- barrels of oil it had promised it would be able to produce -- to a less-certain "probable." Anadarko executives say they are being conservative and expect to pump the oil, but such reserve reclassifications are unusual enough to rattle investors.

Looking beyond those concerns, Anadarko's rig strategy shows off the company's entrepreneurial culture at a time when other energy-industry companies are getting stodgier. As of September, Anadarko had rigs under contract for a total of 339 months reaching out as far as 2012. The closest competitor, BP PLC, had rigs contracted for a total 196 months, according to energy-research firm Pickering Energy Partners Inc.

"They are using their rig access to leverage into high-quality deep-water opportunities, which is smart," says Jonathan Wolff, an energy analyst at Credit Suisse Securities, which has a buy rating on the stock. Its parent company, Credit Suisse, has provided it investment-banking services in the past year.

Anadarko is especially focused on using its rigs to win business in the Gulf, which is red hot right now. Despite hurricane damage in 2004 and 2005, oil and gas discoveries are rising in the Gulf, tax benefits can be alluring and the region is politically stable, unlike places such as Venezuela, Russia and the Middle East.

The tactic already has begun paying off for Anadarko. In one recent rig-barter deal, Anadarko acquired a 45% stake in Newfield Exploration Co.'s Boa prospect in exchange for the use of a rig. In another deal, Anadarko obtained a 35% stake in Norsk Hydro ASA's Green Bay prospect -- located very close to significant oil finds -- by offering a rig. Both prospects are deep-water Gulf of Mexico, a couple hundred miles south of Louisiana. Anadarko executives say they have more trades in the works.

R. Lewis Ropp, an energy analyst at Dallas-based investment manager Barrow, Hanley, Mewhinney & Strauss Inc., which owns about 1.1 million shares, says Anadarko hasn't been rewarded by the market for its efforts.

"Should the fundamentals start to move in their favor, we'd be inclined to add to our position," Mr. Ropp says.

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