Anadarko Calls Trade Most Since 2010 in Bet on 38% Gain

Bullish Anadarko Petroleum Corp. (APC) options trading reached the highest level in almost two years, reflecting speculation that a rally which lifted the stock 21 percent since June is only half over.

Call volume jumped to 90,140 on July 19, the highest level since December 2010 and five times more than bearish contracts, data compiled by Bloomberg show. That day, an investor bought about 29,000 January $80 calls while selling the same number of January $95 calls in a bet the stock will rise above $80 and go as high as $95, according to Trade Alert LLC, a New York-based provider of options-market data.

Shares of The Woodlands, Texas-based company climbed to its highest price in 2 1/2 months on July 18 after Royal Dutch Shell Plc (RDSA) started discussions over a bid for the producer’s gas assets in Mozambique. Anadarko may attract buyers, according to Raymond James & Associates Inc.’s Andrew Coleman. Settlement of a $25 billion environmental liability lawsuit brought against the company by the U.S. and chemical producer Tronox Inc. could push the stock higher, Geoff King of Van Eck Associates Corp. said.

“There’s overhang from the Tronox litigation and we would argue that it’s being overly discounted into the current share price,” King, who helps manage Anadarko shares in the $6 billion Global Hard Assets Fund (GHAAX) as a senior energy analyst at New York-based Van Eck Associates Corp., said yesterday in a phone interview. “The likelihood of an obscenely negative outcome is unrealistic. There’s been takeover speculation for some time given the discount.”

Environmental Claims

The lawsuit is over environmental claims and tort claims related to Tronox’s 2005 spinoff from Kerr-McGee Corp., which was later acquired by Anardako. Tronox filed for bankruptcy in 2009 and sued its former parent, saying it was overburdened with billions of dollars in environmental debts. The U.S., Tronox’s largest creditor on behalf of the Environmental Protection Agency, intervened, creating the current lawsuit.

Anadarko has said it is open to resolving the lawsuit through negotiations or other mechanisms, and a trial resumed yesterday. Analysts have estimated several billion dollars for a settlement are factored into the stock, meaning a resolution probably would set the stage for a rally.

Shell, Europe’s biggest oil company, is interested in the producer’s gas assets in Mozambique, where companies are looking to tap the largest discoveries in a decade, people familiar with the situation said last week. Anadarko may attract buyers because of its exploration capabilities, according to Coleman, an analyst at Raymond James in Houston.

‘Great Portfolio’

“If you’re really good at finding oil and gas, then those sorts of skills are liked by everybody,” Coleman said in a phone interview yesterday. He has an $81 share-price forecast and rates the stock outperform, meaning that he expects the stock to rise more than its peers over the next 12 months. Anadarko has “a great portfolio and at some point they’re going to get credit for it or someone’s going to take them out,” he said.

Anadarko is the second-largest U.S. oil and natural-gas producer by market value among companies that don’t have refineries or a chemical business. ConocoPhillips (COP) is the largest U.S. independent oil and gas producer. Anadarko is known for its oil and gas drilling programs in areas such as Ghana and Mozambique off the coast of Africa, in the Gulf of Mexico and in U.S. onshore projects.

Anadarko Calls

The ratio of outstanding calls to buy Anadarko versus puts to sell rose 25 percent from July 18 to 1.86-to-1 on July 20, its highest level since June 2010, according to data compiled by Bloomberg. Ownership of calls jumped to 345,025 on July 19, its highest level in almost two years.

Options traders have been pushing down the cost of bearish contracts. Puts protecting against a 10 percent decline in Anadarko on July 20 cost 3.33 points more than calls betting on a 10 percent rally, data on three-month options compiled by Bloomberg show. That was the lowest level since May 2011.

John Christiansen, an Anadarko spokesman, declined to comment on the options trading.

Exploration and production companies such as Anadarko may fall if oil prices decline, according to Scott Hanold, an analyst at RBC Capital Markets in Minneapolis.

“Until you see some stability in both the oil price as well as the economic outlook and concerns over Europe, I think the stocks will be volatile,” Hanold said in a telephone interview yesterday. He has an outperform rating on Anadarko and a 12-month price estimate of $99 a share.

Tronox Settlement

Anadarko shares may drop if the Tronox case goes against the company for much more than expected, Hanold said. A settlement in the range of $2 billion is possible, while investors are pricing in about $4 billion of Tronox costs, he said.

The oil and gas producer has fallen 5.1 percent since July 19, when a lawyer for the U.S. and Tronox said no settlement agreement was reached. Anadarko lost 5.7 percent on June 21, the biggest drop since November. Brent slipped to its lowest level since December 2010 that day.

The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), rose 9.9 percent to 20.47 yesterday. Its European counterpart, the VStoxx Index, which tracks Euro Stoxx 50 Index option prices, fell 1.5 percent to 28.02 at 9:42 a.m. in Frankfurt today.

Among the five most-owned Anadarko contracts, four were bullish. January $95 calls and January $80 calls, with an exercise price 38 percent and 16 percent respectively above yesterday’s close, had the largest open interest, data compiled by Bloomberg show. The July 19 call spread, which was made using those two contracts, is a bet the stock will rise above $80 and as high as $95 as it cuts the cost of the trade while capping potential profit.

“The demand for call options is up as investors position for the potential resolution of the litigation case,” Terry Wilson, an equity derivatives strategist at Credit Suisse Group AG in New York, said in an e-mail yesterday. “As a result, skew has flattened to a recent low.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net; Andrew Rummer at arummer@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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