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Anadarko to Hold Settlement Talks as Trial Delayed

Anadarko Petroleum Corp. and its Kerr-McGee unit will hold settlement talks while a trial over a $25 billion lawsuit brought by the U.S. and Tronox Inc. is adjourned for a week, according to court papers. Anadarko rose as much as 4.3 percent.

The parties may also engage in mediation or other forms of dispute resolution, and all settlement talks will be confidential, according to a notice filed today in U.S. Bankruptcy Court in Manhattan, where the trial is being held before Judge Allan Gropper.

“For the first time the court has now indicated publicly that the parties are in settlement discussions,” said Thomas Claps of Susquehanna International Group, an analyst who is following the trial. A settlement would eliminate the “litigation overhang” that comes with the risk of a judge or jury deciding a high-stakes lawsuit, Claps said.

John Hueston, a lawyer for the U.S. and Tronox, didn’t immediately return a call for comment on the filing. John Christiansen, a spokesman for Anadarko, declined to comment.

Justice Department

The lawsuit was initially brought by Tronox against Anadarko in 2009. It was taken over by the Justice Department on behalf of the Environmental Protection Agency. The government seeks to recover $25 billion to clean up 2,772 polluted sites and compensate about 8,100 tort claimants who said they were harmed by toxins.

Anadarko rose 2 percent to $68.00 at 2:27 p.m. in New York Stock Exchange composite trading. The shares earlier reached $69.42.

‘We think there is around $5-6 billion in the stock price for the liability, although we continue to think something less will come out of a settlement,’’ RBC Capital Markets LLC analyst Scott Hanold said in a research note today.

A trial began May 15, with Anadarko facing testimony from more than 50 witnesses. The government seeks $15 billion in assets allegedly transferred in 2005, plus $10 billion in interest and appreciation, according to a lawyer involved in the case.

Gropper had told parties to mediate the dispute last November. By early June, with the trial under way, investors discounted the company’s market value by $2 billion, which implied they were pricing in a possible settlement or penalty of about that amount, Jeffrey Campbell, an analyst for Pritchard Capital Partners in New York, said at the time.

Anadarko’s Board

Witnesses who have testified include bankers, scientists and a mayor who says Kerr-McGee’s toxins destroyed his town, as well as Luke Corbett, the Kerr-McGee chief executive officer from 1997 to 2006 who now sits on Anadarko’s board.

The case tests whether money can be recovered from a successor to a polluting company, even when a bankruptcy ostensibly cleaned the slate.

According to the complaint, The Woodlands, Texas-based Anadarko’s Kerr-McGee unit was part of a two-step transaction that defrauded the EPA of money to clean 2,772 polluted sites.

After an internal reorganization started in 2001, Kerr-McGee spun off its chemicals business and old environmental liabilities as Tronox Inc. beginning in 2005. About three months after the transaction was completed, Anadarko offered to buy Kerr-McGee’s oil and gas assets for $18 billion.

Tronox Bankruptcy

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 EPA, intervened, creating the current lawsuit.

Kerr-McGee hid many polluted properties, some of which were referred to as “secret sites,” the U.S. said.

Anadarko said Kerr-McGee was reorganizing to separate the chemical business from the oil and gas business and maximize shareholder value. “All relevant parties believed that both businesses were healthy,” lawyers for Anadarko wrote in court papers.

“The secret sites weren’t secret,” Thomas Lotterman, a lawyer for Anadarko, told Gropper in a court hearing. “The company’s own auditor said they weren’t an issue.”

David Zott, a lawyer for the U.S. and Tronox, said in opening statements May 15 that evidence would show a handful of Kerr-McGee executives tried to obscure the reason for the Tronox spinoff. He cited evidence that in May 2001, Kerr-McGee’s chief financial officer deleted a reference to the company’s environmental issues from a presentation to the board on why it should authorize a spinoff.

‘Ultimate Endgame’

“All the way back in May 2001, they were thinking about the ultimate endgame,” Zott told Gropper. He said nine lawyers spent 86 days researching the issue of fraudulent conveyance -- the legal theory being used in the lawsuit to seek recovery of environmental costs.

“A tall tale well told is still a tall tale,” Lotterman said in his opening statement the same day. Lotterman said evidence would show that the U.S. is trying to make everyday business activities sound like a scheme to defraud the government by weaving together select facts with the benefit of hindsight.

Anadarko Chief Executive Officer Al Walker said at an energy conference on June 6 that the company isn’t opposed to a settlement.

The plaintiffs run the risk of getting nothing if the judge agrees with Anadarko and “may start to become a little more reasonable and rational around what a settlement might look like” as the case goes forward, Walker said then.

The bankruptcy case is Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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