Anadarko Should Embrace Settlement in Tronox Lawsuit

Anadarko Petroleum Corp. shares fell to a 10-month low and its bonds tumbled after a court ruling that may result in a $14 billion payout, prompting calls for settlement to prevent a prolonged drag on the oil company.

A judge yesterday held the The Woodlands, Texas-based company and its Kerr-McGee unit liable for environmental cleanup from a chemical company spun off in 2005. Anadarko said it would appeal the ruling, which would require it to restore polluted sites and compensate 8,100 claimants.

“This court ruling, if it stands, would deal Anadarko a big financial blow,” Fadel Gheit, an analyst with Oppenheimer & Co. in New York, said in an e-mail today. The maximum ruling could wipe out as much as 20 percent of Anadarko’s value, Gheit said.

U.S. Bankruptcy Judge Allan Gropper in Manhattan has yet to decide the amount Anadarko must pay, indicating the penalty may fall between $5 billion and $14 billion. The higher end is 10 times the $1.4 billion the company had said was its worst-case expectation. It’s the largest award ever in bankruptcy for a U.S. government environmental claim, according to a statement from the Justice Department, Environmental Protection Agency and U.S. Attorney’s Office for the Southern District of New York.

Anadarko, the third-largest U.S. independent oil and natural gas producer, fell 6.4 percent to $78.30 at the close in New York, the lowest closing price since Jan. 18. The company’s market value dropped to $39.4 billion.

Two-Year Low

Anadarko’s $750 million of 6.2 percent bonds due March 2040 dropped 3.8 cents on the dollar to 109.8 cents to yield 5.49 percent in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest level since closing at 109.5 in December 2011.

Facing a final outcome that may take many years of legal wrangling, the company should agree to a settlement of between $5 billion and $8 billion, Citigroup Inc. said in a note today to clients.

Lack of a faster resolution “would create a substantial overhang on Anadarko’s stock price,” Citigroup said in the note. Analysts from ISI Group Inc. said a settlement is a “likely” result of the ruling.

Investor enthusiasm for Anadarko already has been kept in check for several years by the lawsuit involving Tronox Inc. The chemical company was spun off from Kerr-McGee, which Anadarko later acquired. Burdened by environmental debts, Tronox filed for bankruptcy in 2009 and sued Anadarko and Kerr-McGee the same year. It emerged from bankruptcy in February 2011.

Appeal Ruling

Anadarko Chairman and Chief Executive Officer Al Walker promised to appeal the ruling.

“Given the significant factual evidence supporting our position, we vehemently disagree with the judge’s memorandum of opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered,” Walker said in a statement yesterday.

To determine the final size of the damages, the judge asked the company to file within 30 days a so-called proof of claim in Tronox’s bankruptcy case. How that claim is handled will help determine whether the company owes $5 billion, $14 billion, or something in between. Gropper also gave the winners in the case 30 days to file a request to have their legal fees reimbursed by Anadarko.

‘Evade Debts’

The court found that Kerr-McGee fraudulently conveyed assets “to evade its debts, including its liability for environmental clean-up at toxic sites around the country,” according to the government statement today. The U.S. government had sought $25 billion in damages in the case.

During the case, Anadarko contested some of the facts presented by the U.S. and also argued that the company could not be held liable under various legal theories.

For example, the company argued that Gropper did not have authority to issue a final judgment because federal bankruptcy courts have limited power over certain kinds of lawsuits. Gropper disagreed, finding that Anadarko consented to his authority.

While Tronox won’t receive funds from the ruling, since 88 percent of the judgment will go toward pollution and cleanup costs, it may reap hundreds of millions of dollars annually in tax benefits, the Stamford, Connecticut-based company said in a statement. Its shares rose 7.5 percent to $22.76.

Anadarko Uncertainty

For Anadarko, the uncertainty surrounding a final outcome and the amount of the liability resembles the impact of the 2010 Gulf of Mexico oil spill on the value of companies involved, analysts from Tudor Pickering Holt & Co. said in a note to investors today.

Sales of as much as $18 billion of properties, including assets in Brazil and Mozambique, could be used to fund a potential payout, Tudor said.

The company has “substantial liquidity” including cash on hand of more than $7 billion, ISI Group said in a note yesterday.

A strong balance sheet, a good relationship with creditors and demand for any issued shares will allow Anadarko to avoid asset sales at fire sale prices, Eliecer Palacios, CEO of PetroRock Energy LLC, an energy investment and advisory firm, said in a phone interview yesterday.

‘Big Dent’

“Anadarko is a pristine company,” said Palacios, who owns shares in the company. “This is a big dent, nobody wants this, but investors should look beyond Tronox and this chapter. It’s a phenomenal story.”

Analysts at Tudor, Stifel Nicolaus & Co., ISI Group and Global Hunter Securities LLC recommended that investors buy Anadarko stock as the total value of the company’s assets far exceeds its current share price. The stock has 30 buy ratings, six holds and one sell, with a 12-month target price of $107.74, according to the average of 31 analysts’ estimates compiled by Bloomberg.

ConocoPhillips is the largest U.S. independent oil and gas producer by market value, followed by EOG Resources Inc. Independent oil companies don’t own refineries or a chemical business.

(Updates with comment from government in fourth paragraph.)
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