Anadarko $5 Billion Settlement Clears Explorer for Growth

The $5 billion settlement of a long-running pollution case will free Anadarko Petroleum Corp. to rival the world’s biggest energy companies and pursue global ambitions from Mozambique to the Gulf of Mexico.

That is, if they don’t get bought first.

Built for a potential sale by former Chief Executive Officer James Hackett, a renowned deal maker, Anadarko may have outgrown all but a few possible suitors. Two major legal cases in the past five years involving toxic pollution have kept buyers and investors away. With yesterday’s agreement resolving the last of its liability, the question now is whether Anadarko will continue growing, or become the latest “independent” to be swallowed by Big Oil.

“This is a company that people have been thinking the majors would buy for a long time now, but I don’t think they’re in a buying mood,” said Tim Beranek, a money manager at Cambiar Investors LLC, which owns nearly 2 million shares. Anadarko will be able to grow faster than many people expect, he said. “They have a rich portfolio and there’s a lot that they can do.”

Anadarko shares soared 15 percent to an all-time high after it agreed with the U.S. Justice Department to pay $5.15 billion to clean up 85 years worth of pollution left behind by its Kerr-McGee unit.

Toxic Legacy

An estimated $4.4 billion from the settlement, the government’s largest recovery ever for environmental cleanup, will be spent on contamination that stretches from Western uranium mines in Navajo territories to wood-treatment plants in Mississippi and Pennsylvania. The rest will go to injury claims, according to court documents.

“Investor focus can now return to the tremendous value embedded in Anadarko’s asset base, allowing our peer-leading operational and exploration results to again become the basis for valuation,” said Chairman and Chief Executive Officer Al Walker in a statement yesterday.

Anadarko rose 1.3 percent to $100.35 at 11:48 a.m. in New York after the average price target of 28 analysts rose to $111.32, according to data compiled by Bloomberg. The company’s market value rose to $51.4 billion.

Macondo Liability

The company held $3.7 billion in cash at the end of 2013 and received proceeds of $3.1 billion from asset sales in the first three months of this year, as well as $5 billion in available capacity in a credit revolver, William Featherston, an analyst at UBS AG in New York, said today in a note to investors. Those funds and other potential asset sales give the company more than enough cushion to pay for the settlement, he said.

Before this settlement, The Woodlands, Texas-based Anadarko also had been weighed down by liability from the 2010 Deepwater Horizon spill in the Gulf of Mexico for its 25 percent stake in BP Plc’s Macondo well.

The well spewed more than 4 million barrels of oil into the Gulf of Mexico after a blowout in 2010, closing fisheries and tainting shorelines from Texas to Florida. The company paid BP $4 billion to resolve its share of liability for private-party lawsuits related to the spill. The settlement didn’t cover any fines from the U.S. government.

Remaking Anadarko

Former CEO Hackett remade Anadarko after taking charge of the company in 2003, fresh from remaking and selling Ocean Energy Inc., where he’d also been CEO. Anadarko shares had declined 16 percent the previous year as the company missed financial targets. Hackett’s acquisitions of Kerr-McGee and Western Gas Resources in 2006 for a total $21 billion were at first panned by industry analysts, but helped triple Anadarko’s market value as oil prices rose over the next decade.

Hackett pursued exploration projects in Africa and the Gulf of Mexico that have helped boost production to 781,000 barrels a day of oil and natural gas, the fourth-highest of any U.S. energy company. Anadarko plans to grow sales by as much as 7 percent this year. It’s considered to be an “independent” oil and gas company because it focuses exclusively on exploration and production.

The global explorer has announced discoveries off the coast of Mozambique that may contain 70 trillion cubic feet of gas, enough to meet annual U.S. residential demand for 14 years.

‘In Play’

“They are likely to be in play as an acquisition candidate” for major oil companies such as Exxon Mobil Corp., said Ed Hirs, who teaches energy economics at the University of Houston. Anadarko also may seek a merger with EOG Resources Inc. or Noble Energy Inc., similar-sized companies that have developed significant capabilities drilling across the U.S. and on global prospects, he said.

Anadarko may now be too big for buyers like Royal Dutch Shell Plc or ConocoPhillips that have promised shareholders big dividends, share buybacks or asset sales to increase value. As companies increasingly spend more on land drilling opportunities, Anadarko may see lower costs in its deepwater prospects, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

“That would make it even more attractive,” he said.

Freed from its litigation liability, Anadarko can now spend more on growth and make better progress on finding additional partners to develop Mozambique, said Ted Harper, who helps manage more than $10 billion for Frost Investment Advisors LLC, including Anadarko shares.

“Hopefully now some of these discussions on deals can move forward,” he said. “Time will tell.”

Spokesmen for Shell and EOG declined to comment. Spokesmen for ConocoPhillips, Noble and Exxon didn’t immediately return calls.

‘Stick’ Taxpayers

The U.S. lawsuit centered on whether Anadarko should have to pay for the environmental damages wrought by Kerr-McGee, which in 2005 had spun off its chemicals business and environmental liabilities just months before being acquired.

Kerr-McGee “tried to shed its responsibility for this environmental damage and stick the United States taxpayers with the huge cleanup bill,” Deputy Attorney General James Cole said yesterday at a news conference in Washington.

Anadarko will record the impact of the settlement in its first-quarter financial statements, including a $550 million net tax benefit, according to the company.

The lawsuit is Tronox Inc. v. Anadarko Petroleum Corp., 09-ap-01198; and the bankruptcy is Tronox Inc., 09-bk-10156, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.