Tronox was spun-off from Kerr-McGee Corp, which was later bought by Anadarko. Tronox claimed that it was saddled with all the environmental liabilities of its former parent, while Anadarko purchased the remaining petroleum business cleanly. It further claimed this as the reason that led to its bankruptcy in January 2009. This lawsuit has created a huge liability for Anadarko Petroleum Corporation (NYSE:APC), and is expected to lead to a reduction in EPS in the years to come.
For a company with a market cap of around $40 billion, this is a huge setback. The stock usually plummets during such events. But in the case of Anadarko Petroleum Corporation (NYSE:APC), its stock has avoided the drop and has been on an upward trend for a while. It appreciated more than 43% since June 2012 and more than 20% since October 2012.
Robust financial performance
One of the reasons for such optimism is that the company has been reporting strong financial results over the last few quarters. It has beaten the consensus EPS estimate in the last nine quarters. Even in Q4 2012, the company reported an EPS of $0.91 per share, beating the consensus estimate of $0.72 per share easily. Though revenue fell around 11.2% compared to same quarter last year, it still beat consensus estimates.
Natural gas discovery in Mozambique
Anadarko Petroleum Corporation (NYSE:APC) has made a new natural gas discovery off the coast of Mozambique. Its discovery well encountered about 190 net feet of natural gas in the offshore area of the Rovuma Basin. This discovery of a large natural gas accumulation is an outstanding exploration success for the company and is expected to give substantial returns in the future.
Huge oil discovery in Gulf of Mexico
The company discovered huge oil reserves in the Gulf of Mexico last month. This was one of the largest oil discoveries in Gulf of Mexico, with more than 1,000 net feet of oil pay. The fluid properties are of much higher quality than previously encountered by the industry in the same region. The reservoir is believed to be two-three times bigger than the company’s estimate of more than 300 million barrels of oil. This has increased the company’s reserves and might lead to more upside in the stock market.
Industry outlook
The outlook for the natural gas industry is highly optimistic. This is because of an expected increase in natural gas price and an expected surge in demand. Since Anadarko Petroleum Corporation (NYSE:APC) is a high volume offshore producer and operates in reserve-rich areas, this natural gas optimism will greatly help the company to report better financial results in the future.
Also, the company is not just dependent on the natural gas. It is relatively diversified, with crude oil being an important component of its offerings. Therefore, the downside potential if there is a fall in natural gas prices in future is relatively lesser than any pure play natural gas company.
Increasing price target
Credit Suisse raised the price target on Anadarko to $109 and maintained its ‘outperform’ rating on the stock. This target suggests a 34% upside from the current price. According to Barclays, Anadarko has high asset quality and expected strong value creation. They have a price target of $102 on the stock. Canaccord Genuity has also lifted its target price from $125 to $127.
RBC Capital reaffirmed their’ outperform’ rating. A number of other analysts have also expressed optimism about the stock, with a minimum price target of $100. This suggests that the market believes the stock has huge upside potential in future.
Competitors
Its larger peer BP plc (ADR) (NYSE:BP) is vertically integrated and operates at all levels of the value chain. In the past one year, the stock has been quite volatile. The company is steadily recovering from its liabilities related to Gulf of Mexico spill, which has resulted in a fall in EPS over the last few years.
But recently, BP plc (ADR) (NYSE:BP) has been reporting better financial results. The trailing P/E ratio of the company is 11.38, which is higher than the industry average, while the forward P/E ratio is lower. The EPS growth forecast for the next five years is much better than the growth in the last five years. Because of the expected growth forecast, a dividend yield of around 5%, and plans to buyback shares, the stock is expected to give sufficient returns to the investors in the long run.
ConocoPhillips (NYSE:COP) has separated its refining and marketing division into an independent company, Phillips 66 (NYSE:PSX). It has allowed the company to focus on its exploration and production business. Since June last year, the stock has appreciated more than 42%. It is currently trading at trailing P/E ratio of 8.60 and a forward P/E ratio of 9.66, which are slightly above the industry average.
But, its growth forecast for the next five years is relatively better than the growth in the last five years. The company has a high dividend yield of 4.51%. Therefore, because of the business restructuring, better growth forecast, and high dividend yield, this might be a good stock to buy.
Conclusion
Anadarko Petroleum Corporation (NYSE:APC)’s trailing P/E ratio is 17.21, which is slightly higher than the industry average. But its P/S is 3.05, trading at more than 25% discount to its industry average. Its forward P/E ratio is lower at 15.78. This is because the growth forecast for the next five years is 20.5%. The company also has a high profit margin and high return on equity. Despite being in a capital intensive industry, the debt/equity ratio of the company is lesser than the industry average.
The optimistic growth forecast is also driven by the recent natural gas discovery in Mozambique, huge oil discovery in Gulf of Mexico, upcoming Brasada plant, growing reserves and increasing production. The Tronox liability might lead to some fall in the stock price for some time, but it will recover in medium to long-term because of the factors mentioned above.
The article This Company Is a Buy Despite Its Legal Troubles originally appeared on Fool.com and is written by Shas Dey.
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