Anadarko Surges As It Puts Tronox Lawsuit Behind It

Anadarko Corp. agreed to pay $5.15 billion this Thursday to settle fraud claims arising from its 2006 acquisition of Kerr-McGee. With this agreement, which is subject to the bankruptcy court’s approval, the company can put the Tronox lawsuit behind it. This will help it focus more on unlocking greater value from its core operations. Since the court’s ruling last December, uncertainties associated with potential liabilities arising from the lawsuit had been weighing on Anadarko’s stock price. However, after yesterday’s announcement, it surged more than 14% to close at an all-time high of over $99.

We currently have a $85 price estimate for Anadarko, which we will soon be updating based on the recent announcement.

See Our Complete Analysis For Anadarko

In 2006, Kerr-McGee spun off its chemicals business to form Tronox. Just a few months later, Anadarko acquired Kerr-McGee for $18 billion. Tronox inherited huge environmental liabilities from its parent that forced it into bankruptcy in 2009. Soon after filing for bankruptcy, the company filed a lawsuit against Kerr-McGee accusing it of deliberately setting it up for failure.

When Tronox emerged from bankruptcy in 2011, a litigation trust was formed to pursue the lawsuit against Anadarko and Kerr-McGee. Tronox transferred 88% of its interest in the lawsuit to the federal government. December last year, the bankruptcy judge sided with Tronox and agreed that Kerr-McGee had acted improperly during the spin-off of its chemicals business. He ruled that Anadarko might have to pay anywhere between $5 and $14 billion in damages. This weighed significantly on the company’s stock price.

During the 2013 fourth quarter earnings call, Anadarko officials said that according to their estimates, liabilities arising from the case should fall between $850 million to $4 billion. The company also set aside $850 million as “Tronox-related contingent liability” last year. However, according to the recent settlement agreement, the company would have to pay $5.15 billion to settle all charges related to the Tronox lawsuit. It would also be entitled to a net tax benefit of around $550 million as a result of the settlement. Overall, it would imply a net cash payout of around $4.6 billion, which is almost in line with our earlier estimate of $4 billion. We arrived at this estimate based on the probability-weighted average of various possible outcomes. (See: Anadarko Revised To $85 Billion As Tronox Liabilities Weigh On A Strong Operational Outlook)

We believe that Anadarko will be able to easily arrange for the settlement amount from its available cash balance, credit limit and the recent sale of assets in China. At the end of 2013, the company had ~3.7 billion in cash and a credit facility of $5 billion. Additionally, it also sold its stake in two oil fields in China for over $1 billion recently. Therefore, we do not expect this settlement to have a negative impact on the company’s capital program or production growth target for the year. Anadarko plans to grow its total hydrocarbon production by 6-7% y-o-y this year by spending around $8.5 billion on leasing rigs, floating oil platforms and installing pipelines and gas processing facilities.

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