Anadarko Petroleum

BAC:

Acquisition speculation Real or not, speculation reported in London’s Daily Mail that BHP is considering a $90 per sh ($45bn) bid for Anadarko is clearly supportive for what we continue to view as the deep value play in the large cap US oils. It has also been a recurring theme since BHP laid out a strategy to expand E&P targeting many of the areas that overlap perfectly with APC and fuelled further by deep pockets left from BHP’s failed bids for Potash and Rio. But on balance, while we believe speculation of a bid at this level is supportive it is not likely credible in our view: the price is simply too low.

Anadarko’s view: $110 is the starting point

Anadarko themselves laid out a base case value at its Spring strategy update that starts at ~$110 based on $75 oil and $6 US natural gas; this number has almost certainly moved up given higher oil prices and multiple exploration successes that have de-risked another swathe of exploration prospects. This is an international E&P – and they trade differently: on the London Stock Exchange value for ‘risked’ exploration potential is routinely awarded – but with no logical US peers our long- standing view is that US market has been reluctant to pay for upside potential leaving this as a free option in the shares. But in any acquisition situation recognizing the value of exploration upside is a pre-requisite: on any reasonable assessment of risk for multi-year drilling programs in Mozambique, W Africa and the US GoM would leave risks to our base case price target significantly higher.

2011: a big year for exploration …and a shift towards oil

2010 derisked several major exploration plays leaving APC poised for one of the most aggressive drilling programs in its history. While activity will slow in the US GoM, the line up of existing discoveries and related prospects will ensure that exploration remains a key part of the investment case for the foreseeable future. Currently, our PO of $92 includes ~$36 for existing exploration success – but nothing for any future drilling program. This remains a major differentiating factor on APC’s investment case vs peers – but in 2011 this is bolstered by a step change in oil leverage as production accelerates in the Eagleford and Permian basins and start up of the first ‘mega’ projects at Jubilee and Caesar Tonga in the US GoM that can again differentiate performance over the next year.

Sum up: $90 would not be enough

It is at best presumptuous to reward acquisition speculation – especially in a lightly traded holiday market. But it does draw attention to underlying value. Exploration potential is real and remains a free option in APC’s shares; at the same time recent underperformance vs a strong E&P sector suggests a $10bn worst case for any Macondo liability fully priced in – leaving a potential settlement with BP as a binary event that risks share performance to the upside. Arguably, the discount related to this uncertainty is partly offset by any speculative premium – but at current levels we continue to view APC as a deep value exploration play and our top exploration pick amongst the large cap US oils. Maintain Buy.

 

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