Shares of Anadarko Petroleum (APC) are down sharply Tuesday after a lawsuit tied to a year-old Colorado explosion was revived. As the macro environment for the oil markets remains benign, this is providing an entry opportunity for long-term investors in a world-class producer with strong cash flow and an attractive exploration upside.
Anadarko stock traded down as much as 4% after the Denver Business Journal reported that a class-action lawsuit led by the Philadelphia-based Iron Workers Benefit and Pension Fund had been revived on grounds that Anadarko management had received safety warnings prior to a deadly explosion in Firestone, Colo., on April 17, 2017. I think the market is overreacting over this headline ,and while Anadarko will pursue a resolution to this matter in court, it's a near-term distraction for investors over the company's long-term growth plans.
The class-action lawsuit was dismissed last June by U.S. District Court Judge Lee Rosenthal, chief judge in the Southern District of Texas, who ruled the lawsuit failed make specific-enough allegations.
But the plaintiffs' latest complaint reiterated claims that Anadarko prioritized production over safety in the months after it swapped 50,000 acres and thousands of wells in the Wattenberg oil field north of Denver with Noble Energy (NBL) in 2013; and that the problems were compounded by the downturn of oil prices which caused Anadarko to lay off hundreds of employees while simultaneously increasing its drilling activity in the Wattenberg.
We anticipate this issue to remain outstanding in the near term, as an investigation into the explosion by the National Transportation Safety Board remains open.
APC has $800 million in potential incremental cash flow at $60 oil, a comfortable commodity price floor given the current macro environment. Anadarko is refocusing its capital expenditures, building strategic infrastructure in the Delaware Basin, a subset of the prolific Permian Basin in West Texas, which will allow the company to produce natural gas with the appropriate treating capacity.
In addition, APC has secured firm transportation for about 50% of its 2018 production and 100% of its 2019 production, a strong positive driver at a moment when many producers are struggling to get their commodities off the ground. Onshore oil volumes rose 47% in the latest quarter.
Gulf of Mexico
Anadarko peer and partner Kosmos Energy (KOS) announced Monday it has entered the U.S. deepwater Gulf of Mexico (GoM) following the acquisition of Deep Gulf Energy, a private-equity-backed portfolio company controlled by First Reserve Corp. This is an indication that producers are looking at profitable deepwater wells that compete with shale economics. Anadarko is one of the largest independent operators in the Gulf.
APC shares are down almost 6% since the July 31 earnings release, erasing substantial gains in the stock since early July. Nevertheless, APC is up 20% year to date, a significant outperformance vs. benchmarks: +4% for the Energy Select Sector SPDR ETF (XLE) and +11% for the SPDR Oil & Gas Exploration & Production ETF (XOP) .
I remain bullish on the stock as we think APC's management will steer the ship clear and focused on the execution of its growth plan.