Anadarko Erases 'Silkwood' Uncertainty With $5 Billion Tronox Settlement

Apr 3 2014, 5:27pm CDT | by

Anadarko Erases 'Silkwood' Uncertainty With $5 Billion Tronox Settlement
Photo Credit: Forbes Business

Great news for Anadarko Petroleum today as it announced a settlement in its long-running litigation over Tronox. Anadarko has agreed to pay $5.15 billion to plaintiffs. News of the settlement sent Anadarko shares soaring 14.5% in the last two hours of the trading day.

Tronox was a former subsidiary of Kerr-McGee — which Anadarko acquired in 2006. Kerr-McGee had set up Tronox as a kind of pit of despair into which it loaded up decades of toxic environmental liabilities and toxic tort claims, balanced them out with a handful of assets, then spun it out as a standalone public company.

Free of Tronox, Kerr-McGee had become far more attractive to suitors; Anadarko paid $16.4 billion in cash for the company, plus the assumption of what it initially estimated as $1.6 billion in debt and “other liabilities.“ It hadn’t counted on being haunted by those Tronox liabilities, which reared their head after Tronox filed for bankruptcy in 2009, and at one point were tallied up at $25 billion, encompassing more than 2,500 sites across the country. Kerr-McGee had an infamous environmental record; the movie “Silkwood” depicted the tragedy of employee Karen Silkwood, who claimed to have been exposed to deadly levels of radiation while working at on of the company’s uranium processing sites.

In December of last year a judge in the case ruled that Kerr-McGee had improperly spun off Tronox and that Anadarko could be on the hook for as much as $14 billion in cleanup and claims. Anadarko shares had plunged 9% on that news.

The Tronox settlement will erase a huge asterix that investors have had penciled in next to Anadarko for years. Shares in the company had doubled in the five years up today — well outpacing the likes of Apache Corp., Marathon Oil and Devon Energy. Yet Anadarko has been one of the most successful explorers in recent years, participating in vast discoveries offshore Mozambique and Ghana, while capitalizing on vast acreage holdings onshore U.S., especially in the Wattenberg of Colorado, Eagle Ford and Permian basin of Texas. Nicholas Pope, analyst with Cowen & Company, figures that Anadarko could have 20,000 potential drilling locations in the Wolfcamp shale of Texas.

In the Gulf of Mexico it is working on appraising the potential blockbuster Coronado discovery and is currently drilling the Deep Nansen well. Last year I visited the Texas shipyard building out the spar that will produce its Lucius field. Analyst Pope figures that Anadarko’s big offshore projects could add 180,000 bpd of new production by 2020. That would be a 23% boost to the company’s current run rate of roughly 775,000 barrels of oil and natural gas equivalents per day. The company has been living within its means, with expectations of $10 billion in discretionary cash flow this year funding just over $8 billion in capital spending.

Anadarko has for years been whispered about as a juicy takeover target with a lot of optionality for a global supermajor. The company most often mentioned as a buyer is Exxon Mobil. It may be no coincidence that Exxon decided to build its massive new office park just a couple miles from Anadarko headquarters in The Woodlands, just north of Houston. It’s unlikely that all the upside potential in Anadarko has already been taken.

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