Johnson Rice Upgrades Anadarko Shares Following $2B Purchase, Equity Offering

Anadarko Petroleum Corporation APC announced the acquisition of the Gulf of Mexico assets of Freeport-McMoRan Inc FCX for $2.0 billion. The deal metrics are attractive for Anadarko, and the company has the equity funding in place to make the purchase, Johnson Rice & Co’s Charles Meade said in a report. He upgraded the rating on the company to Buy.

Anadarko has sold 35.3 million shares to fund its latest acquisition. The equity offering equates to dilution of ~7 percent and yielded proceeds of $1.92 billion. The deal metrics suggest “a compelling valuation for Anadarko, reflecting a motivated seller and relatively few credible potential buyers,” analyst Meade commented.

Value Creation

Anadarko had decided on purchasing offshore assets that provide near-term cash flow to fund future onshore growth. “Equity investors should be less concerned with where cash flow comes from than where it is going, and on this point Anadarko makes it clear that this US onshore will still be the preferred destination for incremental capex,” Meade wrote.

The analyst considers the acquisition to be “a contrarian move that captures a large chunk of value.” The near-term cash flow that the acquisition would generate, along with the equity offering, delevers Anadarko. The company’s shares “are now the cheapest in our coverage group, and we strongly doubt it will stay that way,” Meade added.

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