Analysts Optimistic on Anadarko's Tronox Settlement

On Thursday, shares of

spiked following the company's announcement that it has entered an agreement with the Litigation Trust in the Tronox Adversary Proceedings to resolve all claims against Kerr-McGee Corporation.

The settlement against Kerr-McGee Corporation and its subsidiaries and affiliates originated from “alleged actions” by Kerr-McGee prior to the 2006 acquisition of Andarko. The press release states the details in the settlement subject to recommendation by the U.S. Bankruptcy Court and approval of the U.S. District Court. “In exchange for a complete release of all claims asserted against Kerr-McGee, Anadarko has agreed to pay a total of $5.15 billion to the plaintiffs, which represents a principal sum of approximately $3.98 billion and 6-percent interest thereon from the filing of the complaint in May 2009. Under the terms of the settlement agreement, the Litigation Trust and Kerr-McGee have agreed to mutually release claims against each other, and the U.S. Government and Kerr-McGee have provided mutual covenants not to sue. The U.S. Government also will provide contribution protection from third-party claims seeking reimbursement from Kerr-McGee at more than 4,000 sites covered by the covenants.” Anadarko Petroleum Corporation expects the impact from the settlement to be reflected in the first-quarter 2014 financial statements. The company will receive a $1.65 billion gross tax benefit associated with the settlement offset by $1.10 billion in uncertain tax positions. The press release states that current net tax benefit for the company is approximately $550 million.

J.P. Morgan analyst Joseph Allman upgraded shares of Anadarko from Underweight to Overweight and raised the price target from $84.00 to $129.00. Allman sees the settlement as “positive” for the stock, even after Thursday's stock action. On Thursday, shares spiked from $86.04 to $95.62 in the afternoon before closing at $99.02. Andrew Coleman from Raymond James reiterated an Outperform rating and raised the price target from $94.00 to $118.00 to reflect the settlement and roll-through of reserves. Raymond James reported that Anadarko's balance sheet is in great shape with “more than enough liquidity to handle the settlement amount – not to mention its ownership of Western Gas shares valued at ~$9.8 billion in market cap to Anadarko.” The analyst laid out the company's numbers of $5 billion undrawn credit facility, $3.7 billion in cash at the 2013 year end, and $2.6 billion in assets. Raymond James models $8.3 billion in capex generating approximately 3% in annual production growth and $8.6 in discretionary cash flow. Morgan Stanley Evan Calio increased the price target on Anadarko from $110.00 to $115.00. Calio commented that with the Tronox resolution, the company will be able to focus on its portfolio, execution, and growth potential. The analyst wrote, “With the Tronox overhang removed (up to $15Bn risk), that has plagued APC for years, we see significant value unlock potential through asset sales, share buybacks and/or accelerated growth (infrastructure permitting).” Shares of Anadarko Petroleum Corporation are currently trading at $101.26, up 2.26%.