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Anadarko Petroleum (APC)
Anadarko Petroleum Takes A $24bn Leap
What does an oil company worth $20bn do when it wants to increase its North American output? It takes out a $24bn line of credit and buys two companies at the same time. Texas-based Anadarko Petroleum, one of the largest independent oil and gas exploration companies, is attempting to acquire both Kerr-McGee (KMG: Charts, News, Offers) and Western Gas Resources (WGR: Charts, News, Offers) in a one of the largest deals since ConocoPhillips, the nation's largest energy company, dropped $35.6bn in its purchase of Burlington Resources last fall. The deal is a big step for the company as it moves to increase its stake in North American energy reserves. The combined companies could pump in $17bn in annual revenues, but that doesn't come without some significant risk.
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Anadarko Petroleum has a fever, and the only prescription is more merging. The company is shelling out $16bn in cash ($70.50/share) for Kerr-McGee, representing a premium of 40% over the current share price. That's round one. Round two has Anadarko pick up Western Gas Reserves for $4.74bn, a 49% premium. The amount of purchases (and assumed debt) total to roughly $23bn. To put this in perspective, Anadarko has a market capitalization of $20bn and has roughly $820m. In other words, Anadarko is making a purchase somewhat larger than its market capitalization. That's a pretty gutsy move for any company, but company executives (and the deal's financial brokers) think that it's certainly worth it.
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The purchase money is going to have to come from someplace. Luckily, UBS (UBS: Charts, News, Offers), Credit Suisse (CSR: Charts, News, Offers) and Citigroup (C: Charts, News, Offers) (don't worry, Goldman Sachs (GS: Charts, News, Offers) also has its fingers in the deal) were more than willing to help ink a deal that will have Anadarko use proceeds from free cash flow from operations and new stock to reduce the $24bn in debt.. There is likely to be some early-round divesting of non-core assets as the company moves to a more focused portfolio as well, which is likely to result in some one-time income adjustments that will eventually smooth out. While the company is likely to let go of some employees as administrative facilities are combined and streamlined, investor fears will still need to be assuaged. After all, the company is taking on as much debt as its current market capitalization. Anadarko president and CEO Jim Hackett has pushed the purchase pretty hard, emphasizing core competencies, cost reductions, the possibility of growth through the acquisition of complementary assets and other pro-merger jargon.
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The company plans on issuing new stock and will take on a significant amount of debt to cover the two new purchases. This will effectively drive down the price of the Anadarko stock as shareholders see their equity stake in the company watered down. An increase in debt will also limit the amount of dividends available per share (currently a 0.7% 5-year average dividend yield). Anadarko and its financial advisors have yet to comment on the new amount of shares to be made available, which will depend on the sale of assets and how profitable the new gas and oil fields are expected to become. Currently, the company has about 116m in outstanding common and preferred shares. The company will also assume $1.6bn in debt from the Kerr-McGee and $560m in debt from the Western Gas deals. As a result of the sudden up tick in purchases, Standard & Poor's is debating a cut in Anadarko's rating (currently BBB+, the third lowest investment grade ranking), while in turn raising Kerr-McGee's and Western Gas' to “investment grade” from their current BB+ (highest junk rating). Part of the possible rate downgrade comes from the risk associated with integrating multiple large companies simultaneously and the high cost of leveraging needed to cover the purchases.
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Is the purchase of these two companies a good idea for Anadarko? Most likely, yes. The two acquisitions have significant interests in both Gulf of Mexico and Rocky Mountain oil and natural gas fields, which happen to be two of the major growth areas in the US. While some risk might be assumed in the Gulf, especially after last fall's hurricane season, the risk might be reduced if the government continues to push for the US to be relatively self-sufficient in its energy consumption. At the same time, Anadarko and energy analysts believe that natural gas and other energy prices will remain high, demonstrated by the willingness to pay a significant premium for the two companies' shares. Depending on the movement of energy prices over the coming months, the three combined companies might be looking at upwards of $17bn or more in combined revenues. This might make it one of the more profitable independent energy exploration companies in the country.
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Profile |
The Company's principal activities are the exploration, development, production and marketing of oil and gas. It operates in three segments: Oil and Gas Exploration, Marketing and Trading and Mineral business. Oil and Gas segment finds and produces natural gas, crude oil, condensate and natural gas liquids. The Marketing and Trading segment is responsible for selling natural gas production as well as purchased volumes of third-party gas and oil. The Minerals segment finds and produces minerals in several coal, industrial minerals and trona (natural soda ash) mines. The Company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent and Rocky Mountain regions, Alaska, Gulf of Mexico, Canada, Algeria, Guatemala, Venezuela and other International areas. On 12-Aug-2004, the Company acquired Access Northeast Energy Inc.
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