Are Hedge Funds Right on Anadarko?

The closest peers for Anadarko as a company are energy producers which are diversified among oil and gas, and so we’d compare it to Exxon Mobil Corporation (NYSE:XOM), BP plc (NYSE:BP), and ConocoPhillips (NYSE:COP). BP carries a forward P/E of 8, with Exxon Mobil and ConocoPhillips trading at 11 and 10 times consensus earnings for 2013 respectively. In fact, each of these oil majors has a trailing P/E multiple less than 10. Because these larger companies haven’t been increasing their production as much as Anadarko, their revenues have been down. ConocoPhillips actually reported a 31% decline in earnings in its most recent quarter compared to the same period in the previous year, while the other two majors had their income change by less than 10%. We’d pass on ConocoPhillips, but BP and Exxon Mobil seem cheaper enough than Anadarko that we’d call them better buys even with lower growth rates.

We’d also look at Chesapeake, which we mentioned earlier as being comparable in the sense of being tied to natural gas prices. Chesapeake is down 32% in the last year as the company has suffered from governance issues and from concerns that it will have difficulty raising cash from asset sales. Of course, natural gas prices have also negatively impacted the company. This has left the stock trading at 13 times forward earnings estimates. It might be a better way to invest in higher natural gas prices.

It’s not clear to us that Anadarko is such a good investment. Some major oil producers are considerably cheaper in terms of their forward earnings (and projections for Anadarko may be a little generous), and even natural gas focused Chesapeake seems to have a lower valuation. For now we would prefer a mix of stocks from these two industries until it becomes more clear that Anadarko is going to deliver earnings in line with the current stock price.