Anadarko Petroleum Corporation (APC), ConocoPhillips (COP), BP plc (ADR) (BP): This Company Is a Buy Despite Its Legal Troubles

Anadarko Petroleum Corporation (NYSE:APC) is currently under the threat of an adverse court ruling in a $25 billion lawsuit filed by paints material company Tronox. Tronox has concluded its case for recovering at least $14 billion in damages from Anadarko Petroleum Corporation (NYSE:APC).

Tronox was spun-off from Kerr-McGee Corp, which was later bought by Anadarko. Tronox claimed that it was saddled with all the environmental liabilities of its former parent, while Anadarko purchased the remaining petroleum business cleanly. It further claimed this as the reason that led to its bankruptcy in January 2009. This lawsuit has created a huge liability for Anadarko Petroleum Corporation (NYSE:APC), and is expected to lead to a reduction in EPS in the years to come.

For a company with a market cap of around $40 billion, this is a huge setback. The stock usually plummets during such events. But in the case of Anadarko Petroleum Corporation (NYSE:APC), its stock has avoided the drop and has been on an upward trend for a while. It appreciated more than 43% since June 2012 and more than 20% since October 2012.

Robust financial performance

One of the reasons for such optimism is that the company has been reporting strong financial results over the last few quarters. It has beaten the consensus EPS estimate in the last nine quarters. Even in Q4 2012, the company reported an EPS of $0.91 per share, beating the consensus estimate of $0.72 per share easily. Though revenue fell around 11.2% compared to same quarter last year, it still beat consensus estimates.

Natural gas discovery in Mozambique

Anadarko Petroleum Corporation (NYSE:APC) has made a new natural gas discovery off the coast of Mozambique. Its discovery well encountered about 190 net feet of natural gas in the offshore area of the Rovuma Basin. This discovery of a large natural gas accumulation is an outstanding exploration success for the company and is expected to give substantial returns in the future.

Huge oil discovery in Gulf of Mexico

The company discovered huge oil reserves in the Gulf of Mexico last month. This was one of the largest oil discoveries in Gulf of Mexico, with more than 1,000 net feet of oil pay. The fluid properties are of much higher quality than previously encountered by the industry in the same region. The reservoir is believed to be two-three times bigger than the company’s estimate of more than 300 million barrels of oil. This has increased the company’s reserves and might lead to more upside in the stock market.

Industry outlook

The outlook for the natural gas industry is highly optimistic. This is because of an expected increase in natural gas price and an expected surge in demand. Since Anadarko Petroleum Corporation (NYSE:APC) is a high volume offshore producer and operates in reserve-rich areas, this natural gas optimism will greatly help the company to report better financial results in the future.

Also, the company is not just dependent on the natural gas. It is relatively diversified, with crude oil being an important component of its offerings. Therefore, the downside potential if there is a fall in natural gas prices in future is relatively lesser than any pure play natural gas company.

Increasing price target

Credit Suisse raised the price target on Anadarko to $109 and maintained its ‘outperform’ rating on the stock. This target suggests a 34% upside from the current price. According to Barclays, Anadarko has high asset quality and expected strong value creation. They have a price target of $102 on the stock. Canaccord Genuity has also lifted its target price from $125 to $127.

RBC Capital reaffirmed their’ outperform’ rating. A number of other analysts have also expressed optimism about the stock, with a minimum price target of $100. This suggests that the market believes the stock has huge upside potential in future.