Anadarko is trading at a discount to its $91 NAV. This is a result of the disconnect between the oil and natural gas futures markets and the public E & P equities. The sell side and equity valuations for the industry seem to be pricing in oil at $28 and gas of $4.50, the price considered “mid-cycle” based on past experience.
Anadarko Petroleum is one of North America’s largest independent oil and gas exploration and production companies. Its activities are confined to “upstream” activities and they sell their output at prevailing commodity prices.
A lot of other large E & P companies also currently trade at discounts to their net asset value based on futures pricing. This discount can persist. However, to the extent that a company either: hedges production to lock in prevailing prices, or sells assets at current valuations, and buys back stock, they will assist in the narrowing of the prevailing discount.
Anadarko is the company exploiting this arbitrage to the greatest degree. They are selling roughly 25% of the company (at prices in the m&a market that better reflect futures pricing) for $3+ billion after tax and buying back at least $2 billion of stock and paying down $1.4 billion of debt. They will also generate excess cash from operations, which will be used to buyback additional stock and pay down additional debt commensurately.
On top of this exciting financial arbitrage, APC’s operations are hitting a sweat spot, and they are likely to post nice production growth and reserve replacement numbers. This means that the company’s NAV is likely to grow assuming constant commodities prices.