Anadarko Petroleum Corp. (APC:US) investors are discounting the company’s market value by $2 billion as analysts and lawyers see few ways to minimize the effect of a $25 billion lawsuit spawned by the toxic past of its Kerr-McGee Corp. unit.
The 2006 purchase of Kerr-McGee’s oil and gas assets, a key part of former Chief Executive Officer Jim Hackett’s legacy of expanding Anadarko, has left the company battling a lawsuit that’s put a cloud over its stock. Energy investors may want to look at buying shares in companies that don’t have the sort of litigation risk that Anadarko has, said Jeffrey Campbell, an analyst for Pritchard Capital Partners in New York.
“We cannot support jumping in front of the litigation bus when peer companies offer attractive upside without unquantifiable risk,” Campbell said in a May 22 note. At its June 7 closing price of $63.20, Anadarko’s stock is underperforming peers by about $4.16 a share, implying investors were pricing in about $2 billion for a possible settlement or penalty, according to Campbell’s estimate.
The suit, which went to trial May 15 in Manhattan Bankruptcy Court, contends The Woodlands, Texas-based Anadarko’s Kerr-McGee unit was part of a two-step transaction that defrauded the Environmental Protection Agency of the money to clean 2,772 polluted sites.
After an internal reorganization started in 2001, Kerr- McGee spun off its chemicals business and old environmental liabilities as Tronox Inc. (TROX:US) beginning in 2005. About three months after the transaction was completed, Anadarko offered to buy Kerr-McGee’s oil and gas assets for $18 billion.
Tronox filed for bankruptcy in 2009 and sued its former parent, saying billions of dollars in environmental debts did it in. The U.S., Tronox’s largest creditor on behalf of the EPA, intervened, creating the current lawsuit.
Anadarko rose 1 percent to $63.84 at the close in New York. The stock has slid 15 percent since closing at $75.06 on May 1. It’s the fourth-worst performer this year among 17 members of the Standard & Poor’s 500 Oil & Gas Exploration & Production index.
The case also comes on the heels of another big legal settlement, said John Lutz, who helps oversee about $8 billion of assets including Anadarko shares at Frost Investment Advisors in San Antonio. Anadarko agreed in October to pay $4 billion for costs related to its 25 percent stake in the Macondo well that was the site of the Deepwater Horizon explosion in the Gulf of Mexico in 2010.
“I do sense that there’s some real investor frustration here with having to deal with these big litigation overhangs on the stock,” Lutz said.
Anadarko isn’t opposed to a settlement and hasn’t been successful in talks toward one so far, Chief Executive Officer Al Walker said at an energy conference on June 6.
The plaintiffs run the risk of getting nothing if the judge agrees with Anadarko and “may start to become a little more reasonable and rational around what a settlement might look like” as the case goes forward, Walker said.
Analysts including Thomas Claps of Susquehanna International Group in New York also see a possibility for lower damages even if Anadarko loses. Claps, who has been following the trial, said he thinks the $25 billion claim could be cut if it’s found that environmental damages were less than that amount.
“It seems $1.5 billion to $6 billion could be a range where the judge is focusing,” Claps said. That number is based on Tronox’s own estimate of what environmental damages were, he said.
However, U.S. Bankruptcy Judge Allan Gropper in a pre-trial ruling denied a request by Anadarko to limit the damages to the amount of claims over environmental and tort damages.
Based on bankruptcy law’s rules about “fraudulent transfers” -- transactions which defraud creditors of money either intentionally or otherwise -- any recovery by the U.S. is most likely to be based on the value of Kerr-McGee’s oil and gas assets that were transferred to Anadarko, not the value of environmental damages, said Michael Cook, a partner in the New York office of Schulte Roth & Zabel LLP.
That doesn’t preclude a number other than $25 billion, he said.
“Just because they claim it’s worth a certain amount doesn’t mean it is,” Cook said. “There has to be a finding of the value of what was transferred.”
Anadarko bought Kerr-McGee for $16.4 billion and an estimated $1.6 billion of debt and other liabilities in a deal announced in June 2006. The purchase was completed in August of that year. Lawyers for the U.S. say they estimate the value of assets transferred was $15 billion, and have added $10 billion for interest and appreciation.
Those numbers seem high to analysts including Claps.
“The judge has said this should be remedial rather than punitive,” he said, noting a Jan. 20 ruling in which Gropper denied Anadarko’s request to cap damages while leaving open the possibility that the U.S.’s claim could be limited. Anadarko has also accused creditors of seeking a “windfall” because they’re asking more than it would cost to satisfy the U.S.’s environmental claims against Tronox.
Under the precedent of Mirant Corp., creditors can seek more than the value of what they’re owed under fraudulent transfer law, Cook said. In that case, an appeals court found that Mirant, an energy company, had standing to pursue recoveries from its lenders over a fraudulent transfer even though unsecured creditors had already been repaid in full.
The EPA’s claims against Kerr-McGee have already been partly satisfied under a settlement between Tronox and the EPA. Tronox paid $320 million to the EPA and said the agency could have all the proceeds of its lawsuit against Anadarko to satisfy the rest of its claims.
The EPA has never given a total estimated damages claim related to Kerr-McGee. It said in court papers that the amounts it seeks to clean up the sites are estimates, based on unpaid past response costs, and potential future costs, for which estimates could change. Many sites have been abandoned for years, resulting in potential groundwater contamination and other new issues, according to EPA records filed with court documents.
The EPA’s settlement says that if the U.S. recovers more than is needed to clean up the sites, the excess money will flow first to sites in the same state, then to sites in other states, and finally to its Superfund program, which cleans up the U.S.’s most hazardous toxic sites.
Anadarko is “optimistic” about its chances of prevailing, general counsel Bobby Reeves said in a May 1 conference call with analysts.
Reeves said Tronox didn’t fail because it was overloaded with environmental liabilities. Instead, it failed because the economic and housing crisis diminished demand for its chemical products, he said. The internal reorganization that separated out oil and gas assets before the sale was “conducted for totally legitimate business purposes and was not in any way done with an intent to harm creditors,” he said.
Reeves also raised the possibility that even if the U.S. is successful, its damages could be limited to about $800 million, since this is closer to the value that Kerr-McGee got from Tronox’s initial public offering. Kerr-McGee got $225 million from equity sales and $537 million from debt issuance at the time.
That argument could prevail, though there are also legal precedents for “collapsing” multiple transactions into one scheme as the U.S. has argued in its case, Cook said.
“That’s the real question. Is it a one-step scheme or a two-step scheme,” said Madlyn Primoff, a partner in the New York office of Kaye Scholer LLP. “I would think the defendants would argue this is two separate transactions and the purchase of the good assets was valid and proper.”
In his Jan. 20 ruling, Gropper said Tronox overstates its case when it “asserts that there are no limits on the recovery of a plaintiff in a case such as this other than the value of the fraudulently transferred property,” but doesn’t say what other limits might be. He also noted that any claim Anadarko can assert for value that it transferred into Tronox might be an “offset” that could be deducted from any damages claim.
For now, both sides are still far apart on numbers; Anadarko has taken charges of $525 million for the case, and says that it’s best estimate as of this time as to what it will ultimately cost the company.
Anadarko may have downplayed the Tronox case somewhat and the amount of damages the U.S. is seeking has “caught some people by surprise over the past couple of months,” Lutz said.
The bankruptcy case is Tronox Inc., 09-10156, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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