Anadarko Makes Amends for Tronox, Shares Rise - Analyst Blog

By Zacks Equity Research,

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Good news flowed in at the exploration & production company Anadarko Petroleum Corporation ( APC ) after it settled the long, drawn-out dispute regarding Tronox. Anadarko agreed to pay $5.15 billion to the plaintiffs for settlement of all claims against Kerr-McGee. The settlement after the lengthy legal proceeding was well received by the investors with Anadarko's shares gaining 14.51% in intraday trade to close at $99.02 yesterday.


Anadarko Petroleum had acquired Kerr-McGee in 2006, with an intention to expand its footprint in the Gulf of Mexico and the Rockies region. But Anadarko was drawn into a legal tangle when Tronox filed a case in May 2009 claiming that Kerr-McGee, its parent company, had acted fraudulently in its spin-off.

Kerr-McGee spun off a part of its business as Tronox before it was merged with Anadarko in 2006. Tronox Ltd. ( TROX ) filed a litigation claiming that Kerr-McGee had passed its environmental liabilities on its shoulders and then in a vanishing act merged into Anadarko. Consequently, Tronox failed to meet the required environmental obligation and filed for bankruptcy in 2009.

In 2011, Tronox came out of bankruptcy as a reorganized company. A litigation trust replaced Tronox as the plaintiff in this case.

Claims Finally Settled

An initial claim of $25 billion was made against Anadarko for cleaning up more than 2,000 sites and providing relief to other Tronox creditors. In mid-Dec 2013, the United States Bankruptcy Court found Anadarko legally responsible for the mess and hinted that the company might have to pay $14.5 billion as compensation.  

Finally, a settlement was reached between the parties, at $5.15 billion, which included the principal amount of $3.98 billion plus 6% interest outstanding from the date of filing the litigation in 2009.

A Deliverance

The Tronox case has long been the albatross tied to Anadarko's neck and the settlement can only mean good for the company. Moreover, the value of the final settlement is much lower than what was expected. Last quarter Anadarko recorded a contingent liability of $850 million for Tronox.

The company, with its existing cash balance and credit facility, will be able to settle the claim. Now with the overhang removed, Anadarko will be able to focus on what it does best, find new generation assets and strengthen its production portfolio globally.

Even if the settlement has been reached at a much lower amount than what was initially claimed, it is by far the largest U.S. environment fine leveled to date. It even surpasses the $4 billion paid by BP plc ( BP ) to settle the Deepwater Horizon oil spill in Gulf of Mexico. This settlement amount will be directed to detoxify the damaged environment over a multi-year period.

To Sum Up

If we go by today's initial trade on the index, Anadarko's shares are destined to move higher from yesterday's close. This is arguably the best possible solution for the long standing Tronox legal dispute.

Anadarko currently has a Zacks Rank #3 (Hold). Investors interested in exploration & production stocks can consider EOG Resources, Inc. ( EOG ), which holds a Zacks Rank #2 (Buy).

ANADARKO PETROL (APC): Free Stock Analysis Report

BP PLC (BP): Free Stock Analysis Report

EOG RES INC (EOG): Free Stock Analysis Report

TRONOX LTD (TROX): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: APC , BP , EOG , TROX

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