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Why Anadarko Petroleum (APC) is Gushing Losses

NEW YORK (TheStreet) -- Anadarko Petroleum (APC) was being pummeled in early Friday trading as investors pored over the details of a detrimental court ruling a day earlier. A U.S. court found the gas explorer and its Kerr-McGee unit to have failed to act responsibly in a spin-off of Tronox  (TROX) in 2005 and that it's liable to pay billions in environmental cleanup costs.

By mid-morning, shares had plummeted 8.5% to $76.54. Year to date, the stock is up 0.47%.

The lawsuit sought to hold the Texas-based business responsible for fraudulent transfers relating to a 2002 internal corporate restructuring of Kerr-McGee. In addition, it was alleged the latter's 2005 spin-off of Tronox, a titanium dioxide business which filed for bankruptcy in 2009, was doomed to fail after being burdened with environmental liabilities.

"Given the significant factual evidence supporting our position, we vehemently disagree with the Judge's Memorandum of Opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered," said Anadarko CEO Al Walker in a statement.

The ruling could see the company liable to pay damages in the range of $5 billion to more than $14 billion.

In response, J.P. Morgan downgraded the stock to "underweight".

"We expect the stock to trade down and think lingering uncertainty will cause the stock to underperform," analyst Joseph Allman wrote in a report.

Meanwhile, UBS said though the ruling was worse than expected, the company's risk/reward upside calls for a "buy" rating and $110 price target.

TheStreet Ratings team rates Anadarko Petroleum Corp as a Buy with a ratings score of B-. The team has this to say about their recommendation:

"We rate Anadarko Petroleum Corp (APC) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, expanding profit margins, growth in earnings per share and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.5%. Since the same quarter one year prior, revenues rose by 15.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 50.4% when compared to the same quarter one year prior, rising from $121 million to $182 million.
  • The gross profit margin for Anadarko Petroleum Corp is rather high; currently it is at 56.82%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.80% trails the industry average.
  • Anadarko Petroleum Corp reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, Anadarko Petroleum Corp turned its bottom line around by earning $4.74 a share vs. -$5.33 a share in the prior year. For the next year, the market is expecting a contraction of 9.9% in earnings ($4.27 vs. $4.74).
  • APC's debt-to-equity ratio of 0.61 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.35 is sturdy.

Also see: The 10 Drunkest States in America... and the 10 Most Sober.

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