There's a bull market in outrage in most corners of Wall Street these days, but curiously not where holders of Anadarko Petroleum ( APC) linger. Shares of the nation's biggest independent oil exploration company have risen 3.8% in the past two weeks since embarrassed executives announced that an accounting error would force them to take a $1.7 billion charge against third-quarter earnings. Bulls interpret investors' indifference as a positive, but that compounds the mistake. The dispassion instead is symptomatic of a mutant form of Enronitis in which shareholders become so saturated with poisonous news they don't feel the immediate impact from one more toxic drop. The classic example occurred in August 2001, when already-battered owners of Enron shares failed to understand that Jeff Skilling's sudden departure as president signaled a much larger problem.
In the case of Anadarko, the postblunder bounce was largely a function of a surge among all energy stocks now that President Bush is rattling sabers at Iraq. Frisky peers such as Devon Energy ( DVN) and Patterson-UTI Energy ( PTEN) are up 13% and 7.5%, respectively. What does the mistake mean? Donn Vickrey, executive vice president of research at the stock-research firm Camelback Research Alliance in Arizona, considers it emblematic of deeper earnings quality issues at the firm. In a prior era, few of these would have caused concern. But these days it pays to understand all nuances of corporate reports, especially when the subject is both an industry leader and a cross-town rival of a once-admired corporate crook such as Enron. For the rest of this year, I'm planning to regularly feature Vickrey's earnings-quality analysis in an effort to bring a wider range of accounting concepts to the foreground. Prior to joining Camelback to work on behalf of clients such as Thomson Financial and Credit Suisse First Boston, Vickrey was an accounting professor at the University of San Diego. In a review of Anadarko's fiscal third-quarter earnings report, issued last week, Vickrey noted: The company is suffering from a significant decline in free cash flow compared with prior quarters. It shows a decline in the quality of receivables, yet has eliminated its usual reserve for "doubtful accounts." It uses the most lenient methods of accounting for oil and gas properties, leading to higher reported income in relation to more conservative methods used by many of its competitors. It has extended a $1 billion stock repurchase program despite an announcement that it deeply cut its exploration and development budget for 2002 -- implying that its best use of capital is to return it to shareholders and reduce investments in future revenue streams. It significantly increased its use of derivatives starting in 2000 and continuing into 2001. Anadarko declined several requests for response to these issues. Before I explain them further, you may need a crash course in accounting.