Anadarko: Breaking Out a $90 Bid

NEW YORK (TheStreet) - Anadarko (APC) is among the largest independent oil and gas exploration and production companies in the world and competes with other major oil companies like ExxonMobil (XOM), BP (BP), Chesapeake (CHK) and Chevron (CVX).

Anadarko's share price jumped 10% last week to reach its 52-week high of $78 on expectation of a $90 bid by Australian mining giant BHP Billiton ( BHP). BHP has been looking for a U.S. acquisition for some time and recent speculation is that Anadarko make the best fit for BHP in the energy space. Credit-default swaps on Anadarko also declined about 27 basis points to 155 last week, which was the bond market's signal that a bid might be in the works.

We have a price estimate of $72.82 on Anadarko, which is about 5% below the current market price.

Below we show how BHP could justify a $90 valuation for Anadarko on a stand-alone basis by looking at its largest value drivers of natural gas and crude oil production.

Natural gas exploration and production makes up 43% of our $72.82 price estimate for Anadarko. The company produced and sold nearly 800 billion cubic feet of natural gas in the year 2009 and has nearly 7.7 trillion cubic feet of proved natural gas reserves. We estimate the company's natural gas sales volume to reach 1,195 billion cubic feet by 2017 because of the increasing demand for power generation.

We forecast the margins to remain stable 65% during our forecast period but given BHP's scale and financial resources, it will be able to improve Anadarko's profitability and enjoy better economies of scale due to transportation and distribution advantages of BHP's current operations.

If Anadarko's ebitda margins reached its historical level of 80%, as seen in 2006, it would add $8 to our price estimate for the natural gas segment.

Natural gas prices has dropped significantly from $7.70 per thousand cubic feet in 2008 to $3.60 per thousand cubic feet in 2009 due to decline in demand because of weak economic environment and limited storage capacities around the world. Though we expect a gradual recovery in natural gas prices, we estimate it to climb to $6.30 per thousand cubic feet by 2013 and then modestly rise thereafter.

However, if natural gas prices reached its 2008 level by the end of our forecast period, this would add $3 to our price estimate for Anadarko.

Crude oil and condensates exploration and production make up 46% of our $72.82 price estimate for Anadarko. The company produced 68 million barrels of crude oil and condensates in 2009 and has nearly 1,000 million barrels proved reserves of crude oil, condensates and natural gas liquids.

Similar to the gas prices, oil prices also took a dive in 2009 but we expect this to recover much more quickly hitting almost $90 per barrel in 2013. However, our EBITDA margins are expected to remain flat.

We feel that BHP would be able to help Anadarko cut costs in distribution, transportation and sales thereby increasing its profit margins. If Anadarko's ebitda margins reached its historical level of 80%, as seen in 2006, it would add $7 to our price estimate for the crude oil segment.

In summary, a $90 bid for Anadarko would signify that BHP is highly optimistic for oil and gas market and is relying on its distribution and transportation capabilities to cut cost and increase margins for Anadarko.

You can see the complete $72.82 Trefis price estimate for Anadarko's stock here .

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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