HEARD ON THE STREET: Don't Be Negligent About Anadarko

14th Jun 2010 17:59

By Liam Denning A DOW JONES COLUMN Feeling brave? Then you might be thinking of buying BP PLC's (BP, BP.LN) battered stock. But don't forget Anadarko Petroleum Corp. (APC). Anadarko owns a 25% stake in the Macondo discovery, site of the Deepwater Horizon explosion and subsequent oil leak. Since the saga began, the company has lost $25 billion, or 33%, of market capitalization, over and above losses that can be explained by movements in the wider exploration and production sector. Similarly, BP--which operates the field, unlike Anandarko--has lost $69 billion, or 37%, relative to its integrated oil and gas peers. On a simple basis, if Anadarko has to foot the bill for 25% of disaster-related costs, then the implied full cost is $98 billion. BP's price, based on its 65% stake in the discovery, implies a total cost of $106 billion. In pretax terms, you're talking more than $150 billion. This looks irrational. BofA Merrill Lynch Global Research estimates capping the well and cleaning up at $16,000 per metric ton of oil. Assume the well has been leaking 40,000 barrels per day and this continues to the end of the year, with BP only capturing 15,000 barrels a day since early June. Under that scenario, the total cost is $15.6 billion. BofA's base case, by the way, is $5 billion. Clearly, this is well below the costs implied in the stock prices. So, does the other $135 billion or so reflect potential compensatory claims and punitive damages? BofA estimates the net present value of claims might run to $11 billion in all. The really fuzzy math is reserved for potential punitive damages. The implication from BP's share price is that these will be astronomical, suggesting investors at least see a risk the firm will eventually be found to have been negligent. In that case, it's not clear Anadarko would have to pay anything beyond the initial clean-up costs. Anadarko has pointed out it acquired the interest in Macondo after drilling had begun and wasn't involved in designing the well or its operating procedures. Any agreement between the field operator and non-operating partners has specific language. But the standard template for deepwater agreements--the American Association of Professional Landmen's Form 810--says parties to the agreement bear liabilities for damages in proportion to their stakes except "when liability results from the gross negligence or willful misconduct" of one of the parties. If BP were found to have been grossly negligent, Anadarko might be able to contest having to pay its share of any punitive damages. And while Anadarko no doubt faces a tougher, higher-cost regime in its important deepwater operations, it doesn't appear to be in danger of losing them altogether. Discounting Armageddon is the market's prerogative, but even that scenario has scope for nuance. (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at [email protected]) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 14, 2010 12:59 ET (16:59 GMT)