BP & Anadarko Make up in $4 Billion Settlement Benefitting Both Parties

Anadarko Petroleum (NYSE:BP) has agreed to pay BP (NYSE:BP) $4 billion in an agreement to settle claims relating to the April 2010 U.S. Gulf of Mexico disaster that resulted in the death of 11 workers and the worst oil spill in U.S. history. Anadarko owned a 25% stake in the well which blew out. ^[1] The contract terms dictated that Anadarko would foot 25% of the costs arising from the the well unless BP was found guilty of gross negligence. BP has welcomed the settlement and has appealed to other parties involved in the contract to also accept their responsibility in the incident.

While $4 billion is a big number, the market expected it to be even greater; and for this reason, in addition to the fact that any uncertainty surrounding future legal liabilities has been eliminated, this is actually positive news for Anadarko. The stock traded up by more than 5% on the news.

We have a price estimate of $85 for Anadarko’s stock, which is a premium of about 15% to its current price after today’s rally.

Good news for BP…

As a part of the settlement, Anadarko has also agreed to drop its case against BP for gross negligence. APC will now contribute $4 billion to the $20 billion fund set up by BP to meet the legal liabilities arising due to various claimants including local citizens, businesses and the government. Earlier we had covered Anadarko’s rumored moves to sell a part of its Brazilian assets which some observers speculated could have been in response to future liabilities arising from its involvement in the oil spill. (See: Anadarko to Offload Brazilian Assets to Focus on Gulf of Mex. and Africa)

Analysts were expecting a payout from Anadarko after Mitsui & Co. Ltd, which held a 10% stake in the well, agreed to pay $1.1 billion for the incident. While the $4 billion settlement by Anadarko seems pricey in comparison, it was actually less than many analysts were expecting.  ^[2]

BP is also looking for similar participation from other contractors involved in the Deep Horizon incident. Rig operator Transocean (NYSE:RIG) and oilfield services provide Halliburton (NYSE:HAL) were contracted by BP to develop the well. BP’s efforts to transfer some responsibility of the disaster on to these companies has resulted in extended litigation. However BP’s position received a shot in the arm last week when the Bureau of Safety and Environmental Enforcement (BSEE) issued 4 citations each against the service contractors for their role in the blowout. (See: Schlumberger Earnings Preview: What We’re Watching)

… but also a positive for Anadarko

Despite the magnitude of the settlement, Anadarko’s stock actually traded up by more than 5% on a day where the overall market was down significantly, indicating that the settlement helps assuage investor concerns regarding litigation exposure.  The company, and the market, can now focus solely on the company’s operations. Anadarko has sufficient liquidity to meet the $4 billion liability without having to raise additional capital or sell assets.

Click here for our full analysis of Anadarko.

1. Anadarko to pay BP $4B in Gulf spill settlement, Chicago Tribune [↩]
2. Anadarko’s BP Settlement Will Let Company Focus on Africa, U.S., BusinessWeek, Oct 2011 [↩]