US CREDIT-Anadarko bond weakness may be buying opportunity

By Karen Brettell

NEW YORK, June 8 (BestGrowthStock) – Anadarko Petroleum Corp’s
(APC.N: ) bonds may be a good buy after its yields have doubled
on concerns over costs the company faces from the largest U.S.
oil spill in history.

The oil producer’s debt has weakened due to the company’s
25 percent ownership stake in a Gulf of Mexico oil well that
exploded in April. The resulting spill leaves the oil producer
liable for what may total billions in cleanup costs as well as
potential earnings hits from a drilling moratorium.

Spreads on Anadarko’s 7.625 percent bonds due 2014 widened
to 493 basis points over comparable Treasuries on Tuesday, to
yield 6.78 percent, from around 70 basis points in April, or a
yield of around 3.3 percent, according to MarketAxess.

The cost to insure Anadarko’s debt in the credit default
swap market has jumped to 418 basis points, or $418,000 per
year to insure $10 million in debt for five years, from around
74 basis points in the same period, according to Markit
Intraday.

Analysts, however, say the company’s debt is pricing in too
much risk, and that now may be a good time to buy.

“Between its current liquidity, insurance, expected free
cash flow, and multiple capex and asset options, Anadarko
should be able to handle its share,” said Philip Adams, analyst
at credit research firm Gimme Credit.

Adams notes that the company could raise as much as $5
billion without tapping the capital markets by cutting capital
spending, selling assets and contracting out to other companies
a percentage of its projects to augment its free cash flows.

Costs from the spill may also be some time away as BP Plc
(BP.L: ) (BP.N: ), which owns 65 percent of the well and is
required to cover most of the costs of the spill, may take time
before it submits claims to other responsible companies, he
said.

Anadarko may be the most severely affected of the companies
with exposure to the oil spill, relative to the company’s cash
flows, said Guy LeBas, chief fixed income strategist at Janney
Montgomery Scott in Philadelphia. LeBas estimates that BP has
around 6 times the cash flows of Anadarko, though it has only 3
times the exposure to the spill.

That said, Anadarko could afford the cost of the spill
running up to around $30 billion, LeBas said.

“That’s less than the other three companies that are
involved in the gulf oil spill, but its still substantial and
likely well more than the ultimate cost of the spill.”

“I think the debt of the four major companies that are
exposed to this is pricing in too high a risk of failure from
this spill cost,” he added.

Transocean (RIG.N: ), which operated the oil rig and
Halliburton (HAL.N: ), which provided cementing services to the
well, are also expected to be significantly impacted by the
spill.

LONGER TERM RISKS

Anadarko’s debt may, however, face longer term risks if the
company is unable to diversify its operations away from the
Gulf of Mexico, which is unlikely to reopen to deep water
drilling any time soon, or if it faces larger costs than
currently expected.

Anadarko last week reaffirmed its sales and volumes
guidance for 2010 and said it is evaluating opportunities to
reallocate capital spending for the year from the Gulf to other
areas, including onshore opportunities.

Nonetheless Moody’s Investors Service last week changed its
outlook on the company to negative, indicating the company’s
credit ratings may be cut into junk territory over the next
12-to-18 months.

Moody’s rates Anadarko Baa3, the lowest investment grade.
Standard & Poor’s and Fitch Ratings both rate the company
BBB-minus, also one rank above junk, and have a stable outlook
on the company.

In addition to lost cash flows from drilling bans, “we
remain concerned about the potential size of accruing costs and
claims for this independent producer,” Moody’s said.

Downgrades into junk territory can significantly increase a
company’s borrowing costs, and impede their financial
flexibility. Analysts at JPMorgan, however, view the near term
risks of a downgrade as remote.

“We do not believe either agency will take a definitive
rating action until more clarity on financial impacts is
obtained,” JPMorgan analysts said in a report. “We do believe
Anadarko will ultimately retain investment grade ratings and
would remain better buyers of Anadarko’s bonds.”

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US CREDIT-Anadarko bond weakness may be buying opportunity