Wednesday, July 05, 2006

Extra Virgin in General, and Anadarko Petroleum in Particular

MSN's Jim Jubak is one of my favorite living investment writers. In addition to doing better than his peers, as far as I can tell, he's entertaining. That's important, since none of the prophets of Mammon are accurate enough to be worth much of my time unless they're also entertaining.

But none of that means that I have to agree with every word he writes. Take, for example, his June 28 article on Anadarko Petroleum's (APC) purchase of Kerr-McGee and Western Gas Resources. Jubak says that

"Anadarko Petroleum is paying a price equal to about $20 a barrel of oil-equivalent proven reserves for Kerr-McGee and about $24 a barrel of oil-equivalent reserves for Western Gas Resources. Anadarko clearly believes the days of $20 oil are gone forever."

However, if you think about what Jubak's continuation means, that conclusion is a lot less certain:
"Anadarko is paying much less per barrel of oil and gas if you add probable and possible reserves to proven reserves -- and there are a lot of reserves in those categories in these deals.... Put those reserves into the equation and Anadarko Petroleum is paying something like $12."
In other words, Anadarko has not really bought the smaller companies' crude at $20/barrel, which would indeed show that the didn't expect the price of crude to be below - or even near - that price in the foreseeable future. They have actually bought that crude at $12 or $13 or $15 or whatever, depending on how much of the "probable" and "possible" energy turns out to be recoverable. So maybe they aren't sure that the days of $20 crude are gone forever. Who knows what they really think?

It also seems reasonable to assume, as Jubak says, that "Acquirers always have a choice of what currency to use in a deal and they always choose the currency that they think is cheaper. If Anadarko Petroleum thought its stock was fully valued or, better yet, over-valued, you can bet the company would have paid in stock, not cash," which would mean that the Anadarko management sees their own stock as undervalued. After all, the larger company's management gets to call the shots because they are paying a premium for the smaller companies' stock, and usually holding out special incentives to the smaller companies' management, as well, and it is the smaller companies' management which really negotiates the deal from their side. But who says that Anadarko's management knows the "real" value of their stock, meaning the price which the market will be willing to pay for it at some undefined date in the future? And even if they do know, what are we to make of the fact that only three months ago one of the directors sold half of his holdings, i.e., about twenty-five million dollars worth, at a price only slightly about the current one?

That's not to say that I disagree with Jubak on these two points. Who am I to disagree with him, anyway? I have a position in Anadarko which I am not planning on selling at the moment, as well as some other energy-related securities which I'm also not planning to sell right now. I'm just not quite as sure as Jim Jubak is as to how to interpret the data.

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