Anadarko Petroleum Corp. might have to pay as much as $14.5 billion after a federal judge late Thursday ruled it acted improperly with Kerr-McGee Corp. after troubled chemicals unit Tronox Inc. was spun off in anticipation of a merger.

Kerr-McGee became a pure-play explorer in 2006 by spinning off Tronox, which at the time was burdened with environmental liabilities related to pollution site cleanups in the United States and elsewhere (see Daily GPI, April 3, 2006). About three months after the spin-off was completed, Anadarko said it would buy Kerr-McGee for $21.7 billion (see Daily GPI, Jan. 30, 2007).

Tronox filed for bankruptcy in 2009 and subsequently sued Anadarko and Kerr-McGee. According to the complaint, Anadarko’s Kerr-McGee unit was part of a two-step transaction that defrauded the U.S. Environmental Protection Agency (EPA) of funds to clean polluted sites. The U.S. Justice Department, as Tronox’s largest creditor, intervened on behalf of the EPA.

The United States has sought $25 billion to clean close to 2,800 sites and compensate about 8,100 claimants. A trust fund set up to pay plaintiffs calls for 88% of the judgment to go for cleanup; the remainder would be for toxin claims.

U.S. Bankruptcy Judge Allan Gropper of the Southern District of New York received the case in 2012 and issued his opinion late Thursday, stating that Anadarko should be liable for environmental and health claims of $5-14.5 billion. Kerr-McGee, he said, acted with intent to delay and hinder Tronox’s creditors when it spun off the unit. Anadarko also was held liable.

“The issue is limited but the difference in damages is large — whether defendants should be liable for damages in the amount of $14.16 billion or $5.15 billion, plus attorneys’ fees and costs to the extent appropriate,” Gropper wrote. Tronox debtors were left “insolvent and undercapitalized” by the transaction, which “was not made for reasonably equivalent value.”

An exact amount of damages would be decided by Gropper after both sides are given an opportunity to argue how the number should be calculated. Anadarko was given 30 days to file a proof of claim.

The potential damages to Anadarko are more than the company had been expecting, according to filings and statements by executives. As it awaited a court decision, filings have assured the marketplace that the company was “confident in the merits of its position.” Anadarko had estimated costs associated with the lawsuit to be $1.4 billion at most, according to a Nov. 4 filing with the Securities and Exchange Commission.

Anadarko has not been holding reserves in anticipation of a big settlement. And as one-third owner of the failed Macondo well in the Gulf of Mexico, The Woodlands, TX, operator has been on the defense regarding settlements in that case as well.

Reaction by the marketplace was swift. In after-hours trading Thursday night Anadarko’s share price plunged by more than 14%; by Friday morning the stock had recovered somewhat and was down 10% from Thursday’s close. The share price overall is up 13% on the year.

“Given the significant factual evidence supporting our position, we vehemently disagree with the judge’s memorandum of opinion, and we fully expect to pursue every avenue available to us through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered,” said CEO Al Walker.

Attorney John Hueston, a Tronox bankruptcy trustee, said “Kerr-McGee’s attempted avoidance of its massive environmental liabilities threatened communities across the nation, which have waited years for Kerr-McGee and Anadarko to be held accountable.”

The judge’s estimated payout was more than most energy analysts had expected. Raymond James & Associates Inc. analysts had expected a judgment of less than $5 billion.

Tudor, Pickering, Holt & Co. (TPH) had earmarked liability at around $2 billion, or $3.00/share. “Expect…management to vigorously oppose the ruling, leaving the stock in limbo for the near term…Analogies can be made to Macondo — look at the potential damages (which even if worst case payouts are unlikely to be paid at once)…” Anadarko “is still attractive. Assets are still great. Today will be no fun, but we are buyers,” the analysts said.

TPH said long-term buyers likely would be rewarded because Anadarko “has enough levers to pull even in the worst-case scenario to finalize a settlement,” including monetizing low/no cash flow assets that include its Western Gas stake, valued at around $8 billion; Brazil assets, worth about $3 billion; or Mozambique properties that are estimated to be worth close to $7 billion.

Wells Fargo analysts agreed that Anadarko should have enough assets to cover any and all costs. In a note Friday they said doing some “quick math,” the Mozambique and Western Gas properties together could be worth $20 billion in a sale.

The final payment is not set in stone, said Wells Fargo. “We admittedly do not understand all the legal nuances, but based on prior comments we think APC will appeal first, then perhaps settle second (with plaintiffs looking a multiyear appellate process). For shares, ultimately the Street will price in whatever dollar judgment is rendered. And the Street won’t like the uncertainty so until we get more clarity on the $5 billion or $14 billion, shares may move lower…Uncertainty remains, but for those looking for an entry point into the name, we would wait for shares to settle today and then look to step in.”