Analysts, many stunned by the news of Anadarko's double play, saw the bounce in the energy markets from the news, but they also saw some negatives. In any case, energy analyst John Gerdes sees it as an expensive play. "The global takeaway here, with the 40% premium to the prices is that Anadarko is betting on $8 long-term gas prices. Otherwise, it's absolutely the wrong mindset."
Gerdes, of SunTrust Robinson Humphrey/The Gerdes Group, told NGI he would have "liked" to have seen Anadarko pay a 20% premium for the two companies, because "I think they're stretching it here...With those kinds of premiums and the structural weakness in the market, a 40% premium is mind-blowing. They are really pushing the envelope here."
Gerdes said, "we don't know how robust the 2007 gas prices will be, and there's some concern that we have permanent, impaired industrial demand. At $8 gas, the bias upward is diminished. At the end of the day, this will work, but the jazz to the upside...I'd love to see it work, but like I said, they are pushing the envelope. No doubt about it."
There was "a lot to like about the deal generally...logically, it's a good deal for Anadarko," he said. "They've been in coalbed methane for years now, and the Wyoming Land Grant. This gives them more access there. They are expanding in the Gulf...that's a good move."
The transactions reverberated across the energy sector on Friday, proving "tremendous" for those stocks, said Gerdes. "The transactions moved the bullishness to U.S. gas. The deals really were working for the sector. The markets spun the Rockies [concentrated] producers, but these deals affect a lot of the major gas producing regions."
Matti Teittinen, an equity analyst with John S. Herold Inc., who covers Kerr McGee, said the announcement took him by surprise.
"I wasn't expecting it," Teittinen told NGI. "Kerr-McGee getting bought was not out of the realm of possibility, but I didn't expect it to be this soon. And certainly not with Western Gas. It was a very bold move.
"This is a good deal for Kerr-McGee, considering where they've been. I'm not sure it's as good a move for Anadarko, but in the long run, they are getting some low-cost reserves, some low-risk development, a good prospect inventory."
Teittinen said a year ago, KMG "would have loved for someone to offer them a 40% premium. They weren't as strong last year. But they sold off the chemicals, made themselves more attractive from where they had been. They'd been in trouble in recent years, and now, their prospects are much better. It's certainly an opportunity for them to monetize their assets."
Although Anadarko CEO Jim Hackett said KMG had not wanted to sell, Teittinen said the price "was a hard offer to resist. They were probably blown away by the offer."
Energy analyst Irene Haas of Canaccord Adams has covered Anadarko and Western for several years.
"It wasn't surprising that Kerr-McGee and Western Gas were bought, but it was surprising that two deals were announced at the same time," Haas told NGI. "Kerr-McGee and Western Gas are both really attractive companies. Western Gas is an unconventional gas story. It's been undervalued for a while now. Kerr-McGee has a tremendous land base and a tremendous operation in the Gulf of Mexico. And its current portfolio is very clean."
Although Haas could not comment on the price paid for Kerr-McGee, she didn't think Anadarko had paid a premium for Western.
"I think they paid a fair price for Western Gas. Its midstream operations are pretty healthy, they are part of the Pinedale Anticline. They've got a quiet operation. Nothing too flashy. But healthy."
The premium prices overall were not that surprising, given current market conditions.
"We'll see more deals, especially within North America, and I expect we'll see premium prices paid for them," said Haas. "The recent deals indicate it's been increasingly difficult to operate in overseas markets. There's a reason ConocoPhillips bought Burlington Resources, for Chevron and Unocal. The acquisition prices may be higher, but there's more control over the assets here."
CreditSights analysts said the transaction was positive "from a strategic perspective. However, the initial leverage factor is a short-term concern compounded by the lack of any concrete financial targets out of the gate, and near-term natural gas market weakness."
The two transactions "came together very quickly within the past 30 days, and Anadarko had very little financial details or operating details to provide other than to indicate generally that it expects the deals to be accretive to earnings and cash flows," said Brian Gibbons of CreditSights.
Anadarko's default swap spreads likely will remain "wide" in the near-term, said Gibbons, then move back to pre-acquisition levels once a financial outlook is completed in the coming months.
"Over the intermediate-to long-term, however, we expect the balance sheet to fully recover and the new Anadarko to have one of the best resource positions in the supply-short North American natural gas business," Gibbons said.
As to which of Kerr-McGee's assets are likely to be sold off, Teittinen said the Rockies and GOM are "most likely safe." But he said KMG's southern assets in South Texas and along the Gulf Coast have been "less the focus" for the company. He also thought the Brazilian assets could be put on the block, even though they are in deep water. "But it's really too early to say."
Haas said she didn't have a feel as to what assets might be sold by Anadarko as it combines the three companies. But she did think there was a possibility some could be spun off, including Western's midstream operations.
Gerdes said he expects to see the "Bohai business stuff" quickly sold off. "The Chinese will be falling all over themselves to get their hands on that."
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