Why did David Einhorn’s Greenlight Capital buy Anadarko Petroleum?

Market Realist

Must-know: Greenlight Capital's new positions in 4Q 2013 (Part 3 of 3)

(Continued from Part 2)

Greenlight Capital opens a position in Anadarko Petroleum

David Einhorn’s Greenlight Capital opened a medium-sized position in Anadarko Petroleum (APC) in 4Q 2013.

In Greenlight Capital’s letter announcing the move, the fund explained:

  • “APC is a global exploration and production company with a high-quality upstream portfolio comprised of U.S. onshore resources, deep-water Gulf of Mexico assets, and interests in other high-potential oil and gas basins around the world. The company also owns 91% of Western Gas Equity Partners (WGP), a publicly traded master limited partnership created in 2012 to hold APC’s limited and general partner interests in Western Gas Partners (WES).”

The letter elaborated:

  • “In mid-December, the company suffered a legal setback stemming from its 2006 acquisition of oil and gas assets from Kerr-McGee, whose titanium dioxide unit went bankrupt. With APC facing potential damages of $14 billion or $5 billion, investors dumped the shares, which we then acquired at an average cost of $78.55. Assuming a worst-case legal outcome, APC’s core valuation net of its stake in WGP and its interest in an undeveloped, but valuable prospect in Mozambique, is less than 4x EBITDA. This is cheap compared to peers that lack APC’s valuable upstream assets and exciting exploration prospects, but nonetheless trade at higher valuations. Our legal analysis suggests that the ultimate payment is likely to be the lesser of the two amounts and will be partly tax deductible. APC shares ended the quarter at $79.32.”

Although Anadarko disagreed with the ruling and said it would file an appeal against it, the stock was downgraded by a number of analysts. J.P. Morgan said, “Lingering uncertainty related to Tronox and potential negative Implications for the company likely will cause the stock to underperform.” However, other analysts believe the company will survive the situation with less impact to its liquidity position by possibly selling off some of its assets. There was also speculation that the company could see a takeover bid from a major energy company.

For more information on Greenlight and its 3Q 2013 positions, see this Market Realist report.

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