Ockham Research submits: Anadarko Petroleum (APC), an independent oil and gas exploration and production company, announced after the close Monday its intention to buy back $5 billion of its stock. The buyback is substantial as it represents about 18% of the outstanding shares. Also included in the announcement, Anadarko will raise its capital spending next year. A share buyback is one of the main ways for management to show confidence in a company’s direction, which is great news for shareholders—not only because the stock is up more than 6% on the announcement—but also because the company has undergone an extensive restructuring over the last few years. This restructuring included the acquisitions of Kerr-McGee and Western Gas Reserves for a combined $23.3 billion in 2006; this and other management decisions now appear to be paying off. Clearly, as this move suggests, APC management still believes that the company’s best days are ahead of it.
Since Anadarko’s stock price peaked in mid-June above $80, the stock has essentially followed the price of oil and is off more than 20%. Even though oil and gas prices have fallen, they are still high from a historical standpoint and the company has taken advantage of the price spike. Anadarko was able to greatly reduce the debt it incurred making the above-referenced acquisitions. Its debt-to-capital ratio was as high as 67% immediately after the acquisitions, but thanks to historically high commodities prices, Anadarko’s CEO expects to whittle the company’s debt-to-capital number down to between 25% and 35% in short order. Management executed these moves at an opportune time right before oil and gas prices started to skyrocket and thus APC was able to buy both companies at a price that—while expensive— would now be considered a very good value.
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