Faced with the possibility of paying a $14.2 billion judgment, Anadarko Petroleum Corp. (NYSE: APC) agreed to settle legal claims against it for $5.15 billion.
The case stems from the merger seven years ago of Anadarko and Kerr-McGee. On Dec. 12, a U.S. bankruptcy judge issued an opinion saying that Anadarko should be held liable for environmental and health claims related to Kerr-McGee spinoff Tronox Inc. Initially, the government and environmental plaintiffs sought $25 billion.
In 2006, Anadarko acquired Kerr-McGee in an all-cash transaction for $16.4 billion. Prior to the merger, Tronox, a chemicals company in the titanium dioxide pigment business, was spun off as a separate company. Tronox has argued in court it was encumbered with 60 years of Kerr-McGee’s legacy liabilities without adequate liability reserves.
“This settlement agreement with the Litigation Trust and the U.S. Government eliminates the uncertainty this dispute has created, and the proceeds will fund the remediation and cleanup of the legacy environmental liabilities and tort claims,” said Anadarko chairman, president and CEO Al Walker. “Investor focus can now return to the tremendous value embedded in Anadarko's asset base, allowing our peer-leading operational and exploration results to again become the basis for valuation. We are grateful to our stakeholders who have maintained their confidence and trust in our people and our assets.”
In exchange for a complete release of all claims asserted against Kerr-McGee, Anadarko agreed to pay a principal sum of $3.98 billion and 6% from the filing of the complaint in May 2009. Under the terms of the settlement, the Litigation Trust and Kerr-McGee have agreed to mutually release claims against each other. The U.S. Government and Kerr-McGee have provided mutual covenants not to sue.
The U.S. Government also will provide contribution protection from third-party claims seeking reimbursement from Kerr-McGee at more than 4,000 sites covered by the covenants.
The company expects the impact of the settlement agreement to be reflected in its first-quarter 2014 financial statements. The company estimates it will record a gross tax benefit of approximately $1.65 billion associated with the settlement, offset by approximately $1.10 billion in uncertain tax positions, currently resulting in a net tax benefit of approximately $550 million.
After the December penalty was announced, GHS Securities reduced Anadarko’s target price to $106 from $133.
Sameer Uplenchwar, GHS senior analyst, said Anadarko has $6.5 billion cash on hand, “which is more than enough to cover the settlement. Additionally, the company has access to a $5 billion line of credit.”
“We view this as a net positive for the stock as it would remove a near-term investment overhang,” Uplenchwar said. “We believe that the stock was discounting $8-$10 billion as an estimate of Tronox liability prior to today's settlement. We now expect longer-term investor interest to return as APC continues to refocus on its core business.”
The federal government initially sought $20.8 billion to clean up 2,772 sites and compensate about 8,100 claimants. Anadarko had said in January it should pay $850 million to $4 billion.
Tronox has said it would receive no immediate or direct benefit from the Dec. 12 opinion. The company estimated that 88% of the judgment would go to trusts and other governmental entities to remediate polluted sites. The remaining 12% of any funds received would be distributed to a tort trust to compensate individuals injured as a result of Kerr-McGee's environmental activities.