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Guideline to Frugal Investing
Choosing the right stocks
Stock Recommendations
Disclaimer
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Anadarko Petroleum (APC) may profit from an upcoming explosive natural gas market.
This stock is also disliked by Wall Street because of the uncertainty of the
2006 aquisitions of Western Gas and Kerr Mcgee. Because this stock is
so hated, it creates a great contrarian play. Further the low stock price
is not justified considering the potential for rising natural gas prices.
The commodities market
is signaling that by January 2008 we could see natural gas at $9 from today's
price of $7. This potential rally in natural gas will enable APC to generate
positive top line growth for 2007 and beyond. If the rally does not materialize
APC will still participate because the company has likely looked in some of
the high futures prices through its dynamic hedging program.
The stock was valued assuming small increases in production and sales. Higher
natural gas or oil prices can dramatically increase sales beyond our projections.
| Company: |
Anadarko Petroleum |
| Trading Symbol: |
APC |
| Date of Recommendation |
3/20/2007 |
| Risk |
Medium - High |
| Stock Price as of Recommended Date |
40.35 |
| Fair Value |
50 |
| Discount of Price vs Fair Value: |
25% |
| If you win on this stock |
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|
| Bears Say |
We Say |
| There is too much uncertainty with the merger. The company may fail
to deliver results to due merger integration problems. |
There are many risks that oil companies face due to the high amount
of capital investment needed to produce revenues. The merger is a risk but it has some
potential positives as well. One positive is that the merger has made the company more
levered to the price of oil and natural gas. So if the price of oil and natural gas rises
the company will surely benefit.
|
| The debt/asset ratio has increased from 16% in 2005 to
39% in 2006. This increased debt makes the stock more risky |
The risk has been accounted for in the assumed Beta. The forward Beta has been adjusted upward
to account for the increased risk. The option market has priced Long term option implied volatility
expiring in January 2009 at 27% compared with Microsoft's Jan 2009 implied volatility 21%. We use
Microsoft as an indicator of a typical stock that has a market beta or a beta = 1. Since the 2009 implied
volatility is assumed to be higher for APC, we adjust our future beta assumptions accordingly.
This higher beta implies a higher cost of capital and lowers the fair value stock price. On the flip side,
all the debt that the company has undertaken has lowered it's after tax cost of capital which raises
fair value the stock price.
|
| Assumptions |
| Expected Revenue Growth Over Next 12-96 Months |
5% |
| Expected Revenue Growth Over Next 96+ Months |
4% |
| Future Beta |
1.37 |
| Assumed Capital needed to grow sales by $1 |
$4 |
| 10 Year Bond Yield and Weighted Cost of Capital |
4.6% and 6.4% |
| ROIC in excess of WACC for 120+ months |
1% |
| Depreciation and Depletion Life |
25.7 years |
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