A Steal of a Deal Fueled Anadarko Petroleum Corporation's 18% Surge in September

Image source: Anadarko Petroleum Corporation.

What happened

Anadarko Petroleum's (NYSE: APC) stock jumped by double digits last month after it signed a deal to acquire Freeport-McMoRan's (NYSE: FCX) deepwater Gulf of Mexico assets for $2 billion. http://seekingalpha.com/pr/16602328-anadarko-announces-2-billion-property-acquisition

So what

Anadarko is buying a portfolio of production and exploration assets from Freeport-McMoRan. Overall, the deal will add 80,000 barrels of oil equivalent production per day, expand its infrastructure in the Gulf, and add 20 tieback opportunities and 15 identified exploration prospects to drive future growth. It did so at a rock-bottom valuation of just 1.5 times enterprise value to EBITDA, which is well below Anadarko's stand-alone value of nine times.

The $2 billion price tag is astounding given what Freeport-McMoRan paid for the assets just a few years ago. For example, it acquired Apache's deepwater Gulf of Mexico assets -- including two development projects and 11 exploration blocks -- in mid-2014 for $1.4 billion. Meanwhile, one of the companies Freeport-McMoRan acquired to create its oil and gas segment spent $6 billion in 2012 to buy deepwater Gulf of Mexico assets from BP and Royal Dutch Shell. While the steep drop in oil prices is the contributing factor in driving down the value of these assets, it is worth noting that several of the assets Anadarko is acquiring have subsequently come on line or expanded production since Freeport bought them. That, in a sense, makes them more valuable because they are generating cash flow instead of consuming capex.

Analysts loved the transaction, with several upgrading Anadarko's stocklast month as a result. Morgan Stanley, for example, gave the stock an overweight rating and bumped its price target from $74 to $81, citing the reasonable acquisition valuation. Johnson Rice, meanwhile, upgraded the stock to a buy, calling the deal "a contrarian move that captures a large chunk of value." Finally, UBS said that the deal should help Anadarko grow its production by 10% per year while also reducing debt.

Now what

Anadarko had a September to remember after it announced what could be a transformational deal because it adds near-term cash flow that the company can reinvest to drive growth going forward. Furthermore, if oil prices rise in the future, these assets have significant cash flow upside because 80% of the production is oil. That is in addition to the upside from future projects as Anadarko develops the expansion opportunities embedded within the acquisition.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper and Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.