Bear Stearns recommends Anadarko for high-grade exposure

By Ronda Fears

Nashville, Tenn., June 27 - Anadarko Petroleum Corp. is a strong credit and the 0% convertibles of 2020 are a good choice for convertible investors looking to increase exposure to the investment-grade end of the credit spectrum, said Bear Stearns & Co. convertible analysts

The analysts recommend the convert for swap and outright investors, on a 70% delta hedge.

"APC is a leader in this sector and although the return potential may be greater in other names, we feel this issue offers defensive qualities in a highly creditphobic world while offering modest equity exposure," the analysts said in a report Thursday.

The company recently raised its capital spending by 10% in 2002 to a total of $2.2 billion, in part due to the rise in natural gas prices recently, as well as a drop in rates charged to lease drilling rigs.

Bear Stearns oil and gas analyst Ellen Hannan on Thursday raised her estimates for natural gas and oil prices for 2002, based on trends in the marketplace, to $22/bbl and $3.00/mcf.

The Bear Stearns estimates for the company going forward were also boosted in some cases. EPS in second quarter is at 80c, up from 62c. For third quarter EPS of 59c is unchanged, as is 70c for fourth quarter. EPS for 2002 was upped to $2.43 from $2.26 with a P/E of 20.1 times, and for 2003 to $2.76 from $2.72 with a P/E of 17.8 times.

Implied volatility on the convertible is fairly valued at 30% and the 100-day historical volatility is around 28%, the analysts said.

"A 70% hedge could offer upside in the event of continued rumblings in the Middle East, as well as what we see as a potential spike in volatility in the fall in this name based on past trends," the analysts said.

"Although the common is trading at a premium to its peers on a valuation, we like the convertible for its modest premium and upside combined with the investment grade rating. Considering the recent turmoil in anything remotely tech, we find some solace in their stellar credit rating."

Long term debt maturities are manageable and well spaced, with a minimal $88 million due during 2002.

The company recently refinanced its other 0% issue of $650 million convertibles through the issuance of long-term bonds.

The bond floor on this issue is solid, supported by the investment-grade rating as well as the short dated put of less than a year, the analysts noted.

Anadarko 0% notes due 2020

Convertible Price: 63.75

Stock Price: $48.93

Conversion Premium: 12.04%

Conversion Price: $42.962

Current Yield 0%

Yield-to-Maturity: 2.56%

Spread: 110 bps over Treasuries

Delta: 70%

100-Day Vol: 28%

Call Price: 55.441

Years To First Call: 0.7

Credit Ratings: BBB+/Baa1

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