Deutsche analysts see Anadarko 0% convertible due 2020 for outright investors.

By Ronda Fears

Nashville, Tenn., Dec. 12 - Anadarko Petroleum Corp.'s zero-coupon convertible due 2020 "offers an excellent opportunity to capture upside in the stock, " but it's recommended only for outright investors due to the expensive implied volatility that would dissuade hedge funds, said Deutsche Banc Alex. Brown convertible analysts Jeremy Howard and Jonathan Cohen in a report Wednesday. The Anadarko zero convert due 2020 is preferred over the Anadarko zero due 2021 because it is more equity sensitive, the analysts said.

Further upside still remains for Anadarko common shares, the convertible analysts said, noting that Deutsche equity analyst David Bradshaw has a positive directional view on the stock with a strong buy recommendation and a $100 per share price target. The common closed at $53.70 on Tuesday.

"We believe the APC 0% 2020 USD offers an excellent opportunity to capture upside in the stock. If the stock rises to the $100 price target in one year's time, the theoretical value of the bond should rise to roughly 116 from its current level of 70.084, a gain of nearly 65%," the analysts said in the report.

"We do caution however, that the implied volatility of this bond appears to be a bit expensive - in the low 50% range compared to listed volatility in the low 40% range, and would therefore recommend this bond to outright investors only." The analysts said the zero convert due 2020 is trading on a delta of 72% and a 12% premium, exhibiting a significantly higher level of equity sensitivity than the zero convert due 2021, which is moving on a 5% delta and a premium of 86%.

"The stock story is one of under-valuation. With continued progress in the Gulf of Mexico and not insubstantial potential stemming from its acreage position north of the border and in the Rockies, shares rebounded from recent slide rising 6%. Valuation is resting at 7.6 times the 2002 EBITDA, which is only 65% of 11.7 times historic average," the analysts said.

"Plenty of catalysts exist to get shares going with exploration activity in the Gulf of Mexico and Canada and substantial buyback program to name a few."

Anadarko Petroleum is one of the world's largest independent oil and natural gas companies. Roughly three-quarters of the company's reserve base and all current production are from the U.S. mid-continent, offshore Gulf of Mexico and the North Slope and Cook Inlet of Alaska. Overseas, the company is most active in Algeria, Eritrea, Jordan, Peru, the North Atlantic and Tunisia. Continuing to mark progress on- and offshore United States, as well as internationally, we believe Anadarko is poised to deliver above-average bottom-line growth, much of which is under-appreciated in the marketplace. Projects in Algeria and in the deep water of the Gulf of Mexico, as well as traditional onshore U.S. operations, in our view, should fuel growth going forward.

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