Rovuma Basin has Huge Potential for Anadarko

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Anadarko Petroleum (NYSE: APC) has had a string of recent successes in deep water oil and gas exploration throughout the world. These discoveries made up for the disappointment with the Spartacus project in the Gulf of Mexico which has cost the company approximately $20 million. One of Anadarko's most exciting international projects is in the Rovuma Basin, which is off the coast of Mozambique, where its latest discovery, the Atum, is located.

This discovery has the potential of adding up to 12 tcf of proven recoverable reserves to the company's cache because Anadarko has a working interest of 36.5% in the joint-venture which has made the discovery. The partners are hopeful that this is a large liquefied natural gas development and the next stage will consist of an appraisal program of four wells. This find follows on the heels of the discovery in Prosperidade and leads to increased expectations in two other offshore Mozambique properties, Orca and Linguado. Anadarko proposes to support production of two new LNG plants in Cabo Delgado and this will provide a platform for supplies to Europe and Asia where gas prices remain strong.

In neighboring Cote d'Ivoire, Anadarko has encountered another discovery of light oil where the Paon-1X found over 100 net feet of oil, the first in that particular block. Anadarko has a 40% working interest in the block that is operated by Tullow Oil (TUWLF). The approach of participating in these discoveries as a partner rather than an independent producer means that the risk of nationalization of finds in coastal Africa is mitigated. Exxon Mobil (XOM) found out about nationalization just a few years ago in Venezuela. These countries can also be politically unstable and you only have to consider Occidental Petroleum (OXY) in Yemen and Libya or the problems that Royal Dutch Shell (RDS-A) is facing in Libya. I believe that Anadarko's strategy of production sharing for risk alleviation is smart.

Anadarko is also balancing out and diversifying its overseas holdings by building infrastructure in the US aggressively. It has started a new natural gas processing plant in the vicinity of the Eagle Ford Shale which is scheduled to start production by April 2013 with a start up capacity of 200 mcf of natural gas liquids per day. The entire industry is optimistic about Eagle Ford despite the fact that all the major US producers are active here. Companies are also expanding into infrastructure such as the recent initiatives from EOG Resources (NYSE: EOG) and Pioneer Natural Resources (PXD) to establish sand mines for fracking operations. EOG is also building a railway system to transport crude and there should be spare capacity for other producers. The biggest producers such as Marathon Oil (MRO) will be competing fiercely with Anadarko.

Anadarko is one of the largest independent oil and gas exploration and production companies with proven reserves of 2.54 billion BBOE and brought in earnings of $2.16 billion in the first quarter of the current fiscal year. Along the lines of BP (NYSE: BP) and ConocoPhillips (COP), the company is seeking reserves and geographical diversification aggressively and this makes it a prime investment prospect for investors looking for oil and natural gas plays. The operating results were marked by record sales volumes and production. The company also generated more than $130 million of free cash flow and EPS of $0.92 against $3.37 per share for the year 2011.

There are signs that the stockpiles in underground storage are growing more slowly as of late. The stockpiles in underground storage for the week ended June 1, 2012 showed a gain of 62 billion cubic feet (BCF) and this was lower than the five-year average for the same period in time. However, natural gas prices have been adversely affected because production from shale has been substantially in excess of demand. The peak in prices during 2011 of around $4.92 per million Btu (MMBtu) has dropped to around $2.25 with a low of $1.82 in April this year. This trend in prices has affected all companies with a weighting towards natural gas such as Chesapeake Energy (CHK)Devon Energy (DVN) and Encana (ECA). This lull in the gas market is a major reason why Anadarko is searching for and successfully finding new plays in oil. In addition to the Côte d'Ivoire where Anadarko has a 40% working interest in the CI-103 block, there has been some success in offshore Ghana as well as offshore Sierra Leone.

Everything has not been smooth sailing for Anadarko because it has had to pay out $4 billion to BP over the Deepwater Horizon Gulf of Mexico oil spill. This has been partly offset by the settlement of an Algerian tax dispute which is $2.6 billion in the favor of the company. The company has also recently settled a dispute of $102 million with Noble Corporation (NE) over the termination of a lease for a drilling rig. In other good news, the company has recently received approval from the U.S. Bureau of Land Management (BLM) to drill gas wells on federal lands in eastern Utah. This is an accomplishment because the BLM is not always easy to deal with. Meanwhile, late last month,Standard & Poor's Ratings Services raised its outlook on Anadarko from stable to positive and affirmed Anadarko's "BBB-" credit rating. This is the result of the rating agency expectation that protection measures for credit will be improved over the next year.

I am extremely impressed by the way Anadarko is going about its business for the future and the strategy that it is pursuing. I also have no doubt that management is highly competent and capable of executing the plans that have been outlined. I would, however continue to rate the stock as a hold for now. However, watch the stock closely and look for any signs of an upturn in natural gas prices in the U.S. or the revival of global demand for crude oil. That would be the time to jump in and start buying Anadarko.


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