Anadarko's South African Oil Operations Will Make You Money In The Long-Term
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
South Africa is usually in the news for mining related ventures and deals, but rarely for oil exploration. So far, South Africa's success in oil and natural gas exploration is limited and hardly comparable to its neighbors. Mozambique and Namibia have been particularly successful in finding offshore oil fields, and several international oil companies such as Anadarko (NYSE: APC), Shell (NYSE: RDS-A), and Eni (NYSE: E) have signed deals with these governments worth millions of dollars. Anadarko recently announced that it would begin to explore and drill off the coast of South Africa. To this effect, it has signed a deal with the South African state-owned oil firm PetroSA. Under the terms of the deal, Anadarko will bag an 80% stake in Block 5/6 and Block 7. The rest would be held by PetroSA.
South Africa: A Great Business Environment For Oil Companies
South Africa is the most developed and advanced nation in the entire African continent. With a stable economy and investment friendly policies, South Africa is a great place for mining and gas companies to establish themselves. Moreover, its proximity to the Antarctic region and access to the Indian Ocean and the Atlantic Ocean offer tremendous possibilities and opportunities to oil companies which seek to explore new and viable oil fields. It is important to note that just a few hundred miles away from South African coastal regions, oil companies have raked in black gold, in Namibia and Mozambique.
The Deal
By agreeing to buy an 80% stake, Anadarko has become one of the more preferred companies in the country. This translates to trading and operations privileges which I believe will provide Anadarko with an advantage over other oil companies in the region. Though South Africa has not been very successful in oil exploration unlike Namibia and Mozambique, we must note that both Mozambique and Namibia have exceptional oil exploration teams from companies like Anadarko.
By allowing Anadarko to work in South Africa, the country has given itself access to one of the most successful oil exploration and drilling teams in the world. Not only that, but South Africa will have access to superior ships and industrial equipment which will certainly help to locate newer oil fields both onshore and offshore. As I see it, this deal is advantageous to both South Africa and Anadarko and each will benefit from the other’s success and economic stability.
The Competition
Chevron (NYSE: CVX) was recently implicated in a tragic incident in Richmond, California, when a fire erupted on its premises. Chevron has also been implicated in Brazil and Ecuador for similar charges that it somehow did not meet environmental standards of those nations. However, it has not affected its business yet. Likewise, BP (NYSE: BP) is still trying to lick its wounds after the Gulf oil leak which has done a lot of damage to its reputation. The Deepwater Horizon oil spill left BP with several lawsuits filed by those who were adversely affected. It also tarnished BP’s image in the international oil community.
Shell has not been immune to oil and gas leaks either and it continues to fight its own battles in various locations in Nigeria. Shell has also not been able to strike any deals with the Kurdistan regional Government lately, because of its close association with Iraqi central government. Shell has a successful business near Basra in Southern Iraq, which is stopping it from going ahead on its own to Kurdistan. If Shell goes ahead and strikes a deal in Kurdistan without Baghdad’s permission, its business in Basra will be affected, leading to significant revenue losses. Anadarko on the other hand has remained consistently safe and clean, and untoward incidents have been far and few. Eni recently announced that it discovered natural gas at the Mamba North East offshore site. The company estimates that the site may hold at least 10 trillion cubic feet of gas. This will of course be something that Anadarko will have to watch, as Anadarko's interests in Mozambique directly collide with Eni's.
If we look at the numbers provided by Anadarko at the end of the 2nd quarter, things are a little unsettling. The company reported a net loss of $380 million (0.76 per share). This is mostly because of the global economy and a weakened Chinese economy. We must remember that many mining companies like Rio Tinto (RIO) and VALE (VALE) have attributed lowered profits to the weakened Chinese economy. Moreover, there is a reduced demand for metals and minerals, and in some occasions, for gas as well. Cash flow at the end of the second quarter was $2 billion and the discretionary cash flow was reported to be $1.951 billion. Despite the unsettling numbers, Anadarko reported increased oil sales. In fact, the company sold an extra 20,000 barrels per day in the first quarter of 2012.
Conclusion
Like I mentioned before, Anadarko discovered its second major natural gas complex in Mozambique. This only hints at all the black gold (oil) that is waiting to be discovered off the coast of South Africa. The company also received a cool $113 million thanks to an Algerian tax resolution. Anadarko expects a total of $1 billion to be resolved in a similar manner. The company’s net debt has been reduced by $800 million and it is making significant progress towards a stable 3rd quarter. Investors may experience short term fluctuations but in the long term, Anadarko remains one of the best companies to invest in. Anadarko remains one of those stocks that you should not sell at the moment.
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