New Kenyan Project - Long-Term Cash Cow For Anadarko?

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Much has been said and written about Anadarko's (NYSE: APC) exploits in Mozambique, where the oil giant has continued to explore, operate and make profits continuously. Additionally, Anadarko has also invested a lot of money in developing countries' infrastructure building programs which will bring a lot of profits to the company in the future. Now, Kenya's Ministry of Energy's top official announced that Anadarko will begin exploring for oil and gas from Dec. 13.

Anadarko plans to drill at the Kiboko prospect in block L11B and the Kubwa prospect in block L7. The project is expected to cost $280 million. Africa Oil (AOI.V)Tullow Oil (TLW.L) and other foreign oil and gas companies have begun to operate in East Africa and the region looks very promising. Anadarko took the right step at the right time by agreeing to explore at the two aforementioned wells. Anadarko's business in Mozambique is already buoyant and the company has received a lot of critical acclaim for its drilling techniques.

Many insiders also believe that Anadarko has a superior advantage when it comes to Kenya, as it understands the geography and culture of the land, being so close to Mozambique. East African nations have begun to take their oil industry very seriously and there seems to be a race towards becoming the largest oil producer in the region. Mozambique, Tanzania, Kenya and South Africa have all dabbled and succeeded at various levels in discovering and producing oil.

At the moment, the most successful country in this region is Mozambique, closely followed by Kenya. South Africa trails behind and Anadarko has a great business in that country as well. The decision to go ahead with the Kenyan project is significant on a number of levels. The Kenyan government has opted to liberalize its economy and has begun to support foreign oil companies in a number of ways. The Kenyan government has understood that only by offering more benefits and discounts to oil majors can the country can succeed in the region.

This has led to oil companies almost being spoiled for choice, while being allotted with wells. Anadarko has a special relationship with the government of Kenya, though it is not mentioned in legal documents. The reason partly is because Kenya is a geopolitical rival of Mozambique and by inviting Anadarko to Kenya, it is going to kick start a race in the East Coast. Most likely, Mozambique will provide newer benefits and concessions to Anadarko in order to get the company to drill more oil and gas. This sort of geopolitical rivalry among East African countries will benefit Anadarko in the long run as the company will only benefit from such rivalries.

Of course, it is good for Kenya and Mozambique too because in the end, they have got their hands on one of the most successful oil companies in the world. Anadarko can also expect to foster great employee relationships among Kenyans, which will be a long term asset to the company. From what I can see, this is a win-win situation for everyone who is included in the project. The Indian Ocean holds some of the largest oil and natural gas reserves in the world, and Anadarko is no stranger to the oceans' long held secrets. Anadarko has a stake of 45% each at L7 and L11B, while Total (NYSE: TOT) has 40% and Cove Energy (CNVGF) holds the remaining stake.

Tullow Oil, the British explorer confirmed that its exploration projects in Kenya are going very well. In fact, the company gained as much as 3.6% since Sept. 14 and its work is progressing steadily in Kenya. Total is exploring in Kenya's offshore block L22, where it is drilling and exploring at water depths of 2000 to 3500 meters.

ERHC Energy (ERHE) recently announced that it would continue to invest and develop infrastructure in Chad and Kenya. The company also plans to explore in other sub-Saharan countries. ERHC has major stakes in Sao Tome and Principe Exclusive Economic Zone (EEZ), which is expected to emerge as a major oil and natural gas destination in the near future. Africa Oil announced that it has successfully encountered oil at the Twiga South-1 exploration well in onshore Kenya Block 13T. The discovery is likely to set off a major oil race across Kenya, Ethiopia, Mozambique and even as far as Chad. These companies have been scrambling to get a piece of the Kenyan pie and most companies that have ventured into the nation have got more than their share of pie.

Chevron (NYSE: CVX) has mostly stuck to Western parts of Africa. If the company decides to venture back into Kenya, it would do a lot of good. Chevron left Kenya and Uganda in 2008 but has operations in Tanzania. ExxonMobil (XOM) on the other hand recently decided to quit Southern Iraq, and it plans to continue its operations in Kurdistan. Most oil companies that operate in Kurdistan have had a fiery relationship with Baghdad. This also includes Marathon (MRO), which opted to dig and explore in Kurdistan rather than Southern Iraq. Marathon opted to work with Total in Kurdistan. Total's business is flourishing in Kurdistan too, thanks to the leeway that Kurdistan Regional Government offers to foreign oil companies.

Anadarko's oil and gas business has seen an upward trend recently, and the results have been very satisfactory. The company trades at $70 at the moment and has a price to book ratio of 1.73, which shows that it is doing pretty well when compared with its peers. The company also has a price to sales ratio of 2.63, which suggests that Anadarko is going in the right direction. With a profit margin of 13.62% and an operating margin of 8.89%, Anadarko can be a source of steady income to investors. Anadarko's revenue is $13.44 billion and its gross profit is $11.29 billion.

With total cash of $2.53 billion and total debt of $14.14 billion, I would be a little worried about the company's liabilities. However, the company has an operating cash flow of $4 billion and with all the oil that is waiting in the waters of Kenya, Anadarko surely has hit another cash cow after Mozambique. In the long run, I am sure Anadarko will gain a lot from the Kenyan project. Anadarko is one of the few companies that have managed to remain consistently profitable and this is one reason I find the company stable, secure and a good place to invest one's money.


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