Either It Skyrockets, or It Goes Bust!

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The general thesis is that oil companies stand to benefit with rising crude prices. Well that is true, but lower crude prices don’t necessarily imply that all oil companies are deemed to fail. Over the last six months, Brent crude prices have lost nearly 4% while shares of Anadarko Petroleum have appreciated by around 21%. This was due to its expansion projects that delivered volumetric growth, but the recent dip in crude prices would definitely pressure its margins. In order to continue growing, Anadarko needs to ramp up its production, and that is exactly what the company is doing.

Mozambique: Area 1

Back in 2010, Anadarko Petroleum (NYSE: APC) and Eni (NYSE: E) jointly discovered the world’s second largest natural gas fields in Mozambique which estimated to contain 150 trillion cubic feet of gas. Naturally, developing the fields and exporting LNG to Asian countries would’ve been the logical move but the developing costs are estimated to reach $50 billion, without any returns till 2018. Moreover, since both the companies lack the expertise to develop natural gas fields, and transport the gas around the globe, their risks seem to be amplified. Thus both the companies decided to divest their stakes, and last month Eni sold 20% of its stake for $4.2 billion. As of now, Eni and Anadarko Petroleum own 50% and 36.5% stakes in the Mozambique project, respectively, and Anadarko is in advanced talks with ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A) to offload 10% of its interest.

Companies around the globe are scrambling to get a chunk of its stake, but it is more likely that deal will involve Exxon or Shell. Both the companies have deep pockets to fund the deal entirely by cash.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>Cash and Cash equivalents</p> </th></tr> </thead> <tbody> <tr> <td> <p>Anadarko Petroleum     </p> </td> <td> <p>$2.47 billion</p> </td> </tr> <tr> <td> <p>Eni</p> </td> <td> <p>$10.07 billion</p> </td> </tr> <tr> <td> <p>Royal Dutch Shell</p> </td> <td> <p>$18.55 billion</p> </td> </tr> <tr> <td> <p>ExxonMobil</p> </td> <td> <p>$9.58 billion</p> </td> </tr> </tbody> </table>

Moreover, the extensive expertise of ExxonMobil and Royal Dutch Shell, in natural gas development, production and transportation would be great for the project. Last year, Royal Dutch Shell produced more natural gas than oil, while Exxon Petroleum produced 49% natural gas and 51% crude.

Another thing to consider is that Anadarko Petroleum was silently in talks with ExxonMobil, while Royal Dutch Shell was blissfully unaware of the ongoing discussions. Since Royal Dutch Shell has been trying to gain a stake in the project for the last 2 years, it is possible that a bidding war may begin. Additionally, Indian-based Oil India has offered to pay up to $5 billion for a 20% stake, Exxon and Shell may have to reconsider their bids.

In case a bidding war happens, investors of Anadarko Petroleum should be greatly pleased. The company has $13.27 billion in long term debt, and the cash from the deal would be partly used to begin LNG development work by 2013, while the remaining cash would be used to repay its liabilities.

But that’s not all!

According to its latest press release, Anadarko is in talks with potential customers in Japan to supply LNG from its upcoming Mozambique plant. Since the nuclear disaster in Japan, the country has been steadily shifting towards cleaner and safer energy sources, and natural gas fits perfectly with its revised long term environmental goals. However, the management of Anadarko told that it is currently in talks with 20 customers across 10 nations, which suggests that Anadarko won’t have to bargain much.

But the future of Anadarko is greatly depending on the Mozambique plant. The company would have to exhaust its cash reserves and strain its cash flows in the coming years, without any returns till 2018. The success of the plant would depend on the expertise of its partner(s) and investors should keep a close eye on the stake sale. That said, Anadarko Petroleum seems to have a tremendous upside and definitely deserves a Buy rating.


Piyush Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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