This Company Is Set to Skyrocket
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When it comes to the oil and gas sector, it's hard to find value plays. The task becomes daunting when we start scouting for large cap companies. While some companies are shifting to high margin projects, others are shedding assets to focus on their core competencies. But as a rare find, Anadarko Petroleum (NYSE: APC) appears to have all the ingredients of a perfect value play.
In 2010, Anadarko and Eni (NYSE: E) jointly discovered of the world’s second largest natural gas reserves in Mozambique, Africa. The region is estimated to contain around 150 trillion cubic feet of natural gas, but the estimates have been revised upwards many times due to fresh hydrocarbon discoveries. And in order to export such gigantic quantities of liquid natural gas, or LNG, Anadarko and Eni are also developing the world’s largest LNG export terminal in Mozambique.
Because Asian and European countries haven’t had their shale gas boom yet, natural gas is 3-5 times more expensive in these continents as compared to North America. So the Mozambique project will play a vital role in reducing the intercontinental price differential. It's worth noting that Mozambique is located on the eastern coast of Africa, which means that it will be able to supply LNG to Asian countries at considerably lower shipping costs compared to U.S. shipments.
This could be a game changer for the entire gas industry, as the dependence on the U.S. for its LNG will gradually reduce. But since the total development cost of the project exceeds $50 billion, both Anadarko and Eni have been selling their respective stakes to raise some capital and reduce their project exposure.
Eni currently owns 50% of Area 4, and operates with $10.29 billion under cash and cash equivalents. Meanwhile, Anadarko owns a 36.5% stake in Area 1 and is looking to offload 10% of its stake for around $4 billion. Anadarko operates with $3.73 billion in cash and cash equivalents.
Eni's gigantic stake in the project, is one of the reasons behind its impressive fiscal year 2014 EPS growth estimate of 18%. But it's worth noting that Anadarko seems to offer balanced growth, and yet it has a higher 2014 EPS growth estimate of 24%.
Besides that, the Niobrara formation also presents a tremendous growth opportunity. According to the latest estimates, Niobrara contains roughly 3 billion barrels of oil reserves and 150 trillion cubic feet of natural gas reserves. The region is still in early stages of development, and hydrocarbon companies are yet to reap profits from the region. But thanks to the production bonanza in the region, Colorado's oil production has already breached its 50 year highs.
It's worth noting that Noble Energy (NYSE: NBL) and Anadarko Petroleum are some of the most prominent oil and gas companies operating in the region.
According to its website, Noble Energy has drilled 85 wells in 2011, 200 wells in 2012 and plans to drill another 300 wells in 2013. It has allocated 45% ($1.7 billion) of its fiscal year 2013 capital expenditures for the development its Niobrara assets. Its management is expecting favorable drilling results and aims to triple its cash flows from the region within the next five years.
On the other hand, Anadarko Petroleum has earmarked a capex budget of $1 billion a year, for its expansion projects in Niobrara. The company owns around 400,000 acres of land in the region and estimates its total reserves to be around 1.5 billion boe. It plans to drill 300 wells in 2013, and aims to further accelerate its drilling operations from 2014 onwards. As stated in its presentation, Anadarko expects 350 million boe of output per well, with 50% oil, 20% gas and 30% NGLs.
It should be noted that the total oil production from Niobrara formation has increased by 10.44% between 2009-2011. And analysts estimate its gross production to further accelerate. This would certainly strengthen Anadarko's global position, as the leading oil and gas producer.
Besides that, Anadarko is also profiting from its Eagleford liquids bonanza. It owns around 400,000 acres of land in Eagleford region, which consists of roughly 600 million boe of liquids. Out of those reserves, around 65% is accounted by high margin oil and natural gas. So, in order to capture this potential, Anadarko has been aggressively expanding in the region.
It had identified around 4,000 drillsites in the region last year, which were examined for exploration and production related activities. And thanks to the better than expected drilling results, Anadarko has been able to record a stellar revenue growth despite weak liquids prices. The hydrocarbon behemoth sold 28,000 barrels of liquids during the recent quarter, which was 60% higher than last year’s corresponding quarter.
Besides that, Anadarko is also developing its Brasada Gas processing plant in the region. It will have a processing capacity of 200 MMcf/d, which can be later expanded to 400 MMcf/d. The development of its 156 acre processing plant is being eagerly awaited, as it will be one of Anadarko’s most valuable onshore active assets. Its management recently stated that the development work is on schedule, and the plant will most likely be operational during its second quarter.
It's evident that Anadarko is gearing up for the rising gas demand over the long run. Since natural gas prices have bottomed out and are trending upwards, its growth prospects are solidified, making it one of the premier natural gas plays. Keeping all the compelling reasons in mind, I think Anadarko Petroleum has the potential to yield spectacular returns over the years to come.
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