Anadarko is Worth $88 On Rising Liquids Output and Offshore Gas Finds

Anadarko Corp. (NYSE:APC), one of the largest independent exploration companies, has driven a successful exploration program to boost its reserves and diversify its resource based beyond American shale plays. In the last quarter, the company announced that its offshore gas find in Mozambique may be among the most significant discoveries of the past decade. (See: Anadarko’s Mozambique Find Could Add Upside to $88 Value) Anadarko along with its partners in the prospect plan to build a LNG production facility to target growing demand from Asian markets. Back home, suppressed gas prices are pushing Anadarko and other companies involved in shale exploration such as Chevron (NYSE:CVX) to target liquid rich plays.

We have a $89 price estimate for Anadarko, which is at a 10% premium to its current market price.

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Diversifying markets

Gas prices in the U.S. have remained suppressed over the past couple of years because of oversupply. Towards the end of 2011, the mild winter exacerbated the situation as demand remained low while shale operators ramped up production. (See: Mild Winter Hurts Natural Gas Demand As Shale Exploration Continues Unabated) Shale now contributes to about a third of the natural gas output in the U.S. Prices are expected to remain low over the short term future because of a fresh round of investments into shale acreage from foreign investors. However, natural gas prices outside the U.S. are not affected by these trends and Anadarko’s move to explore deepwater prospects in Brazil, Africa and the Asia Pacific could be paying off. In 2011, the company devoted 25% of its capital outlay on international frontier projects. ^[1]

Anadarko maintains its 15 – 30 Tcf reserve estimate figures for its Mozambique offshore area 1 find. If the size of the field is towards the higher end of the estimate, the prospect could hold as much as a tenth of the total gas reserves in the U.S. at the end of 2009. Anadarko has a 36.6% working interest in the offshore area 1 prospect.

Together with its partners, the company plans to start construction on the field by 2013 and sell the gas in the international markets by 2018. Plans include building a LNG facility that will target the fast growing Asian markets. LNG prices in Asia have seen a sharp rise in 2011 because of demand from Japan and China.

Liquids output

Anadarko also has plans to raise its liquids output over the future because of the more attractive economics of liquids production in shale plays. Earlier in 2011, the company had highlighted plans to increase total output by 7-9% per annum till 2014 and to increase the fraction of liquids produced from around 45% in 2011 to around 48 – 49% in the same period.  ^[1] In the Eagleford basin, oil makes up 45% of the sales-volumes mix and NGLs constitute another 25%.

In addition to liquids production from shale basins, Anadarko is also jointly developing the Lucius oil & gas fields in the U.S. GoM with Exxon Mobil and other partners. ^[1] The company has also sanctioned the Ceaser/Tonga oil fields in the GoM and the El Merk oil field in Algeria. We estimate oil prices to rise gradually over the next few years, boosting revenues further.

Macondo spill and capital needs

Anadarko also settled its case with BP over claims arising from the Macondo spill incident. The company agreed to pay BP $4 billion to meet expenses arising from the April 2010 incident. The settlement will pressure the cash position of Anadarko which already has plans to build a multi-billion dollar LNG project in Mozambique. Analysts have speculated that the company may sell some of its stake in offshore assets held in Brazil or Africa to raise the necessary capital. (See: Anadarko May Look to Monetize Some Mozambique Assets)

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1. Company Presentation, Anadarko [↩] [↩] [↩]