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One Natural Gas Company Worth Looking Into… Now And Later
Tony Daltorio, Investment U Research
These days, the US natural gas market finds itself weighted down by doom and gloom.
With North America choking on the stuff and underground storage of natural gas potentially approaching 4 trillion cubic feet, pundits keep saying that the market will see prices plunge to $2 per million BTU, where it will stay for years.
To contrarian investors such as myself, that type of talk couldn’t sound any more sweet…
Despite the gloom, we can still see a few glimmers of light in the natural gas market, such as drilling grinding to a multi-year low, barely a year after reaching its all-time high. Or the fact that some producers have voluntarily reduced output, deeming the present value of gas in the ground superior to current prices.
One way or another, US natural gas output has fallen 30% this year, the steepest rate of annual decline ever. But the demand side of the equation may also get a boost as some older, coal-fired generation plants shut down in favor of gas-fired plants.
As a resource, coal is traditionally cheaper. Yet because of environmental compliance fees – that could rise further if Congress passes the currently stalled cap and trade legislation – it costs significantly more by the time it reaches the consumer market.
With all of that factoring in, I firmly believe that prices will eventually rebound, and we could even see this glut melt into a deficit some day.
But while we wait for that to happen, the contrarian in me can’t resist digging around for any gems among the rubble. And I found that gem in Anadarko Petroleum… a business that figured out that the best way to wait out the natural gas gloom, is to play in oil.
The Venus Discovery: It’s Just That Beautiful
Anadarko Petroleum (NYSE: APC), named after the Anadarko basin in western Oklahoma and the Texas panhandle where it began operations, has ventured far beyond its original base.
Since 1985 when it began independent operations, it has grown into one of the largest independent oil and gas producers in the world, with 8 trillion cubic feet of the resource to its credit.
Though the company can claim status as one of the largest natural gas producers in the United States, with the majority of its reserves lying within US borders, Anadarko’s real shine comes from its findings elsewhere.
It started with the 2007 discovery of Africa’s largest deep-water field, Jubilee, off the coast of Ghana. Industry experts believe it holds up to 2 billion barrels of recoverable oil. All by itself, that discovery would turn Ghana into one of the world’s biggest oil producers after it begins pumping next year.
Then, Anadarko and its partners (Tullow Oil, Woodside Petroleum and Repsol) announced their combined efforts to search the coast of Sierra Leone in western Africa, an original effort they named Venus, after the elusive Greek goddess of beauty and love.
At the time they set out, few people thought much of the venture. In fact, even one company executive described it as nothing more than “a $40 million bet.”
But after the last few months, that project and subsequent discovery has become one of the most closely watched drilling operations in the industry, in large part because even its initial success greatly increases the chance that the area holds multiple billions of barrels of oil reserves.
All four companies involved now believe the entire region, which extends in the offshore waters from Sierra Leone to Liberia to the Ivory Coast all the way to Ghana, is rich in oil. And they expect to find more huge oil fields within it over the next five years.
Since Anadarko Petroleum owns 40% of the project, you’d better believe it will benefit from any further finds inside the Venus discovery.
Venus Ascends
I’m sure that if someone looked at the astrological chart for Anadarko, it would show that Venus is in the ascendant. I’m not an astrologer, but that sign reads well to me. I see the company coming into a whole lot of money in the future.
And at the very least, Lady Luck has been smiling on Anadarko as of late.
Just ask head of exploration Bob Daniels: “The Venus discovery confirms the existence of an active petroleum system in the basin and enhances the prospectivity of our vast West Africa acreage.”
But this basin could change the game for more than just Anadarko… It could revolutionize the entire oil industry. The Venus discovery has a chance of establishing a whole new, active hydrocarbon system that may span from western Africa all the way to the Latin American nation of Guyana.
If it can just live up to its potential, it will draw the attention of major oil companies all around the world.
Whether through dumb luck or shrewd analysis, Anadarko bet big on the region. And while everybody else remained ignorant about its true worth, the company – and Tullow Oil – snapped up exploration rights at ridiculously low prices.
At the time they began the project, most investors knew western Africa for its cocoa, not its oil. Now that people have learned the error of their limited imaginations, the value of those exploration rights have gone on to make impressive gains.
Why We Can’t Help But Love Anadarko
Of course both Anadarko and its partners know what to do with their findings. They plan on spending $3 billion in drilling wells in about half a dozen of their best prospects.
If the drilling goes well and they need to bring large, new fields into production, they’ll increase that investment possibly as high as $18 billion.
Bottom line: Anadarko Petroleum has an enviable advantage over its competitors in this new venture that Bob MacKnight from energy consultant PFC Energy calls “The first truly new deep water oil region to open up in more than a decade.”
And that isn’t even the best part…
While many investors still tend to think of Anadarko as only a US natural gas company, it now has a strong grasp on oil as well.
Whenever natural gas does rebound, Anadarko will benefit greatly. But in the meantime and for the future, it has grown into a much more versatile business that can not only cope with the trying times, but thrive in them as well.
Welcome to the world of large oil producers, Anadarko Petroleum. We think you’ve got a beautiful future.
Good investing,
Tony Daltorio
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2 Responses to “One Natural Gas Company Worth Looking Into… Now And Later”
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September 25th, 2009 at 12:51 pm
need more info
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Greg Groves Reply:
November 29th, 2009 at 1:46 pm
APC is indeed an impressive, agressive and experienced leader in the energy sector.
The note that APC has partnered with this company and that company is merely the way business is done in the oil patch.
At 60, it’s hardly a steal. At 35 to 40 it would be. For my money, we watch the suffering in the industry play out a bit until under 40 creates a logical entry point.
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