Anadarko Hopes To Sell A Stake In Mozambican Gas Block To Attract Industry Majors

Anadarko Corp (NYSE:APC) and Videocon, an Indian company, have jointly put up a 20% stake in their Mozambican Rovuma Basin asset for sale. ^[1]

Anadarko is the operator of Offshore Area 1 where these reserves are located and holds a 36.5% share of the fields. Its current partners are Mitsui of Japan with a 20% stake, Bharat Petroleum Corporation Limited and Videocon (both of India, with 10% stake each) and PTT of Thailand (8.5%). The Mozambican government is represented by its national oil company, Empresa Nacional de Hidrocarbonetos, which holds a 15% stake in the fields. If the sale goes through, Videocon would have exited the project completely while Anadarko’s stake will come down to 26.5%.

The sale is expected to bring in up to $4.5 billion based on an earlier deal in the same region. Last year, Cove Energy’s 8.5% stake was bought by PTT Exploration and Production of Thailand for $1.9 billion. Even at that time, there were a large number of players interested in Cove’s stake which led to a bidding war. ((RPT-UPDATE 5-Thailand’s PTT gets Cove Energy after Shell drops bid, Reuters))

The stake sale is likely to be a huge positive for the development of gas resources in the region. It is expected to bring in a major industry player with expertise, funds, and a track record in carrying out development of liquefied natural gas reserves. Existing players, including Anadarko, lack the sufficient expertise and financial resources to execute the project on their own. ^[2]

Click here for our full analysis of Anadarko Corp.

How Important Are Mozambique’s Gas Reserves?

Many large natural gas discoveries have been made since late 2011 off the coasts of Mozambique, Tanzania, and most recently Kenya. So far, some 150 trillion cubic feet of gas has been discovered in the waters of Mozambique, which might supply a country like Japan for 35 years. These discoveries have transformed East Africa into one of the world’s most promising energy provinces, so much so that the region may emerge as a strong competitor to Qatar and Australia in the battle to capture key export markets in Asia. However, before that can happen, a huge challenge is to build facilities on land to turn the reserves into liquefied natural gas, which can then be shipped to the markets. That is where a new player with deep pockets can make all the difference.

Why Anadarko Might Be Selling

While the project is certainly attractive, it comes with a huge price tag. For the development and construction of a new offshore two-train liquefied natural gas terminal alone, Anadarko has estimated the total cost at $15 billion. The company will be constructing the LNG terminal jointly with EnI of Italy which also has huge gas reserves in the region. This will reduce its cost burden to some extent. However, there would certainly be additional costs involved in the development of reserves. Given that Anadarko is a high-debt company keen to reduce its debt obligations, it makes sense for the company to monetize the potential of its reserves. The money raised could be used for twin purposes of financing further project development and paying off debt. The company had a long-term debt of approximately $13 billion on its balance sheet on December 31, 2012. ^[3]

According to Anadarko, the target is to begin construction of LNG plants in 2013 with the goal to bring the resources to market in 2018. Hence, for the next five years, Anadarko will have to keep putting up significant money without generating returns. This will certainly increase the debt burden unless financed using stake sales. Internal accruals are by far insufficient to meet project costs.

The demand for gas in Asia is expected to shoot up going forward, especially in India and China. The Mozambique gas should thus find ready buyers. Natural gas prices in Asia also tend to be higher than in the U.S. due to greater demand. While a supply glut in the U.S. is causing natural gas to be sold below $4 per million British thermal units (mBTU), the price in Asia could be as high as $20 per mBTU. Mozambique also has a competitive advantage over America and European countries in supplying LNG to Asian markets due to geographical proximity. ((Better out than in, The Economist))

Also, considering the scale of resources and lack of experience and skill within the Mozambican government in this area, the times ahead are sure to be challenging. A number of legal, bureaucratic and financial hurdles will have to be overcome in close coordination with the government. This raises the risk profile of the project and financing from external sources will therefore be expensive unless Anadarko and EnI can bring in players like Shell, BP, Total, ExxonMobil or Chevron who have considerable experience and expertise in this area. A higher number and quality of project partners will ease the capital burden of individual players, reduce project risk and thus improve chances of cheaper financing.

What Price Can Anadarko Extract For Its Stake?

Until last year, Cove Energy held an 8.5% stake in the Rovuma Offshore Area 1 field where recoverable gas reserves were estimated between 30-60 trillion cubic feet. PTT Exploration and Production of Thailand eventually won the bidding war and snapped up Cove for $1.9 billion. This transaction will most likely serve as a benchmark for the upcoming sale. Therefore, even if no premium is paid, Anadarko can expect $2.2-2.3 billion for its 10% stake. It may be able to charge a premium if there are multiple interested suitors in play. We think this is a likely scenario because, according to the Financial Times, a total of 25 companies were in Cove’s data room at one point, taking a close look at its assets. These ranged from western majors to state-owned Asian energy groups. ^[4]

We recently revised our price estimate for Anadarko to $80 after Q4 earnings results.

Understand on Trefis how a company’s products impact its stock price

1. Anadarko, Indian tycoon launch $4.5 bln Mozambique gas sale-sources, Reuters [↩]
2. Anadarko and Videocon to Sell Mozambique Gas Stakes, New York Times [↩]
3. Anadarko 2012 10-K, SEC [↩]
4. East Africa: ‘Embarrassment of riches’ hard to exploit, Financial Times [↩]