Anadarko Corp. (NYSE:APC) recently announced that it has signed long-term supply agreements with Asian buyers for two-thirds of the capacity of the first train of its planned liquefied natural gas (LNG) project in Mozambique and hopes to sign similar agreements for the rest soon. Signing long-term supply contracts is crucial to raising the huge capital required to finance LNG projects. Al Walker, the company’s CEO, said that these contracts have financially de-risked the project. We believe that these supply contracts have moved Anadarko closer to a final investment decision (FID) on the Mozambique LNG project, which is expected to ship its first LNG cargo in 2018. 
Anadarko primarily operates in three segments: oil & gas exploration and production, midstream and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States and the Appalachian basin. The company is also an independent producer in the Deepwater Gulf of Mexico, and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, Alaska and New Zealand. At the end of 2013, Anadarko had proven reserves of almost 2.8 billion barrels of oil equivalent.
Our $85 price estimate for Anadarko is almost inline with its current market price.
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East Africa Natural 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 have 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.
Anadarko’s Reserves In The Area
Anadarko is the operator of Offshore Area 1, which covers approximately 2.6 million acres in the deepwater Rovuma Basin. The company and its partners have drilled several successful wells on the block, which are estimated to hold around 40 to 70 trillion cubic feet (tcf) of recoverable natural gas. Additional discoveries can further increase the estimated resource base in the region, which can potentially enhance future development options as well. 
Anadarko holds a 26.5% share of these resources even after the sale of its 10% stake in the project recently. (See: Anadarko Rakes In $2.6 Billion From African Asset Sale) Its current partners are Mitsui of Japan with a 20% stake, Bharat Petroleum Corporation Limited (BPCL), an Indian oil-marketing firm that holds 10% stake and PTT of Thailand that holds 8.5%. ONGC will also hold 10% stake in the project as a result of the recent deal with Anadarko. Apart from that, Videocon’s stake sale has also brought in ONGC and OINL that will together hold 10% stake in the project as well. Its national oil company, Empresa Nacional de Hidrocarbonetos, which holds a 15% stake in the fields, represents the Mozambican government.
Importance of LNG Supply Contracts
The natural gas reserves off East Africa are so massive that they easily dwarf demand from the local markets. Therefore, liquefying and exporting natural gas is the most viable way to tap these resources. Anadarko estimates that its Offshore Area 1 reserves would be enough to feed a 50 million tonnes per annum (MMTPA) LNG plant comprised of 10 LNG trains of 5 MMTPA capacity each. Just to give some perspective, the global LNG demand stood at around 250 MMTPA last year.
Securing capital to build such a huge LNG project is a big challenge. The development of offshore fields, construction of LNG trains and supporting infrastructure such as pipelines to transport the gas produced from offshore fields to onshore processing facilities, requires significant investments. Also, considering the scale of resources and lack of experience and skill within the Mozambican government in this area, times ahead are sure to be challenging for Anadarko. 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 is therefore expected to be expensive. The company estimates the gross cost of building the first two LNG trains in Mozambique along with the wells and supporting subsea infrastructure to be around $15 billion.
Moreover, in the absence of a global LNG price index and a large variance in natural gas prices across the world, there are huge uncertainties associated with any LNG project. Therefore, in the commercial development of an LNG project, the developers first need to confirm sales to the downstream buyers and then sign long-term contracts (typically 20–25 years) with them outlining strict terms and structures for gas pricing. Only when the customers are confirmed and the project is deemed economically feasible, a final investment decision on the project is taken and capital financing of the project moves forward. Therefore, this phase of signing long-term supply contracts at best possible prices is extremely crucial to economic feasibility of the Mozambique LNG project as well as the value it can add to Anadarko’s portfolio.Notes: