Why Is Anadarko Considering Selling A Major Stake In Its Mozambique Project?

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Anadarko Petroleum

Anadarko Corp (NYSE:APC) is considering entering into a joint venture for its Mozambique project in order to monetize up to one third of its interests in the region. We expect the company to receive a lot of offers for the same, given the intense interest oil and gas majors have shown in the assets in this region. [1]

Many large natural gas discoveries have been made since late 2011 off the coasts of Mozambique, Tanzania, and most recently Kenya. These 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. The significance of the region’s reserves was underlined in the battle fought between Royal Dutch Shell and Thailand’s PTT Exploration and Production for the control of Cove Energy. Cove held an 8.5% stake in the Rovuma Offshore Area 1 field where recoverable gas reserves have been estimated as being anywhere between 30-60 trillion cubic feet  PTT eventually won the bidding war and snapped up Cove for $1.9 billion. ((RPT-UPDATE 5-Thailand’s PTT gets Cove Energy after Shell drops bid, Reuters))

While Shell eventually walked away from the bidding war the previous time, this could be another opportunity for it to acquire stake in a promising project. It already has a good relationship with the Mozambique government and has experience in operating LNG facilities. Anadarko may see another attempt by Shell as a desperate attempt to get a slice of the project and drive a hard bargain, particularly if there are more bidders.

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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 themselves. 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 the twin purposes of financing further project development and paying off debt. The company had a long-term debt of approximately $14 billion on its balance sheet on September 30, 2012. [2]

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 would 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. because the pricing mechanism is different. Gas markets in Asia benchmark gas prices to crude oil prices. Since oil prices are expected to be high in the foreseeable future, gas prices should be high as well. This will boost Anadarko’s margins significantly. [3]

We revised our price estimate for Anadarko to $81 after Q3 earnings results. Our price is 10% ahead of the market price.

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

  1. Anadarko Considering Joint Venture in Mozambique, WSJ []
  2. Q3 2012 10-Q Report, SEC []
  3. Decoupling the Oil and Gas Prices, IFRI Report []