Investing in frontier markets can add risk and reward to your portfolio. Frontier plays include countries where local politics, social unrest, or substandard financial reporting creates uncertainty or hazards. These countries may hold undiscovered energy or energy considered too expensive to recover. If you can stomach possible upheaval, your reward potential exceeds those of fainter hearts. Here are three energy companies in frontier countries to consider.
Gas in the Pacific
InterOil (NYSE: IOC ) operates solely in the Pacific country of Papua New Guinea. The primary focus is developing an estimated 10 trillion cubic feet (tcf) of natural gas and bringing it to market. Given the geography, Papua New Guinea will almost certainly export most of its gas to Asia. ExxonMobil has been building the infrastructure for these exports and the two companies are negotiating a deal where InterOil will sell its gas to ExxonMobil.
For the sake of completeness, InterOil also operates retail gas stores in Papua New Guinea, but its natural gas for export business is clearly where the money is going to be made.
If everything works out, the company could produce huge volumes of natural gas for export to countries paying the highest prices in the world. However, the energy minister of Papua New Guinea is pressuring InterOil to produce results, and not for the first time. Additionally, the energy minister and the president seem to have differing opinions as to which oil major should be operating Papua New Guinea's LNG terminals.
InterOil has internal drama of its own. In April, the CEO retired amid controversy regarding a personal friend who had been indicted by the SEC for fraud. A new CEO with impressive credentials has been named. So far, no drama with him.
While the CEO sounds upbeat about InterOil's prospects, he also commented that in five years he hopes to hear about new discoveries and the first LNG project in the area. Five years? For a company losing money? No wonder the stock once dropped 10% in one day.
A safer way to play the frontier game
If you seek the profit potential of frontier investments but like to sleep at night, try investing in companies with a mix of frontier and established energy plays.
For example, Anadarko Petroleum (NYSE: APC ) recently announced its second major natural-gas find off the coast of Mozambique. In a recent presentation, Anadarko characterized these gas plays as "massive" with a minimum of 35 tcf.
Anadarko set out an ambitious schedule for bringing both natural gas production and export facilities online so as not to be outdone by gas exports from Tanzania, Canada and Australia. The company believes its liquefied natural gas facility in Mozambique could be one of the world's largest.
As an investment, Anadarko continues to produce profits with increased oil and gas production. The future holds further promise as Anadarko develops not only its Mozambique natural gas plays, but its oil and gas plays off Ghana, Kenya and in the Gulf of Mexico. One frontier play in Algeria began producing oil this past spring and should grow production in the coming years. These operations add to the company's stable and productive portfolio of US onshore assets. Anadarko also recently doubled its dividend, but at a 0.8% yield, you buy this stock for capital gains.
Noble Energy (NYSE: NBL ) boasts an enviable track record of recent natural gas discoveries. In 1998, it discovered natural gas off the Israeli coast. Later, Noble found the Leviathan and Karish natural gas plays, with the Leviathan described as the biggest natural gas find in its history. Nearby Cyprus recently signed a tentative deal with Noble to build a liquefied natural gas terminal on its Southern Coast. Off the coast of Equatorial New Guinea and Cameroon, oil and natural gas fields were discovered. For all three countries, gas exports to Europe or Asia figure in their future.
The most recent earnings report showed Noble improving its earnings over the first three- and six-month periods compared to 2012. A major driver of these earnings were international operations such as the Equatorial New Guinea and the Israeli gas fields. The company continues exploring in frontier regions including Nicaragua and the Falkland Islands.
Onshore US and offshore Gulf of Mexico oil production add revenue and stability to Noble's balance sheet. Noble seems particularly optimistic about its Colorado oil plays. All to say, Noble seems to be hitting on all cylinders as it produces growing volumes of oil and natural gas.
Final Foolish thoughts
Of these three companies, I like Noble best. The company operates a range of established and frontier assets, all producing or poised to produce growing revenue. Unlike Anadarko, Noble has no liabilities like the Deepwater Horizon disaster to slow it down. So far, none of its frontier operations show signs of political instability or conflict.
That could change if Argentine President Fernandez carries out her threat to have recently seized YPF corporation search for oil off the Falkland Islands. Even if Fernandez pulls such a stunt, Noble's many other assets should keep pumping profits for years to come.
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