Anadarko Petroleum's (NYSE:APC) recent adverse environmental cleanup news eclipses its liquefied natural gas, or LNG, developments in East Africa. Japan's Prime Minister Abe recently visited Mozambique, approved an over $600 million economic development loan, and noted Anadarko's sale of 20% of its stake to Mitsui.
Anadarko and Mitsui intend to ship LNG by 2018 from Mozambique Rovuma Offshore Area 1. The gas field promises over 150 trillion cubic feet, or Tcf, one of the largest finds in East Africa. This reserve by itself would be able to supply Japan for over 30 years.
With over 250 Tcf reserves, Mozambique could well be the fourth largest exporter of gas in the world. East Africa is the new Middle East. Anadarko is on the ground floor in Mozambique. This strategy will act as a foil for low natural gas prices in the U.S.
Anadarko got in Mozambique early and is developing wells nearer to shore than other finds. The company is now monetizing its development investment with a stake sold to India's ONGC for $2.64 billion. This will allow Anadarko to refocus its efforts on new shale plays in the Permian-Delaware Basin in West Texas and in other plays in Colorado, the Gulf of Mexico, and Alaska. This cash can also help defray the multi-billion dollar cost of the LNG port facility it is building with Italy's Eni onshore.
Thailand's PTT plc, the state-owned petroleum company, just signed a preliminary deal for Anadarko to supply 2.6 million tons of LNG from Mozambique. This is part of PTT's expanded investment plan to replace aging natural gas reserves with East African and Myanmar supplies. Along with the $5.5 billion investment plan for 2014 will be an increased focus on the Mozambique stake and less focus on its Canadian oil sands play.
Japan continues to float LNG prices
Anadarko investors should closely watch the ebb and flow of global LNG prices as the company begins to monetize its East African developments. These plays are supplying sub-continent and East Asian regional customers. Long-term prices are beginning to approach spot market pricing in recent deals.
Japan is the largest importer of LNG globally. Japan's demand for low sulphur fuel oil will continue to drop over the next five years by about 1.9% per year to cut costs. LNG and coal are being used for fuel oil with more LNG fired plants to come on line through 2020. Japan has to compete with global second largest importer, South Korea, as well as India, the Philippines, Thailand, and Malaysia for new LNG supplies.
Landed prices in China, South Korea, and Japan are over $15 per million British thermal units, or mmBtu, on the spot market. This is compared with over $4 per mmBTU at Lake Charles, Louisiana, and Cove Point, Nova Scotia. Several $8 to $10 per mmBtu long-term contracts are being renegotiated to align more closely with spot markets. LNG is still linked to oil so that a 15% LNG deal means that a $100 per barrel oil price will translate into a $15 per mmBtu LNG price.
Foolish final thoughts
Anadarko is building more LNG trains in East Africa, even as it is refocusing on shale in West Texas and Colorado. A liquids and gas glut in the U.S. might not be as profitable as feeding an LNG-starved India, Thailand, and Japan.
Anadarko has built the second largest LNG liquefaction facility and port in the world, after Qatar, on the Indian Ocean with Italy's Eni. This port promises to be a major pricing hub for LNG shipments not only to Asia, but also around the horn to Latin America and Europe.
At the least a continued investment in Mozambique gas will help Anadarko diversify its global oil and U.S. plays with both northern and southern hemisphere LNG markets. These decisions should continue to raise expectations of rising future earnings and cash flow.
Anadarko's current trailing 12-month earnings multiple is over 23x, a discounted valuation compared with the 55x average for its industry and stronger than the 18x average for the S&P 500. Anadarko's earnings retention rate is 87%, which along with a return on average equity of 8.3%, implies a potential long-term book equity and earnings growth of 7.2%.
A quick thought experiment: The current price to book ratio, or p/b, is 1.87. With 7.2% book equity growth p/b would rise to 2x. If we were to apply this p/b to the 43.73 book equity per share, obtained by taking the current stock price of $81.79 and dividing by the p/b of 1.87, we get a potential stock price of over $87. Monetizing Mozambique assets is a step in the right direction. Bad news for OPEC could be good news for investors
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