Inward Drifting U.S. and the Asian take Over
We stand at the edge of a fundamental change in world politics and economics. The U.S. is becoming an oil-producing giant. The "Shale-Gas" and "Shale-Oil" booms are likely to turn the U.S. into Saudi Arabia and dispel the chimera of energy independence and make it a reality for Americans. This has resulted into the pull back to the U.S. by the major oil and gas producers from around the world. While the U.S. will increase its production dramatically in the coming years it will not offset the rise in demand emanating from the ASEAN+5 economic bloc and India. The supply disruption concerns in the form of piracy and terrorism are necessitating changes in the oil reserve policy for the region. Geographic checkpoints like the Straits of Hormuz and Malacca will acquire greater significance in the coming decades. These are the facts facing the Oil and Gas industry while we strive to select the best among CNOOC, APACHE and ANADARKO in the analysis given below.
CNOOC is after growth. It is investing from about $12 billion to $14 billion in 2013 in pursuit of an annual average growth rate of 6 percent to 10 percent from 2011 to 2015. Further it has allocated 70 percent of its spending on development in order to bring 10 new oil and gas fields online offshore China. In 2013, the company is also expecting to drill 140 exploration wells. CNOOC will also purchase 2-Dimensional (2D) and 3-Dimensional Data (3D) seismic data, which will boost deepwater exploration activities. Therefore, 2013 is going to be a year of exploration, development and construction for future growth.
A major recent achievement of CNOOC would be the acquisition of Nexen Inc. This means that CNOOC now gets hold of Nexen's substantial reserves in Canadian oil sands. Nexen is also dynamic in natural gas exploration in shale rock formations and also owns approximately 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia.
The above mentioned measures to enhance production by CNOOC both by exploration and acquisition of additional assets around the world is in line with the increasing energy demand of the growing Chinese economy and that of ASEAN.
Apache has not been clear about its strategy; it is also operating in an unstable environment and is also facing debt problems. And therefore has been rightly punished by the investors. It is down 43 percent since April 29, 2011. It experienced a fall of 30 percent in 2012 and its shares have lost nearly 4 percent in this year. The factors contributing to this downward spiral include its exposure to Egypt. It has been the largest producer in the region and though Arab Spring is over, uncertainty is still to be found. Another factor is its lack of clarity, which is apparent from its acquisition of Mariner Energy at a 45 percent premium over the Mariner's closing price the day before the deal was announced in order to become a player in the deepwater Gulf. But now it is selling its deepwater assets in the Gulf of Mexico to plug a $1 billion hole in its balance sheet.
Anadarko is right in recognizing that it lacks both the financial muscle as well as the expertise to develop the Mozambican project on its own. This recognition as well as the need to manage its $13 billion long-term debt has led it to decide to sell part of its gas assets in Mozambican Rovuma basin. The money raised can also be used in the development of the project.
The Street Ratings has also awarded Anadarko a buy with a ratings score of B-. This has come about due to a host of favorable factors, which include a Net Income increase of 156.7 percent when compared to the same quarter one year prior, rising from -$358 million to $203 million. The rate of income growth from the same quarter one year ago has also significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. Secondly, its Net Operating Cash Flow has significantly increased by 206.37 percent to $2,220 million when compared to the same quarter last year while surpassing the industry average cash flow growth rate of 29.07 percent. The Gross Profit Margin for Anadarko is rather high. It also reported significant earnings per share improvement in the most recent quarter compared to the same quarter last year.
Price /Cash Flow
The valuation multiples in the above given table show that CNOOC is the most undervalued business among the three. The Price to Earning value of 8.4 is lower than those of APACHE and ANADARKO and it is well below the industry average as well. Price to Sales value is also below the industry average. It also has an impressive dividend yield of 2.7, which is above those of APACHE, ANADARKO and the industry average. Although it has a Price to Cash Flow value above those of the other two it is still below the industry average of 6.1. CNOOC is pursuing a year of exploration, development and construction for future growth and has acquired Nexen to satisfy the increasing energy demand of the growing Chinese economy. This shows that CNOOC has great growth potential. We recommend it as a strong buy in recognition of the fact that it is currently highly undervalued and seems to have a bright future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.