One of the most lucrative energy deposits in the world can be found off the coast of Mozambique. With an estimated 250 trillion cubic feet of gas, Mozambique can supply energy needs of the entire world for a period of two years. Anadarko Petroleum (NYSE:APC) is the most important player in Mozambique and has access to all the major oil and gas field in Mozambique along with Italy's Enersis (ENI). The company recently announced that it will supply liquefied natural gas to potential customers in Japan, which is one of the largest energy markets in the world. In this article, I will discuss Anadarko's LNG deal with Japanese customers and examine the long-term effects on its profitability and revenue.
Steve Hoyle, vice president of LNG marketing at Anadarko said that the company is advancing efforts to sign deals with selected Japanese companies in order to cash in on the uncertainty of nuclear power in Japan. After the Fukushima nuclear disaster happened in March, of 2011, the Japanese have been particularly skeptical about restarting the reactors in order to meet the island nation's energy demands. Japan's Prime Minister Shinzo Abe announced last month that the reactors will be restarted once safety measures are taken care of. However, the Japanese are adamant about restarting the reactors and Japan faces a severe energy shortage in the long-term. With this in mind, Japan will continue to be one of the largest markets for safer energy sources like LNG. Anadarko has thus captured a market that will prove to be profitable and sustainable in the long term.
Hoyle did not reveal which Japanese companies his team is trying to negotiate with. Tokyo Electric Power Company (Tepco) is being touted as one of the companies who will buy natural gas from Anadarko. Toshiaki Koizumi, director of the Tepco fuel department, had revealed to Platts news agency in February 2013 that it would partner with Tokyo Gas and acquire 10 million cubic meters of gas per year. Moreover, Koizumi also revealed that both Tokyo Electric Power Company and Tokyo Gas will buy gas from Mozambique along with LNG from Alaska. That important piece of information strikes a note now, as Tepco officials have maintained that they are interested in purchasing dry liquid natural gas. Anadarko's Rovuma basin in Mozambique holds dry liquid natural gas in Area 1. Officials from both the companies have met in order to discuss purchase of LNG supplies.
While Anadarko has not made public the nature of these talks with Japanese customers, it is clear that Tepco and Tokyo Gas are part of the discussions. Long-term demand for LNG and an apprehension towards nuclear fuel will make Japan one of the largest markets for Anadarko, when the deals are signed.
Fundamental Impacts on Anadarko
Currently, LNG import price in Japan is $16.66. In February, it was $16.20 and last year, it was $16. This steady increase in import price suggests a favorable trend in which Anadarko will earn a premium for its Mozambican LNG. Prosperidade complex and Golfinho discovery well together hold a minimum of 32 trillion cubic feet of gas and a maximum of 65 trillion cubic feet of gas. Even if we look at the lowest estimates, Anadarko is all set to make a lot of money. A thousand cubic feet of LNG costs $16.66 and 32 trillion cubic feet of LNG will fetch $533 billion at current rates. The actual profit that Anadarko will make from this huge amount will be a tidy sum that will help the company to pay huge dividends.
Anadarko Has Very Few Competitors in Mozambique
Meanwhile, Eni was coaxed by Mozambique's government to partner with Anadarko in order to explore and drill off the coast of Mozambique. A 5 million ton/year facility was jointly split between Eni and Anadarko late last year. Eni is expected to assist and help Anadarko in all its ventures in Mozambique.
Tavares Martinho, Empresa Nacional de Hidrocarbonetos' exploration director suggested that Shell (NYSE:RDS.A) was interested in coming to Mozambique. Shell, which has faced skirmishes in Nigeria because of militant attacks, has constantly sought to enter Mozambique for its relative stability. In early 2012, Shell failed to enter Mozambique and lost to Cove Energy. However, it continues to look for opportunities to enter Mozambican fields. Mozambican government has consistently sought to bring in international players like Shell in to the country to increase competitiveness in LNG production. However, Shell has been repeatedly made to bite dust by Anadarko, Eni and Cove Energy. Malaysia's Petronas has been an obstacle to Shell's dreams in the region as well. Only recently Anadarko announced that it was holding early stage talks with Shell and Exxon Mobil (NYSE:XOM) about selling a share of its massive LNG sources. Shell may still not be able to clinch the deal with Exxon Mobil officials trying very hard to grab the shares.
Similarly, Exxon Mobil has been consistently trying to enter Mozambique. Tavares Martinho revealed that Exxon Mobil too had entered into talks with officials in the country to look for opportunities in exploration and drilling sector. However, Exxon Mobil will have to face existing competitors like Anadarko and Enersis, if it chooses to enter Mozambique. Exxon officials have repeatedly tried to enter Mozambique and Anadarko's offer is a blessing in disguise to them. Moreover, Exxon Mobil's strengths in shipping and global transportation of gas may help Anadarko in return, when it decides to sell its LNG to Japan and other energy markets.
With a market cap of $42 billion and an enterprise value of $54 billion, Anadarko is the second largest U.S. energy company. The company has an impressive price to sales ratio of 3.17 and a price to book ratio of 2.05. Moreover, the company is managed well, with a return on assets of 2.60% and return on equity of 11.97%. With a profit margin of 18%, Anadarko is one of the most lucrative companies to invest in. The Japanese deals will help Anadarko to find a great market for its Mozambican LNG, which is expected to be first shipped in 2018. Certainly, partnering with Japanese companies for sales will help Anadarko to increase its long-term profitability.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.