Cramerica Runs on Natural Gas

“This whole move is predicated upon the idea that Washington has at least embraced natural gas, that this cleaner, greener fossil fuel — I know it’s fossil, which puts it in the dog house — will be a part of our energy future. Take Anadarko, Anadarko Petroleum is one of the strongest derivative natural gas plays, one of those I’ve been recommending since January 12th, when it was at $38.33. The stock is now up to $54.40. A 40% increase.

Even as the price of the commodity has just been crushed.

If natural gas is going to be part of our energy future, then Anadarko is a fantastic stock to own. And its second quarter, recorded record sales volume, selling 4 million more gallons than the midpoint of Anadarko’s guidance. As well as record drilling, the company was able to run fewer rigs but drill more wells and the cost of wells coming down. Anadarko’s a great growth energy with new discoveries in the Gulf of Mexico and Mississippi, a major new project in Ghana that was approved by their government in July and another project in Algeria that’s expected to start producing oil in 2011.

The company’s also done a great job of hedging its natural gas 80% of anticipated natural gas volumes, hedged at $4.18 in the summer months. Hey, who would ever thought that was going to be good, right? And more than 75% of its 2010 natural gas volume’s protected with a middle floor of $5.60 and an upper ceiling of $8.25. So, even if natural gas prices don’t bounce back hard, Anadarko’s still in good shape.

And it’s not starving for cash, either. Remember it raised $1.3 billion with that secondary offering in May? That was at $45.50. Made a lot of people money. You’re up 20% if you got that offering price. Even, again, natural gas collapsed and they raised another $109 million in debt in June, leaving them with $3.5 billion in cash at the end of the quarter and no debt coming due until 2011.” — CNBC’s Mad Money 8/24/2009

Cramer invited Jim Hackett CEO of Anadarko Petroleum (APC) onto his show to discuss the natural gas industry. As you can tell from Cramer’s lead-in to the interview, he is very high on Anadarko specifically and has been recommending them since January. More generally, he is very interested in discussing the benefits of shifting America’s energy infrastructure to run on natural gas that has been produced here in America instead of continuing to import crude oil from all over the world. He made a compelling case for natural gas being a step in the direction of energy independence, and we can hope that this kind of thinking makes its way to Capital Hill soon.

Looking at Anadarko in particular, we think management is doing an exceptional job of dealing with slumping natural gas prices. As mentioned, APC had the foresight to hedge 80% of their production at $4.18, which seemed low at the time, but this has turned out to be a wise strategy as prices continued to fall. In addition to smart hedging, Anadarko management continues to increase production through the downturn. While other producers are forced to slow down production in hopes that prices will rise in the future, APC’s aggressive strategy makes it one of the best positioned to meet today’s challenges.

Anadarko has appreciated more than 40% year to date, and is currently Fairly Valued by our methodology. Based on the company’s current EPS and revenue figures, we would expect APC to trade somewhere between $45 and $62. With that in mind, our analysis would obviously become more positive on Anadarko if the price of natural gas starts to recover. This is a very real possibility as the ratio oil to natural gas prices has reached 26.35x, which is the highest it has been since at least 1990. Prices reflect supply and demand of each commodity, but we would expect a reversion to the mean over time.

The chart to the right lists each stock that Cramer talked about on Monday’s Mad Money. Please visit Ockham for a complete recap of Mad Money.

Original post

Comments

[Joseph L. S...:]

I, too, believe there will be a reversion to the mean between natural gas and oil. If I am wrong, however, I still want to participate in the natural gas business. Anadarko's 80% hedge ensures they have continuing cash flow to acquire competitors. Another such firm is Linn Energy, which has close to 100% of its production through 2010 fully hedged...

Aug 25 12:01 PM

[MarkitWacha:]

NG also has it's place in the Peak Oil argument. If oil production has peaked, then Natural gas production won't peak for about 10 years after that. Add to that the horizontal drilling tech improvements, and it's compelling to use NG as the stepping stone until there are renewables / fusion.

Aug 25 12:17 PM

[Bruce Pile:]

The projected difference between the peaking of nat gas and crude is going to make a huge impact on nations as to whether they are dependent on oil or gas. Take a look at the curves I have posted at goodstockinvesting.blo... that show how drastically different the supply situation becomes in just 10 or 15 years. It is so critical that the U.S. get its transportation converted to gas soon. Electric cars draw their energy from electric power plants, which generate half their energy from coal, the dirtiest of all fossil fuels. Electric cars just are not ready to get us around like we're used to, but nat gas cars only need a conversion done to what we already have. And because gas costs just $42/bbl of oil equivalent, that conversion pays for itself pretty quick. And gas is so much cleaner than gasoline, engines last much longer and cut CO2 and all other pollutants way down. Solar, wind, hydrogen, ethanol - nothing else could immediately cut all pollutants like natural gas. It not only would free our country of peak oil and/or Middle East catastrophe, it is the most aggressive way we have to fight for a green planet. According to Cramer, this concept of domestic gas as a strategic bridge fuel may finally be dawning on Washington.

Aug 25 03:03 PM

[Commies are...:]

God grant me the serenity to accept the things I cannot change, the courage to change the things I can and the wisdom to know when to buy or sell (especially HNU).

Aug 25 06:20 PM

[Immigration:]

1st - US gov't has never liked domestic energy companies as THE policy is to be the last country on the planet with the stuff, 2nd - the hedging strategy is working but if the market went the other way I'm not sure Anadarko would allocate E&P capital to support hedging.. 3rd - mean reversion doesn't consider new pricing regimes, doesn't like leverage and can outlast any patience you allocate to a trade....

Aug 26 09:53 AM

[Gravity404:]

I hold APC and while I think they are a great company I dont think it's the best NG play right now. While they have absored the Kerr McGee and Transwestern acquisitions from a few years ago, they still have tremendous debt from those acquisitions - $13 Billion. I do think they are fairly priced, but their are currently better investment options in this space. In order - DVN, APA, and MRO have the potential for more upside.

I would wait for at least another month for the downturn, keep your powder dry, and buy all at lower prices later this year.

Aug 26 09:55 AM

[Road Runner:]

Joseph L. Shaefer said, "I, too, believe there will be a reversion to the mean between natural gas and oil.".

Why do you believe oil and natural gas prices will converge? By what means do you see this happening? Oil is mostly used for transportation, where natural gas has only a token presence? Do you see vehicles converting to natural gas? I believe this can only be a marginal effort, at best, because natural gas vehicles have limited range. Do you see plug-in electric vehicles coming on strong? Even if plug-in vehicles are a big success, it will take at least 10 years to start to reduce demand for gasoline.
This is why I see this very large gap (4x in equivalent energy terms) between oil and natural gas continuing for years, though it will eventually happen. It's very difficult to replace oil with natural gas.

Aug 26 10:37 AM

[Politics of...:]

The change would appear to be more gradual. Still more of a when query for me, than an if. Probably after Quatar, Iran and the rest of the middle east has converted. I like Boone, CLNE, and CHK, more for the green than the economics, and a little local company ESPH, which filters water/reusable on site for shale drilling, that one is a long dreamers pick. There will be natural gas, but not until someone or something sets the issue or the middle east on fire again. Unfortunately our country requires a kick in the head before re-acting, when it comes to energy.
I like fsys for the mechanics of changing over vehicles, gas is crashing as we speak.

Aug 26 02:41 PM