Anadarko Petroleum: Strong Sale Price For Mozambique Assets Supports Valuation

Aug.26.13 | About: Anadarko Petroleum (APC)

Investors in Anadarko Petroleum (NYSE:APC) reacted with modest enthusiasm to the company's announcement to sell a 10 percent stake in the Mozambique Offshore Area 1 activities.

The proceeds in the promising assets could be used to further rapidly lower its debt position on the balance sheet, fund a recent doubled quarterly dividend, and finance capital expenditures in other promising assets.

The Deal

Anadarko Petroleum announced that it has entered into a definitive agreement with ONGC Videsh, a wholly owned subsidiary of Oil and Natural Gas Corporation from India, to sell a 10 percent interest in Mozambique's Offshore Area 1.

Anadarko will receive $2.64 billion in cash for the 10 percent interest in the activities. The company will remain the operator of Area 1 with a working interest of 26.5% following the sale.

The deal values Anadarko's pre-transaction interest in the project at more than $9.6 billion. Net proceeds are used to accelerate opportunities in the Eagleford Shale, Permian Basins as well as the Gulf of Mexico.

The Area 1 is located in Mozambique's deepwater Rovuma Basin. The natural gas complexes hold an estimated 35 to 65 trillion cubic feet of recoverable gas resources. In cooperation with the local government and Italian-based Eni, Anadarko will continue to work on the development of an LNG park, with first cargoes expected in 2018.

The deal is expected to close around the end of 2013 and is subject to governmental approvals and other customary closing conditions.


Anadarko ended its second quarter with $4.58 billion in cash and equivalents. The company operates with $13.54 billion in total debt for a net debt position of $8.96 billion.

Revenues for the first six months of the year came in at $7.39 billion, up 10.8% on the year before. Net income attributable to common shareholders fell by a third to $1.39 billion.

At this rate annual revenues are seen between $14 and $15 billion, while this year's earnings could come in between $2.5 and $3.5 billion.

Trading around $90 per share, the market values Anadarko around $46 billion. This values operations of the firm at 3.2 times annual revenues and 15 times annual earnings.

Anadarko recently doubled its quarterly dividend to $0.18 per share for an annual dividend yield of 0.8%.

Some Historical Perspective

Long-term investors have seen great returns. Shares have risen from $20 in 2003, and have quadrupled ever since to current all time highs of $90 per share.

Compared to other large integrated oil majors, investors have been attracted to the company's growth profile as Anadarko's dividend yield can not compete with other major oil companies.

Between the calendar year of 2009 and 2012, Anadarko has increased its annual revenues by a cumulative 61% to $13.4 billion. The company turned a $135 million loss in 2009 into a profit of $2.38 billion last year.

Investment Thesis

The sale of Anadarko's 10% stake in the Mozambique activities values its remaining 26.5% stake in the business around $7 billion, or its pre-sale stake at $9.6 billion.

For ONGC Videsh, the deal makes strategic sense as Mozambique has the potential to become one of the largest liquefied natural gas hubs, strategically located near India. The state-controlled company has focused on international expansion to cover India's growing energy needs.

In October of last year, I last took a look at Anadarko's prospects. At the time I concluded that the company has interesting energy assets while showing strong production growth. The impact of the Deepwater Horizon drama and the overhang of the $25 billion lawsuit in a complicated case regarding Tronox caused quite some pessimism among the stock last year.

The prospects of an outright sale in the Mozambique activities could almost eliminate the entire net debt position of the firm. While this seems very unrealistic it just highlights the promising assets which Anadarko owns. Other key projects for the future include the Lucius development in the Gulf of Mexico, the Heidelberg spar project, the El Merk project in Algeria and preliminary plans in Ghana.

Ever since, shares have risen by a third to current levels in the low nineties. While the debt overhang is evaporating quickly, and adjusted earnings keep increasing, there is a lot more clarity for shareholders. Adjusted earnings of $2.0-$2.5 billion for the year are attainable, yet a price tag at 20 times adjusted earnings seems a bit rich.

At this moment I remain on the sidelines, after the nice run-up so far this year, as shares are trading with gains of 25%. At these levels I remain cautious, although I will not initiate a short position. Continued progress in new projects, deleveraging of the balance sheet, and a resolution of the Tronox case could prove me wrong and send shares far above $100 per share.

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.