Anadarko: Monetization Of Mozambique

| About: Anadarko Petroleum (APC)

On Monday, 24th April, Royal Dutch Shell (NYSE:RDS.A) made a formal bid for Anadarko's (NYSE:APC) junior partner Cove Energy (OTC:CNVGF) in the offshore Mozambique gas find. The read across on the valuation suggests that Anadarko's stake in the field is worth over $4.5 billion, a fact not appreciated by the market. After nine wells within the Prosperidade field, Anadarko has finished appraisal drilling and leaves the de-risking work to the declaration of commerciality and FID (final investment decision) sometime in 2013.

Key to this work is the flow testing being carried out by the Deepwater Millenium, which is already beginning to bear fruit. Most sell-side commentators are expecting that the field will come through at the upper end of guidance for in place resources at 25-30 tcf, i.e., 4-5 billion barrels of oil equivalent. Both Anadarko and ENI (NYSE:E) have stated on various occasions that the recoverability rate is likely to be very high, given the porosity of the sands and the high level of proven connectivity. ENI has suggested publicly a recovery rate of 75-90%. This suggests that the newly named Prosperidade field in Area-1 (Anadarko) might have recoverable reserves of circa 3-4 billion boe, of which Anadarko's working interest is 36.5%; so something over 1 billion barrels.

One of the big questions is around the volumetric difference between the Prosperidade field in Area-1 and in Area-4. So far, it would appear that the pay zones expand as they move to the east, i.e. into Area-4. Both of ENI's wells (Mamba South and Mamba North) were drilled very close to the block boundary, but Mamba North-East is some 5km to the east of the block boundary, which is similar to the widest part of the field in Area-1, but the scale of further field extensions is clearly towards the east. As ENI drills further exploration wells, one would hope to see further definition as to the lateral extent of Prosperidade.

Valuations for the two blocks differ across brokers based on three factors: Assumed risk, recoverability and oil price. Whilst the risk assumptions in the Anadarko calculations have come down (positive) due to the sheer number of wells that have been drilled to delineate the field, and due to the start of pressure readings and flow tests, the same is not true for ENI . Also, Anadarko and junior partner Cove Energy tend to be more open in their discussions than ENI. That said, both ENI and Anadarko confirm the connectivity of the gas fields in the two blocks.

Merrill Lynch has put a value per barrel on the ENI block of $3,2/boe, whilst Morgan Stanley put a range of $3-$4/boe again for ENI. Market valuations for Anadarko's Mozambique assets appear to be in the order of $5.5/boe (MS valuation of Cove Energy). It is clear as the project moves through the various stages through to FID in 2013 that both the level of risk will decline and the value per barrel will increase. Importantly, Royal Dutch Shell has now made its bid for Cove Energy formal at 220p (where there is also a competing bid from Thai explorer PTTEP).

The Cove Energy board has given unconditional acceptances to Shell, and one assumes that the government of Mozambique is more interested in Shell arriving into the field with its huge expertise in LNG, than it is in PTTEP - which brings little to the party. At 220p per share, Cove Energy's share price correlates to a valuation of $4.50 per barrel for the Area 1 find, suggesting Anadarko's working interest can be valued at $4.5 billion or about 12.5% of the current market capitalization of Anadarko.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.