If one were to discuss oil and gas stocks, the conversation would invariably veer toward Mozambique and its riches. In fact, just after a few weeks of announcing that Anadarko (APC) found huge reserves at the Atum well 17 kilometers from the famed Golfinho well, the company announced that it has found more than 300 net feet of natural gas in 2 key locations. This discovery is connected to the last month's discovery as well, and Chinese and Indian companies have begun to show a lot of interest as a result.
The new discoveries are said to be Anadarko's second major natural gas discovery in Mozambique. The company has already begun to drill four wells in order to appraise the discoveries. It is not just Anadarko that has tasted luck often in Mozambique but also Cove Energy, which announced that drilling at the Rovuma Area 1 has led to more natural gas discoveries. In related news, Shell (RDS.A) has still kept its offer on the table to woo Cove shareholders with a whopping $1.7 billion. Shell has extended the deadline to two more weeks and this interest comes from the fact that Cove has been able to discover more gas fields in Mozambique.
Meanwhile, Anadarko is left in a very safe position, especially with its LNG industry that is expected to help Mozambican people as well. With major oil and gas companies from the west trying desperately to establish themselves as the number one company in Mozambique, I would expect a more proactive approach from their government. Unfortunately, Mozambique's government seems to be doing very little in terms of changing its legislation to help foreign businesses. While the government has agreed and admitted that it is high time the legislation are tweaked or altogether changed to reflect contemporary gas laws in the U.S. or elsewhere, there seem to be certain blocks that are keeping the government from making these legislative changes.
Professor Jenik Radon of Columbia University's School of International and Public Affairs suggested that the huge oil and natural gas reserves in Mozambique could have serious ramifications on the Southern African economy, and will not be limited to just Mozambique. That seems like a very plausible situation but he also warned that Mozambique must not miss out on this window of opportunity. He reiterated that extraordinary political will, motivation to change outdated laws and infrastructural developments would be required and expected from the Mozambican government.
He also suggested that the Mozambican government ask parent companies of foreign oil organizations to provide guarantees. By acquiring company parent guarantees, Mozambique can ensure that nothing really goes wrong with the existing mining environment. This would include environmental disasters, health and community effects. He suggested that business must never wait and even in the case of Mozambique, the government must not postpone making certain important legislative changes to existing oil and gas laws. The U.S., Canada and South Africa have very developed and advanced oil and gas legislation.
If only Mozambique makes these legislative changes, there would be more transparency even for foreign companies. For companies like Anadarko, such legislative changes will only mean that it would become easier to work in Mozambique. There would be no room for ambiguity and existing laws cannot be used arbitrarily.
Texas-based Anadarko already has a very lucrative oil and natural gas business in the U.S. and elsewhere. With the discovery of the high quality natural gas off the coast of Northern Mozambique, Anadarko has almost written its own success story in the African nation well in advance. While I would hesitate to call it competition, Rio Tinto (RIO) is the only company that is faring as well as Anadarko in Mozambique. However, Rio concentrates upon metals and minerals whereas Anadarko is more interested in oil, natural gas and LNG.
What Mozambique needs to do at the moment is to review its own advantages and disadvantages. After decades of civil war finally came to an end in the early 1990s, the country has gone back to economic growth levels that were seen during its colonization by Portugal. Its capital has already begun to show signs of being oil rich. The dusty and brown streets that characterize most African cities are now replaced by shiny paved avenues that have acacia trees on either side. New schools, hospitals and shopping malls have sprung up even outside Maputo, suggesting an economic development that is only set to accelerate with oil discoveries.
If Mozambique does not act now and change its old and colonial laws, it will probably be stuck in the 1980s when it was experiencing civil war. The country has several friends all over the world including the U.S, South Africa and Canada. All that Mozambican government needs to do is to hold high level talks with foreign governments and gain access to legislation both public and confidential. By modeling these nations' oil policies and regulations, Mozambique has a very bright future to look forward to.
Anadarko has not only contributed to the nation's fuel requirements, but has also been instrumental in helping Mozambican rural folk cook without smoke. Thanks to growing production of LNG, people in Mozambique are now able to savor their own natural resources, which once lay hidden under the soil and water. Anadarko plans to invest in Mozambican infrastructure and geopolitical development, which will have a positive impact not only on its image as an oil company, but also as a foreign investor in Mozambique. Competitors like Chevron (CVX) and BP (BP) are yet to make a mark in Mozambique, and thus the roads are pretty clear for Anadarko to establish itself as the most important multinational oil and natural gas company in Mozambique.
In the event that Mozambique's government does not pass this legislation, Anadarko's future growth in natural gas will certainly be set back. This could dampen investors hopes in Anadarko's strong growth in Mozambique and negatively impact its stock. Anadarko's current trading price is around $60 and the price has seen a downward trend this year. This downward trend could continue if Mozambique's government takes a passive approach to these new developments by failing to change its legislation.
Moreover, sales growth is down by 10% but the net margin has increased if compared with last year's performance. However, thanks to its diversified and balanced approach, Anadarko will be able to compete with its competitors like Chevron and BP in the long run. By exploring and establishing itself in Mozambique, I think Anadarko will see a huge boost in stock value. The Atum well alone, with 300 net feet of natural gas, could significantly add to Anadarko's bottom line, thus increasing its value. With a net income of $2.156 billion, Anadarko is doing pretty well and the future is going to be just great for its investors if it manages to look at geopolitical underpinnings besides just exploration. Anadarko will need to be forceful in getting Mozambique to change its oil legislation, but I see this coming in the next few months. When that happens, Anadarko's value will increase drastically.