A Promising Offshore Drilling Play

09/30/2009 1:00 pm EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist, says Anadarko Petroleum has very attractive oil and gas properties in some of the world’s best offshore drilling areas.

Anadarko Petroleum (NYSE: APC) [is] an exciting new production story. [It] offers exposure to two themes I follow: the end of easy oil and the potential that natural gas prices will recover in 2010.

Anadarko is the operator on the Venus project off the coast of Sierra Leone and has a 40% stake in the field. The littoral region of Sierra Leone and neighboring Liberia, Core D’Ivoire, and Ghana appears to have exciting exploration potential.

In this area, Anadarko has a total of 8.8 million acres [in which] it has leases or shares in joint ventures. The company is performing seismic surveys on much of this acreage to identify drilling opportunities and found as many as 30 plays offer likely drilling targets.

And the Venus well is only the latest in a number of successes for Anadarko off the cost of West Africa. The company has made a series of large discoveries off the cost of Ghana, including the massive Jubilee field—Africa’s largest deepwater play—which is slated to see first production at the end of next year.

Anadarko [also] has significant exposure to wells in Brazil and the deepwater Gulf of Mexico, two of the hottest regions for oil and gas exploration.  In fact, Anadarko announced two additional deepwater Gulf discoveries in August.

Worldwide, Anadarko has plans for roughly a dozen new wells by early 2010, any or all of which could be major upside catalysts [for the stock].

And not all of Anadarko’s wells have to be blockbusters. The more the company drills and identifies targets in existing plays, the more value the market assigns to its remaining acreage.

If Anadarko drills just a few more blockbuster finds, analysts would significantly discount the risk of its remaining wells, increasing the valuation of its remaining acreage. One way or the other, Anadarko appears to be on a path to actually exceed its long-term production growth targets of 5% to 9% annualized over the next few years.

Anadarko does have significant exposure to the US gas market via some legacy acreage in the Rockies. Fortunately, the company doesn’t have a great deal of exposure to near-term gas prices and has hedged about 75% of its production through 2010 at attractive prices.

Nevertheless, I’m bullish on gas prices into 2010—and Anadarko has exposure to this upside through its joint venture with Chesapeake Energy (NYSE: CHK) in the Marcellus play, one of the most promising unconventional gas plays in the US. Anadarko also has interests in the East Texas side of the Haynesville Shale play and the Eagleford, a relatively new play.

With more than $3.5 billion in cash and over $1 billion in undrawn credit facilities, Anadarko has plenty of cash on hand to fund its aggressive drilling plans.

Anadarko rates a Buy under $70 in the Wildcatters Portfolio with a stop at $47.50. (It closed above $63 Tuesday—Editor.)

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