Anadarko’s Huge Find Could Mean Hefty Profits

by Aaron Levitt | March 21, 2013 6:00 am

Anadarko’s Huge Find Could Mean Hefty Profits

It seems that the venerable Gulf of Mexico is still able to surprise the energy patch.

Since the moratorium on drilling — due to BP’s (NYSE:BP[1]) little ‘mishap’[2] — has been lifted, activity in the region has surged. Producers are returning to its riches … but no one expected something this big.

Anadarko Petroleum (NYSE:APC[3]) — one of the nation’s largest independent oil and gas companies — recently announced the discovery one of the most prolific finds in the Gulf since drilling in the region’s waters first began. And for investors, Anadarko’s discovery could one of the best reasons yet to bet on the independent giant.

The Discovery

Already, Anadarko is one of the biggest offshore players in the Gulf of Mexico and cites 32 different field discoveries on its resume. However, even it was surprised by the amount of energy it, along with a consortium of other energy company’s including ConocoPhillips (NYSE:COP[4]), Marathon Oil (NYSE:MRO[5]) and Cobalt (NYSE:CIE[6]), recently discovered in the Shenandoah-2 prospect.

Drilling in about 5,800 feet of water and down a total of 31,405 feet, the independent E&P company encountered oil deposits[7] more than 1,000 feet thick. That dense layer of oil could yield as much as 750 million barrels of crude oil plus additional associated gas deposits.

More importantly, it did not encounter oil-water contact, meaning the firm hasn’t yet found the lower limits of the discovery and there could potentially be  more oil in the well than currently thought. Anadarko had previously estimated that the deposit only contained about 300 feet worth of oil.

The Region

The key for the huge crude oil breakthrough comes from its location in the Gulf — specifically, the Gulf’s deepwater region, known as the Lower Tertiary geological formation. The undersea bounty is estimated to contain around 15 billion barrels of oil.

See, in the early 1990s, production in the Gulf was declining and some E&P firms called the Gulf a “dead sea.” That declining production kicked off the wave of energy producers looking for international oil deposits. However, discovery of the Mahogany field in 1995 brought them back to seek production gains in the new Lower Tertiary frontier.

Subsequently, big finds by Royal Dutch Shell (NYSE:RDS.A[8], RDS.B[9]) and Chevron (NYSE:CVX[10]) have brought producers back to the Gulf in spades … which brings us back to Anadarko’s find.

The Prospects

The Shenandoah Basin — which the well is located in — is right smack in the heart of the Lower Tertiary. All in all, preliminary evidence shows that the Shenandoah field had “reservoir rock and fluid properties of much higher quality than previously encountered by industry in Lower Tertiary discoveries.” That ultimately means that Anadarko’s wells could be even bigger and better than what many analysts thought would be possible from the Gulf’s premier deepwater play.

The success is another sign of the resource potential of the Lower Tertiary and the Gulf of Mexico’s deep seabed and, at the end of the day, underscores the fact the Gulf will remain an important oil producing region for many years to come.

Given that the Shenandoah Basin could be a game changer for the Gulf of Mexico — and, of course, its operators — investors may want to consider loading up on Anadarko’s shares. The firm is strategically positioned to benefit from the region’s potential, with roughly 90% of its current leads and prospects located in the Miocene and Lower Tertiary plays in the Gulf.

For example, the Shenandoah-1 discovery — which was drilled[11] in early 2009 and is less than one mile away from this find — contains more than 300 feet of oil. Likewise, Anadarko is currently drilling two additional wells in the Shenandoah basin and has more acreage to play with. Moreover, given its already huge presence in the Shenandoah, there’s potential for Anadarko to create or even own the undersea infrastructure in the deepwater Gulf of Mexico.

The Stock

So far, Anadarko’s shares have surged about 8% this month and nearly 16% so far this year. However, more gains could be in store based its continued deepwater activities in the Gulf and off the coast of Mozambique.

Analysts estimate that the Shenandoah discovery adds at least $3 a share to Anadarko’s value and revised price targets are now about $20 higher than what the E&P producer currently goes for. And those doesn’t even include the fact that the firm is consistently pegged as potential buy-out[12] target for Exxon (NYSE:XOM[13]) or another state-owned energy firm.

At a price 17 times current earnings, Anadarko isn’t the cheapest option in the energy patch. However, its current share price does seem like a bargain given its long-term potential in the Gulf’s Deepwater.

As of this writing, Aaron Levitt was long RDS-A and RDS-B.

Endnotes:
  1. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  2. mishap’: http://investorplace.com/2013/02/bp-trial-starts-but-legal-limbo-far-from-over/
  3. APC: http://studio-5.financialcontent.com/investplace/quote?Symbol=APC
  4. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  5. MRO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRO
  6. CIE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CIE
  7. encountered oil deposits: http://www.businessweek.com/news/2013-03-20/anadarko-partners-rise-on-gulf-of-mexico-oil-find-dallas-mover
  8. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  9. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  10. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  11. drilled: http://investorplace.com/2013/02/invest-like-goldman-sachs-in-oil-services/
  12. potential buy-out: http://investorplace.com/2013/03/exxons-short-on-production-but-you-should-still-go-long/
  13. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM

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