Cramerica Runs on Natural Gas
Monday, February 14, 2011 by ARSITEKTUR
“This whole move is predicated upon the idea that Washington has at least embraced natural gas, that this cleaner, greener fossil fuel — I know it’s fossil, which puts it in the dog house — will be a part of our energy future. Take Anadarko, Anadarko Petroleum is one of the strongest derivative natural gas plays, one of those I’ve been recommending since January 12th, when it was at $38.33. The stock is now up to $54.40. A 40% increase. Even as the price of the commodity has just been crushed.
If natural gas is going to be part of our energy future, then Anadarko is a fantastic stock to own. And its second quarter, recorded record sales volume, selling 4 million more gallons than the midpoint of Anadarko’s guidance. As well as record drilling, the company was able to run fewer rigs but drill more wells and the cost of wells coming down. Anadarko’s a great growth energy with new discoveries in the Gulf of Mexico and Mississippi, a major new project in Ghana that was approved by their government in July and another project in Algeria that’s expected to start producing oil in 2011.
The company’s also done a great job of hedging its natural gas 80% of anticipated natural gas volumes, hedged at $4.18 in the summer months. Hey, who would ever thought that was going to be good, right? And more than 75% of its 2010 natural gas volume’s protected with a middle floor of $5.60 and an upper ceiling of $8.25. So, even if natural gas prices don’t bounce back hard, Anadarko’s still in good shape.
APC
And it’s not starving for cash, either. Remember it raised $1.3 billion with that secondary offering in May? That was at $45.50. Made a lot of people money. You’re up 20% if you got that offering price. Even, again, natural gas collapsed and they raised another $109 million in debt in June, leaving them with $3.5 billion in cash at the end of the quarter and no debt coming due until 2011.” — CNBC’s Mad Money 8/24/2009
Cramer invited Jim Hackett CEO of Anadarko Petroleum (APC) onto his show to discuss the natural gas industry. As you can tell from Cramer’s lead-in to the interview, he is very high on Anadarko specifically and has been recommending them since January. More generally, he is very interested in discussing the benefits of shifting America’s energy infrastructure to run on natural gas that has been produced here in America instead of continuing to import crude oil from all over the world. He made a compelling case for natural gas being a step in the direction of energy independence, and we can hope that this kind of thinking makes its way to Capital Hill soon.
Looking at Anadarko in particular, we think management is doing an exceptional job of dealing with slumping natural gas prices. As mentioned, APC had the foresight to hedge 80% of their production at $4.18, which seemed low at the time, but this has turned out to be a wise strategy as prices continued to fall. In addition to smart hedging, Anadarko management continues to increase production through the downturn. While other producers are forced to slow down production in hopes that prices will rise in the future, APC’s aggressive strategy makes it one of the best positioned to meet today’s challenges.Mad-Money_8-24
Anadarko has appreciated more than 40% year to date, and is currently Fairly Valued by our methodology. Based on the company’s current EPS and revenue figures, we would expect APC to trade somewhere between $45 and $62. With that in mind, our analysis would obviously become more positive on Anadarko if the price of natural gas starts to recover. This is a very real possibility as the ratio oil to natural gas prices has reached 26.35x, which is the highest it has been since at least 1990. Prices reflect supply and demand of each commodity, but we would expect a reversion to the mean over time.
The chart to the right lists each stock that Cramer talked about on Monday’s Mad Money. Please visit Ockham for a complete recap of Mad Money.
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