HardAssetsInvestor

June 28, 2012

Oppenheimer’s Gheit: NatGas Headed Above $4, Anadarko Top Oil & Gas Stock

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HAI: Natural gas is finally perking up after crashing to decade-lows below $2 earlier this year. Has the market finally turned the corner?

Gheit: We think natural gas prices have bottomed and are likely to move higher. Barring any major government policy changes and unusual weather impacts, natural gas prices should climb above $4/mmbtu in the next two years. However, barring a major shift in Washington, in favor of accelerating the use of natural gas in power generation—replacing coal—and in transportation—replacing gasoline and diesel—we think natural gas prices above $4.50/mcf are not sustainable.

HAI: You recently said the Marcellus Shale “single-handedly” is keeping natural gas low. Can you tell us more about this resource and is there a way for investors to capitalize on it?

Gheit: The Marcellus is probably the largest onshore gas field in North America and even the world. With the largest gas-consuming market [in the U.S. Northeast] within a few hundred miles, liquids content and fast-growing transportation, it has decisive competitive advantages over all other gas plays in North America. There are more than 50 companies operating in the Marcellus. The largest players are Range Resources (RRC), Chesapeake Energy (CHK), Anadarko Petroleum (APC) and Cabot Oil & Gas (COG).

HAI: What is the top pick in your coverage universe and why?

Gheit: Anadarko Petroleum (APC)—This is a premiere exploration company, which has made more discoveries in the last one, three and give years than any other company.

• It has a balanced portfolio between oil and gas, onshore and offshore, U.S. and international.
• It has 7 million U.S. onshore acres of fee land, where oil & gas revenues are exempt from U.S. royalties of 20 percent, which is a huge competitive advantage.
• It recently settled potential liabilities from the [Gulf of Mexico] oil spill by paying BP $4 billion.
• It recently won the tax dispute with Algeria, worth $1.8 billion.
• It recently made a huge natural gas discovery offshore of Mozambique, which could potentially boost its market value by more than $10 billion.

After reaching a record high of $88/share earlier this year, the stock plummeted by 34 percent on potential environmental liabilities by Kerr-McGee, which Anadarko acquired five years ago. We expect a settlement in the next two months, which would remove investor concerns and boost the stock substantially.